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, 2000;
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)
JUNE 30, 1999
(Registrant's Former Fiscal Year End)
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 11, 2000
----------------------- --------------------------------
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 - September 30, 2000 and December 31, 1999.
Consolidated Statements of Operations -- Three and nine months ended
September 30, 2000 and 1999.
Consolidated Statements of Cash Flows -- Nine months ended September
30, 2000 and 1999.
Condensed Notes to consolidated financial statements -- September 30,
2000.
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>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 110,152 $ 1,066,823
Accounts receivable 371,198 4,188,489
Allowance for doubtful accounts (35,458) (179,664)
Unbilled accounts receivable 256,514 --
Compensation draws -- 699,160
Prepaid expenses 152,031 370,105
Other current assets 79,665 106,112
------------ ------------
Total Current Assets 934,102 6,251,025
Property and equipment, net 624,043 751,876
Investment in Curious Pictures 1,476,974 1,369,269
Goodwill, net 155,208 162,500
Other assets 196,004 194,387
------------ ------------
Total Assets $ 3,386,331 $ 8,729,057
============ ============
LIABILITIES & SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 533,525 $ 1,094,832
Accrued liabilities 1,439,563 1,884,285
Line of credit -- 3,548,911
Due to Curious Pictures 1,922,005 1,609,553
Advances due to iNTELEFILM 2,743,989 --
Note payable - iNTELEFILM 3,193,615 3,193,615
Deferred income -- 1,239,527
------------ ------------
Total Current Liabilities 9,832,697 12,570,723
Total Liabilities 9,832,697 12,570,723
Commitments and Contingencies -- --
Shareholders' deficit:
Common stock, $.01 par value:
Authorized shares- 20,000,000
Issued & outstanding shares- 7,506,660
September 30, 2000 and December 31, 1999 75,067 75,067
Additional paid-in capital 17,257,279 17,257,279
Accumulated deficit (23,778,712) (21,174,012)
------------ ------------
Total Shareholders' Deficit (6,446,366) (3,841,666)
------------ ------------
Total Liabilities & Shareholders' Deficit $ 3,386,331 $ 8,729,057
============ ============
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,695,747 $ 11,923,566 $ 15,890,624 $ 46,879,537
Costs and expenses:
Cost of production 1,563,033 10,129,449 14,487,242 39,647,349
General selling & administrative (exclusive
of items shown below) 883,008 1,422,760 2,915,346 6,579,587
Subsidiary stock option compensation -- -- -- 2,016,650
Corporate 206,002 342,485 633,341 1,172,310
Depreciation & amortization 38,573 100,555 154,549 508,009
Restructuring cost & impairment of assets -- -- -- (175,000)
----------------------------- -----------------------------
Loss from operations (994,869) (71,683) (2,299,854) (2,869,368)
Gain on sale of subsidiary stock 149,964 149,964
Equity gain (loss) in Curious Pictures (140,622) 22,199 87,988 22,199
Interest income net of interest (expense) (117,121) (140,274) (378,197) (386,869)
----------------------------- -----------------------------
Net loss before income taxes (1,252,612) (39,794) (2,590,063) (3,084,074)
Income taxes 14,637 -- 14,637 1,892
----------------------------- -----------------------------
Net loss $ (1,267,249) $ (39,794) $ (2,604,700) $ (3,085,966)
============================= =============================
Net loss per share $ (0.17) $ (0.01) $ (0.35) $ (0.41)
============================= =============================
Weighted average number of shares outstanding 7,506,660 7,506,660 7,506,660 7,506,660
============================= =============================
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,604,700) $(3,085,966)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation & amortization 154,549 508,009
Impairment of assets -- (175,000)
Provision for doubtful accounts & director advances 554,954 70,458
Gain on subsidiary stock sale (149,964)
Gain on equity investment in Curious Pictures (87,988) (22,199)
Issuance of non-cash compensation expense -- 2,016,650
Decrease (increase) in: --
Accounts receivable 3,817,291 (664,501)
Other current assets (11,993) 211,077
Other assets (1,617) (214,919)
Increase (decrease) in: --
Accounts payable (561,307) (1,184,619)
Accrued liabilities (444,722) 1,741,836
Deferred income (1,239,527) 117,041
---------------------------
Net cash used in operating activities: (425,060) (832,097)
INVESTING ACTIVITIES:
Capital expenditures (39,141) (1,027,070)
---------------------------
Net cash used in investing activities (39,141) (1,027,070)
FINANCING ACTIVITIES:
Line of credit (3,548,911) (80,611)
Advances due to iNTELEFILM 2,743,989 --
Due to Curious Pictures 312,452 (538,313)
Payment of debt/debt proceeds -- 1,403,615
---------------------------
Net cash provided by (used in) financing activities (492,470) 784,691
---------------------------
Decrease in cash and cash equivalents (956,671) (1,074,476)
Cash and cash equivalents at beginning of period 1,066,823 1,340,657
---------------------------
Cash and cash equivalents at end of period $ 110,152 $ 266,181
===========================
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
Harmony Holdings, Inc. Condensed Notes to Consolidated Financial Statements
(unaudited)
September 30, 2000
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 and nine-month periods ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the
Company's Transition Report on Form 10-K for the period ended December 31, 1999.
