SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year ended June 30, 1999; 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 1-19577
HARMONY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4333330
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5501 Excelsior Boulevard
Minneapolis, Minnesota 55416 55416
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code:(612) 925-8840.
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based upon the closing price of Registrant's Common Stock as
reported on the OTC Bulletin Board as of September 21, 1999) was approximately
$1,578,159.
There were 7,506,660 shares of Registrant's Common Stock issued and outstanding
as of September 21, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements, expressed or implied by such
forward-looking statements.
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934 which are subject to the "safe harbor" created by those
sections. The forward-looking statements include, but are not limited to,
statements related to industry trends and the future growth in the markets of
television commercial and music video production; the Company's strategies for
restructuring its operations and implementing its business plan; the Company's
efforts to secure and protect its proprietary rights; the effect of GAAP
accounting pronouncements on the Company's recognition of revenues; the effect
of the Year 2000 Issue on the Company's operations; the availability of future
rental space; and the sufficiency of the Company's capital resources.
Discussions containing forward-looking statements may be found in "Business"
(which includes "Risk Factors"), "Properties," "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in such forward-
looking statements. The Company disclaims any obligation to update these
forward-looking statements as a result of subsequent events. The risk factors on
pages 7 through 11, among other things, should be considered in evaluating the
Company's prospects and future financial performance.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Harmony Holdings, Inc. was incorporated under the laws of the State of
Delaware on August 5, 1991. To date, the Company has conducted its operations
through various subsidiaries, which subsidiaries in turn operate one or more
wholly owned subsidiaries. As of the date of this report, the Company's
principal wholly-owned subsidiary is The End, Inc. The Company also holds a 49%
ownership interest in Curious Pictures Corporation, with the remaining 51%
interest of
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Curious Pictures Corporation being owned by Children's Broadcasting Corporation
d/b/a Intelefilm(sm)("iNTELEFILM"), the Company's largest shareholder. Unless
the context indicates otherwise, all references to the "Company" are to Harmony
Holdings, Inc. and all of the direct and indirect majority-owned subsidiaries of
Harmony Holdings, Inc. at the time of reference. For periods after August 1,
1999, the reference to the "Company" does not include Curious Pictures
Corporation, a 49% owned subsidiary of Harmony Holdings, Inc.
The Company's principal executive offices are located at 5501 Excelsior
Boulevard, Minneapolis, Minnesota 55416. Its telephone number is (612) 925-8840.
However, the Company's principal production offices are located in Los Angeles
and New York. See "Item 2. Properties."
RECENT RESTRUCTURING OF OPERATIONS
Until the end of the fiscal year ended June 30, 1998, the Company
operated through four principal subsidiaries. Three of these principal
subsidiaries, Harmony Pictures, Inc. f/k/a Chemistry Pictures ("Harmony
Pictures"), The End, Inc. ("The End"), and The End (London), Ltd., were
wholly-owned subsidiaries, and the fourth subsidiary, Curious Pictures
Corporation ("Curious Pictures"), was a 99% owned subsidiary. During the fiscal
year ended June 30, 1998, the Company initiated a company-wide reorganization to
relocate offices, consolidate financial and accounting functions, and otherwise
restructure the operations of the Company. As part of its reorganization, since
the beginning of the fiscal year ended June 30, 1999 ("Fiscal 1999"), the
Company has closed the operations of one of its principal subsidiaries and sold
most of its interest in a second principal subsidiary.
The subsidiary that the Company closed was Harmony Pictures. For the
fiscal year ended June 30, 1998, Harmony Pictures incurred an operating loss of
$1,625,000. When these losses continued into Fiscal 1999 (Harmony Pictures
incurred an additional operating loss of $595,000 for the fiscal quarter ended
September 30, 1998), the Company decided to discontinue the operations of
Harmony Pictures, and to dissolve Harmony Pictures. The dissolution and winding
up of Harmony Pictures was initiated and completed during Fiscal 1999.
In furtherance of the Company's restructuring, on July 23, 1999,
effective July 1, 1999, the Company sold 90% of the issued and outstanding
shares of capital stock of The End (London), Ltd, to Julia Reed, the executive
producer. The Company retained all rights to The End (London) name and logo. In
connection with the sale of stock, the Company and Ms. Reed entered into an
agreement granting Ms. Reed the right to purchase the remaining 10% equity
interest in The End (London) for approximately $803,000. The End(London) is now
known as the Harry Nash Film Productions, Ltd.
RESOLUTION OF CURIOUS PICTURES CORPORATION'S OPTION AND SHARE TRANSFER
AGREEMENT.
During December 1996, the Company entered into an Option and Share
Transfer Agreement ("Option Agreement") with the four principals of Curious
Pictures ("Curious Management"). Under the Option Agreement, Curious Management
received 1% of the issued and outstanding stock of Curious Pictures. In
addition, Curious Management also had the right, based upon Curious Pictures
reaching certain net income levels, to receive additional shares of Curious
Pictures up to an
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additional 50%. As of December 31, 1998, based on the results of operations of
Curious Pictures, it was agreed by all parties, including the Company, that
Curious Management's rights to purchase the 50% equity interest had fully vested
and were exercisable for consideration totaling $50. If Curious Management
exercised their rights under the Option Agreement, they would become a majority
shareholder in Curious Pictures leaving the Company with no control over the
operation or finances of Curious Pictures, leaving the Company with no guarantee
of ever receiving a return on its investment and still obligating the Company to
provide financing to Curious Pictures.
In an effort to preserve the Company's investment in Curious Pictures,
effective August 1, 1999, the Company's largest shareholder, iNTELEFILM,
purchased the stock purchase rights from Curious Management under the Option
Agreement. After iNTELEFILM acquired the stock purchase rights from Curious
Management, it exercised the stock purchase rights under the Option Agreement
and acquired both the 1% interest owned by Curious Management and an additional
50% interest in Curious Pictures. As a result, the Company currently owns 49% of
the outstanding stock of Curious Pictures and iNTELEFILM owns the remaining 51%
of the stock.
Concurrently with the foregoing purchase of stock by iNTELEFILM, the
Company entered into a new five-year employment agreement with each of the four
members of Curious Management. As part of the compensation to be paid to Curious
Management, each member of Curious Management was granted the right to purchase
from the Company 1 share (representing 1% of the capital stock of Curious
Pictures) of the 49 shares (representing the remaining 49% equity interest of
Curious Pictures owned by the Company) at the end of each employment year. As a
result, if all of the members of Curious Management exercise all of the new
options over the five-year term of their employment agreements, iNTELEFILM will
own 51% of the Curious Pictures stock, Curious Management will collectively own
20%, and the Company will own the remaining 29%.
Pursuant to that certain Curious Stock Agreement, effective as of
August 1, 1999, between iNTELEFILM and Curious Management, the members of
Curious Management were granted the right to sell to iNTELEFILM the shares of
Curious Pictures that they earn from the Company (the put right), and iNTELEFILM
obtained the right to purchase such shares from Curious Management (the call
right). The price per share to be paid by iNTELEFILM to Curious Management for
each share under the put and call rights is $96,774 per share.
CONTINUING OPERATIONS AFTER REORGANIZATION
As a result of the closure of Harmony Pictures, the sale of The End
(London) Ltd., and the decrease in the Company's ownership interest in Curious
Pictures, the Company's future operations will be conducted solely through The
End, Inc. (and the subsidiaries of The End, Inc.), and the Company's principal
source of revenues during the current fiscal year ending June 30, 2000 ("Fiscal
2000") will be derived from the operations of The End, Inc. Although the Company
does not currently expect that its operating relationship with Curious Pictures
will materially change as a result of the decrease in its equity ownership of
Curious Pictures, the revenues and expenses of Curious Pictures will no longer
be reflected on the consolidated financial statements of the Company in the
future. As a 49% owner of Curious Pictures, commencing in Fiscal 2000, only 49%
of any income/loss generated by Curious Pictures will be reflected on the
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Company's financial statements. During Fiscal 1999, The End, Inc. generated
revenues of $35,050,000 and income from production (gross profit from
productions less production subsidiary selling and general and administrative
expenses) of $605,000, whereas Curious Pictures generated revenues of
$18,169,000 and income from production of $1,104,000.
The Company has experienced substantial change in the past year in an
effort to strengthen its financial position. Although these changes have
curtailed external growth plans for the immediate future, the Company believes
The End is positioned to experience internal growth during the next year. While
certain divisions curtailed operations, The End was able to sign several new and
prominent commercial directors as well as establish improved facilities in Los
Angeles and New York. It is the Company's belief that these changes strengthen
the outlook for improved revenue and production income at The End. The Company
will continue to monitor the progress of The End in relation to the changes made
in the preceding year. External growth of the Company may occur if either The
End's operations exceed expectations thus supplying the necessary working
capital or iNTELEFILM provides additional working capital to the Company.
SUMMARY DESCRIPTION OF BUSINESS
The Company's primary business during the past few years and its
on-going business continues to be the production of television commercials. The
expertise, reputation and creative vision of the commercial director roster and
ability of the production company to deliver the commercial in an efficient
manner defines the production company's role. The Company's customers are
typically advertising agencies acting on behalf of a television advertiser. The
Company maintains excellent relationships with many of the major advertising
agencies.
The Company currently has a roster of approximately 20 directors with
specialties in varied advertising categories.
The Company continues to maintain relationships with its advertisers.
The Company primarily produces commercials for national advertisers. During
fiscal 1999, such advertisers included Nike, Gatorade, Coca-Cola, Miller Lite,
Mitsubishi, Gateway, Canon and Seiko.
COMMERCIAL TELEVISION PRODUCTION INDUSTRY
Traditionally, the Company's marketing efforts have focused on national
and multi-national advertisers, national network commercials and higher budget
commercials. Nationally, the advertising and commercial production industry has
experienced an increase in the number of markets for television commercials.
Generally, the Company's budgeted price for a commercial ranges from $100,000 to
$400,000 and occasionally in excess of $1,000,000.
The Company's services are marketed by a staff of sales representatives
who seek out available commercial projects suitable for the Company's commercial
directors. These efforts are usually directed towards advertising agencies
located in New York, Los Angeles, Chicago, Detroit, Dallas, San Francisco,
Minneapolis and other regional markets.
Sales personnel hired by the Company work exclusively for the Company
out of offices located in Los Angeles and New York. The Company also employs
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independent sales representatives on a select basis. The Company is seeking to
coordinate its sales efforts in a more efficient manner to enhance revenues.
To sell the commercial director's work, the sales staff uses the
commercial director's reel as its primary tool. This reel is a visual "resume"
containing samples of a particular director's work demonstrating the director's
creativity and experience. These reels are consistently updated and provided to
the ad agencies who generally act as the decision maker.
The Company also advertises in trade publications and has sponsored
agency events on an occasional basis to maintain visibility among advertisers
and advertising agencies and to publicize specific information such as additions
to the directorial roster, completion of a significant commercial, or the
recognition of awards and achievements.
DIRECTOR RETENTION
The Company attracts and retains commercial directors by offering such
directors the opportunity to work in an organization with a highly effective
sales force and a high-quality staff of executive producers and back-office
support. The Company offers directors the ability to work in an environment that
fosters creativity by relieving directors of the worry and burden of running a
business or financing the projects on which they work.
FINANCING THE PRODUCTION OF COMMERCIALS
Ad agencies award jobs to commercial production companies with an
accompanying bid. The award bid contains all of the costs associated with that
particular commercial and is broken down into direct costs of production,
director's fees, insurance and the production company's fee. The production
company and the producer of the commercial carefully monitor costs throughout
the filming process. The pre-approved bid is often altered during filming due to
agreed upon new creative options or unexpected occurrences such as inclement
weather. When this occurs, and the project costs exceed the original budget, the
increased cost is paid for by the agency and its client.
In most circumstances, the Company bills the advertising agency for
33%-70% of the entire budget as stated in the bid, to be paid in advance or on
the first day of principal photography. The remainder of the contract price is
generally paid in one or more installments by the agency within 30 to 120 days
after completion of principal photography. Traditionally, the accounts
receivable have been extremely well managed with write-offs being less than 2%
of all business.
MUSIC VIDEOS
A small percentage of the Company's business is derived from the
production of music videos. The production cycles for music videos is similar to
that of television commercials, but the budgets are generally smaller, ie.
$50,000 to $100,000. The client for music videos is usually the record company
or the performer directly.
EMPLOYEES
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As of September 1, 1999, the Company employed 29 persons on a full-time
basis. Additionally, the Company has approximately 20 directors of commercials
under contract, most of whom are independent contractors, and 6 salespersons,
some of whom are independent contractors. Of such persons, 3 are officers or
other senior executives of the Company. The Company does not anticipate any
further material change in the number of its full-time employees in the near
future. None of the Company's full-time employees are represented by a labor
union and the Company believes that it has good relationships with its
employees.
The Company, through certain of its subsidiaries, is a party to
collective bargaining agreements with the Directors Guild of America, Screen
Actors Guild and the International Alliance of Theatrical Stage Employees. Other
than these collective bargaining agreements, the Company is not a party to any
collective bargaining agreements. It is possible that some of the Company's
future business activities will be affected by the existence of collective
bargaining agreements because many of the performing artists and technical
personnel, such as cameramen and film editors, that it employs on a free-lance
basis are members of unions who are parties to collective bargaining agreements.
The extent to which collective bargaining agreements may affect the Company in
the future is not determinable. Industry strikes in the future by members of
these unions could cause delays or disrupt the Company's activities.
