SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 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 November 3, 1999
-------------------- -------------------------------
COMMON STOCK, PAR VALUE 7,506,660 SHARES
$.01 PER SHARE
<PAGE>
INDEX
HARMONY HOLDINGS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1999 and
June 30, 1999.
Consolidated Statements of Operations -- Three months ended
September 30, 1999 and 1998.
Consolidated Statements of Cash Flows -- Three months ended
September 30, 1999 and 1998.
Notes to consolidated financial statements -- September 30, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
(UNAUDITED) (AUDITED)
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 266,181 $ 2,910,618
Accounts receivable 3,107,405 6,365,303
Allowance for doubtful accounts (179,664) (253,381)
Unbilled receivables 100,584 --
Compensation draws 518,378 --
Prepaid expenses 569,589 --
Other current assets 94,308 1,690,413
-------------------------------
Total Current Assets 4,476,781 10,712,953
Property and equipment, net 707,801 2,629,521
Investment in Curious Pictures 1,122,765 --
Goodwill, net 165,625 168,750
Other assets 205,175 610,231
-------------------------------
Total Assets $ 6,678,147 $ 14,121,455
===============================
LIABILITY & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,345,653 $ 3,232,125
Accrued liabilities 2,460,914 3,842,807
Line of credit 2,124,773 2,468,527
Due to Curious Pictures 1,214,093 --
Note payable - iNTELEFILM 2,278,615 2,729,342
Deferred income -- 3,429,794
-------------------------------
Total Current Liabilities 9,424,048 15,702,594
Total Liabilities 9,424,048 15,702,594
-------------------------------
Minority interest -- 2,700,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares- 20,000,000
Issued & outstanding shares- 7,506,660
September 30, 1999 and June 30, 1999 75,068 75,067
Additional paid-in capital 17,257,277 15,682,245
Accumulated deficit (20,078,246) (20,038,452)
-------------------------------
Total Shareholders' Equity (2,745,901) (4,281,139)
-------------------------------
Total Liabilities & Shareholders' Equity $ 6,678,147 $ 14,121,455
===============================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Revenues:
Contract revenues $ 11,923,566 $ 17,304,399
Cost of production 10,129,449 14,523,459
-------------------------------
Gross profit 1,794,117 2,780,940
Operating expenses:
Selling 397,976 816,684
General and administrative 1,024,784 1,718,626
-------------------------------
Production service income 371,357 245,630
Subsidiary stock option compensation -- 108,800
Corporate 342,485 321,520
Depreciation & amortization 100,555 209,356
-------------------------------
Income (loss) from operations (71,683) (394,046)
Gain (loss) on disposal of The End (London) 149,964 --
Equity gain (loss) in Curious Pictures 22,199 --
Interest income net of interest (expense) (140,274) (104,485)
-------------------------------
Net income (loss) before income taxes (39,794) (498,531)
Income taxes -- 9,601
-------------------------------
Net income (loss) $ (39,794) $ (508,132)
===============================
Net income (loss) per share $ (0.01) $ (0.07)
===============================
Weighted average number of shares outstanding 7,506,660 7,237,429
===============================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net gain (loss) $ (39,794) $ (508,132)
Adjustments to reconcile net gain (loss) to net cash
provided by (used in) operating activities:
Depreciation & amortization 100,555 209,356
Provision for doubtful accounts (73,717) --
(Gain) loss on disposal of The End (London) (149,964) --
(Gain) loss on equity investment in Curous Pictures (22,199) --
Issuance of non-cash compensation expense -- 108,800
Decrease (increase) in:
Accounts receivable 1,886,765 1,251,980
Other current assets (61,548) 306,302
Other assets (61,605) --
Increase (decrease) in:
Accounts payable (673,670) 122,326
Accrued liabilities (326,957) (1,333,826)
Due to Curious Pictures (538,313) --
Deferred income (1,523,617) (123,319)
-------------------------------
Net cash provided by (used in) operating activities: (1,484,064) 33,487
INVESTING ACTIVITIES:
Capital (expenditures) divestitures (283,523) (962,062)
Equity investment in Curious Pictures (85,494) --
Other assets 3,125 230,155
-------------------------------
Net cash used in investing activities (365,892) (731,907)
-------------------------------
FINANCING ACTIVITIES:
Line of credit (343,754) (188,524)
Payment of debt (450,727) --
-------------------------------
Net cash used in financing activities (794,481) (188,524)
-------------------------------
Increase (decrease) in cash and cash equivalents (2,644,437) (886,944)
Cash and cash equivalents at beginning of period 2,910,618 3,834,023
-------------------------------
Cash and cash equivalents at end of period $ 266,181 $ 2,947,079
===============================
</TABLE>
<PAGE>
Harmony Holdings, Inc. Notes to Consolidated Financial Statements (unaudited)
September 30, 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 three-month period ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2000. 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, 1999.
