<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 June 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
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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. Employee
incorporation or organization) Identification No.)
11835 W. Olympic Blvd., Suite 550, Los Angeles, California 90064
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(Address of principal executive offices)
Registrant's phone number, including area code (310) 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 August 19, 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)
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
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<S> <C>
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999
1-2
Condensed Consolidated Statements of Operations (Unaudited) - Three and Six Months
Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June
30, 2000 and 1999 4-5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 8-13
OPERATIONS
PART II - OTHER INFORMATION 14-15
</TABLE>
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
2000 1999
ASSETS (Unaudited)
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<S> <C> <C>
Cash and cash equivalents $ 806,000 $ 5,825,000
Marketable securities 680,000 2,037,000
Accounts receivable, net of allowance for doubtful accounts
of $727,000 and $235,000 in 2000 and 1999, respectively 14,963,000 634,000
Prepaid expenses and other assets 2,377,000 907,000
Income tax receivable 642,000 540,000
Film inventory, net of accumulated amortization of $12,327,000
and $9,124,000 in 2000 and 1999, respectively 24,916,000 9,398,000
Fixed assets, net of accumulated depreciation of $885,000
and $755,000 in 2000 and 1999, respectively 2,016,000 432,000
Goodwill, net of accumulated amortization of $1,426,000
and $1,352,000 in 2000 and 1999, respectively 1,380,000 1,243,000
Trademarks, copyrights and other intangibles net of
accumulated amortization of $488,000 and $401,000 in
2000 and 1999, respectively 1,556,000 1,283,000
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TOTAL ASSETS $49,336,000 $22,299,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
1
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
2000 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
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<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 2,631,000 $ 477,000
Accrued marketing expenses 892,000 1,200,000
Participations and residuals payable 6,013,000 556,000
Capital lease obligations 126,000 --
Deferred revenue 1,060,000 --
Notes payable 19,910,000 --
------------ ------------
Total liabilities 30,632,000 2,233,000
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Series A convertible preferred stock, $100 stated value, 300,000
shares authorized, 127,000 and 199,000 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively, liquidation
preference of $12,687,000 and $19,915,000 at June 30, 2000 and
December 31, 1999, respectively 10,511,000 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, 79,000 shares issued and outstanding as at June 30,
2000, liquidation preference of $7,932,000 at June 30, 2000 7,971,000 --
Common stock, no par value, 30,000,000 shares
authorized, 4,549,000 issued and outstanding
at June 30,2000 and 4,187,000 issued and outstanding at December 31, 1999 23,936,000 22,268,000
Additional paid in capital 4,011,000 4,523,000
Accumulated other comprehensive income (loss) 180,000 (3,037,000)
Accumulated deficit (27,905,000) (20,064,000)
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Total stockholders' equity 8,193,000 3,690,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,336,000 $ 22,299,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
OPERATING REVENUES
Filmed entertainment $ 4,845,000 $ -- $ 4,845,000 $ --
Merchandising and licensing 270,000 364,000 1,152,000 794,000
Publishing -- (3,000) -- 129,000
----------- ----------- ----------- -----------
Net operating revenues 5,115,000 361,000 5,997,000 923,000
----------- ----------- ----------- -----------
COST OF REVENUES
Cost of sales 403,000 561,000 610,000 1,134,000
Amortization of film inventory 3,203,000 -- 3,203,000 250,000
----------- ----------- ----------- -----------
Total cost of revenues 3,606,000 561,000 3,813,000 1,384,000
GROSS PROFIT/(LOSS) 1,509,000 (200,000) 2,184,000 (461,000)
OPERATING EXPENSES
Selling, general and administrative expenses 2,959,000 1,245,000 4,105,000 3,286,000
Amortization of goodwill, trademarks, copyright
and other 66,000 58,000 159,000 117,000
Depreciation expense 93,000 55,000 130,000 108,000
----------- ----------- ----------- -----------
Total operating expenses 3,118,000 1,358,000 4,394,000 3,511,000
LOSS FROM OPERATIONS (1,609,000) (1,558,000) (2,210,000) (3,972,000)
GAIN/(LOSS) ON SALE OF SECURITIES (3,989,000) 210,000 (3,989,000) 235,000
OTHER EXPENSES -- (714,000) -- (714,000)
INTEREST EXPENSE, NET (433,000) (38,000) (369,000) (57,000)
----------- ----------- ----------- -----------
NET LOSS $(6,031,000) $(2,100,000) $(6,568,000) $(4,508,000)
Preferred stock dividends (355,000) (810,000) (703,000) (810,000)
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) -- (570,000) --
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $(6,956,000) $(2,910,000) $(7,841,000) $(5,318,000)
=========== =========== =========== ===========
NET LOSS PER SHARE OF COMMON STOCK
Basic and Diluted $ (1.53) $ (0.70) $ (1.80) $ (1.27)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and Diluted 4,549,000 4,187,000 4,345,000 4,187,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,568,000) $ (4,508,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Premium on derivative financial instruments, net -- 555,000
Depreciation 130,000 108,000
Amortization of film inventory 3,203,000 250,000
Amortization of goodwill, trademarks, copyrights and other 159,000 117,000
Loss on sale of marketable securities 3,989,000 --
Changes in operating assets and liabilities:
Marketable securities (500,000) --
Accounts receivable, net (226,000) 530,000
Prepaid expenses and other assets (760,000) 170,000
