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, 1998; 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 or Organization) Identification No.)
724 1ST AVENUE NORTH-4TH FLOOR
MINNEAPOLIS, MN 55423
(Address of Principal Executive Offices)
(Zip Code)
(612) 338-3300
(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 13, 1998
COMMON STOCK, PAR VALUE 7,506,660 SHARES
$.01 PER SHARE
<PAGE>
INDEX
HARMONY HOLDINGS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1998 and June 30, 1997.
Consolidated Statements of Operations -- Three months ended September
30, 1998 and 1997.
Consolidated Statements of Cash Flows -- Three months ended September
30, 1998 and 1997.
Notes to consolidated financial statements -- September 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITIED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,947,079 $ 3,834,023
Accounts receivable 5,352,206 6,604,186
Allowance for doubtful accounts (43,717) (43,717)
Unbilled accounts receivable 578,785 327,475
Other current assets 493,684 1,051,296
Notes Receivable 5,000 235,155
------------------------------------------
Total Current Assets 9,333,037 12,008,418
Property and equipment, net 2,690,132 2,123,412
Goodwill, net 2,496,065 2,545,885
Other assets 485,206 249,400
------------------------------------------
Total Assets $ 15,004,440 $ 16,927,115
==========================================
LIABILITY & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,322,086 $ 3,199,760
Accrued liabilities 3,072,188 4,406,014
Line of credit 2,561,476 2,750,000
Deferred income 2,218,814 2,342,133
------------------------------------------
Total Current Liabilities 11,174,564 12,697,907
Total Liabilities 11,174,564 12,697,907
------------------------------------------
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares- 20,000,000
Issued & outstanding shares- 7,237,429
September 30 and June 30, 1998 72,375 72,375
Additional paid-in capital 15,909,487 15,800,687
Accumulated deficit (12,151,986) (11,643,854)
------------------------------------------
Total Shareholders' Equity 3,829,876 4,229,208
------------------------------------------
Total Liabilities & Shareholders' Equity $ 15,004,440 $ 16,927,115
==========================================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
Revenues:
Contract revenues $ 17,304,399 $ 11,379,476
Cost of production 14,523,459 9,123,498
-------------------------------------
Gross profit 2,780,940 2,255,978
Operating expenses:
Selling 816,684 732,730
General and administrative 2,040,146 1,917,581
Subsidiary stock option compensation 108,800 -
-------------------------------------
Income (loss) from operations before depreciation & amortization (184,690) (394,333)
Depreciation & amortization 209,356 175,734
-------------------------------------
Income (loss) from operations (394,046) (570,067)
Interest income 15,162 19,883
Interest expense (119,647) (3,695)
-------------------------------------
Net income (loss) before income taxes (498,531) (553,879)
Income taxes 9,601 43,248
-------------------------------------
Net income (loss) $ (508,132) $ (597,127)
=====================================
Net income (loss) per share $ (0.07) $ (0.09)
=====================================
Weighted average number of shares outstanding 7,237,429 6,515,683
=====================================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (508,132) $ (597,127)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation & amortization 209,356 175,102
Amortization of prepaid interest
Issuance of non-cash compensation expense 108,800 37,500
Decrease (increase) in:
Accounts receivable 1,251,980 334,553
Unbilled accounts receivable (251,310) 399,716
Other assets 557,612 (162,596)
Increase (decrease) in:
Accounts payable 122,326 (353,468)
Accrued liabilities (1,333,826) (1,829,543)
Deferred income (123,319) 370,357
-------------------------------------
Net cash provided (used) by operating activities: 33,487 (1,625,506)
INVESTING ACTIVITIES:
Capital expenditures (962,062) (138,074)
Notes receivable 230,155 (4,789)
-------------------------------------
Net cash used in investing activities (731,907) (142,863)
-------------------------------------
FINANCING ACTIVITIES:
Line of credit (188,524) 600,000
Proceeds from issuance (repurchase) of common stock - (600,000)
-------------------------------------
Net cash provided (used) by financing activities (188,524) -
-------------------------------------
Increase (decrease) in cash and cash equivalents (886,944) (1,768,369)
Cash and cash equivalents at beginning of year 3,834,023 2,354,625
-------------------------------------
Cash and cash equivalents at end of year $ 2,947,079 $ 586,256
=====================================
</TABLE>
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 1998
Note 1--Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals with the exception of the adjustments
discussed in Note 2) considered necessary for a fair presentation have been
included. Operating results for the three month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended June 30, 1999. For further information, refer to the consolidated
financial statements and footnote thereto included in the Company's Form 10-K
for the year ended June 30, 1998.
