Use these links to rapidly review the documentITEM 7. FINANCIAL STATEMENTS

---

---

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

FORM 10-KSB

|ý | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001

OR

|o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

Commission file number: 0-23000

---

SUNLAND ENTERTAINMENT CO., INC.(Name of Small Business Issuer in its charter)

CALIFORNIA(State or Other Jurisdiction
of Organization)

95-4217605(IRS Employer Incorporation or
Identification No.)11835 W. OLYMPIC BLVD., SUITE 550,
LOS ANGELES, CALIFORNIA(Address of Principal Executive Offices)

90064(Zip Code)


Issuer's Telephone Number, Including Area Code:310-444-4100

Securities
registered under Section 12(b) of the Exchange Act:NONE

Securities
registered under Section 12(g) of the Exchange Act:

COMMON STOCK, NO PAR VALUE(Title of class)

---

Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the issuer was required to file such reports), and (2) has been subject to such filing requirements for past
90 days: Yes ý    No o

Check
if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best
of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K SB or any amendment to the
Form 10-K SB: ý

State
issuer's revenue for its most recent fiscal year: $11,441,000

State
the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of March 29, 2002, a date within the past 60 days, is: $354,000

State
the number of shares outstanding of each of issuer's classes of common equity, as of March 29, 2002: 4,549,441 (6,957,604 shares including 2,408,163 shares into which
the Series A and B Preferred Stock could be converted).

Transitional
Small Business Disclosure
Format: Yes: o    No: ý

Documents Incorporated By Reference

The following documents are incorporated by reference into this report: None.

---

---

---



FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements with-in the meaning of Section 27A of the Securities Act (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have based these statements on our beliefs and assumptions, based on information currently available to
us. These forward-looking statements are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations set
forth under the sections entitled "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Forward-looking
statements are not guarantees of performance. Our future results and requirements may differ materially from those described in the forward-looking statements. Many of
the factors that will determine these results and requirements are beyond our control. In addition to the risks and uncertainties discussed in "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," investors should consider those discussed under "Risk Factors" and, among others, the following:



These
forward-looking statements speak only as of the date of this report. We do not intend to update or revise any forward-looking statements to reflect changes in our business strategy
or planned capital expenditures, or to reflect the occurrence of unanticipated events.

2

---

PART I

ITEM 1.    BUSINESS

Introduction

General

Sunland Entertainment Co., Inc. (formerly The Harvey Entertainment Company), together with its subsidiaries Sunland Entertainment, Inc. (formerly
Harvey Comics, Inc.), Pepin/Merhi Entertainment Group, Inc., and Inferno Acquisition Corp. (collectively, (the "Company") owns and exploits motion picture product and related
intellectual property. Historically, this included a library of widely recognized classic characters (the "Harvey Classic Characters") and a related film library of animated short features (the
"Harvey Classic Library"). The Company is the successor to Harvey Comics, Inc. ("Harvey Comics") which was founded in 1939 by the Harvey family.

Recent Developments (1999-2002)

Purchase of Convertible Preferred Stock

In July 2001, the Company entered into a Securities Purchase Agreement to purchase from an affiliate of a company which is owned by a preferred
shareholder, who is also a director of the Company (i) 5,500 shares of the Company's Series A Convertible Preferred Stock together with dividends accrued thereon, (ii) 49,500
shares of the Company's Series B Convertible Preferred Stock together with dividends accrued thereon and (iii) 388,235 common stock purchase warrants with exercise prices ranging from $9
to $12 per share. Consideration of $500,000 cash was paid at closing of the transaction. The liquidation value of the purchased Convertible Preferred Stock was approximately $6,398,000. The carrying
amount of the securities purchased exceeded the cash consideration paid by approximately $6,579,000.

Retention of Financial Advisors

In June 2001, the Company retained the investment bank of Houlihan Lokey Howard & Zukin ("Houlihan") to explore strategic alternatives that may be
available to the Company following the completion of the sale of its Harvey Classic Character assets to Classic Media as described below. Pursuant to the engagement, Houlihan provided financial
advisory and investment banking services in connection with the possible merger, consolidation, tender or exchange offer, leveraged buyout, leveraged recapitalization, acquisition or sale of assets or
equity interests, or similar transaction involving all or a substantial part of the business, assets or equity of the Company remaining after the completion of the sale to Classic Media. In
February 2002, the Company terminated its agreement with Houlihan. The Company's management will continue to take an active role in such activities for the Company.

Classic Media, LLC

In March 2001, the Company signed an Asset Sale and Purchase Agreement for the sale of substantially all of the assets, properties and rights of the Harvey
Classic Characters owned by the Company to Classic Media, LLC ("Classic Media"). The sale excluded PM Entertainment and related assets. In May 2001, the Company signed an amendment to the Asset
Purchase and Sale Agreement to increase the purchase price. The purchase price of $17,000,000 plus the assumption of certain liabilities was paid in cash at closing, which occurred June 22,
2001, after the receipt of a shareholder vote and satisfaction of other customary closing conditions. In connection with the sale to Classic Media, the Company changed its name to "Sunland
Entertainment Co., Inc."

3

---

Credit Facility

Effective April 3, 2000, the Company entered into a 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"). In June 2001, upon the closing of the Classic Media transaction, the
Company repaid all borrowings under the Facility and the Facility was terminated. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and
Capital Resources."

Purchase of Pepin/Merhi Entertainment Group, Inc.

Effective April 3, 2000, the Company completed the acquisition of Pepin/Merhi Entertainment Group, Inc. ("PM Entertainment") to broaden the scope of
the Company's entertainment operations. PM Entertainment is a producer and distributor of motion pictures in the United States home video, television and Internet broadcasting markets as well as in
all media in international markets.

The
purchase price consisted of $6,500,000 paid in cash at closing, 363,000 common shares of the Company with a fair value of $1,668,000 and $2,050,000 in subordinated notes. The Company
also assumed existing bank debt with Imperial Bank in the amount of approximately $5,300,000. Additionally, the Company's subsidiary Inferno Acquisition Corp., purchased from Imperial Bank a loan,
secured by the motion picture "Inferno" and guaranteed by PM Entertainment. The Company paid a down payment of $2,000,000 and obtained a loan in the amount of approximately $4,800,000. Financial
results from the operations of PM Entertainment are included in the Company's accompanying Consolidated Financial Statements from the date of acquisition. All bank debt acquired in connection with the
purchase of PM Entertainment has been completely satisfied at December 31, 2001.

Settlement of Metropolitan Contract

The Company's subsidiaries Inferno Acquisition Corp. and PM Entertainment had an ongoing dispute with Metropolitan Film Export regarding $2,300,000 due under a
licensing contract for the motion picture "Inferno". In September 2001, the Company entered into a settlement agreement with Metropolitan Film Export and The Motion Picture Bond Company, an
insuring agent, for $1,625,000 and received the related payment in October 2001. The difference between the proceeds and accounts receivable balance was fully provided for and written off in
October 2001. The proceeds from the settlement were used to satisfy the loan facility with Imperial Bank secured by the motion picture "Inferno".

Equity Infusion

On April 7, 1999, the Company entered into a Stock Purchase Agreement between the Company and Roger A. Burlage, Michael R. Burns, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company received approximately $11,644,000 in cash and approximately $6,226,000 in value of common stock of Kushner-Locke for newly-issued
shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock") and common stock purchase warrants (the "1999 Refinancing"). As the 1999 Refinancing was
oversubscribed, the Company issued a subordinated convertible note in the amount of approximately $2,049,000 which was converted into additional Series A Preferred Stock and common stock
purchase warrants on September 2, 1999. See also "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources."

4

---

Changes In Management

In December 2000, Eric S. Mischel and Glenn R. Weisberger agreed to amend their employment agreements with the Company. Effective January 1, 2001,
Eric S. Mischel resigned all of his positions with the Company and became a part time consultant to the Company. On the same date, Glenn R. Weisberger resigned his positions as Interim Chief Financial
Officer and Corporate Secretary. He continued with the Company on a part time non-exclusive basis as Executive Vice President and General Counsel through June 30, 2001. In
September 2001, Caroline Stewart resigned all of her positions with the Company and Monique Green was appointed the Secretary of the Company and Chief Financial Officer.

In
May 2000, Michael Burns resigned from the Company's Board of Directors and was replaced by William Dallas. In late October 2000, Meyer Gottlieb stepped down from the
Board and the Board appointed William Merrigan as a replacement director. In December 2000, William Dallas stepped down as director and the Board then appointed Paul Guez as a director. In
March 2001, William Merrigan then stepped down as director and the board reappointed William Dallas as a director.

The
Company's principal executive offices are located at 11835 W. Olympic Blvd., Suite 550, Los Angeles, California 90064; its phone number is (310) 444-4100.

Business

Historically, the Company's business strategy involved exploiting the Harvey Classic Characters through filmed entertainment and capitalizing upon the
relationship between filmed entertainment,
merchandising and other ancillary markets. The assets, rights and properties pertaining to these activities were sold to Classic Media in June 2001. Through the Company's subsidiary, PM
Entertainment, the Company will continue its exploitation of motion picture product and related intellectual property by increasing its presence in foreign markets. Due to depressed market conditions,
the Company has decided not to finance new film product. The Company will continue to operate as a scaled-back business focusing on sales of the existing PM Entertainment library.

Filmed Entertainment

Filmed entertainment includes direct-to-video films, television movies and television series. Through its subsidiary PM Entertainment, the
Company extended its operations into the lower budget feature film and video arena. The predecessor of PM Entertainment was an independent entertainment company that produced and distributed motion
pictures into the domestic television and home video markets and into the international markets for all media. PM Entertainment's most valuable assets are its film library of approximately 140 motion
picture titles and 74 episodes of television series. The Company has retained Cinetel Films to act as its sales agent to foreign licensee agreements, Ventura Distribution to handle the distribution of
its domestic home video division and other outside sales consultants for the Company's television properties.

Merchandising

In March 2000, the Company appointed Felix the Cat Productions, Inc.("FTCP"), as its exclusive licensing agent for Latin America. The agreement
covered all of the Company's Harvey Classic Characters for a term of seven and one-half years. FTCP is a fully integrated family oriented entertainment company that manages a roster of
trademarked characters in all areas of entertainment including new technologies, television animation production and distribution, publishing, licensing and merchandising worldwide.

5

---

In
June 2000, the Company appointed Hearst Entertainment as its exclusive licensing agent for the remainder of the world. The agreement covered all of the Company's Harvey Classic
Characters for a term of two years.

In
June 2001, all of the Company's Harvey Classic Character assets, properties and rights were sold to Classic Media and the Company's merchandising and licensing division was
dissolved.

Intellectual Property Assets

The Company's principal assets are its intellectual property rights in its proprietary PM Entertainment library consisting of approximately 140 films and 74
television episodes. The Company has applied for and received copyright and trademark protection in the United States and copyright protection in certain foreign countries which are parties to the
Berne Convention, on many but not all of its film library. The Company attempts vigorously to protect against infringements on the rights it holds to its proprietary film library.

Competition

Competition is intense in the filmed entertainment industry in which the Company operates. The Company's licensed products compete with products produced and/or
distributed by major entertainment companies, as well as numerous smaller entertainment companies. Many of these competitors have significantly longer operating histories, greater financial resources
and larger film catalogs than Sunland Entertainment. Additionally, the film entertainment market for independent films has suffered dramatically over the past year, creating a decreased value on film
assets. Such economic cycles are common and the Company believes as the global economy rebounds, there will be a resurgence in the independent film market as well.

Employees

The Company employs approximately 8 persons on its full-time staff. For the Company's filmed entertainment productions, the Company hires independent
contractors or production facilities for creative work on an as-needed basis. None of the Company's employees are represented by a union and the Company believes relations with its
employees are good.

Factors Which May Affect Future Results

In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution that the following
important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause such results to differ materially from those expressed in
forward-looking statements made by or on behalf of the Company.

Operating Losses.The Company experienced operating losses for the fiscal years ended December 31, 2001 and 2000. Such
losses are expected to continue into the 2002 year as a result of the lack of product
for release in the entertainment media. There can be no assurance that the Company can achieve its business plan, and operating losses are likely to continue into the future.

Risks Related To The Filmed Entertainment Industry.Motion picture production, acquisition and distribution are highly
competitive businesses. The Company competes with major studios, other independent motion picture and television companies, large diversified entertainment conglomerates and others. Some of the
Company's competitors are entities that are part of larger, diversified corporate groups with a variety of other operations, including television networks and cable channels, which can provide
superior means of distributing their products and stable sources of earnings to offset fluctuations in the financial performance of their motion picture and television operations. There is a

6

---

risk that some or all of the Company's motion pictures, if any, will not be commercially successful, resulting in costs not being recouped or anticipated profits not being realized.

The
television, motion picture and direct-to-video industries are highly speculative and historically have involved a substantial degree of risk. The success of a
trademarked or copyrighted television program, video production or motion picture depends upon unpredictable and changing factors such as audience acceptance, which may bear little or no correlation
to the Company's production and other costs.

Audience
acceptance of the Company's products represents a response not only to the artistic components of the products, but also to promotion by the distributor, the availability of
alternative forms of entertainment and leisure time activities, general economic conditions and public taste generally, and other intangible factors, all of which change rapidly and cannot be
predicted with any certainty.

The
entertainment industry in general, the motion picture industry in particular, continues to undergo significant changes, primarily due to technological developments, shifting consumer
tastes and the popularity and availability of other forms of entertainment. As a result, it is impossible to predict the overall effect these factors will have on the operations of the Company.

Fluctuation In Revenue Recognition From Film Licensing.The Company's quarterly and yearly operating results may fluctuate in
part due to the manner in which the Company is required to record revenue from film licensing agreements. Although film licensing agreements typically grant rights for a period of one to five years,
revenues are typically recognized when the license period begins, provided certain conditions are met. Fluctuations in quarterly and yearly operating results may also arise due to the Company's timing
in entering into film licensing agreements. Therefore, the Company believes that period-to-period comparisons of its results from operations are not necessarily an accurate
indication of future performance.

Intellectual Property Rights.The Company's principal assets are its intellectual property rights. The Company has applied
for and received copyright and trademark protection in the United States, and copyright protection in many foreign countries, on many publications and other works. The Company endeavors to protect
against infringements on the rights it holds.

The
term of copyright protection in the U.S. is limited by statute and trademark rights, while potentially of indefinite duration, must be continually used and, depending on the date of
publication, may have to be periodically renewed.

The
Company believes it has protectible rights with respect to all of its proprietary film library subject to licenses granted by the Company. There is, however, no assurance that claims
will not be asserted against the Company which, if successful, would have a material adverse effect on the Company's business.

ITEM 2.    PROPERTIES

The principal offices of the Company consist of approximately 14,000 square feet of general office space located at 11835 W. Olympic Blvd.,
Suite 550, Los Angeles, California 90064. The Company entered into a seven-year lease for such office space commencing in December 1999, with a five-year option
to renew. The Company also leases approximately 9,000 square feet of office space in Santa Monica pursuant to a ten-year lease entered into in December 1993. The Company has
entirely subleased the Santa Monica space to an unaffiliated person through the end of term.

