<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 September 30, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-23000
The Harvey Entertainment Company
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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.
<TABLE>
<CAPTION>
Class Outstanding at November 1, 1999
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<S> <C>
Common Stock, no par value 4,186,941 (7,008,977 shares,
including 2,822,036 shares into
which the Series A Preferred
Stock could be converted)
</TABLE>
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
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<S> <C>
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 1-2
Condensed Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-7
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8-13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K 14
</TABLE>
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PART I - FINANCIAL INFORMATION
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
(UNAUDITED)
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<S> <C> <C>
Cash and cash equivalents $ 7,867,000 $ 451,000
Marketable securities 2,345,000 --
Accounts receivable, net of allowance for doubtful accounts
of $296,000 and $298,000 in 1999 and 1998, respectively 887,000 1,689,000
Prepaid expenses and other assets 283,000 541,000
Income tax receivable 542,000 567,000
Film library, net of accumulated amortization of $7,144,000
and $6,894,000 in 1999 and 1998, respectively 10,726,000 10,873,000
Furniture and equipment, net of accumulated
depreciation of $802,000 and $658,000 in 1999 and 1998,
respectively 375,000 501,000
Goodwill, net of accumulated amortization of $1,318,000
and $1,222,000 in 1999 and 1998, respectively 1,276,000 1,373,000
Trademarks and copyrights, net of accumulated
amortization of $344,000 and $266,000 in 1999 and 1998,
respectively 1,212,000 1,039,000
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TOTAL $25,513,000 $17,034,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
(UNAUDITED)
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<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 626,000 $ 871,000
Participations payable 741,000 861,000
Accrued marketing expenses 1,200,000 1,200,000
Line of credit -- 250,000
Accrued rent and other liabilities 128,000 170,000
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Total liabilities 2,695,000 3,352,000
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Series A convertible preferred stock, $100 stated value,
300,000 shares authorized, 190,000 shares issued and
outstanding at September 30, 1999, liquidation preference
of $19,574,000 at September 30, 1999 15,517,000 --
------------ ------------
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 shares authorized,
4,187,000 issued and outstanding at September 30, 1999 and
December 31, 1998 22,160,000 22,160,000
Additional paid in capital 4,599,000 --
Accumulated other comprehensive income/(loss) (3,881,000) --
Accumulated deficit (15,577,000) (8,478,000)
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Total stockholders' equity 7,301,000 13,682,000
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TOTAL $ 25,513,000 $ 17,034,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Filmed entertainment $ -- $(2,295,000) $ -- $(2,190,000)
Merchandising 117,000 1,174,000 911,000 2,349,000
Publishing -- -- 129,000 --
----------- ----------- ----------- -----------
Net operating revenues 117,000 (1,121,000) 1,040,000 159,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 298,000 976,000 1,675,000 2,599,000
Selling, general and administrative expenses 1,181,000 1,341,000 4,474,000 5,569,000
Amortization of intangibles 57,000 55,000 174,000 154,000
Depreciation expense 36,000 36,000 144,000 102,000
Stock based compensation 76,000 169,000 76,000 969,000
----------- ----------- ----------- -----------
Total operating expenses 1,648,000 2,577,000 6,543,000 9,393,000
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,531,000) (3,698,000) (5,503,000) (9,234,000)
OTHER INCOME 252,000 217,000 657,000 323,000
INTEREST EXPENSE (25,000) -- (82,000) --
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT/(EXPENSE) (1,304,000) (3,481,000) (4,928,000) (8,911,000)
INCOME TAX BENEFIT/(EXPENSE) (1,000) 1,374,000 (1,000) 3,542,000
----------- ----------- ----------- -----------
NET LOSS $(1,305,000) $(2,107,000) $(4,929,000) $(5,369,000)
=========== =========== =========== ===========
Net loss $(1,305,000) $(2,107,000) $(4,929,000) $(5,369,000)
Preferred stock dividends and amortization of
beneficial conversion feature (1,360,000) -- (2,170,000) --
----------- ----------- ----------- -----------
Net loss applicable to common stock $(2,665,000) $(2,107,000) $(7,099,000) $(5,369,000)
=========== =========== =========== ===========
NET LOSS PER SHARE OF COMMON STOCK:
Basic and Diluted $ (0.64) $ (0.50) $ (1.70) $ (1.34)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 4,187,000 4,187,000 4,187,000 4,015,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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NINE MONTHS ENDED
SEPTEMBER 30,
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1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,929,000) $ (5,369,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 144,000 102,000
Amortization of film library 250,000 524,000
Amortization of goodwill, trademarks and copyrights and other 174,000 154,000
Deferred income taxes -- (3,740,000)
Stock based compensation 76,000 969,000
Changes in operating assets and liabilities:
Accounts receivable, net 803,000 3,834,000
Prepaid expenses and other assets 258,000 (328,000)
Income taxes receivable, net of income taxes payable 25,000 (1,163,000)
Investment in film library (103,000) (2,622,000)
Account payable and accrued expenses (245,000) (135,000)
Participations payable (120,000) --
Accrued rent and other liabilities (42,000) 49,000
------------ ------------
Net cash used in operating activities (3,709,000) (7,725,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (18,000) (179,000)
Investments in trademarks and copyrights (251,000) (299,000)
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Net cash used in investing activities (269,000) (478,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of tax effect -- 3,722,000
Borrowings on line of credit 1,750,000 --
Repayment on line of credit (2,000,000) --
Net proceeds from issuance of convertible preferred stock 9,595,000 --
Proceeds from issuance of note payable 2,049,000 --
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Net cash provided by financing activities 11,394,000 3,722,000
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,416,000 (4,481,000)
CASH AND CASH EQUIVALENTS, Beginning of period 451,000 6,316,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 7,867,000 $ 1,835,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ (82,000) $ --
Income taxes $ (21,000) $ 775,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background and Operations: The Harvey Entertainment Company, together with its
wholly-owned subsidiaries Harvey Comics, Inc. and Baby Huey Productions, Inc.
(the "Company") owns and exploits a library of widely recognized classic
characters and other intellectual property assets, including a related film
library of animated short features. The Company is the successor to Harvey
Comics, Inc. which was founded in 1939 by the Harvey family. In 1989, the
Company's predecessor purchased Harvey Comics, Inc. to exploit its intellectual
property and in 1993 the Company completed its initial public offering of common
stock. The roster of the Company's classic characters includes the well known
characters Casper, the Friendly Ghost, Richie Rich, Baby Huey, Wendy, the Good
Little Witch, and Hot Stuff, among many others.
Basis of Presentation: The accompanying consolidated financial statements and
footnotes are unaudited and condensed, as contemplated by the Securities and
Exchange Commission under rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
condensed consolidated financial statements should be read in conjunction with
the more detailed consolidated financial statements and related footnotes
included in the Company's Form 10-KSB as amended filed with the Securities and
Exchange Commission in April 1999.
In the opinion of the Company's management, the accompanying unaudited condensed
consolidated financial statements as of September 30, 1999 and for the three and
nine month periods ended September 30, 1999 and 1998 contain all adjustments,
which include normal recurring accruals, necessary to present fairly the
consolidated financial position of the Company as of September 30, 1999 and the
consolidated results of operations and consolidated cash flows for the nine
month periods ended September 30, 1999 and 1998.
The results of operations for the interim periods of the Company's fiscal year
are not necessarily indicative of the results to be expected for the entire
year. Certain reclassifications of 1998 amounts have been made in order to
conform with the 1999 financial statement presentation.
