SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year ended June 30, 1999; or
[X] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from July 1, 1999 to
December 31, 1999.
Commission File Number 000-19577
HARMONY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4333330
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5501 Excelsior Boulevard
Minneapolis, Minnesota 55416 55416
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code:(612) 925-8840.
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01
par value(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant (based upon the closing price of such stock as reported on the
National Association of Securities Dealers Automated Quotation System as of
September 15, 2000):Common Stock, $.01 par value; $370,381.
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at September 1, 2000
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Common Stock, par value 7,506,660 shares
$.01 per share
DOCUMENTS INCORPORATED BY REFERENCE
NONE
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements, expressed or implied by such
forward-looking statements.
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934 which are subject to the "safe harbor" created by those
sections. The forward-looking statements include, but are not limited to,
statements related to industry trends and the future growth in the markets of
television commercial and music video production; the Company's strategies for
reducing its costs; the Company's efforts to secure and protect its proprietary
rights; the effect of GAAP accounting pronouncements on the Company's
recognition of revenues; the effect of the Year 2000 Issue on the Company's
operations; the availability of future rental space; and the sufficiency of the
Company's capital resources. Discussions containing forward-looking statements
may be found in "Business" (which includes "Risk Factors"), "Properties," "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in such
forward-looking statements. The Company disclaims any obligation to update these
forward-looking statements as a result of subsequent events. The risk factors on
pages 9 through 12, among other things, should be considered in evaluating the
Company's prospects and future financial performance.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Harmony Holdings, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on August 5, 1991, and currently conducts its
operations through its wholly owned subsidiary The End, Inc. ("The End") which
in turn operates one or more of its own subsidiaries and a 49%
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minority ownership interest in Curious Pictures Corporation ("Curious Pictures")
with the remaining 51% interest of Curious Pictures owned by iNTELEFILM
Corporation("iNTELEFILM"), the Company's largest shareholder. The Company also
owns a 10% interest in Harry Nash Film Productions f/k/a The End(London), Ltd.
("The End (London)") based in London. Effective July 1, 1999, the Company sold
90% of the stock of The End (London). Unless the context indicates otherwise,
the term "Company" includes Harmony Holdings, Inc. and all of its direct and
indirect majority-owned subsidiaries of Harmony Holdings, Inc. at the time of
reference. For periods after August 1, 1999, the reference to "Company" does not
include Curious Pictures, a 49% owned subsidiary of Harmony Holdings, Inc. On
June 29, 2000, the Company changed its fiscal year end from June 30 to December
31.
The Company's principal executive offices are located at 5501 Excelsior
Boulevard, Minneapolis, Minnesota 55416. Its telephone number is
(612) 925-8840. However, the Company's principal production offices are
located in Los Angeles and New York. See "Item 2. Properties."
ANNOUNCEMENT OF iNTELEFILM'S TENDER OFFER
On March 23, 2000, iNTELEFILM, the Company's largest shareholder,
announced its intention to commence a tender offer for all of the outstanding
shares of the Company that its does not already own. iNTELEFILM announced that
it will offer to exchange 1 share of its common stock for every 13.75 shares of
the Company's common stock tendered. In the event that iNTELEFILM acquires 90%
of the Company's common stock, iNTELEFILM intends to perform a short-form merger
with Harmony, whereby each outstanding share of Harmony common stock not
tendered would be converted into the same number of iNTELEFILM shares as set
forth in the tender offer. If iNTELEFILM is successful in acquiring such shares,
the Company will no longer be an independent financial reporting entity.
RESTRUCTURING OF OPERATIONS
Until the end of the fiscal year ended June 30, 1998, the Company
operated through four principal subsidiaries. Three of these principal
subsidiaries, Harmony Pictures, Inc. a/k/a Chemistry Pictures ("Harmony
Pictures"), The End, and The End (London), Ltd., were wholly-owned subsidiaries,
and the fourth subsidiary, Curious Pictures, was a 99% owned subsidiary. During
the fiscal year ended June 30, 1998, the Company initiated a company-wide
reorganization to relocate offices, consolidate financial and accounting
functions, and otherwise restructured the operations of the Company. As part of
its reorganization, the Company closed the operations of Harmony Pictures and
sold 90% of the stock of The End (London).
The first subsidiary that the Company closed was Harmony Pictures. For
the fiscal year ended June 30, 1998, Harmony Pictures incurred an operating loss
of $1,625,000. When Harmony Pictures losses continued by incurring an additional
operating loss of $595,000 for the fiscal quarter ended September 30, 1998, the
Company decided to discontinue the operations of Harmony Pictures, and to
dissolve Harmony Pictures. The dissolution and winding up of Harmony Pictures
was initiated and completed during the fiscal year ending June 30, 1999 and, as
a result of the termination of the operations of Harmony Pictures, the Company
recognized a loss of $2,215,000 for the fiscal year ending June 30, 1999 due to
the write-off of assets related to assets of that subsidiary.
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In furtherance of the Company's restructuring, effective July 1, 1999,
the Company sold 90% of its issued and outstanding shares of capital stock of
The End (London), to Julia Reed, the executive producer of The End (London). The
Company retained all rights to The End (London) name and logo. In connection
with the sale of stock, the Company and Ms. Reed entered into an agreement
granting Ms. Reed the right to purchase the remaining 10% equity interest in The
End (London) for approximately $803,000. The End(London) is now known as the
Harry Nash Film Productions, Ltd.
SALE OF 51% CURIOUS PICTURES UNDER THE OPTION AND SHARE TRANSFER AGREEMENT.
Although not part of its planned reorganization, the Company's interest
in another of its principal subsidiaries was reduced on August 1, 1999.
Effective August 1, 1999, iNTELEFILM purchased one share of the Company's common
stock and the stock purchase rights under that certain Option and Share Transfer
Agreement ("Option Agreement") that had been in effect since December 1996
between the Company and the four principal executives of Curious Pictures
(collectively "Curious Management") from Curious Management for a total of
$3,000,000, one-half of which was paid in cash and the balance by delivery of a
promissory note, which was subsequently paid in full. Under the Option
Agreement, Curious Management had been earning the right to purchase 50% of the
outstanding stock of Curious Pictures from the Company upon the achievement of
certain financial goals. It was agreed by all parties, including the
Company, that on August 1, 1999 Curious Management's rights to purchase the 50%
equity interest had fully vested and were exercisable for consideration totaling
$50. If on August 1, 1999 Curious Management had exercised their rights under
the Option Agreement, they would have become a majority shareholder in Curious
Pictures leaving the Company with no control over the operation or finances of
Curious Pictures leaving the Company with no guarantee of ever receiving a
return on its investment and still obligating the Company to provide financing
to Curious Pictures. Furthermore, Harmony did not have the financial resources
to acquire the option rights itself.
After iNTELEFILM acquired the stock purchase rights from Curious
Management, it exercised the stock purchase rights under the Option Agreement
and acquired both the 1% interest owned by Curious Management and an additional
50% interest in Curious Pictures. As a result, the Company currently owns 49% of
the outstanding stock of Curious Pictures and iNTELEFILM owns the remaining 51%
of the stock.
The intrinsic value of the stock options transferred under the option
and share transfer agreement was ultimately determined by iNTELEFILM'S purchase
of the agreement and one additional share of Curious Picture's common stock from
Curious Management for consideration totaling $3,000,000. This aggregate
consideration was valued at $2,700,000 for the options for 50 shares and
$300,000 for one share. The one share was given a slightly higher incremental
value as it represents the marginal share for a majority ownership. Accordingly,
the Company recognized $2,700,000 of stock options compensation through June 30,
1999.
Concurrently with the purchase of stock by iNTELEFILM, Curious Pictures
entered into a new five-year employment agreement with each of the four members
of Curious Management. 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 for $1.00 one share (representing 1% of the capital stock of
Curious Pictures) of the 49 shares (representing the remaining 49% equity
interest of Curious Pictures owned by the Company) 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%.
Pursuant to that certain Curious Stock Agreement, effective as of
August 1, 1999, between iNTELEFILM and Curious Management, 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.
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CONTINUING OPERATIONS AFTER REORGANIZATION
As a result of the closure of Harmony Pictures, the sale of The End
(London), and the decrease in the Company's ownership interest in Curious
Pictures, the Company's operations are now conducted solely through The End (and
the subsidiaries of The End), and the Company's principal source of revenues
during the transition period beginning July 1, 1999 and ending December 31, 1999
("Transition Period") were derived from the operations of The End. Although the
Company does not currently expect that its operating relationship with Curious
Pictures will materially change as a result of the decrease in its equity
ownership of Curious Pictures, the revenues and expenses of Curious Pictures are
no longer reflected on the consolidated financial statements of the Company. As
a 49% owner of Curious Pictures, commencing August 1, 1999, only 49% of any
income(loss) generated by Curious Pictures will be reflected on the Company's
financial statements. During the Transition Period, The End generated revenues
of $18,487,000 and operating loss of $601,000, whereas Curious Pictures
generated revenues of $12,226,000 and operating income of $640,000. Further, The
End's operations in the period subsequent to December 31, 1999 have been
adversely affected as a result of a variety of factors including the Screen
Actor's Guild ("SAG") strike which began May 1, 2000, a change in management,
and the current negotiations of several commercial director agreements. For the
period from January 1, 2000 to June 30, 2000, The End generated revenues of
$14,195,000 and had an operating loss of $2,049,000.
SUMMARY DESCRIPTION OF BUSINESS
The Company's primary business during the past few years and its
on-going business continues to be the production of television commercials.
