<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2000
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
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The Harvey Entertainment Company
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(Exact name of registrant as specified in its charter)
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<S> <C>
California 95-4217605
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(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
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11835 W. Olympic Blvd., Suite 550, Los Angeles, California 90064
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(Address of principal executive offices)
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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.
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<S> <C>
Class Outstanding at November 14, 2000
--------------- -----------------------------------------
Common Stock, no par value 4,549,441 (7,603,997 shares, including
3,054,556 shares into which the Series A
and B Preferred Stock could be converted)
</TABLE>
<PAGE> 2
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
INDEX
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<TABLE>
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PART I - FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets - September 30, 2000 (Unaudited)
and December 31, 1999 1-2
Condensed Consolidated Statements of Operations (Unaudited) - Three
and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 2000 and 1999 4-5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 8-13
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 14
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<PAGE> 3
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
September 30,
2000 December 31,
ASSETS (Unaudited) 1999
------------- -----------
<S> <C> <C>
Cash and cash equivalents $ 1,108,000 $ 5,825,000
Marketable securities 153,000 2,037,000
Accounts receivable, net of allowance for doubtful accounts and sales returns
of $1,572,000 and $235,000 in 2000 and 1999, respectively 16,339,000 634,000
Prepaid expenses and other assets 2,387,000 907,000
Income tax receivable 642,000 540,000
Film inventory, net of accumulated amortization of $15,037,000
and $9,124,000 in 2000 and 1999, respectively 20,046,000 9,398,000
Fixed assets, net of accumulated depreciation of $998,000
and $755,000 in 2000 and 1999, respectively 1,907,000 432,000
Goodwill, net of accumulated amortization of $1,530,000
and $1,352,000 in 2000 and 1999, respectively 1,966,000 1,243,000
Trademarks, copyrights and other intangibles net of
accumulated amortization of $528,000 and $401,000 in
2000 and 1999, respectively 1,577,000 1,283,000
----------- -----------
TOTAL ASSETS $46,125,000 $22,299,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
1
<PAGE> 4
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
September 30,
2000 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1999
------------- ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 1,836,000 $ 477,000
Accrued marketing expenses 292,000 1,200,000
Participations and residuals payable 3,684,000 556,000
Capital lease obligations 109,000 --
Deferred revenue 2,274,000 --
Notes payable 20,779,000 --
------------ ------------
Total liabilities 28,974,000 2,233,000
------------ ------------
Series A convertible preferred stock, $100 stated value, 300,000 shares
authorized, 122,000 and 199,000 shares issued and outstanding at September
30, 2000 and December 31, 1999, respectively, liquidation preference of
$12,221,000 and $19,915,000 at September 30, 2000 and
December 31, 1999, respectively 10,154,000 16,376,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares authorized (300,000 shares
have been designated as Series A convertible preferred stock) -- --
Series B convertible preferred stock, $100 stated value, 300,000 shares
authorized, 88,000 shares issued and outstanding as at September 30,
2000, liquidation preference of $8,758,000 at September 30, 2000 8,758,000 --
Common stock, no par value, 30,000,000 shares
authorized, 4,549,000 issued and outstanding at September 30, 2000
and 4,187,000 issued and outstanding at December 31, 1999 23,936,000 22,268,000
Additional paid in capital 3,942,000 4,523,000
Accumulated other comprehensive income (loss) (347,000) (3,037,000)
Accumulated deficit (29,292,000) (20,064,000)
------------ ------------
Total stockholders' equity 6,997,000 3,690,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,125,000 $ 22,299,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Filmed entertainment $ 5,908,000 $ -- $ 10,752,000 $ --
