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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 2
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 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.)
11835 W. Olympic Blvd., Suite 550, Los Angeles, California 90064
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(Address of principal executive offices)
Registrant's phone number, including area code (310) 789-1990
---------------------------------
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 2, 1999
------------ 4,186,941 (6,705,459 shares, including
Common Stock, no par value 2,518,518 shares into which the Series A
Preferred Stock could be converted)
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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INDEX
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 1-2
Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 1999
and 1998 3
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-8
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 9-14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K 15-16
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PART I - FINANCIAL INFORMATION
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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JUNE 30,
ASSETS 1999 JUNE 30, DECEMBER 31,
(AS RESTATED-SEE NOTE 3) 1999 1998
(UNAUDITED) (UNAUDITED)
------------------------ ------------------- ------------------
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Cash and cash equivalents $ 9,889,000 $ 9,475,000 $ 451,000
Marketable securities 3,048,000 3,048,000 --
Accounts receivable, net of allowance for doubtful accounts
of $491,000 and $298,000 in 1999 and 1998, respectively 1,158,000 1,158,000 1,689,000
Prepaid expenses and other assets 369,000 143,000 541,000
Income tax receivable 542,000 542,000 567,000
Film library, net of accumulated amortization of $7,144,000
and $6,894,000 in 1999 and 1998, respectively 10,519,000 10,519,000 10,873,000
Furniture and equipment, net of accumulated
depreciation of $766,000 and $658,000 in 1999 and 1998,
respectively 401,000 401,000 501,000
Goodwill, net of accumulated amortization of $1,287,000
and $1,222,000 in 1999 and 1998, respectively 1,309,000 1,309,000 1,373,000
Trademarks and copyrights, net of accumulated
amortization of $319,000 and $266,000 in 1999 and 1998,
respectively 1,207,000 1,207,000 1,039,000
----------- ----------- -----------
TOTAL $28,442,000 $27,802,000 $17,034,000
=========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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JUNE 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 JUNE 30,
(AS RESTATED-SEE NOTE 3) 1999 DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1998
------------------ ---------------- ----------------
LIABILITIES:
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Accounts payable and accrued expenses $ 953,000 $ 953,000 $ 871,000
Participations payable 750,000 750,000 861,000
Accrued marketing expenses 1,200,000 1,200,000 1,200,000
Derivative financial instruments 374,000 -- --
Note payable 2,049,000 2,049,000 --
Line of credit -- -- 250,000
Accrued rent and other liabilities 150,000 150,000 170,000
----------- ----------- -----------
Total liabilities 5,476,000 5,102,000 3,352,000
----------- ----------- -----------
Series A convertible preferred stock, $100 stated value,
170,000 shares issued and outstanding at June 30, 1999,
liquidation preference of $17,212,000 at June 30, 1999 12,684,000 12,684,000 --
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares
authorized (170,000 shares have been designated as -- -- --
Series A preferred)
Common stock, no par value, 10,000,000 shares authorized,
4,187,000 issued and outstanding at June 30, 1999 and
December 31, 1998 22,160,000 22,160,000 22,160,000
Additional paid in capital 3,947,000 3,947,000 --
Accumulated other comprehensive income (2,027,000) (3,178,000) --
Accumulated deficit (13,798,000) (12,913,000) (8,478,000)
------------ ------------ -----------
Total stockholders' equity 10,282,000 10,016,000 13,682,000
------------ ------------ ------------
TOTAL $ 28,442,000 $ 27,802,000 $ 17,034,000
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Three Month Ended Six Month Ended
JUNE 30, 1999 JUNE 30, 1999
(AS RESTATED-) THREE MONTHS ENDED (AS RESTATED -) SIX MONTHS ENDED
SEE NOTE 3 JUNE 30, SEE NOTE 3 JUNE 30,
-------------- ------------------------------- ------------- -----------------------------
1999 1998 1999 1998
OPERATING REVENUES:
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Filmed entertainment $ - $ - $ 20,000 $ - $ - $ 105,000
Merchandising 364,000 364,000 400,000 794,000 794,000 1,175,000
Publishing (3,000) (3,000) - 129,000 129,000 -
-------------- -------------- --------------- ------------- ------------- -------------