The
principal offices of PM Entertainment consist of approximately 120,000 square feet of general office, post production and sound stage facilities located in Sunland, California. In
connection with the acquisition of PM Entertainment, the Company entered into a two year lease of the premises with an option to purchase the facility and surrounding property, which expired
March 31, 2002. PM Entertainment's principal business address is 9545 Wentworth Street, Sunland, California 91040.

ITEM 3.    LEGAL PROCEEDINGS

The Company is not currently involved in any other material legal proceedings.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

7

---



PART II

ITEM 5.    MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Prices

The Company's common stock, no par value (the "Common Stock") currently trades on The OTC Bulletin Board under the symbol ("NASDAQ") SUNE. Prior to being delisted
on January 29, 2001, the Common Stock traded on The Nasdaq Stock Market, Inc. Prior to December 5, 1994, the Common Stock traded on the Nasdaq SmallCap Market. The following table
sets forth, for the fiscal quarters indicated, the high and low sale price for the common stock, as reported on NASDAQ.

|Quarterly Period                     |                                        | High |      | Low
|------------------------------------ | -------------------------------------- | ---- | ---- | ---
|Fiscal year ended December 31, 2000: |                                        |      |      |    
|                                     | First Quarter                          |      | 6.00 |    
|                                     | Second Quarter                         |      | 5.00 |    
|                                     | Third Quarter                          |      | 3.50 |    
|                                     | Fourth Quarter                         |      | 1.50 |    
|Fiscal year ended December 31, 2001: |                                        |      |      |    
|                                     | First Quarter                          |      | 0.45 |    
|                                     | Second Quarter                         |      | 0.22 |    
|                                     | Third Quarter                          |      | 0.20 |    
|                                     | Fourth Quarter                         |      | 0.12 |    
|Fiscal year ended December 31, 2002: |                                        |      |      |    
|                                     | First Quarter (through March 27, 2002) |      | 0.11 |    

Holders

As of March 29, 2002, there were approximately 160 holders of record of the Company's Common Stock.

Dividends

The Company has never paid cash dividends on the Common Stock, and provisions in the Company's revolving credit facilities have in the past prohibit the payment
of dividends. The Board of Directors expects that the Company will continue to retain any future earnings for use in its business.

Recent Sales Of Unregistered Securities

The 1999 Refinancing and conversion of the convertible note issued in connection therewith resulted in the issuance of a total of 190,488 shares of the Company's
Series A Preferred Stock, par value $100, and 1,344,618 Warrants to purchase shares of the Company's common stock. The Investor Warrants granted 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 common stock. As part of the 1999 Refinancing, options to purchase 1,344,618
shares of common stock were also issued to certain employees. The employee options granted vest and become exercisable according to schedules set forth in their respective option agreements, and are
exercisable at prices ranging from $9.00 to $12.00 per share of common stock. Terms of the Investor Warrants and employee options provide for expiration dates from 2005 through 2007.

Pursuant
to the 1999 Refinancing, the Company received gross proceeds of approximately $17,900,000, of which approximately $6,226,000 was Kushner-Locke common stock. In connection with

8

---

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 then existing credit
facility. In addition, the Company received additional capital of approximately $2,049,000 from the issuance of a convertible note payable on June 30, 1999. The proceeds from these transactions
were used to fund the Company's filmed production and acquisition activities and for general working capital purposes.

In
April 1999, the Company designated 300,000 shares as Series A Preferred Stock. The Company issued 190,488 shares of Series A Preferred Stock as part of the 1999
Refinancing. The Company recorded a deduction for the beneficial conversion feature associated with the issuance of Series A Preferred Stock based on the fair value of the underlying common
stock at the date of issuance. The deduction was recorded ratably over a six-month period from April to October 1999, during which Series A Preferred Stock could not be
converted into the Company's common stock.

In
July 2001, the Company entered into a Securities Purchase Agreement to purchase from an affiliate of a company which is owned by a preferred shareholder, who is also a director
of the Company, (i) 5,500 shares of the Company's Series A Convertible Preferred Stock together with dividends accrued thereon, (ii) 49,500 shares of the Company's Series B
Convertible Preferred Stock together with dividends accrued thereon and (iii) 388,235 common stock purchase warrants with exercise prices ranging from $9 to $12 per share. Consideration of
$500,000 cash was paid at closing of the transaction. The liquidation value of the purchased Convertible Preferred Stock was approximately $6,398,000. The
carrying amount of the securities purchased exceeded the cash consideration paid by approximately $6,579,000.

The
Series A Preferred Stock is presented as temporary equity, on the Company's balance sheet, and is not included in stockholders' equity, since, under certain circumstances
beyond the control of the Company's management the holders of Series A Preferred Stock may redeem the shares in consideration for cash. In May 2000, to increase stockholders' equity, the
Company allowed holders of Series A Preferred Stock to exchange 84,600 of their shares for an equivalent number of shares of Convertible Preferred Stock ("Series B Preferred Stock"). As
described in further detail in the financial statements, Series B Preferred Stock has substantially similar characteristics to those of Series A Preferred Stock, but is classified as
permanent equity.

The
Series A Preferred Stock has the following characteristics:



9

---



In
May 2000, the Company designated 300,000 shares of authorized Preferred Stock as Series B Preferred Stock. The Company issued 84,600 shares of Series B Preferred
Stock in exchange for an equivalent number of shares of Series A Preferred Stock.

The
Series B Preferred Stock has substantially similar characteristics to those of Series A Preferred Stock, as described above. The liquidation provisions of
Series B Preferred Stock differ from those of Series A Preferred Stock in that a liquidation event is not deemed to include the Company's sale of all or substantially all of its assets
or the acquisition of the Company by another entity by means of merger or consolidation resulting from the transfer of 50% or more of the Company's voting power. At December 31, 2001, the
Series B Preferred Stock is convertible into 1,691,000 shares of the Company's common stock. During 2001, the Company has settled dividend obligations with respect to its Series B
Preferred Stock by issuing 7,838 (2000: 4,519) shares of additional Series B Preferred Stock.

In
connection with the Chase Manhattan Bank Credit Facility (terminated June 2001), the Company issued 126,000 warrants to Chase Equity Associates, LP to purchase shares of the
Company's common stock. The warrants are fully vested, non-forfeitable and are exercisable from their issuance date, at $6.75 per share.

All
warrants described above were issued in reliance on the private placement exemption of Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The Company conducts its operations through its wholly-owned subsidiaries, which include Sunland Entertainment, Inc. and PM Entertainment. The Company's
revenues are derived from two primary sources: (i) filmed entertainment and (ii) merchandising and licensing. This Report contains, or incorporates by reference, certain statements that
may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without
limitation, "Management's Discussion and Analysis of Financial Condition and Results of Operations". These statements are based on current expectations, estimates and projections about our business
based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.

10

---

Critical accounting policies and estimates

General

The SEC recently issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR60"),
suggesting companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the
Company's financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company's significant
accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements.

The
preparation of the Company's financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of a financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, the Company
evaluates its estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the
basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from
these estimates under
different assumptions. The following accounting policies require significant management judgments and estimates:



The
Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates.

11

---

Consolidated Statement of Operations

|                                                                                                                                |  | Year Ended December 31, |           
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|
|Filmed entertainment revenues                                                                                                   |  | $                       | 10,894,000
|Merchandising revenues                                                                                                          |  |                         | 547,000   
|Publishing revenues, net of returns                                                                                             |  |                         |          
|                                                                                                                                |  |                         |           
|Total operating revenues                                                                                                        |  |                         | 11,441,000
|Film costs                                                                                                                      |  |                         | 8,411,000 
|Other costs of sales                                                                                                            |  |                         | 93,000    
|Selling, general & administrative expenses                                                                                      |  |                         | 6,240,000 
|Depreciation and other amortization                                                                                             |  |                         | 1,749,000 
|                                                                                                                                |  |                         |           
|Loss from operations                                                                                                            |  |                         | (5,052,000
|Other income (loss)                                                                                                             |  |                         | 3,935,000 
|                                                                                                                                |  |                         |           
|Loss before income taxes                                                                                                        |  |                         | (1,117,000
|Income tax provision                                                                                                            |  |                         |          
|Extraordinary gain                                                                                                              |  |                         | 293,000   
|Cumulative effect of accounting changes                                                                                         |  |                         | (628,000  
|                                                                                                                                |  |                         |           
|Net loss                                                                                                                        |  |                         | (1,452,000
|Preferred stock dividends                                                                                                       |  |                         | (1,304,000
|Excess of carrying amount on preferred stocks and warrants over fair value transferred to shareholders                          |  |                         | 6,579,000 
|Excess of fair value of Series B stock (less carrying amount and associated beneficial conversion feature of Series A redeemed) |  |                         | (469,000  
|                                                                                                                                |  |                         |           
|Net income (loss) applicable to common stockholders                                                                             |  | $                       | 3,354,000 
|                                                                                                                                |  |                         |           
|Basic & Diluted net income (loss) per share                                                                                     |  | $                       | 0.74      
|                                                                                                                                |  |                         |           

Results From Operations

Fiscal Year 2001 Compared to Fiscal Year 2000

Revenues

The Company's net filmed entertainment revenues were $10,894,000 in 2001 and $17,075,000 in 2000, a decrease of $6,181,000. The decrease is due to the sale of the
Company's library of Harvey Classic Characters to Classic Media in June 2001 with an effective date of February 1, 2001. Additional decreases in revenue result from management's decision not to
finance new product.    The 2001 revenue primarily consists of $4,397,000 of foreign broadcast license revenues, $1,042,000 of domestic home video revenues and $2,579,000 of domestic
license fee revenues, and $2,876,000 from other services, such as production facility rentals.

Net
merchandising revenues were $547,000 and $2,192,000 in 2001 and 2000, respectively, a decrease of $1,645,000. The decrease in revenue is due to the sale of the Company's library of
Harvey Classic Characters to Classic Media in June 2001. The merchandising revenues consist of new licenses for the worldwide merchandising of the Harvey Classic Characters entered into by Hearst
Entertainment on behalf of the Company in 2001 and by Hearst Entertainment and the Company's in-house licensing division in 2000. Although licenses related to film product and
merchandising 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

12

---

accounting treatment, revenue fluctuations from the Company's merchandising activities will likely occur on a quarterly and annual basis.

Net
publishing revenues in 2000 were $56,000. Publishing sales 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 was ceased with the July 1999 issue, resulting from management's decision to focus on the
Company's core entertainment business operations.

Film Costs

Costs of sales (including film amortization) relating to filmed entertainment revenues were $8,411,000 and $12,900,000 in 2001 and 2000, respectively. The
decrease in cost of sales is due to a decrease in film activity in addition to the sale of the Company's Harvey Classic Characters to Classic Media in June 2001.

Other Costs of Sales

Merchandising costs of sales were $93,000 and $255,000 in 2001 and 2000, respectively. The decrease in cost of sales is due to the sale of the Harvey Classic
Characters in June 2001 and closure of the Company's in-house merchandising and licensing division in 2000.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $6,240,000 and $9,906,000 for 2001 and 2000, respectively. The decrease in selling, general and administrative
expenses of $3,666,000 in 2001 is due to a reduction in staffing and other overhead. The Company has budgeted further for additional overhead reductions in the first quarter for 2002.

Depreciation and Amortization

Depreciation and amortization expense was $1,749,000 and $759,000 in 2001 and 2000, respectively. The $990,000 increase is due to the amortization of goodwill
related to the acquisition of PM Entertainment. During the year, the Company reduced the useful life of the PM Entertainment goodwill from ten years to a three year period commencing from
January 1, 2001. The decision to reduce the useful life on goodwill was attributable to a change in the Company's business plan, since the acquisition of PM Entertainment, not to finance new
product and to operate as a scaled-back business focusing on sales of the PM Entertainment library.

Other Income/(Loss)

Loss on the sale of securities was zero and $(3,989,000) in 2001 and 2000, respectively. The loss in 2000 consists of a realized loss on the sale of Kushner-Locke
securities.

Loss
on the impairment of securities was $26,000 and $474,000 in 2001 and 2000, respectively. The loss in 2001 consists of an impairment in the value of Tutornet common stock. Tutornet
stock was completely written off at June 30, 2001.

Gain
on disposition of assets was $3,913,000 and zero in 2001 and 2000, respectively. The gain in 2001 is due primarily to the sale of assets, properties and rights of the Company's
library of Harvey Classic Characters and related contractual rights and agreements for $17 million to Classic Media. This gain was partially offset by losses on the disposition of filmed assets
during one year.

Gains
on settlement were $1,650,000 and zero in 2001 and 2000, respectively. The gains were due to a $250,000 settlement on a license agreement, $1,000,000 pursuant to a settlement
agreement with

13

---

former stockholders of PM Entertainment, and $400,000 paydown of loan pursuant to a settlement agreement with The Motion Picture Bond Company.

Amortization
of deferred financing charges was $1,308,000 and zero in 2001 and 2000 respectively. Deferred financing charges relate mainly to a revolving credit facility entered into
with The Chase Manhattan Bank in April 2000. The charges were being amortized over the five-year term of the facility. In June 2001 the Company repaid the amount owing in
full and wrote off the remaining deferred financing charges.

Interest
expense, net was $839,000 and $1,579,000 in 2001 and 2000, respectively. Interest expense decreased due to a decrease in notes payable. The net expense in 2001 consists of
$642,000 of interest on The Chase Manhattan Bank credit facility, $38,000 in equipment financing charges, $186,000 of interest on other production loans and was partially offset by $27,000 of interest
income. The expense in 2000 consists of $1,218,000 from annual loan fees and borrowings under the Company's line of credit, $334,000 of interest on other production loans and $133,000 of interest on
loans from shareholders, partially offset by interest income of $106,000. See "Liquidity and Capital Resources".

Other
income was $545,000 and $489,000 in 2001 and 2000, respectively. The income was derived mostly from sublease arrangements on leased office space that is no longer occupied. The
company received $443,000 of rent income in 2001 (2000: $491,000).

Extraordinary Gain

Extraordinary gain was $293,000 and zero in 2001 and 2000, respectively. The gain is due to a $293,000 settlement on subordinated notes payable to stockholders of
the Company.

Cumulative Effect of Accounting Change

Effective January 1, 2001, the Company changed its method of accounting for film costs, which resulted in a one-time non-cash charge of $628,000.

Income Taxes

Income tax provision was zero and $(4,000) in 2001 and 2000, respectively.

Liquidity and Capital Resources

Net cash provided/(used in) operating activities was $2,855,000 and $(5,680,000) in 2001 and 2000, respectively. The increase in cash provided by operating
activities was primarily due to an increase in collection of accounts receivable in addition to a decrease in cash used in selling, general and administrative expenses and interest.

Net
cash provided/(used in) investing activities was $16,075,000 and $(4,814,000) in 2001 and 2000, respectively. Investing activities in 2001 resulted from the sale of substantially all
of the Company's Harvey Classic Character assets, properties and rights owned by the Company to Classic Media. Investing activities in 2000 resulted from the acquisition of PM Entertainment.