Merchandising and licensing 91,000 117,000 1,243,000 911,000
Publishing 5,000 -- 6,000 129,000
------------ ------------ ------------ ------------
Net operating revenues 6,004,000 117,000 12,001,000 1,040,000
------------ ------------ ------------ ------------
COST OF REVENUES
Cost of sales 1,341,000 298,000 2,535,000 1,675,000
Amortization of film inventory 2,710,000 -- 5,913,000 --
------------ ------------ ------------ ------------
Total cost of revenues 4,051,000 298,000 8,448,000 1,675,000
GROSS PROFIT/(LOSS) 1,953,000 (181,000) 3,553,000 (635,000)
OPERATING EXPENSES
Selling, general and administrative expenses 2,082,000 1,181,000 5,601,000 4,474,000
Amortization of goodwill,
trademarks, copyright and other 141,000 57,000 300,000 174,000
Depreciation expense 113,000 36,000 244,000 144,000
Stock based compensation -- 76,000 -- 76,000
------------ ------------ ------------ ------------
Total operating expenses 2,336,000 1,350,000 6,145,000 4,868,000
LOSS FROM OPERATIONS (383,000) (1,531,000) (2,592,000) (5,503,000)
GAIN/(LOSS) ON SALE OF SECURITIES -- 565,000 (3,989,000) 799,000
OTHER INCOME/(EXPENSES) (1,000) -- 5,000 (714,000)
INTEREST EXPENSE, NET (641,000) (25,000) (1,017,000) (82,000)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT/EXPENSE (1,025,000) (991,000) (7,593,000) (5,500,000)
INCOME TAX BENEFIT/(EXPENSE) -- (1,000) -- (1,000)
------------ ------------ ------------ ------------
NET LOSS $ (1,025,000) $ (992,000) $ (7,593,000) $ (5,501,000)
Preferred stock dividends (361,000) (1,360,000) (1,064,000) (2,170,000)
Excess of fair value of Series B convertible
preferred stock issued less the carrying
amount of Series A convertible preferred stock
redeemed and the associated beneficial
conversion feature on Series A convertible
preferred stock redeemed -- -- (570,000) --
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (1,386,000) $ (2,352,000) $ (9,227,000) $ (7,671,000)
============ ============ ============ ============
NET LOSS PER SHARE OF COMMON STOCK
Basic and Diluted $ (0.30) $ (0.56) $ (2.08) $ (1.83)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and Diluted 4,549,000 4,187,000 4,427,000 4,187,000
============ ============ ============ ============
3
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,593,000) $ (5,501,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Premium on derivative financial instruments, net -- 242,000
Depreciation 244,000 144,000
Amortization of film inventory 5,913,000 250,000
Amortization of goodwill, trademarks, copyrights and other 300,000 174,000
Loss on sale of marketable securities 3,989,000 --
Stock based compensation 76,000
Changes in operating assets and liabilities:
Marketable securities (500,000) --
Accounts receivable, net (1,602,000) 803,000
Prepaid expenses and other assets (771,000) 32,000
Income taxes receivable, net of income taxes payable (102,000) 25,000
Investment in film inventory (6,484,000) (103,000)
Accounts payable and accrued expenses 828,000 (287,000)
Accrued marketing expense (908,000) --
Participations payable (1,193,000) (120,000)
Deferred revenue 954,000 --
------------ ------------
Net cash used in operating activities (6,925,000) (4,265,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 1,085,000 --
Purchase of property and equipment (110,000) (18,000)
Investments in trademarks and copyrights (415,000) (251,000)
Purchase PM Entertainment (12,688,000) --
------------ ------------
Net cash used in investing activities (12,128,000) (269,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment on line of credit, net -- (250,000)
Net proceeds from issuance of convertible preferred stock -- 9,595,000
Proceeds from bank loans 14,369,000 2,049,000
Proceeds from sale of derivative financial instruments, net -- 970,000
Capital lease obligation (33,000) --
------------ ------------
Net cash provided by financing activities 14,336,000 12,364,000
------------ ------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (4,717,000) 7,830,000
CASH AND CASH EQUIVALENTS, Beginning of period 5,825,000 451,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 1,108,000 $ 8,281,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
4
<PAGE> 7
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 458,000 $ 82,000
Income taxes $ -- $ (21,000)
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND OPERATIONS - The Harvey Entertainment Company ("Harvey"),
together with its wholly-owned subsidiaries Harvey Comics, Inc., Pepin/Merhi
Entertainment Group, Inc. ("PM Entertainment"), Baby Huey Productions, Inc.
