SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 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 February 10, 2000
--------------------- --------------------------------
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 -- December 31, 1999 and June 30, 1999.
Consolidated Statements of Operations -- Three and six months ended
December 31, 1999 and 1998.
Consolidated Statements of Cash Flows -- Six months ended December
31, 1999 and 1998.
Notes to consolidated financial statements -- December 31, 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>
DECEMBER 31, JUNE 30,
1999 1999
(UNAUDITED) (AUDITED)
-----------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,066,823 $ 2,910,618
Accounts receivable 4,328,541 6,365,303
Allowance for doubtful accounts (319,716) (253,381)
Compensation draws 699,160 --
Prepaid expenses 370,105 --
Other current assets 106,112 1,690,413
-----------------------------
Total Current Assets 6,251,025 10,712,953
Property and equipment, net 751,876 2,629,521
Investment in Curious Pictures 1,369,269 --
Goodwill, net 162,500 168,750
Other assets 194,387 610,231
-----------------------------
Total Assets $ 8,729,057 $ 14,121,455
=============================
LIABILITY & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,094,832 $ 3,232,125
Accrued liabilities 1,884,285 3,842,807
Line of credit 3,548,911 2,468,527
Due to Curious Pictures 1,609,553 --
Note payable - iNTELEFILM 3,193,615 2,729,342
Deferred income 1,239,527 3,429,794
-----------------------------
Total Current Liabilities 12,570,723 15,702,594
Total Liabilities 12,570,723 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
December 31, 1999 and June 30, 1999 75,068 75,067
Additional paid-in capital 17,257,278 15,682,245
Accumulated deficit (21,174,012) (20,038,452)
-----------------------------
Total Shareholders' Equity (3,841,666) (4,281,139)
-----------------------------
Total Liabilities & Shareholders' Equity $ 8,729,057 $ 14,121,455
=============================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
1999 1998 1999 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues $ 7,886,708 $ 14,079,885 $ 19,810,274 $ 31,384,284
Cost of production 7,266,853 12,305,295 17,396,302 26,828,754
----------------------------- -----------------------------
Gross profit 619,855 1,774,590 2,413,972 4,555,530
Operating expenses:
Selling 358,965 817,365 756,941 1,634,049
General and administrative 1,007,353 1,502,414 2,032,137 3,221,040
----------------------------- -----------------------------
Production service income (746,463) (545,189) (375,106) (299,559)
Subsidiary stock option compensation -- 108,800 -- 217,600
Corporate 358,883 306,030 701,368 627,550
Depreciation & amortization 80,270 264,980 180,825 474,336
Restructuring cost & impairment of assets -- 3,532,495 3,532,495
----------------------------- -----------------------------
Income (loss) from operations (1,185,616) (4,757,494) (1,257,299) (5,151,540)
Gain (loss) on disposal of The End (London) (30,456) -- 119,508 --
Equity gain (loss) in Curious Pictures 266,220 -- 288,419 --
Interest income net of interest (expense) (145,914) (82,800) (286,188) (187,285)
----------------------------- -----------------------------
Net income (loss) before income taxes (1,095,766) (4,840,294) (1,135,560) (5,338,825)
Income taxes -- -- -- 9,601
----------------------------- -----------------------------
Net income (loss) $ (1,095,766) $ (4,840,294) $ (1,135,560) $ (5,348,426)
============================= =============================
Net income (loss) per share $ (0.15) $ (0.66) $ (0.15) $ (0.73)
============================= =============================
Weighted average number of shares outstanding 7,506,660 7,389,603 7,506,660 7,313,516
============================= =============================
</TABLE>
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1999 1998
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net gain (loss) $(1,135,560) $(5,348,426)
Adjustments to reconcile net gain (loss) to net cash
provided by (used in) operating activities:
Depreciation & amortization 180,825 474,336
Impairment of assets -- 2,215,175
Provision for doubtful accounts 66,335 --
(Gain) loss on disposal of The End (London) (119,508) --
(Gain) loss on equity investment in Curous Pictures (288,419) --
Issuance of non-cash compensation expense -- 217,600
Decrease (increase) in:
Accounts receivable 665,629 2,855,638
Other current assets 45,935 (579,667)
Other assets (50,817) --
Increase (decrease) in:
Accounts payable (924,491) 543,314
Accrued liabilities (903,586) (3,344,794)
Due to Curious Pictures (142,853) --
Deferred income (284,090) (553,297)
Accrued restructuring costs -- 887,794
---------------------------
Net cash used in operating activities: (2,890,600) (2,632,327)
INVESTING ACTIVITIES:
Capital (expenditures) divestitures (438,324) (771,978)
Equity investment in Curious Pictures (65,778) --
Other assets 6,250 230,555
