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 June 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
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HARMONY HOLDINGS, INC.
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(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 August 4, 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 -- June 30, 2000 and December 31, 1999.
Consolidated Statements of Operations -- Three and six months ended
June 30, 2000 and 1999.
Consolidated Statements of Cash Flows -- Six months ended June 30, 2000
and 1999.
Condensed Notes to consolidated financial statements -- June 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>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (UNAUDITED)
----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 1,066,823
Accounts receivable 610,289 4,328,541
Allowance for doubtful accounts (129,664) (179,664)
Compensation draws 559,108
Prepaid expenses 92,977 370,105
Other current assets 106,054 106,112
----------------------------------
Total Current Assets 679,656 6,251,025
Property and equipment, net 660,152 751,876
Investment in Curious Pictures 1,597,879 1,369,269
Goodwill, net 157,292 162,500
Other assets 217,896 194,387
----------------------------------
Total Assets $ 3,312,875 $ 8,729,057
==================================
LIABILITY & SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 636,594 $ 1,094,832
Accrued liabilities 2,155,101 1,884,285
Checks drawn in excess of available funds 238,026 --
Line of credit -- 3,548,911
Due to Curious Pictures 1,954,025 1,609,553
Note payable - iNTELEFILM 3,193,615 3,193,615
Deferred income 314,631 1,239,527
----------------------------------
Total Current Liabilities 8,491,992 12,570,723
Total Liabilities 8,491,992 12,570,723
----------------------------------
Shareholders' deficit:
Common stock, $.01 par value:
Authorized shares- 20,000,000
Issued & outstanding shares- 7,506,660
June 30, 2000 and June 30, 1999 75,068 75,068
Additional paid-in capital 17,257,278 17,257,278
Accumulated deficit (22,511,463) (21,174,012)
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Total Shareholders' Deficit (5,179,117) (3,841,666)
----------------------------------
Total Liabilities & Shareholders' Deficit $ 3,312,875 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,472,611 $ 18,681,272 $ 14,194,877 $ 34,955,971
Costs and expenses:
Cost of production 3,820,494 15,628,596 12,924,209 29,517,900
Selling 239,948 840,100 619,688 1,742,667
General and administrative (exclusive of items shown below) 751,473 1,466,003 1,412,650 3,414,160
Subsidiary stock option compensation -- 1,907,850 -- 2,016,650
Corporate 105,007 299,563 427,339 829,825
Depreciation & amortization 78,548 210,892 115,976 407,454
Restructuring cost & impairment of assets -- -- -- (175,000)
-------------------------------- --------------------------------
Loss from operations (522,859) (1,671,732) (1,304,985) (2,797,685)
Equity gain (loss) in Curious Pictures (4,949) -- 228,610 --
Interest income net of interest (expense) (113,787) (167,506) (261,076) (246,595)
-------------------------------- --------------------------------
Net loss before income taxes (641,596) (1,839,238) (1,337,451) (3,044,280)
Income taxes -- 1,892 -- 1,892
-------------------------------- --------------------------------
Net loss $ (641,596) $ (1,841,130) $ (1,337,451) $ (3,046,172)
================================ ================================
Net loss per share $ (0.09) $ (0.25) $ (0.18) $ (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>
SIX MONTHS ENDED
JUNE 30,
2000 1999
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,337,451) $ (3,046,172)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation & amortization 115,976 407,454
Impairment of assets -- (175,000)
Provision for doubtful accounts & director advances 509,108 144,175
Gain on equity investment in Curious Pictures (228,610)
Issuance of non-cash compensation expense -- 2,016,650
Decrease (increase) in:
Accounts receivable 3,718,252 (2,551,266)
Other current assets 277,186 272,625
Other assets (23,509) (153,314)
Increase (decrease) in:
Accounts payable (458,238) (510,949)
Accrued liabilities 270,816 2,068,793
Deferred income (924,896) 1,640,658
----------------------------------
Net cash provided by operating activities: 1,918,634 113,654
INVESTING ACTIVITIES:
Capital expenditures (19,044) (661,478)
----------------------------------
Net cash used in investing activities (19,044) (661,478)
FINANCING ACTIVITIES:
Checks drawn in excess of available funds 238,026 --
Line of credit (3,548,911) 263,143
Due to Curious Pictures 344,472 --
Payment of debt/debt proceeds -- 1,854,342
----------------------------------
Net cash provided by (used in) financing activities (2,966,413) 2,117,485
----------------------------------
Increase (decrease) in cash and cash equivalents (1,066,823) 1,569,661
Cash and cash equivalents at beginning of period 1,066,823 1,340,657
----------------------------------
Cash and cash equivalents at end of period $ -- $ 2,910,318
==================================
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
Harmony Holdings, Inc. Condensed Notes to Consolidated Financial Statements
(unaudited)
June 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 six-month periods ended June 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 consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the fiscal year ended June 30, 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 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.