Net operating revenues 361,000 361,000 420,000 923,000 923,000 1,280,000
-------------- -------------- --------------- ------------- ------------- -------------
OPERATING EXPENSES:
Cost of sales 561,000 561,000 418,000 1,384,000 1,384,000 1,556,000
Selling, general and administrative 1,245,000 1,245,000 1,636,000 3,286,000 3,286,000 4,290,000
expenses
Amortization of intangibles 58,000 58,000 39,000 117,000 117,000 104,000
Depreciation expense 55,000 55,000 32,000 108,000 108,000 66,000
-------------- -------------- --------------- ------------- ------------- -------------
Total operating expenses 1,919,000 1,919,000 2,125,000 4,895,000 4,895,000 6,016,000
-------------- -------------- --------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (1,558,000) (1,558,000) (1,705,000) (3,972,000) (3,972,000) (4,736,000)
OTHER EXPENSES (714,000) - - (714,000) - -
OTHER INCOME 210,000 381,000 72,000 235,000 405,000 106,000
STOCK BASED COMPENSATION - - (367,000) - - (800,000)
INTEREST EXPENSE (38,000) (38,000) 0 (57,000) (57,000) -
-------------- -------------- --------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAX BENEFIT $ (2,100,000) $ (1,215,000) $ (2,000,000) $ (4,508,000) $(3,624,000) $ (5,430,000)
INCOME TAX BENEFIT - - 797,000 - - 2,168,000
-------------- -------------- --------------- ------------- ------------- -------------
NET LOSS $ (2,100,000) $ (1,215,000) $ (1,203,000) $ (4,508,000) $(3,624,000) $ (3,262,000)
============== ============== =============== ============= ============= =============
Net loss $ (2,100,000) $ (1,215,000) $ (1,203,000) $ (4,508,000) $(3,624,000) $ (3,262,000)
Preferred stock dividends and
amortization of beneficial (810,000) (810,000) - (810,000) (810,000) -
conversion feature -------------- -------------- --------------- ------------- ------------- -------------
Net loss applicable to common stock $ (2,910,000) $ (2,025,000) $ (1,203,000) $ (5,318,000) $(4,434,000) $ (3,262,000)
============== ============== =============== ============= ============= =============
NET LOSS PER SHARE OF COMMON STOCK:
Basic and Diluted $ (0.70) $ (0.48) $ (0.29) $ (1.27) $ (1.06) $ (0.83)
============== ============== =============== ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 4,187,000 4,187,000 4,174,000 4,187,000 4,187,000 3,908,000
============== ============== =============== ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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SIX MONTHS ENDED
JUNE 30, 1999
(AS RESTATED - SIX MONTHS ENDED
SEE NOTE 3) JUNE 30,
----------------- -----------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,508,000) $(3,624,000) $ (3,262,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Premium on derivative financial instruments, net 555,000 - -
Depreciation 108,000 108,000 66,000
Amortization of film library, goodwill, trademarks
and copyrights and other 366,000 366,000 623,000
Deferred income taxes - - (2,211,000)
Stock based compensation - - 800,000
Changes in operating assets and liabilites:
Accounts receivable, net 531,000 531,000 2,155,000
Prepaid expenses and other assets 170,000 397,000 (128,000)
Income taxes receivable, net of income taxes payable 25,000 25,000 (1,318,000)
Account payable and accrued expenses 82,000 82,000 (826,000)
Participations payable (111,000) (111,000) -
Accrued rent and other liabilities (20,000) (20,000) 56,000
----------- ----------- ------------
Net cash used in operating activities (2,802,000) (2,246,000) (4,045,000)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (9,000) (9,000) (130,000)
Investments in trademarks, copyrights
and film library (115,000) (115,000) (249,000)
----------- ----------- ------------
Net cash used in investing activities (124,000) (124,000) (379,000)
----------- ----------- ------------
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 1,750,000 -
Repayment on line of credit (2,000,000) (2,000,000) -
Net proceeds from issuance of convertible
preferred stock 9,595,000 9,595,000 -
Proceeds from issuance of note payable 2,049,000 2,049,000 -
Proceeds from sale of derivative financial
instruments, net 970,000 - -
----------- ----------- ------------
Net cash provided by financing activities 12,364,000 11,394,000 3,722,000
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,438,000 9,024,000 (702,000)
CASH AND CASH EQUIVALENTS, Beginning of period 451,000 451,000 6,316,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, End of period $ 9,889,000 $ 9,475,000 $ 5,614,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid (received) during the year for:
Interest $ 32,000 $ 32,000 $ -
Income taxes $ (21,000) $ (21,000) $ 775,000
=========== =========== ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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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 filed with the Securities and Exchange
Commission on April 13, 1999.
