<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File Number 0-23000
The Harvey Entertainment Company
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(Exact name of registrant as specified in its charter)
California 95-4217605
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11835 West Olympic Boulevard, Suite 550, Los Angeles, California 90064
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(Address of principal executive offices)
Registrant's phone number, including area code (310) 444-4100
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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 November 1, 1999
---------------- --------------------------------------
Common Stock, no par value 4,186,941 (7,008,977 shares, including
2,822,036 shares into which the Series A
Preferred Stock could be converted)
<PAGE> 2
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 1-2
Condensed Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-7
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8-12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K 13
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
September 30,
1999 SEPTEMBER 30,
ASSETS (As Restated-See Note 3) 1999 DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1998
---------------------- --------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents $ 8,281,000 $ 7,867,000 $ 451,000
Marketable securities 2,345,000 2,345,000 --
Accounts receivable, net of allowance for doubtful accounts
of $296,000 and $298,000 in 1999 and 1998, respectively 887,000 887,000 1,689,000
Prepaid expenses and other assets 509,000 283,000 541,000
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 10,726,000 10,726,000 10,873,000
Furniture and equipment, net of accumulated depreciation
of $802,000 and $658,000 in 1999 and 1998, respectively 375,000 375,000 501,000
Goodwill, net of accumulated amortization of $1,318,000
and $1,222,000 in 1999 and 1998, respectively 1,276,000 1,276,000 1,373,000
Trademarks and copyrights, net of accumulated amortization
of $344,000 and $266,000 in 1999 and 1998, respectively 1,212,000 1,212,000 1,039,000
----------- ----------- -----------
TOTAL $26,153,000 $25,513,000 $17,034,000
=========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
September 30,
1999 SEPTEMBER 30,
(RESTATED-SEE NOTE 3) 1999 DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) (UNAUDITED) 1998
--------------------- ---------------- --------------
<S> <C> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 626,000 $ 626,000 $ 871,000
Participations payable 741,000 741,000 861,000
Accrued marketing expenses 1,200,000 1,200,000 1,200,000
Derivative financial instruments 61,000 -- --
Line of credit -- -- 250,000
Accrued rent and other liabilities 128,000 128,000 170,000
------------ ------------ ------------
Total liabilities 2,756,000 2,695,000 3,352,000
------------ ------------ ------------
Series A convertible preferred stock, $100 stated value,
300,000 shares authorized 190,000 shares issued and
outstanding at September 30, 1999, liquidation preference
of $19,574,000 at September 30, 1999 15,517,000 15,517,000 --
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares authorized
(300,000 shares have been designated as Series A convertible
preferred stock) -- -- --
Common stock, no par value, 30,000,000 shares authorized,
4,187,000 issued and outstanding at September 30, 1999 and
December 31, 1998 22,160,000 22,160,000 22,160,000
Additional paid in capital 4,599,000 4,599,000 --
Accumulated other comprehensive income/(loss) (2,730,000) (3,881,000) --
Accumulated deficit (16,149,000) (15,577,000) (8,478,000)
------------ ------------ ------------
Total stockholders' equity 7,880,000 7,301,000 13,682,000
------------ ------------ ------------
TOTAL $ 26,153,000 $ 25,513,000 $ 17,034,000
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 THREE MONTHS ENDED SEPTEMBER 30, 1999 NINE MONTHS ENDED
(AS RESTATED- SEPTEMBER 30, (AS RESTATED- SEPTEMBER 30,
SEE NOTE 3) 1999 1998 SEE NOTE 3) 1999 1998
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<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Filmed entertainment $ -- $ -- $(2,295,000) $ -- $ -- $(2,190,000)
Merchandising 117,000 117,000 1,174,000 911,000 911,000 2,349,000
Publishing -- -- -- 129,000 129,000 --
----------- ----------- ----------- ----------- ----------- -----------
Net operating revenues 117,000 117,000 (1,121,000) 1,040,000 1,040,000 159,000
----------- ----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 298,000 298,000 976,000 1,675,000 1,675,000 2,599,000
Selling, general and
administrative expenses 1,181,000 1,181,000 1,341,000 4,474,000 4,474,000 5,569,000
Amortization of intangibles 57,000 57,000 55,000 174,000 174,000 154,000
Depreciation expense 36,000 36,000 36,000 144,000 144,000 102,000