(recently renamed BHP Productions, Inc.), Shadow Hills Post LLC, Firetrap, Inc.,
Sunland Studios, Inc. and Inferno Acquisition Corp. (collectively the "Company")
owns and exploits a library of widely recognized classic characters and other
intellectual property assets, including a related film inventory of animated
short features, and the Company produces action-adventure motion pictures
primarily for the foreign market through its PM Entertainment subsidiary. Harvey
is the successor to Harvey Comics, Inc. which was founded in 1939 by the Harvey
family. In 1989, Harvey's predecessor purchased Harvey Comics, Inc. to exploit
its intellectual property and in 1993 Harvey completed its initial public
offering of common stock. The roster of the Company's classic characters
includes the well know characters Casper the Friendly Ghost, Richie Rich, Baby
Huey, Wendy the Good Little Witch, and Hot Stuff, among many others.
In the opinion of the Company's management, the accompanying unaudited condensed
consolidated financial statements as of September 30, 2000 and for the three
month and nine months periods ended September 30, 2000 and 1999 contain all
adjustments, which include normal recurring accruals, necessary to present
fairly the consolidated financial position of the Company as of September 30,
2000 and the consolidated results of operations for the three month and nine
months periods ended September 30, 2000 and 1999 and cash flows for the nine
months ended September 30, 2000 and 1999.
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 1999 amounts have been made in order to
conform with the 2000 financial statement presentation.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - The consolidated
financial statements include the accounts of The Harvey Entertainment Company
and its wholly owned subsidiaries, Harvey Comics, Inc., PM Entertainment, Baby
Huey Productions, Inc., Shadow Hills Post LLC, Firetrap, Inc., Sunland Studios,
Inc. and Inferno Acquisition Corp. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
COMPREHENSIVE INCOME - Effective January 1, 1998, the Company adopted the
provisions of 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 during a period from non-owner sources.
Comprehensive loss for the nine months ended September 30, 2000 consists of
$347,000 of unrealized holding losses on marketable securities. Comprehensive
loss for the nine months ended September 30,
6
<PAGE> 9
1999 consists of $2,730,000 of unrealized holding losses on marketable
securities, net of unrealized gains on derivative financial instruments. There
can be no assurance any of these transactions will become definitive, or if
definitive, that any will be accepted by the Company or consummated.
NET INCOME (LOSS) PER SHARE - Basic earnings per share is based upon the net
earnings applicable to common shares outstanding during the period. Diluted
earnings per share reflects the effect of the assumed exercise of stock options
and warrants only in the periods in which such effect would be dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which will be effective in the fourth quarter of 2000. 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 some changes as to how the filmed entertainment
industry classifies its revenues, particularly relating to distribution
arrangements for third-party and co-financed joint venture product. As a result,
the Company's management is in the process of evaluating the overall impact of
SAB 101 on its consolidated financial statements. However, other aspects of SAB
101 are not expected to have a significant effect on the Company's consolidated
financial statements.
On June 12, 2000, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 00-2
"Accounting by Producers or Distributors of Films", which is effective for
fiscal years beginning after December 15, 2000. This statement of position
establishes new film accounting standards, including changes in revenue
recognition and accounting for advertising, development and overhead costs.
Under the new accounting standards, all exploitation costs such as advertising
expenses and marketing costs for theatrical and television products will be
expensed as incurred, whereas under the existing standards, these costs are
capitalized and amortized over the products' lifetime revenues. Management is
currently in the process of evaluating the cumulative effect of this change in
accounting principle.
NOTE 2 - ACQUISITION OF PEPIN/MERHI ENTERTAINMENT GROUP, INC.
