<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 14, 2000
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THE HARVEY ENTERTAINMENT COMPANY
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(Exact name of registrant as specified in charter)
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<S> <C> <C>
California 0-23000 95-4217605
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
11835 W. Olympic Boulevard, Suite 550, Los Angeles, California 90064
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (310) 444-4100
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(Former Name or Former Address, If Changed Since Last Report)
1
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
This filing is being made for the purpose of amending Item 7 of the Current
Report on Form 8-K filed by the Registrant on May 1, 2000 (the "Original 8-K")
with respect to the transactions described therein and below.
On April 14, 2000, the Registrant acquired, all of the outstanding shares of
Pepin/Merhi Entertainment Group, Inc., ("PM"), a California corporation, and all
of the outstanding membership interests in Shadow Hills Post, LLC, a California
limited liability company, pursuant to a Stock Purchase Agreement effective as
of April 3, 2000 by and between the Registrant and the following individuals
(the "Shareholders"): Mr. Joseph T. Merhi, Mr. Richard J. Pepin and Mr. George
Shamieh. The consideration paid by the Registrant to the Shareholders consisted
of (i) approximately $3,990,000 in cash, (ii) the issuance of 362,500 shares of
common stock of the Registrant, (iii) the issuance of promissory notes by the
Registrant in the aggregate principal amount of $2,050,000, and (iv) the
repayment of all of the liabilities of PM owed to the Shareholders, in the
approximate aggregate amount of $2,510,000.
ITEM 7(a). FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
2
<PAGE> 3
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
ITEM 7(a). FINANCIAL STATEMENTS
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
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PAGE
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REPORT OF INDEPENDENT ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7 to F-14
</TABLE>
F-1
<PAGE> 4
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pepin/Merhi Entertainment Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Pepin/Merhi
Entertainment Group, Inc. and its subsidiary at February 29, 2000 and February
28, 1999, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
June 28, 2000
F-2
<PAGE> 5
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
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<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 524,000 $ 338,000
Trade accounts receivable, net 2,795,000 1,382,000
Related party receivable -- 301,000
Income tax receivable -- 1,619,000
Film costs, net 13,671,000 18,974,000
Note receivable from stockholder 165,000 165,000
Property and equipment, net 3,497,000 3,820,000
Deferred income taxes 456,000 959,000
Prepaids and other assets 119,000 342,000
----------- -----------
Total assets $21,227,000 $27,900,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 366,000 $ 933,000
Accrued expenses 438,000 1,668,000
Accrued participations and residuals 6,256,000 5,013,000
Obligations under capital leases 2,253,000 2,357,000
Deferred revenue 1,287,000 4,494,000
Notes payable to bank 5,151,000 8,850,000
Notes payable to stockholders 2,931,000 3,018,000
----------- -----------
Total liabilities 18,682,000 26,333,000
----------- -----------
Commitments and Contingencies (Note 9)
Stockholders' equity:
Common stock, no stated value, 1,000 shares
Authorized, issued and outstanding 342,000 342,000
Retained earnings 2,203,000 1,225,000
----------- -----------
Total stockholders' equity 2,545,000 1,567,000
----------- -----------
Total liabilities and stockholders' equity $21,227,000 $27,900,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 6
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
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<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
2000 1999
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<S> <C> <C>
Revenues $ 28,671,000 $ 26,028,000
Film Costs (20,878,000) (19,816,000)
Selling, general and administrative expenses (5,124,000) (4,465,000)
------------ ------------
Income from operations 2,669,000 1,747,000
Interest expense, net (1,030,000) (1,232,000)
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Income before income taxes 1,639,000 515,000
Income tax expense (661,000) (191,000)
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Net income $ 978,000 $ 324,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 7
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
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<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 978,000 $ 324,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of film costs 14,527,000 16,456,000
Depreciation of fixed assets 360,000 449,000
Non-cash interest on stockholder loan 264,000 261,000
Changes in operating assets and liabilities:
Trade accounts receivable, net (1,413,000) (291,000)
Related party receivable 301,000 (301,000)
Income tax receivable 1,619,000 (1,619,000)
Deferred income taxes 503,000 1,808,000
Prepaids and other assets 223,000 469,000
Accounts payable (567,000) 325,000
Accrued expenses (1,230,000) (9,000)
Accrued participations and residuals 1,243,000 1,108,000
Deferred revenue (3,207,000) 2,124,000
------------ ------------
Net cash provided by operating activities 13,601,000 21,104,000
------------ ------------
Cash flows from investing activities:
Additions to film costs (9,224,000) (14,632,000)
Purchases of property and equipment (37,000) (153,000)
------------ ------------
Net cash used in investing activities (9,261,000) (14,785,000)
------------ ------------
Cash flows from financing activities:
Repayments of capital lease obligations (104,000) (100,000)
Repayments of notes payable to bank (3,699,000) (5,790,000)
Repayments of notes payable to stockholders (351,000) (307,000)
------------ ------------
Net cash used in financing activities (4,154,000) (6,197,000)
------------ ------------
Net increase in cash and cash equivalents 186,000 122,000
Cash and cash equivalents at beginning of year 338,000 216,000
------------ ------------
Cash and cash equivalents at end of year $ 524,000 $ 338,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 965,000 $ 1,380,000
Income taxes (1,512,000) --
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 8
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
<S> <C> <C> <C>
Balance at February 28, 1998 $ 342,000 $ 901,000 $1,243,000
Net Income -- 324,000 324,000
---------- ---------- ----------
Balance at February 28, 1999 342,000 1,225,000 1,567,000
Net Income -- 978,000 978,000
---------- ---------- ----------
Balance at February 29, 2000 $ 342,000 $2,203,000 $2,545,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 9
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pepin/Merhi Entertainment Group, Inc. (the "Company") is principally
engaged in the production, sale and distribution of motion pictures for
the theatrical, videocassette and television markets. The Company is
also engaged in the production, sale and distribution of television
programs. In September 1995, the Company established a wholly owned
subsidiary, Pepin/Merhi Entertainment Group FSC, Inc. (the "Subsidiary")
in the U.S. Virgin Islands. The Subsidiary serves as the commission
agent with respect to the Company's export sales.
On April 14, 2000, The Harvey Entertainment Company ("Harvey") acquired,
all of the outstanding shares of the Company, pursuant to a Stock
Purchase Agreement effective as of April 3, 2000, by and between Harvey
and the following individuals (the "Shareholders")" Mr. Joseph T. Merhi,
Mr. Richard J. Pepin and Mr. George Shamieh. The consideration paid by
Harvey to the Shareholders consisted of (i) $3,990,000 in cash, (ii) the
issuance of 362,500 shares of common stock of Harvey, (iii) the issuance
of promissory notes by Harvey in the aggregate principal amount of
$2,050,000, and (iv) the repayment of certain liabilities of the Company
owed to the Shareholders, in the approximate aggregate amount of
$2,510,000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its Subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenues from international rights and television license agreements are
recognized when the license period begins, the film or television
program is available for exhibition or exploitation in accordance with
the terms of the license agreement, the film or television program has
been accepted by the licensee in accordance with the conditions of the
license agreement, collectibility of the full license fee is reasonably
assured, and the Company has satisfied all significant obligations. For
international rights license agreements management does not consider the
collectibility of the full license fee to be reasonably assured until
such amounts are collected by the Company. As of February 29, 2000, the
Company had not collected $7,461,000 (1999, $10,333,000) on executed
international license agreements for films and television programs which
met all the other criteria for revenue recognition. Of the amount not
collected at February 29, 2000, approximately $3,600,000 has been
collected in cash through May 31, 2000. Revenues for domestic home video
sales are recognized when the product is shipped.
REVENUE-RELATED RESERVES
Reserves for sales returns and doubtful accounts are established based
upon historical experience and management's estimates as shipments are
made. The allowance for sales returns and doubtful accounts aggregated
approximately $457,000 at February 29, 2000 (1999, $322,000) and is
shown as a reduction of trade accounts receivable in the accompanying
consolidated balance sheet.
CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents are short-term investments with
original maturities of 90 days or less.
F-7
<PAGE> 10
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
FILM COSTS
Film costs include the actual direct costs of production, certain
exploitation costs, and capitalized production overhead and interest.
Capitalized exploitation costs include only those costs that benefit
future periods. Film costs, as well as participant and residual
obligations, are amortized each period on an individual-film basis in
the ratio that current period gross revenues bear to management's
estimate of total remaining gross revenues from all sources. Revenue
estimates are reviewed periodically and adjusted as appropriate. The
impact of such adjustments could be material.
Film costs are stated at the lower of unamortized cost or estimated net
realizable value. Losses which may arise because unamortized costs of
individual films exceed anticipated revenues are charged to income
through additional amortization when such losses are determined.
Costs associated with stories and scenarios, net of any reimbursements
and earned advances related to the development of the story, that in the
opinion of management are not planned for use in production of a motion
picture or television program are charged to production overhead.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated
depreciation. Additions to property and equipment include improvements
that significantly add to the productive capacity or extend the useful
life of the asset. Depreciation and amortization is based upon the
estimated service lives (ranging from five to seven years) of
depreciable assets and is generally provided using the declining-balance
method. Both the building and leasehold improvements are depreciated
over the shorter of estimated service life or lease term. Costs of
maintenance and repairs are charged to expense as incurred.