COMPETITION
The television commercial production industry is a highly fragmented
multi-billion dollar industry, with most of the Company's competitors being
relatively small operations. iNTELEFILM, the Company's largest shareholder, is
also in the business of television commercial production and may compete with
the Company. The Company believes that its large director roster with its range
of creative ability, expertise and wide experience coupled with the Company's
reputation and advertising agency relationships, provide the Company with a
competitive edge in its current markets.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company believes that its success is heavily dependent upon its
proprietary rights. To protect its proprietary rights the Company relies on a
combination of copyright, trade secret and trademark laws as well as
nondisclosure and other contractual restrictions. The Company currently holds
the rights to various servicemarks, including the following: Harmony Holdings;
The End; Beginning Entertainment; The Moment Films, Inc.; Gigantic
Entertainment; and Serial Dreamer Films, Inc.
Applications are pending in the Patent and Trademark Office to register
each of the above service marks.
RISK FACTORS
SIGNIFICANT LOSSES; NEGATIVE CASH FLOW FROM OPERATIONS; WORKING CAPITAL
DEFICIENCY; NEGATIVE STOCKHOLDERS' EQUITY; MODIFIED REPORT OF ACCOUNTANTS For
the fiscal years ended June 30, 1998 and 1999, the Company had net losses of
$4,489,000 and $8,395,000 and negative cash flow from operations of $1,156,000
and $2,726,000, respectively. In addition, as of June 30, 1999, the Company had
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a working capital deficiency of $4,990,000 and stockholders' deficit of
$4,281,000. As a result, the Company's independent certified public accountants
have modified their report on the Company's financial statements Fiscal 1999
and have raised substantial doubt as to the Company's ability to continue as a
going concern. Although the Company has completed its reorganization and
believes that it has corrected many of the problems that caused these recent
losses, there can be no assurance that the Company will be able ever operate
profitably in the future. Furthermore, if the Company is unable to solve its
current financial difficulties, the Company may have to cease operations or
otherwise be liquidated.
THE COMPANY MAY BE UNABLE TO REPAY ITS INDEBTEDNESS The Company has
obtained a line of credit that is secured by all of the Company's assets. As of
June 30, 1999, the outstanding balance of the credit facility was $2,469,000.
The lender under the credit facility can accelerate the payment date of the
credit facility if the Company is in violation of any of its loan covenants,
including the requirement that the Company maintain a minimum stockholders
equity of $3,000,000 and repayment of its debt to iNTELEFILM. The Company
currently is in default of these covenants. Although the lender under the credit
facility has waived these covenants default as of June 30, 1999, the lender may
not waive any future defaults. The Company does not currently expect that it
will be able to meet the $3,000,000 stockholders equity requirement in the near
future and has made subsequent repayment to iNTELEFILM. Should the lender not
waive any defaults in the future, the lender could declare the loan immediately
due and payable and commence foreclosure proceedings against the Company's
assets if the Company is unable to repay the entire amount of the loan. In
addition to the foregoing secured loan, as of August 31, 1999 the Company had
borrowed $2,280,000 from iNTELEFILM. The iNTELEFILM bears interest at a rate of
14% per annum and is due and payable on demand. No assurance can be given that
the Company will be able to repay the iNTELEFILM loan when such loan is declared
to be due and payable.
NEED FOR ADDITIONAL FUNDS AND NO ASSURANCE OF AVAILABLE FINANCING.
During the past two fiscal years, the Company has not generated positive cash
flow from operations. The Company's capital needs have recently been met by
loans it has obtained under its credit facility and from loans made to it by
iNTELEFILM, the Company's majority stockholder. The Company may need to raise
additional debt or equity funds to repay its currently outstanding loans and to
fund its future operations. There can be no assurance that iNTELEFILM will make
any additional loans to the Company or that additional debt or equity financing
will be available from third party sources on terms favorable to the Company, or
at all. If adequate funds are not available or not available on acceptable
terms, the Company may not be able to fund its business plan, repay its current
loans or further develop its business. Any such inability would have a material
adverse effect on the Company's business, results of operations and financial
condition.
VOLATILITY OF STOCK PRICE. The Company's Common Stock has experienced
significant price volatility and such volatility may continue to occur in the
future. Factors that could affect the trading price of the Common Stock include
variations in quarterly results of operations, announcements of new projects by
the Company or its competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, overall market conditions
and other factors. In addition, the stock market historically has experienced
extreme price and volume fluctuations, which at times have been unrelated or
disproportionate to the operating performance of certain companies. These market
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fluctuations may adversely affect the market price of the Common Stock.
THE COMPANY'S COMMON STOCK IS THINLY TRADED, CREATING POSSIBLE
LIQUIDITY PROBLEMS FOR SHAREHOLDERS WHO SEEK TO SELL. In February 1999, the
Company's common stock was removed from listing on the Nasdaq SmallCap Market
and currently trades on the OTC Bulletin Board. The trading volume of stock on
the OTC Bulletin Board tends to be less regular than on other markets, which
irregular trading can create a difficulty for shareholders seeking to sell their
shares. Accordingly, no assurance can be given that the common stock will ever
be actively traded on the OTC Bulletin Board market or that, if active trading
does develop, it will be sustained.
TELEVISION COMMERCIAL DIRECTORS AND OTHER KEY PERSONNEL COULD LEAVE THE
COMPANY, IMPAIRING ITS DEVELOPMENT AND PROFITABILITY. The Company believes that
its development and ability to operate profitably in the television commercial
production industry depend on the hiring and continued engagement or employment
of television commercial directors and other key personnel. While the Company
has entered into various agreements with such persons, there can be no assurance
that the Company will be able to retain such talent or that such talent will
fulfill their obligations to the Company. Such persons could leave the Company
and compete against the Company in the industry.
COMPETITION; CHANGING TECHNOLOGIES AND TRENDS. Although the Company
believes that it is a major competitor in a highly fragmented industry, the
Company faces stiff competition from many qualified commercial production
companies and directors. The Company does not have any long-term contracts and
must continually bid on new projects to generate revenues and support its
overhead expenses. As a result, the Company must continually compete with its
competitors for additional revenues. In addition, the demand for directors with
certain talents in the commercial industry continually change reflecting changes
in marketing styles, and technological changes, such as computer enhancements
and other technical advances, also change the type of commercial directors that
are in demand for producing television commercials. Unless the Company is able
to continuously hire directors with the talents that are demanded by its
advertisers, the Company's business and operations will be adversely affected.
No assurance can be given that the Company will have the talent that is required
to be able to successfully bid on the number of television commercials that are
required for the Company to continue its operations.
EFFECT OF ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's
Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws")and
certain provisions of Delaware law could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that investors might be willing to pay in the future for the Company's
Common Stock. These provisions require super-majority approval to amend certain
provisions in the Charter and Bylaws, require that all stock holder actions be
taken at a duly called annual or special meetings and not by written consent,
and impose various procedural and other requirements that could make it more
difficult for stock holders to effect certain corporate action. Further, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging in a
"business combination" with an "interested stockholder," unless the business
combination is approved in a prescribed manner. The application of Section 203
could also have the effect of
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delaying or preventing a change of control of the Company.
YEAR 2000 COMPLIANCE NON-COMPLIANCE MAY NEGATIVELY AFFECT THE COMPANY.
The term "Year 2000" is used to describe general problems that may result from
improper processing of dates and date-sensitive calculations by computers or
other machinery as the Year 2000 is approached and reached. This problem stems
from the fact that many of the world's computer hardware and software
applications have historically used only the last two digits to refer to a year.
As a result, many of these computer programs do not or will not properly
recognize a year that ends with "00." If not corrected, this could result in a
system failure or miscalculations which may cause disruptions in operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar business activities.
To operate the Company's business, the Company relies on certain
information technology ("IT") and non-technology systems, including production,
payroll, accounts payable, banking and general ledger systems. The Company does
not maintain any propriety IT systems and has not made any modifications to any
of the other IT systems provided to the Company by outside vendors. We have
hired an outside IT consultant to access the readiness of our hardware and
software. This assessment has been completed and it is anticipated that
remediation needed to bring any of the Company's systems into compliance will be
completed by October 31, 1999.
The Company also relies upon certain suppliers and service providers,
over which the Company can assert little control. The Company has contacted
critical suppliers and service providers to access the readiness of such parties
and to determine the extent to which the Company may be vulnerable to such
parties' failure to resolve their own Year 2000 issues. To date, ongoing
communications with these parties have not brought to the Company's attention
any material noncompliance issues.
The Company believes that based upon the results of its assessment, any
future expenses that may be incurred will not have a material adverse effect on
the Company's business, operating results or financial conditions.
The Company recognizes that Year 2000 issues constitute a material
known uncertainty. The Company also recognizes the importance of ensuring that
Year 2000 issues will not adversely affect its operations. The Company believes
that the processes described above will be effective to manage the risks
associated with the problem. However, we cannot assure you that the processes
can be completed on the timetable described above or that remediation will be
fully effective. The failure to identify and remediate Year 2000 issues, or the
failure of key suppliers and service providers or other critical third parties
who do business with the Company to timely remediate their Year 2000 issues
could cause an interruption in the Company's business operations. At this time,
however, we do not possess information necessary to estimate the overall
potential financial impact of Year 2000 compliance issues.
Specific risks the Company may face with regard to Year 2000 issues
include the inability of its suppliers and service providers to achieve Year
2000 readiness which could result in delayed production schedules and may
materially adversely affect the Company's business, operating results and
financial condition. The most likely worst case scenario is that the Company
would be
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unable to produce television commercials due to disruptions in the functioning
of its production equipment. The Company's failure to produce television
commercials would result in reduced revenues and cash flows during the period of
disruption and could materially adversely affect its business, operating results
and financial condition.
The Company recognizes the need for Year 2000 contingency plans in the
event that remediation is not fully successful or that the remediation efforts
of the Company's vendors, suppliers and service providers are not timely
completed. The Company is currently finalizing its Year 2000 contingency plans.
SPECIAL NOTE REGARDING THE COMPANY'S FORWARD LOOKING STATEMENTS. Some
of the information in this document may contain forward-looking statements. You
can identify such statements by noting the use of forward-looking terms such as
"believes," "expects," "plans," estimates," and other similar words. Risks,
uncertainties or assumptions that are difficult to predict may affect such
statements. The risk factors presented above and other cautionary statements
could cause our actual operating results to differ materially from those
expressed in any forward-looking statement. The Company cautions readers of this
document to keep in mind these risk factors and other cautionary statements and
to refrain from placing undue reliance on any forward-looking statements, which
speak only as of the date of this document.
ITEM 2. PROPERTY
PROPERTIES AND FACILITIES
The Company's executive offices are located at 5501 Excelsior
Boulevard, Minneapolis, Minnesota. The facility is shared with iNTELEFILM and
Media Management, L.L.C., ("MMLLC"), a management company owned by Messrs. Dahl
and Perkins, each of whom is a director of the Company. The Company pays MMLLC a
monthly fixed amount for providing administrative, legal, financial and
accounting services to the Company. The fixed amount includes the rent for the
executive offices of the Company. See "Item 13. Certain Relationships and
Related Transactions"
As of September 1, 1999, the Company currently leases office facilities
at the following locations, for the purposes of conducting its television
commercial and music video production business:
The End, Inc.'s California facility is located at 433 South Beverly
Hills Drive in Beverly Hills, California. The lease is for ten years
ending in October 2008 at a monthly rate of $21,909. The End, Inc.'s
current New York facility is located at 75 Varick Street, New York, New
York and is shared with Populuxe Pictures, Inc., a subsidiary of
iNTELEFILM. The lease is for ten years ending in August 2009 at a
monthly rate of $9,282 of which Populuxe Pictures, Inc. pays $3,094.
The Company leases office space located at 420 South Beverly Hills
Drive in Beverly Hills, California on a month to month basis at a
monthly rate of $1,950.
The Company also leases storage facilities in New York, New York and
Los Angeles, California.
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The various leases listed above range in size from approximately 2,000
square feet to approximately 20,000 square feet. There can be no assurance that
the current facilities will be adequate to meet the Company's future capacity
needs.
ITEM 3. LEGAL PROCEEDINGS
On June 30, 1998, a complaint was filed by Rick Bieber against Harmony
Holdings, Inc. and Harmony Pictures, Inc. in the Superior Court of the State of
California, County of Los Angeles. Mr. Bieber was the president of Harmony
Pictures, Inc. until his employment was terminated by Harmony Pictures, Inc.
effective April 23, 1998. Harmony Pictures, Inc. terminated Mr. Bieber's
employment for breaching his written employment agreement with Harmony Pictures,
Inc. and his fiduciary obligations to the company. The termination date of the
employment agreement was December 31, 2000. However, the employment agreement
provided that it could be terminated before the termination date by Harmony
Pictures, Inc. (i) for cause or (ii) if Harmony Pictures, Inc. was not
profitable by the quarter ended June 30, 1998. Harmony Pictures, Inc. incurred
losses of $253,000 and $1,997,000 for the quarter (unaudited) and year ending
June 30, 1998, respectively.
Mr. Bieber alleges that the defendants, by terminating his employment
agreement before December 31, 2000, breached his agreement. Mr. Bieber also
alleged that defendants slandered and libeled him with reference to the
circumstances relating to his termination. The court has dismissed the slander
and libel claims and has dismissed all claims against Harmony Holdings, Inc. On
his remaining breach of contract claim and labor code claims, Mr. Bieber seeks
damages in excess of $680,000, the reinstatement of his 250,000 stock options at
the exercise price specified in the employment agreement, an unspecified amount
of contingent compensation and attorneys' fees and costs of suit. The Company
has filed an answer denying any liability and has filed a cross-complaint
against Mr. Bieber for breach of contract and breach of fiduciary duty. The
Company intends to vigorously defend the lawsuit. The Company does not believe
this matter to be material.