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 June 30, 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 $5.0 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 March 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
effect an exchange tender offer with the shareholders of the Company to
acquire all of the outstanding shares of the Company's common stock
that is 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. If iNTELEFILM is successful in acquiring
such shares, the Company will become a wholly owned subsidiary of
iNTELEFILM, and will no longer be an independent financial reporting
entity.
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
June 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 and possible alternatives.
D. During the six months ended June 30, 2000, the Company recorded a
valuation allowance associated with commercial director advances in
excess of earnings totaling $559,000, of which $411,000 relates to
advances paid in 1999. Such advances are regularly paid to established
directors on a monthly basis and are offset against the actual earnings
from commercial directorial services. The Company capitalizes these
monthly payments and recognizes them as an expense in the period that
they are offset against a director's actual earnings. Capitalized
amounts were evaluated for impairment based on anticipated future
commercial project awards for individual directors and an allowance was
established for capitalized amounts believed to be impaired. The
valuation allowance was primarily necessitated by changes in the
workflow and contractual relationships of the majority of The End's
directors after the resignation of two principal officers of The End.
E. 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. This on-going strike has limited the Company's ability
to produce television commercials domestically. The Company has made an
effort to limit the effect that the strike may have on its operations
by utilizing non-union talent and continuing to produce its commercials
outside of the United States wherever possible. To date, the Company
has experienced some loss of business as a result of the strike. The
Company can give no assurance that an extended strike will not have an
adverse affect on its operations.
F. In August 2000, the Company, 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 provides for borrowings for working capital under a
revolving line of credit with availability based on acceptable accounts
receivable.
<PAGE>
The line of credit bears interest at a variable rate (10.29% at July
26, 2000). The agreement will provide financing for The End as well as
two subsidiaries of iNTELEFILM.
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 six-month periods ended June 30, 2000:
Three Months Six Months
Ended 6/30/00 Ended 6/30/00
------------- -------------
Contract revenues $ 6,208,981 $10,638,964
Cost of production 4,305,393 7,570,966
----------- -----------
Gross profit 1,903,588 3,067,998
Operating expenses 1,427,424 2,553,953
----------- -----------
Income from operations 476,164 514,045
Interest income 486 1,514
----------- -----------
Net income $ 476,650 $ 515,559
----------- -----------
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.
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
<PAGE>
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 the
recently commenced 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, Inc. ("The End"). The End, a wholly owned subsidiary of the Company,
operates several of its own subsidiaries. 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. 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). Accordingly, the results of operations for
the three and six-month periods ended June 30, 1999 reflect the operations of
two subsidiaries that are not included in the results of operations for the
three and six-month periods ended June 30, 2000.
Results of Operations:
Three and Six Months Ended June 30, 2000 Compared to Three and Six
Months Ended June 30, 1999:
The Company's total revenues for the three and six-month periods
decreased compared to the prior year's results primarily because of elimination
of two subsidiaries from the currently reported revenues. As indicated in the
financial statements, total revenue decreased $14,208,000 or 76% from
$18,681,000 in the second quarter of 1999 to $4,473,000 in the second quarter of
2000. During the six months ended June 30, 2000, revenues decreased $20,761,000
or 60% compared to the same period of 1999. Of the six-month decrease in
revenues, $13.5 million is from the two divisions no longer operated by the
Company. Additionally, revenues at The End decreased $7.2 million in the first
half 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 are
gradually sending more jobs into production, there continued to be fewer jobs on
which to bid through August 4, 2000. Additionally, a portion of the decrease in
revenues at The End has been attributed to the commercial director contracts
that were not renewed.