Stock based compensation 76,000 76,000 169,000 76,000 76,000 969,000
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 1,648,000 1,648,000 2,577,000 6,543,000 6,543,000 9,393,000
----------- ----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,531,000) (1,531,000) (3,698,000) (5,503,000) (5,503,000) (9,234,000)
OTHER EXPENSES -- -- -- (714,000) -- --
OTHER INCOME 565,000 252,000 217,000 799,000 657,000 323,000
INTEREST EXPENSE (25,000) (25,000) -- (82,000) (82,000) --
----------- ----------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX
BENEFIT/(EXPENSE) (991,000) (1,304,000) (3,481,000) (5,500,000) (4,928,000) (8,911,000)
INCOME TAX BENEFIT/(EXPENSE) (1,000) (1,000) 1,374,000 (1,000) (1,000) 3,542,000
----------- ----------- ----------- ----------- ----------- -----------
NET LOSS $ (992,000) $(1,305,000) $(2,107,000) $(5,501,000) $(4,929,000) $(5,369,000)
=========== =========== =========== =========== =========== ===========
Net loss $ (992,000) $(1,305,000) $(2,107,000) $(5,501,000) $(4,929,000) $(5,369,000)
Preferred stock dividends and
amortization of beneficial
conversion feature (1,360,000) (1,360,000) -- (2,170,000) (2,170,000) --
----------- ----------- ----------- ----------- ----------- -----------
Net loss applicable to
common stock $(2,352,000) $(2,665,000) $(2,107,000) $(7,671,000) $(7,099,000) $(5,369,000)
=========== =========== =========== =========== =========== ===========
NET LOSS PER SHARE OF
COMMON STOCK:
Basic and Diluted $ (0.56) $ (0.64) $ (0.50) $ (1.83) $ (1.70) $ (1.34)
=========== =========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic and Diluted 4,187,000 4,187,000 4,187,000 4,187,000 4,187,000 4,015,000
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, NINE MONTHS ENDED
(AS RESTATED - SEE NOTE 3) SEPTEMBER 30,
------------------------- --------------------------------
1999 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,501,000) $ (4,929,000) $ (5,369,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Premium on derivative financial instruments, net 242,000 -- --
Depreciation 144,000 144,000 102,000
Amortization of film library 250,000 250,000 524,000
Amortization of goodwill, trademarks and copyrights and other 174,000 174,000 154,000
Deferred income taxes -- -- (3,740,000)
Stock based compensation 76,000 76,000 969,000
Changes in operating assets and liabilities:
Accounts receivable, net 803,000 803,000 3,834,000
Prepaid expenses and other assets 32,000 258,000 (328,000)
Income taxes receivable, net of income taxes payable 25,000 25,000 (1,163,000)
Investment in film library (103,000) (103,000) (2,622,000)
Account payable and accrued expenses (245,000) (245,000) (135,000)
Participations payable (120,000) (120,000) --
Accrued rent and other liabilities (42,000) (42,000) 49,000
------------ ------------ ------------
Net cash used in operating activities (4,265,000) (3,709,000) (7,725,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (18,000) (18,000) (179,000)
Investments in trademarks and copyrights (251,000) (251,000) (299,000)
------------ ------------ ------------
Net cash used in investing activities (269,000) (269,000) (478,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of tax effect -- -- 3,722,000
Borrowings on line of credit 1,750,000 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 sale of derivative financial instruments, net 970,000 -- --
Proceeds from issuance of note payable 2,049,000 2,049,000 --
------------ ------------ ------------
Net cash provided by financing activities 12,364,000 11,394,000 3,722,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,830,000 7,416,000 (4,481,000)
CASH AND CASH EQUIVALENTS, Beginning of period 451,000 451,000 6,316,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 8,281,000 $ 7,867,000 $ 1,835,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ (82,000) $ (82,000) $ --
Income taxes $ (21,000) $ (21,000) $ 775,000
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background and Operations: The Harvey Entertainment Company, together with its
wholly-owned subsidiaries Harvey Comics, Inc. and Baby Huey Productions, Inc.
(the "Company") owns and exploits a library of widely recognized classic
characters and other intellectual property assets, including a related film
library of animated short features. The Company is the successor to Harvey
Comics, Inc. which was founded in 1939 by the Harvey family. In 1989, the
Company's predecessor purchased Harvey Comics, Inc. to exploit its intellectual
property and in 1993 the Company completed its initial public offering of common
stock. The roster of the Company's classic characters includes the well known
characters Casper, the Friendly Ghost, Richie Rich, Baby Huey, Wendy, the Good
Little Witch, and Hot Stuff, among many others.