Income taxes receivable, net of income taxes payable (102,000) 25,000
Accounts payable and accrued expenses 1,623,000 62,000
Accrued marketing expense (308,000) --
Participations payable (767,000) (111,000)
Deferred revenue (260,000) --
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Net cash used in operating activities (387,000) (2,802,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 1,085,000 --
Investment in film inventory (6,051,000) --
Purchase of property and equipment (105,000) (9,000)
Investments in trademarks and copyrights (357,000) (115,000)
Purchase of PM Entertainment (12,688,000) --
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Net cash used in investing activities (18,116,000) (124,000)
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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 13,500,000 2,049,000
Proceeds from sale of derivative financial instruments, net -- 970,000
Capital lease obligation (16,000) --
------------ ------------
Net cash provided by financing activities 13,484,000 12,364,000
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NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (5,019,000) 9,438,000
CASH AND CASH EQUIVALENTS, Beginning of period 5,825,000 451,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 806,000 $ 9,889,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
4
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION :
Cash received/(paid) during the quarter for:
Interest $ 22,000 $ 32,000
Income taxes $ -- $(21,000)
</TABLE>
See accompanying notes to consolidated financial statements
5
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 June 30, 2000 and for the three month
periods ended June 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 June 30, 2000 and the consolidated
results of operations and consolidated cash flows for the three month periods
ended June 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 income for the 6 months ended June 30, 2000 was $180,000 of
unrealized holding gains on marketable securities. Comprehensive loss for the 6
months ended June 30, 1999 was $2,027,000 of unrealized holding losses on
marketable securities, net of unrealized gains on derivative financial
instruments.
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
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
assumed exercise of stock options and warrants only in the periods in which such
effect would be dilutive.
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 $201,000 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 6 months ended June 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 INCOME STATEMENT DATA (THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
6 Months Ended
June 30,
----------------
2000 1999
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<S> <C> <C>
Revenues $12,258 $16,262
Net loss applicable to common stock $(8,045) $(5,258)
Net loss per share applicable to common stock:
Basic and diluted $ (1.77) $ (1.16)
</TABLE>
* * * * * *
7
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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 cash paid at closing and 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.
RETENTION OF INVESTMENT EVALUATION ADVISORS
The Company has received several informal equity investment proposals, and in
response has engaged Houlihan Valuation Advisors as a financial advisor to the
Company. Pursuant to the engagement, Houlihan Valuation Advisors will review,
evaluate and make recommendations to the Board of Directors regarding these
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
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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 JUNE 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 animated direct-to-video featuring the
Company's classic character Casper entitled "Casper's Haunted Christmas". The
Company is in production on two live action TV movies entitled "Layover" and
"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 $4,845,000 in 2000 and zero in
1999. The increase is due to revenues generated by PM Entertainment. The 2000
revenue primarily consists of $4,104,000 of foreign broadcast license revenues,
$664,000 of domestic home video revenues and $51,000 of license fees received
from UPN for "Baby Huey's Great Easter Adventure".
Net merchandising and licensing revenues were $270,000 and $364,000 in 2000 and
1999, respectively, a decrease of $94,000. 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.
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 related to the Company's former monthly magazine were
zero in 2000 and $(3,000) in 1999. 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. The negative revenues in 1999
were mainly due to subscription refunds.
Cost of Sales - Filmed entertainment cost of sales were $359,000 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 acquisition of PM Entertainment
Merchandising cost of sales were $50,000 and $391,000 in 2000 and 1999,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity in 2000 and the reversal of accounts receivable
previously written off.
Publishing cost of sales were $(6,000) in 2000 and $170,000 in 1999. The
publication of the magazine was ceased with the July 1999 issue. The negative
cost of sales in 2000 was due to a refund of previously recorded expenditure.
Amortization of the film library was $3,203,000 and zero in 2000 and 1999,
respectively. Amortization in 2000 consists of $3,160,000 amortization of the PM
Entertainment film library and $43,000 amortization of "Baby Huey's Great Easter
Adventure" included in the Harvey Entertainment film inventory.
9
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $2,959,000 and $1,245,000 for 2000 and 1999,
respectively, an increase of $1,605,000. The increase in selling, general and
administrative expenses in 2000 is due to the acquisition of PM Entertainment.
Depreciation and Amortization - Depreciation expense was $93,000 and $55,000 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 $24,000 in 2000 and $26,000
in 1999. Amortization of goodwill was $42,000 in 2000 and $32,000 in 1999.