Additionally, effective August 1, 1999, iNTELEFILM Corporation ("iNTELEFILM"),
the Company's majority shareholder, purchased 51% of the outstanding stock of
Curious Pictures Corporation ("Curious Pictures") (see Note 2B). As a result,
for financial statement purposes, the Company will account for Curious Pictures'
operations under the equity method, rather than consolidating their financial
results as it has for all periods prior to August 1, 1999.
Note 2--Significant Transactions During Fiscal Year Ending June 30, 2000
The following significant transactions occurred during the first three months of
the fiscal year ending June 30, 2000 and are considered not-recurring:
A. Effective July 1, 1999, the Company sold 90% of the issued and
outstanding shares of capital stock of The End (London), LTD ("The End
(London)") to a principal executive (the "Purchaser") of The End
(London) for nominal consideration. 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. For the fiscal year ended
June 30, 1999 and 1998, The End (London) had gross revenues of
approximately $11.2 million and $3.7 million, and net losses of
approximately $862,000 and $591,000, 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 into an agreement
granting the Purchaser the right, under certain circumstances, to
purchase the remaining 10% equity interest in The End (London) from the
Company for approximately $803,000.
B. Effective August 1, 1999, iNTELEFILM purchased the option and share
transfer agreement ("the Option Agreement") entered into by the Company
and the four principal executives of Curious Pictures (collectively,
"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
<PAGE>
purchase the 50% equity interest in Curious Pictures had fully vested
and were exercisable for consideration totaling $50. iNTELEFILM
immediately exercised those options. 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 $3.0 million, consisting of $1.5 million in
cash and a $1.5 million note receivable. 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.
At the same time, Curious Pictures 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. 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%. 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.
Note 3--Investment in Curious Pictures
Effective August 1, 1999, the Company has a 49% equity
investment in Curious Pictures (see Note 2B). Curious Pictures'
operations are summarized as follows for the period of August 1, 1999
through September 30, 1999:
Two Months
Ended 9/30/99
-------------
Contract revenues $4,454,740
Cost of production 3,506,762
----------
Gross profit 947,978
Operating expenses 906,440
----------
Income from operations 41,538
Interest (income) (3,765)
----------
Net income $45,303
----------
<PAGE>
Curious Pictures results from operations are accounted for
under the equity method for all periods after August 1, 1999. Previous
periods are consolidated in the Company's financial statements. As a
result of the transition to the equity method, the Company increased
paid-in capital by $1.1 million to state the investment at the
Company's prorata share of Curious Pictures' net assets.
Note 4--Reclassifications
Certain amounts in the 1999 financial statements have been
reclassified to conform with 2000 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
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 quarter ended September 30, 1999, the Company operated
through two 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 two principal subsidiaries that represent the major
operating divisions are The End, Inc. ("The End") and Curious Pictures. The End
is a wholly owned subsidiary of the Company. Curious Pictures operated as a
majority owned subsidiary during July 1999 only. Effective August 1, 1999, the
Company owns only 49% of Curious Picture's common stock (see Note 2B of the
attached financial statements). As a result, the Company will recognize, as an
equity investment, 49% of the income or loss produced by Curious Pictures.
During the fiscal year ended June 30, 1999, the Company operated two additional
divisions, Harmony Pictures, Inc. ("Harmony Pictures") and The End (London).
Harmony Pictures discontinued operations during the second quarter of fiscal
year 1999, and the Company sold 90% of the stock of The End (London) as of July
1, 1999 (see Note 2A of the attached financial statements).
Results of Operations:
Three months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998:
The Company's total revenues decreased $5,381,000 or 31% from
$17,305,000
<PAGE>
in the first quarter of fiscal year 1999 to $11,924,000 in the first quarter of
fiscal year 2000. Of the decrease in revenues, $5.9 million is from the two
divisions no longer operated by the Company, while $2.9 million is from revenues
of Curious Pictures which is no longer consolidated in the Company's financial
statements. Revenues at The End increased $3.5 million in the first quarter of
fiscal year 2000 compared to the same period in the prior year. These increases
were due primarily to the improved resources with which The End is able to
attract and retain directors.
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 84% to 85% in the first quarter of fiscal year 2000 compared to
the same period of fiscal year 1999. As a result of the increase in the cost of
production, gross margins as a percentage of revenues decreased from 16% for the
quarter ended September 30, 1998 to 15% in the quarter ended September 30, 1999.
Additionally, the addition of several new directors led to the submission of
lower bids by the Company 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.