Net Loss Per Share: Net loss per share is computed by dividing the net loss
applicable to common shareholders for the period by the weighted average number
of common shares outstanding. Shares associated with stock options, warrants and
convertible preferred stock are not included to the extent they are
anti-dilutive. Net loss per share information has been determined on the basis
of 4,187,000 weighted average number of shares outstanding for the three and
nine month periods ended September 30, 1999 and 4,187,000 and 4,015,000 weighted
average number of shares outstanding for the three and nine month periods ended
September 30, 1998, respectively. The net loss per common share for the three
and nine month periods ended September 30, 1999 gives effect to stock dividends
of $312,000 and $524,000 for the three and nine month periods ended September
30, 1999, respectively, and the amortization of the beneficial conversion
feature of $1,048,000 and $1,646,000 related to the Series A Preferred Stock
issued on April 26, 1999 for the three and nine month periods ended September
30, 1999, respectively (See Note 2 - Equity Infusion).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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Income Taxes: Deferred income taxes represent the tax consequences in future
years of differences between the income tax basis of assets and liabilities and
their basis for financial reporting purposes.
Comprehensive Income: Effective January 1, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130 ("SFAS No.
130"), "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The Company reported an unrealized loss
of approximately $703,000 and $3,881,000 as part of comprehensive income for the
three and nine month periods ended September 30, 1999, respectively, resulting
from the adjustment to the fair market value, as of September 30, 1999, of the
common stock of The Kushner-Locke Company (See Note 2 - Equity Infusion).
Contingencies: From time to time, the Company has been party to various
litigation and administrative proceedings relating to claims arising from its
operations in the normal course of business. Based on the advice of counsel,
management believes that the resolution of these matters will not have a
material effect on the Company's business, results of operations, financial
condition or cash flows.
Year 2000: The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
software problems associated with the year 2000. At present, management does not
expect that material incremental costs will be incurred, or significant Company
resources dedicated in 1999 to become year 2000 compliant.
NOTE 2 - EQUITY INFUSION
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company agreed to
issue and sell 170,000 shares of its Series A Preferred Stock ("Series A
Preferred Stock") and warrants ("Warrants") to purchase up to 2,400,000 shares
of the Company's Common Stock in consideration of cash and common stock of
Kushner-Locke ( the "1999 Refinancing"). Of the Warrants issued, 1,200,000 were
granted immediately to investors participating in the 1999 Refinancing (the
"Investor Warrants") and 1,200,000 would be granted in the future at the
discretion of new management ("Management Warrants"). In addition, as described
in Note 4 below, as a result of the 1999 Refinancing being oversubscribed and
the desire of the Company to realize the potential benefits of additional
capital, on June 30, 1999 the Company issued a subordinated note (the "Note") in
the amount of approximately $2,049,000. The Note was converted into 20,488
shares of Series A Preferred Stock and 144,618 Investor Warrants to purchase
Common Stock on September 2, 1999, and an additional 144,618 Management Warrants
were concurrently provided for future grants. The total cash consideration
received in the 1999 Refinancing and issuance of the Note was approximately
$11,578,000, net of transaction fees and expenses of approximately $1,970,000.
Under United States Generally Accepted Accounting Principles ("U.S. GAAP"), the
investment by Kushner-Locke in the form of Kushner-Locke common stock has been
initially fair valued at approximately $6,200,000. The fair value of the
investments of the Kushner-Locke common stock, the net cash consideration and
the Note were initially allocated in the following manner for financial
accounting purposes: Series A Preferred Stock: $11,900,000, Additional Paid in
Capital related to the Investor Warrants: $2,100,000 and Additional Paid in
Capital related to a beneficial conversion feature of the Series A Preferred
Stock: $1,800,000. The beneficial conversion feature of the Series A Preferred
Stock will be amortized into retained earnings ratably over a six-month period
from April 26, 1999 until the convertibility provision of the Series A Preferred
Stock becomes effective on October 26, 1999.
On April 26, 1999, in connection with the issuance and sale of the Series A
Preferred Stock and Warrants, the Company entered into a Registration Rights
Agreement (the "1999 Agreement") with Michael R. Burns, Roger A.
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<PAGE> 9
Burlage, Al Checchi, Ken Slutsky and Kushner-Locke (the "Shareholders"). The
1999 Agreement gives the Shareholders certain demand and piggyback registration
rights, commencing 18 months following the issuance and sale of the Series A
Preferred Stock and the Warrants, to register the Common Stock issuable upon
conversion of the Series A Preferred Stock and the exercise of the Warrants. The
transactions contemplated by the Stock Purchase Agreement were consummated on
April 26, 1999.
NOTE 3 - MARKETABLE SECURITIES
In connection with the 1999 Refinancing, the Company received approximately
470,000 common shares of Kushner-Locke fair valued for financial accounting
purposed under U.S. GAAP at approximately $6,200,000. As of September 30, 1999,
the market value of such shares was approximately $2,435,000. As the Company is
currently holding the Kushner-Locke shares as available for sale securities, in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the unrealized loss from
this investment is being recorded in an unrealized holding loss account as a
separate component of Stockholders' Equity.
NOTE 4 - NOTE PAYABLE
As discussed above, as a result of the 1999 Refinancing being oversubscribed,
and the desire of the Company to realize the potential benefits of additional
capital, on June 30, 1999 the Company issued the Note in the amount of
approximately $2,049,000. 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. In accordance with provisions contained in therein,
the Note was converted into 20,488 shares of Series A Preferred Stock and
144,618 warrants to purchase Common Stock on September 2, 1999, after
shareholder approval of certain required proposals at the Company's Annual
Meeting of Shareholders' held on August 17, 1999.
NOTE 5 - STOCK BASED COMPENSATION
The 1999 Refinancing and conversion of the Note resulted in the issuance of a
total of 2,689,236 Warrants to purchase shares of the Company's Common Stock,
1,344,618 of which were Investor Warrants and 1,344,618 of which were Management
Warrants. Of the Investor Warrants granted, those granted to non-employees are
fully vested, non-forfeitable and are exercisable commencing six months from
their issuance date, at prices ranging from $9.00 to $12.00 per share of the
Common Stock. Management Warrants, and any Investor Warrants, granted to
employees vest and become exercisable according to schedules set forth in their
respective warrant agreements, and are exercisable at prices ranging from $9.00
to $12.00 per share of Common Stock. The Company accounts for stock issued to
non-employees in accordance with Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", and Emerging
Issues Task Force 96-18 ("EITF 96-18"). In accordance with SFAS 123 and EITF
96-18, the fair value of any Management Warrants granted in the future to
non-employees will be measured either at the date of grant or at the end of the
reporting period, as appropriate. Based on the determination of the fair value
of the Company's Common Stock, the Company may incur substantial non-cash
charges to earnings in future reporting quarters.
* * * * * *
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements made based on current
management expectations pursuant to the "safe-harbor" provisions of the Private
Securities Litigation Act of 1995. These statements are not guarantees of future
performance and actual outcomes may differ materially from what is expressed or
forecasted. There are many factors that may affect the Company's business and
its results of operations. These include, without limitation, risks relating to
the Company's expansion strategy, risks of the Company's merchandising and
filmed entertainment activities, the management of growth, risks of acquired
companies, fluctuations in quarterly and annual operating results, accounting
principles applicable to filmed entertainment, the release of filmed
entertainment products and other factors discussed herein and in the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 and any
other filings made by the Company with the Securities and Exchange Commission.