On April 3, 2000, the Company acquired 100% of the outstanding shares of PM
Entertainment for approximately $6,500,000 in cash, 362,500 common shares of the
Company and a $2,050,000 subordinated note. The acquisition was accounted for
under the purchase method of accounting, and accordingly, the results of the
acquisition of PM Entertainment are included with the results of the Company
from the date of acquisition on April 3, 2000. Goodwill of $901,000 is being
amortized over a period of 10 years.
The unaudited condensed pro forma results of operations below assume the PM
Entertainment acquisition occurred at the beginning of the earliest period
presented and were prepared based upon the historical consolidated statement of
operation of the Company and PM Entertainment for the nine months ended
September 30, 2000 and 1999, adjusted to reflect purchase accounting. The
unaudited pro forma information is not necessarily indicative of the combined
results of operation of the Company and PM Entertainment that would have
resulted if the transactions had occurred on the dates previously indicated, nor
is it necessarily indicative of future operating results of the Company.
PRO FORMA STATEMENT OF OPERATIONS (THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
2000 1999
--------------------
<S> <C> <C>
Revenues $18,262 $23,277
Net loss applicable to common stock $ 9,432 $ 6,498
Net loss per share applicable to common stock:
Basic and diluted $ 2.07 $ 1.55
</TABLE>
NOTE 3 - LIQUIDITY AND SUBSEQUENT EVENT
The Company on August 24, 2000 entered into a Letter of Intent with Classic
Media LLC on essentially the following terms, namely in exchange for $26,000,000
in cash and approximately $4,000,000 in assets the Company agreed to issue
preferred stock with a conversion price of $3.00 per share and also 10,740,000
warrants to purchase shares of common stock in the Company for prices ranging
from $2.50 per share up to $6.00 per share. On September 28, 2000, the Company
and Classic Media LLC agreed to reduce the conversion price form $3.00 per share
to $2.85 per share. Subsequent to the close of the quarter, Classic Media LLC
terminated the Letter of Intent. Both parties have placed a claim for $1,000,000
earnest money deposit made by Classic Media LLC.
Management believes that the Company's current and anticipated sources of
working capital are not sufficient to provide the necessary liquidity and
financing for the Company's operating financial needs as set forth in
Management's current business plan for the next twelve months. Management has
begun to address these issues, including seeking out several strategic partners
and investors, such as the aborted agreement with Classic Media LLC and may
consider other transactions which would constitute a change of control. There
can be no assurance any of these transactions will become definitive, or if
definitive, that any will be accepted by the Company or consummated.
*******
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS FOR THE COMPANY
STRATEGIC ACQUISITION
On September 24, 1999, the Company signed a letter of intent for the acquisition
of 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 PM Entertainment
acquisition closed effective as of April 3, 2000. The purchase price consisted
of $6,500,000 of cash paid at closing and the issuance by the Company of: (1)
$1,668,000 in shares of the Company's common stock and (2) a $2,050,000
subordinated note to be paid over five future quarterly periods. The Company
also assumed existing bank debt in the amount of approximately $5,200,000. In
connection with the acquisition of PM Entertainment, the Company also purchased
from Imperial Bank a loan, secured by the motion picture "Inferno", by paying a
down payment of $2,000,000 and obtaining a loan from Imperial Bank in the amount
of approximately $4,800,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CREDIT FACILITY
Effective as of April 3, 2000 the Company entered into a new five year,
$25,000,000 revolving credit facility with The Chase Manhattan Bank ("Chase
Bank") to provide operating funds and a portion of the acquisition financing of
the PM Entertainment acquisition. The facility is secured by substantially all
of the assets of the Company (including PM Entertainment) and replaces a
$2,500,000 facility with City National Bank that expired in April 1999. It was
the intention of Chase Bank to syndicate the loan for the full balance of
$25,000,000, but due to changes in the credit market, it was decided to not
syndicate the full balance of the facility and the amount available to the
Company has been limited to $15,000,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
MERCHANDISING AND LICENSING
The management of the Company instituted a review of the Company's financial
results from its Merchandising and Licensing division. This review indicated
that this division was not performing to the expectations of management. Based
on the outcome of this review, the Company entered into an agreement with Hearst
Entertainment for the outsourcing of the majority of this department that went
into effect on June 15, 2000. The Company previously agreed to outsource its
licensing and merchandising operations related to Latin America to Felix the Cat
Productions, Inc., effective March 27, 2000. The Company has retained all
merchandising rights relative to the Internet.