Except as described above, the Company is not a party to any other
material legal proceedings. From time to time the Company is a party to
litigation which is incidental to its business, including administrative
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Following the completion of the Company's initial public offering in
November 1991, its Common Stock began trading on the Nasdaq Small Cap Market
under the symbol "HAHO." In February 1999, the Company's common stock was
removed from the Nasdaq SmallCap Market and currently trades on the OTC Bulletin
Board under the same trading symbol. The following table sets forth the high and
low closing (or trade) price per share of the Common Stock for the fiscal
periods
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indicated, as provided to the Company The Nasdaq Stock Market and the OTC
Bulletin Board.
Fiscal Year - 1998 High Low
Quarter Ended Trade Trade
- ------------- ----- -----
September 30, 1997 $2.31 $2.19
December 31, 1997 2.00 2.00
March 31, 1998 1.50 1.25
June 30, 1998 1.63 1.63
Fiscal Year - 1999 High Low
Quarter Ended Trade Trade
- ------------- ----- -----
September 30, 1998 1.66 1.00
December 31, 1998 1.44 1.16
March 31, 1999 1.50 1.00
June 30, 1999 1.06 .88
The quotations may include inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
On September 21, 1999, the closing price was $.47. As of such date, the
Company estimates there were approximately 46 registered holders of record of
the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock during any period for which financial information is provided in this
Annual Report on Form 10-K. Under the terms of the Company's revolving line of
credit, the Company currently is prohibited from paying dividends on its Common
Stock. The Company currently intends to retain future earnings, if any, to fund
the development and growth of its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future even if such
payment were permitted under the revolving line of credit or if such restriction
is otherwise no longer effective.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company is set forth below (000's
omitted except for per share data). This selected financial data should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
6/30/99 6/30/98 6/30/97 6/30/96 6/30/95
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract revenue $ 66,340 $ 53,355 $ 64,831 $ 60,415 $ 61,227
Cost of production 56,347 43,617 52,174 51,041 50,920
------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Gross profit 9,994 9,738 12,657 9,374 10,307
Selling expenses 3,377 2,729 3,238 3,001 2,808
General & administrative
expenses 6,635 8,032 6,105 5,627 5,992
------------------------------------------------------------------------
Income (loss) from productions (18) (1,022) 3,313 746 1,507
Subsidiary stock option
compensation 2,234 391 75 -- --
Corporate charges 1,457 2,379 1,146 2,050 1,655
Depreciation and
amortization 882 700 620 564 528
Restructuring costs
and impairment of assets 3,357 -- -- -- --
------------------------------------------------------------------------
Income (loss)
from operations (7,949) (4,492) 1,472 (1,868) (676)
Interest income (expense), net (434) 25 40 (243) (9)
------------------------------------------------------------------------
Income (loss) before taxes $ (8,383) $ (4,467) $ 1,511 $ (2,111) $ (685)
Income tax expense 11 22 179 20 --
Net income (loss) (8,395) (4,489) 1,332 (2,131) (685)
------------------------------------------------------------------------
Basic & diluted
net income (loss) per share $ (1.13) $ (0.69) $ 0.20 $ (0.37) $ (0.12)
Weighted average
shares outstanding 7,409 6,515 6,682 5,692 5,567
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
6/30/99 6/30/98 6/30/97 6/30/96 6/30/95
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $ 2,911 $ 3,834 $ 2,355 $ 447 $ 230
Current assets 10,713 12,008 9,505 4,986 7,707
Goodwill, net 169 2,546 2,758 2,969 3,181
Total assets 14,121 16,927 14,505 9,687 12,955
Current liabilities 15,703 12,698 6,748 5,382 6,196
Subordinated notes payable -- -- -- -- 385
Total liabilities 15,703 12,698 6,748 5,382 6,581
Minority interest 2,700 466 75 -- --
Stockholders' equity (deficit) $ (4,281) $ 3,763 $ 7,682 $ 4,304 $ 6,374
</TABLE>
14
<PAGE>
ITEM 7. 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-K and other documents previously filed or hereinafter
filed by the Company from time to time with the SEC.
Overview
During the fiscal year ended June 30, 1999, the Company operated
through four major groups, or divisions. Each division consisted 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 represented the major
operating divisions were The End, The End (London), Curious Pictures, and
Harmony Pictures.
During the second quarter of fiscal year 1999, the Company discontinued
the operations of Harmony Pictures. The three remaining principal subsidiaries
continued to be fully operational throughout the fiscal year.
Results of Operations:
YEAR ENDED JUNE 30, 1999 AS COMPARED WITH YEAR ENDED JUNE 30, 1998
For the year ended June 30, 1999, contract revenues increased by 24% or
$12,985,000 to $66,340,000 from $53,355,000 for the year ended June 30, 1998.
This increase in revenue represents revenue increases of $7.5 million by The End
(London), $4.6 million by Curious Pictures, and $10.1 million by The End. These
increases were due primarily to the improved resources with which the
subsidiaries were able to attract and retain directors. The increase in revenues
at these divisions more than offset the decrease in revenues due to the
discontinuance of Harmony Pictures. Revenue at Harmony Pictures decreased $9.0
million during the year ended June 30, 1999. As mentioned above, the Company
discontinued the operations of Harmony Pictures during the second quarter of
fiscal year 1999.
Cost of production is directly related to revenues and includes all
direct costs incurred in connection with the production of television
commercials and music videos including film, crews, location fees and commercial
directors' fees. Cost of production as a percentage of revenues increased from
approximately 82% to 85% the fiscal year ended June 30, 1999 compared to fiscal
year 1998. As a result of the increase in the cost of production, gross margins
as a percentage of revenues decreased from 18% for the year ended June 30, 1998
to 15% in the year ended June 30, 1999. This decrease in gross margins is due in
part to the higher costs of production at The End(London) and Harmony Pictures,
91% and 88%, respectively. Additionally, the addition of several new directors
throughout the year led to the submission of lower bids by the Company than the
previous year in an attempt to increase operating revenues and to gain work for
newly signed directors. The Company believes the cost of production as a
percentage of revenue will decrease as new directors become more established.
15
<PAGE>
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
production contracts. These expenses increased in conjunction with the increase
in revenues. Selling expenses totaled $3,377,000 in the fiscal year ended June
30, 1999 compared to $2,729,000 in the prior fiscal year, an increase of 24%.
General and administrative expenses consist of overhead costs such as
office rent and expenses, general and administrative payroll, and related items.
General and administrative expenses decreased $1,397,000 in fiscal year 1999 to
$6,635,000 as compared to $8,032,000 for fiscal year 1998. These expenses
decreased 17% due in part to the cessation of operations at Harmony Pictures.
General and administrative expenses at Harmony Pictures decreased $1.5 million
during fiscal year 1999 due to the discontinuation of its operations, while
these expenses increased slightly at the remaining three divisions.
Stock option compensation expense reported during the year ended June
30, 1999 was $2,234,000, an increase of $1,844,000 over the fiscal year ended
June 30, 1998. This expense represents a non-cash charge resulting from certain
managers of Curious Pictures earning stock options of Curious Pictures under a
December 15, 1996 agreement between the Company and the managers. Effective
August 1, 1999, this option agreement was purchased by iNTELEFILM. The
cumulative amount of compensation expense recognized related to this agreement
is $2,700,000 and is reflected as a minority interest in Curious Pictures on the
accompanying balance sheet.
Corporate charges decreased $922,000 or 39% from $2,379,000 in fiscal
year 1998 to $1,457,000 in fiscal year 1999. This decrease is due primarily to
the consolidation of the corporate offices in Minneapolis, which include the
executive, accounting, and legal staff.
Depreciation and amortization expense increased in the fiscal year 1999
by $182,000 or 26% compared to fiscal year 1998. Although there has been an
overall increase of this expense over the year, depreciation and amortization
expense decreased in the last two quarters due to the disposal of depreciable
assets and the impairment of goodwill resulting from the discontinuance of
operations of Harmony Pictures.
Upon reaching the decision to discontinue the Harmony Pictures
division, management determined that the goodwill associated with the division
was fully impaired. Accordingly, an impairment charge of $2,215,000 was
recognized in the second quarter of fiscal 1999. Other restructuring costs of
$1,142,000 were also recognized on the accompanying income statement. The
restructuring costs relate to the incremental costs of discontinuing the
division and include severance payments, contract buyouts, lease obligations,
non-refundable prepayments, and general office shut down logistics.
Interest income decreased $71,000 and interest expense increased
$389,000 during fiscal year 1999 compared to fiscal year 1998, as a result of
increased borrowings by the Company under its credit facility entered into with
Freemont, as well as the interest incurred as a result of borrowings from
iNTELEFILM.
Income tax expense decreased $11,000 from $22,000 in fiscal year 1998
to $11,000 in fiscal year 1999. 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
16
<PAGE>
valuation allowance booked against the deferred tax asset. A valuation allowance
has been established for the full amount of the Company's net deferred tax
asset, 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 year ended June 30, 1999, the Company's effective income
tax rate varied from the statutory federal tax rate as a result of state taxes,
an increase in the valuation allowance booked against the deferred tax asset,
and stock option compensation and goodwill impairment which generated no current
tax benefit.
The Company as a whole incurred net losses of $8,395,000 during the
fiscal year ended June 30, 1999. The losses for the year include the
restructuring and asset impairment costs totaling $3,357,000 related to the
discontinued operations of Harmony Pictures and the non-cash stock option
compensation expense of $2,234,000 related to the Curious Pictures option
agreement.
YEAR ENDED JUNE 30, 1998 AS COMPARED WITH YEAR ENDED JUNE 30, 1997
For the year ended June 30, 1998, contract revenues decreased by 18%
or $11,476,000 to $53,355,000 from $64,831,000 for the year ended June 30, 1997.
Included in revenues for the period ended June 30, 1997 were revenues of
$928,000 from unprofitable operations that have since been terminated.
Accordingly, revenues from comparable operations, excluding those from ceased
operations decreased $10,548,000. The decrease in contract revenues was
primarily attributable to the loss of one director (who left The End on July 1,
1997) who billed in excess of $10,000,000 in contract revenues during his last
year with The End. The End has subsequently replaced this director, but contract
revenues decreased $4,558,000 during the year ended June 30, 1998. Additionally,
Harmony Pictures terminated the services of one internal sales representative in
September 1997 and did not replace him until December 1997. Contract revenues at
Harmony Pictures decreased $9,544,000 during the year ended June 30, 1998
compared to the year ended June 30, 1997. Contract revenues at Curious Pictures
increased $74,000 and contract revenues at the new subsidiary, The End (London),
increased $3,501,000 during the year ended June 30, 1998 compared to the year
ended June 30, 1997.
Cost of production for the year ended June 30, 1998 decreased by 16% or
$8,557,000 to $43,617,000 from $52,174,000 for the year ended June 30, 1997.
Expressed as a percentage of revenues, cost of production was 82% for the year
ended June 30, 1998 compared with 80% for the year ended June 30, 1997 and
resulted in gross profit percentages of 18% and 20% respectively. As part of the
overall plan to increase the revenues at Harmony Pictures, the subsidiary has
prepared bids with lower margins in order to regain business, which has
contributed to the 2% decline in gross profit percentages.
Selling expenses for the year ended June 30, 1998 decreased to $2,729,000 from
$3,238,000 for the year ended June 30, 1997, representing a decrease of $509,000
or 16%. Overall sales expenses decreased due
17
<PAGE>
to a decrease in promotions and director speculation reels. Additionally, sales
expenses at currently inactive operations accounted for $73,000 of the decrease
in selling expense and sales commissions overall decreased $458,000 due to the
reduction in overall contract revenues.
General and administrative expenses for the year ended June 30, 1998 increased
to $8,032,000 from $6,105,000 for the year ended June 30, 1997, representing an
increase of $1,927,000 or 32%. Of the increase in general and administrative
expense, $367,000 was attributable to The End (London), a new subsidiary in
London, England, and $258,000 was due to the opening of a new San Francisco
office for Curious Pictures. As the Company changed its accounting function from
a centralized system to a decentralized system in which each of the Company's
subsidiaries maintains its own account systems and accounting staff, general and
administrative expenses at the divisions increased. Additionally, personnel
changes at The End and Harmony Pictures attributed to this increase.
Stock option compensation expense reported during the year ended June 30, 1998
was $391,000, and increase of $316,000 over the fiscal year ended June 30, 1997.
This expense represents a non-cash charge resulting from Curious Management
earning stock options of Curious Pictures under December 15, 1996 the share
transfer agreement between the Company and Curious Management.
Corporate charges increased $1,233,000 from $1,146,000 for the year ended June
30, 1997 to $2,379,000 for the year ended June 30, 1998. A portion of this
increase was due to the Company's recognition of $550,000 of corporate
reorganization costs during the year ended June 30, 1998. These one-time costs
were incurred in conjunction with a company-wide reorganization in which
substantially all of the Company's executive officers were changed, including
its principal financial and accounting officers. In addition the Company changed
its accounting function from a system in which all financial information was
collected in central location to a decentralized system in which each of the
Company's subsidiaries maintains its own accounting systems and account staff.
During the year ended June 30, 1998, there were, to some extent, duplicate
corporate expenses due to the management functions performed in both Minnesota
and Los Angles. Certain of the Company's new officers and directors operate from
offices in Minnesota. Management sublet the former corporate office in Los
Angeles and eliminated eight corporate staff members.
Depreciation and amortization expenses increased for the year ended June 30,1998
to $700,000 from $620,000 for the year ended June 30, 1997, and increase of
$80,000 or 13%. This change is due to the increase in depreciable assets. The
Company did not recognize any expense relating to abandoned projects, litigation
expense, or severance salaries during the year ended June 30, 1998, thereby
reflecting an aggregate decrease of $1,038,000 compared to the year ended June
30, 1997.