RECENT DEVELOPMENTS FOR THE COMPANY
On September 24, 1999, the Company signed a letter of intent for the acquisition
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 purchase price, contemplated by the Letter of Intent, consists of
$10,000,000 in cash, a portion of which will be paid at closing. The completion
of the transaction is anticipated prior to December 15, 1999, and is subject to
the completion of a definitive agreement, formal due diligence and other
customary conditions, including finalization of financing for the acquisition.
There can be no assurance that the transaction and related financing will be
obtained on terms acceptable to the Company or that the transaction will be
completed as contemplated above.
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company agreed to
issue and sell 170,000 shares of its Series A Preferred Stock ("Series A
Preferred Stock") and warrants ("Warrants") to purchase up to 2,400,000 shares
of the Company's Common Stock for a total consideration of approximately
$17,700,000 (the "1999 Refinancing"). On April 26, 1999, in connection with the
issuance and sale of the Series A Preferred Stock and Warrants, the Company
entered into a Registration Rights Agreement (the "1999 Agreement") with Michael
R. Burns, Roger A. Burlage, Al Checchi, Ken Slutsky and Kushner-Locke (the
"Shareholders"). The 1999 Agreement gives the Shareholders certain demand and
piggyback registration rights, commencing 18 months following the issuance and
sale of the Series A Preferred Stock and the Warrants, to register the Common
Stock issuable upon conversion of the Series A Preferred Stock and the exercise
of the Warrants. The transactions contemplated by the Stock Purchase Agreement
were consummated on April 26, 1999.
The 1999 Refinancing was oversubscribed, and, in order to enable the Company to
realize the potential benefits of additional capital, the Company issued a note
in the amount of $2,048,750 to Paul Guez (the `Note"). The Note 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 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 into 20,488 shares of Series A
Preferred Stock (convertible into 303,518 shares of Common Stock) and warrants
to purchase 144,618 shares of Common Stock. Subsequent to the issuance of Series
A Preferred Stock to Mr. Guez, the Company has 190,488 shares of Series A
Preferred Stock outstanding (convertible into an aggregate of 2,822,036 shares
of Common Stock).
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<PAGE> 11
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Results of Operations - The Company is in the early stages of developing new
film products and formulating a corporate strategy regarding a range of business
opportunities under its new permanent management, the results of which will not
be realized until subsequent periods. The development of new revenue
opportunities in the filmed entertainment area requires significant lead time.
The number of projects expected to generate revenues in the near term is
therefore limited and, accordingly, the Company expects foreseeable operating
results to be adversely impacted.
Revenues - Net filmed entertainment revenues were $0 and a negative $2,295,000
in 1999 and 1998, respectively. The Company currently has several film
entertainment projects in a variety of development stages, but the successful
outcome of these projects can not be determined at this point in time. The 1998
quarter reflected an adjustment of $2,316,000 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 projected worldwide sales
of approximately 5,000,000 units whereas actual sales to date reported during
the quarter to the Company by the video's distributor approximated 4,500,000
units, necessitating the adjustment in the 1998 third quarter.
Net merchandising revenues were $117,000 and $1,174,000 in 1999 and 1998,
respectively, a decrease of $1,057,000. The revenues in 1999 and 1998 consist of
new licenses for the worldwide merchandising of the Harvey Classic Characters
and the licensing revenues from the Company's direct-to-video features entered
into by the Company's in-house licensing division. Although merchandising
licenses are generally granted for a period of one to three years, the majority
of the minimum guaranteed license revenues are recognized when the license
period begins, provided certain conditions have been met. Due to this accounting
treatment, revenue fluctuations from the Company's merchandising activities will
likely recur in the future on a quarterly and annual basis. The ongoing success
of the merchandising program depends, in part, upon the attractiveness and
future exploitation of the Harvey Classic Characters.
Net publishing revenues related to the Company's monthly magazine, approved for
publishing by the Board of Directors in July 1998 during interim management's
tenure, were $0 for the three month period ended September 30, 1999. There were
no comparable sales in 1998. The publication of the magazine has ceased,
resulting from new management's decision to focus on the Company's core
entertainment business operations. The July 1999 issue was the last issue
published for distribution.
Cost of Sales - Cost of sales related to filmed entertainment revenues were
$7,000 and $24,000 in 1999 and 1998, respectively. The cost of sales related to
filmed entertainment for 1999 and 1998 were low due to sparse activity in both
periods. Amortization of the film library was $0 and $4,000 in 1999 and 1998,
respectively. There was no amortization in the current quarter as there were no
revenues derived from the film library, which is amortized in accordance with
the individual film forecast method.
Merchandising cost of sales were $291,000 and $882,000 in 1999 and 1998,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity for the current quarter.
Publishing cost of sales were $0 and $70,000 in 1999 and 1998, respectively.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses ("SG&A") were $1,181,000 and $1,341,000 for 1999 and
1998, respectively, a decrease of $160,000. The decrease in SG&A is primarily
due to lower costs incurred for consulting services in the current quarter and
an overall decrease in other overhead expenses.
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<PAGE> 12
Depreciation and Amortization - Depreciation expense was $36,000 in both 1999
and 1998. Amortization of trademarks and copyrights was $25,000 in 1999 and
$19,000 in 1998. Amortization of goodwill was $32,000 in both 1999 and 1998.
Other Income - Other income was $252,000 and $217,000 in 1999 and 1998,
respectively. Other income in 1999 resulted from investment income from the sale
of certain securities, and in 1998 the Company received a favorable settlement
of litigation.
Stock Based Compensation - Stock based compensation was $76,000 and $169,000 in
1999 and 1998, respectively, related to the issuance of warrants to a consultant
to the Company, for the three months ended September 30, 1999 and the issuance
of options to Global Media during the three months ended September 30, 1998.
Income Taxes - Income tax benefit/(expense) was ($1,000) and $1,374,000 in 1999
and 1998, respectively. The current tax expense was the result of an assessment
of additional income taxes for the 1997 tax year. The income tax benefit for
1998 is due to the use of operating losses generated in 1998 against the
deferred income tax liabilities and prior year operating income. A valuation
allowance was established at the 1998 year end to reduce deferred income tax
assets to the amount expected to be realized. At the end of the current quarter,
an additional valuation allowance was established to offset the benefit
generated by current quarter's loss. Realizable income tax benefits from the
Company's cumulative tax losses have been reported as an income tax receivable
of $542,000 at the end of the current quarter.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues - Net filmed entertainment revenues were $0 and a negative $2,190,000
in 1999 and 1998, respectively. The 1998 year to date period reflected an
adjustment of $2,316,000 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 projected worldwide sales of approximately
5,000,000 units whereas actual sales to date as reported during the quarter to
the Company by the video's distributor approximated 4,500,000 units,
necessitating the adjustment in 1998.
Net merchandising revenues were $911,000 and $2,349,000 in 1999 and 1998,
respectively, a decrease of $1,438,000. The revenues in 1999 and 1998 consist of
new licenses for the worldwide merchandising of the Harvey Classic Characters
and the licensing revenues from the Company's direct-to-video features entered
into by the Company's in-house licensing division. Although merchandising
licenses are generally granted for a period of one to three years, a substantial
portion of the minimum guaranteed license revenues are recognized when the
license period begins, provided certain conditions have been met. Due to this
accounting treatment, revenue fluctuations from the Company's merchandising
activities will likely recur in the future on a quarterly and annual basis. The
ongoing success of the merchandising program depends, in part, upon the
attractiveness and future marketability of the Harvey Classic Characters.