Contracts for the production of television commercials are generally awarded
based on the personal relationships between the advertising agency, the
advertiser and the television commercial production company. The expertise,
reputation and creative vision of the commercial director roster and ability of
the production company to deliver the commercial in an efficient manner defines
the production company's role. The Company has established the base to expand
the role of the production company within the industry. The Company's customers
are typically advertising agencies acting on behalf of a television advertiser.
The Company maintains excellent relationships with many of the major advertising
agencies.
The Company currently has a roster of approximately 12 commercial
directors with specialties in varied advertising categories.
The Company continues to maintain excellent relationships with its
advertisers and has produced commercials for national advertisers such as:
Chrysler, Mazda, Coca-Cola, Renault, Lenscrafters, Cannon, Dr. Pepper,
Barbie, Target, Excedrin, Mitsubishi, Motorola and BMW.
COMMERCIAL TELEVISION PRODUCTION INDUSTRY
The markets for television commercials consist of national/regional
television networks, regional television stations or syndication and national
cable networks. Within each of these markets there exist sub markets based on
the nature of the advertiser - national or multi-national companies versus local
businesses and high and low budget commercials. Over the past few years, the
national advertising and commercial production industry has experienced a
dramatic increase in the number of markets for television commercials.
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MARKETING AND SALES STRATEGY
Traditionally, the Company's marketing efforts have focused on national
and multi-national advertisers, national network commercials and higher budget
commercials. Generally, the Company's budgeted price for a commercial ranges
from $100,000 to $400,000 and occasionally in excess of $1,000,000 with many of
the newer younger commercial directors at the lower end of the range and the
more experienced commercial directors at the higher end of the range. The
Company believes that as the newer younger commercial directors enhance their
skills, it will be able to produce higher quality, higher revenue commercials.
The Company's services are marketed by a staff of sales representatives
who seek out available commercial projects suitable for the Company's commercial
directors. These efforts are usually directed towards advertising agencies
located in New York, Los Angeles, Chicago, Detroit, Dallas, San Francisco,
Minneapolis and other regional markets. Some of the sales representatives are
employees of the Company and others are independent contractors. Currently, the
Company is in the process of negotiating new sales representation agreements.
There can be no assurance that the Company will be able to obtain such sales
representatives or that the terms of such agreements will be favorable to the
Company.
To sell the commercial director's work, the sales staff uses its
primary tool - the commercial director's reel. This reel is a visual "resume"
containing samples of a particular commercial director's work (most frequently
in the form of commercials) demonstrating the commercial director's creativity
and experience. Several reels are developed featuring its commercial directors
and highlighting different creative areas and subject matter. These reels are
constantly updated and provided to the ad agencies who generally act as the
decision maker.
The Company also advertises in trade publications and has sponsored
agency events on an occasional basis to maintain visibility among advertisers
and advertising agencies and to publicize specific information such as additions
to the commercial directorial roster, completion of a significant commercial, or
the recognition of awards and achievements.
DIRECTOR RETENTION
The number of commercial directors of the Company has recently
decreased from 20 commercial directors as of September 1, 1999 to 12 commercial
directors as of September 15, 2000. The primary decrease in the number of
commercial directors is due to the expiration of commercial director agreements
and the departure of commercial directors not under any contract with the
Company. Currently, the Company is in the process of negotiating several
commercial director agreements. However, there can be no assurance that the
Company will be able to retain its current commercial directors or hire any new
commercial directors.
TELEVISION COMMERCIAL PRODUCTION
The commercial production process is divided into several stages:
creating the concept; bidding; pre-production; principal photography; and
post-production. Commercial production companies usually enter the process at
the bidding phase and leave the process prior to the post production phase.
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THE INITIAL CONCEPT. Advertising agencies develop commercial ideas
based upon the needs of their clients. These ideas are embodied in a story board
written and created by the advertising agency or in some cases by the client
itself. The story board combines the script and the visual story line. After the
client approves the idea, the agency approaches several production companies to
determine how each company and its commercial director would bring the
commercial concept to fruition. It is common for the production companies to be
selected for a bid based primarily on the reputation and talent of commercial
directors associated with the production company.
BIDDING. Personnel at the television commercial production companies
analyze the commercial concept as communicated by the advertising agency. The
commercial director and his/her associates at the production company determine
how the story board can best be captured on film. They ascertain what
subcontractors must be hired, what locations must be secured, what free-lance
technical support is to be employed, what equipment is to be leased and what the
total cost will be to film the commercial. During this stage, the television
production company staff and the commercial director often suggest changes to
the story board both to enhance the commercial and to enable the commercial to
be filmed within the agency's and client's budget expectations.
A final bid is then submitted to the agency. The bid includes without
limitation the cost of shooting locations, actors (if applicable), technical
personnel, props and sets, and other production materials.
The agency selects the production company. Several factors contribute
to the decision such as the commercial director's ideas about how the commercial
would be shot, the bid submitted by the production company, the reputation of
the commercial director and the relationship between the agency, advertiser and
production company.
PRE-PRODUCTION. Once the commercial is "awarded", the production
company enters the pre-production period. The production company hires a line
producer who works with the commercial director to produce the commercial.
Locations are selected; sets are designed and built; props fabricated and/or
procured, and, if applicable, characters are cast and wardrobe selected. At a
formal meeting preceding the shooting days, the agency approves all of the
creative choices made in preparation for filming.
PRINCIPAL PHOTOGRAPHY. Principal photography usually ranges from one
day to a month depending upon the number of commercials shot and the technical
complexity of the commercial. The Company engages independent contractors and
crews on a commercial-by-commercial basis to perform the tasks involved in the
production of the commercial. Throughout the shooting process, agency personnel
approve each scene as shot.
The commercial is shot on motion picture film which is later developed
at a laboratory. The developed images are then viewed by the agency, the
advertiser and the production company.
POST-PRODUCTION. The post production process involves editing the film
footage and sound (which may or may not be recorded during production) through
color correcting the final video. This process may also involve voice-over,
titles, music and special effects. While the commercial director may or may not
be an active part of the post production process, the director of music videos
generally does take on the post production responsibility.
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Most often the agency independently edits the commercial. The
commercial director may attend the editorial sessions and may be responsible for
providing a first cut for the agency. The edit is then completed and approved by
the agency and the client. Most typically, the Company is not involved in the
post production process.
FINANCING THE PRODUCTION OF COMMERCIALS
Ad agencies award jobs to commercial production companies with an
accompanying bid. The award bid contains all of the costs associated with that
particular commercial and is broken down into direct costs of production,
commercial director's fees, insurance and the production company's fee. The
production company and the producer of the commercial carefully monitor costs
throughout the filming process. The agreed upon bid is often altered because
during the principal photography stage the agency, client and commercial
director agree upon a new creative option or because of unexpected occurrences
such as inclement weather. When this occurs, and the project costs exceed the
original budget, the increased cost is paid for by the agency and its client.
In most circumstances, the Company bills the advertising agency for
33%-70% of the entire budget as stated in the bid, to be paid in advance or on
the first day of principal photography. The remainder of the contract price is
generally paid in one or more installments by the agency within 30 to 120 days
after completion of principal photography. Traditionally, the accounts
receivable have been extremely well managed with write-offs being less than 2%
of all business.
MUSIC VIDEOS
A smaller percentage of the Company's business is derived from the
production of music videos. The production cycles for music videos is similar to
that of television commercials, but the budgets are generally smaller, i.e.
$50,000 to $100,000. The Company is generally involved in the post production
phase of music videos. The client for music videos is usually the record company
or the performer directly. Some of the performers for which the Company has
produced music videos include Oasis, Trick Daddy and K.D. Lange.
EMPLOYEES
As of September 15, 2000, the Company had 24 employees who work on a
full-time basis. Additionally, the Company had approximately 12 commercial
directors, all of whom are independent contractors, and 3 sales representatives.
Of such persons, 2 are officers or other senior executives of the Company. The
Company does not anticipate any further material change in the number of its
full-time employees in the near future. None of the Company's full-time
employees are represented by a labor union and the Company believes that it has
good relationships with its employees.
The Company, through certain of its subsidiaries, is a party to
collective bargaining agreements with the Directors Guild of America, SAG and
the International Alliance of Theatrical Stage Employees. Other than these
collective bargaining agreements, the Company is not a party to any collective
bargaining agreements.
On May 1, 2000, members of the SAG began a strike against the
advertising agencies that
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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 producing commercials outside the
United States wherever possible. To date, the Company has lost business as a
result of the strike. The Company can give no assurance that an extended strike
will not have a significant adverse effect on its operations and liquidity.
In addition, 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, that it employs on a free-lance basis are members of
unions who are parties to collective bargaining agreements. The extent to which
collective bargaining agreements may affect the Company in the future is not
determinable.
COMPETITION
The television commercial production industry is a highly fragmented
multi-billion dollar industry, with most of the Company's competitors being
relatively small operations. iNTELEFILM, the Company's largest shareholder, is
also in the business of television commercial production and may compete with
the Company. Although the Company believes that its commercial director roster
and advertising agency relationships may have a competitive advantage, there can
be no assurance that the Company will be able to successfully compete against
its competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's proprietary rights are an important part of its business.
To protect its proprietary rights the Company relies on a combination of
copyright, trade secret and trademark laws as well as nondisclosure and other
contractual restrictions. The Company currently holds and uses the rights to
various servicemarks, including the following: Harmony Holdings, Inc.(sm); The
End, Inc.(sm); The Beginning Entertainment, Inc.(sm); and The Moment Films,
Inc.(sm).