Note 2--Significant Transactions During Fiscal Quarter Ended September 30,1998
The following significant transactions occurred during the first three months of
the fiscal year ending June 30, 1999 and are considered not-recurring:
A. In July 1998, Children's Broadcasting Corporation ("CBC") purchased
250,000 shares of the Company's common stock on the open market. The
purchase of these shares resulted in an increase in CBC's ownership of
the Company to approximately 44.1%.
B. In July 1998, the Company replaced its then existing bank line of
credit with an asset based loan and security agreement with Heller
Financial, Inc. ("Heller"). This loan and security agreement provides
for the following borrowings: a revolving line of credit with maximum
availability of $4,500,000 based on acceptable accounts receivable,
which line of credit bears interest at a variable rate (9.75% at
September 30, 1998); and a $500,000 term note to be disbursed at the
sole discretion of Heller. The loan and security agreement requires the
Company to comply with certain restrictive covenants and is guaranteed
by CBC.
C. In November 1998, CBC made an equity investment in the Company of
$350,000 by purchasing 269,231 shares of the Company's common stock for
a price of $1.30 per share. CBC's ownership in the Company is now
approximately 44.6%.
D. In November 1998, the Company began the process of discontinuing
operations of its Harmony Pictures division. This division consists of
Harmony Pictures, Inc., Melody Films, Inc., Lexington Films, Inc., and
<PAGE>
Pure Films, Inc. During the last fiscal year, this division recorded
operating losses of $1,625,000 and during the quarter ended September
30, 1998, it recorded operating losses of $595,000. The Company expects
to incur expenses related to the discontinuation of the division in the
second quarter ending December 31, 1998, but the aggregate amount of
these expenses has not yet been determined.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's services may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive pricing and such other risks and uncertainties as are described in
this report on Form 10-Q and other documents previously filed or hereafter filed
by the Company from time to time with the Securities and Exchange Commission.
Overview
The Company currently operates through four major groups, or divisions.
Each division consists of one of the Company's subsidiaries, which subsidiary in
turn may operate one or more of its own subsidiaries. The four principal
subsidiaries that represent the major operating divisions are The End, Inc.
("The End"), The End (London),LTD., Curious Pictures Corporation ("Curious"),
and Chemistry Pictures, Inc. (formerly known as Harmony Pictures, Inc.). The End
(London), LTD. was formed in 1997 and, accordingly, did not significantly
contribute to the Company's overall operations during the fiscal quarter ended
September 30, 1997.
For the fiscal year ended June 30, 1998, Chemistry Pictures, Inc.,
together with its three subsidiaries (collectively, "Harmony Pictures"),
generated revenues of $10,876,000 and incurred an operating loss of $1,625,000.
As described below, for the fiscal quarter ended September 30, 1998 ("Current
Quarter"), Harmony Pictures generated total revenues of only $1,139,000 and
incurred an operating loss of $595,000. As further described below, on a
consolidated basis, the Company would have operated profitably for the Current
Quarter but for the losses incurred by Harmony Pictures. Based on the foregoing
continuous losses, the Company in November 1998 decided to discontinue the
operations of Harmony Pictures and to dissolve Harmony Pictures. Accordingly,
the operations of Harmony Pictures are currently being wound down, and its
assets are being liquidated.