In the opinion of the Company's management, the accompanying unaudited condensed
consolidated financial statements as of June 30, 1999 and for the three and six
month periods ended June 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 June 30, 1999 and the consolidated
results of operations and consolidated cash flows for the six month periods
ended June 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 six
month periods ended June 30, 1999 and 4,174,000 and 3,908,000 weighted average
number of shares outstanding for the three and six month periods ended June 30,
1998, respectively. The net loss per common share for the three and six month
periods ended June 30, 1999 gives effect to stock dividends of $212,000 and the
amortization of the beneficial conversion feature of $598,000 related to the
Series A Preferred Stock issued on April 26, 1999 (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
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financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
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 has reported an unrealized
loss of approximately $2 million relating to the common stock of the
Kushner-Locke Company, net of the gain on the sale of derivative financial
instruments entered into to hedge against changes in the market value of such
stock. Such loss was included as part of other comprehensive income for the
quarter ended June 30, 1999.
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 2.4 million shares
of the Company's Common Stock in consideration of cash and common stock of
Kushner-Locke ( the "1999 Refinancing"). Of the Warrants issued, 1.2 million
were granted immediately to investors participating in the 1999 Refinancing (the
"Investor Warrants") and 1.2 million will 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 million. The total cash consideration
received in the 1999 Refinancing and issuance of the Note was approximately
$11.578 million, net of transaction fees and expenses of approximately $1.97
million. 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 fair valued at approximately $6.2 million. 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: $11.9 million, Additional Paid in
Capital related to the Investor Warrants: $2.1 million and Additional Paid in
Capital related to a beneficial conversion feature of the Series A Preferred
Stock: $1.8 million. 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.
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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.
NOTE 3 - RESTATEMENT OF QUARTERLY INFORMATION
The Company has restated filings on Form 10-QSB for the quarterly period ended
June 30, 1999 for transactions related to derivative financial instrument in
order to account for them in compliance with the provisions of Statement of
Financial Accounting Standards (SFAS), No. 80 "Accounting for Futures Contracts"
and SFAS, No. 115 "Accounting for Certain Investments in Debt and Equity
Securities."
The Company has entered into derivative financial instrument contracts for the
purpose of minimizing risk associated with changes in the market value of the
Company's investment in Kushner-Locke common shares (the "Hedged Security") that
could adversely affect its results of operations and financial position if
un-hedged. The company does not use derivative financial instruments for trading
or speculative purposes.
In accordance with the terms of SFAS No. 80 and SFAS No. 115, any gain or loss
on these derivative instruments would be offset against any unrealized gains or
losses associated with the Hedged Security.
NOTE 4 - MARKETABLE SECURITIES
In connection with the 1999 Refinancing, the Company received approximately
470,000 common shares of Kushner-Locke fair valued for financial accounting
purposes under U.S. GAAP at approximately $6.2 million. As of June 30, 1999, the
market value of such shares was approximately $3.048 million. 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 5 - 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 million. The Note bears 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. Subject to shareholder approval of certain
proposals at the Company's Annual Meeting of Shareholders' on August 17, 1999,
the Note will be converted into 20,488 shares of Series A Preferred Stock and
144,618 warrants to purchase Common Stock immediately after the Annual Meeting.
If the proposals are not approved, the repayment of the Note may be accelerated
and the Company may be required to repay all amounts due thereunder upon demand.
