SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 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 000-19577
HARMONY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4333330
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5501 EXCELSIOR BLVD.
MINNEAPOLIS, MN 55416
(Address of Principal Executive Offices)
(Zip Code)
(612) 925-8840
(Registrant's Telephone Number, Including Area Code)
724 1ST STREET NORTH - FOURTH FLOOR
MINNEAPOLIS, MN 55401
(former address)
Indicate by check mark whether the Registrant (1) has filed all
Reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
Class Outstanding at May 7, 1999
COMMON STOCK, PAR VALUE 7,506,660 SHARES
$.01 PER SHARE
1
<PAGE>
INDEX
HARMONY HOLDINGS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- March 31, 1999 and June 30, 1998.
Consolidated Statements of Operations -- Three and nine months ended
March 31, 1999 and 1998.
Consolidated Statements of Cash Flows -- Nine months ended December
31, 1999 and 1998.
Notes to consolidated financial statements -- March 31, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
AMENDED
-----------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 723,873 $ 3,834,023
Accounts receivable 5,584,663 6,604,186
Allowance for doubtful accounts (109,206) (43,717)
Unbilled accounts receivable 972,001 327,475
Other current assets 1,240,425 1,051,296
Notes Receivable 4,400 235,155
-----------------------------
Total Current Assets 8,416,156 12,008,418
Property and equipment, net 2,443,910 2,123,412
Goodwill, net 171,875 2,545,885
Other assets 543,569 249,400
-----------------------------
Total Assets $ 11,575,510 $ 16,927,115
=============================
LIABILITY & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,339,430 $ 3,199,760
Accrued liabilities 1,440,257 4,406,014
Accrued restructuring costs 758,760 --
Line of credit 2,192,135 2,750,000
Note payable - CBC 3,050,000 --
Deferred income 1,442,785 2,342,133
-----------------------------
Total Current Liabilities 13,223,367 12,697,907
Total Liabilities 13,223,367 12,697,907
-----------------------------
Minority interest 792,150 465,750
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares- 20,000,000
Issued & outstanding shares- 7,506,660
March 31, 1999 and 7,237,429 June 30, 1998 75,068 72,375
Additional paid-in capital 15,682,245 15,334,937
Accumulated deficit (18,197,321) (11,643,854)
-----------------------------
Total Shareholders' Equity (2,440,008) 3,763,458
-----------------------------
Total Liabilities & Shareholders' Equity $ 11,575,510 $ 16,927,115
=============================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
AMENDED AMENDED
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues $ 16,274,699 $ 14,756,151 $ 47,658,983 $ 37,476,387
Cost of production 13,889,304 11,861,075 40,718,058 30,115,565
----------------------------- -----------------------------
Gross profit 2,385,395 2,895,076 6,940,925 7,360,822
Operating expenses:
Selling 902,567 545,586 2,536,616 1,745,037
General and administrative 1,948,157 2,473,250 5,169,196 5,779,168
----------------------------- -----------------------------
Income (loss) from productions (465,329) (123,760) (764,887) (163,383)
Subsidiary stock option compensation 108,800 -- 326,400 --
Corporate 530,262 697,796 1,157,813 1,581,264
Depreciation & amortization 196,562 175,806 670,898 525,877
Restructuring costs and impairment of assets (175,000) -- 3,357,495 --
----------------------------- -----------------------------
Income (loss) from operations (1,125,953) (997,362) (6,277,493) (2,270,524)
Interest income 16,818 32,545 46,743 62,032
Interest expense (95,907) (28,079) (313,117) (40,316)
----------------------------- -----------------------------
Net income (loss) before income taxes (1,205,042) (992,896) (6,543,867) (2,248,808)
Income taxes -- -- 9,601 23,142
---------------------------------------------------------------
Net income (loss) $ (1,205,042) $ (992,896) $ (6,553,468) $ (2,271,950)
============================= =============================
Net income (loss) per share $ (0.16) $ (0.15) $ (0.89) $ (0.35)
============================= =============================
Weighted average number of shares outstanding 7,506,660 6,487,429 7,376,957 6,494,219
============================= =============================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1999 1998
AMENDED
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(6,553,468) $(2,271,950)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation & amortization 670,898 525,877
Impairment of assets 2,215,175 --
Issuance of non-cash compensation expense 326,400 75,000
Decrease (increase) in:
Accounts receivable 1,085,012 (387,125)
Unbilled accounts receivable (644,526) 413,019
Other assets (189,129) 671,821
Increase (decrease) in:
Accounts payable 1,139,670 144,229
Accrued liabilities (2,965,756) (2,216,413)
Deferred income (899,348) (605,786)
Accrued restructuring costs 758,760 --
