SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1997; or
[ ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ___________.
Commission File Number 000-19577
HARMONY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4333330
(State or Other
Jurisdiction of (I.R.S. Employer
Incorporation Identification No.)
or Organization)
1990 Westwood Boulevard, Suite 310
Los Angeles, California 90025-4676
(Address of Principal Executive Offices)
(Zip Code)
(310) 446-7700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
Class Outstanding at November 14, 1997
Common Stock, par value 6,487,429 shares
$.01 per share
1
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PART I--FINANCIAL INFORMATION
ITEM 1.
<TABLE>
<CAPTION>
Financial Statements Page
<S> <C>
Consolidated Balance Sheets:
September 30, 1997 (unaudited) and June 30, 1997 3
Consolidated Statements of Operations (unaudited):
Three Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited):
Three Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2.
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 8
PART II-- OTHER INFORMATION
ITEM 5.
Other Information 11
ITEM 6.
11
Exhibits and Reports on Form 8-K
</TABLE>
2
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<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Balance Sheets
----------------------------------------------------------------------------- ---------------------- -----------------
September 30, 1997 June 30, 1997
(unaudited)
----------------------------------------------------------------------------- ---------------------- -----------------
Assets
<S> <C> <C>
Current Assets:
Cash $ 586,256 $ 2,354,625
Accounts receivable - net of allowance for doubtful accounts of $43,717 4,946,112 5,280,665
and $97,646
Unbilled accounts receivable 465,844 865,560
Other current assets 1,063,515 794,883
213,678 208,889
Note receivable from officer ---------------------- -----------------
Total current assets 7,275,405 9,504,622
Property and equipment, at cost, net of accumulated depreciation and 1,968,981 1,953,064
amortization
Goodwill, net of accumulated amortization of $1,507,588 and $1,454,643 2,704,720 2,757,665
Other assets 183,659 289,695
---------------------- -----------------
Total assets $ 12,132,765 $ 14,505,046
====================== =================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,340,751 $ 1,694,219
Accrued liabilities 2,401,125 4,230,668
Bank line of credit 600,000 -
Deferred income 1,193,728 823,371
---------------------- -----------------
Total current liabilities 5,535,604 6,748,258
Stockholders' Equity:
Preferred Stock, $.01 par value, authorized 10,000,000 shares; none issued
Common Stock, $.01 par value, authorized 20,000,000 shares, issued and 64,625 66,933
outstanding 6,462,429 and 6,693,198
Additional paid-in capital 14,284,937 14,845,129
Accumulated deficit (7,752,401) (7,155,274)
---------------------- -----------------
6,597,161 7,756,788
Stockholders' equity
---------------------- -----------------
Total Liabilities and Stockholders' Equity $ 12,132,765 $ 14,505,046
====================== =================
----------------------------------------------------------------------------- ---------------------- -----------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
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Harmony Holdings, Inc.
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------- ------------------------------------------
Three Months Ended
September 30,
- --------------------------------------------------- ------------------------------------------
1997 1996
-------------------- ---------------------
-------------------- ---------------------
<S> <C> <C>
Contract revenues $ 11,379,476 $ 13,816,519
Cost of production 9,123,498 11,145,918
-------------------- ---------------------
Gross profit 2,255,978 2,670,601
Selling expenses 732,730 658,696
Operating expenses 1,917,581 1,480,863
Depreciation and amortization 175,734 143,971
-------------------- ---------------------
(Loss) income from operations (570,067) 387,071
Interest income 19,883 2,378
Interest expense (3,695) (21,076)
-------------------- ---------------------
Net (loss) income before income taxes (553,879) 368,373
Income taxes 43,248 0
-------------------- ---------------------
Net (loss) income $ (597,127) 368,373
==================== =====================
Net (loss) income per share $ (0.09) 0.06
Weighted average shares outstanding 6,515,683 6,182,328
- --------------------------------------------------- -------------------- ---------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
Increase (decrease) in cash September 30,
- --------------------------------------------------------------------------------------------------------------------
1997 1996
--------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (597,127) $ 368,373
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 175,102 143,168
Amortization of prepaid interest 0 3,823
Issuance of non-cash compensation expense 37,500 0
Changes in assets and liabilities:
Accounts receivable 334,553 (442,222)
Unbilled accounts receivable 399,716 (129,101)
Other current assets (268,632) (463,126)
Note receivable former officer - interest (4,789) 0
Other assets 106,036 2,801
Accounts payable (353,468) (128)
Accrued liabilities (1,829,543) 1,462,215
Deferred income 370,357 (287,990)
--------------------------------------
Net cash provided by (used in) operating activities (1,630,295) 657,813
--------------------------------------
Cash flows from investing activities:
Capital expenditures (138,074) (110,610)
--------------------------------------
(138,074) (110,610)
Net cash used by investing activities
--------------------------------------
Cash flows from financing activities:
Proceeds from issuance of (repurchase of) stock (600,000) 2,000,000
Repayments subordinated notes payable 0 (385,000)
Net borrowings under bank line of credit 600,000 (300,000)
--------------------------------------
0 1,315,000
Net cash provided by financing activities
--------------------------------------
(1,768,369) 1,862,203
Net increase (decrease) in cash
2,354,625 446,740
Cash, beginning of period
Cash, end of period
--------------------------------------
$ 586,256 $ 2,308,943
- -------------------------------------------------------------------------------======================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
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HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 1997
(1) Basis of Presentation
The financial information included herein is unaudited, however, such
information reflects all adjustments (consisting of normal recurring accruals)
which are, in the opinion of management, necessary to present fairly the results
of operations for the periods presented. The results of operations for the six
months ended September 30, 1997 are not necessarily indicative of a full year.