NOTE 6 - STOCK BASED COMPENSATION
The 1999 Refinancing included the issuance of 2.4 million of Warrants to
purchase shares of the Company's Common Stock, 1.2 million of which were
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Investor Warrants and 1.2 million of which were Management Warrants. Of the 1.2
million 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, 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 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 2.4 million shares
of the Company's Common Stock for a total consideration of approximately $17.7
million (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 bears 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. Subject to 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 into 20,488 shares of Series A Preferred Stock
(convertible into 303,525 shares of Common Stock) and Warrants to purchase
144,618 shares of Common Stock. Upon the issuance of Series A Preferred Stock to
Mr. Guez, the Company will have 190,488 shares of Series A Preferred Stock
outstanding (convertible into an aggregate of 2,822,044 shares of Common Stock).
If either (i) the increase in authorized shares of Series A Preferred Stock or
(ii) the conversion of the Note are not approved, then Mr. Guez may accelerate
the Note and require the Company to repay all amounts due thereunder on demand.
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 Interim President, 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.
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Shortly thereafter Ronald B. Cushey was appointed Executive Vice President,
Chief Financial Officer and Secretary.
FOR THE THREE MONTHS ENDED JUNE 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 1999 is therefore
limited and, accordingly, the Company expects 1999 operating results to be
adversely impacted.
Revenues - Net filmed entertainment revenues were $0 and $20,000 in 1999 and
1998. The 1998 revenues consisted of foreign broadcast license revenues from the
Harvey Classic Film Library through the Company's prior foreign distributor,
whose distribution agreement expired in November 1997. There were no such
comparable revenues for 1999.
Net merchandising revenues were $364,000 and $400,000 in 1999 and 1998,
respectively, a decrease of $36,000. 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 $(3,000) for the current quarter. There were no comparable sales in
1998. The negative revenues were mainly due to subscription refunds as 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
$4,000 and $14,000 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 $386,000 and $404,000 in 1999 and 1998,
respectively. The decrease in cost of sales is due to slightly lower
merchandising activity for the current quarter.
Publishing cost of sales were $171,000 in 1999.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses ("SG&A") were $1,245,000 and $1,636,000 for 1999 and
1998, respectively, a decrease of $391,000. The decrease in SG&A is primarily
due to lower costs incurred for consulting services in the current quarter.
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Depreciation and Amortization - Depreciation expense was $55,000 and $32,000 in
1999 and 1998. Amortization of trademarks and copyrights was $26,000 in 1999 and
$7,000 in 1998. Amortization of goodwill was $32,000 in both 1999 and 1998.
Other Expenses - Other expenses were $714,000 and $0 in 1999 and 1998,
respectively. The expense in 1999 represents the premium associated with
purchase of derivative financial instruments.
Other Income - Other income was $210,000 and $72,000 in 1999 and 1998,
respectively. The increase in other income was due to higher investment income
from the sale of certain securities in the current quarter.
Income Taxes - Income tax benefit was $0 and $797,000 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 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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues - Net filmed entertainment revenues were $0 and $105,000 in 1999 and
1998, respectively. The 1998 revenues consisted of license fee revenues received
from Fox Kids' Network for the "Casper" animated episodes and from foreign
broadcast license revenues for the Harvey Classic Film Library, distributed
through the Company's prior foreign distributor through November 1997. There
were no such comparable revenues for 1999.
Net merchandising revenues were $794,000 and $1,175,000 in 1999 and 1998,
respectively, a decrease of $381,000. 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
$256,000 and $754,000 in 1999 and 1998, respectively. The decrease in costs of
sales is due to a decrease in filmed entertainment activity for the period.
Amortization of the film library was $250,000 and $519,000 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-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
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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 $747,000 and $802,000 in 1999 and 1998,
respectively. The decrease in merchandising costs is due to a decrease in
merchandising activity for the period.
Publishing cost of sales were $381,000 in 1999.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses ("SG&A") were $3,286,000 and $4,290,000 for 1999 and
1998, respectively, a decrease of $1,004,000. 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 and a $450,000 provision
relating to the Company's prior participation interest in Universal Studio's
Harvey-related merchandising business.
Depreciation and Amortization - Depreciation expense was $108,000 and $66,000 in
1999 and 1998, respectively. Amortization of trademarks, copyrights and other
was $53,000 in 1999 and $40,000 in 1998. Amortization of goodwill was $64,000 in
both 1999 and 1998.
Other Expenses - Other expenses were $714,000 and $0 in 1999 and 1998,
respectively. The expense in 1999 represents the premium associated with
purchase of derivative financial instruments.