Net publishing revenues related to the Company's monthly magazine, approved for
publishing by the Board of Directors in July 1998 during interim management's
tenure, were $129,000 for 1999. There were no comparable sales in 1998. The
publication of the magazine has ceased, with the July 1999 issue being the last
issue published for distribution, as a result of new management's decision to
focus on the Company's core entertainment business operations.
Cost of Sales - Cost of sales relating to filmed entertainment revenues were
$262,000 and $787,000 in 1999 and 1998, respectively. The decrease in cost of
sales is due to a decrease in filmed entertainment activity for the period.
Amortization of the film library was $250,000 and $524,000 in 1999 and 1998,
respectively. The amortization amount in 1999 reflects an additional estimated
loss related to "Baby Huey's Great Easter Adventure", the live-
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action, direct-to-video produced in 1998, featuring the Company's classic
character Baby Huey, and released in March 1999. The amortization amount in the
1998 period includes the write-off of $500,000 of previously capitalized product
development costs due to uncertainties concerning the recoverability of such
costs based on the Company's business plan contemplated in 1998. Additionally,
1998 cost of sales included a $150,000 adjustment in the carrying value of
certain video inventory.
Merchandising cost of sales were $1,031,000 and $1,742,000 in 1999 and 1998,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity for the period.
Publishing cost of sales were $382,000 and $70,000 in 1999 and 1998,
respectively.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses ("SG&A") were $4,474,000 and $5,569,000 for 1999 and
1998, respectively, a decrease of $1,095,000. The higher SG&A expenses in the
1998 period is primarily due to the effect of an approximate $500,000 provision
relating to doubtful accounts from previously recognized guarantees from agents
and licensees operating in the Pacific Rim territories, a $450,000 provision
relating to the Company's prior participation interest in Universal Studio's
Harvey-related merchandising business, and higher other overhead expenses.
Depreciation and Amortization - Depreciation expense was $144,000 and $102,000
in 1999 and 1998, respectively. Amortization of trademarks, copyrights and other
was $78,000 in 1999 and $58,000 in 1998. Amortization of goodwill was $96,000 in
both 1999 and 1998.
Other Income - Other income was $657,000 and $323,000 in 1999 and 1998,
respectively. Other income in 1999 resulted from investment income from the sale
of certain securities, and in 1998 the company received a favorable settlement
of litigation.
Stock Based Compensation - Stock based compensation was $76,000 and $969,000 in
1999 and 1998, respectively, related to the issuance of warrants to a consultant
to the Company, for the nine months ended September 30, 1999 and the issuance of
options to Global Media during the nine months ended September 30, 1998.
Income Taxes - Income tax benefit/(expense) was ($1,000) and $3,542,000 in 1999
and 1998, respectively. The current tax expense was the result of an assessment
of additional income taxes for the 1997 tax year. 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 at the
1998 year end to reduce deferred income tax assets to the amount expected to be
realized. At the end of the current quarter, an additional valuation allowance
was established to offset the benefit generated by current quarter's losses.
Realizable income tax benefits from the Company's cumulative tax losses have
been reported as an income tax receivable of $542,000 at the end of the current
period.
Year 2000 - The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
software problems associated with the year 2000. At present, management does not
expect that material incremental costs will be incurred, or significant Company
resources dedicated in 1999 to become year 2000 compliant.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3,709,000 and $7,725,000 in 1999 and
1998, respectively. The reduction in cash used in operating activities was
primarily due to the reduction of deferred tax liability and accounts receivable
balances in 1998.
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<PAGE> 14
Net cash used in investing activities was $269,000 and $478,000 in 1999 and
1998, respectively. The decrease in cash used for investing activities was
primarily due to less investment by the Company in its trademarks, copyrights
and film library and purchase of less furniture and equipment in 1999.
Net cash provided by financing activities was $11,394,000 and $3,722,000 in 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, and the desire of the
Company to realize the potential benefits of additional capital, on June 30,
1999 the Company issued a subordinated note (the "Note") in the amount of
approximately $2,049,000. 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 into 20,488 shares of Series A Preferred Stock (convertible
into 303,518 shares of Common Stock) and 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 is currently in discussions with the Bank
to renew or extend the credit facility. The Company is also in discussions with
other financial institutions with respect to obtaining a permanent credit
facility.
The 1999 Refinancing and conversion of the Note resulted in the issuance of a
total of 2,689,236 Warrants to purchase shares of the Company's Common Stock,
1,344,618 of which were Investor Warrants and 1,344,618 of which were Management
Warrants. Of the Investor Warrants granted, those granted to non-employees are
fully vested, non-forfeitable and are exercisable commencing six months from
their issuance date, at prices ranging from $9.00 to $12.00 per share of the
Common Stock. Management Warrants, and any Investor Warrants, granted to
employees vest and become exercisable according to schedules set forth in their
respective warrant agreements, and are exercisable at prices ranging from $9.00
to $12.00 per share of Common Stock. The Company accounts for stock issued to
non-employees in accordance with Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", and Emerging
Issues Task Force 96-18 ("EITF 96-18"). In accordance with SFAS 123 and EITF
96-18, the fair value of any Management Warrants granted in the future to
non-employees will be measured either at the date of grant or the end of the
reporting period, as appropriate. Based on the determination of the fair value
of the Company's Common Stock, the Company may incur substantial non-cash
charges to earnings in future reporting quarters.
On September 24, 1999, the Company signed a letter of intent for the acquisition
of PM Entertainment Group, Inc., 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 purchase
price, contemplated by the Letter of Intent, consists of $10,000,000 in cash, a
portion of which will be paid at closing. The completion of the transaction is
anticipated prior to December 15, 1999, and is subject to the completion of a
definitive agreement, formal due diligence and other customary conditions,
including finalization of financing for the acquisition. There can be no
assurance that the transaction and related financing will be obtained on terms
acceptable to the Company or that the transaction will be completed as
contemplated above.
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<PAGE> 15
On April 26, 1999, the Company consummated the transactions contemplated by the
Stock Purchase Agreement and received gross proceeds of approximately
$17,700,000. 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 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, subject to securing
additional financing for the proposed PM Entertainment acquisition. In addition
to the proposed 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.
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<PAGE> 16
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Realty Trust Advisors, Inc. On December 31, 1997, Realty Trust
Advisors, Inc. ("RTA") filed suit against the Company in Los Angeles
Superior Court seeking damages arising out of the alleged failure of
the Company to pay certain commissions. On May 11, 1998, the Company
filed a 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 moved for summary adjudication on the Company's
cross-complaint which was denied in June, 1999. On July 1, 1999, the
parties to the above actions entered into a Settlement Agreement and
Mutual General Release and executed a dismissal with prejudice of
the entire action. The Company's defense and prosecution costs of
this matter were covered in their entirety by its insurer.
Item 2 - Changes in Securities and Use of Proceeds
None
Items 3 and 4 are omitted as not applicable.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports and Form 8-K
Item 6 (a)- Exhibit 10.66 Employment Agreement dated as of October 4, 1999
between the Company and Glenn Weisberger
Exhibit 10.67 Acquisition letter of intent dated September 24,
1999 between the Company and PM Entertainment
Group, Inc.
Exhibit 27 Financial Data Schedule (Electronic Filing Only)
Item 6 (b)- Reports on Form 8-K
None
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HARVEY ENTERTAINMENT COMPANY
AND SUBSIDIARIES (Registrant)
November 12, 1999 /s/Ronald B. Cushey
------------------------------------------------------------
Name: Ronald B. Cushey
Title: Executive Vice President and Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.66
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into as of this 22nd day
of September, 1999, by and between THE HARVEY ENTERTAINMENT COMPANY, a
California corporation (the "Company"), and GLENN WEISBERGER (the "Employee").