---------------------------
Net cash used in operating activities: (5,056,312) (3,651,328)
INVESTING ACTIVITIES:
Capital expenditures (1,126,730) (382,686)
Notes receivable 230,755 (650,000)
---------------------------
Net cash used in investing activities (895,975) (1,032,686)
---------------------------
FINANCING ACTIVITIES:
Line of credit (557,865) 2,750,000
Bank Overdraft -- 134,140
Debt proceeds 3,050,000 --
Proceeds from issuance (repurchase) of common stock 350,000 (554,750)
---------------------------
Net cash provided by/(used in) financing activities 2,842,135 2,329,390
---------------------------
Increase (decrease) in cash and cash equivalents (3,110,151) (2,354,624)
Cash and cash equivalents at beginning of period 3,834,023 2,354,624
---------------------------
Cash and cash equivalents at end of period $ 723,872 $ --
===========================
</TABLE>
<PAGE>
Harmony Holdings, Inc. Notes to Consolidated Financial Statements (unaudited)
March 31, 1999
Note 1--Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals with the exception of the adjustments
discussed in Note 2) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 1999. For further information, refer to the consolidated
financial statements and footnote thereto included in the Company's Form 10-K
for the year ended June 30, 1998.
Note 2--Significant Transactions During Fiscal Year Ending June 30, 1999
The following significant transactions occurred during the first nine months of
the fiscal year ending June 30, 1999 and are considered not-recurring:
A. In July 1998, Children's Broadcasting Corporation ("CBC") purchased
250,000 shares of the Company's common stock on the open market. The
purchase of these shares resulted in an increase in CBC's ownership
of the Company to approximately 44.1%.
B. In July 1998, the Company replaced its then existing bank line of
credit with an asset-based loan and security agreement with Heller
Financial, Inc. ("Heller"). This loan and security agreement
provides for borrowings under a revolving line of credit with
maximum availability of $5,000,000 based on acceptable accounts
receivable, which line of credit bears interest at a variable rate
(9.25% at March 31, 1999). The loan and security agreement requires
the Company to comply with certain restrictive covenants and is
guaranteed by CBC.
C. In November 1998, CBC made an equity investment in the Company of
$350,000 by purchasing 269,231 shares of the Company's common stock
for a price of $1.30 per share. CBC also purchased an additional
225,000 shares of the Company's common stock from individual
shareholders. Through these transactions, CBC's ownership in the
Company increased to approximately 49.1%.
D. In November 1998, the Company announced and began the process of
discontinuing operations of its Harmony Pictures division of
companies. This division consists of Harmony Pictures, Inc., Melody
Films, Inc., Lexington Films, Inc., and Pure Films, Inc. During the
June 30, 1998 fiscal year, this division recorded revenues of
$10,867,000 and operating losses of $1,625,000. Results of
operations for the division prior to discontinuance in the second
quarter of fiscal year 1999 were:
Six Months Ended
12/31/98 12/31/97
--------------------
Revenues $1,855,000 $5,801,000
Operating Loss $(812,000) $(592,000)
In connection with discontinuing the division's operations,
management
<PAGE>
has estimated and accrued restructuring costs totaling $888,000. In
addition to this accrual, the Company had incurred and paid costs
totaling $429,000 prior to recording this accrual in December 1998.
These costs were accrued when the discontinuance decisions were
announced and the restructure costs could be reasonably estimated.
These costs include severance payments, contract buyouts, lease
obligations, non-refundable prepayments, and general office
shut-down logistics. At March 31, 1999, $759,000 of these accrued
expenses remained on the balance sheet. The Company believes all
obligations will have been met by the close of the fiscal year
ending June 30, 1999. Upon reaching the decision to discontinue the
division's operations, management determined that the goodwill
associated with the divisions was fully impaired. Accordingly, an
impairment charge equaling the net book value of the goodwill,
$2,215,000, was recognized in the quarter ended December 31, 1998.
E. In November and December 1998, CBC advanced the Company working
capital of $75,000, $500,000, $200,000, and $100,000 in four
separate transactions. These advances are evidenced by four
promissory notes, each due within 30 days after demand and each
bearing interest at a rate of 10% per annum. Of these advances,
$200,000 plus related interest was repaid to CBC. In February 1999,
pursuant to board consents of the related-party transaction
committee of the Company, all outstanding promissory notes due from
the Company to CBC now bear interest rates of 14% per annum.