The information contained in this Quarterly Report on Form 10-Q
should be read in conjunction with the audited financial statements as of June
30, 1997 filed as part of the Company's Annual Report on Form 10-K.
(2) Organization, Business, and Principles of Consolidation
Harmony Holdings, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on August 5, 1991 as a wholly owned subsidiary of
Ventura Entertainment Group Ltd. ("Ventura"). In connection with its formation
and initial capitalization, Ventura contributed all of the capital stock of
Harmony Pictures, Inc. ("Harmony") and Melody Films, Inc. ("Melody") to the
Company. Harmony and Melody have been operating since 1979. In March 1990,
Ventura acquired Harmony and Melody from its co-founders, Stuart Gross and
Robert Lieberman. The Company conducts its operations through its wholly owned
subsidiaries, Harmony Pictures, Inc., Melody Films, Inc., Lexington Films, Inc.,
The End Inc., The Beginning Inc., The Moment Inc., The End (London) Ltd.,
Curious Pictures Corporation, Hollywood Business Solutions, Inc. and Harmony
Entertainment, Inc. Unless the context indicates otherwise, the term "Company"
includes all of these subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. As of June 30, 1994, Ventura
owned approximately 27 percent of the Company's common stock. As of June 30,
1995, Ventura had sold its entire interest in the Company. Curious Pictures
Corporation is 99% owned, the 1% minority interest is not presented separately
as the amounts are not significant.
The Company operates in one reportable segment, producing television
commercials, music videos and related media. The Company's services are usually
directed towards advertising agencies located in the major markets of New York,
Los Angeles, Chicago, Detroit, Dallas, San Francisco and in regional markets.
(3) Equity
On July 25, 1997, the Company re-purchased 230,769 shares (originally
issued in July 1996) of its common stock at $2.60 per share for a total purchase
price of $600,000.
(4) Commitments and Contingencies
A lawsuit was filed on March 22, 1996, (served August 12, 1996) in
Superior Court of the State of California, County of Los Angeles. A wrongful
death claim has been made by the estate of Henry Gillermo Urgoiti, his wife and
three children for an accident that occurred during the filming of a music video
in August 1995. The complaint contains six causes of action, three causes for
negligence, one cause for negligent product liability, one cause for strict
liability and one cause for breach of warranty. Harmony Holdings, Inc., has been
named in all six causes of action, Harmony Pictures Inc., The End Inc. and three
of it's employees have been named in one of the negligence claims. Other
defendants include Southern California Edison, Virgin Records America, Inc. Bell
Helicopters and Helinet Aviation Services. While it is too early in the
discovery process to assess economic risk, management has been advised by the
Company's insurance broker that there is adequate insurance to cover any damages
assessed against the Company. The probability of an unfavorable outcome and
range of possible loss is unknown. Accordingly, no amounts have been accrued at
September 30, 1997.
6
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A cross-complaint related to the preceding matter, was filed on
December 23, 1996 in Superior Court of the State of California, County of Los
Angeles. The complaint has been filed by Virgin Records Limited against The End,
Inc. and Southern California Edison for contractual indemnity, equitable
indemnity, comparative contribution and declaratory relief. While it is too
early in the discovery process to assess economic risk or insurance coverage,
the Company's insurance broker has advised management that there is adequate
insurance to cover any damages assessed against the Company. The probability of
an unfavorable outcome and range of possible loss is unknown. Accordingly, no
amounts have been accrued at September 30, 1997.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months ended September 30, 1997 as compared with Three Months ended
September 30, 1996
For the three months ended September 30, 1997, revenues decreased by
18%, or $2,437,043, to $11,379,476 from $13,816,519 for the three months ended
September 30, 1996. The subsidiaries that ceased operations during 1996
accounted for $547,050 or 4% of the Company's revenue for the three months ended
September 30, 1996. Revenues excluding those from ceased operations decreased by
$1,889,993.