RISK FACTORS
WE HAVE EXPERIENCED SIGNIFICANT LOSSES; WORKING CAPITAL DEFICIENCIES;
NEGATIVE STOCKHOLDERS' EQUITY AND OUR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
HAVE QUALIFIED THEIR REPORT OF ACCOUNTANTS. For the fiscal years ended June 30,
1998 and 1999, we had net losses of $4,489,000 and $8,395,000, respectively. For
the six months ended December 31, 1999, we had net losses of $1,136,000. In
addition, as of December 31, 1999, we had a working capital deficiency of
$6,320,000 and negative stockholders' equity of $3,842,000. As a result, our
independent certified public accountants have qualified their report on our
financial statements for the year ending June 30, 1999 and for the period ending
December 31, 1999 and have raised substantial doubt as to our ability to
continue as a going concern. Although we have completed our reorganization and
believe that we have corrected many of the problems that caused these historical
losses, we continue to operate at a loss and there can be no assurance that we
will ever be able to operate profitably in the future. Furthermore, if we are
unable to solve our current financial difficulties, we may have to cease
operations or otherwise be liquidated.
WE MAY BE UNABLE TO REPAY OUR INDEBTEDNESS. Through early March 2000,
we had funded a portion of our working capital needs through a revolving line of
credit with Finova Capital Corporation ("Finova"),
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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. In March 2000, Finova terminated this
line of credit due to an event of default by us under the loan agreement. We
subsequently repaid our indebtedness to Finova in full. In addition, as of June
30, 2000, we had borrowed $3.2 million from iNTELEFILM pursuant to demand
promissory notes. The iNTELEFILM notes bear interest at a rate of 14% per annum
and are due and payable on demand. On March 23, 2000, iNTELEFILM demanded
payment in full of the loans it had made to us. iNTELEFILM subsequently granted
us a forbearance of our payment demand for an indeterminate amount of time in
order to enable our independent directors to evaluate our position and possible
alternatives. No assurance can be given that we will be able to repay the
iNTELEFILM loans. In addition to the $3.2 million, as of September 7, 2000,
iNTELEFILM has provided us with working capital of $2.5 million. There is no
assurance that we will be able to repay the working capital provided by
iNTELEFILM when such amount is declared to be due and payable. In the event
iNTELEFILM is successful in its announced tender offer, the substantial
indebtedness owed to iNTELEFILM will be eliminated. In the event iNTELEFILM is
not successful in its tender offer, the substantial indebtedness owed to
iNTELEFILM will remain due and payable and there can be no assurance that the
Company will be able to repay such indebtedness when such amount is declared to
be due and payable. In August 2000, we, 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. The line of credit
bears interest at a variable rate (10.24% at September 8, 2000) and all parties
to the agreement cross-collateralize all borrowings. No assurance can be given
that we will be able to repay such loan when such loan is declared due and
payable. The Company currently has a negative cash flow from operations and,
accordingly, does not have the financial ability to repay the loan.
WE NEED ADDITIONAL FUNDS TO OPERATE OUR BUSINESS AND THERE IS NO
ASSURANCE THAT WE WILL BE ABLE TO RECEIVE ADDITIONAL FINANCING. During the past
two fiscal years and the Transition Period, we have not generated positive cash
flow from operations. Our capital needs have been met by loans we have obtained
under lending facilities and from loans made to us by iNTELEFILM. We may need to
raise additional debt or equity funds to repay our current outstanding loans and
to fund our future operations. Under the loan agreement with GE Capital, we can
only borrow against our eligible accounts receivable and as a result, we need
additional funds to operate our business. To date, iNTELEFILM has provided us
with the working capital we will need through loans and advances. However, there
can be no assurance that iNTELEFILM will make any additional loans or provide
any additional working capital to us or that additional debt or equity financing
will be available from third party sources on terms favorable to us, or at all;
however, management believes that such advances will continue as necessary
through January 1, 2001. If adequate funds are not available or not available on
acceptable terms, we may not be able to fund our operations, repay our current
indebtedness or further develop our business. Any such inability would have a
material adverse effect on our business, results of operations and financial
condition.
OUR STOCK PRICE MAY BE VOLATILE. Our Common Stock has experienced
significant price volatility and such volatility may continue to occur in the
future. For the six months ending December 31, 1999, our stock fluctuated from
$1.094 to $.125. Factors that could affect the trading price of the Common Stock
include variations in quarterly results of operations, our announcements of new
projects or our competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, overall market conditions
and other factors. In addition, the stock market historically has experienced
extreme price and volume fluctuations, which at times have been unrelated or
disproportionate to the operating performance of certain companies. These market
fluctuations may adversely affect the market price of the Common Stock.
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OUR COMMON STOCK IS THINLY TRADED, CREATING POSSIBLE LIQUIDITY PROBLEMS
FOR SHAREHOLDERS WHO SEEK TO SELL. In February 1999, our common stock was
removed from listing on the Nasdaq SmallCap Market and currently trades on the
OTC Bulletin Board. The trading volume of stock on the OTC Bulletin Board tends
to be less regular then other markets, which irregular trading can create a
difficulty for shareholders seeking to sell their shares. Accordingly, no
assurance can be given that our common stock will ever be actively traded on the
OTC Bulletin Board market or that, if active trading does develop, it will be
sustained.
OUR TELEVISION COMMERCIAL DIRECTORS AND OTHER KEY PERSONNEL COULD
LEAVE, IMPAIRING OUR DEVELOPMENT AND PROFITABILITY. We believe that our
development and ability to operate profitably in the television commercial
production industry depends on the hiring and continued engagement or employment
of television commercial directors and other key personnel. While we have
entered into various agreements with such persons, there can be no assurance
that we will be able to retain such talent or that such talent will fulfill
their obligations to us. Such persons could leave and compete against us in the
industry. Since September 1, 1999 to September 15, 2000, the number of
commercial directors has decreased from 20 to 12. Although we are currently
negotiating several commercial director agreements, there can be no assurance
that we will be able to retain such commercial directors or that the terms of
any such agreements will be favorable to the Company.
THE SCREEN ACTORS GUILD STRIKE AND OTHER LABOR DISPUTES COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS. On May 1, 2000, members of the SAG
began a strike against the advertising agencies that represent our customer
base. This on-going strike has limited our ability to produce television
commercials domestically. We have made an effort to limit the effect that the
strike may have on our operations by utilizing non-union talent and producing
commercials outside of the United States wherever possible. To date, we have
lost business as a result of the strike. We can give no assurance that an
extended strike will not have a significant adverse affect on our operations and
liquidity. In addition, it is possible that some of our 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, that we employ on a free-lance basis are members of
unions who are parties to collective bargaining agreements. There can be no
assurance that our future business activities will not be adversely affected as
a result of any collective bargaining agreements.
OUR COMPETITION; CHANGING TECHNOLOGIES AND TRENDS MAY SIGNIFICANTLY
IMPACT OUR BUSINESS. We face stiff competition from many qualified commercial
production companies and commercial directors. We do not have any long-term
contracts and must continually bid on new projects to generate revenues and
support our overhead expenses. As a result, we must continually compete with our
competitors for additional revenues. iNTELEFILM, is also in the business of
television commercial production and may compete against us. In addition, the
demand for commercial directors with certain talents in the commercial industry
continually change reflecting changes in marketing styles, and technological
changes, such as computer enhancements and other technical advances, also change
the type of commercial directors that are in demand for producing television
commercials. Unless we are able to continuously hire commercial directors with
the talents that are demanded by our advertisers, our business and operations
will be adversely affected. No assurance can be given that we will have the
talent that is required to be able to successfully bid on the number of
television commercials that are required for us to continue our operations.
OUR ANTI-TAKEOVER PROVISIONS MAY PREVENT A CHANGE OF CONTROL. Certain
provisions of our Certificate of
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Incorporation (the "Charter") and Bylaws (the "Bylaws") and certain provisions
of Delaware law could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire or
take control of us. Such provisions could limit the price that investors might
be willing to pay in the future for our Common Stock. These provisions require
super-majority approval to amend certain provisions in the Charter and Bylaws,
require that all stockholder actions be taken at a duly called annual or special
meetings and not by written consent, and impose various procedural and other
requirements that could make it more difficult for stock holders to effect
certain corporate action. Further, we are subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibit us from engaging in a "business combination" with an "interested
stockholder," unless the business combination is approved in a prescribed
manner. The application of Section 203 could also have the effect of delaying or
preventing a change of control of us.
YEAR 2000 ISSUES MAY HAVE AN ADVERSE ON OUR BUSINESS. As of September
1, 2000, we have not experienced and we do not anticipate any material adverse
effects on our equipment, systems and operations as a result of Year 2000
issues. However, our failure, or the failure of our vendors, suppliers or other
critical third parties with whom we conduct business to achieve Year 2000
compliance on a timely basis could materially adversely affect our business,
operating results and financial condition.
SPECIAL NOTE REGARDING THE COMPANY'S FORWARD LOOKING STATEMENTS. Some
of the information in this document may contain forward-looking statements. You
can identify such statements by noting the use of forward-looking terms such as
"believes," "expects," "plans," estimates," and other similar words. Risks,
uncertainties or assumptions that are difficult to predict may affect such
statements. The risk factors presented above and other cautionary statements
could cause our actual operating results to differ materially from those
expressed in any forward-looking statement. The Company cautions readers of this
document to keep in mind these risk factors and other cautionary statements and
to refrain from placing undue reliance on any forward-looking statements, which
speak only as of the date of this document.
ITEM 2. PROPERTY
PROPERTIES AND FACILITIES
The Company's executive offices are located at 5501 Excelsior
Boulevard, Minneapolis, Minnesota and is leased from Media Management, L.L.C.,
("MMLLC"), a management company owned by Messrs. Dahl and Perkins, each of whom
is a director of the Company. The facility is shared with iNTELEFILM. The
Company pays MMLLC a monthly fixed amount for providing administrative, legal,
financial and accounting services to the Company. The fixed amount also includes
the rent for the executive offices of the Company. See "Item 13. Certain
Relationships and Related Transactions."