Additionally, all future notes between the Company and CBC would
also bear a 14% interest rate. The Company believes that the 14%
interest rate is more representative of the interest rates that
would be charged to the Company by other junior and unsecured
lenders from which the Company may seek financing.
F. In January 1999, CBC advanced the Company working capital of
$75,000, $1,100,000 and $900,000 in three separate transactions.
These advances are evidenced by three promissory notes, each due
within 30 days after demand and each bearing interest at a rate of
14% per annum.
G. In February 1999, the Company filed a report on Form 8-K with the
Securities and Exchange Commission announcing that effective as of
close of business on February 9, 1999, the Company's shares of
common stock were removed from the Nasdaq SmallCap Market and are
now being traded on the OTC Bulletin Board which is run and operated
by Nasdaq. This action was a result of the Company falling below the
net tangible asset threshold required to remain listed on the Nasdaq
SmallCap Market.
H. In February 1999, CBC advanced the Company working capital of
$300,000 as evidenced by promissory notes due within 30 days after
demand and bearing interest at a rate of 14% per annum.
I. In April 1999, CBC purchased 225,000 shares of the Company's common
stock on the open market. This purchase of stock increases CBC's
ownership of the Company to 52.1%. As a further commitment to its
investment, CBC's board of directors extended its commitment to
invest such funds in the Company as may be necessary to meet its
working capital requirements through December 31, 1999.
Note 3--Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform with 1999 presentation. These reclassifications have no effect on the
accumulated deficit or the net loss previously reported.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
<PAGE>
Results of Operations
Statements in this report that are forward-looking are based on
current expectations, and actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's services may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive pricing and such other risks and uncertainties as are described in
this report on Form 10-Q and other documents previously filed or hereafter filed
by the Company from time to time with the Securities and Exchange Commission.
Overview
During the periods reported herein, the Company operated through
four major groups, or divisions. Each division consists of one of the Company's
subsidiaries, which subsidiary in turn may operate one or more of its own
subsidiaries. The four principal subsidiaries that represent the major operating
divisions are The End, Inc. ("The End"), The End (London),LTD. ("The End
(London)"), Curious Pictures Corporation ("Curious Pictures"), and Harmony
Pictures, Inc. ("Harmony Pictures"). The End (London) was formed in 1997 and, as
a start-up company, did not contribute significantly to the Company's overall
operations during the nine months ended March 31, 1998 to the extent it has as a
fully operational division during the nine months ended March 31, 1999.
During the second quarter of fiscal year 1999, the Company
discontinued the operations of Harmony Pictures. The three remaining principal
subsidiaries continue to be fully operational.
Results of Operations:
Three and Nine months Ended March 31, 1999 Compared to Three and
Nine Months Ended March 31, 1998:
The Company's total revenues increased $1,519,000 or 10% from
$14,756,000 in the third quarter of fiscal year 1998 to $16,275,000 in the third
quarter of fiscal year 1999. Revenues during the first nine months of the
current year increased 27% from $37,476,000 through March 31, 1998 to
$47,659,000 through March 31, 1999. This increase in revenue represents revenue
increases of $7.5 million by The End (London), $5.6 million by Curious Pictures,
and $3.8 million by The End. These increases are due primarily to the improved
resources with which the subsidiaries are able to attract and retain directors.
The increase in revenues at the three remaining operating divisions more than
offsets the decrease in revenues due to the discontinuance of Harmony Pictures.
Revenue at Harmony Pictures decreased $6.6 million during the first nine months
of the current year. 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 including film, crews, location fees and commercial directors' fees.
Cost of production as a percentage of revenues increased from approximately 80%
to 85% during the third quarter and first nine months of fiscal year 1999
compared to similar periods of fiscal year 1998. This increase is due to bids
submitted by the Company at lower margins 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 will decrease to previous levels as
these new directors become more established. As a result of the increase in the
cost of production, gross margins as a percentage of revenues decreased from 20%
for the quarter and nine months ended March 31, 1998 to 15% in the same periods
of fiscal year 1999.