The current operations of Harmony Holdings, Inc. ("the Company") are not
expected to be sufficient to fund its working capital needs and its debt service
obligations in the near future. Therefore, the Company will be dependent on
internal financing which, given current operating losses, may not be sufficient
to fund operations. Given these facts, the Company's independent certified
public accountants modified their opinion on the Company's December 31, 1999
Consolidated Financial Statements to contain a paragraph wherein they expressed
substantial doubt about the Company's ability to continue as a going concern.
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") from the four principal
executives of Curious Pictures (collectively, "Curious Management"). 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.
On June 29, 2000, the Company's Board of Directors approved a change in the
fiscal year-end of the Company from June 30 to December 31 effective with the
calendar year beginning January 1, 2000.
Note 2--Significant Transactions During Fiscal Year Ending December 31, 2000
The following significant transactions occurred during 2000 and are considered
non-recurring:
A. Through early-March 2000, the Company had funded a portion of its
working capital needs through a revolving line of credit with Finova
Capital Corporation ("Finova"), an unaffiliated institutional lender,
which provided for borrowings of up to $4.5 million, based on
acceptable accounts receivable. The Finova credit facility was
guaranteed by iNTELEFILM, the owner of approximately 55% of the
Company's outstanding
<PAGE>
common stock. In April 2000, Finova terminated this line of credit and
the Company repaid its indebtedness to Finova in full.
B. In March 2000, iNTELEFILM publicly announced its future intention to
commence an exchange offer with the shareholders of the Company to
acquire all of the outstanding shares of the Company's common stock
that are not currently owned by iNTELEFILM in exchange for shares of
iNTELEFILM common stock. iNTELEFILM currently owns approximately 55% of
the Company's common stock. According to its announcement, iNTELEFILM
proposes to offer one share of its common stock for every 13.75 shares
of the Company's common stock and the offer is conditioned upon
iNTELEFILM obtaining at least 90% of the outstanding stock of the
Company. If iNTELEFILM is successful in acquiring such shares, the
Company will become a wholly owned subsidiary of iNTELEFILM. According
to an amended 13D filed with the Securities and Exchange Commission
("SEC") on November 3, 2000 by iNTELEFILM, if iNTELEFILM's exchange
offer is not successful, iNTELEFILM currently does not intend to
continue funding the Company's operating losses.
C. On March 23, 2000, iNTELEFILM demanded payment in full of the loans it
had made to the Company, which aggregated approximately $3.2 million at
March 23 and September 30, 2000. However, on May 1, 2000, iNTELEFILM
granted the Company forbearance of its payment demand for an
indeterminate amount of time in order to enable the Company's
independent directors to evaluate the Company's position on and
possible alternatives to the announced iNTELEFILM exchange offer.
D. Independent of the notes payable to iNTELEFILM, the Company received
advances from iNTELEFILM during the period from January 1, 2000 to
September 30, 2000. These non-interest bearing advances are unsecured
and primarily funded a portion of the line of credit pay-off and the
Company's operations. At September 30, 2000, $2.7 million of these
advances remained due and payable to iNTELEFILM for a total
indebtedness to iNTELEFILM of $5.9 million.