CLASSIC MEDIA LLC
The Company received several informal equity investment proposals, and in
response engaged Houlihan Valuation Advisors as a financial advisor to the
Company to review the proposals. Pursuant to the engagement, Houlihan Valuation
Advisors reviewed, evaluated and made certain recommendations to the Board of
Directors regarding these investment proposals. The Company on August 24, 2000
entered into a Letter of Intent with Classic Media LLC on essentially the
following terms, namely in exchange for $26,000,000 in cash and approximately
$4,000,000 in assets the Company agreed to issue preferred stock with a
conversion price of $3.00 per share and also 10,740,000 warrants to purchase
shares of common
8
<PAGE> 11
stock in the Company for prices ranging from $2.50 per share up to $6.00 per
share. On September 28, 2000, the Company and Classic Media LLC agreed to reduce
the conversion price from $3.00 per share to $2.85 per share. Subsequent to the
close of the quarter, Classic Media LLC terminated the Letter of Intent. Both
parties have placed a claim for $1,000,000 earnest money deposit made by Classic
Media LLC. The Company believes that pursuant to the Letter of Intent as
amended, it is entitled to receive the deposit, but there can be no assurances
that if the parties litigate the issue, the Company will prevail.
The Company has attempted to restart discussions with the various other
interested parties for other equity investment proposals. There can be no
assurance that any of these proposals will become definitive, or if definitive,
that any will be accepted by the Company or consummated. Due to the capital
limitations imposed on the Company by the inability to access the full credit
facility, as set forth above in the discussion of the Credit Facility, the
Company has doubts as to its ability to fully implement its business plan
without an additional infusion of capital either via debt or equity.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF OPERATIONS
The Company's business plan is in the process of being implemented. Thus any
possible results will not be realized until subsequent periods, if ever.
The Company accepted delivery on one live action TV movie entitled "Layover" and
is in post-production on one live action TV movie entitled "Firetrap".
Development and production of all other new products of the Company are subject
to financing and distribution alternatives.
Revenues - Net filmed entertainment revenues were $5,908,000 in 2000 and zero in
1999. The increase is due to revenues generated by PM Entertainment and the
delivery of the animated direct to video "Casper's Haunted Christmas". The 2000
revenue primarily consists of $2,899,000 of foreign broadcast license revenues,
$769,000 of domestic home video revenues and $2,015,000 of domestic license
fees.
Net merchandising and licensing revenues were $91,000 and $117,000 in 2000 and
1999, respectively, a decrease of $26,000. The merchandising revenues in 2000
and 1999 consist of new licenses for the worldwide merchandising of the Harvey
Classic Characters entered into by the Company's in-house licensing division and
by Hearst Entertainment on behalf of the Company. Although merchandising
licenses are generally granted for a period of one to three years, the minimum
guaranteed license revenues are recognized when the license period begins,
provided certain conditions have been met. Due to this accounting treatment,
revenue fluctuations from the Company's merchandising activities will likely
recur in the future on a quarterly and annual basis. The ongoing success of the
merchandising program is in part dependent upon the attractiveness, future
marketability and the release of new product involving the Harvey Classic
Characters or the potential acquisition of new characters. The Company has
agreed to outsource the majority of its merchandising program to Hearst
Entertainment effective June 15, 2000 and Felix the Cat Productions, Inc.,
regarding Latin America effective March 27, 2000.
Net revenues generated from music publishing fees were $5,000 in 2000 and zero
in 1999.