<PAGE>
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
television commercial contracts. These expenses increased in conjunction with
the increase in revenues. Selling expenses totaled $903,000 in the third quarter
of fiscal year 1999 compared to $546,000 in the third quarter of fiscal year
1998, an increase of 65%. During the first nine months of fiscal year 1999,
these expenses increased 45% compared to the same period in fiscal year 1998 due
primarily to expenses related to The End (London), which has been fully
operational throughout the current fiscal year but was not fully operational
during the last fiscal year.
General and administrative expenses and corporate charges consist of
overhead costs such as office rent and expenses, executive, general and
administrative payroll, and related items. These expenses decreased $693,000 in
the third quarter of fiscal year 1999 to $2,478,000 as compared to $3,171,000
for the third quarter of fiscal year 1998. These expenses decreased 14% during
the first nine months of fiscal year 1999 as compared to the same period in
fiscal year 1998, due in part to the cessation of operations at Harmony
Pictures. During comparable nine-month periods of fiscal year 1999 and fiscal
year 1998, general and administrative expenses at Harmony Pictures decreased
$796,000 due to the discontinuation of its operations. While these expenses
increased slightly at the remaining three divisions, general and administrative
expenses decreased $423,000 at the corporate level due to the restructuring of
the corporate offices.
The $109,000 stock option compensation expense reported during the
quarter ended March 31, 1999 and $326,000 reported for the nine months ended
March 31, 1999 represent 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. The cumulative amount of
compensation expense recognized related to this agreement is reflected as a
minority interest in Curious Pictures on the accompanying balance sheet.
Depreciation and amortization expense increased in the third quarter
of fiscal year 1999 by 12% and in the first nine months of fiscal year 1999 it
increased by 28% compared to the same periods of fiscal year 1998, due to an
overall increase in depreciable assets over the first nine months of fiscal
1999.
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
$1,317,000 were also recognized in the second quarter and reduced by $175,000 in
the third quarter on the accompanying income statement. This reduction
represents a change in the estimate of costs to close the division. 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 $16,000 and $15,000 during the three and
nine months ended March 31, 1999 respectively compared to similar periods ending
March 31, 1998. Interest expense for the third quarter of fiscal year 1999 was
$96,000, an increase of $68,000 over the third quarter of fiscal year 1998.
During the first nine months of fiscal year 1999, interest expense increased
$273,000 from $40,000 to $313,000 as a result of increased borrowings by the
Company under the new credit facility the Company entered into with Heller in
July 1998, as well as the interest incurred as a result of borrowings from CBC.
No income tax expense was incurred in the third quarter of fiscal
year 1999 and income tax expense decreased to $10,000 from $23,000 during the
first nine months of fiscal year 1999 compared to the same period of fiscal year
1998. The Company's effective income tax rate varied from the statutory federal
tax rate
<PAGE>
as a result of state taxes and an increase in the 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.
The Company as a whole incurred net losses of $1,205,000 and
$6,553,000 for the three and nine-month periods ended March 31, 1999
respectively. The losses for the nine-month period include the restructuring and
asset impairment costs totaling $3,357,000 related to the discontinued
operations of Harmony Pictures. During the first nine months of fiscal year
1999, the Company would have generated a net loss of only $2,109,000 if it were
not for the activities of Harmony Pictures.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was a
deficit of $4,807,000 at March 31, 1999 compared to a deficit of $689,000 at
June 30, 1998.
In July 1998, the Company replaced its bank line of credit with an
asset based loan and security agreement with Heller (see Note 2.B of the
financial statements). As part of this agreement, the Company is allowed to
borrow from a revolving line of credit, with a maximum availability of
$5,000,000 or a percentage of acceptable accounts receivable. The interest rate
is variable (9.25% at March 31, 1999). At March 31, 1999, the Company had a
$2,192,000 balance due on the line of credit. The loan and security agreement
requires the Company to comply with certain restrictive covenants. At March 31,
1999, the Company was not in compliance with the covenant, which requires that
the Company maintain a minimum stockholders' equity of $3,000,000. The Company
has received a waiver from Heller regarding this covenant in the past and is
seeking a waiver for the current reporting period.
As the Company's operations have not been able to support its
working capital needs, CBC, the Company's principal stockholder, has extended
its undertaking to invest such funds in the Company as necessary to meet its
working capital requirements through December 31, 1999. This may involve loans
or the purchase of securities. In November 1998, CBC made an equity investment
in the Company of $350,000 by purchasing 269,231 shares of the Company's common
stock for a price of $1.30 per share. CBC's ownership in the Company is now
approximately 52.1%. Throughout November and December 1998, CBC 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 CBC advanced the Company an aggregate of
$2,375,000 as evidenced by 30-day demand promissory notes bearing the same terms
described above.