---------------------------
Net cash used in investing activities (497,852) (541,423)
---------------------------
FINANCING ACTIVITIES:
Line of credit 1,080,384 (544,616)
Payment of debt/debt proceeds 464,273 875,000
Proceeds from issuance of common stock -- 350,000
---------------------------
Net cash obtained in financing activities 1,544,657 680,384
---------------------------
Decrease in cash and cash equivalents (1,843,795) (2,493,366)
Cash and cash equivalents at beginning of period 2,910,618 3,834,023
---------------------------
Cash and cash equivalents at end of period $ 1,066,823 $ 1,340,657
===========================
</TABLE>
<PAGE>
Harmony Holdings, Inc. Notes to Consolidated Financial Statements (unaudited)
December 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 three and six-month periods ended December
31, 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 footnotes 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 six months of
the fiscal year ending June 30, 2000 and are considered non-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
the underlying options to purchase the 50% equity interest in
Curious Pictures had fully vested and were
<PAGE>
exercisable for consideration totaling $50. iNTELEFILM immediately
exercised those options. iNTELEFILM also acquired a 1% equity
interest from Curious Management that was originally 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 December 31, 1999:
Three Months Five Months
Ended 12/31/99 Ended 12/31/99
-------------- --------------
Contract revenues $ 6,447,496 $ 10,902,237
Cost of production 4,711,873 8,218,636
------------ ------------
Gross profit 1,735,623 2,683,601
Operating expenses 1,192,984 2,099,423
------------ ------------
Income from operations 542,639 584,178
Interest (income) (668) (4,432)
------------ ------------
Net income $ 543,307 $ 588,610
------------ ------------
Curious Pictures results from operations are accounted
for under the equity method for all periods after August 1, 1999.
Previous
<PAGE>
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 six months ended December 31, 1999, the Company operated
through two major 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's
ownership of Curious Picture's was reduced to 49% (see Note 2B of the attached
financial statements). As a result, the Company will hereafter 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). Accordingly, the
results of operations for periods in the fiscal year ended June 30, 1999 reflect
the operations of two subsidiaries that are not included in the results of
operations in the current fiscal year.
Results of Operations:
Three and Six Months Ended December 31, 1999 Compared to Three and
Six Months Ended December 31, 1998:
The Company's total revenues decreased $6,193,000 or 44% from
$14,080,000
<PAGE>
in the second quarter of fiscal year 1999 to $7,887,000 in the second quarter of
fiscal year 2000. During the six months ended December 31, 1999, revenues
decreased $11,574,000 or 37% compared to the same period of fiscal year 1999. Of
the decrease in revenues, $8.3 million is from the two divisions no longer
operated by the Company, while $8.1 million is from revenues of Curious Pictures
which is no longer consolidated in the Company's financial statements. Revenues
at The End increased $4.8 million in the first half 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 87% to 92% in the second quarter of fiscal year 2000 compared to
the same period of fiscal year 1999, and from 85% to 88% in the first half of
fiscal year 2000 compared to the same period of the prior year. Exclusive of
Curious Pictures and the two divisions on longer operated by the Company, The
End's cost of production increased from 84% to 86% during the first half of
fiscal 2000 compared to the same period of the prior fiscal year. 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 $359,000 and $757,000 in the
second quarter and first half of fiscal year 2000, respectively, compared to
$817,000 and $1,634,000 in the second quarter and first half of fiscal year
1999, respectively. Of this 54% decrease during these comparative six month
periods, a $1.02 million decrease is related to Curious Pictures and the two
divisions no longer operated by the Company while selling expense at The End
increased $147,000.
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 $495,000 in the second
quarter of fiscal year 2000 to $1,007,000 as compared to $1,502,000 for the
second quarter of fiscal year 1999. These expenses decreased $1,189,000 or 37%
during the first half of fiscal year 2000 compared to the same period of the
prior year. General and administrative expenses increased $709,000 at The End
due primarily to the increased activities at The End's subsidiaries as new
directors were signed. The decrease of $1.9 million is related to Curious
Pictures and the two divisions no longer operated by the Company.