E. During the nine months ended September 30, 2000, the Company recorded a
valuation allowance associated with commercial director advances in
excess of earnings totaling $845,000, of which $411,000 relates to
advances paid in 1999. Such advances are regularly paid to established
commercial directors on a monthly basis and are offset against the
actual earnings from commercial directorial services. The Company
accounts for these monthly payments as prepaid compensation and
recognizes them as an expense in the period that they are offset
against a commercial director's actual earnings. Capitalized amounts
were evaluated for collectibility based on anticipated future
commercial project awards for individual commercial directors and an
allowance was established for capitalized amounts believed to be
uncollectible. The valuation allowance was primarily necessitated by a
decrease in the workflow and by the termination of a number of
commercial directors at the Company's wholly-owned subsidiary, The End,
Inc. ("The End"), which events may prevent the advances from being
recouped.
<PAGE>
F. On May 1, 2000, members of the Screen Actors Guild ("SAG") began a
strike against the advertising agencies that represent the Company's
customer base. On October 28, 2000, this strike was settled. During
this six-month strike, the Company's ability to produce television
commercials domestically was affected. The Company attempted to reduce
the effects the strike had on its operations by utilizing non-union
talent and producing its commercials outside of the United States
whenever possible. However, the Company did lose business as a result
of the strike. No assurance can be given that the Company's operations
and liquidity will not continue to be affected by the strike in the
near future.
G. In August 2000, The End, in conjunction with iNTELEFILM, entered into
an accounts-receivable-based loan and security agreement with General
Electric Capital Corporation ("GE Capital"). This loan and security
agreement has a maximum availability of $7.0 million for the combined
group, and is secured by substantially all assets of the Company and
provides for borrowings for working capital under a revolving line of
credit with availability based on acceptable accounts receivable. The
line of credit bears interest at a variable rate (10.24% at September
30, 2000). The agreement will provide financing for The End as well as
two subsidiaries of iNTELEFILM and all parties to the agreement
cross-collateralize all borrowings. The agreement is subject to certain
restrictive covenants that limit capital expenditures and require
minimum EBITDA and tangible net worth.
Note 3- Investment in Curious Pictures
Effective August 1, 1999, the Company has a 49% equity investment in Curious
Pictures. Curious Pictures' operations are summarized as follows for the three
and nine-month periods ended September 30, 2000:
Three Months Nine Months
Ended 9/30/00 Ended 9/30/00
----------- -----------
Contract revenues $ 5,424,797 $16,005,513
Cost of production 4,462,269 12,127,753
----------- -----------
Gross profit 962,528 3,877,760
Operating expenses 1,216,704 3,657,308
----------- -----------
Income from operations (254,176) 220,452
Interest (income) expense 16,354 14,840
Income tax expense 16,452 26,043
----------- -----------
Net income $ (286,982) $ 179,569
----------- -----------
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 $1.6 million to state
the investment at the Company's prorata share of Curious Pictures' net assets.
<PAGE>
Note 4- Reclassifications
Certain amounts in the 1999 financial statements have been reclassified to
conform to 2000 presentation. These reclassifications have no effect on the
accumulated deficit or the net loss previously reported.
Note 5- Pending Litigation
On October 20, 1999, Imperial Bank, a California banking corporation, filed a
lawsuit against Cinequanon Pictures International, Inc., the Company; Jennifer
Peckham, an individual, and Daniel Sales, an individual, in Los Angeles Superior
Court, Case No. BC218753. Imperial Bank alleges that the Company guaranteed
$250,000 of Cinequanon's obligations to Imperial Bank. The Company denies that
it has any liability to Imperial Bank and intends to vigorously defend this
lawsuit.
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 continuing
disruption to the Company's business and the industry following the recently
settled SAG strike, 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 2000, the Company operated through only one major division, The
End, a wholly owned subsidiary of the Company, operating several of its own
subsidiaries. Through June 30, 1999, the Company operated The End London, LTD
("The End (London)"). Effective July 1, 1999, the Company sold 90% of the stock
of The End (London). Through July 31, 1999, Curious Pictures operated as a
majority owned subsidiary. Effective August 1, 1999, the Company's ownership of
Curious Pictures was reduced to 49%. As a result, the Company now recognizes, as
an equity investment, 49% of the income or loss produced by Curious Pictures.