LONG-LIVED ASSETS
Long-lived assets, primarily consisting of property and equipment are
reviewed in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121). In the event that facts
and circumstances indicate that the book value of assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash
flow is required. The Company has not recorded any impairment losses.
DEFERRED REVENUE
Deferred revenue represents advances received on licensing agreements
before revenue is recognized. Advances are recognized as revenue when
the earnings process is complete in accordance with the terms of the
revenue recognition criteria as described above.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes." Under SFAS No. 109, deferred income taxes are recognized
for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future year to differences between
financial statement carrying amounts and the tax basis of existing
assets and liabilities.
CONCENTRATIONS OF CREDIT RISK
Certain financial instruments potentially subject the Company to credit
risk. These financial instruments consist primarily of cash and
receivables. The Company places its cash with financial institutions
and, at times, such amounts may be in excess of the FDIC insurance
limits. The Company grants uncollateralized credit to its customers who
are located in various geographical areas. The Company provides an
estimate of uncollectible accounts, including a reserve for estimated
future product returns. For the year ended February 29, 2000, 58% (1999,
74%) of the Company's revenues are attributable to the sale of film and
television program rights to customers in foreign territories. The
Company's largest customer accounted for approximately 22% of total
revenues for the year ended February 29, 2000 (1999, 12%). No other
customer accounted for more than 10% of total revenues in either of the
two years ended February 29, 2000. The Company currently receives all of
its film processing services from one company. A
F-8
<PAGE> 11
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
delay in processing services from this company could result in a
possible loss in sales which could adversely affect operating results.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
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 reported period. Actual results could differ
from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101")
In December 31, 1999, the Securities and Exchange Commission issued SAB
101, which would be effective for the Company in the fiscal year ending
February 28, 2002. SAB 101 clarifies certain existing accounting
principles for the recognition and classification of revenues in
financial statements. While the Company's existing revenue recognition
policies are consistent with the provisions of SAB 101, the new rules
are expected to result in changes as to how the filmed entertainment
industry classifies its revenues relating to the license to
sub-distributors of rights to exploit motion picture product. Currently,
the Company, consistent with the filmed entertainment industry,
classifies as revenue the gross amount of revenues it receives from
licenses to sub-distributors and records as film cost expense the
related producers' share of revenues. Under SAB 101, in certain
circumstances the Company will only recognize as revenues its net
distribution fees. As a result, the Company is in the process of
evaluating the overall impact of SAB 101 on its consolidated financial
statements. It is expected that both annual revenues and film costs in
the Company's consolidated financial statements will be reduced by an
equal amount as a result of these classification changes, which will not
result in any change to income from operations or net income.
Statement of Position No. 00-02 "Accounting by Producers or
Distributors of Films" ("SOP 00-02")
In June 2000, the American Institute of Certified Public Accountants
issued SOP 00-02 which establishes new accounting standards for
producers and distributors of films, including changes in revenue
recognition and accounting for advertising, development and overhead
costs. SOP 00-02 requires that advertising and distribution costs for
theatrical and television product be expensed as incurred. In addition,
development costs for abandoned projects and certain indirect overhead
costs are to be charged directly to expense instead of being capitalized
to film costs as the current guidance prescribes. The Company is in the
process of evaluating the overall impact of applying the guidance set
out in SOP 00-02 which would be effective for the Company in the fiscal
year ending February 28, 2002.
F-9
<PAGE> 12
2. FILM COSTS
Film costs are comprised of the following at February 29, 2000 and
February 28, 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Feature Films:
Films in process $ 3,035,000 $ 9,556,000
Films released, net of accumulated amortization of
$73,299,000 and $61,089,000 respectively 8,152,000 4,962,000
----------- -----------
11,187,000 14,518,000
Television Programs:
Television programs released, net of accumulated
amortization of $21,046,000 and $18,729,000 respectively 2,484,000 4,456,000
----------- -----------
$13,671,000 $18,974,000
=========== ===========
</TABLE>
Interest cost capitalized to films and television programs was $198,000
for the year ended February 29, 2000 (1999, $409,000).
