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 December 31, 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 February 13, 1998
Common Stock, par value 6,487,429 shares
$.01 per share
1
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TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
ITEM 1.
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Financial Statements Page
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Consolidated Balance Sheets:
December 31, 1997 (unaudited) and June 30, 1997 3
Consolidated Statements of Operations (unaudited):
Six Months Ended December 31, 1997 and 1996 4
Consolidated Statements of Operations (unaudited):
Three Months Ended December 31, 1997 and 1996 5
Consolidated Statements of Cash Flows (unaudited):
Six Months Ended December 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2.
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 9
PART II-- OTHER INFORMATION
ITEM 6.
13
Exhibits and Reports on Form 8-K
Signatures 13
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2
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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
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Harmony Holdings, Inc.
Consolidated Balance Sheets
----------------------------------------------------------------------------- ---------------------- -----------------
December 31, 1997 June 30, 1997
(unaudited)
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Assets
<S> <C> <C>
Current Assets:
Cash $1,129,265 $ 2,354,625
Accounts receivable - net of allowance for doubtful accounts of $43,717 2,779,091 5,280,665
and $97,646
Unbilled accounts receivable 868,956 865,560
Other current assets 1,157,771 794,883
218,467
Note receivable from former officer 208,889
---------------------- -----------------
---------------------- -----------------
6,153,550 9,504,622
Total current assets
2,046,254 1,953,064
Property and equipment, at cost, net of accumulated depreciation and
amortization
2,651,775 2,757,665
Goodwill, net of accumulated amortization of $1,560,533 and $1,454,643
153,942 289,695
Other assets
---------------------- -----------------
====================== =================
$ 11,005,521 $ 14,505,046
Total assets
====================== =================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,264,404 $ 1,694,219
Accrued liabilities 2,346,728 4,230,668
Deferred income 1,396,405 823,371
---------------------- -----------------
5,007,537 6,748,258
Total current liabilities
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 64,875 66,933
outstanding 6,487,429 and 6,693,198
Additional paid-in capital 14,367,437 14,845,129
Accumulated deficit (8,434,328) (7,155,274)
---------------------- -----------------
---------------------- -----------------
5,997,984 7,756,788
Stockholders' equity
---------------------- -----------------
====================== =================
Total Liabilities and Stockholders' Equity $ 11,005,521 $ 14,505,046
====================== =================
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See Accompanying Notes to Consolidated Financial Statements
3
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<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Statement of Operations
(unaudited)
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Six Months Ended
December 31,
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1997 1996
-------------------- ---------------------
-------------------- ---------------------
Contract revenues $ 22,720,236 $ 29,537,842
Cost of production 18,254,490 23,593,378
-------------------- ---------------------
-------------------- ---------------------
Gross profit 4,465,746 5,944,464
Selling expenses 1,199,451 1,545,250
Operating expenses 4,189,387 3,339,551
Depreciation and amortization 350,071 292,165
-------------------- ---------------------
-------------------- ---------------------
(Loss) income from operations (1,273,163) 767,498
Interest income 29,487 38,386
Interest expense (12,236) (27,660)
-------------------- ---------------------
Net (loss) income before income taxes (1,255,912) 778,224
Income taxes 23,142 103,492
-------------------- ---------------------
-------------------- ---------------------
Net (loss) income $ (1,279,054) 674,732
==================== =====================
Basic earnings (loss) per share $ (0.20) 0.10
Weighted average shares outstanding 6,497,614 6,437,763
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See Accompanying Notes to Consolidated Financial Statements
4
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<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Statement of Operations
(unaudited)
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Three Months Ended
December 31,
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<S> <C> <C>
1997 1996
-------------------- ---------------------
-------------------- ---------------------
Contract revenues $ 11,340,760 $ 15,721,323
Cost of production 9,130,992 12,447,460
-------------------- ---------------------
-------------------- ---------------------
Gross profit 2,209,768 3,273,863
Selling expenses 567,237 886,554
Operating expenses 2,171,276 1,858,659
Depreciation and amortization 174,337 148,194
-------------------- ---------------------
-------------------- ---------------------
(Loss) income from operations (703,082) 380,456
Interest income 9,604 36,008
Interest expense (8,541) (6,584)
-------------------- ---------------------
Net (loss) income before income taxes (702,019) 409,880
Income taxes (20,106) 103,492
-------------------- ---------------------
-------------------- ---------------------
Net (loss) income $ (681,913) 306,388