Net
cash provided by/(used in) financing activities was $(18,475,000) and $6,257,000 in 2001 and 2000, respectively. Cash used in financing activities in 2001 is due to the repayment of
The Chase Manhattan Bank credit facility, subordinated notes payable to stockholders and other production loans. Cash provided by financing activities in 2000 is due to the funds provided from The
Chase Manhattan Bank credit facility.

14

---



In June 2001, the Company repaid all borrowings under (i) a credit facility entered into with The Chase Manhattan Bank credit facility, (ii) production loans received from The
Lewis Horwitz Organization and (iii) on subordinated notes payable to stockholders of the Company.

In
March 2001, the Company signed an Asset Purchase and Sale Agreement with Classic Media for the sale of substantially all of the Company's Harvey Classic Character assets,
properties and rights. In May 2001, the Company signed an amendment to the Asset Purchase and Sale Agreement to increase the purchase price. The assets, properties and rights sold include the
Company's library of Harvey Classic Characters and certain contractual rights and agreements which relate to those assets. The purchase price of $17,000,000 plus the assumption of certain liabilities
was paid in cash at closing, which occurred on June 22, 2001, after the receipt of a shareholder vote and satisfaction of other customary closing conditions.

Pursuant
to the terms of the Loan and Security Agreements, with the Lewis Horwitz Organization, the Company received loans from The Lewis Horwitz Organization, which loans were secured
by the accounts receivable of certain motion pictures. The loans were fully repaid in February 2001.

In
April 2000, the Company acquired 100% of the outstanding shares of PM Entertainment. The purchase price consisted of $6,500,000 in cash, 363,000 common shares of the Company
with a fair value of $1,668,000, a $2,050,000 subordinated note and assumption of Imperial Bank debt of approximately $5,300,000. In connection with the acquisition of PM Entertainment, the Company
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
pursuant to a Loan and Security Agreement. Loans from Imperial Bank were completely repaid by December 31, 2001.

At
April 3, 2000 the Company entered into a five year, $25,000,000 revolving credit facility with The Chase Manhattan Bank to provide operating funds and a portion of the
acquisition financing of the PM Entertainment acquisition. In June 2001, upon the closing of the Classic Media transaction, the Company repaid all borrowings under the Facility and the Facility
was terminated.

Management
believes that the Company's current and anticipated sources of working capital from collection of accounts receivable and new sales of the Company's remaining film library are
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. To address previous liquidity issues Management sold certain assets, properties and rights owned by the Company to Classic
Media. The assets, properties and rights sold include the Company's library of Harvey Classic Characters and certain contractual rights and agreements which relate to those assets. The purchase price
of $17 million plus the assumption of certain liabilities was paid in cash at closing, which occurred on June 22, 2001, after the receipt of shareholder vote and satisfaction of other
customary closing conditions. Management utilized the funds to repay a significant portion of the Company's debt outstanding, including the borrowings under The Chase Manhattan Bank Facility and
subordinated notes payable. Management continues to operate the Company as a scaled-back business focusing on sales of the PM Entertainment library. Management engaged Houlihan to explore
strategic alternatives that may be available to the Company following the completion of its transaction with Classic Media. In February 2002, the Company terminated its agreement with Houlihan.
The Company's management will continue to take an active role in such strategic activities for the Company.

Inflation and Seasonality

Inflation has not been material to the Company during the past five years.

15

---

ITEM 7. FINANCIAL STATEMENTS

Pages F-1 through F-22 follow.

The
following tables set forth supplementary data for each of the years in the two-years ended December 31, 2001.

|                                                                                                |  | 2001 |           
|----------------------------------------------------------------------------------------------- |  | ---- | ----------
|
|
|Revenues                                                                                        |  | $    | 6,545,000 
|Gross Profit                                                                                    |  |      | 909,000   
|Income (Loss) before extraordinary gain and cumulative effect of change in accounting principle |  |      | (2,283,000
|Net Income (Loss)                                                                               |  |      | (2,911,000
|Net Income (Loss) attributable to Common Stock                                                  |  |      | (3,285,000
|Income (Loss) per share:                                                                        |  |      |           
|Basic and Diluted                                                                               |  | $    | (0.72     



|                                               |  | 2000 |         
|---------------------------------------------- |  | ---- | --------
|
|
|Revenues                                       |  | $    | 882,000 
|Gross Profit                                   |  |      | 676,000 
|Net Income (Loss)                              |  |      | (536,000
|Net Income (Loss) Attributable to Common Stock |  |      | (885,000
|Loss per share:                                |  |      |         
|Basic and Diluted                              |  | $    | (0.21   

Footnote 1Includes loss of $3,898,000 recorded upon the sale of marketable securities.

Footnote 2Includes additional amortization of $1,000,000 in 2000 to adjust the carrying book value of certain film properties
to their net realizable value.

Footnote 3Includes adjustment to realize impairment loss of $474,000 on the investment in the common stock of Tutornet.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable

16

---

PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

MANAGEMENT

Set forth below is certain information with respect to the directors and executive officers of the Company as of the date of the filing of this report:

|Name               |  | Age |  | Position                                         
|------------------ |  | --- |  | -------------------------------------------------
|Roger A. Burlage   |  | 59  |  | Chairman of the Board and Chief Executive Officer
|Monique Green      |  | 32  |  | Chief Financial Officer and Corporate Secretary  
|William Dallas     |  | 47  |  | Director                                         
|Michael S. Doherty |  | 48  |  | Director                                         
|Gary M. Gray       |  | 57  |  | Director                                         
|Paul Guez          |  | 58  |  | Director                                         

Each
of the directors and executive officers serves in similar positions for both the Company and its wholly owned subsidiaries. Directors are currently elected for terms of one year
each.

The
Company's Bylaws allow the Board to fix the number of directors between five and nine. The number of directors is currently fixed at five.

Roger A. Burlagehas served as Chairman and Chief Executive Officer of The Sunland Entertainment Co., Inc. since April 1999.
Until he joined the Company, Mr. Burlage was President of Burlage/Edell Productions Inc., a film and television production company which he formed in February 1998 with his
partner Elaine Hastings-Edell, and Chief Executive Officer of Heartland Entertainment, Inc., an independent film production entity. From March 1996 until July 1997, he served as
Chairman and Chief Executive Officer of LIVE Entertainment Inc. ("LIVE"), a diversified independent entertainment company, after serving as President and Chief Executive Officer since joining
LIVE in January 1994. Mr. Burlage became a Director of LIVE in December 1994, and after LIVE's sale to a private investor group in July 1997 remained with LIVE until
February 1998 on a significantly full time basis as a transitional Chairman. From 1989 until joining LIVE, Mr. Burlage served as President and Chief Executive Officer of Trimark
Holdings, Inc. ("Trimark"), an independent entertainment entity, and most recently was a member of Trimark's Board of Directors from April 1998 until April 1999. Prior to joining
Trimark, Mr. Burlage served in several other capacities in the entertainment industry, including executive positions with New World Pictures, Ltd. and with AVCO Corporation and AVCO
Embassy Pictures.

Monique Greenjoined Sunland in December 1999 and was elected Chief Financial Officer and Corporate Secretary in
September 2001. Prior to joining Sunland, Ms. Green worked as a financial consultant to entertainment companies, mainly in the areas of financial reporting, tax compliance and business
management. From 1991 to 1997, Ms. Green worked with various public accounting firms, including a five-year tenure in public accounting at Arthur Andersen and PricewaterhouseCoopers
in Los Angeles.

William Dallaswas appointed as a director at Sunland in March of 2000. Mr. Dallas has also served as a director from May of 2000
through December of 2000. Mr. Dallas is the founder of First Franklin and has served as its Chairman since 1981. First Franklin is a leading nonprime wholesale lender in the mortgage banking
industry. The firm provides mortgage lenders with a wide variety of products and services, focusing on its proprietary risk-based Direct Access loan programs. First Franklin

17

---

is a subsidiary of National City Bank (NYSE:NCC). Headquartered in San Jose, First Franklin employs close to 900 professionals in over 30 locations nationwide. National City Corporation is one of the
nation's largest commercial banks. Mr. Dallas has also co-founded two other banking institutions: In 1995, Mr. Dallas helped found Heritage Bank of Commerce (NASDAQ HTBC), a
community business bank serving Silicon Valley; and in 1998, Mr. Dallas helped found California Oaks State Bank in Thousand Oaks. Mr. Dallas is a Certified Mortgage Banker, and is a
Board advisor to Factual Data Corporation, a Colorado based credit services provider since. Mr. Dallas also presently serves as director for the following companies: Affinity Corporation a
private technology company dedicated to mortgage fraud detection, LoanCity.com a provider of mortgage infrastructure technology and products based in San Jose, Diversified Capital, a mortgage
brokerage in Northern California, and Finet.com a publicly traded mortgage company. Mr. Dallas accepted the nomination of California Lutheran University to be secretary of the Board of Regents
and he teaches Venture Development, a class he created at CLU.

Michael S. Dohertyhas been a Director of the Company since December 1997. Since November 1999, Mr. Doherty has been
President of Doherty, Scotti & Company, LLC, a firm specializing in venture capital and private equity funding for development stage companies. From February 1999 to October 1999,
Mr. Doherty served as Senior Managing Director of Spencer Trask Securities Incorporated. Mr. Doherty served as Managing Director and Director of Privae Equity at Cruttenden Roth
Incorporated from October 1996 to February 1999. From 1992 to October 1999, he served as Vice President of Arnhold and S. Bleichroeder Inc, a New York-based investment
banking, brokerage and asset management firm. Mr. Doherty also serves on the Boards of several public and private companies, including ACLN Ltd., a marine transport company, IPAXS, a
voice-over Internet Provider and Internet telephony company, Xycom, Inc., an industrial automation company and Zyan Communications, Inc., a provider of digital subscriber
line services.

Gary M. Grayhas been a Director of the Company since 1991 and served as the Chairman of the Board from March 1998 to
April 1999. Mr. Gray is a Managing Director of Milestone Capital, Inc., a firm based in Houston, Texas which, in concert with affiliated foreign entities, invests in or acquires
control of private companies with operations in the United States. Prior to locating in Houston in 1997, from 1994 to 1997, Mr. Gray practiced law and provided business consulting services to
foreign clients from offices based in Oklahoma and, from 1991 to 1993, practiced law in New York. Prior to attending
Harvard Law School from 1987 to 1990, Mr. Gray was involved in various investment and banking activities, principally in Oklahoma.

Paul Guezhas been a director of Sunland since 1999. As an investor in many business activities, Mr. Guez is also chairman of the
board of DVT 3000, a DVD company, and has been the president of Stone Canyon International, a movie production firm, since 1998. For the past eleven years, Mr. Guez has been overseeing Azteca
Production, a clothing manufacturing company that he founded with his brother, Hubert Guez in 1990. Prior to Azteca, Mr. Guez headed the JAG clothing label, which he purchased in 1984, as well
as the Sasson Jeans label which he launched in 1976.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934

Section 16(a)
of the Securities Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission ("SEC") and the National Association of Securities Dealers, Inc. initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.

18

---



To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and certain other representations that no other reports were required, during
the year ended December 31, 2001, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied
with.

ITEM 10.    EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION AND OTHER REMUNERATION

The following table and related footnotes show the compensation paid during the fiscal years ended December 31, 2001, 2000 and 1999 to the Company's Chief
Executive Officer, and its three other most highly compensated officers for services rendered during such period to the Company.

SUMMARY COMPENSATION TABLE

|                                                                                                                 |  |                |  | Annual Compensation |                         | Long Term Compensation |  
|---------------------------------------------------------------------------------------------------------------- |  | -------------- |  | ------------------- | ----------------------- | ---------------------- | -
|
|Roger A. Burlage(1)
Chairman and Chief
Executive Officer                                                         |  | 2001
2000
1999 |  | $$$                 | 543,734
519,412
342,949 |                        |  
|Caroline Stewart(5)(8)
(Former) Chief Financial
Officer and Corporate
Secretary                                  |  | 2001           |  | $                   | 86,921                  |                        |  
|Monique Green(8)
Chief Financial Officer and
Corporate Secretary                                                 |  | 2001           |  | $                   | 81,852                  |                        |  
|Eric S. Mischel(1)
(Former) President and
Chief Operating Officer                                                |  | 2000
1999      |  | $$                  | 252,216
171,474         |                        |  
|Ronald B. Cushey(5)
(Former) Executive Vice
President and Chief
Financial Officer                                |  | 2000
1999      |  | $$                  | 75,331
102,885          |                        | $
|Glenn R. Weisberger(5)(7)
Executive Vice President,
(Former) General Counsel
and Interim Chief Financial
Officer |  | 2000
1999      |  | $$                  | 149,340
35,785          |                        | $
|Charles Day
(Former) Senior Vice
President of Consumer
Products                                                  |  | 2000
1999      |  | $$                  | 46,250
181,250          |                        |  

---

19

---



OPTION GRANTS IN LAST FISCAL YEAR

The following table and related footnotes set forth the number of securities underlying options granted in the last fiscal year (2001) and held by each person who
served as the Company's Chief Executive Officer and its three other most highly compensated officers and the value thereof.

|Name             |  | Number of Securities
Underlying Options
Granted |  | Percent of Total
Options Granted
to Employees in
Fiscal Year |  | Exercise or
Base Price
($/Share) |  | Expiration
Date
|---------------- |  | ----------------------------------------------- |  | ------------------------------------------------------------ |  | -------------------------------- |  | ---------------
|Roger A. Burlage |  | 0                                               |  | N/A                                                          |  | N/A                              |  | N/A            
|Caroline Stewart |  | 0                                               |  | N/A                                                          |  | N/A                              |  | N/A            
|Monique Green    |  | 0                                               |  | N/A                                                          |  | N/A                              |  | N/A            

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR  AND FISCAL YEAR-END OPTION VALUES

|Name                |  | Shares
Acquired on
Exercise (#) |  | Value
Realized ($) |  | Number of Securities
Underlying Unexercised
Options at 12/31/01 |  | Value of Unexercised
In-the-Money Options
at 12/31/01
|------------------- |  | ------------------------------- |  | ------------------ |  | --------------------------------------------------------------- |  | -----------------------------------------------------
|Roger A. Burlage    |  | 0                               |  | N/A                |  | 589,309                                                         |  | 0/0                                                  
|Eric S. Mischel     |  | 0                               |  | N/A                |  | 260,000                                                         |  | 0/0                                                  
|Ronald B. Cushey    |  | 0                               |  | N/A                |  | 60,000                                                          |  | 0/0                                                  
|Glenn R. Weisberger |  | 0                               |  | N/A                |  | 75,000                                                          |  | 0/0                                                  

20

---



The Common Stock closed on The Nasdaq National Market on December 31, 2001 at $0.09 per share.