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following at February 29,
2000 and February 28, 1999:
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Building, acquired under a capital lease $ 2,210,000 $ 2,210,000
Office equipment and computers 322,000 285,000
Production equipment 741,000 741,000
Postproduction equipment, acquired under a
capital lease 363,000 363,000
Furniture and fixtures 169,000 169,000
Automobiles and trucks 112,000 112,000
Leasehold improvements 1,320,000 1,320,000
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5,237,000 5,200,000
Less accumulated depreciation (including $525,000
relating to leased property as of February 29, 2000
(1999, $377,000)) (1,740,000) (1,380,000)
---------- ----------
$ 3,497,000 $ 3,820,000
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</TABLE>
F-10
<PAGE> 13
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
4. NOTES PAYABLE TO BANK
Pursuant to the terms of an Amended Revolving Credit Loan and Security
Agreement (the "Agreement"), the Company had a credit facility with a
bank originally allowing for borrowings of up to $14,000,000. Subsequent
to The Harvey Entertainment Company's acquisition of all outstanding
shares in the Company on April 14, 2000 (see Note 1) the amounts
outstanding on the credit facility were repaid in full and the credit
facility was terminated.
The Agreement provided the Company with the following levels of
availability on its credit facility:
<TABLE>
<S> <C>
Prior to June 30, 1998 $ 14,000,000
June 30, 1998 - September 29, 1998 13,680,000
September 30, 1998 - December 30, 1998 13,000,000
December 30, 1998 - March 30, 1999 12,000,000
Thereafter 10,000,000
</TABLE>
At February 29, 2000 the bank had reserved $980,000 of availability
under the credit facility for direct obligations of the Company for the
Film (as defined in Note 9) in which the Company had acquired specific
licensing rights.
The credit facility was collateralized by the Company's assets and was
secured by the qualifying accounts receivable of the Company as defined
in the Agreement. Interest accrued at the Prime Rate (8.75% at February
29, 2000) plus 1.25% per annum. A commitment fee of .5% per annum is
paid on the unused portion of the commitment.
The Agreement, which governed the terms and conditions of the credit
facility, contained certain covenants including, among other things,
restrictions on the amount of further indebtedness and the maintenance
of certain financial ratios. At February 29, 2000, the Company was not
in compliance with certain covenants of the Agreement.
The carrying value of the Company's credit facility at February 29, 2000
and February 28, 1999 approximated its fair value due to the short term
to maturity and the fact that the interest rate is reset periodically.
5. INCOME TAXES
Income tax expense for the year ended February 29, 2000 and February 28,
1999 consist of:
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Current
Federal $106,000 $ 7,000
State 2,000 23,000
Foreign withholding 49,000 73,000
-------- --------
$157,000 $103,000
-------- --------
</TABLE>
<TABLE>
<S> <C> <C>
Deferred
Federal $320,000 $ 73,000
State 184,000 15,000
------- --------
$504,000 $ 88,000
------- --------
Total tax expense $661,000 $191,000
======= ========
</TABLE>
F-11
<PAGE> 14
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
Income tax expense differs from the amount computed by applying the
Federal statutory rate of 34% to income before income taxes as shown
below:
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Computed "expected" income tax expense $557,000 $ 177,000
Foreign withholding taxes 49,000 73,000
Foreign sales corporation deduction, net
of federal taxes due (90,000) (122,000)
State income taxes, net of Federal income tax benefit 122,000 38,000
Other nondeductible expenses 23,000 25,000
-------- ---------
$661,000 $ 191,000
======== =========
</TABLE>
The differences which give rise to deferred tax assets at February 29,
2000 and February 28, 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss $246,000 $699,000
Trade accounts receivable allowance/return reserve 134,000 114,000
Other 76,000 146,000
-------- --------
$456,000 $959,000
======== ========
</TABLE>
In assessing the recoverability of deferred income tax assets management
considers whether it is more likely than not that some or all of the
deferred income tax assets will not be realized. Management considers
historical taxable income, projected future taxable income and tax
planning strategies in making this assessment. The Company has assessed
its past earnings history and trends, budgeted sales, and expiration
dates of carryforwards and has determined that is more likely than not
that deferred tax assets will be realized.
As of February 29, 2000 the Company has net operating loss carryforwards
of approximately $403,000 and $1,212,000 for Federal and State income
tax purposes, respectively. If certain substantial changes in the
Company's ownership should occur, there would be an annual limitation on
the amount of the carryforward which can be utilized.
6. LEASES
In April 1997, the Company executed a 21-year noncancellable lease
agreement with an entity owned by the stockholders of the Company for
use of the building and premises. Due to the terms of the agreement and
in accordance with the provisions of Statement of Financial
F-12
<PAGE> 15
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
Accounting Standards No. 13, "Accounting for Leases," the leased land
and building are accounted for as operating and capital leases,
respectively. As of February 29, 2000 the building had a net book value
of $1,912,000 (1999, $2,017,000), net of accumulated depreciation of
$298,000 (1999, $193,000) and is included in property and equipment in
the accompanying consolidated balance sheet.