Basis of Presentation: The accompanying consolidated financial statements and
footnotes are unaudited and condensed, as contemplated by the Securities and
Exchange Commission under rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
condensed consolidated financial statements should be read in conjunction with
the more detailed consolidated financial statements and related footnotes
included in the Company's Form 10-KSB as amended filed with the Securities and
Exchange Commission in April 1999.
In the opinion of the Company's management, the accompanying unaudited condensed
consolidated financial statements as of September 30, 1999 and for the three and
nine month periods ended September 30, 1999 and 1998 contain all adjustments,
which include normal recurring accruals, necessary to present fairly the
consolidated financial position of the Company as of September 30, 1999 and the
consolidated results of operations and consolidated cash flows for the nine
month periods ended September 30, 1999 and 1998.
The results of operations for the interim periods of the Company's fiscal year
are not necessarily indicative of the results to be expected for the entire
year. Certain reclassifications of 1998 amounts have been made in order to
conform with the 1999 financial statement presentation.
Net Loss Per Share: Net loss per share is computed by dividing the net loss
applicable to common shareholders for the period by the weighted average number
of common shares outstanding. Shares associated with stock options, warrants and
convertible preferred stock are not included to the extent they are
anti-dilutive. Net loss per share information has been determined on the basis
of 4,187,000 weighted average number of shares outstanding for the three and
nine month periods ended September 30, 1999 and 4,187,000 and 4,015,000 weighted
average number of shares outstanding for the three and nine month periods ended
September 30, 1998, respectively. The net loss per common share for the three
and nine month periods ended September 30, 1999 gives effect to stock dividends
of $312,000 and $524,000 for the three and nine month periods ended September
30, 1999, respectively, and the amortization of the beneficial conversion
feature of $1,048,000 and $1,646,000 related to the Series A Preferred Stock
issued on April 26, 1999 for the three and nine month periods ended September
30, 1999, respectively (See Note 2 - Equity Infusion).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
5
<PAGE> 8
Comprehensive Income: Effective January 1, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130 ("SFAS No.
130"), "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The Company reported an unrealized loss
of approximately $703,000 and $2,730,000 as part of comprehensive income for the
three and nine month periods ended September 30, 1999, respectively, resulting
from the adjustment to the fair market value, as of September 30, 1999, of the
common stock of The Kushner-Locke Company, net of the gain on the sale of
derivative financial instruments entered into to hedge against changes in the
market of such stock. (See Note 2 - Equity Infusion).
Contingencies: From time to time, the Company has been party to various
litigation and administrative proceedings relating to claims arising from its
operations in the normal course of business. Based on the advice of counsel,
management believes that the resolution of these matters will not have a
material effect on the Company's business, results of operations, financial
condition or cash flows.
Year 2000: The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
software problems associated with the year 2000. At present, management does not
expect that material incremental costs will be incurred, or significant Company
resources dedicated in 1999 to become year 2000 compliant.
NOTE 2 - EQUITY INFUSION
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company agreed to
issue and sell 170,000 shares of its Series A Preferred Stock ("Series A
Preferred Stock") and warrants ("Warrants") to purchase up to 2,400,000 shares
of the Company's Common Stock in consideration of cash and common stock of
Kushner-Locke ( the "1999 Refinancing"). Of the Warrants issued, 1,200,000 were
granted immediately to investors participating in the 1999 Refinancing (the
"Investor Warrants") and 1,200,000 would be granted in the future at the
discretion of new management ("Management Warrants"). In addition, as described
in Note 4 below, as a result of the 1999 Refinancing being oversubscribed and
the desire of the Company to realize the potential benefits of additional
capital, on June 30, 1999 the Company issued a subordinated note (the "Note") in
the amount of approximately $2,049,000. The Note was converted into 20,488
shares of Series A Preferred Stock and 144,618 Investor Warrants to purchase
Common Stock on September 2, 1999, and an additional 144,618 Management Warrants
were concurrently provided for future grants. The total cash consideration
received in the 1999 Refinancing and issuance of the Note was approximately
$11,578,000, net of transaction fees and expenses of approximately $1,970,000.
Under United States Generally Accepted Accounting Principles ("U.S. GAAP"), the
investment by Kushner-Locke in the form of Kushner-Locke common stock has been
initially fair valued at approximately $6,200,000. The fair value of the
investments of the Kushner-Locke common stock, the net cash consideration and
the Note were initially allocated in the following manner for financial
accounting purposes: Series A Preferred Stock: $11,900,000, Additional Paid in
Capital related to the Investor Warrants: $2,100,000 and Additional Paid in
Capital related to a beneficial conversion feature of the Series A Preferred
Stock: $1,800,000. The beneficial conversion feature of the Series A Preferred
Stock will be amortized into retained earnings ratably over a six-month period
from April 26, 1999 until the convertibility provision of the Series A Preferred
Stock becomes effective on October 26, 1999.