Gain/(Loss) on the Sale of Securities - Gain/(loss) on the sale of securities
was $(3,989,000) and $210,000 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.
Other Expenses - Other expenses were zero 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, net was $433,000 and $38,000 in 2000
and 1999, respectively. Interest expense increased due to an increase in notes
payable at the beginning of the quarter. The net expense in 2000 consists of
$296,000 of interest on the Chase Manhattan Bank credit facility, $100,000 of
interest on other production loans, $85,000 amortization of financing charges
relating mainly to the Chase Manhattan Bank credit facility and $48,000 of
interest income primarily from investment of capital into money market funds.
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues - Net filmed entertainment revenues were $4,845,000 and zero in 2000
and 1999, respectively. The increase is due to revenues generated by PM
Entertainment. The 2000 revenue primarily consists of $4,104,000 of foreign
broadcast license revenues, $664,000 of domestic home video revenues and $51,000
of license fee revenues received from UPN for "Baby Huey's Great Easter
Adventure".
Net merchandising and licensing revenues were $1,152,000 and $794,000 in 2000
and 1999, respectively, an increase of $ 358,000. 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 Characters
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 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
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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 related to the Company's former monthly magazine were
zero in 2000 and $129,000 in 1999. Publishing sales in 1999 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
$359,000 and $6,000 in 2000 and 1999, respectively. The increase in cost of
sales is due to an increase in filmed entertainment activity due to the
acquisition of PM Entertainment.
Merchandising costs of sales were $257,000 and $747,000 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 $(6,000) in 2000 and $381,000 in 1999. The
publication of the magazine was ceased with the July 1999 issue. The negative
cost of sales in 2000 is due to a refund of expenditure previously recorded.
Amortization of the film library was $3,203,000 and $250,000 in 2000 and 1999,
respectively. Amortization in 2000 consists of $3,160,000 amortization of the PM
Entertainment film inventory and $43,000 amortization of "Baby Huey's Great
Easter Adventure" included in the Harvey Entertainment film inventory. Included
in the 1999 film amortization amount is related to the recognition of an
additional write-off of the 1999 direct-to-video, "Baby Huey's Great Easter
Adventure."
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $4,105,000 and $3,286,000 for 2000 and 1999,
respectively, an increase of $709,000. The increase in selling, general and
administrative expenses in 2000 is due to the acquisition of PM Entertainment in
the second quarter, 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 $130,000 and $108,000
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 $84,000 in 2000 and $53,000
in 1999. Amortization of goodwill was $75,000 in 2000 and $64,000 in 1999.
Gain/(Loss) on the Sale of Securities - Gain/(loss) on the sale of securities
was $(3,989,000) and $235,000 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.
Other Expenses - Other expenses were zero and $714,000 in 2000 and 1999,
respectively. The expense in 1999 represents the premium associated with the
purchase of derivative financial instruments.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
Interest Expense, Net - Interest expense was $369,000 and $57,000 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 $296,000 of
interest on the Chase Manhattan Bank credit facility, $100,000 of interest on
other production loans, $85,000 amortization of financing charges relating
mainly to the Chase Manhattan Bank credit facility and $112,000 of interest
income primarily from investment of capital into money market funds.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $387,000 and $2,802,000 in 2000 and
1999, respectively. The decrease in cash used in operating activities was
primarily due to a decrease in the operating loss for the period and an increase
in the accounts payable balance.
Net cash used in investing activities was $18,116,000 and $124,000 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 $13,484,000 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 Horowitz 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 cash paid at closing and
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.
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
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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, and may consider transactions which would constitute a change of
control. As previously announced, the Company has received several informal
equity investment proposals, and in response has engaged Houlihan Valuation
Advisors as a financial advisor to the Company. Pursuant to the engagement,
Houlihan Valuation Advisors will review, evaluate and make recommendations to
the Board of Directors regarding these 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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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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 quarter 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 May 1, 2000, the Company filed a Form 8-K regarding the
following matters: its acquisition of PM Entertainment; an
Employment Agreement entered into by and among George Shamieh, PM
Entertainment and the Company; the acquisition of a loan
concerning the motion picture entitled "Inferno"; and the
execution of the Chase Credit Facility.
II. On June 2, 2000, the Company filed a Form 8-K regarding the
following: the designation of its Series B Convertible Preferred
Stock; the exchange of certain shares of the Company's Series A
Convertible Preferred Stock for newly issued shares of the Series
B Convertible Preferred Stock; and the pro forma financial
results of such exchange.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
III. On June 29, 2000, the Company filed an amendment to its Form 8-K
originally filed on May 1, 2000 in order to report pro forma
financial information regarding the acquisition of PM
Entertainment.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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
August 19, 2000 /s/ Glenn R. Weisberger
-------------------------------------------
Name: Glenn R. Weisberger
Title: Executive Vice President, General Counsel and
Chief Financial Officer
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