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
<PAGE>
increased from approximately 84% in the second quarter and first half of 1999 to
85% and 91% in the second quarter and first half of 2000, respectively. Included
in The End's cost of production for the first half of 2000 is $559,000 in
charges related to the Company's change in estimated valuation for the advances
paid to its commercial production directors (see Note 2D to the financial
statements). Of this amount, $411,000 is 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 directors. The Company
believes the overall cost of production, as a percentage of revenue, will not
increase as new commercial directors become more established and the directorial
pool is stabilized.
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
production contracts. Selling expenses totaled $240,000 and $620,000 in the
second quarter and first half of 2000, respectively, compared to $840,000 and
$1,743,000 in the second quarter and first half of fiscal year 1999,
respectively. Of this 64% decrease during these comparative six-month periods, a
$992,000 decrease is related to the two divisions no longer operated by the
Company. As a result of the decrease in revenues at The End, selling expense
decreased $131,000 as less commission was paid.
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 $715,000 in the second quarter of
2000 from $1,466,000 in the second quarter of 1999. These expenses decreased
$2,002,000 or 59% during the first half of 2000 compared to the same period of
the prior year. General and administrative expenses decreased $390,000 at The
End due primarily to the resignation of its two principal officers in November
1999 (see "Liquidity and Capital Resources"). A decrease of $1.6 million is
related to the two divisions no longer operated by the Company.
The $2,017,000 stock option compensation expense reported during the
six months ended June 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 $195,000 and $403,000 in the second quarter
and first half of 2000, respectively, compared to respective periods for 1999.
This 49% decrease can be attributed to the consolidation of corporate duties of
the Company and iNTELEFILM.
Depreciation and amortization expense decreased in the second quarter
of 2000 by $132,000 or 63% compared to the second quarter of 1999. Depreciation
and amortization decreased by 72% in the first half of 2000 compared to the
first
<PAGE>
half of 1999. This decrease is primarily related to the two divisions no longer
operated by the Company.
Interest expense decreased $54,000 during the second quarter of 2000
compared to the second quarter of 1999, and increased $14,000 during the first
half of 2000 compared to the same period in 1999. Interest expense is a result
of 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 in 2000. 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 $1,337,000 and $3,046,000 for the
six-month periods ended June 30, 2000 and 1999, respectively. The net loss for
the period ended June 30, 1999 includes 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 $7,812,000 at June 30, 2000 compared to a deficit of $6,320,000 at
December 31, 1999. The Company had no cash at June 30, 2000 compared to
$1,067,000 at December 31, 1999.
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 $5.0
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.
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, $3.2 million remained outstanding
at June 30, 2000. On March 23, 2000, iNTELEFILM made a demand for the full
repayment of the promissory notes and related accrued interest. On May 1, 2000,
iNTELEFILM notified the Company that it would forbear taking any action on the
collection of such promissory notes for an indeterminate amount of time in order
to permit the independent directors of the Company to evaluate the Company's
financial condition and its response to the repayment demand.
During the six months ended June 30, 2000, the Company incurred a net
loss
<PAGE>
of $1.3 million and cash flow from operations of $1.9 million, resulting in a
working capital deficit of $7.8 million and an accumulated deficit totaling
$22.5 million at June 30, 2000. In August 2000, The End, along with two
subsidiaries of iNTELEFILM, entered into an accounts receivable-based loan and
security with GE Capital. This agreement provides for borrowings by The End for
working capital under a revolving line of credit (see note 2F 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. Prior
to this agreement being signed, the Company's only external financing resources
were its notes payable with iNTELEFILM, the repayment of 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. No assurance
can be given that the Company will be able to cure iNTELEFILM's note payable
call at the expiration of the forbearance. Such a cure may include conversion of
the iNTELEFILM notes to common stock and 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. 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 has taken steps to reduce the Company's operating cash flow
deficit including the 1999 disposition of most of its interest in The End
(London), a subsidiary that incurred losses of $862,000. Although iNTELEFILM is
still providing the Company with some financing, iNTELEFILM is not obligated to
make any additional advances to the Company. Should iNTELEFILM cease making
additional advances to the Company and the line of credit through GE Capital be
insufficient to meet the Company's working capital needs, the Company would be
unable to fund its operations and would have to consider drastically reducing or
terminating its operations.