Interest income overall, increased for the year ended June 30, 1998 to $125,000
from $79,000 for the year ended June 30, 1997, representing an increase of
$46,000 or 58%. In January 1998, the Company entered into a $650,000 note
18
<PAGE>
receivable agreement with iNTELEFILM, who owned 44% of the Company's common
stock as of June 30, 1998. Pursuant to the note, the Company remitted $611,000
of proceeds to iNTELEFILM and applied the remaining $39,000 of the note balance
to a loan fee for the note origination. Interest was accrued at 15%. The note
was repaid in full with two installments (May 1998 and June 1998).As of June 30,
1998, the Company had a $235,000 note receivable from a former CEO of the
Company. The note bore interest at a variable rate (10% at June 30,1998) and was
subsequently repaid in full in September 1998. Because of these two notes,
interest income increased $79,000 while other interest income decreased $33,000
due to less cash held in short term investments compared to the prior year.
Interest expense increased for the year ended June 30, 1998 to $99,000 from
$39,000 for the year ended June 30, 1997, representing an increase of $60,000
due to increased borrowings under the line of credit.
Income tax expense for the year ended June 30, 1998 decreased to $22,000 from
$179,000 for the year ended June 30, 1997, representing a decrease of $157,000
or 88%. 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 year ended June 30, 1998, the Company's effective income
tax rate varied from the statutory federal tax rate as a result of state taxes
of $22,000 and an increase in the valuation allowance booked against the
deferred tax asset. Income tax expense during the year ended June 30, 1997
included $39,000 of federal alternative minimum tax and $140,000 of state taxes.
The Company recognized a net loss of $4,489,000 for the year ended June 30, 1998
compared to net income of $1,332,000 for the year ended June 30,
1997,representing a decrease in net income of $5,821,000.
New Accounting Pronouncements:
Statement of Financial standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is
effective for financial statements with fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the balance sheet and
to measure them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (I) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income for the period of
change.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to affect its financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its working capital, was a
deficit of $4,990,000 at June 30, 1999 compared to a deficit of
$689,000 at June 30, 1998.
19
<PAGE>
Consolidated cash was $2,911,000 at June 30, 1999 and $3,834,000 at
June 30, 1998, a decrease of $923,000.
Cash used in operating activities for the year ended June 30, 1999 was
$2,726,000. Accounts receivable at June 30, 1999 decreased $566,000
from June 30, 1998, and other assets at June 30, 1999 increased
$996,000 from June 30, 1998. Accounts payable at June 30, 1999
increased $32,000 from June 30, 1998, accrued expenses decreased
$563,000 from June 30, 1998 to June 30, 1999, and deferred income
increased $1,088,000 during that same period.
During the year ended June 30, 1999, cash used in investing activities
was $995,000. This represents cash used for capital expenditures
incurred in the normal course of operations, less the payment of the
note receivable received by the Company from a former officer.
Cash provided by financing activities during the year ended June 30,
1999 was $2,798,000 which was provided through the cash borrowings from
iNTELEFILM and the proceeds from the issuance of common stock to
iNTELEFILM, net of the repayment of borrowings from iNTELEFILM.
In July 1998, the Company replaced its then existing bank line of
credit with an asset-based loan and security agreement with Heller
Financial Services which was assigned to Freemont. This loan and
security agreement provides for borrowings under 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 (9.25% at June 30, 1999). The loan and security agreement requires
the Company to comply with certain restrictive covenants, one of which
is that the Company maintain a minimum shareholders' equity of
$3,000,000. The Company has received a waiver of that covenant through
June 30, 1999. This loan and security agreement is guaranteed by
iNTELEFILM.
As the Company's operations have not been able to support its working
capital needs, iNTELEFILM, the Company's principal stockholder, has
extended its undertaking to provide the Company with such funds as
necessary to meet its working capital requirements through December 31,
1999. Such additional funds may be in the form of loans or the purchase
of securities. In November 1998, iNTELEFILM 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. INTELEFILM's
ownership in the Company is now approximately 55.2%. Throughout
November and December 1998, iNTELEFILM advanced the Company an
aggregate of $875,000 as evidenced by four promissory notes, each due
within 30 days of demand and each bearing interest at a rate of 14% per
annum. Additionally, in January and February iNTELEFILM advanced the
Company an aggregate of $2,375,000 as evidenced by 30-day demand
promissory notes bearing the same terms described above. At June 30,
1999, advances totaling $2,729,000 remained outstanding. Subsequently,
in August 1999, the Company repaid $500,000 of the iNTELEFILM loans,
representing $451,000 of principal and $49,000 of related interest.
In November 1998, management of the Company announced it had
20
<PAGE>
determined that it was 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, those entities recorded revenues of $10,867,000 and an operating
loss of $1,625,000. For the six months ended December 31, 1998, those
entities recorded revenues of $1,855,000 and an operating loss of
$812,000. An additional one-time restructuring expense of approximately
$1,142,000 related to the discontinued operations of the division was
recorded. Additionally, management determined that the goodwill
associated with the division was fully impaired. Accordingly, an
impairment charge equaling the net book value of the goodwill,
$2,215,000 was recognized. It is management's belief that the
discontinuance of operations at the Harmony Pictures division will aid
the Company in meeting its working capital requirements in the future.
For nominal consideration, effective July 1, 1999, the Company sold 90%
of the issued and outstanding shares of capital stock of The End
(London) to Julia Reed, the executive producer of The End (London).
Prior to this sale, The End (London), was a wholly-owned subsidiary of
the Company. For the fiscal year ended June 30, 1998 and 1999, The End
(London) had gross revenues of $3,747,000 and $11,243,000, and net
losses of $591,000 and $862,000, respectively. In connection with the
sale of the stock, the Company and Julia Reed entered into an agreement
granting Ms. Reed the right, under certain circumstances, to purchase
the remaining 10% equity interest in The End (London) from the Company
for approximately $803,000. The disposition of this subsidiary will
relieve the Company of having to financially support this subsidiary.
Effective as of August 1, 1999, iNTELEFILM purchased the
Option Agreement entered into by the Company and Curious Management
dated December 15, 1996. Immediately following the purchase of the
Option Agreement, iNTELEFILM exercised these options. iNTELEFILM also
acquired a 1% equity interest owned by Curious Management that was
conveyed to Curious Management upon signing the Option agreement. As a
result of this transaction the Company currently owns 49% of the
outstanding stock of Curious Pictures and iNTELEFILM owns 51% of the
stock. Prior to the acquisition, the Company owned 99% of the
outstanding shares of Curious Pictures, and Curious Management owned
1%. By having its interest in Curious Pictures reduced to below 50%,
the Company will no longer recognize the revenues and expense of this
subsidiary.
21
<PAGE>
During the year ended June 30, 1999, the Company incurred a
net loss of $8,395,000 and a cash flow from operations deficit of
$2,726,000, resulting in a working capital deficit of $4,990,000 and an
accumulated deficit totaling $20,038,000 at June 30, 1999. At this time
the Company's only firm external financing resources are its existing
asset based loan and security agreement with Freemont, its notes
payable with iNTELEFILM which are due on demand, and iNTELEFILM's
expressed intention to fund the Company's working capital needs through
December 31, 1999. The asset based loan and security agreement requires
that the Company maintain minimum stockholders' equity of $3 million
which was not met by the Company for the majority of 1999. Freemont has
waived this covenant up to June 30, 1999, however, no assurance can be
given that the Company will meet this requirement in the future, that
Freemont will grant future waivers, or that iNTELEFILM will not call
its demand notes payable. Given these circumstances, and the
possibility of future operating losses, the Company is at risk of
losing its line of credit and may need to rely solely on iNTELEFILM
until other financing options become available. Further, as no legally
binding commitment for financing exists between the Company and
iNTELEFILM, no assurance can be given that financing will be offered by
iNTELEFILM or that said financing, if offered, will be in a form
acceptable to the Company. Primarily as a result of these items, the
Company's independent certified public accountants modified their
opinion on the Company's 1999 Consolidated Financial Statements to
contain a paragraph wherein they expressed substantial doubt about the
Company's ability to continue as a going concern. Management expects
that the amount of cash required by operations will be substantially
diminished as a result of the benefits derived from the discontinuation
of Harmony Pictures and the sale of 90% of The End (London). Harmony
Pictures and The End (London) incurred losses of $4,444,000 and
$862,000 for the year ended June 30, 1999, respectively. This
$4,444,000 loss of Harmony Pictures includes $3,357,000 of
restructuring and impairment of asset charges recognized in connection
with the closing of Harmony Pictures. Additionally, The End recorded
revenues of $35,050,000 and income from production of $605,000 for the
year ended June 30, 1999. Management will continue to seek waivers from
Freemont. If waivers are granted and iNTELEFILM does not call its notes
payable, management believes sufficient funds will be available to
sustain operations. In the event that the Company is unable to maintain
its current financing, the Company will need to obtain alternate
financing. However, no assurance can be given that the Company will, in
fact, be able to obtain alternate financing or that the terms of such
financing will be favorable to the Company. In the event that the
Company is unable to maintain its current financing or obtain
alternative financing, the Company may have to take steps to further
reduce its operating expenses, which may negatively impact the
Company's operations.
22
<PAGE>
SEASONALITY AND INFLATION
The Company does not believe inflation nor seasonality has affected the
results of its operations and does not anticipate that inflation nor seasonality
will have an impact on its future operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable
Interest Rate Risk
The Company's interest rate risk results from short-term debt at fixed
and variable rates, primarily fixed interest rate debt which is due on demand to
a related party and a variable interest rate demand line of credit due to a
finance company. As the Company's debt portfolio is short-term in nature,
management's primary method to mitigate the impact of fluctuations in interest
rates is to monitor credit availability and the Company's credit worthiness in
an effort to ensure that the debt portfolio is competitively priced. The
following table provides information about the Company's notes payable and line
of credit and presents principal cash flows and current interest rates by
expected maturity date.