As of September 1, 2000, the Company currently leases office facilities
at the following locations, for the purposes of conducting its television
commercial and music video production business:
The End, Inc.'s California facility is located at 433 South Beverly
Hills Drive in Beverly Hills, California. The lease is for ten years
ending in October 2008 at a monthly rate of $21,909.00.
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The End, Inc.'s current New York facility is located at 75 Varick
Street, New York, New York. The lease is for ten years ending in August
2009 at a monthly rate of $9,282,00.
Although these facilities are currently sufficient, there can be no
assurance that the current facilities will be adequate to meet the Company's
future capacity needs.
ITEM 3. LEGAL PROCEEDINGS
On October 20, 1999, Imperial Bank, a California banking corporation
filed a lawsuit against Cinnequanon 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.
Except as described above, the Company is not a party to any other
material legal proceedings. From time to time the Company is a party to
litigation which is incidental to its business, including administrative
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the period
covered by this Transition Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Following the completion of the Company's initial public offering in
November 1991, its Common Stock began trading on the Nasdaq Small Cap Market
under the symbol "HAHO." In February 1999, the Company's common stock was
removed from the Nasdaq SmallCap Market and currently trades on the OTC Bulletin
Board under the same trading symbol. The following table sets forth the high and
low bid (or trade) price per share of the Common Stock for the fiscal period and
Transitional Period indicated, as provided to the Company The Nasdaq Stock
Market and the OTC Bulletin Board.
Fiscal Year - 1998 High Low
Quarter Ended Closing Price Closing Price
------------- ------------- -------------
September 30, 1997 2.31 2.19
December 31, 1997 2.00 2.00
March 31, 1998 1.50 1.25
June 30, 1998 1.63 1.63
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Fiscal Year - 1999 High Low
Quarter Ended Closing Price Closing Price
------------- ------------- -------------
September 30, 1998 1.66 1.00
December 31, 1998 1.44 1.16
March 31, 1999 1.50 1.00
June 30, 1999 1.06 .88
Transition Period - December 31, 1999
High Low
Quarter Ended Closing Price Closing Price
------------- ------------- -------------
September 30, 1999 1.094 .313
December 31, 1999 .469 .125
The quotations may include inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
On September 1, 2000, the closing price was $.110. As of such date, the
Company estimates there were approximately 46 registered holders of record of
the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock during any period for which financial information is provided in this
Transition Report on Form 10-K. Under the terms of the Company's loan agreement
with GE Capital, the Company currently is prohibited from paying dividends on
its Common Stock. The Company currently intends to retain future earnings, if
any, to repay its outstanding indebtedness and to fund the development and
growth of its business and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future even if such payment were permitted under
the loan agreement with GE Capital or if such restriction is otherwise no longer
effective.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company is set forth below (000's
omitted except for per share data). This selected financial data should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited financial statements
included elsewhere in this Transition Report on Form 10-K.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Six Months Ended Twelve Months Ended
December 31, June 30,
------------------------- ----------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Contract revenue $ 19,810 $ 31,384 $66,340 $53,355 $64,831 $60,415 $61,227
Cost of production 17,396 26,829 56,347 43,617 52,174 51,041 50,920
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------- ----------------------------------------------------
Selling, general &
administrative expenses 2,799 4,855 10,012 10,760 9,343 8,628 8,800
Subsidiary stock option
compensation - 218 2,234 391 75 - -
Corporate charges 701 628 1,457 2,379 1,147 2,050 1,655
Depreciation & amortization 171 474 882 700 620 564 528
Restructuring costs &
impairment of assets - 3,532 3,357 - - - -
------------------------- ----------------------------------------------------
Income (loss) from operations (1,257) (5,152) (7,949) (4,492) 1,472 (1,868) (676)
Gain on disposal of production
division 120 - - - - - -
Equity earnings in Curious
Pictures 280 - - - - - -
Interest income (expense), net (278) (187) (434) 25 40 (243) (9)
------------------------- ----------------------------------------------------
Income (loss) before taxes (1,135) (5,339) (8,383) (4,467) 1,512 (2,111) (685)
Income tax expense - 10 11 22 179 20 -
------------------------- ----------------------------------------------------
Net income (loss) $(1,135) $(5,349) $(8,394) $(4,489) $1,333 $(2,131) $(685)
------------------------- ----------------------------------------------------
Income (loss) per share-
basic and diluted $(0.15) $(0.73) $(1.13) $(0.69) $ 0.20 $(0.37) $(0.12)
------------------------- ----------------------------------------------------
Weighted average shares
outstanding 7,507 7,314 7,409 6,515 6,682 5,692 5,567
------------------------- ----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
December 31, June 30,
1999 1999 1998 1997 1996 1995
------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash $1,067 $2,911 $3,834 $2,355 $447 $230
Current assets 6,251 10,713 12,008 9,505 4,986 7,707
Goodwill, net 163 169 2,546 2,758 2,969 3,181
Total assets 8,729 14,121 16,927 14,505 9,687 12,955
Current liabilities 12,571 15,703 12,698 6,748 5,382 6,196
Non-current liabilities - - - - - 385
Total liabilities 12,571 15,703 12,698 6,748 5,382 6,581
Minority interest - 2,700 466 75 - -
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
------------ ----------------------------------------------------
Stockholders' equity (deficit) $(3,842) $(4,281) $3,763 $7,682 $4,304 $6,374
------------ ----------------------------------------------------
</TABLE>
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ITEM 7. 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 our 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
Transition Report on Form 10-K and other documents previously filed or hereafter
filed by the Company from time to time with the Securities and Exchange
Commission. For further information, refer to the consolidated financial
statements and footnotes thereto included in the our Form 10-Q for the six
months ended June 30, 2000.
Overview
During the six months ended December 31, 1999, we operated
through two major divisions. Each division consists of one of our subsidiaries,
that subsidiary in turn operates one or more of its own subsidiaries. The two
principal subsidiaries that represent the major operating divisions are The End
and Curious Pictures. The End is a wholly owned subsidiary of ours. Curious
Pictures operated as a majority owned subsidiary during July 1999 only.
Effective August 1, 1999, our ownership of Curious Pictures' was reduced to 49%
(see Note 3 to the attached financial statements). As a result, we 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, we operated two
additional divisions, Harmony Pictures and The End (London). Harmony Pictures
discontinued operations during the second quarter of fiscal year 1999, and we
sold 90% of the stock of The End (London) as of July 1, 1999 (see Note 3 to the
attached financial statements). Accordingly, the results of operations for the
six months ended December 31, 1998 reflect the operations of three subsidiaries
that are not included in the results of operations in the current fiscal year.
Results of Operations:
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31,
1998:
During the six months ended December 31, 1999, revenues decreased
$11,574,000 or 37% compared to the same period of 1998. Of the decrease in
revenues, $8,330,000 is from the two divisions we no longer operate, while
$8,081,000 is from revenues of Curious Pictures, which we no longer consolidate
in our financial statements. Revenues at The End increased $4,837,000 in the six
months ended December 31, 1999 compared to the same period in the prior year.
These increases were due primarily to The End's ability to attract and retain
commercial 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 86% to 88% in the six months ended December 31, 1999 compared to
the same period of
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1998. Exclusive of Curious Pictures and the two divisions we no longer operate,
The End's cost of production increased from 87% during the six months ended
December 31, 1998 to 88% during the six months ended December 31, 1999. With the
addition of several new commercial directors, we submitted lower bids in an
attempt to increase operating revenues and to gain work for newly signed
commercial directors. We believe the cost of production, as a percentage of
revenue, will decrease as new commercial 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 $757,000 in the six months ended
December 31, 1999 compared to $1,634,000 in the same period of 1998. Of this 54%
decrease during these comparative six-month periods, a $1,024,000 decrease is
related to Curious Pictures and the two divisions we no longer operate while, in
conjunction with increased revenues, 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 $1,179,000 or 37% from $3,211,000
during the six months ended December 31, 1998 to $2,032,000 in the same period
of 1999. General and administrative expenses increased $719,000 at The End due
primarily to the increased activities at The End's subsidiaries as new
commercial directors were signed. The decrease of $1,898,000 is related to
Curious Pictures and the two divisions we no longer operate.
The $218,000 stock option compensation expense reported during the six
months ended December 31, 1998 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 (see Note 3 to the
attached financial statements).
Corporate charges increased $74,000 in the six months ended December
31, 1999 compared to the respective six-month period in 1998. This 12% increase
is due primarily to additional professional fees incurred in litigation,
renegotiating employment and commercial director contracts, and negotiations
with Finova regarding the line of credit (see Note 7 to the attached financial
statements).
Depreciation and amortization expense decreased in the six months ended
December 31, 1999 by $304,000 or 64% compared to the same period in 1998. This
expense decreased primarily due to the two divisions we no longer operate and
Curious Pictures.
As a result of the sale of 90% of our interest in The End (London) (see
Note 3 to the attached financial statements), we were relieved of liabilities in
excess of assets forfeited, resulting in a non-cash gain of $120,000.
Interest expense net of interest income increased $91,000 during the
during the six months ended December 31, 1999 compared to the six months ended
December 31, 1998. This increase was a result of our increased borrowings under
our credit facility, as well as the interest incurred as a result of borrowings
from iNTELEFILM (see Note 11 to the attached financial statements).