==================== =====================
Basic earnings (loss) per share $ (0.11) 0.05
Weighted average shares outstanding 6,481,779 6,693,198
- --------------------------------------------------- -------------------- ---------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
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<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
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Six Months Ended
Increase (decrease) in cash December 31
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1996
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--------------------------------------
Cash flows from operating activities:
Net income (loss) $ (1,279,054) $ 674,732
Adjustments to reconcile net loss to cash used by operating activities:
Depreciation and amortization 348,806 290,731
Amortization of prepaid interest 0 3,823
Issuance of non-cash compensation expense 75,000 0
Changes in assets and liabilities:
Accounts receivable 2,501,574 (2,441,567)
Unbilled accounts receivable (3,396) (832,466)
Other current assets (367,677) (511,233)
Note receivable former officer - interest (4,789) 0
Other assets 135,753 (15,730)
Accounts payable (429,815) (394,744)
Accrued liabilities (1,883,940) 1,250,030
Deferred income 573,034 742,444
--------------------------------------
--------------------------------------
(334,504) (1,233,980)
Net cash used by operating activities
--------------------------------------
--------------------------------------
Cash flows from investing activities:
Capital expenditures (336,106) (233,588)
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--------------------------------------
(336,106) (233,588)
Net cash used by investing activities
--------------------------------------
--------------------------------------
Cash flows from financing activities:
Proceeds from issuance of (repurchase of) stock (554,750) 2,000,000
Repayments subordinated notes payable 0 (385,000)
Net borrowings under bank line of credit 0 (300,000)
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--------------------------------------
(554,750) 1,315,000
Net cash provided by (used by) financing activities
--------------------------------------
--------------------------------------
(1,225,360) (152,568)
Net decrease in cash
2,354,625 446,740
Cash, beginning of period
Cash, end of period
--------------------------------------
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$ 1,129,265 $ 294,172
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements
6
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HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 1997
(1) Basis of Presentation
These statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and do not include all the
information and note disclosures required by generally accepted accounting
principles for complete financial statements and may be subject to year-end
adjustments. 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 December 31, 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 Harmony Holdings, Inc. and 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) Earning (Loss) per share Basic earnings (loss) per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common share outstanding for the period. Diluted
earnings (loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earning (loss) per share is not presented
when the effect is antidilutive.
7
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(5) 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 The End Inc.'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, the Company's insurance broker
has advised management that there is adequate insurance to cover the amount of
damages asserted in the complaint against the Company. The probability of an
unfavorable outcome and range of possible loss is unknown. Accordingly, no
amounts have been accrued as contingent liabilities in the accompanying
financial statements.
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 was 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 the amount of damages asserted against the Company. The probability of an
unfavorable outcome and range of possible loss is unknown. Accordingly, no
amounts have been accrued as contingent liabilities in the accompanying
financial statements.
On December 22, 1997, a lawsuit entitled Directors Guild of
America-Producer Pension Plan, et al. v. Harmony Pictures Inc., Melody Films
Inc., and Velocity Films Inc., Case No. 97-8359-JMI (Manx), was filed in the
United States District Court, Central District of California, The pension and
health plans have alleged that, for the audit period covered, the defendants
have not permitted a full audit of their records and are liable for unpaid
pension and health contributions, liquidated damages, interest, audit and
attorneys' fees. The prayer of the complaint requests damages in accordance with
proof at trial and the allegations of the complaint reference audit costs of
$8,442 and interest of $34,037 however, defendants have received a January 13,
1998, interim report which asserts defendants owe the Plans an additional
$45,158 in contributions, $20,548 in interest and $17,422 in audit fees. Also,
the Plans have requested an audit of defendants records through the present.
The lawsuit is in the initial stages of discovery and the parties
intend to file cross motions for summary judgment relating to defendants'
affirmative defense of accord and satisfaction. Accordingly, at this time,
counsel for the company is not able to estimate the likelihood of an adverse
result or, if an adverse outcome occurs, the amount of liability that may be
incurred by the company.