Future minimum payments by year and in the aggregate, under these
noncancelable operating and capital leases, consist of the following:
<TABLE>
<CAPTION>
Land Building Total
---- -------- -----
<S> <C> <C> <C>
2001 $ 154,000 $ 248,000 $ 402,000
2002 154,000 248,000 402,000
2003 154,000 248,000 402,000
2004 154,000 248,000 402,000
2005 154,000 248,000 402,000
Thereafter 2,034,000 3,259,000 5,293,000
Less imputed interest -- (2,394,000) (2,394,000)
---------- ---------- ----------
$2,804,000 $2,105,000 $4,909,000
========== ========== ==========
</TABLE>
Total rental expense under operating leases for the year ended February
29, 2000 was $154,000 (1999, $178,000).
Additionally, the Company is obligated under noncancelable capital
leases for postproduction equipment which expire on various dates
through September 2002. Future minimum lease payments as of February 29,
2000 are as follows:
<TABLE>
<S> <C>
2001 108,000
2002 47,000
Less imputed interest (7,000)
-----------
$ 148,000
===========
</TABLE>
7. PENSION PLAN
The Company sponsors a defined contribution profit sharing plan.
Contributions are made at the discretion of the Company's stockholders
and allocations to participants are based upon salaries and years of
service. The Company did not make any contributions to the plan for the
years ended February 29, 2000 and February 28, 1999.
8. RELATED PARTY TRANSACTIONS
As described in Note 6, the Company leases its building and premises
from a company that is owned by the Company's stockholders. At February
28, 1999 the Company had a receivable of $8,000 due from this company
which had been included in the accompanying balance sheet as a related
party receivable. This amount was repaid in full during the year ended
February 29, 2000.
A note receivable from stockholder of $165,000 at February 29, 2000
(1999, $165,000) is a non-interest-bearing amount that is payable on
demand. Notes payable to stockholders of $2,931,000 at February 29, 2000
(1999, $3,018,000) bear interest at the applicable Federal Rate (8.5% at
F-13
<PAGE> 16
PEPIN/MERHI ENTERTAINMENT GROUP, INC. AND SUBSIDIARY
February 29, 2000), as defined and are payable on demand. Notes payable
to stockholders includes $264,000 of interest which was accrued during
the year ended February 29, 2000 (1999, $261,000). The Company's
stockholders provide services to the Company, however, they have not
entered into employment agreements. For the year ended February 29,
2000, the Company paid the stockholders total salaries of $780,000
(1999, $315,000). Stockholder indebtedness is subordinated to the notes
payable to the bank pursuant to a subordination agreement executed in
conjunction with the Agreement relating to the Company's credit
facility.
During the year ended February 28, 1999, the Company advanced $293,000
to a post production company owned by the Company's stockholders,
primarily for working capital purposes. These advances were repaid in
full during the year ended February 29, 2000. During the year ended
February 29, 2000, the Company incurred costs of $730,000 (1999,
$748,000) relating to post production services supplied by this company.
As of February 29, 1999, the Company owed $30,000 for post production
services supplied by this company. This outstanding amount was paid in
full during the year ended February 28, 2000.
Included in accrued participations and residuals at February 28, 1999
was $33,000 due to Loco Motion Pictures, Inc. (LMP), a Nevada
corporation. The Company and LMP entered into a joint venture agreement
under which each contribute 50% of the production costs and each receive
50% of distributed revenues of the film titled "Storybook." LMP is owned
by a family member of one of the stockholders. During the year ended
February 28, 1999 the Company recorded participation expenses due to LMP
of $66,000. During the year ended February 29, 2000 the amounts owed to
LMP by the Company were repaid in full.
9. COMMITMENTS AND CONTINGENCIES
The Company is the foreign sales agent for a film (the "Film") pursuant
to the terms of a Sales Agency Agreement dated June 12, 1998 (the "Sales
Agency Agreement"). The Company is entitled to earn a sales agency fee
for distribution of the Film in various foreign territories and to
participate in the net profits of the Film, as defined, in perpetuity.
Furthermore, the Company is the licensee of the Film in three specific
foreign territories. Pursuant to the terms of the Sales Agency
Agreement, the Company has guaranteed the bank which financed the Film
(the "Bank") a minimum sale of $2,100,000 for these three territories
(the "Minimum Guarantee").
In a separate agreement, the Company also guaranteed, as foreign sales
agent of the Film, payment of $14,338,000 to the Bank which represents
amounts due from foreign customers based on executed sales contracts.
As set out in Note 10, on April 14, 2000, Harvey acquired, all of the
outstanding shares of the Company. Simultaneously with the closing of
the acquisition, Harvey purchased from the Bank all of their rights and
interests in and to a production loan concerning the Film, that had been
guaranteed by the Company, for a purchase price of $6.8 million, payable
as follows: (i) $2 million in cash and (ii) $4.8 million by means of a
promissory note issued by Harvey to the Bank pursuant to a Loan and
Security Agreement, by and among Harvey and Bank. The Company will
continue to distribute the Film in accordance with its prior
distribution agreements for the Film.