Cost of Sales - Filmed entertainment cost of sales were $1,316,000 and zero in
2000 and 1999, respectively. The increase in cost of sales is due to an increase
in filmed entertainment activity due to the
9
<PAGE> 12
acquisition of PM Entertainment and delivery of the animated direct to video
"Casper's Haunted Christmas".
Merchandising cost of sales were $25,000 and $298,000 in 2000 and 1999,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity in 2000.
Amortization of the film library was $2,710,000 and zero in 2000 and 1999,
respectively. Amortization in 2000 consists of $1,430,000 amortization of the PM
Entertainment film library and $1,280,000 amortization of the Harvey
Entertainment film library.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $2,082,000 and $1,181,000 for 2000 and 1999,
respectively, an increase of $901,000. The increase is due to the acquisition of
PM Entertainment.
Depreciation and Amortization - Depreciation expense was $113,000 and $36,000 in
2000 and 1999, respectively. The increase in depreciation was due to the
acquisition of fixed assets included in PM Entertainment.
Amortization of trademarks, copyrights and other was $37,000 in 2000 and $25,000
in 1999. Amortization of goodwill was $104,000 in 2000 and $32,000 in 1999. The
increase in amortization of goodwill is due to the acquisition of PM
Entertainment.
Stock Based Compensation - Stock based compensation was zero in 2000 and $76,000
in 1999. Compensation in 1999 related to the issuance of warrants to a
consultant to the Company.
Gain/(Loss) on the Sale of Securities - Gain/(loss) on the sale of securities
was zero and $565,000 in 2000 and 1999, respectively. The gain in 1999 consists
of investment income from the sale of securities and derivative financial
instruments.
Interest Expense, Net - Interest expense, net was $641,000 and $25,000 in 2000
and 1999, respectively. Interest expense increased due to an increase in notes
payable. The net expense in 2000 consists of $379,000 of interest on the Chase
Manhattan Bank credit facility, $163,000 of interest on other production loans
and $99,000 amortization of financing charges relating mainly to the Chase
Manhattan Bank credit facility.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues - Net filmed entertainment revenues were $10,752,000 and zero in 2000
and 1999, respectively. The increase is due to revenues generated by PM
Entertainment and the delivery of the animated direct to video "Casper's Haunted
Christmas". The 2000 revenue primarily consists of $7,002,000 of foreign
broadcast license revenues, $1,432,000 of domestic home video revenues and
$2,065,000 of domestic license fee revenues.
Net merchandising and licensing revenues were $1,243,000 and $911,000 in 2000
and 1999, respectively, an increase of $332,000. In 2000, $500,000 of revenues
were generated from the licensing of the Richie Rich character for use in an
internet company's website. The merchandising revenues in 2000 and 1999 consist
of new licenses for the worldwide merchandising of the Harvey Classic
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Characters entered into by the Company's in-house licensing division and by
Hearst Entertainment on behalf of the Company. Although merchandising licenses
are generally granted for a period of one to three years, the minimum guaranteed
license revenues are recognized when the license period begins, provided certain
conditions have been met. Due to this accounting treatment, revenue fluctuations
from the Company's merchandising activities will likely recur in the future on a
quarterly and annual basis. The ongoing success of the merchandising program is
in part dependent upon the attractiveness, future marketability and the release
of new product involving the Harvey Classic Characters or the potential
acquisition of new characters. The Company has agreed to outsource the majority
of its merchandising program to Hearst Entertainment effective June 15, 2000 and
Felix the Cat Productions, Inc., regarding Latin America effective March 27,
2000.
Net publishing revenues were $6,000 in 2000 and $129,000 in 1999. Publishing
sales in 1999 related to the Company's former monthly magazine were on a fully
returnable basis recorded upon shipment, net of a reserve based on estimated
returns. Publishing revenues also included sales of advertising space and
subscriptions to the Company's magazine. The publication of the magazine was
ceased with the July 1999 issue, resulting from 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
$2,260,000 and $263,000 in 2000 and 1999, respectively. The increase in cost of
sales is due to the acquisition of PM Entertainment.