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
production contracts. Selling expenses totaled $398,000 in the first quarter of
fiscal year 2000 compared to $817,000 in the same period of fiscal year 1999, a
decrease of $419,000. Selling expense at The End increased $50,000 during these
comparative periods, while a decrease of $469,000 is related to Curious Pictures
and the two divisions no longer operated by the Company.
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 $694,000 in the first quarter of
fiscal year 2000 to $1,025,000 as compared to $1,719,000 for the first quarter
of fiscal year 1999. These expenses increased $341,000 at The End due primarily
to the increased activities at The End's subsidiaries as new directors were
signed. The decrease of $1,035,000 is related to Curious Pictures and the two
divisions no longer operated by the Company.
The $109,000 stock option compensation expense reported during the
quarter ended September 30,1999 represented a non-cash charge resulting from
certain managers of Curious Pictures earning stock options of Curious Pictures.
This agreement terminated upon iNTELEFILM's exercise of the options granted (see
Note 2B to the financial statements).
Corporate charges increased $21,000 or 7% in the first quarter of
fiscal year 2000 compared to the same period of fiscal 1999.
Depreciation and amortization expense decreased in the first quarter of
fiscal year 2000 by $109,000 or 52% compared to the first quarter of fiscal year
1999. This expense decreased primarily due to the discontinuance of operations
<PAGE>
of Harmony Pictures which led to the write-off of the related goodwill.
As a result of the sale of 90% of the Company's interest in The End
(London) (see Note 2A to the financial statements), the Company was relieved of
liabilities in excess of assets forfeited, resulting in a non-cash gain to the
Company of $150,000.
Interest expense increased $36,000 during the first quarter of fiscal
year 2000 compared to fiscal year 1999, as a result of increased borrowings by
the Company under its credit facility, as well as the interest incurred as a
result of borrowings from iNTELEFILM.
Income tax expense decreased $10,000 in the first quarter of fiscal
year 2000 as compared to the first quarter of 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 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 incurred net losses of $40,000 and $508,000 for the
three-month periods ended September 30, 1999 and 1998, respectively.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was a
deficit of $4,948,000 at September 30, 1999 compared to a deficit of $4,990,000
at June 30, 1999.
Consolidated cash was $266,000 at September 30, 1999 and $2,911,000 at
June 30, 1999, a decrease of $2,645,000.
Although the Company's net loss for the quarter ended September 30,
1999 was $40,000, cash used in operating activities for the quarter ended
September 30, 1999 was $1,484,000. Net of the effect of the sale of the End
(London) and the effect of not consolidating Curious Pictures, accounts
receivable at September 30, 1999 decreased $1,887,000 from June 30, 1999, and
other assets at September 30, 1999 increased $123,000 from June 30, 1999.
Accounts payable at September 30, 1999 decreased $674,000 from June 30, 1999,
other liabilities decreased $865,000 from June 30, 1999 to September 30, 1999,
and deferred income decreased $1,524,000 during that same period.
During the quarter ended September 30, 1999, cash used in investing
activities was $366,000. This represents cash used for capital expenditures
incurred in the normal course of operations, and cash forfeited in the
transactions involving The End (London) and Curious Pictures (see Note 2A & 2B
to the financial statements).
<PAGE>
Cash used in financing activities during the quarter ended September
30, 1999 was $794,000, which was used to pay down the line of credit and to
repay borrowings from iNTELEFILM.
To date, the Company has funded a portion of its working capital needs
through a revolving line of credit with Freemont Funding, Inc. (" Freemont"),
which provides for borrowings of up to $5.0 million, based on acceptable
accounts receivable. This line of credit bears interest at a variable rate
(9.75% at September 30, 1999) and is secured by a lien on all of the Company's
assets. The loan and security agreement requires the Company to comply with
certain restrictive covenants, one of which is that the Company maintains a
minimum shareholders' equity of $3.0 million. As of September 30, 1999, the
Company had negative shareholders' equity of $2.7 million, and as a result, is
in default of the agreement. As a result, Freemont has the right to declare all
obligations under this agreement immediately due and payable. However, in
preliminary negotiations, Freemont has agreed to forbear from exercising these
rights until a date in the first quarter of 2000, yet to be determined, provided
the Company meets certain conditions. These conditions include, but are not
limited to, the Company delivering to Freemont, on or before a date in January
2000, yet to be determined, a commitment letter for the consummation of a
financing that will result in the repayment of all obligations owed Freemont by
the Company. As part of these preliminary negotiations, Freemont has agreed to
continue to make advances to the Company during this time period, provided all
conditions of the agreement are met. The Company's obligations under the credit
facility are 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
have to date been, and may in the future be in the form of loans or the purchase
of securities. During the last fiscal year, iNTELEFILM advanced the Company an
aggregate of $3.3 million as evidenced by promissory notes, each due within 30
days of demand and each bearing interest at a rate of 14% per annum. At
September 30, 1999, advances totaling $2.3 million remained outstanding.