Results of Operations:
Three months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997:
Revenues for the Current Quarter increased by $5,925,000 or 52%, over
revenues for the fiscal quarter ended September 30, 1997 ("Prior Quarter"). The
increase in revenues reflects and increase in revenue in three of the Company's
four divisions. Most of the increase in revenues is a result of the $4,798,000
of revenues generated by The End (London), LTD., compared to $41,000 of revenue
generated by this new subsidiary last year. In addition, revenues generated by
The End and by Curious increased during the Current Quarter by $2,181,000 and
$405,000 respectively. Revenues at The End increased due to additional directors
<PAGE>
retained by The End. The increase in revenues in the three divisions was partly
offset by a $1,312,000 decrease in revenues generated by Harmony Pictures (from
$2,451,000 in the Prior Quarter, to $1,139,000 in the Current Quarter). As
mentioned above, the Company has decided to close the operations of Harmony
Pictures and to dissolve this division.
Cost of production is ordinarily 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 as a percentage of revenues increased from
approximately 80% to 84% due to bids submitted by the Company at lower margins
than last year in an attempt to increase its operating revenues and, in part due
to the cost of revenues of Harmony Pictures, which exceeded 89% of Harmony
Pictures' contract revenues. As a result of the increase in the cost of
production, gross margins as a percentage of revenues decreased from 20% for the
Prior Quarter to 16% in the Current Quarter.
Selling expenses consist of sale commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
television commercial contracts. Selling expenses increased by 11% in the
Currant Quarter over the Prior Quarter due primarily to expenses incurred by The
End (London), LTD., which incurred only minimal selling expenses in the
comparable fiscal quarter last year.
General and administrative expenses consist of overhead costs such as
office rent and expenses, executive, general and administrative payroll, and
related items. General and administrative expenses increased by 6 % in the
Current Quarter over the Prior Quarter. Of the increase in general and
administrative expense, $121,000 was attributable to The End (London) LTD., the
new subsidiary in London, England, and to certain non-recurring expenses related
to the prior termination of certain officers of the Company. In addition,
Harmony Pictures incurred $563,000 of general and administrative expenses
despite generating only $1,139,000 of revenues. As a percentage of revenues,
general and administrative and subsidiary stock options compensations expenses
of the Company decreased from 16.8% in the Prior Quarter to 12.4% in the Current
Quarter. Excluding the revenues and general and administrative expenses of
Harmony Pictures, general and administrative expenses of the Company in the
Current Quarter would have decreased to 9.8% of revenues.
The $109,000 stock option compensation expense represents a non-cash
charge resulting from certain managers of Curious earning stock options under a
December 15, 1996 agreement between the Company and the managers.
Depreciation and amortization expense increased in the Current Quarter
by 19% over the Prior Quarter due to the increase in depreciable assets of
approximately $962,000.
Interest income overall, decreased slightly for the current quarter
ended September 30, 1998 due to lower cash balances held by the Company.
Interest expense increased in the Current Quarter by $116,000 due to increased
borrowings by the Company under the new credit facility the Company entered into
with Heller
<PAGE>
in July 1998.
Income tax expense in the Current Quarter decreased to $10,000 from
$43,000 in the Prior Quarter, representing a decrease of $33,000 or 77%. A full
valuation allowance has been established as the Company cannot determine that it
is more likely than not that the deferred tax assets (primarily net operating
loss carryforwards) will be realized. During the Current and Prior quarters, the
Company's effective income tax rate varied from the statutory federal tax rate
as a result of state taxes and an increase in the valuation allowance booked
against the deferred tax asset.
For the fiscal quarter ended September 30, 1998, the Company as a whole
(including Harmony Pictures) incurred net losses of $508,000. During this
current quarter, Harmony Pictures incurred net losses of $595,000. Accordingly,
excluding Harmony Pictures, the Company would have generated net income of
approximately $86,000 during the current quarter. As a result of the operations
of Harmony Pictures, the Company has decided to dissolve Harmony Pictures.