DIRECTOR COMPENSATION

Directors of the Company who are neither employees of the Company nor of the Company's affiliates receive $20,000 in cash each year for serving on the Board.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 31, 2002, certain information regarding the beneficial ownership of the Company's Common Stock by:
(i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, Series A Preferred Stock or Series B Preferred Stock,
(ii) each of the Company's current directors and nominees, (iii) each person who served as an executive officer of the Company during fiscal year 2001, (iv) each person who is an
executive officer of the Company as of March 31, 2002, and (v) the Company's current directors and executive officers as a group:

|Name and Address
of Beneficial Owners          |  | Title of Class(1)                                              |  | Number of Shares
and Nature of
Beneficial Ownership |  | Percent of
Class(2) |    
|---------------------------------------------- |  | -------------------------------------------------------------- |  | --------------------------------------------------- |  | ------------------- | ---
|AKA USA Holdings Limited(3)
Beneficial Owner   |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 1,075,000

                                       |  | 23.63

           | %  
|Ahmad Bin Khalid Al-Saud(3)
Beneficial Owner   |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 1,075,000

                                       |  | 23.63

           | %  
|Universal Studios, Inc.(4)
Beneficial Owner    |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 374,500

                                         |  | 8.23

            | %  
|Aim Holdings, LLC(5)
Beneficial Owner          |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 124,497
6,021
                                     |  | 0.90
12.45
        | %% 
|Sheldon Brody(6)
Beneficial Owner              |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 100,843
4,877
                                     |  | 0.73
10.08
        | %% 
|Gerard Guez(7)
Beneficial Owner                |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 248,775
1,430
10,598                                |  | 1.78
2.96
9.28      | %%%
|Park Financial Corporation(8)
Beneficial Owner |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 248,995
12,043
                                    |  | 1.78
24.89
        | %% 
|L D B Corporation(9)
Beneficial Owner          |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 248,991
1,204
10,838                                |  | 1.78
2.49
9.49      | %%%
|                                               |  |                                                                |  |                                                     |  |                     |    

21

---

|Checchi Family Trust(10)
Beneficial Owner                                                                          |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 249,008

12,043       |  | 1.78

10.55      | %% 
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------- |  | ---------------------- |  | ----------------- | ---
|Roger A. Burlage(11)
Chairman and C.E.O.                                                                           |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 619,309
602
5,419      |  | 10.54
1.24
4.75   | %%%
|Monique Green(12)
Chief Financial Officer and Corporate
Secretary                                                  |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 

                  |  | 

             |    
|Michael S. Doherty(13)
Director                                                                                    |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 80,000

             |  | 1.73

          | %  
|Paul Guez(14)
Director                                                                                             |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 1,027,442
7,121
52,470 |  | 4.30
14.72
45.97  | %%%
|Gary M. Gray(15)
Director                                                                                          |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 127,500

            |  | 2.73

          | %  
|William Dallas(16)
Director                                                                                        |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 248,995
1,204
10,838   |  | 1.78
2.49
9.49    | %%%
|Glenn R. Weisberger(17)
(Former) Executive Vice President,
(Former) General Counsel and
(Former) Interim Secretary |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 115,000

            |  | 2.47

          | %  
|Caroline J. Stewart(18)
(Former) Chief Financial Officer and
(Former) Corporate Secretary                          |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 

                  |  | 

             |    
|Eric S. Mischel(19)
(Former) President and
(Former) Chief Operating Officer                                        |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 226,175
90
813         |  | 4.49
0.19
0.71    | %%%
|Ronald B. Cushey(20)
(Former) Executive Vice President
(Former) Chief Financial Officer and
(Former) Secretary     |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 79,919
963
           |  | 1.44
1.99
       | %% 
|All Officers and Directors a group(21)
(6 persons)                                                                 |  | Common Stock
Series A Preferred Stock
Series B Preferred Stock |  | 2,496,687
8,927
68,727 |  | 23.84
18.45
60.21 | %%%

---

22

---



23

---



24

---

25

---



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The
Company has entered into certain relationships and transactions with related parties. Such relationships and transactions include, without limitation, the following:

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS AND DIRECTORS.

The Company entered into an employment agreement with Roger A. Burlage, dated April 7, 1999 which provides that he will serve as the Company's Chairman and
Chief Executive for a term of four years. Mr. Burlage is entitled to an annual salary of $500,000, with minimum annual increases of 7.5%. Mr. Burlage is also eligible to receive a
discretionary bonus as determined by the Board. As part of the agreement, Mr. Burlage was granted warrants to purchase 400,000 shares of the Company's Common Stock at exercise prices ranging
from $9.00 to $12.00 per share, and may receive up to an additional 200,000 warrants at his election under certain circumstances within one year of the effective date of his employment agreement. One
half of such warrants vested upon Mr. Burlage signing the agreement and the balance vest over a three-year period, with 25% vesting on the first anniversary, and 12.5% vesting on
each of the second and third anniversaries of the agreement. Mr. Burlage is also entitled to be reimbursed for up to $7,500 per year for country club dues, and to receive all other benefits
generally available to the Company's other officers, including participation in stock incentive, retirement, medical, dental and accidental benefit plans, life and disability insurance and vacation.
If Mr. Burlage's position is eliminated as a result of a merger or consolidation of the Company, Mr. Burlage will be entitled to terminate his employment within three months of such
event and to receive all salary, benefits and emoluments in effect as such date through the remainder of his four-year term.

The
Company entered into an employment agreement with Charles Day, effective October 16, 1996, as amended on December 19, 1997, which provides that Mr. Day served as
The Company's Senior Vice President of Consumer Products. In September 1998, the agreement was extended through March 31, 2000 and it was not renewed further upon its expiration. The
termination agreement between the
Company and Mr. Day is described below. The employment agreement was further amended on May 17, 1999 to increase Mr. Day's annual salary from $139,000 to $149,000 effective as of
that date. In addition to his annual salary, Mr. Day was entitled to certain other benefits including a monthly living allowance of $3,000 during the term of his employment agreement, insurance
benefits, four weeks of paid vacation, use of an automobile, reimbursement of automobile insurance expenses, reimbursement of moving expenses at the beginning of the term and reimbursement of
attorney's fees incurred in connection with the negotiation of his employment agreement. Mr. Day was also entitled to receive an annual bonus equal to a percentage of pre-tax net
profits from the Company's merchandising activities under Mr. Day's supervision. In addition, Mr. Day received an option to purchase 15,000 shares of common stock at $11.00 per share
(adjusted to $7.25 per share in December 1998) vesting over three years and an option to purchase 5,000 shares of common stock at $11.00 per share vesting over two years. Mr. Day's
employment agreement also provided that the Company would indemnify Mr. Day for any loss he incurs by virtue of his position as an employee of the Company.

The
Company entered into a termination agreement with Mr. Day, dated January 21, 2000. The agreement terminates Mr. Day's employment at The Company as of
March 31, 2000. Mr. Day was to be paid any accrued vacation pay and any unreimbursed business expenses. All vested and unexercised stock options were to expire per the terms of the stock
option plan agreement. All unvested stock options as of March 31, 2000 were to be cancelled. Pursuant to the termination agreement, the Company and Mr. Day released each other from any
and all, known or unknown, claims, liabilities, losses, agreements, rights, causes of action and expenses of any nature arising during the period of

26

---

Mr. Day's employment, relating to the employment, or concerning the termination of Mr. Day's employment.

The
Company entered into an employment agreement with Ronald B. Cushey, dated April 26, 1999, which provides that he will serve as the Company's Executive Vice President and Chief
Financial Officer and Corporate Secretary for a term of three years. Mr. Cushey has since resigned pursuant to the settlement agreement described below. The April 1999 employment
agreement states that Mr. Cushey was entitled to annual salaries of $150,000, $165,000 and $180,000, in the first, second and third years of the term, respectively, as well as an annual
discretionary bonus as determined by the Board. Mr. Cushey's annual salary could have been increased to $200,000 in certain circumstances if the Company's annual revenues exceed $20,000,000 or
if responsibilities related to additional corporate activity were required. As part of the agreement, Mr. Cushey was granted warrants to purchase 80,000 shares of the Company's Common Stock at
exercise prices ranging from $9.00 to $12.00 per share, with one-half of such warrants vesting on signing of the agreement, 25% vesting on the first anniversary of the agreement and 12.5%
vesting on each of the second and third anniversaries of the agreement. Mr. Cushey was also entitled to receive all other benefits generally available to the Company's other officers, including
participation in stock incentive, retirement, medical, dental and accidental benefit plans, life and disability insurance and vacation.

The
Company entered into a settlement agreement with Mr. Cushey, dated May 24, 2000. The agreement provides that Mr. Cushey's employment is terminated as of
May 24, 2000. All unvested stock options and warrants that were not vested as of Mr. Cushey's termination were cancelled. All vested and unexercised stock options and warrants are to
expire per the terms of the stock option plan and applicable warrant agreement. Pursuant to the termination agreement, the Company and Mr. Cushey
released each other from any and all, known or unknown, claims, liabilities, losses, agreements, rights, causes of action and expenses of any nature arising during the period of Mr. Cushey's
employment, relating to the employment, or concerning the termination of Mr. Cushey's employment.

The
Company entered into an employment agreement with Eric S. Mischel, dated April 26, 1999 which provided that he would serve as the Company's President and Chief Operating
Officer for a term of four years. Mr. Mischel has since resigned pursuant to the settlement agreement described below. The April 1999 employment agreement states that Mr. Mischel
was entitled to an annual salary of $250,000 with minimum annual increases of 71/2%, as well as an annual discretionary bonus as determined by the Board. As part of the agreement,
Mr. Mischel was granted warrants to purchase 210,000 shares of the Company's Common Stock at exercise prices ranging from $9.00 to $12.00 per share, with one-half of such warrants
vesting on signing of the agreement, 25% vesting on the first anniversary of the agreement and 12.5% vesting on each of the second and third anniversaries of the agreement. The Company agreed to
obtain certain film projects previously held by Mr. Mischel in The Mischel Company, of which he was president prior to joining the Company. The Company paid Mr. Mischel was paid an
amount of $65,000 for the transfer of all title, rights and interest in these projects. He was entitled to receive a profit participation of 60% on certain of the film projects transferred to the
Company. Mr. Mischel was also entitled to receive all other benefits generally available to the Company's other officers, including participation in stock incentive, retirement, medical, dental
and accidental benefit plans, life and disability insurance and vacation.

The
Company entered into a settlement agreement with Mr. Mischel, dated December 15, 2000. The agreement commenced on January 1, 2001 and terminates on
April 25, 2003. The agreement terminates Mr. Mischel's previous employment agreement as of January 1, 2001, and provides that Mr. Mischel, on a part time basis, is to
assist the Company in developing the BUNNY, RICHIE RICH, HOT STUFF, and the WALTER MILLER projects for a period of one year, as well as the new Hearst licensing and merchandising deals. The Company is
to pay a $134,365 annual consulting fee to Mr. Mischel for his services. If the Company is sold to a third party during the term of the agreement, the Company is to pay Mr. Mischel an
amount equal to $313,500 less the amounts previously paid to

27

---

Mischel. Payment is to be made within 5 days of the consummation of the sale. If the acquiring entity fails to pay the foregoing amount, Mr. Mischel is entitled to receive $627,000 less
the amounts previously paid to Mischel. As of January 1, 2001, all of Mr. Mischel's unvested warrants were cancelled, and all of his stock options became fully vested and are exercisable
for one year after the date Mr. Mischel ceases to provide services under the settlement agreement. However, in no event shall any options be exercisable after January 2, 2002. The
exercise price of all of Mr. Mischel's options is to be $0.80 per share. The Company will provide health insurance coverage to Mr. Mischel until the earlier of April 25, 2003, or
such time as Mr. Mischel becomes eligible for health insurance by a new employer. In addition, The Company and Mr. Mischel released each other from any and all, known or unknown, claims,
arising during the period of Mr. Mischel's employment, relating to his employment or termination.

The
Company entered into an employment agreement with Glenn R. Weisberger, dated September 22, 1999, which provides that he will serve as the Company's Executive Senior Vice
President and General Counsel for a three year term. This agreement has since been amended as detailed below. The 1999 agreement provides that Mr. Weisberger will receive an annual guaranteed
salary of $145,000 for the
first year, $155,000 for the second year, and $165,000 for the third year, as well as an annual discretionary bonus as determined by the Board. As part of the agreement, Mr. Weisberger was
granted warrants to purchase 40,000 shares of the Company's Common Stock, with one-half of such warrants vesting on signing of the agreement, 25% vesting on the first anniversary of the
agreement and 12.5% vesting on each of the second and third anniversaries of the agreement.

The
Company amended Mr. Weisberger's agreement on January 1, 2001. The amended agreement provided that he will serve as the Company's Senior Executive Vice President and
General Counsel, on a part-time basis, until the earlier of June 30, 2001, or such time that Mr. Weisberger accepts full-time employment with a new employer.
Mr. Weisberger is entitled to a monthly salary of $15,000. As part of the agreement, Mr. Weisberger's options and warrants are to vest and become exercisable as of January 1, 2001
and up until one year after the date Mr. Weisberger ceases to provide services to the Company. Options may be exercised at a price of $0.80 a share. Mr. Weisberger is not entitled to any
benefit coverage other than health benefit coverage, which will be provided until the earlier of October 31, 2002, or such time that Mr. Weisberger is eligible for health benefits from a
new employer. In addition, the Company and Mr. Weisberger released each other from any and all, known or unknown, claims, liabilities, losses, agreements, rights, causes of action and expenses
of any nature arising during the period of Mr. Weisberger's employment, relating to the employment, or concerning the termination of Mr. Weisberger's employment.

The
Company entered into a consulting agreement with William Merrigan on May 28, 2000, which was to commence on June 1, 2000 and continue for two to three months at
Mr. Merrigan's option. Pursuant to the agreement, Mr. Merrigan is to perform exclusive consulting services in regards to the Company's banking and financing needs in exchange for a
compensation of $10,000 per month payable in advance of each month. In addition, the agreement provides that in the event of a sale of the Company, a change of control at the Company, or an equity
infusion into Company is closed within 12 months of the commencement date of the agreement, Mr. Merrigan is entitled to receive a Success Bonus in the amount of $45,000. The bonus was
paid in $5,000 monthly installments commencing in March 2001 and was paid in full upon the close of a sales transaction in June 2001.

Prudential Securities Inc.

On April 7, 1999 Harvey entered into a Stock Purchase Agreement by and among Harvey and Michael R. Burns, Roger A. Burlage, Ken Slutsky, William Dallas,
Paul Guez and the Kushner-Locke Company pursuant to which Harvey issued and sold 170,000 shares of its Series A Preferred Stock and warrants to purchase up to 2,400,000 shares of Harvey's
Common Stock. In connection with the Stock

28

---

Purchase, Prudential Securities Inc. received fees of approximately $450,000 for advisory services rendered. Michael R. Burns, a former director of Harvey who resigned in May 2000, was
then Managing Director of Prudential Securities Inc.

REGISTRATION
RIGHTS AGREEMENTS

The
Company entered into a Registration Rights Agreement dated as of December 7, 1990, as amended by letter dated as of April 22, 1993, with Universal Studios and AKAUSA
(the "Registration Agreement"). The Registration Agreement provides that at any time after June 18, 1994, AKAUSA and/or Universal Studios may request that the Company use its best efforts to
register for sale under the Securities Act their respective shares of the Common Stock. The Registration Agreement also provides for a second demand registration and for certain "piggy back"
registration rights in the event the Company initiates another registered stock offering under the Securities Act.