For nominal consideration, effective July 1, 1999, the Company sold 90%
of the issued and outstanding shares of capital stock 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 $3.7 million and $11.2 million and net losses of $591,000 and
$862,000, respectively. In connection with the sale of the stock, the Purchaser,
under certain circumstances, may purchase the remaining 10% equity interest in
The End (London) from the Company for approximately $803,000. As a result of
this transaction, the Company was relieved of approximately $1.5 million in
liabilities and forfeited approximately $1.3 million of assets, including
$314,000 of cash. The disposal of this subsidiary will relieve the Company of
the need to financially support this subsidiary and should improve future
liquidity.
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 no longer consolidates the
revenues and expenses of this division, rather it accounts for Curious Pictures
as an
<PAGE>
equity investment. Additionally, the Company now reflects on its balance sheet,
the amount due to Curious Pictures, which totaled $1.8 million and $1.2 million
at August 1, and September 30, 1999, respectively. Prior to the aforementioned
transaction, this payable was eliminated through the consolidation of Curious
Pictures.
During the quarter ended September 30, 1999, the Company incurred a net
loss of $40,000 and a cash flow from operations deficit of $1.5 million,
resulting in a working capital deficit of $5.0 million and an accumulated
deficit totaling $20.1 million at September 30, 1999. At this time the Company's
only 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. As the Company is currently in default
of its agreement with Freemont, Freemont has the right to declare all
obligations under this agreement immediately due and payable and, if the
indebtedness is not repaid, to foreclose on the Company's assets. However,
Freemont has agreed to forbear from exercising these rights until a date in the
first quarter of 2000, yet to be determined, provided the Company meets certain
conditions. These conditions include, but are not limited to, the Company
delivering to Freemont, on or before a date in January 2000, yet to be
determined, a commitment letter for the consummation of a financing that will
result in the repayment of all obligations owed Freemont by the Company.
Freemont has agreed to continue to make advances to the Company during this time
period, provided all conditions of the agreement are met. To date, the Company
has not obtained a commitment from any lender or other financing source for a
facility that will either replace the Freemont credit facility or result in the
repayment of the Freemont loan. If the Company is not able to repay the Freemont
loan in full upon the expiration of the forbearance agreement in the first
quarter of 2000, Freemont will be entitled to foreclose on all of the Company's
assets. In addition, even if the Company is able to repay the Freemont loan in
full, unless the Company obtains an alternate credit facility, the Company will
not be able to fund its working capital needs which, in turn, will materially
and adversely affect the Company's future liquidity and operation. No assurance
can be given that the Company will be able to repay the Freemont loan in the
first quarter of 2000, or that the Company will be able to find an alternative
source of financing to fund its future working capital needs. Given these
circumstances, the Company will be dependent on financing from iNTELEFILM until
other financing options become available. However, no legally binding commitment
for financing exists between the Company and iNTELEFILM, and 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 June 30, 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 in its future
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 $4.4 million
and $862,000 for the year ended June 30, 1999, respectively. This $4.4 million
loss of Harmony Pictures includes $3.4 million of restructuring and impairment
of asset charges recognized in connection with the closing of Harmony Pictures.
Additionally, The End recorded revenues of $35.1 million and $10.6 million for
the year ended June 30, 1999 and the quarter ended September 30, 1999
respectively, and earned income from production of $605,000 and $267,000 for the
year ended June 30, 1999 and the quarter ended September 30, 1999 respectively.
Although the Company believes that its operating expenses will be significantly
reduced in the future due to the reorganization it has now completed, the
Company does not expect that, in the near future, its operations will generate
sufficient cash to fund its working capital needs and to repay its outstanding
indebtedness. Accordingly, the Company will continue to be dependent upon
iNTELEFILM for financing. In the event that the Company is unable to obtain a
form of funding from iNTELEFILM, 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 that event, the Company may have to take additional
steps to further reduce its operating expenses, which may negatively impact the
Company's operations.
<PAGE>
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 computer 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 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.
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits.
27 Financial Data Schedule
Reports on Form 8-K.
<PAGE>
1. The Company's Current Report on Form 8-K filed on August 6,
1999, relating to the sale of 90% of the issued and
outstanding stock of The End (London) to Julia Reed, the
executive producer of The End (London) and the purchase by
iNTELEFILM_ Corporation of 51% of Curious Pictures Corporation
from the four principal executives of Curious Pictures.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on November 12, 1999.
HARMONY HOLDINGS, INC.
BY: /s/ James G. Gilbertson
------------------------------------
James G. Gilbertson
ITS: Chief Operation Officer and
Chief Financial Officer
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