The $218,000 stock option compensation expense reported during the
six months ended December 31, 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).
<PAGE>
Corporate charges increased $53,000 and $74,000 in the second
quarter and first half of fiscal year 2000, respectively, compared to respective
periods in fiscal 1999. This 12% increase is due primarily to additional
professional fees incurred in litigation, renegotiating contracts, and
negotiations with Finova Capital Corporation ("Finova") (see Liquidity and
Capital Resources).
Depreciation and amortization expense decreased in the second
quarter of fiscal year 2000 by $185,000 or 70% compared to the second quarter of
fiscal year 1999. Depreciation and amortization decreased by 62% in the first
half of the current fiscal year compared to the first half of fiscal 1999. This
expense decreased primarily due to the two divisions no longer operated by the
Company and Curious Pictures.
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 $120,000.
Interest expense increased $63,000 during the second quarter of
fiscal year 2000 compared to fiscal year 1999, and increased $99,000 during the
first half of fiscal year 2000 compared to the same period in fiscal year 1999.
This increase was 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.
No income tax expense has been reported since the period ended
September 30, 1998. 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 $1,136,000 and $5,348,000 for the
six-month periods ended December 31, 1999 and 1998, respectively. The net losses
for the periods ended December 31, 1999 included a one-time charge for
restructuring costs and the impairment of assets related to discontinuing the
operations of Harmony Pictures.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was a
deficit of $6,320,000 at December 31, 1999 compared to a deficit of $4,990,000
at June 30, 1999.
Consolidated cash was $1,067,000 at December 31, 1999 and $2,911,000
at June 30, 1999, a decrease of $1,844,000.
Although the Company's net loss for the six months ended December
31, 1999 was $1,136,000, cash used in operating activities for the six months
ended December 31, 1999 was $2,891,000. Net of the effect of the sale of the End
<PAGE>
(London) and the effect of not consolidating Curious Pictures, accounts
receivable at December 31, 1999 decreased $666,000 from June 30, 1999, and other
assets at December 31, 1999 increased $5,000 from June 30, 1999. Accounts
payable at December 31, 1999 decreased $924,000 from June 30, 1999, other
liabilities decreased $1,046,000 from June 30, 1999 to December 31, 1999, and
deferred income decreased $284,000 during that same period.
During the six months ended December 31, 1999, cash used in
investing activities was $498,000. 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).
Cash obtained in financing activities during the six months ended
December 31, 1999 was $1,545,000, which was a result of increased use of the
line of credit and borrowings from iNTELEFILM.
To date, the Company has funded a portion of its working capital
needs through a revolving line of credit with Finova, which provided for
borrowings of up to $5.0 million, based on acceptable accounts receivable. This
line of credit bears interest at a variable rate (10.0% at December 31, 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 December 31, 1999, the Company had negative shareholder's equity
of $3.8 million, and accordingly, is in default of the agreement. As a result,
the Company and Finova entered into a forbearance agreement whereby Finova
agreed to forbear its right to declare the Company's obligation immediately due
and payable until March 1, 2000. However, the Company is no longer able to
borrow against the line of credit. 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
historically provided the Company with such funds as necessary to meet its
working capital requirements. Such additional funds have to date been in the
form of loans or the purchase of securities. Of the advances made to the Company
by iNTELEFILM as evidenced by promissory notes, each due within 30 days of
demand and each bearing interest at a rate of 14% per annum, $3.3 million
remained outstanding at December 31, 1999.
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
<PAGE>
the need to financially support this subsidiary and should improve future
liquidity.
Effective as of August 1, 1999, iNTELEFILM purchased, from Curious
Management, the Option Agreement entered into by the Company and Curious
Management dated December 15, 1996. In order to keep Curious Pictures and
Curious Management together in the Company, the Company's board of directors
agreed to allow iNTELEFILM to purchase this agreement for the benefit of both
parties, and consented to the final agreement whereby, immediately following the
purchase of the Option Agreement, iNTELEFILM exercised these options and also
acquired a 1% equity interest owned by Curious Management. 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%. Additionally, the members of Curious Management entered
into new five-year employment agreements whereby their compensation includes the
right to purchase from the Company an additional 20% of the Curious Pictures
shares held by the Company. In turn Curious Management may sell these shares to
iNTELEFILM, thereby, decreasing the Company's ownership in Curious Pictures and
increasing iNTELEFILM's ownership in Curious Pictures (see Note 2B to the
financial statements). 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 equity investment.