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<PAGE>
No income tax expense was reported during the six months ended
December 31, 1999. Our 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 our net deferred tax asset, as we cannot
determine that it is more likely than not that the deferred tax assets
(primarily net operating loss carryforwards) will be realized.
We 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
six-month period ended December 31, 1998 included a one-time charge for
restructuring costs and the impairment of assets related to discontinuing the
operations of Harmony Pictures (see Note 12 to the attached financial
statements).
Year ended June 30, 1999 as compared with year ended June 30, 1998:
For the year ended June 30, 1999, contract revenues increased by 24%
or $12,985,000 to $66,340,000 from $53,355,000 for the year ended June 30, 1998.
This increase in revenue represents revenue increases of $7.5 million by The End
(London), $4.6 million by Curious Pictures, and $10.1 million by The End. These
increases were due primarily to the improved resources with which the
subsidiaries were able to attract and retain commercial directors. The increase
in revenues at these divisions more than offset the decrease in revenues due to
the discontinuance of Harmony Pictures. Revenue at Harmony Pictures decreased
$9.0 million during the year ended June 30, 1999. As mentioned above, we
discontinued the operations of Harmony Pictures during the second quarter of
fiscal year 1999.
Cost of production is directly related to revenues and includes all
direct costs incurred in connection with the production of television
commercials and music videos including film, crews, location fees and commercial
directors' fees. Cost of production as a percentage of revenues increased from
approximately 82% to 85% for the fiscal year ended June 30, 1999 compared to
fiscal year 1998. As a result of the increase in the cost of production, gross
margins as a percentage of revenues decreased from 18% for the year ended June
30, 1998 to 15% in the year ended June 30, 1999. This decrease in gross margins
is due to bids we submitted at lower margins than the previous year in an
attempt to increase operating revenues and to gain work for newly signed
commercial directors. Additionally, lower margins are realized on music videos
than on television commercials. As we have taken on more music video projects in
the last fiscal year, the overall margins have decreased. We believe that the
cost of production as a percentage of revenue will decrease as these new
commercial 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. These expenses increased in conjunction with the increase
in revenues. Selling expenses totaled $3,377,000 in the fiscal year ended June
30, 1999 compared to $2,729,000 in the prior fiscal year, an increase of 24%.
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 $1,397,000 in fiscal year 1999 to
$6,635,000 as compared to $8,032,000 for fiscal year 1998. These expenses
decreased 17% due in part to the cessation of operations at Harmony Pictures.
General and administrative expenses at Harmony Pictures decreased $1.5 million
during fiscal year 1999 due to the discontinuation of its operations, while
these expenses increased slightly at the remaining three divisions.
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<PAGE>
Stock option compensation expense reported during the year ended June
30, 1999 was $2,234,000, an increase of $1,844,000 over the fiscal year ended
June 30, 1998. This expense represented a non-cash charge resulting from Curious
Management earning stock options of Curious Pictures under a December 15, 1996
agreement between the Company and Curious Management. Effective August 1, 1999,
this Option Agreement was purchased by iNTELEFILM. The cumulative amount of
compensation expense recognized related to this agreement was $2,700,000 and is
reflected as a minority interest in Curious Pictures on the accompanying balance
sheet.
Corporate charges decreased $922,000 or 39% from $2,379,000 in fiscal
year 1998 to $1,457,000 in fiscal year 1999. This decrease was due primarily to
the consolidation of the corporate offices in Minneapolis, which include the
executive, accounting, and legal staff.
Depreciation and amortization expense increased in the fiscal year
1999 by $182,000 or 26% compared to fiscal year 1998. Although there was an
overall increase of this expense over the year, depreciation and amortization
expense decreased in the last two quarters due to the disposal of depreciable
assets and the impairment of goodwill resulting from the discontinuance of
operations of Harmony Pictures.
Upon reaching the decision to discontinue the Harmony Pictures
division, management determined that the goodwill associated with the division
was fully impaired. Accordingly, an impairment charge of $2,215,000 was
recognized in the second quarter of fiscal 1999. Other restructuring costs of
$1,142,000 were also recognized on the accompanying income statement. The
restructuring costs relate to the incremental costs of discontinuing the
division and primarily consist of general office closing logistics, however also
include amounts which in aggregate are not significant in nature, such as
severance payments, contract buyouts, lease obligations and non-refundable
prepayments.
Interest income decreased $71,000 and interest expense increased
$389,000 during fiscal year 1999 compared to fiscal year 1998, as a result of
our increased borrowings under our credit facility entered into with Freemont
Capital Corporation, which subsequently transferred its interest to Finova, as
well as the interest incurred as a result of borrowings from iNTELEFILM.
Income tax expense decreased $11,000 from $22,000 in fiscal year 1998
to $11,000 in fiscal year 1999. Our 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
was established for the full amount of our net deferred tax asset, as we cannot
determine that it is more likely than not that the deferred tax assets
(primarily net operating loss carryforwards) will be realized.
The Company as a whole incurred net losses of $8,395,000 during the
fiscal year ended June 30, 1999. The losses for the year included the
restructuring and asset impairment costs totaling $3,357,000 related to the
discontinued operations of Harmony Pictures and the non-cash stock option
compensation expense of $2,234,000 related to the Option Agreement.
New Accounting Pronouncements:
Statement of Financial Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is
effective for financial statements with fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 requires companies to recognize ALL
derivatives contracts as either assets or liabilities in the balance sheet and
to measure them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or
20
<PAGE>
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change.
Historically, we have not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, we do not expect
adoption of the new standard to affect our financial statements.
In 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
dealing with revenue recognition which is effective in the fourth quarter of
fiscal 2000. The Company does not expect is adoption to have a material effect
on the Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"),
which is effective July 1, 2000. This interpretation clarifies the application
of APB Opinion 25 for certain issues related to stock issued to employees. The
Company believes its existing stock based compensation policies and procedures
are in compliance with FIN 44 and therefore, the adoption of FIN 44 will not
have a material effect on the Company's financial statements.
Liquidity and Capital Resources
During the six months ended December 31, 1999, we 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.
For nominal consideration, effective July 1, 1999, we 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 ours. 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 us for approximately $803,000. As a result of this transaction, we
were 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 has relieved us of 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, our 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, we
currently own 49% of the outstanding stock of Curious Pictures and iNTELEFILM
owns 51% of the stock. Prior to the acquisition, we owned 99% of the outstanding
shares of Curious Pictures, and Curious Management owned 1%. By having our
interest in Curious Pictures reduced to below 50%, we no longer consolidate the
revenues and expenses of this division, rather we account for Curious Pictures
as an equity investment. Accordingly, we now reflect on our balance sheet, an
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investment in and an amount due to Curious Pictures, which totaled $1.4 million
and $1.6 million, respectively, at December 31, 1999. Prior to the
aforementioned transaction, this payable was eliminated through the
consolidation of Curious Pictures (See Note 3 to the attached financial
statements).
Through December 31, 1999, we funded a portion of our 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 our outstanding common stock. In
April 2000, we repaid our indebtedness to Finova in full. Independent of the
notes payable to iNTELEFILM in the amount of approximately $3.2 million, we
received advances from iNTELEFILM during the period from January 1, 2000 to
September 7, 2000. These non-interest bearing advances are unsecured and
primarily funded a portion of the line of credit pay-off and our operations. At
September 7, 2000, $2.5 million of these advances remained due and payable to
iNTELEFILM for a total indebtedness to iNTELEFILM of $5.7 million. Management
believes that such advances will continue as necessary through January 1, 2001.
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 14 to the attached 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, we may need to seek additional
outside financing to fund our operations. Although iNTELEFILM has provided us
with financing in the past, there can be no assurance that iNTELEFILM will
continue to provide us with additional financing or that we will be able to
obtain additional financing from other third parties.
Prior to this agreement being signed, our only external financing
resources were our 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. No assurance can be given that we 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 we will be able to fund our operations without additional sources of
outside financing. We continue to attempt to reduce our cash usage through work
force, operating reductions and an increase in the number of our commercial
directors. Primarily as a result of these items, our independent certified
public accountants modified their opinion on our December 31, 1999 Consolidated
Financial Statements to contain a paragraph wherein they expressed substantial
doubt about our ability to continue as a going concern (see Note 2 to the
attached financial statements).
In March 2000, iNTELEFILM publicly announced its future intention to
effect an exchange tender offer with our stockholders to acquire all of the
outstanding shares of our common stock that is not currently owned by iNTELEFILM
in exchange for shares of iNTELEFILM common stock. iNTELEFILM currently owns
approximately 55% of our common stock. According to its announcement, iNTELEFILM
proposes to offer one share of its common stock for every 13.75 shares of our
common stock. If iNTELEFILM is successful in acquiring such shares, we will
become a wholly-owned subsidiary of
22
<PAGE>
iNTELEFILM, and will no longer be an independent financial reporting entity.
On May 1, 2000, members of the SAG began a strike against the
advertising agencies that represent our customer base. This on-going strike has
limited our ability to produce television commercials domestically. We have made
an effort to limit the effect that the strike may have on our operations by
utilizing non-union talent and producing commercials outside of the United
States wherever possible. To date, we have lost business as a result of the
strike. We can give no assurance that an extended strike will not have a
significant adverse affect on our operations and liquidity. In addition, it is
possible that some of our 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, that we
employ on a free-lance basis are members of unions who are parties to collective
bargaining agreements. There can be no assurance that our future business
activities will not be adversely affected as a result of any collective
bargaining agreements.
Management has taken steps to reduce our operating cash flow deficit
including the 1999 disposition of most of our interest in The End (London).