8
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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.
Results of Operations
Six Months ended December 31, 1997 as compared with Six Months ended December
31, 1996
For the six months ended December 31, 1997, contract revenues
decreased by 23%, or $6,817,606, to $22,720,236 from $29,537,842 for the six
months ended December 31, 1996. Included in revenues for the 1996 period were
revenues of $587,655 generated from unprofitable operations that were terminated
during the six months ended December 31, 1996. Accordingly, revenues from
comparable operations, excluding those from ceased operations decreased by
$6,230,951. The decrease in contract revenues was primarily attributable to the
loss of one director (who left The End, Inc., on July 1, 1997) who billed in
excess of $10,000,000 in contract revenues during his last year with The End,
Inc. The End, Inc. has subsequently replaced this director. Additionally,
Harmony Pictures, Inc., terminated the services of one sales representative in
September 1997 and did not replace him until December 1997.
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 six months ended December 31, 1997, decreased by 23%,
or $5,338,888, to $18,254,490 from $23,593,378 for the six months ended December
31, 1996. Expressed as a percentage of revenues, cost of production for the six
months ended December 31, 1997, was 80% compared with 80% for the six months
ended December 31, 1996 and resulted in gross profit percentages of 20% and 20%,
respectively.
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
television commercial contracts. Selling expenses for the six months ended
December 31, 1997, decreased to $1,199,451 from $1,545,250 for the six months
ended December 31, 1996, representing a decrease of $345,799 or 22%. Most of the
decrease in selling expenses was due to a reduction in sales commissions. Sales
commissions decreased by $257,910 due to the reduction in overall contract
revenues.
Operating expenses consist of overhead costs such as office rent and
expenses, executive, general and administrative payroll, and related items.
Operating expenses for the six months ended December 31, 1997, increased to
$4,189,387 from $3,339,551 for the six months ended December 31, 1996,
representing an increase of $849,836 or 25% of the increase in operating
expense, $298,275 was attributable to a new subsidiary in London, England and to
the opening of a new San Francisco office for Curious Pictures Corporation. The
balance of the increase was due to the restructuring of the Company's corporate
offices and decentralizing it's subsidiary accounting procedures. During the six
months ended December 31, 1997, to some extent there have been duplicate
corporate expenses due to the management functions performed in both Minnesota
and Los Angeles. Certain of the Company's new officers and directors operate
from offices in Minnesota, which has increased travel expenses and caused
certain duplication of expenses. The Minnesota office has added approximately
$160,000 in operating expenses during the six months ended December 31, 1997.
Management believes that most of the additional costs will be eliminated when
the corporate reorganization is completed.
9
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Depreciation and amortization expense increased for the six months
ended December 31, 1997, to $350,071 from $292,165 for the six months ended
December 31, 1996. The change is due to the increase in depreciable assets of
$431,834.
Interest income decreased for the six months ended December 31, 1997,
to $29,487 from $38,386 for the six months ended December 31, 1996, representing
a decrease of $8,899, due to less cash held in short term investments compared
to the prior year. Interest expense decreased for the six months ended December
31, 1997, to $12,236 from $27,660 for the six months ended December 31, 1996,
representing a decrease of $15,424, due to a decrease in borrowings under the
line of credit.
Income tax expense was $23,142 for the six months ended December 31,
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 six months ended December 31, 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.
Three Months ended December 31, 1997 as compared with Three Months ended
December 31, 1996
For the three months ended December 31, 1997, revenues decreased by
28%, or $4,380,563, to $11,340,760 from $15,721,323 for the three months ended
December 31, 1996. The decrease in contract revenues was primarily attributable
to the loss of one director (who left The End, Inc., on July 1, 1997) who billed
in excess of $10,000,000 in contract revenues during his last year with The End,
Inc. The End, Inc. has subsequently replaced this director. Additionally,
Harmony Pictures, Inc. terminated the services of one sales representative in
September 1997 and did not replace him until December 1997.