In
October 1994, the Company sold 250,000 shares of Common Stock, AKAUSA sold 200,000 shares of Common Stock and Mr. Montgomery sold 50,000 shares of Common Stock in a
private placement. Purchasers therein were granted registration rights. The Company filed a registration statement on Form S-3 to register the shares sold in the 1994 private
placement. AKAUSA also exercised its piggyback registration rights with respect to the Company's Form S-3 filing.

On
April 26, 1999, in connection with the issuance and sale of the Series A Preferred Stock and Warrants in the Stock Purchase, the Company entered into a Registration
Rights Agreement (the "1999 Agreement") with Michael R. Burns, Roger A. Burlage, Al Checchi, Ken Slutsky and The Kushner-Locke Company (the "Holders"). The 1999 Agreement gives the Holders certain
demand and piggyback registration rights commencing on the date that is 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.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 10-KSB

|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                                                                                                                                                                                                          
|2.1            |  | Stock Purchase Agreement dated as of April 3, 2000, by and among The Harvey Entertainment Company, Richard J. Pepin, Joseph T. Merhi, and George Shamieh (incorporated by reference to Exhibit 2 of the Company's
Form 8-K dated April 14, 2000)                                                                                         
|2.2            |  | Asset Purchase and Sale Agreement dated March 7, 2001, by and between The Harvey Entertainment Company, Harvey Comics, Inc. and BHP Productions, Inc., on the one hand, and Classic Media, LLC, on the other hand and Exhibits A, B, and C
thereto (incorporated by reference to Exhibit 2 of the Company's Form 8-K dated March 7, 2001)
|2.3            |  | Amendment to Asset Purchase and Sale Agreement dated as of May 4, 2001 by and among the Harvey Entertainment Company, Harvey Comics, Inc., BHP Productions, Inc. and Harvey Entertainment, Inc. as consented to by Classic Media, LLC (incorporated
by reference to Exhibit 2 of the Company's Form 8-K dated May 9, 2001.               
|3.1(i)         |  | Second Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of Company's Registration Statement No. 33-63363-LA)                                                                                                                                                               
|3.2(i)         |  | First Amendment to Second Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 of Company's Registration Statement No. 33-63363-LA)                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                                                                                          

29

---

|3.3(i)  |  | Certificate of Determination filed with the California Secretary of State of April 15, 1999 (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K dated April 26, 1999)                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.4(i)  |  | Certificate of Determination for Series B Convertible Preferred Stock of The Harvey Entertainment Company (incorporated by reference to Exhibit 3(i) of the Company's Form 8-K dated June 2, 2000)                                                 
|3.5(ii) |  | Second Restated and Amended Bylaws of the Company (incorporated herein by reference to Exhibit 3.3 of Company's Registration Statement No. 33-63363-LA)                                                                                            
|3.6(ii) |  | First Amendment to Second Restated and Amended Bylaws of the Company (incorporated herein by reference to Exhibit 3.4 of Company's Registration Statement No. 33-63363-LA)                                                                         
|4.1     |  | Form of Stock Certificate (incorporated herein by reference to Exhibit 4 of Company's Registration Statement No. 33-63363-LA)                                                                                                                      
|10.1    |  | Registration Agreement, dated as of December 7, 1990, by and among the Company, AKAUSA and MCA (incorporated herein by reference to Exhibit 10.11 of Company's Registration Statement No. 33-63363-LA)                                             
|10.2    |  | Shareholders Agreement, dated as of December 7, 1990, by and among the Company, AKAUSA and MCA (incorporated herein by reference to Exhibit 10.12 of Company's Registration Statement No. 33-63363-LA)                                             
|10.3    |  | 1993 Stock Option Plan and Stock Option Agreements (incorporated herein by reference to Exhibit 10.41 of Company's Registration Statement No. 33-63363-LA)                                                                                         
|10.4    |  | Special Salary Reduction Stock Option Plan of 1993 and Stock Option Agreements (incorporated herein by reference to Exhibit 10.42 of Company's Registration Statement No. 33-63363-LA)                                                             
|10.5    |  | Profit Sharing Plan and Trust Adoption Agreement (incorporated herein by reference to Exhibit 10.43 of Company's Registration Statement No. 33-63363-LA)                                                                                           
|10.6    |  | Office Lease between Company and 100 Wilshire Associates dated December 8, 1993 (incorporated herein by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1993)                                              
|10.7    |  | 1994 Stock Option Plan (incorporated by reference to the Company's 1994 definitive Proxy Statement)                                                                                                                                                
|10.8    |  | Sublease Agreement dated as of November 14, 1995 between the Company and Travelers Management, Inc., a California corporation (incorporated herein by reference to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995)
|10.9    |  | Stock Option Agreement dated as of July 13, 1995 between the Company and Jeffrey A. Montgomery (incorporated herein by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995)                               
|10.10   |  | Stock Option Agreement dated as of July 13, 1995 between the Company and Gregory M. Yulish (incorporated herein by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995)                                   
|        |  |                                                                                                                                                                                                                                                    

30

---

|10.11 |  | Warrant Agreement with Arnhold and S. Bleichroeder dated January 16, 1997 (incorporated herein by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996)                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 |  | Warrant Agreement with Michael Doherty dated January 16, 1997 (incorporated herein by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996)                                                            
|10.13 |  | The Harvey Entertainment Company 1997 Stock Option Plan (incorporated herein by reference to the Company's 1997 definitive Proxy Statement)                                                                                                    
|10.14 |  | Stock Option Agreement dated April 17, 1997 between the Company and Gregory M. Yulish (incorporated herein by reference to the Company's Annual report on Form 10-KSB for the year ended December 31, 1997)                                    
|10.15 |  | Stock Option Agreement dated April 17, 1997 between the Company and Jeffrey A. Montgomery (incorporated herein by reference to the Company's Annual report on Form 10-KSB for the year ended December 31, 1997)                                
|10.16 |  | Employment Agreement dated as of October 1996 between the Company and Charles Day (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                                     
|10.17 |  | Stock Option Agreement dated as of October 1996 between the Company and Charles Day (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                                   
|10.18 |  | Amendment dated December 19, 1997 to Employment Agreement dated as of October 1996 between the Company and Charles Day (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998)
|10.19 |  | Stock Option Agreement dated December 19, 1997 between the Company and Charles Day (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                                    
|10.20 |  | Stock Option Agreement dated February 27, 1998 between the Company and Don Gold (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                                       
|10.21 |  | Warrant Agreement dated March 23, 1998 between the Company and Anthony J. Scotti, Michael S. Hope and Leonard Breijo (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1998)  
|10.22 |  | Stock Option Agreement Director dated April 13, 1998 between the Company and Gary M. Gray (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                             
|10.23 |  | Stock Option Agreement Services dated April 13, 1998 between the Company and Anthony J. Scotti (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                        
|10.24 |  | Stock Option Agreement Services dated April 13, 1998 between the Company and Michael S. Hope (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                          
|      |  |                                                                                                                                                                                                                                                

31

---

|10.25 |  | Stock Option Agreement Services dated April 13, 1998 between the Company and Leonard Breijo (incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)                                                                       
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.26 |  | Stock Purchase Agreement dated as of April 7, 1999 by and among the Company, Michael R. Burns, Roger A. Burlage, Ken Slutsky and The Kushner-Locke Company (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated
April 26, 1999)                                      
|10.27 |  | Warrant Agreement dated as of April 26, 1999 among the Company, Roger A. Burlage, Michael R. Burns, The Kushner-Locke Company, Al Checchi and Ken Slutsky (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K dated
April 26, 1999)                                       
|10.28 |  | Registration Rights Agreement dated as of April 26, 1999 by and among the Company, The Kushner-Locke Company, Roger A. Burlage, Michael R. Burns, Al Checchi and Ken Slutsky (incorporated by reference to Exhibit 10.3 of the Company's
Form 8-K dated April 26, 1999)                    
|10.29 |  | Registration Rights Agreement dated as of April 26, 1999 by and between The Kushner-Locke Company and the Company (incorporated by reference to Exhibit 10.4 of the Company's Form 8-K dated April 26, 1999)                                                                               
|10.30 |  | Employment Agreement dated as of April 5, 1999 by and between the Company and Roger A. Burlage (incorporated by reference to Exhibit 10.5 of the Company's Form 8-K dated April 26, 1999)                                                                                                  
|10.31 |  | Employment Agreement dated as of April 26, 1999 between the Company and Ronald B. Cushey (incorporated by reference to Exhibit 10.61 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1999)                                                                 
|10.32 |  | Employment Agreement dated as of April 26, 1999 between the Company and Eric S. Mischel (incorporated by reference to Exhibit 10.62 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999)                                                                  
|10.33 |  | Warrant Agreement dated as of June 30, 1999 between the Company and Paul Guez (incorporated by reference to Exhibit 10.64 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999)                                                                            
|10.34 |  | Registration Rights Agreement dated as of June 30, 1999 by and between the Company and Paul Guez (incorporated by reference to Exhibit 10.65 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1999)                                                         
|10.35 |  | Employment Agreement dated as of October 4, 1999 between the Company and Glenn Weisberger (incorporated by reference to Exhibit 10.66 of the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1999)                                                           
|10.36 |  | Acquisition letter if intent dated September 24, 1999 between the Company and PM entertainment Group, Inc. (incorporated by reference to Exhibit 10.66 of the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1999)                                          
|10.37 |  | Settlement and Mutual Release Agreement dated as of March 13, 2000 among the Company and Dorothy Oriolo, Donald Oriolo, Joan Gersh and Joseph Donald Oriolo (incorporated by reference to Exhibit 10.73 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999)
|      |  |                                                                                                                                                                                                                                                                                            

32

---

|10.38 |  | Lease Agreement dated September 22, 1999 between the Company and Douglas Emmett Realty Fund 1997, a California limited partnership (incorporated by reference to Exhibit 10.76 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999)                                                                                                                                                 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.39 |  | Employment Agreement dated as of April 1, 2000, by and among The Harvey Entertainment Company, Pepin/Merhi Entertainment Group, Inc., and George Shamieh (incorporated by reference to Exhibit 10.77 of the Company's Form 8-K dated
April 14, 2000)                                                                                                                                                               
|10.40 |  | Lease Agreement dated as of April 1, 2000, by and between Pepin/Merhi Entertainment Group, Inc. and Pepin Merhi Shamieh, LLC (incorporated by reference to Exhibit 10.78 of the Company's Form 8-K dated April 14,
2000)                                                                                                                                                                                           
|10.41 |  | Sale and Assignment Agreement dated as of April 3, 2000, by and among Inferno Acquisition Corp., Imperial Bank, and Natexis Banque (incorporated by reference to Exhibit 10.79 of the Company's Form 8-K dated April 14,
2000)                                                                                                                                                                                     
|10.42 |  | Loan and Security Agreement dated as of April 3, 2000, by and among Inferno Acquisition Corp., Imperial Bank and Natexis Banque (incorporated by reference to Exhibit 10.80 of the Company's Form 8-K dated April 14, 2000)                                                                                                                                                                                        
|10.43 |  | Continuing Guaranty dated as of April 3, 2000, by The Harvey Entertainment Company in favor of Imperial Bank and Natexis Banque (incorporated by reference to Exhibit 10.81 of the Company's Form 8-K dated April 14, 2000)                                                                                                                                                                                        
|10.44 |  | Credit, Security, Guaranty and Pledge Agreement dated as of April 3, 2000 among the Company, the other Borrowers referred to therein, the Guarantors referred to therein, the Lenders referred to therein and The Chase Manhattan Bank as
Administrative Agent and Issuing Bank (incorporated by reference to Exhibit 10.82 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000.)
|10.45 |  | Letter of Intent dated August 24, 2000, by and between The Harvey Entertainment Company and Classic Media LLC (incorporated by reference to Exhibit 10.83 of the Company's Form 8-K dated August 24, 2000)                                                                                                                                                                                                         
|10.46 |  | Amendment to Letter of Intent dated September 28, 2000, by and between The Harvey Entertainment Company and Classic Media LLC (incorporated by reference to Exhibit 10.84 of the Company's Form 8-K dated September 28,
2000)                                                                                                                                                                                      
|10.47 |  | Settlement agreement dated May 24, 2000, by and among The Harvey Entertainment Company and Ronald B. Cushey (incorporated by reference to Exhibit 10.85 of the Company's Form 10-KSB dated April 16, 2001)                                                                                                                                                                                                         
|10.48 |  | Amendment to employment agreement dated January 1, 2001, by and among The Harvey Entertainment Company and Glenn R. Weisberger (incorporated by reference to Exhibit 10.86 of the Company's Form 10-KSB dated April 16, 2001)                                                                                                                                                                                      
|10.49 |  | Settlement agreement dated December 15, 2000, by and among The Harvey Entertainment Company and Eric S. Mischel (incorporated by reference to Exhibit 10.87 of the Company's Form 10-KSB dated April 16, 2001)                                                                                                                                                                                                     
|10.50 |  | Agency Agreement dated February 1, 2001, by and among The Harvey Entertainment Company and Cinetel Films, Inc. (incorporated by reference to Exhibit 10.88 of the Company's Form 10-KSB dated April 16, 2001)                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                    

33

---

|10.51 |  | Agency Agreement dated May 2, 2000, by and among The Harvey Entertainment Company and Hearst Entertainment (incorporated by reference to Exhibit 10.89 of the Company's Form 10-KSB dated April 16, 2001)                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.52 |  | Securities Purchase Agreement dated July 2, 2001 by and among Sunland Entertainment, Inc. and SHO Investments, LLC *                                                                                                                              
|16    |  | Letter of Deloitte & Touche LLP re: change in certifying accountant (incorporated by reference to Exhibit 16 of the Company's Form 8-K dated June 25, 1999)                                                                                       
|21    |  | List of subsidiaries of Company (incorporated herein by reference to Exhibit 22 of Company's Registration Statement No. 33-63363-LA)                                                                                                              
|99.1  |  | Pro Forma Balance Sheet and Pro Forma Statement of Operations of The Harvey Entertainment Company as of and for the three month period ended March 31, 2000 (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated
June 2, 2000)
|99.2  |  | Press release dated August 24, 2000 regarding a Letter of Intent for an Investment by Classic Media LLC in The Harvey Entertainment Company (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated August 24,
2000)             
|99.3  |  | Press Release dated September 29, 2000, regarding Classic Media LLC's completion of due diligence regarding The Harvey Entertainment Company (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated September 28,
2000)         
|99.4  |  | Press Release dated November 1, 2000, regarding termination of the proposed investment by Classic Media LLC in The Harvey Entertainment Company (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated November 1,
2000)        
|99.5  |  | Press release regarding Asset Purchase and Sale Agreement with Classic Media, LLC (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated March 7, 2001)                                                                         
|99.6  |  | Press Release dated May 9, 2001, regarding the Amendment to Asset Purchase and Sale Agreement (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated May 9, 2001)                                                               
|99.7  |  | Press Release dated June 14, 2001, regarding shareholder approval for the transaction and a corporate name change (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated July 9, 2001)                                          
|99.8  |  | Press Release dated June 26, 2001, regarding the closing of the transaction (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated July 9, 2001)                                                                                
|99.9  |  | Pro Forma Balance Sheet and Pro Forma Statement of Operations of the Harvey Entertainment Company as of and for the three-month period ended March 31, 2001 (incorporated by reference to Exhibit 99 of the Company's Form 8-K dated
July 9, 2001)

---

34

---



Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer has caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|THE HARVEY ENTERTAINMENT COMPANY
|--------------------------------
|Date: April 12, 2002            
|Date: April 12, 2002            

Pursuant
to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

|SIGNATURE                               |  | TITLE    |  | DATE          
|--------------------------------------- |  | -------- |  | --------------
|                                        |  |          |  |               
|/s/WILLIAM DALLASWilliam Dallas         |  | Director |  | April 12, 2002
|/s/MICHAEL S. DOHERTYMichael S. Doherty |  | Director |  | April 12, 2002
|/s/GARY M. GRAYGary M. Gray             |  | Director |  | April 12, 2002
|/s/PAUL GUEZPaul Guez                   |  | Director |  | April 12, 2002

35

---



ITEM 7.    FINANCIAL STATEMENTS

SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                                                                                           |  | PAGE       
|------------------------------------------------------------------------------------------ |  | -----------
|REPORT OF INDEPENDENT ACCOUNTANTS                                                          |  | F-2        
|CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 |  |            
|Consolidated Balance Sheets                                                                |  | F-3 to F-4 
|Consolidated Statements of Operations                                                      |  | F-5        
|Consolidated Statements of Stockholders' Equity                                            |  | F-6        
|Consolidated Statements of Cash Flows                                                      |  | F-7 to F-8 
|Notes to Consolidated Financial Statements                                                 |  | F-9 to F-21

F-1

---



REPORT OF INDEPENDENT ACCOUNTANTS

To
the Board of Directors and Stockholders of
Sunland Entertainment Co., Inc.:

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of The Sunland Entertainment Co., Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are
the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 1 to the consolidated financial statements, management is currently exploring strategic alternatives available to the Company which would involve the possible
merger, consolidation, acquisition, sale or other transaction involving all or a substantial part of the business, assets or equity of the Company.