On April 26, 1999, in connection with the issuance and sale of the Series A
Preferred Stock and Warrants, the Company entered into a Registration Rights
Agreement (the "1999 Agreement") with Michael R. Burns, Roger A. 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.
6
<PAGE> 9
NOTE 3 - RESTATEMENT OF QUARTERLY INFORMATION
The Company has restated filings on Form 10-QSB for the quarterly period ended
September 30, 1999 for transactions related to derivative financial instruments
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
purposed under U.S. GAAP at approximately $6,200,000. As of September 30, 1999,
the market value of such shares was approximately $2,435,000. As the Company is
currently holding the Kushner-Locke shares as available for sale securities, in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the unrealized loss from
this investment is being recorded in an unrealized holding loss account as a
separate component of Stockholders' Equity.
NOTE 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 $2,049,000. The Note accrued interest at an annual rate of 7%,
payable quarterly on the last day of each March, June, September and December,
commencing on June 30, 1999. In accordance with provisions contained in therein,
the Note was converted into 20,488 shares of Series A Preferred Stock and
144,618 warrants to purchase Common Stock on September 2, 1999, after
shareholder approval of certain required proposals at the Company's Annual
Meeting of Shareholders' held on August 17, 1999.
NOTE 6 - STOCK BASED COMPENSATION
The 1999 Refinancing and conversion of the Note resulted in the issuance of a
total of 2,689,236 Warrants to purchase shares of the Company's Common Stock,
1,344,618 of which were Investor Warrants and 1,344,618 of which were Management
Warrants. Of the Investor Warrants granted, those granted to non-employees are
fully vested, non-forfeitable and are exercisable commencing six months from
their issuance date, at prices ranging from $9.00 to $12.00 per share of the
Common Stock. Management Warrants, and any Investor Warrants, granted to
employees vest and become exercisable according to schedules set forth in their
respective warrant agreements, and are exercisable at prices ranging from $9.00
to $12.00 per share of Common Stock. The Company accounts for stock issued to
non-employees in accordance with Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", and Emerging
Issues Task Force 96-18 ("EITF 96-18"). In accordance with SFAS 123 and EITF
96-18, the fair value of any Management Warrants granted in the future to
non-employees will be measured either at the date of grant or at the end of the
reporting period, as appropriate. Based on the determination of the fair value
of the Company's Common Stock, the Company may incur substantial non-cash
charges to earnings in future reporting quarters.
* * * * * *
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements made based on current
management expectations pursuant to the "safe-harbor" provisions of the Private
Securities Litigation Act of 1995. These statements are not guarantees of future
performance and actual outcomes may differ materially from what is expressed or
forecasted. There are many factors that may affect the Company's business and
its results of operations. These include, without limitation, risks relating to
the Company's expansion strategy, risks of the Company's merchandising and
filmed entertainment activities, the management of growth, risks of acquired
companies, fluctuations in quarterly and annual operating results, accounting
principles applicable to filmed entertainment, the release of filmed
entertainment products and other factors discussed herein and in the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 and any
other filings made by the Company with the Securities and Exchange Commission.
RECENT DEVELOPMENTS FOR THE COMPANY
-----------------------------------
On September 24, 1999, the Company signed a letter of intent for the acquisition
of PM Entertainment Group, Inc. ("PM Entertainment"), a privately-owned producer
and distributor of motion pictures in the United States home video, television
and Internet broadcasting markets as well as all media in international markets.
The purchase price, contemplated by the Letter of Intent, consists of
$10,000,000 in cash, a portion of which will be paid at closing. The completion
of the transaction is anticipated prior to December 15, 1999, and is subject to
the completion of a definitive agreement, formal due diligence and other
customary conditions, including finalization of financing for the acquisition.
There can be no assurance that the transaction and related financing will be
obtained on terms acceptable to the Company or that the transaction will be
completed as contemplated above.