Whereas, Company desires to engage the services of Employee, whose
experience, knowledge and abilities are extremely valuable to Company, and
Employee desires to enter the employ of Company,
Now, therefore, Company and Employee agree as follows:
1. Position and Duties: Reporting.
(a) Company hereby employs Employee, and Employee hereby accepts
employment, as Senior Vice President and General Counsel of Company during the
Term hereof as specified in Paragraph 6 below, with powers and duties consistent
with such position. Employee shall perform such additional, different and/or
incidental duties, and accept the election or appointment to such other offices
or positions, as are consistent with Employee's position and reasonably
designated by the Chairman and Chief Executive Officer of Company. Employee
shall perform such duties and responsibilities incidental to his employment as
may from time-to-time be reasonably requested by Company, consistent with
Employee's position, stature and experience, and shall faithfully observe
Company's policies and procedures consistent with the provisions hereof. The
provisions of this Paragraph 1(a) shall be subject to the terms of Paragraph 6
hereof. Employee shall report to the Chairman/CEO of the Company.
(b) Employee shall devote his full working time to the promotion
of Company's business and welfare, and as such his services in the entertainment
industry shall be exclusive to Company hereunder during the Term.
Notwithstanding any contrary provisions hereof, Employee may engage in other
business activities with Company's prior written consent provided the same shall
not adversely affect the performance of Employee's services hereunder and
provided further, during the Term hereunder, Employee shall not, directly or
indirectly, (i) engage in any business for his own account which is competitive
with the businesses of Company or Company's subsidiaries or affiliates
(collectively, "Competitive Business") so long as Company or the Company's
subsidiaries or affiliates (as the case may be) continue to engage in such
business; (ii) enter the employ of, or render any services to, any person
engaged in a Competitive Business; or (iii) become interested in a Competitive
Business in any capacity including, without limitation, as an individual,
partner, shareholder, officer, director, principal, agent, trustee or
consultant. In addition, during the Term and the one-year period following
termination of his employment hereunder, Employee shall not, directly or
indirectly (i) induce any customer or supplier of Company or Company's
subsidiaries or affiliates to terminate its relationship with Company or
Company's subsidiaries or affiliates (as the case may be), or (ii) solicit or
induce any of Company's employees to
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<PAGE> 2
terminate their employment with Company, or hire or cause any of the then
current employees of Company to be hired by any other company (except companies
controlled by Company). Notwithstanding anything to the contrary, without the
consent of the Company Employee may acquire and/or retain, solely as an
investment, and take customary actions to maintain and preserve Employee's
ownership of:
(i) securities of any corporation which are registered
under Sections 12(b) or 12(g) of the Securities Exchange Act of 1934, as
amended, and which are publicly traded, as long as Employee is not part of any
control group of such corporation; and
(ii) any securities of a partnership, trust, corporation
or other person, the ownership of income producing real estate or other passive
investments, so long as Employee remains a passive investor in that entity and
does not become part of any control group thereof (except in a passive capacity)
and so long as such entity is not, directly or indirectly, in competition with
the Company or its subsidiaries or affiliates.
2. Compensation.
(a) Annual Guaranteed Salary. During the term of his employment
hereunder, Company shall pay to Employee a salary, in equal installments not
less frequently than monthly, at the rate of $145,000 per year for the first
year of the Term, $155,000 per year for the second year of the Term, and
$165,000 per year for the third year of the Term.
(b) Incentive Compensation. Employee shall be eligible for
consideration to receive an annual bonus based on Company's performance, which
bonus (if any) shall be determined by the Board of Directors in its sole
discretion; however, the bonus shall be no less than the bonus to be paid to any
other senior management executive of Company of similar stature or position as
Employee.
3. Warrants and Stocks.
(a) Warrants to Purchase Common Stock. On the effective date
hereof, Employee shall be granted warrants ("Warrants") to purchase forty
thousand (40,000) shares of common stock no par value per share ("Common
Stock"), of Company pursuant to the terms of the Warrant Agreement dated as of
April 5, 1999, among the Company, Roger Burlage and the other signatories
thereto (the "Warrant Agreement"). The Warrants granted to Employee shall
consist equally of Series A Warrants, Series B Warrants and Series C Warrants of
Company. The Warrants shall vest as provided in Schedule I attached hereto.
(b) Stock Options. Employee shall have the right to participate
in stock option plans available to any other senior executive employee of
Company of equal or lesser stature to Employee. With the exception of the number
of options, such
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<PAGE> 3
participation shall be on terms no less favorable than those provided to any
other senior executive employee of comparable or lesser level to Employee in
Company. Any such stock options granted hereunder shall vest if Employee is
terminated other than for Cause. The time Employee has to exercise his options
after termination shall be governed by the Company's stock option plan.
Notwithstanding the foregoing, subject to approval of the Company's Stock Option
Committee and the approval of the proposal put forth to the Company's
shareholders at the 1999 Annual Shareholders' meeting regarding the increase in
the amount of stock options available for grant under the Company's 1997 Stock
Option Plan, management shall use its best efforts to convince the Company's
Stock Option Committee to promptly grant Employee options ("Options") to
purchase fifteen thousand (15,000 ) shares of Common Stock of the Company at a
price equal to the Common Stock closing price on the date of the Option grant.
The vesting period of such Option grant will be made in accordance with the 1997
Stock Option Plan or as determined by the Stock Option Committee.
(4). Expenses. Company will reimburse or pay Employee for all usual,
reasonable and necessary expenses paid or incurred by Employee in the
performance of his duties hereunder, consistent with Company's expense
reimbursement policies and subject to receipt by Company of appropriate
documentary proof of all expenditures for which reimbursement is sought.
(5). Employee Benefits. Employee shall be entitled to participate to the
full extent of the participation by any other senior executive employee of
Company of comparable level or below to Employee in any profit-sharing, pension,
vacation, health insurance, life insurance and disability or other plans,
benefits or policies available to the senior executive employees of comparable
level or below to Employee established by Company (in its sole and absolute
discretion) from time to time and not duplicative of those provided herein.
(6). Term.
(a) The period of Employee's employment by Company hereunder (the
"Term") shall commence on the effective date hereof and shall terminate upon the
first to occur of the following events: (i) three (3) years from the Effective
Date as set forth in Paragraph 17 herein, (ii) the death of Employee, (iii) at
the option of Company upon twenty (20) days prior written notice to Employee, in
the event of the inability of Employee to perform his duties hereunder, whether
by reason of injury, illness (physical or mental) or otherwise, for a period of
four (4) consecutive months or six (6) months in the aggregate ("disability"),
or (iv) the discharge of Employee for Cause. Cause shall mean, and be limited
to, (x) acts of deliberate dishonesty constituting either the commission of a
felony or the misappropriation of substantial corporate assets for personal
benefit, (y) willful failure to observe or follow reasonable and explicit
instructions or directives of Company, or (z) willful malfeasance or willful
failure to act involving material nonfeasance, if in either case such
malfeasance or nonfeasance would have a material adverse effect on Company.