Although iNTELEFILM is still providing us with some financing, iNTELEFILM is not
obligated to make any additional advances to us. Should iNTELEFILM cease making
additional advances to us and the line of credit through GE Capital be
insufficient to meet our working capital needs, we may have to seek alternative
financing. If we are not able to obtain adequate financing, or financing on
acceptable terms, we could be forced to further reduce or terminate our
operations or potentially default on our obligations to our creditors, all of
which may be materially adverse to our operations and prospects.
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 our 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 $2,901,000. Net of the effect of the sale of The End (London) and
the effect of not consolidating Curious Pictures, accounts receivable at
December 31, 1999 decreased $592,000 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 $1,054,000 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 $488,000. 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 3 to the
attached 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.
Consolidated cash was $2,911,000 at June 30, 1999 and $3,834,000 at
June 30, 1998, a decrease of $923,000.
23
<PAGE>
Cash used in operating activities for the year ended June 30, 1999 was
$2,726,000. Accounts receivable at June 30, 1999 decreased $566,000 from June
30, 1998, and other assets at June 30, 1999 increased $996,000 from June 30,
1998. Accounts payable at June 30, 1999 increased $32,000 from June 30, 1998,
accrued expenses decreased $563,000 from June 30, 1998 to June 30, 1999, and
deferred income increased 1,088,000 during that same period.
During the year ended June 30, 1999, cash used in investing activities
was $995,000. This represents cash used for capital expenditures incurred in the
normal course of operations, less the payment of the note receivable received by
from a former officer.
Cash provided by financing activities during the year ended June 30,
1999 was $2,798,000 which was provided through the cash borrowings from
iNTELEFILM and the proceeds from the issuance of common stock to iNTELEFILM, net
of the repayment of borrowings from iNTELEFILM.
Year 2000 Compliance.
Before the rollover of the year from 1999 to 2000, many installed
computer systems and software products were coded to accept only two digit date
entries and were unable to accept four digit date entries to distinguish 21st
century dates from the 20th century dates. As a result, computer systems and
software used by many companies prior to the rollover date required upgrading or
replacement to comply with such "Year 2000" requirements. Our failure, the
failure of our vendors, suppliers or other critical third parties with whom we
conduct business to achieve Year 2000 compliance on a timely basis could
materially adversely affect our business, operating results and financial
condition.
As of September 1, 2000, we had not experienced and do not anticipate
any material adverse effects on our production equipment, systems or operations
as a result of Year 2000 issues. Business is continuing as usual, and internal
equipment and systems will continue to be monitored for any likely disruptions.
Further, as of September 1, 2000, we had not experienced any operational
difficulties as a result of Year 2000 issues with our vendors, suppliers or
other critical third parties with whom we conduct business. However, Year 2000
compliance has many elements and potential consequences, some of which may not
be foreseeable or may be realized in future periods. Consequently, there can be
no assurance that unforeseen circumstances may not arise, or that we will not in
the future identify equipment or systems which are not Year 2000 compliant.
Although the transition to the Year 2000 did not have any significant
impact on us or our equipment, systems and operations, we will continue to
monitor the impact of the Year 2000 on our equipment and systems and those of
our vendors, suppliers and other critical third parties. The contingency plans
that were developed for use in the event of Year 2000-related failures will be
maintained and generalized for ongoing business use.
We have not and do not anticipate spending any material amounts of
money relating to Year 2000 issues.
INFLATION
Inflation has not had a significant effect on us.
24
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's interest rate risk results from short-term debt at fixed
and variable rates, primarily fixed interest rate debt which is due on demand to
a related party and a variable interest rate demand under the GE Capital loan
agreement. As the Company's debt portfolio is short-term in nature, management's
primary method to mitigate the impact of fluctuations in interest rates is to
monitor credit availability and , to the extent possible, the Company's credit
worthiness in an effort to ensure that the debt portfolio is competitively
priced. The following table provides information about the Company's notes
payable and line of credit and presents principal cash flows and current
interest rates by expected maturity date.
Fair Value and Due on Demand
at December 31, 1999
----------------------------
Note payable to related party $3,193,615
Fixed Interest Rate 14.0%
Line of Credit - Finova $3,548,911
Variable Interest Rate
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HARMONY HOLDINGS, INC.
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1999
AND THE
YEARS ENDED
JUNE 30, 1999 AND 1998
<PAGE>
HARMONY HOLDINGS, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants..........................F-1
Consolidated Balance Sheets.................................................F-2
Consolidated Statements of Operations.......................................F-3
Consolidated Statement of Stockholders' Equity (Deficit)....................F-4
Consolidated Statements of Cash Flows.......................................F-5
Notes to Consolidated Financial Statements...........................F-6 - F-24
Schedule II - Valuation and Qualifying Accounts............................F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Harmony Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Harmony
Holdings, Inc. as of December 31, 1999 and June 30, 1999, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the six months and three years then ended, respectively. We
have also audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Harmony Holdings,
Inc. at December 31, 1999 and June 30, 1999, 1998 and 1997 and the consolidated
results of its operations and cash flows for the six months and three years then
ended, respectively, in conformity with generally accepted accounting
principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered from recurring
losses, negative working capital and negative cash flow from operations that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO SEIDMAN, LLP
Milwaukee, Wisconsin
February 8, 2000, except Note 7 dated March 17, 2000
and Notes 2 and 14 dated September 8, 2000
F-1
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1999 1999 1998
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,066,823 $ 2,910,618 $ 3,834,023
Accounts receivable - net of allowance for doubtful accounts of
$179,664, $253,381 and $43,717, respectively 4,008,825 6,111,922 6,560,469
Unbilled accounts receivable - - 327,475
Compensation draws - net of allowance for commercial director
advances of $140,052 and $0, and $0, respectively 699,160 642,530 509,446
Prepaid expenses 370,105 897,813 517,749
Accounts receivable - affiliates (Note 11) 18,187 34,650 -
Other current assets 87,925 115,420 259,256
--------------------------------------------------
Total Current Assets 6,251,025 10,712,953 12,008,418
Property and equipment, at cost, net of accumulated
depreciation and amortization (Note 4) 751,876 2,629,521 2,123,412
Investment in Curious Pictures (Notes 1 and 3) 1,369,269 - -
Goodwill, net of accumulated amortization of $87,500,
$81,250 and $1,666,423, respectively 162,500 168,750 2,545,885
Other assets 194,387 610,231 249,400
--------------------------------------------------
Total Assets $ 8,729,057 $ 14,121,455 $ 16,927,115
==================================================
LIABILITY & SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 870,172 $ 3,083,381 $ 3,199,760
Accounts payable - affiliates (Note 11) 224,660 148,744 -
Accrued liabilities (Note 6) 1,884,285 3,842,807 4,406,014
Line of credit (Note 7) 3,548,911 2,468,527 2,750,000
Due to Curious Pictures (Notes 1 and 3) 1,609,553 - -
Notes payable to related party (Note 11) 3,193,615 2,729,342 -
Deferred income 1,239,527 3,429,794 2,342,133
--------------------------------------------------
Total Current Liabilities 12,570,723 15,702,595 12,697,907
Minority interest (Note 8) - 2,700,000 465,750
Commitments and Contingencies (Note 8) - - -
Shareholders' equity (deficit): (Note 9)
Preferred Stock, $.01 par value, authorized 10,000,000
shares; none issued - - -
Common stock, $.01 par value, authorized 20,000,000
shares, issued and outstanding 7,506,660, 7.506,660
and 7,237,429, respectively 75,067 75,067 72,375
Additional paid-in capital 17,257,279 15,682,245 15,334,937
Accumulated deficit (21,174,012) (20,038,452) (11,643,854)
--------------------------------------------------
Total Shareholders' Equity (Deficit) ( 3,841,666) (4,281,140) 3,763,458
--------------------------------------------------
Total Liabilities & Shareholders' Equity (Deficit) $ 8,729,057 $ 14,121,455 $ 16,927,115
==================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED
DECEMBER 31, JUNE 30,
---------------- -----------------------------------------------
1999 1999 1998 1997
---------------- -----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 19,810,274 $ 66,340,255 $ 53,355,100 $ 64,830,918
Costs and expenses:
Cost of production 17,396,302 56,346,654 43,616,737 52,174,372
Selling, general and administrative
(exclusive of all items shown below) 2,799,307 10,011,915 10,760,628 9,343,159
Subsidiary stock option compensation
(Note 8) - 2,234,250 390,750 75,000
Corporate 376,368 993,656 2,204,724 1,146,452
Corporate expenses paid to affiliated
management company (Note 11) 325,000 463,720 174,348 -
Depreciation & amortization 170,596 881,790 700,145 620,400
Restructuring cost & impairment of assets
(Note 12) - 3,357,495 - -
-------------------------------------------------------------------
Income (loss) from operations ( 1,257,299) (7,949,225) ( 4,492,232) 1,471,535
Gain on disposal of The End (London) 119,508 - - -
Equity earnings in Curious Pictures 280,419 - - -
Interest income 8,656 53,770 44,154 58,775
Interest income - related parties (Note 11) - - 80,305 19,933
Interest expense ( 110,051) ( 303,073) ( 99,144) ( 39,053)
Interest expense - related parties (Note 11) ( 176,793) ( 184,577) - -
-------------------------------------------------------------------
Net income (loss) before income taxes ( 1,135,560) (8,383,105) ( 4,466,917) 1,511,190
Income tax expense (Note 5) - 11,493 21,663 178,763