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company agreed to
issue and sell 170,000 shares of its Series A Preferred Stock ("Series A
Preferred Stock") and warrants ("Warrants") to purchase up to 2,400,000 shares
of the Company's Common Stock for a total consideration of approximately
$17,700,000 (the "1999 Refinancing"). On April 26, 1999, in connection with the
issuance and sale of the Series A Preferred Stock and Warrants, the Company
entered into a Registration Rights Agreement (the "1999 Agreement") with Michael
R. Burns, Roger A. Burlage, Al Checchi, Ken Slutsky and Kushner-Locke (the
"Shareholders"). The 1999 Agreement gives the Shareholders certain demand and
piggyback registration rights, commencing 18 months following the issuance and
sale of the Series A Preferred Stock and the Warrants, to register the Common
Stock issuable upon conversion of the Series A Preferred Stock and the exercise
of the Warrants. The transactions contemplated by the Stock Purchase Agreement
were consummated on April 26, 1999.
The 1999 Refinancing was oversubscribed, and, in order to enable the Company to
realize the potential benefits of additional capital, the Company issued a note
in the amount of $2,048,750 to Paul Guez (the `Note"). The Note accrued interest
at an annual rate of 7%, payable quarterly on the last day of each March, June,
September and December, commencing on June 30, 1999. As a result of shareholder
approval of an increase in the authorized shares of Series A Preferred Stock and
the conversion of the Note, the Company's Board of Directors approved the
conversion of the Note on September 2, 1999 into 20,488 shares of Series A
Preferred Stock (convertible into 303,518 shares of Common Stock) and warrants
to purchase 144,618 shares of Common Stock. Subsequent to the issuance of Series
A Preferred Stock to Mr. Guez, the Company has 190,488 shares of Series A
Preferred Stock outstanding (convertible into an aggregate of 2,822,036 shares
of Common Stock).
8
<PAGE> 11
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
------------------------------------------------------
Results of Operations - The Company is in the early stages of developing new
film products and formulating a corporate strategy regarding a range of business
opportunities under its new permanent management, the results of which will not
be realized until subsequent periods. The development of new revenue
opportunities in the filmed entertainment area requires significant lead time.
The number of projects expected to generate revenues in the near term is
therefore limited and, accordingly, the Company expects foreseeable operating
results to be adversely impacted.
Revenues - Net filmed entertainment revenues were $0 and a negative $2,295,000
in 1999 and 1998, respectively. The Company currently has several film
entertainment projects in a variety of development stages, but the successful
outcome of these projects can not be determined at this point in time. The 1998
quarter reflected an adjustment of $2,316,000 to reduce the Company's estimate
of the lifetime profitability of the 1997 direct-to-video title "Casper, A
Spirited Beginning." The Company's original forecast projected worldwide sales
of approximately 5,000,000 units whereas actual sales to date reported during
the quarter to the Company by the video's distributor approximated 4,500,000
units, necessitating the adjustment in the 1998 third quarter.
Net merchandising revenues were $117,000 and $1,174,000 in 1999 and 1998,
respectively, a decrease of $1,057,000. The revenues in 1999 and 1998 consist of
new licenses for the worldwide merchandising of the Harvey Classic Characters
and the licensing revenues from the Company's direct-to-video features entered
into by the Company's in-house licensing division. Although merchandising
licenses are generally granted for a period of one to three years, the majority
of the minimum guaranteed license revenues are recognized when the license
period begins, provided certain conditions have been met. Due to this accounting
treatment, revenue fluctuations from the Company's merchandising activities will
likely recur in the future on a quarterly and annual basis. The ongoing success
of the merchandising program depends, in part, upon the attractiveness and
future exploitation of the Harvey Classic Characters.
Net publishing revenues related to the Company's monthly magazine, approved for
publishing by the Board of Directors in July 1998 during interim management's
tenure, were $0 for the three month period ended September 30, 1999. There were
no comparable sales in 1998. The publication of the magazine has ceased,
resulting from new management's decision to focus on the Company's core
entertainment business operations. The July 1999 issue was the last issue
published for distribution.
Cost of Sales - Cost of sales related to filmed entertainment revenues were
$7,000 and $24,000 in 1999 and 1998, respectively. The cost of sales related to
filmed entertainment for 1999 and 1998 were low due to sparse activity in both
periods. Amortization of the film library was $0 and $4,000 in 1999 and 1998,
respectively. There was no amortization in the current quarter as there were no
revenues derived from the film library, which is amortized in accordance with
the individual film forecast method.
Merchandising cost of sales were $291,000 and $882,000 in 1999 and 1998,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity for the current quarter.
Publishing cost of sales were $0 and $70,000 in 1999 and 1998, respectively.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses ("SG&A") were $1,181,000 and $1,341,000 for 1999 and
1998, respectively, a decrease of $160,000. The decrease in SG&A is primarily
due to lower costs incurred for consulting services in the current quarter and
an overall decrease in other overhead expenses.