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<PAGE> 4
Company agrees to give written notice to Employee specifying the claimed
Cause and, provided such Cause is curable, to permit Employee to correct the
claimed Cause as soon as practical thereafter but no later than seven (7)
business days after receipt of the applicable notice. However, in no event shall
the occurrence of Cause within clause (x) of this Paragraph 6(a) be subject to
cure. Upon the termination of Employee's employment pursuant to this Paragraph
6(a), Company shall have no further liability or obligation of any kind or
nature whatsoever to Employee under this Agreement, except that any salary or
other benefits accrued or earned by Employee to the date of termination but not
paid shall be paid by Company to Employee or his estate, and Employee shall be
entitled to such benefits, if any, under Sections 4 and 5 hereof to which he has
become entitled prior to the date of his termination of employment.
(b) If, without Cause, Company without Employee's consent
determines to remove Employee from the office of the Senior Vice President and
General Counsel of Company, Employee shall have the right to elect to treat such
event as a termination of his employment by Company without Cause with the
consequences provided in this Paragraph 6(b). If Employee's employment is
terminated by Company without Cause, Employee shall be entitled to receive from
Company until the ending date of the period of employment hereunder (determined
as provided in Paragraph 6(a) hereof) the salary, benefits and emoluments in
effect at the date of such termination, including without limitation, the
immediate vesting of any unvested stock options and/or Warrants theretofore
granted. Upon the payment of the amounts provided in this Paragraph 6(b),
Company shall have no further liability or obligation of any kind or nature
whatsoever to Employee under this Agreement.
7. Mitigation. Except as noted below, Employee shall be obligated to
mitigate the damages he may incur in the event of termination by Company without
cause. Employee agrees that if Employee furnishes his services for other
engagements or employment after such termination without Cause by Company
hereunder, the total compensation actually earned or received by Employee
together with any welfare or other benefits earned by Employee through the date
when this Agreement would have terminated had it not been terminated without
Cause, shall reduce any amounts and benefits which Company would otherwise be
required to pay or provide to Employee. Employee agrees that he shall give
written notice to Company (promptly after accepting employment or furnishing his
services after such termination of his employment with Company) of any amounts
earned or received (or to be earned or received) by Employee and any benefits
provided (or to be provided) to Employee pursuant to his new employment
agreement. Notwithstanding the foregoing, Employee's obligation to mitigate
shall not become effective until a period beginning six months from the date of
termination by Company without cause.
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<PAGE> 5
8. Nondisclosure of Confidential Information.
(a) "Confidential Information" shall include, but not be limited
to, all of Company's and its subsidiaries' and affiliates' performance, sales,
financial, pricing, cost, manufacturing, contractual and marketing information,
ideas, knowledge and data, and all processes, products, formulae, designs,
practices, techniques, trade secrets, research, know-how, merchandising
agreements, licensing agreements, distribution agreements, customer lists,
technical requirements of customers and identity and purchasing terms of
suppliers.
(b) Employee acknowledges that Company, and its subsidiaries and
affiliates, have exclusive rights to all of their respective Confidential
Information and agrees to assign all rights he might otherwise possess in any
Confidential Information to the Company. Except as required in the performance
of his duties hereunder, Employee shall not at any time during or after the term
of his employment, directly or indirectly use, communicate, disclose or
disseminate, lecture upon/publish articles or otherwise put in the public
domain, any Confidential Information or any other information of a secret,
proprietary, confidential or generally undisclosed nature relating to Company,
or its subsidiaries or affiliates, or their products, operations and activities
until such Confidential Information is disclosed by law or legal process or
becomes generally available to the public by independent discovery, development
or publication or generally known within the industry other than as a result of
Employee's breach hereof.
(c) All documents, records, notebooks, notes, memoranda, computer
records and other repositories of or containing Confidential Information or any
other information of a secret, proprietary, confidential or generally
undisclosed nature relating to Company, or its subsidiaries or affiliates, or to
its products, operations and activities made or compiled by Employee at any time
or made available to Employee prior to or during the term of his employment by
Company, including any and all copies thereof shall be the property of Company,
shall be held by Employee in trust solely for the benefit of the Company, and
shall be delivered to Company by Employee on the termination of Employee's
employment or at any other time on the request of Company.
9. Warranties/Indemnities. Employee hereby represents and warrants that
he: (i) is free to enter into this Agreement and to furnish Company all of the
services and grant all of the rights herein set forth; (ii) is in good health
and free from any disability or other condition which will or could interfere
with the full performance of his obligations hereunder; and (iii) has not made
nor will make any commitments or do any acts in conflict with this Agreement or
in derogation of Company's rights hereunder. Employee shall defend, indemnify
and hold harmless Company and all those claiming under Company from and against
any claims, damages, liabilities, costs and expenses (including reasonable
attorneys' fees and costs, whether or not in connection with litigation) arising
out of any breach or default by Employee hereunder. Employee agrees that Company
shall have the sole right to control the legal defense against any such claims,
demands or
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<PAGE> 6
litigation, including the right to select counsel of its choice and to
compromise or settle any such claims, demands or litigation.
10. Ownership of Properties. Company, as employer, shall own, and
Employee hereby transfers and assigns to Company, all rights in and to any
material and/or ideas written, suggested or submitted by Employee during the
Term and all other results and proceeds of his services for Company
("Properties"). Company and its licensees and assigns shall have the right to
adapt, change, revise, delete from, add to and/or rearrange the Properties or
any part thereof written or submitted by Employee and to combine the same with
other works to any extent, and to change or substitute the title thereof, and in
this connection Employee hereby waives any so-called "moral rights" of authors.
Employee agrees to execute and deliver to Company such assignments or other
instruments as Company may require from time to time to evidence its ownership
of the results and proceeds of Employee's services, failing which Company shall
have the irrevocable right to do so as Employee's attorney-in-fact; provided,
however, that nothing in this Paragraph 10 shall be deemed in any manner to
restrict or qualify Employee's ownership or right to exploit Employee's personal
memoirs.
11. Right to Injunction/Remedies. Employee acknowledges that Company's
remedies at law for a breach by him of the provisions of Paragraphs 1, 8 and 10
hereof will be inadequate. Accordingly, in the event of the breach or threatened
breach by Employee of any such provisions, Company shall be entitled to seek
injunctive relief in addition to any other remedy it may have. In the event of
any breach by Company of this Agreement, Employee shall be limited to his remedy
at law for damages, if any, and shall not have the right to terminate or rescind
this Agreement or in any way to enjoin or restrain the production, distribution,
advertising or other exploitation of any motion pictures or other productions,
it being specifically agreed that all rights granted and agreed to be granted to
Company under this Agreement shall be irrevocably vested in Company and shall
not be subject to rescission for any cause.
12. Assignment. Employee may not assign, transfer or convey this
Agreement or any interest therein. This Agreement and all of Company's rights
and obligations hereunder may be assigned or transferred by it, in whole but not
in part, to and shall be binding upon and inure to the benefit of any successor
of Company, but any such assignment shall not relieve Company of any of its
obligations. The term successors shall mean only any corporation or other
business entity which by merger, consolidation, purchase of assets or otherwise
succeeds to or otherwise acquires all or substantially all of the assets of
Company; provided that nothing herein shall limit the provisions Paragraph 6(b)
hereof.
13. Arbitration.
(a) Without limiting Company's right to seek injunctive relief as
described in Paragraph 11, in the event of a disagreement or dispute between
Company and Employee related to this Agreement, the matter will be finally
settled in Los Angeles,
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California by arbitration by a single arbitrator (unless the parties cannot
agree on such arbitrator in which case each party will select an arbitrator and
the two arbitrators so selected shall select the third arbitrator) in a
proceeding conducted under the rules of the American Arbitration Association or
any similar successor body, the arbitrator also apportioning the costs of the
arbitration. The decision of the arbitrator(s) in writing shall be final and
binding upon the parties and will not be subject to appeal. If either party
fails to abide by such decision, the other party may seek the order of any
federal or state court having jurisdiction thereof which shall enter judgment on
the decision of the arbitrator(s), and the party so failing to abide shall be
responsible for the payment of the expenses of the court proceeding and all
resulting enforcement expenses, including actual attorneys' fees. The parties
agree to use their best efforts to complete any arbitration hereunder
expeditiously.