Also
discussed in Note 1 to the consolidated financial statements, the Company changed its method of film accounting on January 1, 2001.

PricewaterhouseCoopers LLPCentury City, California
March 29, 2002

F-2

---



SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|             |                                                                                                                                                                                                          | Years Ended December 31,
|------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------
|
|ASSETS       |                                                                                                                                                                                                          |                         
|             | Cash and cash equivalents                                                                                                                                                                                |                         
|             | Marketable securities                                                                                                                                                                                    |                         
|             | Accounts receivable, net of allowance for doubtful accounts of $907,000 and $521,000 in 2001 and 2000, respectively and net of a returns reserve of $111,000 and $193,000 in 2001 and 2000, respectively |                         
|             | Prepaid expenses and other assets                                                                                                                                                                        |                         
|             | Income tax receivable                                                                                                                                                                                    |                         
|             | Film inventory, net of accumulated amortization of $12,477,000 and 19,005,000 in 2001 and 2000, respectively                                                                                             |                         
|             | Fixed assets, net of accumulated depreciation of $994,000 and $1,045,000 in 2001 and 2000, respectively                                                                                                  |                         
|             | Goodwill, net of accumulated amortization of $1,676,000 and $1,734,000 in 2001 and 2000, respectively                                                                                                    |                         
|             | Trademarks, copyrights and other intangibles net of accumulated amortization of $457,000 in 2000                                                                                                         |                         
|             |                                                                                                                                                                                                          |                         
|TOTAL ASSETS |                                                                                                                                                                                                          | $                       
|             |                                                                                                                                                                                                          |                         

See accompanying notes to consolidated financial statements.

(Continued)

F-3

---

SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                                                                                                                                                               | Years Ended December 31,   |           
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------
|
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                                                                                                                                                               |                            |           
|LIABILITIES:                               |                                                                                                                                                                                                                                                                                                               |                            |           
|                                           | Accounts payable and accrued expenses                                                                                                                                                                                                                                                                         |                            | $         
|                                           | Participations and residuals payable                                                                                                                                                                                                                                                                          |                            |           
|                                           | Deferred revenue                                                                                                                                                                                                                                                                                              |                            |           
|                                           | Notes payable                                                                                                                                                                                                                                                                                                 |                            |           
|                                           |                                                                                                                                                                                                                                                                                                               |                            |           
|                                           |                                                                                                                                                                                                                                                                                                               | Total liabilities          |           
|                                           |                                                                                                                                                                                                                                                                                                               |                            |           
|                                           | Series A Convertible Preferred Stock, $100 stated value, 300,000 shares authorized, 48,000 and 124,000 shares issued and outstanding at December 31, 2001 and December 31, 2000, respectively, liquidation
preference of $4,838,000 and $12,435,000 at December 31, 2001 and December 31, 2000, respectively  |                            |           
|                                           |                                                                                                                                                                                                                                                                                                               |                            |           
|STOCKHOLDERS' EQUITY:                      |                                                                                                                                                                                                                                                                                                               |                            |           
|                                           | Preferred stock, $1 par value, 3,000,000 shares authorized (300,000 shares designated as Series A Convertible Preferred Stock and 300,000 shares designated as Series B Convertible Preferred Stock)                                                                                                          |                            |           
|                                           | Series B Convertible Preferred Stock, $100 stated value, 300,000 shares authorized, 114,000 and 89,000 shares issued and outstanding at December  31, 2001 and December 31, 2000, respectively, liquidation
preference of $11,415,000 and $8,911,000 at December 31, 2001 and December 31, 2000, respectively |                            |           
|                                           | Common stock, no par value, 30,000,000 shares authorized, 4,550,000 issued and outstanding at December 31, 2001 at December 31, 2000, respectively                                                                                                                                                            |                            |           
|                                           | Additional paid in capital                                                                                                                                                                                                                                                                                    |                            |           
|                                           | Accumulated deficit                                                                                                                                                                                                                                                                                           |                            |           
|                                           |                                                                                                                                                                                                                                                                                                               |                            |           
|                                           |                                                                                                                                                                                                                                                                                                               | Total stockholders' equity |           
|                                           |                                                                                                                                                                                                                                                                                                               |                            |           
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                                                                                                                                               | $                          | 15,688,000
|                                           |                                                                                                                                                                                                                                                                                                               |                            |           

See
accompanying notes to consolidated financial statements.

F-4

---



SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                                                                                                                                                |                                              | Twelve Months Ended
December 31, |           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------- | ----------
|
|OPERATING REVENUES                                                                                                                                                                                                                              |                                              |                                  |           
|                                                                                                                                                                                                                                                | Filmed entertainment                         |                                  | $         
|                                                                                                                                                                                                                                                | Merchandising and licensing                  |                                  |           
|                                                                                                                                                                                                                                                | Publishing                                   |                                  |           
|                                                                                                                                                                                                                                                |                                              |                                  |           
|                                                                                                                                                                                                                                                |                                              | Net operating revenues           |           
|COST OF REVENUES                                                                                                                                                                                                                                |                                              |                                  |           
|                                                                                                                                                                                                                                                | Film costs                                   |                                  |           
|                                                                                                                                                                                                                                                | Other costs of sales                         |                                  |           
|                                                                                                                                                                                                                                                |                                              |                                  |           
|                                                                                                                                                                                                                                                |                                              | Total cost of revenues           |           
|GROSS PROFIT                                                                                                                                                                                                                                    |                                              |                                  | 2,937,000 
|OPERATING EXPENSES                                                                                                                                                                                                                              |                                              |                                  |           
|                                                                                                                                                                                                                                                | Selling, general and administrative expenses |                                  |           
|                                                                                                                                                                                                                                                | Depreciation and amortization                |                                  |           
|                                                                                                                                                                                                                                                |                                              |                                  |           
|                                                                                                                                                                                                                                                |                                              | Total operating expenses         |           
|LOSS FROM OPERATIONS                                                                                                                                                                                                                            |                                              |                                  | (5,052,000
|Loss on sale of securities                                                                                                                                                                                                                      |                                              |                                  |          
|Loss on impairment of marketable securities                                                                                                                                                                                                     |                                              |                                  | (26,000   
|Gain on disposition of assets                                                                                                                                                                                                                   |                                              |                                  | 3,913,000 
|Gain on settlement                                                                                                                                                                                                                              |                                              |                                  | 1,650,000 
|Amortization of deferred financing charges                                                                                                                                                                                                      |                                              |                                  | (1,308,000
|Interest expense, net                                                                                                                                                                                                                           |                                              |                                  | (839,000  
|Other income                                                                                                                                                                                                                                    |                                              |                                  | 545,000   
|                                                                                                                                                                                                                                                |                                              |                                  |           
|LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                                                                                                                         |                                              |                                  | (1,117,000
|Income Taxes                                                                                                                                                                                                                                    |                                              |                                  |          
|LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                                                                                                                                       |                                              |                                  | (1,117,000
|Extraordinary gain                                                                                                                                                                                                                              |                                              |                                  | 293,000   
|Cumulative effect of accounting change                                                                                                                                                                                                          |                                              |                                  | (628,000  
|                                                                                                                                                                                                                                                |                                              |                                  |           
|NET LOSS                                                                                                                                                                                                                                        |                                              |                                  | (1,452,000
|Preferred stock dividends                                                                                                                                                                                                                       |                                              |                                  | (1,304,000
|Excess of carrying amount of Series A and Series B convertible preferred stock and warrants over fair value transferred to shareholders                                                                                                         |                                              |                                  | 6,579,000 
|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 |                                              |                                  | (469,000  
|                                                                                                                                                                                                                                                |                                              |                                  |           
|NET INCOME/(LOSS) APPLICABLE TO COMMON STOCKHOLDERS                                                                                                                                                                                             |                                              | $                                | 3,354,000 
|                                                                                                                                                                                                                                                |                                              |                                  |           
|LOSS PER SHARE OF COMMON STOCK BEFORE EXTRAORDINARY GAIN AND CUMULATIVE EFFECT OF ACCOUNTING CHANGESBasic and diluted                                                                                                                          |                                              |                                  | (0.25     
|Extraordinary gain                                                                                                                                                                                                                              |                                              |                                  | 0.07      
|Cumulative effect on accounting change                                                                                                                                                                                                          |                                              |                                  | (0.14     
|Preferred stock dividends                                                                                                                                                                                                                       |                                              |                                  | (0.29     
|Preferred stock and warrant redemption                                                                                                                                                                                                          |                                              |                                  | 1.45      
|Beneficial conversion feature                                                                                                                                                                                                                   |                                              |                                  | (0.10     
|                                                                                                                                                                                                                                                |                                              |                                  |           
|NET INCOME/(LOSS) PER SHARE OF COMMON STOCKBasic and diluted                                                                                                                                                                                   |                                              | $                                | 0.74      
|                                                                                                                                                                                                                                                |                                              |                                  |           
|WEIGHTED AVERAGE SHARES OUTSTANDINGBasic and diluted                                                                                                                                                                                           |                                              |                                  | 4,550,000 
|                                                                                                                                                                                                                                                |                                              |                                  |           

See accompanying notes to consolidated financial statements.

F-5

---



SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  YEARS ENDED DECEMBER 31, 2001 AND 2000

|                                   |                                                                  | Series B Preferred |   | Common Stock |            |   |           |  |   |            |  |   |          
|---------------------------------- | ---------------------------------------------------------------- | ------------------ | - | ------------ | ---------- | - | --------- |  | - | ---------- |  | - | ---------
|
|
|BALANCE, DECEMBER 31, 1999         |                                                                  |                   |   | $            |           |   | 4,187,000 |  | $ | 22,268,000 |  | $ | 4,523,000
|Issuance of warrants               |                                                                  |                    |   |              |            |   |           |  |   |            |  |   | 320,000  
|Issuance of common stock           |                                                                  |                    |   |              |            |   | 363,000   |  |   | 1,668,000  |  |   |          
|Conversion of preferred stock      |                                                                  | 84,590             |   |              | 8,459,000  |   |           |  |   |            |  |   | (901,000 
|Stock dividends declared           |                                                                  | 4,520              |   |              | 452,000    |   |           |  |   |            |  |   |          
|Components of comprehensive loss:  |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          
|                                   | Realization of loss upon sale or impairment of equity securities |                    |   |              |            |   |           |  |   |            |  |   |          
|                                   | Net loss                                                         |                    |   |              |            |   |           |  |   |            |  |   |          
|Total comprehensive loss           |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          
|                                   |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          
|BALANCE, DECEMBER 31, 2000         |                                                                  | 89,110             |   | $            | 8,911,000  |   | 4,550,000 |  | $ | 23,936,000 |  | $ | 3,942,000
|Issuance of warrants               |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          
|Issuance of common stock           |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          
|Conversion of preferred stock      |                                                                  | 74,780             |   |              | 7,478,000  |   |           |  |   |            |  |   | (738,000 
|Stock dividends declared           |                                                                  | 7,840              |   |              | 784,000    |   |           |  |   |            |  |   |          
|Excess on fair value of conversion |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          
|Stock Repurchase                   |                                                                  | (57,580            | ) |              | (5,758,000 | ) |           |  |   |            |  |   | (681,000 
|                                   | Net loss                                                         |                    |   |              |            |   |           |  |   |            |  |   |          
|                                   |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          
|BALANCE, DECEMBER 31, 2001         |                                                                  | 114,150            |   | $            | 11,415,000 |   | 4,550,000 |  | $ | 23,936,000 |  | $ | 2,523,000
|                                   |                                                                  |                    |   |              |            |   |           |  |   |            |  |   |          

See
accompanying notes to consolidated financial statements.