Depreciation and Amortization - Depreciation expense was $36,000 in both 1999
and 1998. Amortization of trademarks and copyrights was $25,000 in 1999 and
$19,000 in 1998. Amortization of goodwill was $32,000 in both 1999 and 1998.
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Other Income - Other income was $565,000 and $217,000 in 1999 and 1998,
respectively. Other income in 1999 resulted from investment income from the sale
of certain securities and gains on the sale of derivative financial instruments
entered into to hedge against changes in the market value of Kusher-Locke
Company common stock. In 1998, the Company received a favorable settlement of
litigation.
Stock Based Compensation - Stock based compensation was $76,000 and $169,000 in
1999 and 1998, respectively, related to the issuance of warrants to a consultant
to the Company, for the three months ended September 30, 1999 and the issuance
of options to Global Media during the three months ended September 30, 1998.
Income Taxes - Income tax benefit/(expense) was ($1,000) and $1,374,000 in 1999
and 1998, respectively. The current tax expense was the result of an assessment
of additional income taxes for the 1997 tax year. The income tax benefit for
1998 is due to the use of operating losses generated in 1998 against the
deferred income tax liabilities and prior year operating income. A valuation
allowance was established at the 1998 year end to reduce deferred income tax
assets to the amount expected to be realized. At the end of the current quarter,
an additional valuation allowance was established to offset the benefit
generated by current quarter's loss. Realizable income tax benefits from the
Company's cumulative tax losses have been reported as an income tax receivable
of $542,000 at the end of the current quarter.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
-----------------------------------------------------
Revenues - Net filmed entertainment revenues were $0 and a negative $2,190,000
in 1999 and 1998, respectively. The 1998 year to date period reflected an
adjustment of $2,316,000 to reduce the Company's estimate of the lifetime
profitability of the 1997 direct-to-video title "Casper, A Spirited Beginning."
The Company's original forecast projected worldwide sales of approximately
5,000,000 units whereas actual sales to date as reported during the quarter to
the Company by the video's distributor approximated 4,500,000 units,
necessitating the adjustment in 1998.
Net merchandising revenues were $911,000 and $2,349,000 in 1999 and 1998,
respectively, a decrease of $1,438,000. The revenues in 1999 and 1998 consist of
new licenses for the worldwide merchandising of the Harvey Classic Characters
and the licensing revenues from the Company's direct-to-video features entered
into by the Company's in-house licensing division. Although merchandising
licenses are generally granted for a period of one to three years, a substantial
portion of the minimum guaranteed license revenues are recognized when the
license period begins, provided certain conditions have been met. Due to this
accounting treatment, revenue fluctuations from the Company's merchandising
activities will likely recur in the future on a quarterly and annual basis. The
ongoing success of the merchandising program depends, in part, upon the
attractiveness and future marketability of the Harvey Classic Characters.
Net publishing revenues related to the Company's monthly magazine, approved for
publishing by the Board of Directors in July 1998 during interim management's
tenure, were $129,000 for 1999. There were no comparable sales in 1998. The
publication of the magazine has ceased, with the July 1999 issue being the last
issue published for distribution, as a result of new management's decision to
focus on the Company's core entertainment business operations.
Cost of Sales - Cost of sales relating to filmed entertainment revenues were
$262,000 and $787,000 in 1999 and 1998, respectively. The decrease in cost of
sales is due to a decrease in filmed entertainment activity for the period.
Amortization of the film library was $250,000 and $524,000 in 1999 and 1998,
respectively. The amortization amount in 1999 reflects an additional estimated
loss related to "Baby Huey's Great Easter Adventure", the live-action,
direct-to-video produced in 1998, featuring the Company's classic character Baby
Huey, and released in March 1999. The amortization amount in the 1998 period
includes the write-off of $500,000 of previously capitalized product development
costs due to uncertainties concerning the recoverability of such costs based on
the Company's business plan contemplated in 1998. Additionally, 1998 cost of
sales included a $150,000 adjustment in the carrying value of certain video
inventory.
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Merchandising cost of sales were $1,031,000 and $1,742,000 in 1999 and 1998,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity for the period.
Publishing cost of sales were $382,000 and $70,000 in 1999 and 1998,
respectively.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses ("SG&A") were $4,474,000 and $5,569,000 for 1999 and
1998, respectively, a decrease of $1,095,000. The higher SG&A expenses in the
1998 period is primarily due to the effect of an approximate $500,000 provision
relating to doubtful accounts from previously recognized guarantees from agents
and licensees operating in the Pacific Rim territories, a $450,000 provision
relating to the Company's prior participation interest in Universal Studio's
Harvey-related merchandising business, and higher other overhead expenses.