The Company is involved in legal claims arising in the ordinary course
of business. However, in the opinion of management, these matters will
not materially affect the Company's consolidated financial position, if
and when resolved in a future period.
F-14
<PAGE> 17
ITEM 7(b). PRO FORMA FINANCIAL INFORMATION
The acquisition has been accounted for as a purchase. The fair value of purchase
consideration has been allocated to tangible and identifiable intangible assets
acquired and liabilities assumed based on their relative fair values. The
unallocated excess of the purchase price over the fair value of assets
acquired and liabilities assumed has been classified as goodwill. Harvey is
currently evaluating the fair value of certain assets to be acquired and
liabilities assumed and evaluating the economic life of goodwill. Upon
completion of this evaluation, Harvey will make a final allocation of the
purchase price and a final determination of the economic life of good will
which may include adjustments to the preliminary estimates referenced above
which have been made solely for the purpose of developing the unaudited pro
forma consolidated financial information.
The following unaudited pro forma condensed, consolidated balance sheet as of
March 31, 2000 and Statement of Operations for the three months ended March 31,
2000 and the twelve months ended December 31, 1999 illustrate (i) the effect of
the PM acquisition as if it had been consummated on March 31, 2000 for the
unaudited pro forma balance sheet, and (ii) effect of the acquisition as if it
had been consummated on January 1, 1999 for the unaudited pro forma Statement
of Operations for the three month period ended March 31, 2000 and (iii) the
effect of the acquisition as if it had been consummated on January 1, 1999 for
the unaudited pro forma Statement of Operations for the year ended
December 31, 1999.
The unaudited pro forma consolidated financial information is presented for
comparative purposes only and is not intended to be indicative of actual
consolidated results of operations or consolidated financial position that would
have been achieved had the acquisition been consummated as of the dates
indicated above nor do they purport to indicated results which may be attained
in the future.
3
<PAGE> 18
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 2000
<TABLE>
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE HARVEY PEPIN/MERHI PRO FORMA
ENTERTAINMENT ENTERTAINMENT ------------------------------
COMPANY GROUP, INC. ADJUSTMENT COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 2,167,000 $ 524,000 $ (2,300,000)a $ 391,000
Marketable securities 1,846,000 -- 1,846,000
Other investments 500,000 -- 500,000
Accounts receivable, net 690,000 2,795,000 7,461,000 b 10,946,000
Note receivable from stockholders -- 165,000 165,000
Prepaid and other assets 1,011,000 119,000 1,130,000
Income tax receivable 540,000 -- 540,000
Deferred income taxes -- 456,000 456,000
Film inventory, net 11,819,000 13,671,000 3,116,000 c 28,606,000
Fixed assets, net 489,000 3,497,000 (1,912,000)d 2,074,000
Goodwill, net 1,211,000 -- 800,000 c 2,011,000
Trademarks, copyright and other intangibles,
net 1,247,000 -- 1,344,000 e 2,591,000
------------ ------------ ------------ ------------
TOTAL ASSETS $ 21,520,000 $ 21,227,000 $ 8,509,000 $ 51,256,000
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 569,000 $ 804,000 1,373,000
Accrued marketing expenses 892,000 -- 892,000
Accrued participations and residuals 664,000 6,256,000 6,920,000
Accrued rent 56,000 -- 56,000
Obligations under capital leases -- 2,253,000 $ (2,105,000)d 148,000
Deferred revenue -- 1,287,000 1,287,000
Note payable to bank -- 5,151,000 (5,151,000)f 17,203,000
4,800,000 g
12,403,000 h
Note payable to stockholders -- 2,931,000 (2,931,000)j 2,050,000
2,050,000 k
------------ ------------ ------------ ------------
Total liabilities 2,181,000 18,682,000 9,066,000 29,929,000
Series A convertible preferred stock,
$100 stated value 16,725,000 -- -- 16,725,000
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value -- -- --
Common stock, no par value 22,268,000 342,000 (342,000)l 23,936,000
1,668,000 m
Additional paid in capital 4,523,000 -- 320,000 n 4,843,000
Accumulated other comprehensive income (3,228,000) -- (3,228,000)
Retained earnings/(accumulated deficit) (20,949,000) 2,203,000 (2,203,000)l (20,949,000)
------------ ------------ ------------ ------------
Total stockholders' equity 2,614,000 2,545,000 (557,000) 4,602,000
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 21,520,000 $ 21,227,000 $ 8,509,000 $ 51,256,000
============ ============ ============ ============
</TABLE>
PF-1
<PAGE> 19
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
THE HARVEY PEPIN/MERHI PRO FORMA
ENTERTAINMENT ENTERTAINMENT -----------------------------
COMPANY GROUP, INC. ADJUSTMENT COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Merchandising and licensing $ 882,000 $ -- $ 882,000