Harmony Pictures is expected to continue to negatively affect the Company's
overall operations in future fiscal periods until it has been closed, and the
Company expects to incur certain discontinuation expenses related to the
termination of Harmony Pictures. The Company is currently not able to accurately
estimate the duration or the amount of such on-going losses related both to the
operations of Harmony Pictures to date or to the dissolution of that division.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was a
deficit of $1,842,000 at September 30, 1998 compared to a deficit of $689,000 at
June 30, 1998.
In July 1998, the Company replaced its bank line of credit with an
asset based loan and security agreement with Heller (see Note 2.B of the
financial statements). As part of this agreement, the Company is allowed to
borrow from a revolving line of credit, with a maximum availability of
$4,500,000 or a percentage of acceptable accounts receivable. The interest rate
is variable (9.75% at September 30, 1998). At September 30, 1998, the Company
had a $2,561,000 balance due on the line of credit.
As the Company's operations have not been able to support its working
capital needs, CBC, the Company's principal stockholder, has resolved to invest
such funds in the Company as necessary to meet its working capital requirements
through June 30, 1999. This may involve loans or the purchase of securities. In
November 1998, CBC made an equity investment in the Company of $350,000 by
purchasing 269,231 shares of the Company's common stock for a price of $1.30 per
share. CBC's ownership in the Company is now approximately 44.6%.
In November 1998, management of the Company determined it is in the
best interest of the Company to discontinue the operations of the Harmony
Pictures division. The division consists of Harmony Pictures, Inc., Melody
Films, Inc., Lexington Films, Inc. and Pure Film, Inc. For the year ended June
30, 1998,
<PAGE>
those entities recorded revenues of $10,867,000 and an operating loss of
$1,625,000. Additionally, for the quarter ended September 30, 1998, those
entities recorded revenues of $1,139,000 and an operating loss of $595,000. The
Company expects to incur additional expenses related to the discontinuation of
the division in the second quarter ended December 31, 1998, but the aggregate
amount of these expenses has not yet been determined. The Company believes that
be discontinuing operations at the Harmony Pictures division will enable the
Company to meet its working capital requirements in the future. The following is
a pro forma statement of operations of the Company with and without the Harmony
pictures division for the quarter ended September 30, 1998. The pro forma
statement of operations does not purport to present the Company's consolidated
results of operations as it might have been, or as they may be in the future had
the division discontinuance occurred prior to the quarter ended September 30,
1998:
HARMONY HOLDINGS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
WITHOUT HARMONY PICTURES DIVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------------------------------------------------
HHI WITHOUT
HHI HP DIVISION HP DIVISION
-----------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Contract revenues $ 17,304,399 $ 1,139,371 $ 16,165,028
Cost of production 14,523,459 1,015,999 13,507,460
-----------------------------------------------------------------
Gross profit 2,780,940 123,372 2,657,568
Operating expenses:
Selling 816,684 88,636 728,048
General and administrative 2,040,146 562,810 1,477,336
Subsidiary stock option compensation 108,800 108,800
-
-----------------------------------------------------------------
Income (loss) from operations before depreciation & (184,690) (528,074) 343,384
amortization
Depreciation & amortization 209,356 66,544 142,812
-----------------------------------------------------------------
Income (loss) from operations (394,046) (594,618) 200,572
Interest income 15,162 15,162
-
Interest expense (119,647) (119,647)
-
-----------------------------------------------------------------
Net income (loss) before income taxes (498,531) (594,618) 96,087
Income taxes 9,601 9,601
-
-----------------------------------------------------------------
Net income (loss) $ (508,132) $ (594,618) $ 86,486
=================================================================
Net income (loss) per share $ (0.07) $ 0.01
======================= =====================
Weighted average number of shares outstanding 7,237,429 7,237,429
======================= =====================
</TABLE>
<PAGE>
Consolidated cash was $2,947,000 at September 30, 1998 and $3,834,000
at June 30, 1998, a decrease of $887,000.