Merchandising costs of sales were $281,000 and $1,031,000 in 2000 and 1999,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity in 2000.
Publishing costs of sales were immaterial in 2000 and $381,000 in 1999. The
publication of the magazine was ceased with the July 1999 issue.
Amortization of the film library was $5,913,000 and zero in 2000 and 1999,
respectively. Amortization in 2000 consists of $4,643,000 amortization of the PM
Entertainment film inventory and $1,270,000 amortization of the Harvey
Entertainment film library.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $5,601,000 and $4,474,000 for 2000 and 1999,
respectively, an increase of $1,127,000, is due to the acquisition of PM
Entertainment. However lower costs incurred for consulting services throughout
the year and an overall decrease in other overhead expenses were reflected in
the first quarter.
Depreciation and Amortization - Depreciation expense was $244,000 and $144,000
in 2000 and 1999, respectively. The increase in depreciation was due to the
acquisition of fixed assets included in PM Entertainment.
Amortization of trademarks, copyrights and other was $122,000 in 2000 and
$78,000 in 1999. Amortization of goodwill was $178,000 in 2000 and $96,000 in
1999.
Stock Based Compensation - Stock based compensation was zero in 2000 and $76,000
in 1999. Compensation in 1999 related to the issuance of warrants to a
consultant to the Company.
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Gain/(Loss) on the Sale of Securities - Gain/(loss) on the sale of securities
was $(3,989,000) and $799,000 in 2000 and 1999, respectively. The loss in 2000
consists of a realized loss on the sale of Kushner-Locke securities. The gain in
1999 consists of investment income from the sale of securities and derivative
financial instruments.
Other Income/(Expenses) - Other income/(expenses) were $5,000 and $(714,000) in
2000 and 1999, respectively. The expense in 1999 represents the premium
associated with the purchase of derivative financial instruments.
Interest Expense, Net - Interest expense was $1,017,000 and $82,000 in 2000 and
1999, respectively. Interest expense increased due to an increase in notes
payable at the beginning of the quarter. The expense consists of $675,000 of
interest on the Chase Manhattan Bank credit facility, $266,000 of interest on
other production loans, $184,000 amortization of financing charges relating
mainly to the Chase Manhattan Bank credit facility and $108,000 of interest
income primarily from investment of capital into money market funds.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating increase activities was $6,925,000 and $4,265,000 in
2000 and 1999, respectively. The increase in cash used in operating activities
was primarily due to an increase in investment in film inventory, prepaids and
accounts receivable, offset by a decrease in the operating loss for the period
and an increase in the accounts payable and deferred revenue balances.
Net cash used in investing activities was $12,128,000 and $269,000 in 2000 and
1999, respectively. The increase in investing activities resulted from the
acquisition of PM Entertainment and increased investment in film inventory.
Net cash provided by financing activities was $14,336,000 and $ 12,364,000 in
2000 and 1999, respectively. The cash provided by financing activities in 2000
resulted from proceeds from the Chase Manhattan Bank credit facility and The
Lewis Horwitz Organization production loans. The cash provided by financing
activities in 1999 resulted from the 1999 preferred stock investments in the
Company, sale of derivative financial instruments and the issuance of a
subordinate note.
Effective as of April 3, 2000 the Company entered into a new five year,
$25,000,000 revolving credit facility with The Chase Manhattan Bank (the "Chase
Credit Facility") to provide operating funds and a portion of the acquisition
financing of the PM Entertainment acquisition. Borrowings under the Chase Credit
Facility are limited to $15,000,000 until additional participant lenders are
added to the Chase Credit Facility, at which time the borrowings available will
be increased, up to a maximum of $25,000,000. Borrowings under the Chase Credit
Facility are determined under a borrowing base calculation, which includes
certain allowable accounts receivable, film and intellectual property rights,
and are secured by substantially all of the assets of the Company and PM
Entertainment. Interest is payable on the outstanding borrowings under the Chase
Credit Facility at the rate of either 1.5% per annum above the prime rate (as
defined in the Chase Credit Facility) or 2.5% per annum above the London
Interbank Offered Rate, at the Company's election. The Chase Credit Facility
requires the Company to meet certain financial ratios.