Filmed entertainment -- 6,261,000 6,261,000
---------- ---------- --------- -----------
Net operating revenues 882,000 6,261,000 -- 7,143,000
OPERATING EXPENSES:
Cost of sales 206,000 4,549,000 4,755,000
Selling and general administrative expenses 1,143,000 1,191,000 $ 150,000 a 2,484,000
Amortization of goodwill, trademarks,
copyright and other 93,000 -- 67,000 c 170,000
10,000 b
Depreciation expense 38,000 90,000 (26,000)d 102,000
---------- ---------- --------- -----------
Total operating expenses 1,480,000 5,830,000 201,000 7,511,000
---------- ---------- --------- -----------
PROFIT/(LOSS) FROM OPERATIONS (598,000) 431,000 (201,000) (368,000)
Other (income) expense 2,000 -- 2,000
Interest expense, net (64,000) 258,000 (258,000)e 370,000
434,000 f
---------- ---------- --------- -----------
PROFIT/(LOSS) BEFORE INCOME TAXES (536,000) 173,000 (377,000) (740,000)
Income tax expense -- 70,000 (70,000)g --
---------- ---------- --------- -----------
NET PROFIT/(LOSS) (536,000) 103,000 (307,000) (740,000)
Preferred stock dividends (349,000) -- (349,000)
---------- ---------- --------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (885,000) $ 103,000 $(307,000) $(1,089,000)
========== ========== ========= ===========
Historical basic and diluted net loss per
share applicable to common stockholders $ (0.21)
==========
Shares used in the calculation of historical basic
and diluted net loss per share applicable to
common stockholders 4,187,000
==========
Pro forma basic and diluted net loss per share
applicable to common stockholders $ (0.24)
===========
Shares used in the calculation of pro forma basic and diluted
net loss per share applicable to common stock holders 4,550,000 h
===========
</TABLE>
PF-2
<PAGE> 20
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE HARVEY PEPIN/MERHI PRO FORMA
ENTERTAINMENT ENTERTAINMENT -------------------------------
COMPANY GROUP, INC. ADJUSTMENT COMBINED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Merchandising and licensing $ 1,385,000 $ -- $ 1,385,000
Publishing 129,000 -- 129,000
Filmed entertainment 24,000 29,822,000 29,846,000
------------ ------------ ----------- ------------
Net operating revenues 1,538,000 29,822,000 -- 31,360,000
OPERATING EXPENSES:
Cost of sales 2,959,000 22,068,000 25,027,000
Selling and general administrative expenses 6,554,000 4,484,000 $ 600,000 c 11,638,000
Amortization of goodwill, trademarks,
copyright and other 236,000 -- 269,000 c 545,000
40,000 b
Depreciation expense 187,000 426,000 (105,000)d 508,000
Equity based charges 108,000 -- 108,000
------------ ------------ ----------- ------------
Total operating expenses 10,044,000 26,978,000 804,000 37,826,000
------------ ------------ ----------- ------------
PROFIT/(LOSS) FROM OPERATIONS (8,506,000) 2,844,000 (804,000) (6,466,000)
Other (income) expense 219,000 -- 219,000
Interest (income) expense, net (171,000) 1,080,000 (1,080,000)e 1,566,000
1,737,000 f
------------ ------------ ----------- ------------
PROFIT/(LOSS) BEFORE INCOME TAXES (8,554,000) 1,764,000 (1,461,000) (8,251,000)
Income tax expense 3,000 705,000 (705,000)g 3,000
------------ ------------ ----------- ------------
NET PROFIT/(LOSS) (8,557,000) 1,059,000 (756,000) (8,254,000)
Preferred stock dividends and deduction for
beneficial conversion feature 3,029,000 -- 3,029,000
------------ ------------ ----------- ------------
NET PROFIT/(LOSS) APPLICABLE TO COMMON STOCKHOLDERS $(11,586,000) $ 1,059,000 $ (756,000) $(11,283,000)
============ ============ =========== ============
Historical basic and diluted net loss per share
applicable to common stockholders $ (2.77)
============
Shares used in the calculation of historical
basic and diluted net loss per share applicable
to common stockholders 4,187,000
============
Pro forma basic and diluted net loss per
share applicable to common stockholders $ (2.48)
============
Shares used in the calculation of pro forma
basic and diluted net loss per share applicable
to common stock holders 4,550,000 h
============
</TABLE>
PF-3
<PAGE> 21
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA ADJUSTMENTS GIVING EFFECT TO THE ACQUISITION OF PEPIN/MERHI
ENTERTAINMENT GROUP, INC. AND SUBSIDIARY ("PM") IN THE UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000, REFLECT THE FOLLOWING:
a. Reflects cash paid as part of a settlement of outstanding bank notes payable
b. Reflects certain sales of motion picture product not recognized in the
financial statements of PM at March 31, 2000. Management of PM did not
consider collectibility of sales made in foreign markets to be assured
until the company collected the amounts. Following the acquisition of PM,
Harvey management have performed an assessment of these sales made in the
international market and have posted this adjustment to recognize sales the
collection of which they consider to be reasonably assured.