Cost of production for the three months ended December 31, 1997,
decreased by 27%, or $3,316,468, to $9,130,992 from $12,447,460 for the three
months ended December 31, 1996. Expressed as a percentage of revenues, cost of
production for the three months ended December 31, 1997, was 81% compared with
79% for the three months ended December 31, 1996 and resulted in gross profit
percentages of 19% and 21%, respectively. The decrease in gross profit for the
three months ended December 31, 1997, was primarily due to the increased
competitive factors within the commercial production industry, offset in part by
management's continuing efforts to reduce costs and maximize purchasing power.
Selling expenses for the three months ended December 31, 1997,
decreased to $567,237 from $886,554 for the three months ended December 31,
1996, representing an decrease of $319,317 or 36%. Selling commissions decreased
by $204,081, while other selling expenses decreased by $115,236. The decrease
was primarily attributable $31,638 decrease in promotion expense, $32,129
decrease in sales salaries and a $43,675 decrease in director speculation reels.
Operating expenses for the three months ended December 31, 1997,
increased to $2,171,276 from $1,858,659 for the three months ended December 31,
1996, representing a increase of $312,617 or 17%. The increase in operating
expense is primarily attributable to $389,847 combined increase in insurance,
outside service, salaries and entertainment offset by a combined decrease of
$126,200 in advertising, leased equipment and legal. The increase of $312,617
includes $74,692 for a new subsidiary in London, England and $64,999 for a new
San Francisco office for Curious Pictures Corporation. In addition, operating
expenses increased due to fees paid to new officers and directors together with
certain expenses related to the on going reorganization of the Company's
corporate operations.
10
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Depreciation and amortization expense increased for the three months
ended December 31, 1997, to $174,337 from $148,194 for the three months ended
December 31, 1996, representing an increase of $26,143. The change is due to the
increase in depreciable assets of $431,834.
Interest income decreased for the three months ended December 31,
1997, to $9,604 from $36,008 for the three months ended December 31, 1996,
representing a decrease of $26,404, due to less cash held in short term
investments compared to the prior year. Interest expense increased for the three
months ended December 31, 1997, to $8,541 from $6,584 for the three months ended
December 31, 1996, representing an increase of $1,957, due to an increase in
borrowings under the line of credit.
Income tax expense was ($20,106) for the three months ended December
31, 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 December 31, 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
As of December 31, 1997, the Company had working capital of $1,146,013
including cash of $1,129,265 compared to working capital of $2,756,364 including
cash of $2,354,625 at June 30, 1997. Cash used by operating activities for the
six months ended December 31, 1997 was $334,504. This included a decrease in
accounts receivable of $2,501,574 and a decrease in accounts payable and accrued
expenses of $2,313,755, both of which are directly related to the decrease in
contract revenues for the period.
Cash used in investing activities for the six months ended December 31,
1997, was $336,106 and represents capital expenditures incurred in the normal
course of operations.
Cash used by financing activities for the six months ended December 31,
1997 was $554,750. The cash used by financing activities was the result of a
$600,000 repurchase of common stock net of $45,250 in proceeds from stock
options exercised.
On May 10, 1995, the Company entered into a $3,000,000 asset based
revolving line of credit with a bank, with interest currently at the bank=s
prime rate plus .5% per annum. Borrowings under the credit facility are secured
by a lien on the assets of the Company. The bank=s prime rate at December 31,
1997 was 8.50%. The maximum outstanding balance during the six months ended
December 31, 1997 was $800,000 and the weighted average interest rate was 9.00%.
The credit agreement expires October 30, 1998. Borrowing is based upon certain
percentages of acceptable accounts receivables. The loan agreement has certain
financial covenants one of which is to maintain profitability on a quarterly
basis another is to maintain tangible net worth of at least $5,000,000. The
Company was not in compliance with these covenants at December 31, 1997. The
bank has agreed to take no action due to the non-compliance.
11
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To the extent that future revenues and related gross profits from
operations do not provide sufficient funds to offset operating costs, the
Company's present resources will decrease. The Company, as of December 31, 1997,
had entered into various employment agreements with its officers and others
which obligate it to make minimum payments of approximately $6,176,968 over the
next five years. The payments due are $3,720,151, $2,115,317 and $341,500 for
the years ended December 31, 1998, 1999 and 2000. Of such amounts, $3,512,683 is
for administrative personnel and $2,664,284 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 six months ended December 31, 1997, the Company paid
$1,075,356 in such draws to these directors and salespeople; they earned
$1,424,061 in fees, which sum exceeded the draws advanced by a net $348,705.