On March 23, 2000, iNTELEFILM publicly announced that it intends to
begin a tender offer for all of the outstanding shares of the Company that it
does not already own. The independent directors of the Company have asked
iNTELEFILM to forbear on its demand to have the $3.2 million loan repaid in
order to permit the directors to evaluate the Company's financial alternatives
and the effect that the announced tender offer will have on the Company and its
financing alternatives. As of the date of this report, the Company had not
decided what action it would take in response to the repayment demand by
iNTELEFILM, the pending financial circumstances, or the announcement of a future
tender offer.
On May 1, 2000, members of SAG began a strike against the advertising
agencies that represent the Company's customer base. This on-going strike has
limited the Company's ability to produce television commercials domestically.
The Company has made an effort to limit the effect that the strike may have on
its operations by utilizing non-union talent and continuing to produce its
commercials outside of the United States wherever possible. To date, the Company
has experienced some loss of business as a result of the strike. The Company can
give no assurance that an extended strike will not have a significant adverse
affect on its operations.
<PAGE>
In November 1999, two of the principal officers of The End resigned.
Under their agreements with The End, certain of the commercial directors of The
End now have the right to terminate their agreement with The End. To date, one
of The End's commercial directors has exercised his right to terminate his
agreement and has ended his exclusive representation by The End. Subsequent to
the departures of the aforementioned officers, the Company appointed a long-time
executive with The End to the position of executive producer, and appointed a
new chief operating officer who is a known talent as an executive in the
financial, administrative, production and marketing arena of the entertainment
industry. During the quarters ended June 30, 2000 and March 31, 2000 The End
produced revenues of $4.5 and $9.7 million, respectively, and an operating loss
of $394,000 and $453,000, respectively, compared to revenues of $7.9 million and
an operating loss of $814,000 for the quarter ended December 31, 1999. No
assurance can be given that these departures will not cause material adverse
impact on operations or financial performance of The End. The impact of the
departures of the foregoing individuals of The End on the Company's liquidity
and profits/losses is not currently ascertainable; however, it has reduced The
End's overhead and necessitated the valuation allowance for director advances in
excess of earnings discussed fully in Note 2D to the financial statements.
Cash provided by operating activities for the six months ended June 30,
2000 was $1,919,000. Accounts receivable at June 30, 2000 decreased $3,718,000
from December 31, 1999, and other assets at June 30, 2000 decreased $254,000
from December 31, 1999. Accounts payable at June 30, 2000 decreased $458,000
from December 31, 1999, other liabilities increased $271,000 from December 31,
1999 to June 30, 2000, and deferred income decreased $925,000 during that same
period.
During the six months ended June 30, 2000, cash used in investing
activities was $19,000. This represents cash used for capital expenditures
incurred in the normal course of operations.
Cash used in financing activities during the six months ended June 30,
2000 was $2,966,000, which was a result of the payoff of the line of credit with
Finova net of cash used that Curious Pictures produced.
Inflation
Inflation has not had a significant effect on the Company.
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.
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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
The Company filed the following Current Report on Form 8-K with
the Commission during the quarter for which this report is filed:
1. The Company's Current Report on Form 8-K filed on June 29,
2000 regarding the change of fiscal year end to December
31, 1999.
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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 August 14, 2000.
HARMONY HOLDINGS, INC.
BY: /s/ Steven C. Smith
---------------------------------------
Steven C. Smith
ITS: Executive Vice President
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EXHIBIT INDEX
27 Financial Data Schedule