Accordingly, the results of operations for the nine-month period ended September
30, 1999 reflect the operations of two subsidiaries that are not included in the
results of operations for the nine-month periods ended September 30, 2000.
Results of Operations:
Three and Nine Months Ended September 30, 2000 Compared to Three and
Nine Months Ended September 30, 1999:
The Company's total revenues for the three and nine-month
periods decreased compared to the prior year's results due in part to the
elimination of two subsidiaries from the currently reported revenues. As
indicated in the
<PAGE>
financial statements, total revenue decreased $10,228,000 or 86% from
$11,924,000 in the third quarter of 1999 to $1,696,000 in the third quarter of
2000. During the nine months ended September 30, 2000, revenues decreased
$30,989,000 or 66% compared to the same period of 1999. $14.8 million of the
nine-month decrease in revenues was related to the two divisions no longer
operated by the Company. Additionally, revenues at The End decreased $16.1
million in the first nine months of 2000 compared to the same period in the
prior year. The Company believes that the decrease in revenues at The End
resulted from the effects of the SAG strike, which began in May 2000. In
reaction to the initial strike announcement, many agencies withheld production
as they assessed the situation in an attempt to determine when a settlement
might be reached. Although the agencies began gradually sending more jobs into
production, there continued to be fewer jobs on which to bid through October 28,
2000 when the strike was settled. Additionally, a portion of the decrease in
revenues at The End was attributed to the commercial director and sales
representative contracts that were not renewed or otherwise terminated. The
Company has signed new commercial directors and sales representatives to replace
the prior commercial directors and sales representatives.
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, production
insurance and commercial directors' fees. Cost of production as a percentage of
revenues increased from approximately 85% in the third quarter and first nine
months of 1999 to 92% and 91% in the third quarter and first nine months of
2000, respectively. Included in The End's cost of production for the first nine
months of 2000 was $845,000 in charges related to the Company's change in
estimated valuation for the advances paid to its commercial directors (see Note
2E to the financial statements). Of this amount, $411,000 was related to
advances paid in 1999. Additionally, during the first six months of 2000, the
Company experienced several unexpected production problems that directly caused
an increase in the overall cost of two projects. Negotiations to secure several
commercial directors to longer-term contracts are ongoing and may further
increase the Company's future cost of production with respect to these
commercial directors. The Company believes the overall cost of production, as a
percentage of revenue, will return to a percentage closer to historical levels,
as new commercial directors become more established and the directorial pool is
stabilized.
General selling and administrative expenses consist of sales
commissions, advertising and promotional expenses, travel and other expenses
incurred in the securing of production contracts, as well as overhead costs such
as office rent and expenses, general and administrative payroll, and related
items. General selling and administrative expenses totaled $883,000 and
$2,915,000 in the third quarter and first nine months of 2000, respectively,
compared to $1,423,000 and $6,580,000 in the third quarter and first nine months
of 1999, respectively. Of this 56% decrease during these comparative nine-month
periods, $862,000 was related to The End, the only division operated by the
Company for the full nine-month period in 2000 and 1999. As a result of the
decrease in revenues at The End, less sales commissions were paid. General
overhead expenses decreased at The End primarily as a result of the resignation
of two principal officers in November 1999. The remaining decrease was related
to the two divisions no longer operated by the Company.
<PAGE>
The $2,017,000 stock option compensation expense reported during the
nine months ended September 30, 1999 represented a non-cash charge resulting
from Curious Management earning stock options of Curious Pictures. This
agreement terminated upon iNTELEFILM's exercise of the options granted in August
1999.
Corporate charges decreased $136,000 and $539,000 in the third quarter
and first nine months of 2000, respectively, compared to respective periods for
1999. This 46% decrease over comparable nine-month periods was attributed to the
consolidation of corporate duties of the Company and iNTELEFILM.