Fair Value at
Due on Demand June 30, 1999
------------- -------------
Note payable to related party $2,729,342 $2,729,342
Fixed interest rate 14.0%
Line of Credit $2,468,527 $2,468,527
Variable interest rate 9.25%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HARMONY HOLDINGS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1999 AND 1998
23
<PAGE>
HARMONY HOLDINGS, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants............................25
Consolidated Balance Sheets...................................................26
Consolidated Statements of Operations.........................................27
Consolidated Statement of Stockholders' Equity (Deficit)......................28
Consolidated Statements of Cash Flows.........................................29
Notes to Consolidated Financial Statements.................................30-44
Schedule II - Valuation and Qualifying Accounts...............................45
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Harmony Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Harmony
Holdings, Inc. as of June 30, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended June 30, 1999. We have also audited the
schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and schedule. We
believe that our audits provide a reasonable basis for our opinion.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harmony Holdings,
Inc. as of June 30, 1999 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered from recurring
losses, negative working capital and negative cash flow from operations that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO SEIDMAN, LLP
/s/BDO SEIDMAN, LLP
Milwaukee, Wisconsin
August 20, 1999, except for
Note 7 which is dated
September 27, 1999
25
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 7)
Current Assets:
Cash and cash equivalents $ 2,910,618 $ 3,834,023
Accounts receivable - net of allowance for doubtful accounts
of $253,381 and $43,717, respectively 6,111,922 6,560,469
Unbilled accounts receivable -- 327,475
Other current assets (Note 4) 1,690,413 1,286,451
--------------------------------
Total current assets 10,712,953 12,008,418
Property and equipment, at cost, net of accumulated
depreciation and amortization (Note 3) 2,629,521 2,123,412
Goodwill, net of accumulated amortization of $81,250
and $1,666,423 168,750 2,545,885
Other assets 610,231 249,400
--------------------------------
Total assets $ 14,121,455 $ 16,927,115
================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 3,232,125 $ 3,199,760
Accrued liabilities (Note 6) 3,842,807 4,406,014
Line of credit (Note 7) 2,468,527 2,750,000
Notes payable to related party (Note 11) 2,729,342 --
Deferred income 3,429,794 2,342,133
--------------------------------
Total current liabilities 15,702,595 12,697,907
Minority interest (Note 8) 2,700,000 465,750
Commitments and Contingencies (Note 8) -- --
Stockholders' Equity (Deficit): (Note 9)
Preferred Stock, $.01 par value, authorized 10,000,000 shares;
none issued -- --
Common Stock, $.01 par value, authorized 20,000,000 shares,
issued and outstanding 7,506,660 and 7,237,429,
respectively 75,067 72,375
Additional paid-in capital 15,682,245 15,334,937
Accumulated deficit (20,038,452) (11,643,854)
--------------------------------
Stockholders' equity (Deficit) (4,281,140) 3,763,458
--------------------------------
Total Liabilities and Stockholders' (Deficit) Equity $ 14,121,455 $ 16,927,115
================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Contract revenues $ 66,340,255 $ 53,355,100 $ 64,830,918
Cost of production 56,346,654 43,616,737 52,174,372
------------------------------------------------
Gross profit 9,993,601 9,738,363 12,656,546
Selling expenses 3,376,716 2,728,734 3,237,854
General and administrative expenses 6,635,199 8,031,894 6,105,305
------------------------------------------------
Income (loss) from productions (18,314) (1,022,265) 3,313,387
Subsidiary stock option compensation (Note 8) 2,234,250 390,750 75,000
Corporate 993,656 2,204,724 1,146,452
Corporate expenses paid to affiliated
management company (Note 11) 463,720 174,348 --
Depreciation and amortization 881,790 700,145 620,400
Restructuring costs and impairment of assets
(Note 12) 3,357,495 -- --
------------------------------------------------
Income (loss) from operations (7,949,225) (4,492,232) 1,471,535
Interest income 53,770 44,154 58,775
Interest income - related parties (Note 11) -- 80,305 19,933
Interest expense (303,073) (99,144) (39,053)
Interest expense - related parties (Note 11) (184,577) -- --
------------------------------------------------
Income (loss) before income taxes (8,383,105) (4,466,917) 1,511,190
Income tax expense (Note 5) 11,493 21,663 178,763
------------------------------------------------
Net income (loss) $ (8,394,598) $ (4,488,580) $ 1,332,427
================================================
Basic and diluted net income (loss) per share $ (1.13) $ (0.69) $ 0.20
================================================
Weighted average shares outstanding 7,409,000 6,515,000 6,682,000
================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID IN CAPITAL DEFICIT EQUITY (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996 5,693,198 $ 56,933 $ 12,735,136 $ (8,487,701) $ 4,304,368
Sale of common stock 1,000,000 10,000 1,990,000 -- 2,000,000
Issuance of stock options
(Note 9) -- -- 44,993 -- 44,993
Net income -- -- -- 1,332,427 1,332,427
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 6,693,198 66,933 14,770,129 (7,155,274) 7,681,788
Exercise of stock options
(Note 9) 775,000 7,750 1,162,500 -- 1,170,250
Repurchase of common
stock (Note 9) (230,769) (2,308) (597,692) -- (600,000)
Net Loss -- -- -- (4,488,580) (4,488,580)
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 7,237,429 72,375 15,334,937 (11,643,854) 3,763,458
Issuance of common stock
(Note 1) 269,231 2,692 347,308 -- 350,000
Net loss -- -- -- (8,394,598) (8,394,598)
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 7,506,660 $ 75,067 $ 15,682,245 $(20,038,452) $ (4,281,140)
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) $ (8,394,598) $ (4,488,580) $ 1,332,427
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 881,790 700,145 620,400
Impairment of assets 2,215,175 -- --
Provision for doubtful accounts 209,664 (53,929) 22,017
Issuance of non-cash compensation expense 2,234,250 390,750 119,993
Changes in operating assets and liabilities:
Accounts receivable 238,883 (1,225,875) (1,577,278)
Unbilled accounts receivable 327,475 538,085 (488,749)
Other current assets (634,717) (256,413) (357,730)
Other assets (360,831) 40,295 (126,869)
Accounts payable 32,365 1,505,541 451,702
Accrued liabilities (563,207) 175,346 2,142,881
Deferred income 1,087,661 1,518,762 (543,729)
-------------------------------------------------
Net cash provided by (used in) operating
activities (2,726,090) (1,155,873) 1,595,065
-------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (1,225,939) (658,713) (793,291)
Other current assets 230,755 (26,266) (208,889)
-------------------------------------------------
Net cash used in investing activities (995,184) (684,979) (1,002,180)
-------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of stock 350,000 1,170,250 2,000,000
Repurchase of common stock -- (600,000) --
Issuance of subordinated notes payable -- -- (385,000)
Net borrowings under bank line of credit (281,473) 2,750,000 (300,000)
Net borrowings from related party 2,729,342 -- --
-------------------------------------------------
Net cash provided by financing activities 2,797,869 3,320,250 1,315,000
-------------------------------------------------
Increase in cash and cash equivalents (923,405) 1,479,398 1,907,885
Cash and cash equivalents, beginning of year 3,834,023 2,354,625 446,740
-------------------------------------------------
Cash and cash equivalents, end of year $ 2,910,618 $ 3,834,023 $ 2,354,625
=================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 487,650 $ 99,144 $ 62,905
=================================================
Income taxes $ -- $ 57,900 $ 57,289
=================================================
Non-cash compensation expense $ 2,234,750 $ 390,750 $ 119,993
=================================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. The Company
conducts its operations through its wholly owned subsidiaries,
Harmony Pictures, Inc. (fka Chemistry Pictures, Inc.), Melody Films,
Inc., Lexington Films, Inc., The End Inc., The Beginning
Entertainment, Inc., The Moment Films, Inc., Harry Nash Film
Production, Ltd. (fka The End (London) Ltd.), Curious Pictures
Corporation, Hollywood Business Solutions, Inc., Pure Film, Inc.,
Serial Dreamer Films, Inc., Furious Pictures Corporation, Delirious
Pictures Corporation, Gigantic Entertainment, Inc., and Unscented,
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.
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,
Minneapolis, San Francisco and in regional markets.
In April 1999, Children's Broadcasting Corporation, d.b.a.
iNTELEFILM ("iNTELEFILM"), a publicly traded corporation, increased
its ownership position of the Company to 52.1% of the Company's
outstanding common stock. The Company is accordingly accounted for
by iNTELEFILM as a consolidated subsidiary as of April 1, 1999. The
Company has properly not employed the provisions of push-down
accounting. Accordingly, the Company's assets and liabilities have
not been recast to reflect the excess of iNTELEFILM's purchase price
over the proportionate net book value acquired. At June 30, 1999,
iNTELEFILM owned 55.2% of the Company's outstanding common stock.
In November 1998, the Company announced and 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 Pure Films, Inc. As of June 30, 1999,
operations have substantially ceased for these subsidiaries (Note
12). In connection with this discontinuation, Chemistry Pictures,
Inc. was renamed to its former name of Harmony Pictures, Inc.
In July 1999, iNTELEFILM purchased the Option and Share Transfer
Agreement entered into by the Company and the four principal
executives of Curious Pictures Corporation (Note 8 and 13). As a
result of this purchase and iNTELEFILM's exercise of the stock
options granted Curious management under the agreement, the Company
currently owns only 49% of Curious Pictures common stock.
Accordingly, the Company will begin to account for Curious Pictures
as an equity basis investment rather than as a consolidated
subsidiary as of July 1, 1999.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
30
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contract Revenues:
The Company produces television commercials and music videos under
firm bid, cost plus or cost plus fixed fee contracts, which are
typically less than one month in duration. At June 30, 1999 and
1998, the Company had no long-term contracts. Contract revenues are
recognized using the percentage of completion method. The percentage
of contract revenues recognized is computed at that percentage of
estimated total revenues that incurred costs to date bears to total
estimated costs, after giving effect to the most recent estimate of
costs to complete. Revisions in costs and revenue estimates are
reflected in the period in which the facts which require the
revision become known. Deferred income represents amounts billed in
excess of revenues earned.
Property and Equipment:
Property and equipment are stated at cost. Major improvements and
replacements of property and equipment are capitalized. Maintenance
and repairs are expensed. Upon retirement or other disposition of
property, applicable cost and accumulated depreciation and
amortization are removed from the accounts and any gains or losses
are included in operations.
Depreciation of property and equipment is computed using the
straight-line method based on estimated useful lives ranging from
three to seven years. Leasehold improvements are amortized using the
straight-line method over the term of the lease or the life of the
related improvements, whichever is shorter.
Goodwill:
Goodwill primarily represents the excess of the Company's purchase
price, including additional payments over the fair market value of
Harmony Pictures, The End and Melody net assets at the date of
acquisition. Goodwill has been amortized on a straight-line basis
over 20 years for all periods. The Company continually evaluates the
existence of goodwill impairment on the basis of whether the
goodwill is fully recoverable from projected, undiscounted net cash
flows of the related business unit. Amortization expense for the
years ended June 30, 1999, 1998 and 1997 was $161,960, $211,780 and
$211,780, respectively.
In connection with the closing of the Harmony Pictures Division
(Note 12), Goodwill with a net book value of $2,215,175 was
determined by management to be fully impaired and was accordingly
written-off.
Income Taxes:
The Company applies SFAS No. 109, " Accounting for Income Taxes."
SFAS No. 109 prescribes the use of the liability method to compute
the differences between the tax bases of assets and liabilities and
the related financial reporting amounts using currently enacted tax
laws and rates.
31
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share ("EPS"). SFAS No. 128
requires dual presentation of basic EPS and diluted EPS on the face
of all income statements issued after December 15, 1997, for all
entities with complex capital structures. The adoption of SFAS No.
128 had no effect on the Company's financial statements. Basic EPS
is computed as net income available to common shareholders divided
by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock options and warrants. As
the Company's stock options and warrants are antidilutive for all
periods presented, basic and diluted EPS are the same.
Stock Based Compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), establishes a fair value
method of accounting for stock-based compensation plans and for
transactions in which a company acquires goods or services from
non-employees in exchange for equity instruments. The Company
adopted this accounting standard on July 1, 1996. SFAS 123 also
gives the option to account for stock-based employee compensation in
accordance with Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock issued to Employees," or SFAS 123. The Company
has chosen to account for stock-based compensation utilizing the
intrinsic value method prescribed in APB 25. Accordingly,
compensation cost for stock options is measured as the excess, if
any, of the fair market price of the Company's stock at the
measurement date over the amount an employee must pay to acquire
stock.
If SFAS 123 is not adopted related to stock-based employee
compensation, SFAS 123 for footnote purposes requires that companies
measure the cost of stock-based employee compensation at the grant
date based on the value of the award and recognize this cost over
the service period. The value of the stock-based award is determined
using a pricing model whereby compensation cost is the excess of the
fair value of the stock as determined by the model at grant date or
other measurement date over the amount an employee must pay to
acquire the stock.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the year. Actual results could differ
from those estimates.
32
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements:
Statement of Financial standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) issued by the
FASB is effective for financial statements with fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS 133 requires
companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing
of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset
or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new
standard to affect its financial statements.
Reclassifications:
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform with the 1999 presentation. These
reclassifications have no effect on the accumulated deficit or the
net income (loss) previously reported.
NOTE 2 CONTINUED EXISTENCE AND MANAGEMENT PLAN
The Company's consolidated financial statements are presented on the
going concern basis which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business.
However, during 1999, the Company incurred a net loss of $8,394,598
and a negative cash flow from operations of $2,726,090, resulting in a
working capital position of negative $4,989,642 and an accumulated
deficit totaling $20,038,452 at June 30, 1999. Additionally, the
Company has no firm external financing resources other than its notes
payable with iNTELEFILM (Note 11) which are due on demand and an
existing asset based loan and security agreement (Note 7). These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. The asset based loan and security
agreement requires that the Company maintain minimum stockholders
equity of $3,000,000 which was not met by the Company for the majority
of 1999. The lender has waived this covenant up to June 30, 1999;
however, no assurance can be given that the Company will meet this
requirement in the future, that the lender will grant future waivers,
or that iNTELEFILM will not call its demand notes payable.
Accordingly, it is foreseeable that these credit facilities may become
unavailable to the Company. Additionally, the commercial production
industry revenues are often variable and unpredictable on a month by
month basis. Given these circumstances and that the Company has
historically used cash in its operations, additional capital may be
necessary to sustain the Company's operations. Management expects that
the amount of cash required by operations will be substantially
diminished as a result of the benefits derived from the
discontinuation of the Harmony Pictures division (Note 12) and the
sale of 90% of the subsidiary common stock of The End (London) (Note
13). Further, Management will continue to seek compliance waivers and
debt continuances from its lenders. If such waivers are granted,
iNTELEFILM does not call its notes payable and the facilities remain
fully utilizable by the Company, management believes that no other
financing
33
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 CONTINUED EXISTENCE AND MANAGEMENT PLAN (CONTINUED)
will be necessary. In the event that the Company is unable to maintain
its current financing or obtain replacement financing, the Company may
have to take steps to further reduce its operating expenses, which may
negatively impact the Company's operations. The financial statements
do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at June 30:
1999 1998
---------------------------
Furniture and fixtures $ 1,167,428 $ 1,465,940
Computer equipment 2,376,732 1,364,146
Leasehold improvements 1,495,975 1,070,950
----------------------------
5,040,135 3,901,036
Less: accumulated depreciation 2,410,614 1,777,624
----------------------------
$ 2,629,521 $ 2,123,412
============================
Depreciation expense for the years ended June 30, 1999, 1998 and 1997
was $719,830, $488,365, and $405,900, respectively.
NOTE 4 OTHER CURRENT ASSETS
Other current assets consisted of the following at June 30:
1999 1998
----------------------------
Prepaid expenses $ 897,813 $ 517,749
Director and salesperson compensation
draws 642,530 509,446
Other 150,070 259,256
----------------------------
$ 1,690,413 $ 1,286,451
============================
NOTE 5 INCOME TAXES
For the year ended June 30, 1999 and 1998 income tax expense consisted
of state taxes currently payable. The Company had no current federal
and no deferred income tax expense in any period presented. For the
year ended June 30, 1997, income tax expense consisted of $39,234
federal alternative minimum taxes and $139,529 state taxes currently
payable.
34
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 INCOME TAXES (CONTINUED)
At June 30, 1999, the Company has net federal operating loss
carryforwards as follows for income tax purposes:
Carryforward Expires Net Operating Loss
---------------------------------------------
2005 $ 251,730
2006 1,721,893
2007 6,430
2008 2,709,559
2009 348,090
2011 1,366,208
2013 3,108,872
2019 (approximate) 2,750,000
------------------
$ 12,262,782
==================
The Company's ability to utilize the net operating loss carry forwards
is dependent upon the company's ability to generate taxable income in
future periods. Federal net operating losses of approximately
$7,400,000 million are limited to $792,000 per year, due to ownership
changes as defined under Section 382 of the Internal Revenue Code of
1986. Any unused portion can be carried forward and utilization of the
net operating loss carry forward may also be limited in any one year
by alternative minimum tax rules.