However, 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
$91,667.
The Company is currently in the process of reorganizing the management
of the Harmony Holdings, Inc. In connection with the reorganization, effective
October 1, 1997, the Company entered into a services agreement with Radio
Management Corporation ("RMC"), an affiliate of Children's Broadcasting
Corporation ("CBC") that provides management services to CBC and other
companies. Pursuant to the services agreement, RMC has agreed to provide payroll
services, general accounting services, general legal services and such other
services as the parties may agree for a monthly payment of $19,372. The services
agreement may be terminated by either party upon 60 days written notice to the
other party. In addition, in connection with the reorganization, the Company has
commenced relocating the corporate offices of Harmony Holdings, Inc. from Los
Angeles, California, to RMC's offices in Minneapolis, Minnesota. In connection
with the relocation, the Company will also reduce its workforce in Los Angeles
and will attempt to sublease its corporate headquarters.
Management believes that the foregoing restructuring will, in the short
term, negatively affect the Company's liquidity because of the costs involved in
effecting both the relocation and the reduction in the workforce, and because of
the rent obligation that the Company will continue to bear until the Los Angeles
offices are subleased. However, the Company believes that over the longer term,
the reorganization will, when fully implemented, result in more effective and
efficient operations.
12
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On January 7, 1998, the Company made a $650,000 loan to CBC (the
"Loan"). In connection with the Loan, CBC paid the Company a loan fee of $39,000
and agreed to pay interest at a rate of 15% per annum. The Loan is payable
within 30 days after demand is made by the Company and can be repaid at any time
by CBC. CBC has informed the Company that, by no later then the end of February
1998, it expects to have entered into one or more binding agreements to sell one
or more of its radio stations and that it intends to use the proceeds from the
sale of the first radio station to fully repay the Loan. Based on the expected
closing dates of the station sales currently being negotiated by CBC, CBC
expects that the Loan will be fully repaid by no later than the end of June,
1998. The Company currently estimates that its current cash balances, its
anticipated cash flow, and funds available under its credit facility will be
sufficient to meet the Company's working capital requirements until the
anticipated Loan repayment date. Although CBC currently owns valuable radio
station properties that it is in the process of selling, CBC does not currently
have sufficient cash available to repay the Loan in full should the Company
demand repayment. Accordingly, although the Loan by its terms is repayable upon
30 days' notice, because of CBC's lack of liquidity, CBC would not have the
ability to repay the loan until the consummation of the sale of a radio station.
Therefore, should the Company develop a cash shortfall and require the repayment
of the Loan, absent a sale of radio station, it is unlikely that the Company
could depend on the repayment of Loan to cure the Company's cash flow
difficulties.
The Company has no material commitments for capital expenditures and
has not made any arrangements for external sources of financing other than its
existing credit facility. Management believes that the Company's present cash
balanced and anticipated cash flows from operations and current borrowing
arrangements will be sufficient to meet its needs for at least the next twelve
months.
Inflation
Inflation has not had a significant effect on the Company.
Year 2000 compliance
The Company has made an assessment of it's systems and has been
advised by it's computer consultant that all of it's systems are year 2000
compliant.
13
<PAGE>
PART II-- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description
10.1 Service agreement between Radio Management Corporation
and Harmony Holdings, Inc. effective October 1, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K - None
14
<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 thereunto duly authorized.
HARMONY HOLDINGS, INC.
Date: February 17, 1998
By/s/Christopher T. Dahl
Christopher T. Dahl
Chairman of the Board, Chief Executive Officer
Date: February 17, 1998
By/s/Brian Rackohn
Brian Rackohn
Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
15
<PAGE>
Exhibit 10.1
18
SERVICE AGREEMENT
THIS AGREEMENT made effective October 1, 1997, by and between RADIO
MANAGEMENT CORPORATION, a Minnesota corporation (hereinafter ARMC@), and HARMONY
HOLDINGS, INC., a Delaware corporation (hereinafter AHHI@).