Depreciation and amortization expense decreased $62,000 in the third
quarter of 2000 compared to the third quarter of 1999 and decreased $353,000 in
the first nine months of 2000 compared to the same period in 1999. This 70%
decrease during the comparable nine-month periods was primarily related to the
two divisions no longer operated by the Company.
Interest expense decreased $23,000 during the third quarter of 2000
compared to the third quarter of 1999, and $9,000 during the first nine months
of 2000 compared to the same period in 1999. Interest expense was a result of
borrowings by the Company under its credit facility, as well as the interest
incurred as a result of borrowings from iNTELEFILM.
Income tax expense of $15,000 was reported in the first nine months of
2000 compared to $2,000 in the first nine months of 1999. These expenses were
related to state taxes.
The Company incurred net losses of $2,605,000 and $3,086,000 for the
nine-month periods ended September 30, 2000 and 1999, respectively. The net loss
for the period ended September 30, 1999 included a $2.0 million non-cash,
non-recurring stock option compensation charge related to Curious Pictures.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was a
deficit of $8,899,000 at September 30, 2000 compared to a deficit of $6,320,000
at December 31, 1999. The Company had $110,000 of cash at September 30, 2000
compared to $1,067,000 at December 31, 1999.
On March 23, 2000, iNTELEFILM publicly announced its future intention
to effect an exchange offer with the Company's stockholders to acquire all of
the outstanding shares of the Company's common stock that are not currently
owned by iNTELEFILM in exchange for shares of iNTELEFILM common stock. According
to its announcement, iNTELEFILM proposes to offer one share of its common stock
for every 13.75 shares of the Company's common stock, and the offer is
conditioned upon iNTELEFILM obtaining at least 90% of the outstanding stock of
the Company. If iNTELEFILM is successful in acquiring such shares, the Company
will become a wholly-owned subsidiary of iNTELEFILM. According to iNTELEFILM's
amended 13D filed with the SEC on November 3, 2000, iNTELEFILM currently does
not intend to continue funding the Company's operating losses if iNTELEFILM's
exchange offer is unsuccessful. As indicated below, iNTELEFILM has to date
funded a major portion of the Company's operating losses through loans and
advances ($5.9 million of
<PAGE>
which remains outstanding). Failure to obtain additional loans or advances will
adversely affect the Company's ability to operate its business as currently
conducted.
Through early-March 2000, the Company had funded a portion of its
working capital needs through a revolving line of credit with Finova, an
unaffiliated institutional lender, which provided for borrowings of up to $4.5
million, based on acceptable accounts receivable. The Finova credit facility was
guaranteed by iNTELEFILM, the owner of approximately 55% of the Company's
outstanding common stock. In April 2000, Finova terminated this line of credit
and the Company repaid its indebtedness to Finova in full. Independent of the
notes payable to iNTELEFILM in the amount of approximately $3.2 million, the
Company received advances from iNTELEFILM during the period from January 2000
through September 2000. These non-interest bearing advances are unsecured and
primarily funded a portion of the line of credit pay-off and the Company's
operations. At September 30, 2000, $2.7 million of these advances remained due
and payable for a total indebtedness to iNTELEFILM of $5.9 million. Management
believes that advances will continue to be provided by iNTELEFILM as necessary
until the exchange offer is completed. However, iNTELEFILM has stated in its
amended 13D filed with the SEC on November 3, 2000 that it does not currently
intend to continue to fund the Company's operating losses if iNTELEFILM is not
successful in obtaining at least 90% of the Company's common stock through the
exchange offer.
In August 2000, The End, along with two subsidiaries of iNTELEFILM,
entered into an accounts receivable-based loan and security agreement with GE
Capital. This agreement provides for borrowings by The End for working capital
under a revolving line of credit (see note 2G to the financial statements),
thereby enabling The End to operate its business through a line of credit
instead of depending solely on iNTELEFILM to fund its operations. However, this
line of credit only allows The End to borrow against its eligible accounts
receivable and all parties to the agreement cross-collateralize all borrowings.
Therefore, there can be no assurance that such line of credit will be sufficient
to fund The End's operations. As a result, the Company may need to seek
additional outside financing to fund its operations. There can be no assurance
that the Company will be able to obtain additional financing from other third
parties.