A reconciliation of the statutory federal income tax rate (benefit)
and the effective tax rate as a percentage of income (loss) before
taxes on income is as follows:
1999 1998 1997
--------------------------
Statutory rate (benefit) (34.0)% (34.0)% 34.0%
Operating losses generating no current tax
benefit 11.8 27.4 --
Write-off intangible asset not recognized
for tax purposes 9.6 -- --
Stock option compensation generating no
current tax benefit 9.1 3.0 1.7
Loss of foreign subsidiary 3.5 3.6 --
Current benefit of fully reserved net
operating loss carryforward utilization -- (33.1)
State taxes 0.1 0.5 9.2
--------------------------
Effective Rate 0.1% 0.5% 11.8%
==========================
35
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities as of December 31 are as follows:
1999 1998
---------------------------
Deferred tax assets:
Net operating loss carry forwards $ 4,918,000 $ 3,725,000
Other items not yet deductible
for tax purposes 190,000 68,000
---------------------------
5,108,000 3,793,000
Deferred tax liabilities:
Depreciation (56,000) (50,000)
Valuation allowance (5,052,000) (3,743,000)
---------------------------
Net deferred tax asset $ -- $ --
===========================
As the Company has posted losses in most years since inception and
utilization of the net operating losses, the Company's primary
deferred tax asset, is limited by IRS Section 382, realization of the
tax benefit related to these net deferred tax asset is uncertain.
Accordingly, no deferred tax asset has been recorded to reflect their
potential value. The net change in the deferred tax valuation
allowance was an increase (decrease) of $1,309,000, $1,364,000 and
$(848,000) in 1999, 1998, and 1997, respectively.
NOTE 6 ACCRUED LIABILITIES
Accrued liabilities consisted of the following at June 30:
1999 1998
---------------------------
Accrued production costs $ 1,416,457 $ 2,454,963
Accrued director fees 893,052 780,359
Other 1,533,298 1,170,692
---------------------------
$ 3,842,807 $ 4,406,014
===========================
36
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 LINE OF CREDIT
On June 30, 1998, the Company had a $3,000,000 asset based revolving
line of credit with a bank. On July 30, 1998, the bank line of credit
was replaced with an asset based loan and security agreement due to a
finance company. The loan and security agreement which is secured by
virtually all assets provides for the following borrowings: a
revolving line of credit with maximum availability of $4,500,000 or a
specified percentage of acceptable accounts receivable with interest
at a variable rate (9.25% at June 30, 1999). At June 30, 1999, the
maximum availability was $3,644,353, of which $1,175,826 was unused.
The loan and security agreement requires the Company to comply with
certain restrictive covenants and is guaranteed by iNTELEFILM. During
the years ended June 30, 1999, 1998 and 1997, the weighted average
interest rate was 9.48%, 9.5% and 8.33%, respectively. At June 30,
1999, the Company had not met the requirement to maintain minimum
stockholders equity of $3,000,000 and had made certain debt payments
to iNTELEFILM not allowed by the agreement. The lender has waived all
violation occurring on or prior to June 30, 1999; however, no waiver
has been provided for violations occurring after that date. Such
violations include not meeting the minimum shareholders equity
requirements for the period after June 30, 1999 and subsequent
payments to iNTELEFILM (Note 11). As of September 27, 1999, the lender
has taken no action against the Company in response to these
violations.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company is a party to a number of noncancelable operating lease
agreements involving buildings and equipment which expire at various
dates. The future minimum lease commitments are as follows for the
years ending June 30:
2000 $ 747,789
2001 706,571
2002 721,282
2003 743,205
2004 732,160
Thereafter 2,707,690
------------
Total minimum payments $ 6,358,697
============
Total rental expense for the years ended June 30, 1999, 1998 and
1997 aggregated $813,542, $807,956 and $774,396. iNTELEFILM
guarantees a Company operating lease with future minimum lease
payments aggregating $1,050,000 payable through November 2008.
37
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Contracts:
The Company has entered into various employment agreements with its
officers and commercial directors, which obligate it to make minimum
payments of approximately $6,419,125. The payments due are
$2,782,947, $1,155,868, $998,280, $902,950, $499,080 and $80,000,
for the years ended June 30, 2000, 2001, 2002, 2003, 2004 and
thereafter, respectively. Of these amounts $4,148,553 are for
administrative personnel and $2,270,572 are for commercial
television directors and salespeople. Certain of these agreements
provide for additional compensation based on subsidiary revenues,
defined subsidiary operating profits or other incentives. This
additional compensation is payable whether or not the Company
achieves an operating profit as a whole. 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.
Lawsuits:
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 case was
settled by the Company's insurance carrier during 1999 with no
additional cost incurred by the Company.
On June 30, 1998, a complaint was filed by Rick Bieber against
Harmony Holdings, Inc. and Harmony Pictures, Inc. in the Superior
Court of the State of California, County of Los Angeles. Mr. Bieber
was the president of Harmony Pictures, Inc. until his employment was
terminated by Harmony Pictures, Inc. effective April 23, 1998.
Harmony Pictures, Inc. terminated Mr. Bieber's employment for
breaching his written employment agreement with Harmony Pictures,
Inc. and his fiduciary obligations to the company. The termination
date of the employment agreement was December 31, 2000. However, the
employment agreement provided that it could be terminated before the
termination date by Harmony Pictures, Inc. (i) for cause or (ii) if
Harmony Pictures, Inc. was not profitable by the quarter ended June
30, 1998. Harmony Pictures, Inc. incurred losses of $253,000 and
$1,997,000 for the quarter (unaudited) and year ending June 30,
1998, respectively.
Mr. Bieber alleges that the defendants, by terminating his
employment agreement before December 31, 2000, breached his
agreement. Mr. Bieber also alleged that defendants slandered and
libeled him with reference to the circumstances relating to his
termination. The court has dismissed the slander and libel claims
and has dismissed all claims against Harmony Holdings, Inc. On his
remaining breach of contract claim and labor code claims, Mr. Bieber
seeks damages in excess of $680,000, the reinstatement of his
250,000 stock options at the exercise price specified in the
employment
38
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreement, an unspecified amount of contingent compensation and
attorneys' fees and costs of suit. The Company has filed an answer
denying any liability and has filed a cross-complaint against Mr.
Bieber for breach of contract and breach of fiduciary duty. The
Company intends to vigorously defend the lawsuit. The Company does
not believe this matter to be material.
The Company is involved in other litigation on a number of matters
and is subject to certain claims which arise in normal course of
business, none of which, in the opinion of the Company's management
is expected to have a materially adverse effect on the Company's
financial position or results of operations.
Subsidiary Share Transfer Agreement:
The Company entered into a option and share transfer agreement ("the
Option Agreement") with four members of management of Curious
Pictures Corporation ("Curious") dated December 15, 1996. The
agreement called for stock equaling one percent (1%) of Curious
outstanding common stock to be issued to the four principle
executives of management, (collectively "Curious Management"), upon
the signing of the agreement. Under the agreement, the four members
of management had the ability to earn an additional fifty-percent
(50%) of the company through yearly stock option grants with an
exercise price of $1.00 per share beginning in calendar year 1997.
The stock options were fully earned based upon the results of
operations of Curious and became exercisable in December 1998. In
July 1999, the options were exercised by iNTELEFILM after iNTELEFILM
purchased the Option Agreement from Curious Management (Note 13).
The Company has the right to put its remaining forty nine percent
(49%) of Curious Pictures Corporation to iNTELEFILM for a price to
be determined based on fair value at that time, but not to be less
than $1,960,000.
As a result of the Option Agreement and the intrinsic value
established by interim valuations of Curious and ultimately by the
subsequent iNTELEFILM purchase, the Company has recognized
compensation expense related to the stock options of $2,234,250,
$390,750 and $75,000 in 1999, 1998 and 1997, respectively. The
aggregate compensation expense recognized is reflected on the
accompanying balance sheet as a minority interest totaling
$2,700,000 and $465,750 at June 30, 1999 and 1998, respectively.
401(k) Savings/Profit-Sharing Plan:
The Company has a 401(k) plan available to all employees meeting
certain service requirements. Eligible employees may contribute a
portion of their annual salary to the plan, subject to certain
limitations. The Company may make matching contributions and also
may provide profit-sharing contributions at the discretion of its
board of directors. Employees become fully vested in the Company
contributions after six years of service. There were no Company
contributions in 1999, 1998 and 1997.
NOTE 9 STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN
Common Stock:
Pursuant to a Stock Subscription Agreement entered into in July
1996, the Company sold to Unimedia, S.A., a French company
(Unimedia), 1,000,000 shares of Common Stock of the Company at a
purchase price of $2.00 per share. The purchase price was received
by the Company on August 16, 1996.
39
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN (CONTINUED)
Common Stock (Continued):
On July 21, 1997, iNTELEFILM and Unimedia entered into an agreement
whereby Unimedia agreed to sell, and iNTELEFILM agreed to buy
Unimedia's 1,000,000 shares of Common Stock of the Company for
$2,600,000 and Unimedia agreed to dismiss the litigation entitled
Unimedia S.A. V. Harmony Holdings, Inc. and Harvey Bibicoff, Case
No. CV 96-7109 JGD (RNBx), pending in the United States District
Court for the Central District of California. iNTELEFILM assigned
its right to buy 230,769 of the Shares to the Company, thereby
reducing the number of issued and outstanding shares of common stock
of the Company and resulting in a purchase price of $2,000,000 and
$600,000 to iNTELEFILM and the Company, respectively. The closing of
the purchase occurred on July 25, 1997.
Incentive and Non-Qualified Stock Option Plans:
During the year ended June 30, 1997, the Company issued 257,500
stock options to certain outside board of director members and other
consultants of the Company, at prices ranging from $1.50 to $2.00.
The terms of the options are from three to five years and
compensation expense totaling $44,993 is included in the statement
of operations relating to these options.
The Company adopted a Stock Option Plan on August 7, 1991, as
amended and restated in February 1998. The purpose of the Stock
Option Plan is to secure for the Company and its stockholders the
benefits arising from stock ownership by selected employees of the
Company as the Board of Directors of the Company (the "Board"), or a
committee thereof constituted for that purpose, may from time to
time determine.
The Stock Option Plan provides for the granting of an aggregate of
incentive and non-incentive options to purchase a maximum of
3,250,000 shares of the Common Stock. The Stock Option Plan
authorizes the grant of options to employees intended to qualify as
incentive stock options ("Incentive Options") under Section 422 of
the Code, and the grant of options which do not qualify
("Non-Qualified Options") as incentive stock options under Section
422 of the Code.
The Stock Option Plan is currently administered by the Board. The
Board, subject to the provisions of the Stock Option Plan, has full
power to select the individuals to whom awards will be granted, to
fix the number of shares that each optionee may purchase, to set the
terms, conditions, and vesting of each option, and to determine all
other matters relating to the Stock Option Plan. The Stock Option
Plan provides that the Board will select grantees from among
full-time employees, officers, directors and consultants of the
Company or its subsidiaries, and individuals or entities, subject to
an acquisition or management agreement with the Company.
The option exercise price of each option shall be determined by the
Board, but shall not be less than 100% of the fair market value of
the shares on the date of grant. No Incentive Options may be granted
to any employee who owns, at the date of grant, stock representing
in excess of 10% of the combined voting power of all classes of
stock of the Company or of a parent or a subsidiary unless the
exercise price for stock subject to such options is at least 110% of
the fair market value of such stock at the time of grant and the
option term does not exceed five years.
40
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN (CONTINUED)
Incentive and Non-Qualified Stock Option Plans (Continued):
The term of each option shall be fixed by the Board and may not
exceed ten years from the date of grant. If a participant who holds
options ceases, for any reason, to be an employee, consultant or
director of otherwise affiliated with the Company (the
"Termination"), the option expires 30 days after the Termination.
Notwithstanding the foregoing, in the event of Termination due to
the optionee's death or incapacity, the option will terminate 12
months following the date of such optionee's death or incapacity.
Options granted under the Stock Option Plan may be exercisable in
installments. The aggregate fair market value of stock with regard
to which Incentive Options are exercisable by an individual for the
first time in any calendar year may not exceed $100,000.
Upon the exercise of options, the option exercise price must be paid
in full, either in cash or other form acceptable to the Board. The
Board may terminate the plan at its discretion.
A summary of the status of the Company's stock option plan as of
June 30, 1999, 1998 and 1997, and the changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998 June 30, 1997
Weighted- Weighted- Weighted-
average average average
Shares exercise price Shares exercise price Shares exercise price
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,527,000 $1.52 2,607,000 $2.04 1,314,500 $2.45
Granted 162,500 1.65 2,064,000 1.43 1,307,500 1.22
Exercised -- -- 775,000 1.51 -- --
Forfeited 1,106,500 1.58 1,369,000 2.40 15,000 2.13
---------- ---------- ----------
Outstanding at end of year 1,583,000 $1.52 2,527,000 $1.52 2,607,000 $2.04
========== ========== ==========
Options exercisable at year end 1,068,834 $1.54 1,538,000 $1.58 2,198,000 $2.08
Weighted average fair value of
options granted during the year $1.02 $0.82 $0.17
</TABLE>
Additionally, on March 10, 1998, the Company repriced 989,000
options outstanding with varying exercise prices to $1.44 per share.
The repricing was considered a forfeiture of the existing options
and a grant of new options for the purposes of the table above.
The following table summarizes information about stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/99 Life (Yrs) Price at 6/30/99 Price
- --------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
$1.06-1.50 1,313,000 3.07 $1.39 883,834 $1.41
1.50-2.00 182,500 2.96 1.96 97,500 1.93
2.01-3.00 85,000 1.85 2.47 85,000 2.47
3.01-5.00 2,500 -- 3.63 2,500 3.63
------------ ------------
Total 1,583,000 2.99 $1.52 1,068,834 $1.54
============ ============
</TABLE>
41
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN (CONTINUED)
Incentive and Non-Qualified Stock Option Plans (Continued):
SFAS Statement 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding net
income (loss) and earnings (loss) per share as if compensation cost
for the Company's stock option plans had been determined in
accordance with the fair value based method prescribed in SFAS
Statement 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for
grants in 1999, 1998 and 1997, respectively: dividend yield of zero
for all years; expected volatility of 87.5, 59.5 and 5.2 percent;
risk-free interest rates of 4.9, 5.7 and 5.9 percent and an
estimated option life of 5.0, 5.0 and 3.0 years.