-------------------------------------------------------------------
Net income (loss) $( 1,135,560) $( 8,394,598) $( 4,488,580) $ 1,332,427
===================================================================
Net income (loss) per share - basic and diluted $( 0.15) $( 1.13) $( 0.69) $ 0.20
===================================================================
Weighted average number of shares
outstanding 7,506,660 7,409,000 6,515,000 6,682,000
===================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY (DEFICIT)
------------------------------- --------------- ---------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 5,693,198 $ 56,933 $ 12,735,136 $( 8,487,701) $ 4,304,368
Sale of common stock 1,000,000 10,000 1,990,000 - 2,000,000
Issuance of stock options
(Note 9) - - 44,993 - 44,993
Net income - - - 1,332,427 1,332,427
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 6,693,198 66,933 14,770,129 ( 7,155,274) 7,681,788
Exercise of stock options
(Note 9) 775,000 7,750 1,162,500 - 1,170,250
Repurchase of common
stock (Note 9) ( 230,769) ( 2,308) ( 597,692) - ( 600,000)
Net Loss - - - ( 4,488,580) (4,488,580)
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 7,237,429 72,375 15,334,937 (11,643,854) 3,763,458
Issuance of common stock 269,231 2,692 347,308 - 350,000
Net loss - - - ( 8,394,598) (8,394,598)
----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 7,506,660 75,067 15,682,245 (20,038,452) (4,281,140)
Set up Curious Pictures as an
equity basis investment (Note 3) - - 1,575,034 - 1,575,034
Net loss - - - ( 1,135,560) (1,135,560)
----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 7,506,660 $ 75,067 $ 17,257,279 $(21,174,012) $(3,841,666)
=============== ========== ================== ================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
DECEMBER 31, JUNE 30,
----------------- ---------------------------------------------
1999 1999 1998 1997
----------------- ---------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $( 1,135,560) $( 8,394,598$( 4,488,580)$ 1,332,427
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation & amortization 170,596 881,790 700,145 620,400
Impairment of assets - 2,215,175 - -
Provision for doubtful accounts 140,052 226,868 30,167 97,464
Gain on disposal of The End (London) ( 119,508) - - -
Equity earnings in Curious Pictures ( 280,419) - - -
Issuance of non-cash compensation expense - 2,234,250 390,750 119,993
Decrease (increase), exclusive of disposition, in:
Accounts receivable 591,912 221,679 ( 1,309,971) ( 1,652,725)
Other current assets 45,935 ( 307,242) 281,672 ( 846,479)
Other assets ( 50,817) ( 360,831) 40,295 ( 126,869)
Increase (decrease), exclusive of disposition, in:
Accounts payable ( 924,491) 32,365 1,505,541 451,702
Accrued liabilities ( 911,586) ( 563,207) 175,346 2,142,881
Due to Curious Pictures ( 142,853) - - -
Deferred income ( 284,090) 1,087,661 1,518,762 ( 543,729)
----------------------------------------------------------------
Net cash provided by (used in) operating
activities: ( 2,900,829) ( 2,726,090) ( 1,155,873) 1,595,065
----------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures ( 107,737) ( 1,225,939) ( 658,713) ( 793,291)
Cash relinquished in The End (London) and Curious
Pictures transactions ( 379,835) - - -
Other assets ( 51) 230,755 ( 26,266) ( 208,889)
----------------------------------------------------------------
Net cash used in investing activities ( 487,623) ( 995,184) ( 684,979) ( 1,002,180)
----------------------------------------------------------------
FINANCING ACTIVITIES:
Line of credit 1,080,384 ( 281,473) 2,750,000 ( 300,000)
Debt proceeds net of debt repayment 464,273 2,729,342 - ( 385,000)
Repurchase of common stock - - ( 600,000) -
Proceeds from issuance of common stock - 350,000 1,170,250 2,000,000
----------------------------------------------------------------
Net cash obtained in financing activities 1,544,657 2,797,869 3,320,250 1,315,000
----------------------------------------------------------------
Increase (decrease) in cash and cash equivalents ( 1,843,795) ( 923,405) 1,479,398 1,907,885
Cash and cash equivalents at beginning of period 2,910,618 3,834,023 2,354,625 446,740
----------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,066,823 $ 2,910,618$ 3,834,023 $ 2,354,625
================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 158,835 $ 487,650$ 99,144 $ 62,905
================================================================
Income taxes $ - $ - $ 57,900 $ 57,289
================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business, and Principles of Consolidation:
Harmony Holdings, Inc. (the "Company") was incorporated under
the laws of the State of Delaware on August 5, 1991, and
currently conducts its operations through its wholly owned
subsidiary The End, Inc. ("The End") which in turn operates one
or more of its own subsidiaries and a 49% minority ownership
interest in Curious Pictures Corporation ("Curious Pictures")
with the remaining 51% interest of Curious Pictures owned by
iNTELEFILM Corporation ("iNTELEFILM"), the Company's largest
shareholder. The Company also owns a 10% interest in Harry Nash
Film Productions f/k/a The End (London), Ltd. ("The End
(London)") based in London. Effective July 1, 1999, the Company
sold 90% of the stock of The End (London). Unless the context
indicates otherwise, the term "Company" includes Harmony
Holdings, Inc. and all of its direct and indirect majority-owned
subsidiaries of Harmony Holdings, Inc. at the time of reference.
For periods after August 1, 1999, the reference to "Company"
does not include Curious Pictures, a 49% owned equity investment
of Harmony Holdings, Inc. (Note 3).
The Company operates in one reportable segment, producing
television commercials, music videos and related media. The
Company's services are usually directed towards advertising
agencies located in the major markets of New York, Los Angeles,
Chicago, Detroit, Dallas, Minneapolis, San Francisco and in
regional markets.
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. As audited financial statements have been prepared for
all periods through June 30, 1999, the Company is presenting
audited financial statements for the six-month transition period
from June 1, 1999 through December 31, 1999.
In April 1999, iNTELEFILM Corporation ("iNTELEFILM"), a publicly
traded corporation, increased its ownership position of the
Company to 52.1% of the Company's outstanding common stock. The
Company is accordingly accounted for by iNTELEFILM as a
consolidated subsidiary as of April 1, 1999. The Company has
properly not employed the provisions of push-down accounting.
Accordingly, the Company's assets and liabilities have not been
recast to reflect the excess of iNTELEFILM's purchase price over
the proportionate net book value acquired. At December 31, 1999,
iNTELEFILM owned 55.2% of the Company's outstanding common
stock.
In November 1998, the Company announced and began the process
of discontinuing operations of its Harmony Pictures division.
This division consists of Harmony Pictures, Inc., Melody
Films, Inc., Lexington Films, Inc., and Pure Films, Inc. As of
June 30, 1999, operations had ceased for these subsidiaries
(Note 12). In connection with this discontinuation, Chemistry
Pictures, Inc. was renamed to its former name of Harmony
Pictures, Inc.
Effective August 1, 1999, iNTELEFILM purchased the Option and
Share Transfer Agreement entered into by the Company and the
four principal executives of Curious Pictures Corporation (Note
3 and 8). As a result of this purchase and iNTELEFILM's exercise
of the stock options granted Curious management under the
agreement, the Company currently owns only 49% of Curious
Pictures common stock. Accordingly, the Company began accounting
for Curious Pictures as an equity basis investment rather than
as a consolidated subsidiary as of August 1, 1999. Additionally,
the
F-6
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Organization, Business, and Principles of Consolidation
(Continued):
Company now reflects on its balance sheet, the amount due to
Curious Pictures, which totaled $1,609,553 at December 31, 1999.
Prior to the aforementioned transaction, this payable was
eliminated through the consolidation of Curious Pictures.
Investments in unconsolidated affiliates are accounted for using
the equity method when the Company owns at least 20%, but no
more than 50% of such affiliates. Under the equity method, the
Company records its proportionate share of profits and losses
based on its percentage interest in these affiliates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Contract Revenues:
The Company produces television commercials and music videos
under firm bid, cost plus or cost plus fixed fee contracts,
which are typically less than one month in duration. At December
31, 1999 and June 30, 1999 and 1998, the Company had no
long-term contracts. Contract revenues are recognized using the
percentage of completion method. The percentage of contract
revenues recognized is computed at that percentage of estimated
total revenues that incurred costs to date bears to total
estimated costs, after giving effect to the most recent estimate
of costs to complete. Revisions in costs and revenue estimates
are reflected in the period in which the facts which require the
revision become known. Deferred income represents amounts billed
in excess of revenues earned.
Property and Equipment:
Property and equipment are stated at cost. Major improvements
and replacements of property and equipment are capitalized.
Maintenance and repairs are expensed. Upon retirement or other
disposition of property, applicable cost and accumulated
depreciation and amortization are removed from the accounts and
any gains or losses are included in operations.
Depreciation of property and equipment is computed using the
straight-line method based on estimated useful lives ranging
from three to seven years. Leasehold improvements are amortized
using the straight-line method over the term of the lease or the
life of the related improvements, whichever is shorter.
Goodwill:
Goodwill primarily represents the excess of the Company's
purchase price, including additional payments over the fair
market value of Harmony Pictures, The End and Melody net assets
at the date of acquisition. Goodwill has been amortized on a
straight-line basis over 20 years for all periods. The Company,
using the best estimates of management, continually evaluates
the existence of goodwill impairment on the basis of whether the
goodwill is fully recoverable from projected, undiscounted net
cash flows of the related business unit. Amortization expense
for the six months ended December 31, 1999 and the years ended
June 30, 1999, 1998 and 1997 was $6,302, $161,960, $211,780 and
$211,780, respectively.
F-7
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill (Continued):
In connection with the closing of the Harmony Pictures Division
(Note 12), Goodwill with a net book value of $2,215,175 was
determined by management to be fully impaired and was
accordingly written-off.