On September 24, 1999, the Company signed a letter of intent for the acquisition
of all of the outstanding stock of 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 closing of the PM Entertainment acquisition occurred effective as of April
3, 2000. The purchase price consisted of $6,500,000 of cash paid at closing and
the issuance by the Company of: (1)
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$1,668,000 in shares of the Company's common stock and (2) a $2,050,000
subordinated note to be paid over five future quarterly periods. The Company
also assumed existing bank debt in the amount of approximately $5,200,000. In
connection with the acquisition of PM Entertainment, the Company also purchased
from Imperial Bank a loan, secured by the motion picture "Inferno", by paying a
down payment of $2,000,000 and obtaining a loan from Imperial Bank in the amount
of approximately $4,800,000. PM Entertainment operates out of a 120,000 square
foot office, production and post-production facility located just outside the
Los Angeles area. As part of the PM Entertainment acquisition, the Company has
entered into a two-year lease arrangement with a purchase option for the leased
facilities. In accordance with the Accounting Principles Board Opinion No. 16
("APB 16"), this acquisition will be accounted for under the purchase method of
accounting.
Management believes that the Company's current and anticipated sources of
working capital are not sufficient to provide the necessary liquidity and
financing for the Company's operating financial needs as set forth in
Management's current business plan for the next twelve months. Management has
begun to address these issues, including seeking out several strategic partners
and investors, such as the aborted agreement with Classic Media LLC and may
consider other transactions which would constitute a change of control. As
previously announced, the Company entered into an agreement with Classic Media
LLC for a change in control, which terminated after the end of the quarter. The
Company has recommenced discussions with several third parties concerning other
possible equity investment proposals. There can be no assurance that any of
these proposals will become definitive, or if definitive, that any will be
accepted by the Company or consummated. No assurance can be given that
additional financing or equity investments will become available or, if
available, will be on terms acceptable to the Company or its shareholders (where
shareholders approval may be required).
INFLATION AND SEASONALITY
Inflation has not been material to the Company during the past five years.
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PART II - OTHER INFORMATION
ITEM 1. - Legal Proceedings
The Company is not currently involved in any material legal
proceedings.
ITEM 2. - Changes in Securities and Use of Proceeds
In connection with the Company's acquisition of PM Entertainment
as of April 3, 2000, the Company issued 362,500 unregistered
shares of its common stock as part of the purchase price for PM
Entertainment. The shares were issued as follows: 125,000 shares
to Mr. Richard J. Pepin, 125,000 shares to Mr. Joseph T. Merhi,
and 112,500 shares to Mr. George Shamieh. The Company did not
receive any cash payment for the issued shares. The Company
incurred no material expenses in connection with such issuance.
During the period the Company reached agreement with holders of
the Company's Series A Convertible Preferred Stock to exchange
portions of their Series A Preferred Stock for substantially
similar shares of the Company's Series B Convertible Preferred
Stock. The amount exchanged was approximately 42% of the total
Series A Preferred Stock authorized and outstanding at the time
of exchange.
On April 3, 2000 the Company issued 126,000 warrants to Chase
Equity Associates, LP as part of the fee payable by the Company
to Chase Equity Associates, LP in connection with the Chase
Credit Facility.
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 27 Financial Data Schedule (Electronic Filing Only)
ITEM 6. (B) - Reports on Form 8-K
I. On August 24, 2000, the Company filed a Form 8-K regarding the
signing of a Letter of Intent with Classic Media LLC.
II. On September 29, 2000, the Company filed an amendment to its
Form 8-K originally filed on August 24, 2000 regarding an
amendment to the Letter of Intent with Classic Media LLC.
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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
November 14, 2000 /s/ Glenn R. Weisberger
----------------------------------
Name: Glenn R. Weisberger
Title: Executive Vice President, General Counsel and Chief
Financial Officer
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