Under the accounting provisions of SFAS Statement 123, the Company's
net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Net Income (Loss):
As reported $ (8,394,598) $ (4,488,580) $ 1,332,427
=============================================
Pro forma $ (8,572,481) $ (4,780,327) $ 1,218,362
=============================================
Basic and diluted earnings
(loss) per share:
As reported $ (1.13) $ (0.69) $ .20
=============================================
Pro forma $ (1.16) $ (0.73) $ .18
=============================================
</TABLE>
NOTE 10 CONCENTRATION OF CREDIT RISKS
The Company's cash is deposited with various financial institutions,
and is insured up to a maximum of $100,000 at each institution by the
Federal Deposit Insurance Corporation ("FDIC"). At June 30, 1999, the
Company's deposits with three financial institutions exceeded the
maximum amount insured by the FDIC by $2,001,484. At June 30, 1999,
the Company had bank accounts at foreign banks with deposits
aggregating $291,541.
The Company grants credit to advertising agencies, principally based
in the United States. The Company performs ongoing credit evaluations
of its customers' financial condition, and generally requires no
collateral from its customers. The Company's credit losses are subject
to the general economic conditions of the advertising industry.
NOTE 11 RELATED PARTY TRANSACTIONS
Notes Receivable:
In January 1998, the Company entered into a $650,000 note receivable
agreement with iNTELEFILM. Pursuant to the note, the Company
advanced $611,000 of proceeds to iNTELEFILM and applied the
remaining $39,000 of the note balance to a loan fee for the note
origination. Interest was accrued at 15%. The note was repaid in
full with two installments (May 1998, $322,863 and June 1998,
$327,137).
42
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 RELATED PARTY TRANSACTIONS (CONTINUED)
Notes Receivable (Continued):
During the year ended June 30, 1998, the Company recognized interest
and loan fee income aggregating $80,305, respectively, related to
this note receivable.
Notes Payable:
During 1999, iNTELEFILM made operating advances to the Company
aggregating $3,050,000 pursuant to unsecured demand note agreements
which bear a fixed interest rate of 14.0%. At June 30, 1999,
advances totaling $2,729,342 remain outstanding and the Company has
incurred interest expense totaling $184,577 in 1999. Subsequently,
in August 1999, the Company has made additional payments totaling
$500,000 ($450,728 in principal and $49,272 in interest).
Management Services Contracts:
In October 1997, the Company entered into a management services
contract with a privately held affiliate (the "Management Company")
related to the Company through common control. The contract, which
is on a month to month basis and is cancelable with a 60-day notice.
The management fees totaled $463,720 and $174,348 during the years
ended June 30, 1999 and 1998. In June 1999, the contract was amended
to increase the monthly management fee to $50,000 beginning with
July 1999.
The Management Company also provides services for iNTELEFILM and
another privately held affiliate each related to the Company through
common control. The management fee is based on estimated usage of
the Management Company's services.
In May 1998, the Management Company advanced the Company $225,000
pursuant to a note payable with interest at 10%. In June 1998, the
Company repaid the note in full together with accrued interest of
$3,051.
NOTE 12 DISCONTINUATION OF HARMONY PICTURES DIVISION
In November 1998, the Company announced and began the process of
discontinuing operations of its Harmony Pictures division (the
"Division"). This division consists of Harmony Pictures, Inc.,
Melody Films, Inc., Lexington Films, Inc., and Pure Films, Inc. In
connection with discontinuing the division's operations, management
has estimated and accrued restructuring costs totaling $1,142,495.
These costs were accrued when the discontinuance decisions were made
and the restructure costs could be reasonably estimated. These costs
include severance payments, contract buyouts, lease obligations,
non-refundable prepayments, and general office closing logistics.
The Company believes substantially all closing obligations have been
met as of June 30, 1999. Further, upon reaching the decision to
discontinue the Division's operations, management determined that
the goodwill associated with the Division was fully impaired.
Accordingly, an impairment charge equaling the net book value of the
goodwill, $2,215,000 was recognized in 1999.
43
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 SUBSEQUENT EVENTS
Sale of Subsidiary Common Stock:
For nominal consideration, on July 23, 1999, the Company sold 90% of
the issued and outstanding shares of common stock of The End
(London) to a principal executive (the "Purchaser") of The End
(London). The End (London) is a commercial production company based
in London, England, and prior to this sale was a wholly owned
subsidiary of the Company. The sale is effective as of July 1, 1999.
For the fiscal years ended June 30, 1999, 1998 and 1997, The End
(London) had gross revenues of approximately $11,243,000,
$3,747,000, and $0, and net losses of approximately $862,000,
$591,000, and $0, respectively. The Company retained all rights to
the "The End (London)" name and logo. In connection with the sale,
the Company and the Purchaser entered an agreement granting the
Purchaser the right, under certain circumstances, to purchase the
remaining 10% equity interest in The End (London) from the
Registrant for approximately $800,000.
Resolution of the Subsidiary Share Transfer Agreement:
Effective August 1, 1999, iNTELEFILM purchased the Option Agreement
(Note 8) entered into by the Company and Curious Management.
Pursuant to the purchase agreement and based on the results of
operations of Curious Pictures, it was agreed by all parties,
including the Company, that Curious Management's options to purchase
the 50% equity interest in Curious had fully vested and were
exercisable for consideration totaling $50. iNTELEFILM also acquired
a 1% equity interest owned by Curious Management that was conveyed
to Curious Management upon signing the Option Agreement. The
consideration paid to Curious Management by iNTELEFILM for the
aforementioned acquisitions aggregated $3,000,000, consisting of
$1,500,000 in cash and a $1,500,000 note receivable. Subsequently,
iNTELEFILM acquired 50% of Curious Pictures through the exercise of
stock options granted under the Option Agreement. As a result, the
Company currently owns 49% of the outstanding stock of Curious
Pictures and iNTELEFILM owns 51% of the stock.
At the same time, Curious entered new five-year employment
agreements with Curious Management which are retroactive to January
1, 1999. As part of the compensation to be paid to Curious
Management, each member of Curious Management was granted the right
to purchase from the Company one share (representing 1% of the
capital stock of Curious Pictures) of the Company's remaining 49
shares at the end of each employment year for $1 per share. As a
result, if all of the members of Curious Management exercise all of
the new options over the five-year term of their employment
agreements, iNTELEFILM will own 51% of the Curious Pictures stock,
Curious Management will collectively own 20%, and the Registrant
will own the remaining 29%. The Company, iNTELEFILM, and Curious
Management also entered a Stock Agreement effective as of August 1,
1999. Under this agreement, the members of Curious Management were
granted the right to sell to iNTELEFILM the shares of Curious
Pictures that they earn from the Company (the put right),and
iNTELEFILM obtained the right to purchase such shares from Curious
Management (the call right). The price per share to be paid by
iNTELEFILM to Curious Management for each share under the put and
call rights is $96,774 per share.
44
<PAGE>
Harmony Holdings, Inc.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Additions charged Balance at
Beginning of Year to costs and expenses Deductions End of Year
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Allowance for
doubtful
accounts $75,629 $ 97,646 $75,629 $ 97,646
=======================================================================
1998
Allowance for
doubtful
accounts $97,646 $ 30,167 $84,096 $ 43,717
=======================================================================
1999
Allowance for
doubtful
accounts $43,717 $226,868 $17,204 $253,381
=======================================================================
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company as of September 21, 1999. There are no family
relationships between any directors and any executive officers.
Name Age Position
---- --- --------
Christopher T. Dahl 56 Chairman of the Board, President
and Chief Executive Officer
Richard W. Perkins 68 Director
William E. Cameron 54 Director
Gerald Germain 57 Director
William M. Toles 52 Director
James G. Gilbertson 38 Chief Operating Officer and Chief
Financial Officer
Jill J. Theis 29 Secretary and General Counsel
CHRISTOPHER T. DAHL has been Chief Executive Officer and Chairman of
the Company since July 22, 1997. Since its inception in February, 1990, Mr. Dahl
has been the President, Chief Executive Officer and Chairman of the Board of
Directors of iNTELEFILM, a publicly traded company and the Company's largest
shareholder. He is also Chairman and Chief Executive Officer of Community
Airwaves Corporation ("CAC"), a company that owns and operates radio stations in
Hawaii. Mr. Dahl serves as the managing partner of Media Management, L.L.C.
("MMLLC"), a company that provides corporate,
46
<PAGE>
legal, accounting and financial services to the Company, iNTELEFILM and CAC.
From 1969 to 1979, he was the founder and President of a group of companies
involved in photo finishing, retail photo sales, home sewing notions, toy
distribution and retail craft stores. He was employed by Campbell-Mithun and
Knox Reeves Advertising from 1965 through 1969.
RICHARD W. PERKINS has been a director of the Company since July 22,
1997. Mr. Perkins has also been a director of iNTELEFILM since its inception.
For more than five years, Mr. Perkins has been President and Chief Executive
Officer of Perkins Capital Management, Inc., a registered investment advisor.
Mr. Perkins is also a director of CAC and a partner of MMLLC, as well as the
following publicly held companies: Bio-Vascular, Inc., a medical products
manufacturer; CNS, Inc., a consumer products manufacturer; Lifecore Biomedical,
Inc., a medical device manufacturer; Nortech Systems, Inc., an electronic
sub-systems manufacturer; Eagle Pacific Industries, Inc., a manufacturer of
plastic pipe; Quantech LTD., a developer of immunological tests; and Vital
Images, Inc., a medical visualization software company.
WILLIAM E. CAMERON has been a director of the Company since July 22,
1997. Mr. Cameron has also been a director of iNTELEFILM since April 2, 1998.
For more than five years, Mr. Cameron has been Head of International Business
Development for Universal Health Communications, the largest
medical/health/wellness video library in the world. After spending ten years in
London, England, Mr. Cameron relocated to Los Angeles, California in 1998, to
take over International Telemedicine Marketing for KZT Corporation, the creators
of the video phone. Mr. Cameron also serves as a director of RME Entertainment.
WILLIAM M. TOLES has been a director of the Company since July 22,
1997. For more than five years, Mr. Toles has been the President and Chief
Executive Officer of Tol-O-Matic, a privately held manufacturer of motion
control products.
GERALD GERMAIN has been a director of the Company since May 13, 1998.
For the past four years, Mr. Germain has been recognized as an industry
authority on a large variety of financial and operations issues. From 1984 to
1994, he served as Chief Financial Officer and, towards the end, as Vice
Chairman of Doyle Dane Bernbach (now known as DDB Needham). In 1978, Mr. Germain
became Chief Financial Officer of Compton Communications, Inc. (now known as
Saatchi & Saatchi Worldwide) and became its Executive Vice President in 1982. In
1967, Mr. Germain was also a staff accountant with the advertising agency
D'Arcy, Masius, Benton & Bowles, where he eventually became Senior Vice
President, Worldwide Treasurer. Mr. Germain graduated from Brooklyn College and
received a J.D. degree from the New York University of Law School.
JAMES G. GILBERTSON has served as the Company's Chief Operating Officer
since November, 1997, and more recently, as the Company's Chief Financial
Officer. Mr. Gilbertson has also served as
47
<PAGE>
iNTELEFILM's Chief Operating Officer since April 1996 and its Chief Financial
Officer since July 1992. From June 1988 to July 1992, he was the Chief Financial
Officer of Parker Communications, which operated a group of radio stations. From
1985 to June 1988, he was Controller of the radio division of Palmer
Communications located in Des Moines, Iowa. Prior to joining Palmer
Communications, Mr. Gilbertson was a practicing certified public accountant with
the firm of Ernst & Young LLP. Mr. Gilbertson is also an executive officer of
CAC.
JILL J. THEIS has served as the Secretary and General Counsel of the
Company since February, 1999. Ms. Theis has also served as iNTELEFILM's and
CAC's Secretary and General Counsel since February 1999. Ms. Theis received her
B.A., cum laude, from Hamline University and received a J.D. degree from William
Mitchell College of Law.
48
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid to
or accrued by the Company's Chief Executive Officer and each of the Company's
executive officers receiving in excess of $100,000 (the "Named Executive
Officers") in the fiscal year ending June 30, 1999 for services rendered to the
Company and its subsidiaries during the fiscal years ended June 30, 1999, 1998
and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Awards
Compensation -------------------------
Name and ---------------------------- Securities Underlying
Principal Position Year Salary($)(1) Bonus($) Options(#)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Christopher T. Dahl (1) 1999 81,000 -- --
Chief Executive Officer 1998 68,750 15,000 375,000
and Chariman of the Board 1997 -- -- --
Harvey Bibicoff (2) 1999 239,231
Chief Executive Officer 1998 274,600 -- --
1997 247,200 -- 350,000
James Gilbertson (1) 1999 161,675
Chief Operating Officer & 1998 130,000 7,500 75,000
Chief Financial Officer 1997 130,000
</TABLE>
(1) Includes payment by MMLLC and Harmony in the cases of Mr. Dahl and Mr.
Gilbertson
(2) Mr. Bibicoff was relieved of his CEO duties as of November 3, 1997.
The following table sets forth the number of securities underlying
options granted in 1999, the percent the grant represents of the total options
granted to employees during such fiscal year, the per-share exercise price of
the options granted, and the expiration date of the options for the Named
Executive Officers.
49
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the Named Executive Officers in the fiscal
year ending June 30, 1999.