Cost of production is directly related to revenues and includes all
direct costs incurred in connection with the production of television
commercials including film, crews, location fees and commercial directors' fees.
Cost of production for the Three months ended September 30, 1997, decreased by
18%, or $2,022,420, to $9,123,498 from $11,145,918 for the Three months ended
September 30, 1996. Expressed as a percentage of revenues, cost of production
for the Three months ended September 30, 1997, was 80% compared with 81% for the
Three months ended September 30, 1996 and resulted in gross profit percentages
of 20% and 19%, respectively. The increase in gross profit for the three months
ended September 30, 1997, was primarily due to management's continuing efforts
to reduce costs and maximize purchasing power, offset by the increased
competitive factors within the commercial production industry. The subsidiaries
that ceased operations during 1996 accounted for $448,229 or 4% of the Company's
cost of production for the three months ended September 30, 1996. Cost of
production excluding those from ceased operations decreased by $2,470,649 which
was directly attributable to the decrease in revenues.
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
commercial contracts. Selling expenses for the three months ended September 30,
1997, increased to $732,730 from $658,696 for the three months ended September
30, 1996, representing an increase of $74,034 or 11%. Selling commissions
decreased by $53,829, while other selling expenses increased by $127,863. The
increase was primarily attributable to $107,844 increase in promotion and
advertising expense and $19,745 increase in sales salaries expense. Selling
expenses for the operations ceased during 1996, accounted for $22,318 or 3% of
the total selling expenses for the three months ended September 30, 1996.
Selling expenses excluding those from ceased operations increased by $96,352.
Operating expenses consist of overhead costs such as office rent and
expenses, executive, general and administrative payroll, and related items.
Operating expenses for the three months ended September 30, 1997, increased to
$1,917,581 from $1,480,863 for the three months ended September 30, 1996,
representing a increase of $436,718 or 29%. Operating expenses for the
operations ceased during 1996, accounted for $71,726 or 5% of the total
operating expenses for the three months ended September 30, 1996. Operating
expenses excluding those from ceased operations increased by $508,444. The
increase in operating expense is primarily attributable to $568,512 combined
increase in insurance, office expense, outside service, rent, salaries and
telephone offset by a combined decrease of $119,374 in advertising, bad debts,
entertainment, investor relations, leased equipment and legal. The increase of
$508,444 includes $91,954 for a new subsidiary in London, England and $65,938
for a new San Francisco office for Curious Pictures Corporation.
Depreciation and amortization expense increased for the three months
ended September 30, 1997, to $175,734 from $143,971 for the three months ended
September 30, 1996, representing an increase of $31,763. The change is due to
the increase in depreciable assets of $138,074.
Interest income increased for the three months ended September 30,
1997, to $19,883 from $2,378 for the three months ended September 30, 1996,
representing an increase of $17,505, due to more cash held in short term
investments compared to the prior year.
8
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Interest expense decreased for the three months ended September 30,
1997, to $3,695 from $21,076 for the three months ended September 30, 1996,
representing a decrease of $17,381, due to a decrease in borrowings under the
line of credit.
Income tax expense was $43,248 for the three months ended September
30, 1997. The tax expense is primarily attributable to federal alternative
minimum tax and state taxes imposed by various states in which the companies
conduct business. A full valuation allowance has been established as the Company
cannot determine that it is more likely than not that the deferred tax assets
will be realized. During the three months ended September 30, 1997, the
Company's effective income tax rate varied from the statutory federal tax rate
as a result of the utilization of operating losses for which no tax benefit had
been recognized due to the valuation allowance on the net deferred tax asset.
Liquidity and Capital Resources
Three months ended September 30, 1997 as compared with Three months ended
September 30, 1996
As of September 30, 1997, the Company had working capital of $1,739,801
including cash of $586,256 compared to working capital of $2,011,259 including
cash of $2,308,943 at September 30, 1996. Cash used by operating activities for
the three months ended September 30, 1997, increased $2,288,108 to $1,630,295
from cash provided by operations of $657,813 for the three months ended
September 30, 1996. The material items relating to the net increase in cash used
by operations were: $965,500 decrease in income from operations; $1,305,592
decrease in billed and unbilled accounts receivable; $3,645,098 decrease in
accounts payable and accrued expenses, $292,940 decrease in other current assets
and other assets and an increase in deferred income of $658,347.