Prior to this agreement being signed, the Company's only external
financing resources were its advances from and notes payable to iNTELEFILM, the
repayment of such notes which iNTELEFILM demanded on March 23, 2000. On May 1,
2000, iNTELEFILM agreed to forbear its right to collect on the notes for an
undetermined amount of time. If iNTELEFILM demands the repayment of its loans,
the Company does not believe it could repay iNTELEFILM's note at the expiration
of the forbearance. Although the Company may offer to repay the iNTELEFILM loans
through the issuance of shares of the Company's common stock, any such issuance
would result in substantial dilution to existing shareholders. Additionally, no
assurance can be given that the Company will be able to fund its operations
without additional sources of outside financing. The Company continues to
attempt to reduce its cash usage through work force and operating reductions and
an increase in the number of its commercial directors. Primarily as a result of
these items, the Company's independent certified public accountants modified
their opinion on the Company's December 31, 1999 Consolidated Financial
Statements to contain a paragraph wherein they expressed substantial doubt about
<PAGE>
the Company's ability to continue as a going concern (see Note 1 to the
financial statements).
On May 1, 2000, members of SAG began a strike against the advertising
agencies that represent the Company's customer base. On October 28, 2000, this
strike was settled. During this six-month strike, the Company's ability to
produce television commercials domestically was affected. The Company attempted
to reduce the effects the strike had on its operations by utilizing non-union
talent and producing its commercials outside of the United States whenever
possible. However, the Company did lose business as a result of the strike. No
assurance can be given that the Company's operations and liquidity will not
continue to be affected by the strike in the near future. 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, which the
Company employs on a free-lance basis, are members of unions who are parties to
collective bargaining agreements.
During the nine months ended September 30, 2000, The End's operations
have been adversely affected as a result of a variety of factors including the
SAG strike, the reorganization of management, and the negotiations of commercial
director and sales representation agreements. Given these circumstances, the
Company has taken steps to reduce The End's ongoing operating expenses and has
recently negotiated several commercial director and sales representative
agreements. Management believes that with improved sales representation and the
addition of commercial directors to its roster, the operating losses and the
overall operating cash needs of The End may lessen. However, there can be no
assurance that The End will ever reach profitability or that it will be able to
retain its commercial directors or sales representatives or that its commercial
directors and sales representatives will fulfill their obligations to The End,
which in turn could adversely affect the Company's overall liquidity.
Cash used in operating activities for the nine months ended September
30, 2000 was $425,000. Accounts receivable at September 30, 2000 decreased
$3,817,000 from December 31, 1999, and other assets at September 30, 2000
increased $14,000 from December 31, 1999. Accounts payable at September 30, 2000
decreased $561,000 from December 31, 1999, other liabilities decreased $445,000
from December 31, 1999 to September 30, 2000, and deferred income decreased
$1,240,000 during that same period.
During the nine months ended September 30, 2000, cash used in investing
activities was $39,000. This represents cash used for capital expenditures
incurred in the normal course of operations.
Cash used in financing activities during the nine months ended
September 30, 2000 was $492,000, which was a result of the payoff of the line of
credit with Finova net of cash used that Curious Pictures produced and the cash
advances received from iNTELEFILM.
Inflation
Inflation has not had a significant effect on the Company.
<PAGE>
PART II - Other Information
Item 1. Legal Proceedings
On October 20, 1999, Imperial Bank, a California banking corporation
filed a lawsuit against Cinequanon Pictures International, Inc.; the Company;
Jennifer Peckham, an individual and Daniel Sales, an individual in Los Angeles
Superior Court, Case No. BC218753. Imperial Bank alleges that the Company
guaranteed $250,000 of Cinnequanon's obligations to Imperial Bank. The Company
denies that it has any liability to Imperial Bank and intends to vigorously
defend this lawsuit.
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
Not applicable
<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 14, 2000.
HARMONY HOLDINGS, INC.
BY: /s/ Steven C. Smith
------------------------
Steven C. Smith
ITS: Chief Financial Officer
EXHIBIT INDEX
27 Financial Data Schedule