(b) The prevailing party in any arbitration shall be entitled to
be reimbursed for attorneys fees and costs in connection with the pursuit of
such arbitration, subject to the following limitation: such reimbursement shall
not exceed the total attorneys fees and costs incurred by whichever of the two
parties to such arbitration has the lesser aggregate attorneys fees and costs.
By way of example, if Employee brings an arbitration against Company and Company
prevails in such arbitration, (thus entitling Company to reimbursement of
attorneys fees and costs), and if Employee's legal fees and costs amount to
$50,000 and Company's legal fees and costs amount to $85,000, Company's recovery
of legal fees and costs against Employee in such instance shall be limited to
$50,000.
14. Indemnification. Employee shall be entitled to the benefit of
indemnification to the fullest extent permitted by applicable law at the time of
assertion of any liability against Employee.
15. Notices. All notices hereunder shall be in writing and shall be
given either by personal delivery, telegram or telecopy (toll prepaid) or by
registered or certified mail (postage prepaid) to the appropriate party at the
address listed below, and the date of such personal delivery, mailing,
telegraphing or telecopying shall be the date of the giving of such notice.
If to Company: The Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, California 90067
Attention: Chairman of the Board
with a copy to: The Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, California 90067
Attention: Legal Department
7
<PAGE> 8
If to Employee: Glenn Weisberger
3930 Sunset Ridge Road
Moorpark, CA 93021
16. Miscellaneous.
(a) In the event there is any conflict between the provisions of
this Agreement and any statute, law or regulation, the latter shall prevail;
provided, however, that in such event the provision(s) of this Agreement so
affected shall be curtailed and limited only to the minimum extent necessary to
permit compliance with the minimum mandatory requirement(s) thereof, and no
other provision(s) of this Agreement shall be affected thereby, and all such
other provisions will continue in full force and effect.
(b) This Agreement shall be governed by the laws of the State of
California applicable to agreements executed and to be wholly performed therein
and shall not be modified except by a written document executed by the parties
hereto.
(c) This Agreement expresses the entire understanding of the
parties hereto and replaces any and all former agreements, negotiations or
understandings, written or oral, relating to the subject matter hereof.
(d) The remedies herein provided are cumulative and the exercise
of one shall not preclude the exercise of any other.
(e) No waiver by either party hereto of any failure by the other
party to keep or perform any covenant or condition of this Agreement shall be
deemed a waiver of any preceding, succeeding or continuing breach of the same,
or any other covenant or condition.
(f) Paragraph headings are for the convenience of the parties
only and shall not be used in construing meaning.
(g) This Agreement shall not be construed to create a joint
venture or partnership between the parties, and shall not be interpreted in
favor of or against either party on grounds that said party drafted this
Agreement.
(h) This Agreement shall be executed in a number of identical
counterparts, each of which shall be construed as an original for all purposes,
but all of which taken together shall constitute one and the same Agreement.
8
<PAGE> 9
17. This Employment Agreement shall become effective (the "Effective
Date") as of October 4, 1999.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
EMPLOYEE: THE HARVEY ENTERTAINMENT
COMPANY
___________________________________ By: _______________________________
GLENN WEISBERGER
Title: ____________________________
9
<PAGE> 10
Schedule I (Glenn Weisberger)
Employee's right to exercise the Warrants granted pursuant to Paragraph
3 of the Agreement to which this Schedule I is attached shall vest in accordance
with the following schedule:
<TABLE>
<CAPTION>
Length of Employment Employee's Warrants that Vest
-------------------- -----------------------------
<S> <C>
On signing this Agreement 20,000
One year after the Effective Date
described in Paragraph 17 10,000
End of the second year of the Term 5,000
End of the third year of the Term 5,000
</TABLE>
Notwithstanding anything to the contrary herein or in the Warrant
Agreement, in the event of the termination of Employee's employment by Company
without Cause or as a result of Employee's death or disability during the term
of and pursuant to the attached Employment Agreement, all unvested Warrants held
individually by Employee shall immediately vest and shall remain exercisable for
a period equal to the then balance of the term of the Warrants (i.e., the
balance of the six year, seven year or eight year term depending on the relevant
Warrants).
10
<PAGE> 1
EXHIBIT 10.67
THE HARVEY ENTERTAINMENT COMPANY
1999 AVENUE OF THE STARS
SUITE 2050
LOS ANGELES, CA 90067
September 24, 1999
Rick Pepin
Joseph Merhi
George Shamieh
PM Entertainment, Inc.
9450 Chivers Avenue
Sun Valley, CA 92352
Gentlemen:
This Letter of Intent sets forth the intention of The Harvey
Entertainment Company, a California corporation ("Harvey"), to enter into a
definitive acquisition agreement and related documents (the "Definitive
Agreement") for the acquisition by Harvey from the existing shareholders
("Sellers") of 100% of the outstanding shares of PM Entertainment, Inc. (the
"Company") on the following terms and conditions:
1. PURCHASE PRICE: The purchase price will be $10.0 million of which
Harvey will pay $6.0 million in cash at the Closing, and $4.0 million through
delivery of a promissory note issued by Harvey with interest at 10% per annum
and with a 15 month maturity ("Note"). The Note will be payable $875,000 plus
interest for each of the four quarters following the closing and $500,000 plus
interest on the 15th month anniversary of the closing. Breaches of
representations and warranties may be offset against the last payment on the
Note The Note may be prepaid by Harvey at any time. It is anticipated that the
cash portion and the Note will be paid to the Sellers as their interests appear.
In addition to the cash purchase price, Harvey agrees to acquire the Company
subject to the approximate $13 million of bank debt, payables and other
liabilities which currently burden the Company.
2. CLOSING: The Closing shall occur on the date selected by Harvey (not
later than December 15, 1999) and will be subject to normal closing conditions
including receipt of all necessary regulatory approvals, Board of Director
approvals, and so forth, including, if and to the extent necessary, approvals
under the Hart-Scott-Rodino Antitrust Improvements Act.
3. CONDITIONS TO CLOSING: The Closing will be subject to completion of
Harvey's due diligence examination to its satisfaction; negotiation and
execution of a Definitive Agreement and any related agreements containing the
terms set forth therein; negotiation and execution of a lease and purchase
option satisfactory to Harvey for the Company's headquarters premises; obtaining
all governmental and third party consents and approvals; absence of any material
adverse change, absence of a material pending or threatened litigation and
continued truth and accuracy of all representations and warranties and
compliance with all covenants.