In November 1998, management of the Company determined 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 as well. It is management's belief that the
discontinuance of
<PAGE>
operations at the Harmony Pictures division will aid the Company in meeting its
working capital requirements in the future.
Consolidated cash was $724,000 at March 31, 1999 and $3,834,000 at
June 30, 1998, a decrease of $3,110,000.
Cash used in operating activities for the nine months ended March
31, 1999 was $5,056,000. Accounts receivable at March 31, 1999 decreased
$1,085,000 from June 30, 1998, and other current assets at March 31, 1999
increased $834,000 from June 30, 1998. Accounts payable at March 31, 1999
increased $1,140,000 from June 30, 1998, accrued expenses decreased $2,966,000
from June 30, 1998 to March 31, 1998, deferred income decreased $899,000 and
accrued restructuring cost increased $759,000 during that same period.
During the nine months ended March 31, 1999, cash used in investing
activities was $896,000. 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 nine months ended
March 31, 1999 was $2,842,000 which was provided through the cash borrowings
from CBC and the proceeds from the issuance of common stock to CBC, net of the
repayment of $200,000 of the borrowings from CBC.
During the nine months ended March 31, 1999, the Company incurred a
net loss of $6,553,000 and a cash flow from operations deficit of $5,056,000,
resulting in a working capital deficit of $4,807,000 and an accumulated deficit
totaling $18,197,000 at March 31, 1999. At this time the Company's only firm
external financing resource other than its existing asset based loan and
security agreement, which requires that the Company maintain minimum
stockholders equity of $3,000,000, is the commitment CBC has made to fund the
Company's working capital needs through December 31, 1999. The Company has taken
steps to curtail its level of net operating losses by discontinuing the
operations of the Harmony Pictures division. The write-off and losses of Harmony
Pictures accounted for $3,357,000 of the $6,553,000 net loss during the year. If
the losses are not curtailed, the Company risks losing its line of credit and
will need to rely solely on CBC until other financing options become available.
In order to obtain the proceeds that the Company expects it may need during the
next year, the Company intends to attempt to raise additional debt and/or equity
financing. The Company is currently holding discussions with various possible
financing sources and believes that the requisite financing can be obtained.
However, no assurance can be given that the Company will, in fact, be able to
obtain additional financing or that the terms of such financing will be
favorable to the Company. The Company believes that both the expected benefits
to be derived from the current restructuring of the Company's operations,
including the discontinuation of operation at the Harmony Pictures division, the
expected level of operations during the next year, and the continued support of
CBC may offset some or all of any liquidity shortage that may occur.
Inflation
Inflation has not had a significant effect on the Company.
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's compute programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure of miscalculations causing disruptions or operations,
including, among other things, a temporary inability to process transactions,
send invoices, or
<PAGE>
engage in similar business activities. Management has made an assessment of its
systems and has been advised by its computer consultant that its systems are
Year 2000 compliant. Management also believes that its television production
equipment will not be impacted by the Year 2000 Issue because the equipment is
not date sensitive. Additionally, management believes it will not be materially
impacted by the Year 2000 compliance of third parties with which it conducts
business.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on October 7, 1999.
HARMONY HOLDINGS, INC.
BY: /s/ James G. Gilbertson
---------------------------------
James G. Gilbertson
ITS: Chief Operation Officer and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 723,873
<SECURITIES> 0
<RECEIVABLES> 5,584,663
<ALLOWANCES> (109,206)
<INVENTORY> 0
<CURRENT-ASSETS> 8,416,156
<PP&E> 4,174,357
<DEPRECIATION> (1,730,447)
<TOTAL-ASSETS> 11,575,510
<CURRENT-LIABILITIES> 13,223,367
<BONDS> 0
0
0
<COMMON> 75,068
<OTHER-SE> (2,515,076)
<TOTAL-LIABILITY-AND-EQUITY> 11,575,510
<SALES> 47,658,983
<TOTAL-REVENUES> 47,658,983
<CGS> 40,718,058
<TOTAL-COSTS> 40,718,058
<OTHER-EXPENSES> 13,218,418
<LOSS-PROVISION> (109,206)
<INTEREST-EXPENSE> 313,117
<INCOME-PRETAX> (6,543,867)
<INCOME-TAX> 9,601
<INCOME-CONTINUING> (6,553,468)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,553,468)
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