Cash used in investing activities (ie: capital expenditures) for the
three months ended September 30, 1997, increased $27,464 to $138,074 from
$110,610 for the three months ended September 30, 1996.
Cash provided by financing activities for the three months ended
September 30, 1997, decreased by $1,315,000 to $0 from $1,315,000 for the three
months ended September 30, 1996. The material decrease in the amount of cash
provided by financing activities were: $2,000,000 less proceeds from the
issuance of stock, $600,000 repurchase of stock, $385,000 paydown on
subordinated debt in 1996 and a $900,000 increase in net borrowings on the line
of credit agreement.
On May 10, 1995, the Company originally entered into a $3,000,000 asset
based revolving line of credit with a bank, with interest at the bank=s prime
rate plus 1.0% per annum, collateralized by the assets of the Company. The
bank=s prime rate at September 30, 1997 was 8.50%. The maximum outstanding
balance during the three months ended September 30, 1997 was $800,000 and the
weighted average interest rate was 8.50%. The agreement expires November 30,
1997. Borrowing is based upon certain percentages of acceptable receivables. The
loan agreement has certain financial covenants one of which is to maintain
profitability on a quarterly basis. The Company was not in compliance with this
at September 30, 1997 and the non-compliance was waived by the Bank.
To the extent that future revenues and related gross profits from
these operations do not provide sufficient funds to offset operating costs, the
Company's present resources will decrease. The Company, as of September 30,
1997, had entered into various employment agreements with its officers and
others which obligate it to make minimum payments of approximately $7,210,858
over the next five years. The payments due are $3,760,929, $2,379,929, $871,250,
$159,000 and $39,750 for the years ended September 30, 1998, 1999, 2000, 2001
and 2002. Of such amounts, $4,264,183 is for administrative personnel and
$2,946,675 is for commercial television directors and salespeople. Certain
director and salespeople agreements provide for additional compensation based on
revenues and other items of the subsidiaries. Other agreements provide for
additional compensation based on certain defined operating profits of the
subsidiaries. This additional compensation is payable whether or not the Company
has a profit. Some of the television directors who are associated with the
Company receive monthly draws against the directors' compensation for production
of commercials. The monthly draws equal the minimum guaranteed compensation
payable to such directors. Although the draws are recoupable by the Company out
of compensation otherwise payable to such directors, such directors are not
obligated to repay such draws, if their fees for commercials produced do not
exceed the monthly draws that have been paid. Consequently, the Company is
obligated to provide compensation to these directors whether or not they are
directing commercials. Most of the Company's sales personnel receive monthly
draws offset by their earned commissions. During the three months ended
September 30, 1997, the Company paid $556,448 in such draws to these directors
and salespeople; they earned $757,439 in fees, which sum exceeded the draws
advanced by a net $200,991. On an individual basis, some of the directors and
sales personnel's fees earned were less than their draws and decreased the
Company's profits by $66,667.
9
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The Company has no material commitments for capital expenditures and
has not made any arrangements for external sources of financing other than what
has been disclosed. Management believes that the Company's present cash and
other resources are sufficient for its needs for at least the next twelve
months.
Inflation
Inflation has not had a significant effect on the Company.
10
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PART II-- OTHER INFORMATION
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K
Harmony Holdings, Inc. filed two Current Reports on Form 8-K dated as of
July 22, 1997. The first was an item 5. Other Event, filed on July 30, 1997 and
the second was an item 1. Change in Control of Registrant, filed on August 5,
1997.
No other Items of Part II of the Quarterly Report on Form 10-Q are applicable to
the period covered by this Quarterly Report on Form 10-Q.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARMONY HOLDINGS, INC.
Date: November 14, 1997
By/s/Christopher T. Dahl
Christopher T. Dahl
Chairman of the Board, Chief Executive Officer
Date: November 14, 1997
By/s/Brian Rackohn
Brian Rackohn
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 586,256
<SECURITIES> 0
<RECEIVABLES> 5,411,956
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,275,405
<PP&E> 3,405,474
<DEPRECIATION> 1,436,493
<TOTAL-ASSETS> 12,132,765
<CURRENT-LIABILITIES> 5,535,604
<BONDS> 0
0
0
<COMMON> 64,625
<OTHER-SE> 6,532,536
<TOTAL-LIABILITY-AND-EQUITY> 12,132,765
<SALES> 11,379,476
<TOTAL-REVENUES> 11,379,476
<CGS> 9,123,498
<TOTAL-COSTS> 9,123,498
<OTHER-EXPENSES> 2,826,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,695
<INCOME-PRETAX> (553,879)
<INCOME-TAX> 43,248
<INCOME-CONTINUING> (597,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (597,127)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