F-6

---



SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                                                                         |                                                                                                       | Years Ended December 31                             |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                    |                                                                                                       |                                                     |           
|Income/(loss) before extraordinary gain and cumulative effect of change in accounting method                                                                             |                                                                                                       | $                                                   | (1,117,000
|Adjustments to reconcile net loss before extraordinary gain and cumulative effect of change in accounting method to net cash provided by/(used in) operating activities: |                                                                                                       |                                                     |           
|                                                                                                                                                                         | Depreciation and amortization                                                                         |                                                     |           
|                                                                                                                                                                         | Amortization of film inventory                                                                        |                                                     |           
|                                                                                                                                                                         | Loss on the sale of marketable securities                                                             |                                                     |           
|                                                                                                                                                                         | Gain on disposition of assets, net                                                                    |                                                     |           
|                                                                                                                                                                         | Gain on settlement                                                                                    |                                                     |           
|                                                                                                                                                                         | Amortization of deferred financing charges                                                            |                                                     |           
|                                                                                                                                                                         | Changes in operating assets and liabilities, net of effects from acquisition/disposition of business: |                                                     |           
|                                                                                                                                                                         | Marketable securities                                                                                 |                                                     |           
|                                                                                                                                                                         | Accounts receivable, net                                                                              |                                                     |           
|                                                                                                                                                                         | Prepaid expenses and other assets                                                                     |                                                     |           
|                                                                                                                                                                         | Income taxes receivable                                                                               |                                                     |           
|                                                                                                                                                                         | Addition to film costs                                                                                |                                                     |           
|                                                                                                                                                                         | Accounts payable and accrued expenses                                                                 |                                                     |           
|                                                                                                                                                                         | Accrued marketing expense                                                                             |                                                     |           
|                                                                                                                                                                         | Participations and residuals payable                                                                  |                                                     |           
|                                                                                                                                                                         | Deferred revenue                                                                                      |                                                     |           
|                                                                                                                                                                         |                                                                                                       |                                                     |           
|                                                                                                                                                                         |                                                                                                       | Net cash provided by/(used in) operating activities |           
|                                                                                                                                                                         |                                                                                                       |                                                     |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                                                    |                                                                                                       |                                                     |           
|                                                                                                                                                                         | Sale of marketable securities                                                                         |                                                     |           
|                                                                                                                                                                         | Expenditures for fixed assets                                                                         |                                                     |           
|                                                                                                                                                                         | Investments in trademarks and copyrights                                                              |                                                     |           
|                                                                                                                                                                         | Purchase of PM Entertainment                                                                          |                                                     |           
|                                                                                                                                                                         | Net proceeds from divesture                                                                           |                                                     |           
|                                                                                                                                                                         |                                                                                                       |                                                     |           
|                                                                                                                                                                         |                                                                                                       | Net cash provided by/(used in) investing activities |           
|                                                                                                                                                                         |                                                                                                       |                                                     |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                    |                                                                                                       |                                                     |           
|                                                                                                                                                                         | Proceeds from bank loans                                                                              |                                                     |           
|                                                                                                                                                                         | Repayment of notes payable                                                                            |                                                     |           
|                                                                                                                                                                         | Repayment of bank loans                                                                               |                                                     |           
|                                                                                                                                                                         | Purchase of preferred stock                                                                           |                                                     |           
|                                                                                                                                                                         |                                                                                                       |                                                     |           
|                                                                                                                                                                         |                                                                                                       | Net cash (used in)/provided by financing activities |           
|                                                                                                                                                                         |                                                                                                       |                                                     |           
|NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                                                                                                                     |                                                                                                       |                                                     | 455,000   
|CASH AND CASH EQUIVALENTS, Beginning of period                                                                                                                           |                                                                                                       |                                                     | 1,588,000 
|                                                                                                                                                                         |                                                                                                       |                                                     |           
|CASH AND CASH EQUIVALENTS, End of period                                                                                                                                 |                                                                                                       | $                                                   | 2,043,000 
|                                                                                                                                                                         |                                                                                                       |                                                     |           

See
accompanying notes to consolidated financial statements

F-7

---

SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |              | Years Ended
December 31, |  
|------------------------------------------------- | ------------ | ------------------------ | -
|
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |              |                          |  
|Cash received/(paid) during the period for:       |              |                          |  
|                                                  | Interest     |                          | $
|                                                  | Income taxes |                          | $

NON-CASH FINANCING ACTIVITY:

See Notes 2 and 6 for disclosure of non-cash financing activity.

F-8

---



SUNLAND ENTERTAINMENT CO., INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  YEARS ENDED DECEMBER 31, 2000 AND 1999

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Background and OperationsSunland Entertainment Co., Inc. ("Sunland") (formerly the Harvey
Entertainment Company ("Harvey"), together with its subsidiaries Sunland Entertainment, Inc. (formerly Harvey Comics, Inc.), Pepin/Merhi Entertainment Group, Inc. and Inferno
Acquisition Corp. (collectively, (the "Company") is incorporated in the state of California and is primarily engaged in the exploitation of motion picture product and related intellectual property.
Prior to the sale of the Harvey assets to Classic Media, LLC ("Classic Media"), as discussed below, the Company was 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 related to the well know charactersCasper the Friendly Ghost,
Richie Rich, Baby Huey, Wendy the Good Little Witch, andHot Stuff. In 1993 the Company completed its initial public offering of
common stock. In April 2000, the Company acquired Pepin/Merhi Entertainment Group, Inc. ("PM Entertainment"), a producer and distributor of motion picture product. In March 2001,
the Company signed an Asset Purchase and Sale Agreement for the sale of substantially all of the assets, properties and rights of the Harvey Classic Characters owned by the Company to Classic Media.
In May 2001, the Company signed an amendment to the Asset Purchase and Sale Agreement to increase the purchase price. The purchase price of $17,000,000 plus the assumption of certain
liabilities was paid in cash at closing, which occurred in June 2001. In connection with the sale to Classic Media, the Company changed its name to "Sunland Entertainment Co., Inc."

In
June 2001, the Company retained financial advisors to explore strategic alternatives that may be available to the Company following the completion of the sale of its Harvey
Classic Characters to Classic Media as described above. Pursuant to the engagement, the financial advisors provided services in connection with the possible merger, consolidation, tender or exchange
offer, leveraged buyout, leveraged recapitalization, acquisition or sale of assets or equity interest, or similar transaction involving all or a substantial part of the business, assets or equity of
the Company remaining after the completion of the sale to Classic Media. In February 2002, the Company terminated its agreement with
the advisors and Company's management will continue to take an active role in such activities for the Company.

Basis of Presentation and Principles of ConsolidationThe consolidated financial statements reflect the financial position,
results of operations and cash flows of the Company and its wholly owned subsidiaries. The Company has elected to present an unclassified balance sheet. All significant intercompany accounts and
transactions have been eliminated on consolidation.

Cumulative Effect of Change in Film Accounting Principle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" ("SOP 00-2"). SOP
00-2 establishes new film accounting standards, including changes in revenue recognition and accounting for advertising, development and overhead costs. Effective January 1, 2001,
the Company's adopted SOP 00-2, and as a result, recorded a one-time, non-cash charge of $628,000, or $0.14 per share. This charge has been reflected in the
Company's Consolidated Statement of Operations as a cumulative effect of accounting change, effective January 1, 2001. The adoption of SOP 00-2 did not have a material impact on the
Company's current and future years' revenues and operating results.

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

F-9

---

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.

Cash and Cash EquivalentsThe Company considers investments with original maturities of 90 days or less to be cash
equivalents.

Film CostsThe Company accounts for film costs in accordance with SOP 00-2. Film inventory is stated at the lower
of cost, net of accumulated amortization, or estimated net realizable value. Film inventory consists of direct production costs, production overhead and capitalized interest.

Amortization
is determined using the individual film forecast method, whereby costs accumulated in the development and production of a film are amortized in the proportion that the
current gross revenue bears to management's estimate of the remaining total gross revenues expected to be derived from all sources. Revenue estimates on a film-by-film basis
are reviewed periodically by management and are revised, if warranted, based on management's appraisal of current market conditions. Where applicable, unamortized inventory is written down to net
realizable value using a discounted cash flows model based on this appraisal.

Included
in film inventory are development costs, which represents expenditures directly attributable to projects, which are incurred prior to their production. Such inventory items are
capitalized and, upon commencement of production, are charged to the production. Development costs not charged to the production are written off when the project is abandoned or when more than three
years has passed from the first expenditure.

Estimated
liabilities for participations and residuals are amortized in the same manner as film inventory costs. Based on management's estimate, $940,000 of the accrued participations
and residuals at December 31, 2001 will be paid during the year ending December 31, 2002.

Fixed AssetsFixed assets are stated at cost and are depreciated using the straight-line method over three to ten
year estimated lives. Leasehold improvements are amortized over the shorter of the lease term or the estimated life of the improvement.

GoodwillGoodwill represents the excess of the consideration paid for PM Entertainment in 2000 over the estimated fair value
of net assets acquired. In 2001, the Company reduced the useful life of goodwill from ten years to a remaining period of three years commencing from January 2001. The decision to reduce the
useful life on goodwill related to the PM Entertainment acquisition was made due to a change in the Company's business plan, resulting from a change in economic conditions occurring subsequent to the
acquisition of PM Entertainment, not to finance new product and to operate as a scaled-back business focusing on sales of the PM Entertainment library.

Goodwill
related to the acquisition of Harvey Comics, Inc. was being amortized over a period of 20 years. However, as previously discussed, the assets to which this
goodwill related were sold to Classic Media in the current year.

The
Company assesses potential impairments to its goodwill periodically in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." An impairment review is performed whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered by the Company include, but are not limited to: significant under performance relative to expected historical or projected
future operating results; significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business; significant negative industry or economic trends. When the
Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates
the future undiscounted cash flows expected to result

F-10

---

from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, then the Company recognizes an
impairment loss. The impairment loss is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the asset, determined either based on the market value if available, or discounted cash flows, if not. The Company has identified no such impairment losses.

Revenue RecognitionRevenue is recognized in accordance with the provisions of SOP 00-2. The majority of the Company's
licensing agreements for motion picture product and related merchandising call for nonrefundable guaranteed fees, which are recognized as revenue when the license period begins, provided certain other
conditions have been met pursuant to the criteria specified in SOP 00-2. Additional revenues in excess of non-refundable guaranteed fees are recognized when earned based on receipt
of royalty statements. Payments received under licensing agreements for which the product is not yet available are recorded as deferred revenue.

The
Company recognizes revenue related to sales of motion picture product on videocassette and Digital Video Disk upon shipment of the product. At the time it recognizes the revenue, the
Company estimates returns and records a corresponding reduction of revenue.

Concentration of Credit RiskFinancial instruments that potentially subject the Company to a concentration of credit risk
consist of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with high credit quality financial institutions; at times, such balances with any one
financial institution may exceed FDIC insured limits. Concentration of credit risk associated with accounts receivable is limited due to the large number of customers, as well as their dispersion
across geographic areas. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Although the Company has a diversified customer base, a substantial
portion of its debtors' ability to honor their contracts is dependent upon financial conditions in the filmed entertainment industry. Currently, 42% of the Company's receivables are derived from a
single foreign licensee in South America.

Income TaxesThe Company records income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes." The standard requires, among other provisions, an asset and liability approach to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and tax basis of assets and liabilities. Valuation allowances are provided if, based upon the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be realized.

Stock-Based CompensationThe Company accounts for stock-based employee compensation arrangements in accordance with the
provisions of Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations and complies with the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost, if any, is recognized over the respective vesting period
based on the difference, if any, on the date of grant, between the fair value of the Company's common stock and the grant price. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and EITF 96-18, "Accounting for Equity Instruments that are issued to other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."

Comprehensive IncomeThe Company accounts for comprehensive income in accordance with 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. The difference between total comprehensive loss and net loss for 2001 and 2000 were insignificant.

F-11

---

Net Income (Loss) Per ShareThe Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings
per Share," and Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss
per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Common equivalent
shares related to stock options, warrants and convertible preferred stock have been excluded from the computation because their effect is anti-dilutive.

Financial InstrumentsIn June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB delayed the effective date of the standard, which is now effective for the Company's fiscal year beginning
January 1, 2001. If the Company enters into derivative transactions in the future, SFAS No. 133 will require the Company to record all derivatives on its balance sheet at fair value.
Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, or deferred and recorded as a component of accumulated other
comprehensive income until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in
earnings. The impact of SFAS No. 133 on the Company's financial statements will depend on a variety of factors, including the extent of the Company's future hedging activities, the types of
hedging instruments used and the effectiveness of such instruments. There was no impact of adopting SFAS No. 133 on the Company's financial statements.

The
Company's financial instruments consist of cash and cash equivalents, marketable securities classified as available for sale, accounts receivable, accounts payable, accrued expenses
and notes payable. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable are representative of their fair values due to their
short-term maturities. Marketable securities classified as available for sale are stated at fair value in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities."

ReclassificationsCertain reclassifications have been made to the 2000 consolidated financial statements to conform to the
current year's presentation.

New Accounting GuidanceIn June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS Nos. 141 and 142,
"Business Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS No. 141 replaces Accounting Principles Board ("APB") Opinion No. 16. It also provides guidance on
purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill and other intangible assets with
indefinite useful lives ("goodwill") from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142 are effective for all business combinations completed after June 30, 2001. Upon
adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1,
2001 that do not meet the criteria for recognition under SFAS No. 141 will be reclassified to goodwill. The Company will be required to implement SFAS No. 142 in the first quarter of
fiscal 2002. The Company is in the process of evaluating the impact of adopting SFAS Nos. 141 and 142.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is applicable to financial statements
issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and portions of APB Opinion No. 30, "Reporting the Results of Operations". SFAS No. 144 provides a single accounting
model for long-lived assets to be disposed of and significantly changes the criteria that

F-12

---

would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not
depreciated and are stated at the lower of fair value and carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the
period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The Company is in the process of assessing the impact of adopting this standard.

2.    ACQUISITION OF PEPIN/MERHI ENTERTAINMENT GROUP, INC.

In April 2000, the Company acquired 100% of the outstanding shares of PM Entertainment for approximately $6,500,000 in cash, 363,000 common shares of the
Company with a fair value of $1,668,000 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. The Company acquired net assets with a fair value of $6,100,000. Goodwill of $4,118,000 is being
amortized on a straight line basis, initially over a ten year period from the acquisition date to a revised period of three years, commencing from January 1, 2001.

3.    MARKETABLE SECURITIES

During 2000, the Company received approximately 68,000 common shares of Tutornet.com, Inc. ("Tutornet") with a fair value of $500,000 for the licensing of
certain character rights for use on
Tutornet's website. In the prior year, the market value of the securities was approximately $26,000 and a loss impairment of $474,000 was taken as the reduction in value was not deemed temporary.
During the current year, the value of the stock decreased further, resulting in the Company writing off the remaining $26,000.

4.    FILM INVENTORY

Film inventory consists of the following at December 31, 2001 and 2000:

2001

2000Films released, net of accumulated amortization

$
4,660,000

$
16,263,000Films in development





1,919,000Total film inventory

$
4,660,000

$
18,182,000


Approximately
$633,000 of released film inventory is expected to be amortized during the next twelve months. As discussed in Note 1, management plans to operate the Company as a
scaled back business while they consider various strategic alternatives. Therefore, the Company estimates that approximately 45% of unamortized costs of released films at December 31, 2001 will
be amortized within the next three years.

F-13

---

5.    FIXED ASSETS

Fixed assets are comprised of the following at December 31, 2001 and 2000.