The following table sets forth certain information regarding options
exercised by the Named Executive Officers during fiscal 1999 and the number and
value of unexercised in-the-money options for the Named Executive Officers at
June 30, 1999.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised in-
Options at the-Money Options at
Shares Value Fiscal Year Ended(#) Fiscal Year Ended (1)($)
Acquired on Realized -------------------------------------------------------
Name Exercise(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Christopher T. Dahl -- -- 150,000/225,000 0/0
Harvey Bibicoff -- -- 50,000/0 0/0
James Gilbertson -- -- 25,000/50,000 0/0
</TABLE>
(1) Market value of underlying securities at fiscal year-end minus the exercise
price.
COMPENSATION OF DIRECTORS
No fees are paid to Directors of the Company for their services as
members of the Board of Directors. The Company reimbursed all Directors for
reasonable travel and lodging expenses incurred in attending meetings of the
Board of Directors.
Concurrently with his election as a Director and Chairman of the Board
of the Company on July 22, 1997, Christopher T. Dahl was appointed the Company's
President. Mr. Dahl presently receives an annual salary of $75,000 for his
services as President.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
50
<PAGE>
The following table contains certain information as of September 21,
1999, regarding the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director of the Company, (iii) the executive
officers of the Company and directors as a group, and (iv) each Named Executive
Officer, and as to the percentage of the outstanding shares held by them on such
date. Any shares which are subject to an option or a warrant exercisable within
60 days are reflected in the following table and are deemed to be outstanding
for the purpose of computing the percentage of Common Stock owned by the option
or warrant holder but are not deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by any other person. The business
address of Messrs. Dahl, Cameron and Gilbertson is 5501 Excelsior Boulevard,
Minneapolis, Minnesota 55416.
Shares Percent
Beneficially of
Name and Address Owned (1) Class
---------------- --------- -----
Children's Broadcasting Corporation
d/b/a iNTELEFILM 4,139,562 (2) 55.2%
5501 Excelsior Boulevard
Minneapolis, Minnesota 55416
Harvey Bibicoff 0 *
Christopher T. Dahl 150,000 (3)(4) 2.0%
Richard W. Perkins 50,000 (3)(4) *
William E. Cameron 50,000 (3)(4) *
William M. Toles 50,000 (3) *
Gerald Germain 50,000 (3) *
James G. Gilbertson 25,000 (3)(4) *
All Directors and
Executive Officers as a Group 376,667 (3) 4.8%
* Less than 1%
1. Securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set
forth in the regulations of the Commission and, accordingly,
may include securities owned by or for, among others, the
spouse, children or certain other relatives of such person as
well as other securities as to which the person has or shares
voting or investment power or has the option or right to
acquire Common Stock within 60 days.
2. Based upon statement's filed with Commission, Children's
Broadcasting Corporation has the sole right to sell such
shares and has sole voting power over such shares.
3. Shares purchasable upon the exercise of options.
4. Although this stockholder is also an officer and/or director
of Children's Broadcasting Corporation, the stockholder
disclaims beneficial ownership of the shares owned by
Children's Broadcasting Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since August, 1998, the Company has received administrative, legal,
accounting and financial services from MMLLC.
51
<PAGE>
MMLLC is a limited liability company which is owned by Messrs. Dahl and Perkins,
the Company's Chairman of the Board and Chief Executive Officer and another
director of the Company, respectively. MMLLC provides corporate, legal,
accounting and financial services to the Company, iNTELEFILM and CAC. From
October 1, 1997 to July, 1998, the Company received identical administrative,
legal, accounting and financial services from Radio Management Corporation
("RMC"). The Company paid RMC an aggregate of $174,000 for such services during
the fiscal year ended June 30, 1998. The Company paid MMLLC and RMC an aggregate
of $464,000 for such services during the fiscal year ended June 30, 1999. These
arrangements were approved by the Related Party Transaction Committee of the
Company's Board of Directors, which is comprised of disinterested directors, and
the Company believes such arrangments were on terms at least as favorable as
could have been obtained from unaffiliated third parties.
On August 1, 1997, the Company entered into an independent contractor
agreement with William Camerson, a Director of the Company. Under the agreement,
Mr. Cameron provides non-exclusive services to the Company, including, without
limitation, the initiation, promotion, development and maintenance of business
and investment contacts relating to increasing the Company's sales, marketing
and investment opportunities. The contract is at will and compensation under the
contract is $3,000 for every month that it is in force.
iNTELEFILM guarantees the Company's operating line of credit with
Fremont and The End's New York office lease. In addition, during 1999,
iNTELEFILM made operating advances to the Company aggregating $3,050,000
pursuant to unsecured demand note agreements which bear a fixed interest rate of
14%. During year ending June 30, 1999, the Company paid interest expense
totaling $184,577. As of September 21, 1999, approximately $2.28 million
remained outstanding.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules and Exhibits
(1) The audited consolidated financial statements of Harmony
Holdings, Inc. and Subsidiaries filed as a part of this Annual Report
on Form 10-K are listed in the Index to Consolidated Financial
Statements preceding the Company's Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form10-K, which Index to
Consolidated Financial Statements is hereby incorporated herein by
reference.
(2) Registrant's Schedule II-Valuation and Qualifying Accounts
is included with Registrant's Consolidated Financial Statements in Item
8 hereof.
(3) The following documents required by Item 601 of Regulation
S-K are filed as exhibits or are incorporated by reference herein:
Exhibit Number Description
3.1 Restated Certificate of Incorporation of
Company, filed in the office of the
Secretary of State of the State of
Delaware, filed as
52
<PAGE>
Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Registration No.
33-3342193), is hereby incorporated by
reference.
3.3 By-Laws of Registrant, filed in the office
of the Secretary of State of the State of
Delaware, filed as Exhibit 3.3 to the
Company's Registration Statement on Form
S-1 (Registration No. 33-3342193), is
hereby incorporated by reference.
3.3.1 Amendment No. 1 to By-laws of Registrant,
filed in the office of the Secretary of
State of the State of Delaware, filed as
Exhibit 3.3.1 to the Company's
Registration Statement on Form S-1
(Registration No. 33-3342193), is hereby
incorporated by reference.
10.1 1991 Stock OptionPlan, filed as Exhibit
10.1 to the Company's Registration
Statement on Form S-1 (Registration No.
33-3342193), is hereby incorporated by
reference.
10.29 Stock Purchase Agreement among Children's
Broadcasting Corporation, Harvey Bibicoff
and Harmony Holdings, Inc., dated July
21, 1997, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated
August 5, 1997, is hereby incorporated by
reference.
10.30 Stock Purchase Agreement among Children's
Broadcasting Corporation and Unimedia
S.A., dated July 21, 1997, filed as
Exhibit 10.2 to the Company's Current
Report on Form 8-K dated August 5, 1997,
is hereby incorporated by reference.
10.31 Mutual General Release among, Unimedia,
Harvey Bibicoff and Harmony Holdings,
Inc., filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated
August 5, 1997, is hereby incorporated by
reference.
10.32 Loan and Security Agreement by and between
the Company and Heller Financial, Inc.,
dated July 30, 1998, filed as Exhibit 10.1
to the Form 8-K filed on August 26, 1998,
is hereby incorporated by this reference.
10.33 Service Agreement by and between the
Company and Radio Management, L.L.C.,
(n/k/a Media Management, LLC) dated as of
August 1, 1998.
10.34 Purchase Agreement dated as of July 27,
1999 and effective as of August 1, 1999 by
and among Children's Broadcasting
Corporation, a Minnesota corporation;
Harmony Holdings, Inc., a Delaware
corporation; Curious Pictures Corporation,
a New York corporation; and Susan Holden;
Stephen Oakes; Richard Winkler; and David
Starr, as individuals filed as an Exhibit
to the Company's Current Report on Form
8-K dated August 6, 1999 and incorporated
herein by reference.
10.35 Curious Stock Agreement dated as of July
27, 1999 and effective as of August 1,
1999, by and among Children's Broadcasting
Corporation; Harmony Holdings, Inc.; Susan
Holden; Stephen Oakes; Richard Winkler;
and David Starr, as individuals, filed as
an Exhibit to the Company's Current Report
on Form 8-K dated August 6, 1999 and
incorporated herein by reference.
10.36 Purchase Agreement dated as of July 23,
1999, effective as of July 1, 1999 by and
between Harmony Holdings, Inc. and Julia
Reed, filed as an Exhibit to the Company's
Current Report on Form 8-K dated August 6,
1999 and incorporated herein by reference.
53
<PAGE>
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: SEPTEMBER 28, 1999 By: /s/ Christopher T. Dahl
-----------------------
Christopher T. Dahl
Chairman, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Christopher T. Dahl Chairman of the Board, September 28,
----------------------- Chief Executive Officer 1999
Christopher T. Dahl and President
/s/ Richard W. Perkins Director September 28,
---------------------- 1999
Richard W. Perkins
/s/ William E. Cameron Director September 28,
---------------------- 1999
William E. Cameron
/s/ William M. Toles Director September 28,
---------------------- 1999
William M. Toles
/s/ Gerald Germain Director September 28,
---------------------- 1999
Gerald Germain
/s/ James G. Gilbertson Chief Operating Officer September 28,
---------------------- and Chief Financial 1999
James G. Gilbertson Officer
55
<PAGE>
Exhibit Index
3.1 Restated Certificate of Incorporation of Company, filed in the
office of the Secretary of State of the State of Delaware,
filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-1 (Registration No. 33-3342193), is hereby
incorporated by reference.
3.3 By-Laws of Registrant, filed in the office of the Secretary of
State of the State of Delaware, filed as Exhibit 3.3 to the
Company's Registration Statement on Form S-1 (Registration No.
33-3342193), is hereby incorporated by reference.
3.3.1 Amendment No. 1 to By-laws of Registrant, filed in the office
of the Secretary of State of the State of Delaware, filed as
Exhibit 3.3.1 to the Company's Registration Statement on
Form S-1 (Registration No. 33-3342193), is hereby incorporated
by reference.
10.1 1991 Stock OptionPlan, filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-3342193), is hereby incorporated by reference.
10.29 Stock Purchase Agreement among Children's Broadcasting
Corporation, Harvey Bibicoff and Harmony Holdings, Inc. ,
dated July 21, 1997, filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated August 5, 1997, is hereby
incorporated by reference.
10.30 Stock Purchase Agreement among Children's Broadcasting
Corporation and Unimedia S.A., dated July 21, 1997, filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K
dated August 5, 1997, is hereby incorporated by reference.
10.31 Mutual General Release among, Unimedia, Harvey Bibicoff and
Harmony Holdings, Inc., filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated August 5, 1997, is
hereby incorporated by reference.
10.32 Loan and Security Agreement by and between the Company and
Heller Financial, Inc., dated July 30, 1998, filed as Exhibit
10.1 to the Form 8-K filed on August 26, 1998, is hereby
incorporated by this reference.
56
<PAGE>
10.33 Service Agreement by and between the Company and Radio
Management, L.L.C. (n/k/a Media Management, LLC), dated as of
August 1, 1998.
10.34 Purchase Agreement dated as of July 27, 1999 and effective as
of August 1, 1999 by and among Children's Broadcasting
Corporation, a Minnesota corporation; Harmony Holdings, Inc.,
a Delaware corporation; Curious Pictures Corporation, a New
York corporation; and Susan Holden; Stephen Oakes; Richard
Winkler; and David Starr, as individuals filed as an Exhibit
to the Company's Current Report on Form 8-K dated August 6,
1999 and incorporated herein by reference.
10.35 Curious Stock Agreement dated as of July 27, 1999 and
effective as of August 1, 1999, by and among Children's
Broadcasting Corporation; Harmony Holdings, Inc.; Susan
Holden; Stephen Oakes; Richard Winkler; and David Starr, as
individuals, filed as an Exhibit to the Company's Current
Report on Form 8-K dated August 6, 1999 and incorporated
herein by reference.
10.36 Purchase Agreement dated as of July 23, 1999, effective as of
July 1, 1999 by and between Harmony Holdings, Inc. and Julia
Reed, filed as an Exhibit to the Company's Current Report on
Form 8-K dated August 6, 1999 and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
57
EXHIBIT 21
STATE
NAME OF
INCORPOR-
ATION
- --------------------------------------------------------------------------
Harmony Pictures, Inc. Delaware
Melody Films, Inc. Delaware
Lexington Films, Inc. California
Pure Film, Inc. California
The End, Inc. California
The End, Ltd. (London) n/k/a United Kingdom
The Harry Nash Film Productions, Ltd.
The Moment Films, Inc. California
Serial Dreamer Films, Inc. California
The Beginning Entertainment, Inc. California
Gigantic Entertainment, Inc. California
Curious Pictures Corporation New York
Delirious Pictures Corporation New York
Furious Pictures Corporation New York
Unscented, Inc. California
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 2,910,618
<SECURITIES> 0
<RECEIVABLES> 6,365,303
<ALLOWANCES> (253,381)
<INVENTORY> 0
<CURRENT-ASSETS> 10,712,953
<PP&E> 5,040,135
<DEPRECIATION> (2,410,614)
<TOTAL-ASSETS> 14,121,455
<CURRENT-LIABILITIES> 15,702,595
<BONDS> 0
0
0
<COMMON> 75,067
<OTHER-SE> (4,356,207)
<TOTAL-LIABILITY-AND-EQUITY> 14,121,455
<SALES> 66,340,255
<TOTAL-REVENUES> 66,340,255
<CGS> 56,346,654
<TOTAL-COSTS> 56,346,654
<OTHER-EXPENSES> 17,942,826
<LOSS-PROVISION> (253,381)
<INTEREST-EXPENSE> 487,650
<INCOME-PRETAX> (8,383,105)
<INCOME-TAX> 11,493
<INCOME-CONTINUING> (7,949,225)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,394,598)
<EPS-BASIC> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