4. DUE DILIGENCE: Harvey has not had an opportunity to review detailed
financial and related information regarding Company, nor to review various
operational and employee
<PAGE> 2
PM Entertainment Board of Directors
September 24, 1999
Page 2
matters. In reliance upon the agreements herein, Harvey will promptly commence a
due diligence investigation of the Company. Such due diligence investigation
will include a review of the Company's film library and rights, current
production arrangements, bank facilities, all tax returns and tax issues, all
compensation and employment practices, workers compensation, ERISA and
environmental issues, compliance with licensing and other legal requirements,
all pending and threatened litigation, all material contracts, agreements and
commitments. The Company, its affiliates, counsel and accountants shall afford
to Harvey and its accountants, counsel, and other representatives reasonable
access to the Company, its key employees and suppliers, and shall furnish to
Harvey all information concerning the business, assets, copyrights, film
licensing agreements, customers, prospects, financial condition, litigation,
material contracts, real property leases, and other properties of the Company
for the purpose of making such financial, accounting, legal, and other review
and due diligence investigation and examination deemed desirable by Harvey. The
Company and its affiliates, attorneys and accountants will also cooperate and
provide to Harvey or its lenders and investors such information and
documentation as may be necessary. Absent matters which are discovered during
the initial due diligence period and which require follow-up or more detailed
review and examination, Harvey anticipates concluding its due diligence on or
before November 30, 1999.
5. SHAMIEH AGREEMENTS: Execution of a Definitive Agreement and closing
of the transaction contemplated herein is contingent upon Harvey entering into
an exclusive employment agreement with George Shamieh ("Shamieh") which will
provide that Shamieh will act as the President of a new division to be formed at
Harvey to operate the assets currently held by the Company. This agreement will
include reporting requirements, duties, responsibilities and incentives. A
second agreement with Shamieh and his wholly owned corporation ACI will provide
for an output and distribution deal for the ACI library and its current
productions. After these productions are completed, ACI will become dormant as
Shamieh will be exclusive to Harvey. Both agreements must be on terms
satisfactory to Harvey.
6. OPERATION OF THE BUSINESS: Pending the Closing, the business of the
Company will be conducted in the ordinary course and in a manner consistent with
prior practice unless the parties agree otherwise. No dividends, new issuance of
securities, non-customary bonuses or pay increases, financings or library sales
will be permitted between the date hereof and the Closing.
7. OWNERSHIP OF THE COMPANY: By signing this Letter of Intent, the
Company represents to Harvey that the only outstanding equity security of the
Company is its common stock and that the persons signing the letter of intent as
Sellers constitute all of the shareholders. No option plans or other classes of
securities exist.
8. DEFINITIVE AGREEMENT: The parties will in good faith negotiate and
sign a Definitive Agreement as soon after acceptance hereof as is practicable,
which agreement shall include such warranties, representations and
indemnification provisions as are customary in definitive agreements of this
sort. Furthermore, representations and warranties shall survive the
<PAGE> 3
PM Entertainment Board of Directors
September 24, 1999
Page 3
Closing for a period to be determined (tax ERISA and environmental
representations and warranties shall survive for the applicable statutes of
limitations). Upon execution of the Definitive Agreement, the provisions of this
Letter of Intent shall lapse.
9. ASSET SALE: Harvey may determine, in lieu of purchasing 100% of the
stock of the Company, to acquire 100% of the assets and assume those disclosed
liabilities acceptable to Harvey. Harvey's decision of whether to acquire stock
or assets shall be made within thirty (30) days of the execution of this Letter
of Intent.
10. EXCLUSIVE NEGOTIATIONS: Sellers understand that Harvey will incur
substantial third party fees and internal costs in performing its due diligence
and in negotiating the Definitive Agreement in reliance upon the agreements
hereunder. In consideration of the efforts Harvey proposes to undertake and in
order to facilitate our continuing discussions, you have agreed that from this
date until the earlier of the Closing or ninety (90) days from the date of
acceptance of this Letter of Intent, neither the Company, any Seller, nor any of
the Company's affiliates, nor anyone acting on behalf of the Company or Seller
will solicit, negotiate, act upon or entertain in any way an offer from any
other person or entity to purchase either the Company, its securities or any
material assets of the Company or furnish any information to any other person in
that regard, and you and Company and Sellers agree promptly (within two (2)
business days) to notify Harvey upon the receipt of any of them of an
unsolicited competing offer in respect of such a purchase and of the proposed
terms of the offer.
11. INFORMATION IN CONFIDENCE: All information and documentation
provided by Company to Harvey or its representatives shall be kept strictly
confidential by Harvey and its representatives and will not be used or disclosed
by Harvey or such representative for purposes other than its consideration of
the transaction contemplated hereby except to the extent that (i) it was already
known to Harvey or its representatives or available to Harvey on a
non-confidential basis when received, (ii) it hereafter becomes lawfully
obtainable from other sources, or (iii) it must be disclosed by Harvey or its
affiliates in any document filed with any government agency or authority and
available for public inspection. This covenant will survive for a period of two
(2) years from the date of termination of the letter of intent. In the event the
Closing fails to occur within ninety (90) days from the date hereof, Harvey will
return all confidential documents received from Company and will take reasonable
steps to assure Company that all copies given by Harvey to its representatives
or affiliates are returned or destroyed.
12. CONFIDENTIALITY OF THE LETTER OF INTENT: Except as required by law
or in connection with the implementation of this Letter of Intent, the terms of
this Letter will be kept strictly confidential. To the extent that any
disclosure becomes legally required, the Company or Harvey, as the case may be,
shall be notified promptly and before the required disclosure is made.
13. EXPENSES: All fees, costs and expenses of Harvey, as one party, or
the Company and Sellers as one party, relating to the preparation of this Letter
of Intent, the Definitive
<PAGE> 4
PM Entertainment Board of Directors
September 24, 1999
Page 4
Agreement and all other matters in connection with the acquisition, including
but not limited to, legal, accounting, and filing fees will be borne by Harvey
if incurred by it or on its behalf, and will be borne by Sellers if incurred by
Company or Sellers or on their behalf. Sellers and Harvey will indemnify the
other against any liability for broker's fees, finder's fees, investment banking
fees, or commissions claimed by anyone hired or contracted by the indemnifying
party.
14. COUNTERPARTS: This Letter of Intent may be signed by facsimile and
may be executed in two or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same document.
15. TERMINATION AND BINDING AGREEMENT: This Letter of Intent shall
expire and terminate after September 27, 1999 if not sooner accepted by the
Company or revoked by Harvey. Upon acceptance by the Company, this Letter of
Intent shall be binding and may not be terminated by either party except as
provided herein. This Letter of Intent is an expression of interest only and
neither party shall be bound to enter into the Definitive Agreement or to
effectuate the purchase and sale prior to executing the Definitive Agreement.
Pending execution of the Definitive Agreement, only the provisions of Paragraphs
8, 10, 11, 12, 13 and 15 hereof shall bind the parties.
If you agree to the foregoing, please sign and return the enclosed copy
of this Letter of Intent to the undersigned for receipt no later than September
27, 1999.
Very truly yours,
THE HARVEY ENTERTAINMENT COMPANY
By: ______________________________
Name:
Title:
<PAGE> 5
PM Entertainment Board of Directors
September 24, 1999
Page 5
AGREED TO:
"The Company" Sellers:
PM ENTERTAINMENT, INC.
Rick Pepin
By: _______________________________
Name:
Title: Joseph Merhi
George Shamieh
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,867
<SECURITIES> 2,345
<RECEIVABLES> 1,183
<ALLOWANCES> (296)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,177
<DEPRECIATION> (802)
<TOTAL-ASSETS> 25,513
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 22,160
<OTHER-SE> (14,859)
<TOTAL-LIABILITY-AND-EQUITY> 25,513
<SALES> 0
<TOTAL-REVENUES> 117
<CGS> 0
<TOTAL-COSTS> 298
<OTHER-EXPENSES> 1,241
<LOSS-PROVISION> 109
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> (1,304)
<INCOME-TAX> 1
<INCOME-CONTINUING> (1,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,305)
<EPS-BASIC> (0.64)
<EPS-DILUTED> (0.64)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