Additionally, the Company now reflects on its balance sheet, the amount due to
Curious Pictures, which totaled $1.8 million and $1.6 million at August 1, and
December 31, 1999, respectively. Prior to the aforementioned transaction, this
payable was eliminated through the consolidation of Curious Pictures.
During the six months ended December 31, 1999, the Company incurred
a net loss of $1.1 million and a cash flow from operations deficit of $2.9
million, resulting in a working capital deficit of $6.3 million and an
accumulated deficit totaling $21.2 million at December 31, 1999. At this time
the Company's only external financing resources are its notes payable with
iNTELEFILM which are due on demand. As the Company is currently in default of
its agreement with Finova, Finova is no longer advancing the Company funds
through its credit facility. The Company and Finova have entered into a
forbearance agreement whereby Finova agreed to forbear its right to declare the
Company's obligations immediately due and payable until March 1, 2000. As of
January 31, 2000, $667,000 was due Finova. While management is actively pursuing
alternative financing, the Company has not obtained a commitment from any lender
or other financing source for a facility that will either replace the Finova
credit facility or result in the repayment of the Finova loan. In the interim,
iNTELEFILM has indicated its willingness to make additional advances which, when
combined with advances currently outstanding, are not to exceed $4.0 million.
These advances have substantially replaced the Finova credit facility as of
January 31, 2000.
In the event that Finova is not repaid by March 1, 2000 and they
demand payment, Finova will be entitled to foreclose on all of the Company's
assets. In addition, even if the Company is able to repay the Finova loan in
full, unless the Company obtains an alternate credit facility, the Company may
not be able to fund its working capital needs if it exceeds iNTELEFILM's current
advances which, in turn, will materially and adversely affect the Company's
future liquidity and
<PAGE>
operation. No assurance can be given that the Company will be able to repay the
Finova loan by March 1, 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 continued financing from
iNTELEFILM until other financing options become available. However, no legally
binding commitment for continued 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 $18.5 million for
the year ended June 30, 1999 and the six months ended December 31, 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
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.
In November 1999, two of the principal officers of The End resigned
from the Company. Under their agreements with The End, certain of the commercial
directors of The End have the right to terminate their employment at The End in
the event that the foregoing two principals resign from the Company. To date,
one of The End's commercial directors has exercised his right to terminate his
employment with The End, and certain other directors are holding discussions
with The End regarding their future employment with The End. The departure of
the two principal executives and of the one commercial director has not, to
date, had any material impact on The End's revenues. However, no assurance can
be given that their departure will not cause other directors to terminate their
relationships with The End or that these departures will not cumulatively
negatively impact the operations and financial performance of The End in the
future. Should any additional commercial directors leave the employ of The End,
the Company's liquidity may be negatively impacted until The End is able to
replace the lost commercial directors. The impact of the departure of the
foregoing employees of The End on the Company's liquidity and profits/losses is
not currently
<PAGE>
ascertainable.
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. To date, the Company has experience no ill
effects related to the Year 2000 Issue. 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.
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.
In December 1999, the Company settled the litigation
between Rick Bieber and Harmony Pictures, Inc. In
connection with the settlement, the Company paid Mr.
Bieber and Mr. Bieber's counsel a total of $65,000, the
parties entered into a mutual release agreement, and the
lawsuit was dismissed with prejudice.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Although the Company has not defaulted on any of its
payment obligations under its existing credit facility,
the Company currently is in default of certain of its
covenants under its loan agreement with Finova Capital
Corporation. Finova has agreed to
<PAGE>
forbear its right to declare the Company's obligations
immediately due and payable under the credit facility
until March 1, 2000. See "Item 2 - Management's
Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital
Resources," above.
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.
27.1 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 February 11, 2000.
HARMONY HOLDINGS, INC.
BY: /s/ Steven C. Smith
-----------------------------------
Steven C. Smith
ITS: Chief Financial Officer
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