Depreciation and Amortization - Depreciation expense was $144,000 and $102,000
in 1999 and 1998, respectively. Amortization of trademarks, copyrights and other
was $78,000 in 1999 and $58,000 in 1998. Amortization of goodwill was $96,000 in
both 1999 and 1998.
Other 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 $799,000 and $323,000 in 1999 and 1998,
respectively. Other income in 1999 resulted from investment income from the sale
of certain securities and gains on the sale of derivative financial instruments
entered into to hedge against changes in the market value of Kusher-Locke
Company common stock. In 1998, the Company received a favorable settlement of
litigation.
Stock Based Compensation - Stock based compensation was $76,000 and $969,000 in
1999 and 1998, respectively, related to the issuance of warrants a consultant to
the Company, for the nine months ended September 30, 1999 and the issuance of
options to Global Media during the nine months ended September 30, 1998.
Income Taxes - Income tax benefit/(expense) was ($1,000) and $3,542,000 in 1999
and 1998, respectively. The current tax expense was the result of an assessment
of additional income taxes for the 1997 tax year. The income tax benefit for
1998 is due to the use of operating losses generated in 1998 against the
deferred income tax liabilities and prior year operating income, and the tax
effect of stock options exercised. A valuation allowance was established at the
1998 year end to reduce deferred income tax assets to the amount expected to be
realized. At the end of the current quarter, an additional valuation allowance
was established to offset the benefit generated by current quarter's losses.
Realizable income tax benefits from the Company's cumulative tax losses have
been reported as an income tax receivable of $542,000 at the end of the current
period.
Year 2000 - The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
software problems associated with the year 2000. At present, management does not
expect that material incremental costs will be incurred, or significant Company
resources dedicated in 1999 to become year 2000 compliant.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4,265,000 and $7,725,000 in 1999 and
1998, respectively. The reduction in cash used in operating activities was
primarily due to the reduction of deferred tax liability and accounts receivable
balances in 1998.
Net cash used in investing activities was $269,000 and $478,000 in 1999 and
1998, respectively. The decrease in cash used for investing activities was
primarily due to less investment by the Company in its trademarks, copyrights
and film library and purchase of less furniture and equipment in 1999.
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<PAGE> 14
Net cash provided by financing activities was $12,364,000 and $3,722,000 in 1999
and 1998, respectively. The cash provided by financing activities in 1999
resulted from the cash proceeds from the 1999 Refinancing, sale of derivative
financial instruments and the issuance of a subordinated note payable as
described below. The 1998 cash provided by financing activities resulted
primarily from the exercise of employee stock options.
As a result of the 1999 Refinancing being oversubscribed, and the desire of the
Company to realize the potential benefits of additional capital, on June 30,
1999 the Company issued a subordinated note (the "Note") in the amount of
approximately $2,049,000. The Note accrued interest at an annual rate of 7%,
payable quarterly on the last day of each March, June, September and December,
commencing on June 30, 1999. As a result of shareholder approval at the
Company's Annual Meeting of Shareholders' on August 17, 1999 of an increase in
the authorized shares of Series A Preferred Stock and the conversion of the
Note, the Company's Board of Directors approved the conversion of the Note on
September 2, 1999 into 20,488 shares of Series A Preferred Stock (convertible
into 303,518 shares of Common Stock) and warrants to purchase 144,618 shares of
Common Stock.
The Company was party to a $2,500,000 revolving line of credit with City
National Bank ("Bank") to provide funds for operations. The facility originally
had a maturity date of March 31, 1999. On April 9, 1999, the bank extended the
maturity of the debt to April 30, 1999 and amended the covenants such that the
Company was in compliance at that date. The facility was secured by
substantially all of the assets of the Company. On April 27, 1999 the entire
outstanding balance of $2,013,000, inclusive of accrued interest through the
date of payment, was paid off with the funds the Company received in connection
with the 1999 Refinancing. The Company is currently in discussions with the Bank
to renew or extend the credit facility. The Company is also in discussions with
other financial institutions with respect to obtaining a permanent credit
facility.