c. Reflects preliminary estimates of the revaluation of PM film inventory to
fair value and the unallocated amount of the excess of the purchase price
over the fair value of PM assets acquired. Harvey is currently evaluating
the fair value of certain assets to be acquired and liabilities assumed.
Upon completion of this valuation, Harvey will make a final allocation of
the excess purchase price over fair value, which may include adjustments to
the preliminary estimates referenced above which have been made solely for
the purpose of developing the unaudited pro forma consolidated financial
information.
d. Reflects elimination of the net carrying value and related obligations of a
buildings held by PM under certain capital leases. Harvey did not assume the
benefits and obligations under certain capital leases following the
acquisition of PM.
e. Reflects finance fees incurred in connection with entering the Credit,
Security, Guaranty, and Pledge Agreement (the "Chase Credit Facility") with
The Chase Manhattan Bank.
f. Reflects the repayment of PM's bank note payable that took place as a result
of Harvey's acquisition of PM.
g. Reflects a promissory note issued to Imperial Bank and Natexis Banque
(together, the "Banks") as partial consideration for the purchase of all of
their rights and interests in and to a production loan concerning a motion
picture entitled "Inferno". Simultaneous with the closing the Harvey's
acquisition of PM, Harvey purchased these rights from the Banks. Prior to
the acquisition, PM had guaranteed all amounts outstanding on the production
loan concerning Inferno.
h. Reflects amounts drawn down to finance Harvey's acquisition of PM under the
terms of a Credit, Security, Guaranty, and Pledge Agreement (the "Chase
Credit Facility") with The Chase Manhattan Bank.
j. Reflects repayment of notes payable to PM stockholder that took place
simultaneous with Harvey's acquisition of PM.
k. Reflects the issuance of promissory notes by the Harvey to the former PM
shareholders.
l. Reflects elimination of historical PM Equity.
PF-4
<PAGE> 22
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
m. Reflects the issuance of 362,500 shares of Harvey common stock to the former
PM shareholders.
n. Reflects the fair value of warrants to purchase Harvey common stock issued
to The Chase Manhattan Bank as a condition of entering the Chase Credit
Facility.
PRO FORMA ADJUSTMENTS GIVING EFFECT TO THE ACQUISITION OF PEPIN/MERHI
ENTERTAINMENT GROUP, INC. AND SUBSIDIARY ("PM") IN THE UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 12 MONTH PERIOD ENDED
DECEMBER 31, 1999 AND THE THREE MONTH PERIOD ENDED MARCH 31, 2000, REFLECT THE
FOLLOWING:
a. Reflects rent due on operating lease entered into as a result of Harvey's
acquisition of PM.
b. Reflects amortization of the unallocated excess of the purchase price over
the fair value of assets acquired and liabilities assumed. Management has
preliminarily estimated the economic life of goodwill to be 20 years.
c. Reflects amortization of capitalized finance fees incurred in connection
with entering the Chase Credit Facility over the initial term of the
facility.
d. Reflects elimination of depreciation expense on building carried in the PM
balance sheet that is subject to a capital lease. Harvey did not assume the
benefits and obligations under the capital lease following the acquisition
of PM.
e. Reflects elimination of interest expense on notes payable that were repaid
or otherwise extinguished as a result of Harvey's acquisition of PM.
f. Reflects interest charge associated with notes payable entered into as a
result of Harvey's acquisition of PM.
g. Reflects adjustments to consolidated condensed pro forma income tax
expense.
h. Difference in number of shares used in the calculation of pro forma basic
and diluted net loss per share applicable to common stockholders results
from the issuance of 362,500 shares of Harvey common stock to the former PM
shareholders.
PF-5
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
THE HARVEY ENTERTAINMENT COMPANY
By: /s/ Roger A. Burlage
---------------------------------------------
Roger A. Burlage, Chief Executive Officer and
Chairman of the Board
Date: June 28, 2000
4