Other Income - Other income was $235,000 and $106,000 in 1999 and 1998,
respectively. The increase in other income was due to higher investment income
from the sale of certain securities in the current quarter.
Income Taxes - Income tax benefit provision was $0 and $2,168,000 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.
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 $2,802,000 and $4,045,000 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.
Net cash used in investing activities was $124,000 and $379,000 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.
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Net cash provided by financing activities was $12,364,000 and $3,722,000 in the
second quarter periods in 1999 and 1998, respectively. The increase is due to
the cash proceeds from the 1999 Refinancing, sale of derivative financial
instruments and the issuance of a subordinated note payable as described 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 million. The Note bears 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. Subject to shareholder approval of certain
proposals at the Company's Annual Meeting of Shareholders' on August 17, 1999,
the Note will be converted into 20,488 shares of Series A Preferred Stock and
144,618 warrants to purchase Common Stock immediately after the Annual Meeting.
If the proposals are not approved, the repayment of the Note may be accelerated
and the Company may be required to repay all amounts due thereunder upon demand.
The Company is party to a $2.5 million 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 $1.75 million outstanding under this line of
credit and interest expense of $19,000 was paid during the first quarter of
1999. On April 27, 1999 the entire outstanding balance of $2.013 million,
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 negotiations with the Bank to renew the credit facility for an
additional six month term. Although the Company has received a verbal commitment
from the Bank for the extension of the credit facility, the completion of such
an extension is not assured.
The 1999 Refinancing included the issuance of 2.4 million of Warrants to
purchase shares of the Company's Common Stock, 1.2 million of which were
Investor Warrants and 1.2 million of which were Management Warrants. Of the 1.2
million 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 April 26, 1999, the Company consummated the transactions contemplated by the
Stock Purchase Agreement and received gross proceeds of approximately $17.7
million. In connection with such transactions, the Company incurred fees and
expenses of approximately $1.9 million. In addition, the Company received
additional capital of approximately $2 million 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
financial needs for at least the next twelve months. 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
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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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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
On April 26, 1999 the Company completed the 1999 Refinancing and
received a total gross consideration of approximately $17.7
million. The Company received such consideration net of fees paid
to Donaldson, Lufkin & Jenrette Securities Corporation for
rendering a fairness opinion and providing advisory services in
connection with the 1999 Refinancing. The Company also paid
Prudential Securities Inc. fees of approximately $450,000 for
advisory services rendered. Michael R. Burns, a Director of the
Company, is a Managing Director of Prudential Securities Inc.
There were no underlying discounts or commissions paid by the
Company in connection with the sale of Series A Preferred Stock.
The Company completed the sale of Series A Preferred Stock in
reliance upon an exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Act"). The
Company received various representations and warranties from the
investors including a representation that the investors are
"accredited investors" within the meaning of Rule 501(a) under
the Act.
Items 3 and 4 are omitted as not applicable.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports an Form 8-K
Item 6 (a)- Exhibit 10.61* Employment Agreement dated as of April 26, 1999
between the Company and Ronald B. Cushey
Exhibit 10.62* Employment Agreement dated as of April 26, 1999
between the Company and Eric S. Mischel
Exhibit 10.63* Note Payable Agreement dated as of June 30, 1999
between the Company and Paul Guez
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Exhibit 10.64* Warrant Agreement dated as of June 30, 1999
between the Company and Paul Guez
Exhibit 10.65* Registration Rights Agreement dated as of
June 30, 1999 by and between the Company and
Paul Guez
Exhibit 27 Financial Data Schedule (Electronic Filing Only)
* Previously filed as an exhibit to the registrant's Form 10-Q
filed on August 16, 1999.
Item 6 (b)- Reports on Form 8-K
Report filed on April 26, 1999 pursuant to Item 5 reporting the
sale of $17 million of newly- issued Series A Preferred Stock by
the Company.
Report filed on June 25, 1999 pursuant to Item 4 reporting a
change in the Company's certifying accountant.
<PAGE> 19
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
(Registrant)
August 10, 2000 /s/ Glenn Weisberger
---------------------------------------
Name: Glenn Weisberger
Title: Executive Vice President and
Acting Chief Financial Officer