The 1999 Refinancing and conversion of the Note resulted in the issuance of a
total of 2,689,236 Warrants to purchase shares of the Company's Common Stock,
1,344,618 of which were Investor Warrants and 1,344,618 of which were Management
Warrants. Of the Investor Warrants granted, those granted to non-employees are
fully vested, non-forfeitable and are exercisable commencing six months from
their issuance date, at prices ranging from $9.00 to $12.00 per share of the
Common Stock. Management Warrants, and any Investor Warrants, granted to
employees vest and become exercisable according to schedules set forth in their
respective warrant agreements, and are exercisable at prices ranging from $9.00
to $12.00 per share of Common Stock. The Company accounts for stock issued to
non-employees in accordance with Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", and Emerging
Issues Task Force 96-18 ("EITF 96-18"). In accordance with SFAS 123 and EITF
96-18, the fair value of any Management Warrants granted in the future to
non-employees will be measured either at the date of grant or the end of the
reporting period, as appropriate. Based on the determination of the fair value
of the Company's Common Stock, the Company may incur substantial non-cash
charges to earnings in future reporting quarters.
On September 24, 1999, the Company signed a letter of intent for the acquisition
of PM Entertainment Group, Inc., a privately-owned producer and distributor of
motion pictures in the United States home video, television and Internet
broadcasting markets as well as all media in international markets. The purchase
price, contemplated by the Letter of Intent, consists of $10,000,000 in cash, a
portion of which will be paid at closing. The completion of the transaction is
anticipated prior to December 15, 1999, and is subject to the completion of a
definitive agreement, formal due diligence and other customary conditions,
including finalization of financing for the acquisition. There can be no
assurance that the transaction and related financing will be obtained on terms
acceptable to the Company or that the transaction will be completed as
contemplated above.
On April 26, 1999, the Company consummated the transactions contemplated by the
Stock Purchase Agreement and received gross proceeds of approximately
$17,700,000. In connection with such transactions, the Company incurred fees and
expenses of approximately $1,900,000 and subsequently repaid the outstanding
balance of approximately $2,013,000 on the Company's credit facility. In
addition, the Company received additional capital of approximately $2,049,000
from the issuance of the Note on June 30, 1999.
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<PAGE> 15
Management believes that the Company's current and anticipated sources of
working capital will provide adequate liquidity for the Company's operating
financial needs for at least the next twelve months, subject to securing
additional financing for the proposed PM Entertainment acquisition. In addition
to the proposed acquisition of PM Entertainment noted above, from time to time
the Company considers acquisition and investment possibilities, including film
libraries and companies ancillary to the Company's business, subject to the
availability of financing as necessary. No assurance can be given that such
financing will be available or, if available, will be at costs comparable to
current financings or on terms acceptable to the Company.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Realty Trust Advisors, Inc. On December 31, 1997, Realty Trust
Advisors, Inc. ("RTA") filed suit against the Company in Los Angeles
Superior Court seeking damages arising out of the alleged failure of
the Company to pay certain commissions. On May 11, 1998, the Company
filed a dermurrer and a motion to strike the fraud and punitive damage
portions of the first amended complaint, which were granted. In August
1998, RTA unsuccessfully sought relief from that order in the Court of
Appeal. On or about July 9, 1998, the Company filed an answer to the
first amended complaint and a cross-complaint against RTA and its
principal, Anne Keshen, for fraud and declaratory relief. RTA filed a
demurrer and a motion to strike the fraud and punitive damage portions
of the Company's cross-complaint, which were denied. RTA and Keshen
filed an answer in November 1998. RTA and Keshen moved for summary
adjudication on the Company's cross-complaint which was denied in
June, 1999. On July 1, 1999, the parties to the above actions entered
into a Settlement Agreement and Mutual General Release and executed a
dismissal with prejudice of the entire action. The Company's defense
and prosecution costs of this matter were covered in their entirety by
its insurer.
Item 2 - Changes in Securities and Use of Proceeds
None
Items 3 and 4 are omitted as not applicable.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports and Form 8-K
Item 6 (a)- Exhibit 10.66* Employment Agreement dated as of October 4, 1999
between the Company and Glenn Weisberger
Exhibit 10.67* Acquisition letter of intent dated September 24,
1999 between the Company and PM Entertainment
Group, Inc.
Exhibit 27* Financial Data Schedule (Electronic Filing Only)
*Previously filed as an exhibit to the registrant's Form 10-Q, filed on November
12, 1999.
Item 6 (b)- Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HARVEY ENTERTAINMENT COMPANY
(Registrant)
October 26, 2000 /s/ Glenn Weisberger
Name: Glenn Weisberger
Title: Executive Vice President,
General Counsel and Chief
Financial Officer
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