2001

2000Furniture, fixtures, equipment and post production equipment

$
806,000

$
1,296,000Leasehold improvements


477,000


597,0001,283,000


1,893,000Less accumulated depreciation


(994,000
)

(1,045,000
)$
289,000

$
848,000


F-14

---

6.    INCOME TAX

The income tax (benefit) expense for the years ended December 31, 2001 and 2000 consist of the following:

2001

2000Current

$


$
4,000Deferred


254,000


(3,481,000
)Valuation allowance


(254,000
)

3,481,000Provision for income taxes

$


$
4,000


Income
tax (benefit) expense computed at the statutory federal income tax rate of 34% and the provision for income tax (benefit) expense in the financial statements for the years ended
December 31, 2001 and 2000 differ as follows:

2001

2000Provision computed at the statutory rate

$
(494,000
)
$
(3,217,000
)Change in valuation allowance


254,000


3,481,000Other


240,000


(260,000
)Income tax provision (benefit)

$


$
4,000


The
following are the components of the Company's deferred tax assets and (liabilities) at December 31, 2001 and 2000:

2001

2000Federal net operating loss carryforward

$
4,977,000

$
5,057,000State net operating loss carryforward


847,000


858,000Accounts receivable


856,000


753,000Equity based charges


457,000


457,000Capital loss carryforward


2,328,000


2,124,000Film inventory


1,453,000


1,466,000Total deferred tax asset


10,918,000


10,715,000Film rights


(1,687,000
)

(1,687,000
)Deferred state taxes


(498,000
)

(542,000
)Total deferred tax liability


(2,185,000
)

(2,229,000
)Valuation allowance

$
(8,733,000
)
$
(8,486,000
)Net deferred tax asset/(liability)

$


$



At
December 31, 2001, the Company has a net operating loss carryforward of $14,600,000 and $9,600,000 for federal and state income tax purposes, respectively. These net operating
loss carryforwards begin to expire in 2018 and 2003, respectively. The net operating losses can be carried forward to offset future taxable income, if any. Realization of the above carryforwards may
be subject to utilization limitations, which may inhibit the Company's ability to use these carryforwards in the future. At December 31, 2001 realizable income tax benefits from the Company's
cumulative tax losses have been reported as an income tax receivable of $590,000 (2000, $540,000).

F-15

---

7.    DEBT

Effective April 2000, the Company entered into a five year, $25,000,000 revolving credit facility (the "Facility") with The Chase Manhattan Bank (the
"Bank") to provide operating funds and a portion of the acquisition financing of the PM Entertainment acquisition. Borrowings under the Facility were limited to $15,000,000 until additional
participant lenders were added to the Facility, at which time the borrowings available would have increased, up to a maximum of $25,000,000. Borrowings under the Facility were determined under a
borrowing base calculation, which included certain allowable accounts receivable, film and intellectual property rights, and were collateralized by substantially all of the assets of the Company. Upon
the closing of the Classic Media transaction, in June 2001, the Company repaid all borrowings under the Facility, the Facility was terminated, and the unamortized deferred financing charges of
$1,308,000 were written off.

The
purchase price of PM Entertainment included $2,050,000 subordinated notes payable to stockholders of the Company to be paid over five future quarterly periods. Interest was payable
on the
notes at a rate of 10% per annum. In June 2001, the Company entered into a settlement agreement on the subordinated notes payable and recognized an extraordinary gain of $293,000.

In
connection with the acquisition of PM Entertainment, the Company purchased from Imperial Bank a loan, collateralized by the right to exploit the motion picture "Inferno". In
consideration for acquiring this loan receivable, the Company paid Imperial Bank $2,000,000 and issued the bank the promissory note in the amount of approximately $4,800,000 pursuant to a Loan and
Security Agreement. Interest is payable on the loan at the prime rate and the loan matured on December 31, 2001. The balance outstanding on the loan was $1,640,000 at September 30, 2001.
In September 2001, the Company entered into a settlement agreement with Metropolitan Film Export regarding amounts due under a licensing contract for the related motion picture and The Motion
Picture Bond Company, an insuring agent, for $1,625,000 and received the related payment in October 2001. The difference between the proceeds and accounts receivable balance was fully provided
for and written off. The proceeds from the settlement were used to completely satisfy $1,640,000 balance outstanding on the loan facility with Imperial Bank.

During
fiscal year 2000, the Company entered into loan agreements with The Lewis Horwitz Organization to finance production of two motion pictures. These loans were repaid in full in
February 2001.

8.    TEMPORARY EQUITY

In April 1993, the Company authorized 3,000,000 shares of convertible preferred stock and in April and September 1999 designated 300,000 shares as
Series A Preferred Stock. As part of a refinancing that occurred in 1999, the Company issued 190,488 shares of Series A Preferred Stock.

The
Company recorded a deduction for the beneficial conversion feature associated with the issuance of Series A Preferred Stock based on the fair value of the underlying common
stock at the date of issuance. The deduction was recorded ratably over a six-month period from April 1999 to October 1999, during which Series A Preferred Stock could
not be converted into the Company's common stock.

The
Series A Preferred Stock is presented as temporary equity, on the Company's balance sheet, and is not included in stockholders' equity, since, under certain circumstances
beyond the control of the Company, the holders of Series A Preferred Stock may redeem the shares in consideration for cash. In order to increase stockholders' equity, in May 2000, the
Company allowed holders of Series A Preferred Stock to exchange a portion of their shares for an equivalent number of shares of Series B Convertible Preferred Stock. As described more
fully in Note 9, Series B Preferred Stock has substantially similar characteristics to those of Series A Preferred Stock, but is classified as permanent

F-16

---

equity. In May 2000, 84,600 shares of Series A Preferred Stock were exchanged for an equivalent number of Series B Preferred shares. In May 2001, approximately 75,000 shares of
Series A Convertible Preferred Stock were exchanged for Series B Convertible Preferred Stock. In July 2001, the Company purchased 5,500 shares of Series A Preferred
Stock from an affiliate of a company owned by a preferred shareholder, who is also a director of the Company. See Note 9 for additional discussion.

The
Series A Preferred Stock has the following characteristics:

Voting:The holders of Series A Preferred Stock are entitled to elect two directors to the Company's Board of
Directors and are entitled to the number of votes equal to the number of shares of common stock into which the Series A Preferred Stock is then convertible. On all other matter, including the
election of the other Company directors, holders of the Series A Preferred Stock vote (on an as-converted basis) together with common stockholders and holders of Series B
Preferred Stock (voting in an as-converted basis) as one class.

Dividends:The holders of the convertible preferred stock are entitled to receive dividends equal to $7 per share per annum
paid quarterly. At the Company's election, the quarterly dividends may be settled by the issuance of additional Series A Preferred Stock. During 2001, the Company has settled dividend
obligations with respect to its Series A Preferred Stock by issuing of 5,203 (2000: 9,791) shares of additional Series A Preferred Stock.

Liquidation Preference:In the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders
of the Company's outstanding Series A Preferred Stock shall receive for each share an amount equal to the sum of $100 per share, respectively, payable in preference and priority to any payments
made to the holders of the then outstanding common stock.

Liquidation
is deemed to include the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or consolidation
resulting from the transfer of 50% or more of the Company's voting power.

Additionally,
the Company may redeem, at its liquidation amount, Series A Preferred Stock five years following the date the shares were issued.

Conversion:Each share of Series A Preferred Stock, at the option of the holder, is convertible at any time into a
number of shares of common stock as determined by dividing the Original Issue Price of Series A Preferred Stock by the Conversion Price, as defined, in effect at the time. The Original Issue
Price of Series A Preferred Stock is $100 per share. The initial Conversion Price of Series A Preferred Stock is $6.75 and is subject to adjustment in accordance with
anti-dilution provisions contained in the Company's Articles of Incorporation. At December 31, 2001, the Series A Preferred Stock is convertible into 717,000 shares of the
Company's common stock (2000: 1,842,000).

9.    STOCKHOLDERS' EQUITY



In May 2000, the Company designated 300,000 shares of authorized Preferred Stock as Series B Preferred Stock. As described in Note 8, the
Company issued 84,600 shares of Series B Preferred Stock in exchange for an equivalent number of shares of Series A Preferred Stock.

The
Series B Preferred Stock has substantially similar characteristics to those of Series A Preferred Stock, as described in Note 8 above. The liquidation provisions
of Series B Preferred Stock differ from those of Series A Preferred Stock in that a liquidation event is not deemed to include the Company's sale of all or substantially all of its
assets or the acquisition of the Company by another entity by means of merger or consolidation resulting from the transfer of 50% or more of the Company's voting power. At December 31, 2001,
the Series B Preferred Stock is convertible into 1,691,000 shares of the

F-17

---

Company's common stock (2000: 1,300,000). During 2001, the Company has settled dividend obligations with respect to its Series B Preferred Stock by issuing 7,838 shares of additional
Series B Preferred Stock (2000: 4,519).

In
July 2001, the Company entered into a Securities Purchase Agreement to purchase from an affiliate of a company owned by a preferred shareholder, who is also a director of the
Company (i) 5,500 shares of the Company's Series A Convertible Preferred Stock together with dividends accrued thereon, (ii) 49,500 shares of the Company's Series B
Convertible Preferred Stock together with dividends accrued thereon and (iii) 388,235 common stock purchase warrants with exercise prices ranging from $9 to $12 per share. Consideration of
$500,000 cash was paid at closing of the transaction. The liquidation value of the purchased Convertible Preferred Stock was approximately $6,398,000. The carrying amount of the securities purchased
exceeded the cash consideration paid by approximately $6,579,000.



As stated in Note 2, in April 2000, the Company issued 363,000 shares of common stock in partial consideration for the acquisition of PM
Entertainment.



As partial consideration for entering into a revolving credit facility, the Company granted warrants to a bank to purchase 126,000 shares of common stock at $6.75
per share. These warrants, which had a fair value of $320,000 at the date of grant, are fully vested and expire ten years from their issuance date. The Company recorded the fair value of these
warrants as deferred financing costs to be expensed on a straight-line basis over the terms of the related revolving credit facility.

As
part of the 1999 Refinancing, the Company granted warrants to purchase 1,344,618 shares of common stock at prices ranging between $9 to $12 per share. The warrants had a fair value of
$2,360,000 at the date of grant, are fully vested and expire six to eight years from their issuance date.

During
1999, the Company granted warrants to non-employees in consideration for services rendered. These warrants, to purchase 25,000 shares of common stock, are fully
vested, exercisable at prices ranging from $6.69 to $12.00 and expire six to ten years from their issuance date.

Warrants
to purchase 352,000 shares of the Company's common stock, granted to various parties prior to 1999, remain unexercised. These warrants, exercisable at price ranges from
$10.00 to $13.48, are fully vested and expire on various dates through March 2003.

10.  COMMITMENTS AND CONTINGENCIES

LeasesThe Company leases office space and office equipment under operating leases expiring through
2006. Future minimum lease payments due under non-cancelable operating leases at December 31, 2001 are as follows:

2002


792,0002003


653,0002004


544,0002005


389,0002006


400,000Thereafter


Total minimum lease payments

$
2,778,000


F-18

---

The
Company has entered into certain sublease arrangements for leased office space no longer occupied. The terms of the subleases expire on various dates through December 2003.

Rent
expense charged to operations in 2001 was $1,200,000 (2000:$1,207,000). Rent income from sublease arrangements in 2001 was $443,000 (2000: $491,000). Future minimum rental income
under sublease arrangements is $377,000 for the fiscal year 2002.

LitigationThe Company is party to legal proceedings, which are routine and incidental to the business. The Company believes
the results of such litigation will not have a material adverse effect on the Company's financial condition or results of operations.

11.  EMPLOYEE BENEFIT PLANS

The Company's employee stock option plans (the "Plans") provide for the grant of non-statutory or incentive stock options to the Company's employees,
officers, directors or consultants.

The
Company's Board of Directors administers the Plans, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise
price of each option. Stock options granted pursuant to the terms of the Plans generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant
(110% for awards issued to a 10% or more shareholder). The term of the options granted under the Plans cannot be
greater than 10 years; 5 years for a 10% or more shareholder. Options vest at varying rates generally over five years. An aggregate of 1,050,000 shares were reserved under the Plans, of
which 53,500 shares were available for future grant at December 31, 2001.

As
a result of the refinancing that took place in 1999, the Company granted options, not covered by the Plans described above, to purchase 1,344,618 shares of common stock to certain
employees, officers and directors. These options vest either on the grant date or over three years from the grant date. The options are exercisable at prices ranging from $9 to $12 per share and
expire six to eight years from their issuance date.

F-19

---

The following table summarizes activity in the Company's stock option plans (including options issued as part of the 1999 refinancing) during the years ended December 31, 2001 and
2000:

Number of
Shares

Weighted Average
Price
Per ShareBalance, December 31, 1999

1,950,000

$  9.99Granted

137,000

5.81Canceled

(326,000
)
8.88Balance, December 31, 2000

1,761,000

$  9.87Granted



Canceled

(42,000
)
6.17Balance at December 31, 2001

1,719,000

$  9.61


The
following summarizes pricing and term information for options issued to employees and directors which are outstanding as of December 31, 2001:

Options Outstanding

Options ExercisableRange of Exercise Prices

Number
Outstanding
at December 31,
2001

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
Exercisable
at December 31,
2001

Weighted
Average
Exercise
Price$  4.50 -   5.00

55,000

8.15

$
3.49

55,000

$
3.496.69

20,000

7.38


6.69

20,000


6.696.75 -   7.25

228,000

7.35


4.48

194,000


4.098.81 -   9.00

450,000

3.32


9.00

412,000


9.009.50

10,000

5.38


9.50

10,000


9.5010.50

20,000

6.38


10.50

20,000


10.5011.00 - 12.69

936,000

4.92


11.56

861,000


11.57$  4.50 - 12.69

1,719,000

4.98

$
9.61

1,572,000

$
9.60


The
Company has adopted the disclosure-only provision of SFAS No. 123. The estimated fair value of options granted during 2001 and 2000 pursuant to
SFAS No. 123 was approximately zero and $274,000, respectively. Had the Company adopted SFAS No. 123, pro forma net loss would have been $(12,342,000) and pro forma basic diluted net
loss per share would have been $(2.77) for 2000. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
dividend yield of zero, a risk-free interest rate of 5.16% to 6.44%, a volatility of 70% and expected lives of three years. The impact of SFAS No. 123 for 2001 was not
material.

The
Company's profit-sharing plans cover substantially all employees with more than one year of service with the Company. Contributions under the profit-sharing plan are at the
discretion of the Company and are limited to 15% of eligible employee compensation. The profit-sharing plans were terminated at December 31, 2000.

F-20

---

12.  EARNINGS PER SHARE

The following table sets forth common stock equivalents (potential common stock) that are not included in the net income (loss) per share calculation above
because their effect would be anti-dilutive for the periods indicated:

Year Ended December 31,2001

2000Weighted average common stock equivalents:Series A Preferred Stock

717,000

1,842,000Series B Preferred Stock

1,691,000

1,320,000Stock options

1,509,000

1,527,000Warrants

1,823,000

1,791,000


13.  GEOGRAPHIC INFORMATION

The Company operates in one segment: the exploitation of motion picture product and related intellectual property.

Worldwide
sales by geographic area for the years ended December 31, 2001 and 2000 are as follows:

2001

2000U.S./Canada

$
6,787,000

$
7,650,000Asia


487,000


3,114,000Europe


3,516,000


6,431,000Other


651,000


2,128,000$
11,441,000

$
19,323,000


At
December 31, 2001, the amount owing from one customer approximated 42% of the total accounts receivable.

14.  RELATED PARTIES

In April 2000, the Company entered into a 2-year lease agreement with an entity owned by stockholders of the Company, which expired
March 31, 2002. The lease is classified as an operating lease. Rent expense under the operating lease in 2001 was $600,000 (2000: $450,000).

F-21

---