Cash provided by operating activities for the Current Quarter ended
September 30, 1998 was $33,000. Accounts receivable at September 30, 1998
decreased $1,252,000 from June 30, 1998, and other current assets at September
30, 1998 decreased $306,000 from June 30, 1998. Accounts payable at September
30, 1998 increased $122,000 from June 30, 1998, accrued expenses decreased
$1,334,000 from June 30, 1998 to September 30, 1998 and deferred income
decreased $123,000 during that same period.
During the Current Quarter, cash used in investing activities was
$732,000. This represents cash used for capital expenditures incurred in the
normal course of operations, less the payment of the note receivable due the
Company from a former officer.
Cash used in financing activities during the Current Quarter was
$189,000 which was provided through borrowings from the line of credit referred
to in Note 2.B of the financial statements.
During the Current Quarter, the Company incurred a net loss of $508,000
and cash flow from operations of $33,000, resulting in a working capital
position of negative 1,842,000 and an accumulated deficit totaling $12,152,000
at September 30, 1998. At this time the Company's only firm external financing
resource other than its existing asset based loan and security agreement, which
requires that the Company maintain minimum stockholders equity of $3,000,000, is
the commitment CBC has made to fund the Company's working capital needs through
the end of the current fiscal year. The Company is currently taking steps to
curtail its level of net operating losses by discontinuing the operations of the
Harmony Pictures division. If the losses are not curtailed, the Company risks
loosing its line of credit and will need to rely solely on CBC until other
financing options become available. In order to obtain the proceeds that the
Company expects it may need during the next year, the Company intends to attempt
to raise additional debt and/or equity financing. The Company is currently
holding discussions with various possible financing sources and believes that
the requisite financing can be obtained. However, no assurance can be given that
the Company will, in fact, be able to obtain additional financing or that the
terms of such financing will be favorable to the Company. The Company believes
that both the expected benefits to be derived from the current restructuring of
the Company's operations, including the discontinuation of operation at the
Harmony Pictures division and certain managerial changes that have recently been
made, and the expected level of operations during the next year, may offset some
or all of any liquidity shortage that may occur.
Inflation
Inflation has not had a significant effect on the Company.
Year 2000 Compliance
Management has made an assessment of its systems and has been advised
by its computer consultant that its systems are year 2000 compliant.
<PAGE>
Management also believes that its television production equipment will not be
impacted by the Year 2000 Issue because the equipment is not date sensitive.
Additionally, management believes it will not be materially impacted by the Year
2000 compliance of third parties with which it conducts business.
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1 THROUGH 5.
NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
1. Financial Data Schedule
b. Current Reports on Form 8-K
The Company filed the following document with the Commission during the
quarter for which this report is filed:
1. The Company's Current Report on Form 8-K filed on August 26, 1998,
relating to the Company's entry into a $4,500,000 asset based
revolving line of credit facility with Heller Financial Corporation.
<PAGE>
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 hereunto duly authorized on November 16, 1998.
CHILDREN'S BROADCASTING
CORPORATION
BY: /s/ James G. Gilbertson
James G. Gilbertson
ITS: Chief Operating Officer
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2947079
<SECURITIES> 0
<RECEIVABLES> 5352206
<ALLOWANCES> (43717)
<INVENTORY> 0
<CURRENT-ASSETS> 9333037
<PP&E> 2886194
<DEPRECIATION> 196062
<TOTAL-ASSETS> 15004440
<CURRENT-LIABILITIES> 11174564
<BONDS> 0
0
0
<COMMON> 72375
<OTHER-SE> 3757501
<TOTAL-LIABILITY-AND-EQUITY> 15004400
<SALES> 2780940
<TOTAL-REVENUES> 2780940
<CGS> 14523459
<TOTAL-COSTS> 3174986
<OTHER-EXPENSES> 129248
<LOSS-PROVISION> (43717)
<INTEREST-EXPENSE> 119647
<INCOME-PRETAX> (498531)
<INCOME-TAX> 9601
<INCOME-CONTINUING> (508132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (508132)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