WHEREAS, RMC engages in the business of providing general and
administrative services to businesses and HHI is the owner of various media and
entertainment production companies, including without limitation, television,
film and music videos; and
WHEREAS, HHI intends to retain RMC to provide certain general and
administrative services for its media and entertainment production companies
according to the terms and provisions set forth herein.
NOW, THEREFORE, based upon the mutual premises contained herein, and other good
and valuable consideration, the parties hereby hereto agree as follows:
1. SERVICES. During the term hereof, RMC shall perform certain
general and administrative
services for HHI, including without limitation, payroll
services, general accounting services, general legal services
and such other services as the parties my mutually agree to
from time to time.
2. COMPENSATION. In consideration of the services performed by
RMC hereunder, HHI shall pay RMC the sum of Nineteen Thousand
Three Hundred Seventy Two and no/100 Dollars ($19,372.00) per
month payable within thirty (30) days from the end of each
calendar month. The compensation paid to RMC hereunder shall
not include any fees or expenses for accounting, legal or
other services performed for HHI by third parties.
3. QUARTERLY REVIEW. The parties agree that they will review the
services provided by RMC hereunder and the compensation set
forth herein at the end of each calendar quarter during the
term hereof, and at such time the services and compensation
may be adjusted upon the mutual agreement of the parties.
<PAGE>
4. EXPENSES. In addition to the compensation set forth in Section
2 above, HHI shall pay all reasonable and necessary expenses
incurred by RMC in connection with the services performed
hereunder, including without limitation, travel and lodging
expenses and any other expenses directly attributable to the
services performed by RMC hereunder. RMC shall bill HHI on a
monthly basis for such expenses and HHI shall pay the same
within thirty (30) days from the date HHI receives any such
invoice.
5. INDEPENDENT CONTRACTOR. The parties hereby acknowledge
that (i) RMC, while performing services hereunder, at all times acting as an
independent contractor and not as an employee of HHI; (ii) the employees of RMC
shall at no time be considered employees of HHI in connection with the services
performed hereunder; and (iii) RMC shall be solely responsible for all federal,
state and local income taxes, employment taxes, self-employment taxes, workers=
compensation insurance premiums and any and all other similar taxes or payments
RMC is required to make as a result of the services RMC performs hereunder. HHI
shall approve the engagement of any officer of RMC who shall pursuant to such
engagement also serve as an officer of HHI, and HHI shall affirm and agree to
the terms of such engagement.
6. LIMITATIONS ON LIABILITY. HHI hereby agrees that in no event
shall RMC be liable to HHI for any indirect, special or
consequential damages or lost profits arising out of or in any
way related to this Agreement or the performance of services
hereunder or any breach thereof and that RMC=s liability to
HHI hereunder, if any, shall in no event exceed the total
compensation paid to RMC hereunder.
7. TERM. This Agreement shall commence on the date hereof and
shall continue thereafter on a month to month basis. This
Agreement may be terminated by either party, at any time, upon
providing written notice delivered to the other party. Such
termination shall be effective sixty (60) days from receipt of
such notice.
8. TERMINATION. Notwithstanding Section 7 above, this Agreement shall terminate
upon the occurrence of any of the following events:
a. by RMC if HHI is more than sixty (60) days delinquent in its payment of
compensation or expenses pursuant to Sections 2 or 3 above;
<PAGE>
b. by either party if the other party is in default
under any provision hereunder and such default is not
cured within thirty (30) days after notice thereof is
given to the defaulting party;
c. by either party if the other party becomes insolvent or seeks protection,
voluntarily or involuntarily, under any bankruptcy law; or
d. upon mutual agreement of both parties.
A termination of this Agreement pursuant to Section 8 or
Section 7 above shall not relieve HHI of its obligation to pay
RMC compensation or expenses for any services rendered or
expenses incurred prior to the date of termination.
9. GOVERNING LAW. This Agreement shall be construed and enforced in accordance
with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
RADIO MANAGEMENT CORPORATION
BY: B/S/ RADIOMANAGEMENTCORPORATION
HARMONY HOLDINGS, INC.
BY: B/S/ Harmony Holdings, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
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<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,129,265
<SECURITIES> 0
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