Income Taxes:
The Company applies SFAS No. 109, " Accounting for Income
Taxes." SFAS No. 109 prescribes the use of the liability
method to compute the differences between the tax bases of
assets and liabilities and the related financial reporting
amounts using currently enacted tax laws and rates.
Income (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, Earnings Per Share ("EPS"). SFAS
No. 128 requires dual presentation of basic EPS and diluted EPS
on the face of all income statements issued after December 15,
1997, for all entities with complex capital structures. The
adoption of SFAS No. 128 had no effect on the Company's
financial statements. Basic EPS is computed as net income
available to common shareholders divided by the weighted average
number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common
shares issuable through stock options and warrants. As the
Company's stock options and warrants are antidilutive for all
periods presented, basic and diluted EPS are the same.
Stock Based Compensation:
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), establishes a fair
value method of accounting for stock-based compensation plans
and for transactions in which a company acquires goods or
services from non-employees in exchange for equity instruments.
The Company adopted this accounting standard on July 1, 1996.
SFAS 123 also gives the option to account for stock-based
employee compensation in accordance with Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock issued to
Employees," or SFAS 123. The Company has chosen to account for
stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market
price of the Company's stock at the measurement date over the
amount an employee must pay to acquire stock.
If SFAS 123 is not adopted related to stock-based employee
compensation, SFAS 123 for footnote purposes requires that
companies measure the cost of stock-based employee compensation
at the grant date based on the value of the award and recognize
this cost over the service period. The value of the stock-based
award is determined using a pricing model whereby compensation
cost is the excess of the fair value of the stock as determined
by the model at grant date or other measurement date over the
amount an employee must pay to acquire the stock.
F-8
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
Comprehensive Income:
The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. The Company does not have any components of
comprehensive income.
New Accounting Pronouncements:
In 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" dealing with revenue recognition which is effective
in the fourth quarter of fiscal 2000. The Company does not
expect its adoption to have a material effect on the Company's
financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"), which is effective July 1, 2000. This
interpretation clarifies the application of APB Opinion 25 for
certain issues related to stock issued to employees. The Company
believes its existing stock based compensation policies and
procedures are in compliance with FIN 44 and therefore, the
adoption of FIN 44 will not have a material effect on the
Company's financial statements.
Statement of Financial standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133)
issued by the FASB is effective for financial statements with
fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133 requires companies to recognize all derivatives
contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or
loss is recognized in income in the period of change.
Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of
the new standard to affect its financial statements.
Reclassifications:
Certain amounts in the 1998 and 1997 financial statements have
been reclassified to conform with the 1999 presentation. These
reclassifications have no effect on the accumulated deficit or
the net income (loss) previously reported.
F-9
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 CONTINUED EXISTENCE AND MANAGEMENT PLAN
The Company's consolidated financial statements are presented on
the going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. However, during the six months ended December 31, 1999,
the Company incurred a net loss of $1,135,560 and a negative cash
flow from operations of $2,900,829, resulting in a negative
working capital position of $6,319,698 and an accumulated deficit
totaling $21,174,012 at December 31, 1999. As of December 31, 1999
the Company had no firm external financing resources other than
its advances from and notes payable to iNTELEFILM (Note 11 and 14)
or an asset based loan and security agreement (Note 7).
Subsequently, in April 2000, the lender under the asset based loan
and security agreement terminated this line of credit and the
Company repaid its indebtedness in full. Additionally, on March
23, 2000, iNTELEFILM demanded payment of its notes totaling
$3,193,615 outstanding at December 31, 1999, but agreed to forbear
taking any action on collection of such 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
repayment demand. Further, 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 has had on its operations by utilizing
non-union talent and continuing to produce its commercials outside
of the United States whenever possible. These conditions raise
substantial doubt about the Company's ability to continue as a
going concern.
In the period subsequent to December 31, 1999, the Company's
operations have been adversely affected as a result of a variety
of factors including the SAG strike, the reorganization of
management, and the current negotiations of commercial director
agreements. Given these circumstances and the fact that the
Company has historically used cash in its operations, additional
capital will be necessary to sustain and build the Company's
operations in the near term. In response to these adversities, the
Company has taken steps to reduce its ongoing operating expenses
and has made recent investments in The End's sales representation
and is currently negotiating several commercial director
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 Company may lessen. However, there can be no assurance that
the Company will reach profitability or that it will be able to
retain its commercial directors or that its commercial directors
will fulfill their obligations to the Company.
The Company received advances from iNTELEFILM during the period
from January 1, 2000 to September 8, 2000. These unsecured
advances are independent of the notes payable to iNTELEFILM and
primarily funded a portion of the line of credit pay-off and the
Company's operations. At September 7, 2000, $2,510,535 of these
advances remained due and payable to iNTELEFILM for a total
indebtedness to iNTELEFILM of $5,704,150. Additionally, management
anticipates that advances will continue as necessary in the near
term through at least January 1, 2001. In August 2000, The End,
along with two subsidiaries of iNTELEFILM, entered into an
accounts receivable-based loan and security agreement with an
independent lending institution. This agreement provides for
borrowings by The End for working capital under a revolving line
of credit, thereby enabling The End to operate its business
through a line of credit instead of depending solely on iNTELEFILM
to fund its operations. However, The End may only borrow against
eligible accounts receivable. In the event that the Company is
unable to maintain its current financing, or that its current
financing is not sufficient to meet the Company's needs, the
Company may have to seek alternative financing. If the Company
F-10
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 CONTINUED EXISTENCE AND MANAGEMENT PLAN (CONTINUED)
is not able to obtain adequate financing, or financing on
acceptable terms, it could be forced to further reduce or
terminate its operations or potentially default on obligations to
creditors, all of which may be materially adverse to the Company's
operation and prospects.
The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the
Company to continue as a going concern.
NOTE 3 SUBSIDIARY STOCK SALE AND SHARE TRANSFER AGREEMENT RESOLUTION
Sale of Subsidiary Common Stock:
For nominal consideration, effective July 1, 1999, the Company
sold 90% of the issued and outstanding shares of common stock of
The End (London) to a principal executive (the "Purchaser") of
The End (London). 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 years
ended June 30, 1999, 1998 and 1997, The End (London) had gross
revenues of approximately $11,243,000, $3,747,000, and $0, and
net losses of approximately $862,000, $591,000, and $0,
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 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 $800,000.
Resolution of the Subsidiary Share Transfer Agreement:
Effective August 1, 1999, iNTELEFILM purchased the Option
Agreement (Note 8) entered into by the Company and Curious
Management. Pursuant to the purchase agreement and based on the
results of operations of Curious Pictures, it was agreed by all
parties, including the Company, that Curious Management's
options to purchase the 50% equity interest in Curious had fully
vested and were exercisable for consideration totaling $50.
iNTELEFILM also acquired a 1% equity interest owned by Curious
Management that was conveyed to Curious Management upon signing
the Option Agreement. The consideration paid to Curious
Management by iNTELEFILM for the aforementioned acquisitions
aggregated $3,000,000, consisting of $1,500,000 in cash and a
$1,500,000 note receivable. Subsequently, iNTELEFILM acquired
50% of Curious Pictures through the exercise of stock options
granted under the Option Agreement. As a result, the Company
currently owns 49% of the outstanding stock of Curious Pictures
and iNTELEFILM owns 51% of the stock.
The intrinsic value of the stock options transferred under the
option and share transfer agreement was ultimately determined by
iNTELEFILM's purchase of the agreement and one additional share
of Curious common stock from the management group for
consideration totaling $3,000,000. This aggregate consideration
was valued at $2,700,000 for the options for 50 shares and
$300,000 for one share. The one share was given a slightly
higher incremental value as it represents the marginal share for
a majority ownership. Accordingly, the Company recognized
$2,700,000 of stock options compensation through June 30, 1999.
F-11
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 SUBSIDIARY STOCK SALE AND SHARE TRANSFER AGREEMENT RESOLUTION
(CONTINUED)
Resolution of the Subsidiary Share Transfer Agreement (Continued):
At the same time, Curious 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 for $1 per share. 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.
The following amounts represent Curious Pictures' results from
operations for the periods presented that Curious Pictures was
accounted for under the equity method. Such amounts have been
derived from Curious Pictures' financial statements for the
fiscal year ended December 31, 1999:
Five Months
Ended 12/31/99
---------------
Contract revenues $ 10,902,237
Cost of production 8,218,636
---------------
Gross profit 2,683,601
Operating expenses 2,115,749
---------------
Income from operations 567,852
Interest income 4,432
---------------
Net income $ 572,284
===============
Company's equity income in Curious Pictures $ 280,419
===============
The balance sheet of Curious Pictures is summarized as follows:
December 31, 1999
-----------------
Current assets $ 3,966,185
Non-current assets 2,351,391
---------------
Total assets $ 6,317,576
---------------
Current liabilities 3,419,474
Stockholders' equity 2,898,102
---------------
Total liabilities and stockholders' equity $ 6,317,576
===============
F-12
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 SUBSIDIARY STOCK SALE AND SHARE TRANSFER AGREEMENT RESOLUTION
(CONTINUED)
Resolution of the Subsidiary Share Transfer Agreement (Continued):
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.
At August 1, 1999, the Company reflected an investment of 49% of
the net assets of Curious Pictures resulting in a
reclassification to additional paid in capital totaling
$1,575,033.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999 1998
------------ ----------------------------
<S> <C> <C> <C>
Furniture and fixtures $ 528,734 $1,167,428 $1,465,940
Computer equipment 239,676 2,376,732 1,364,146
Leasehold improvements 518,668 1,495,975 1,070,950
1,287,078 5,040,135 3,901,036
Less: accumulated depreciation 535,202 2,410,614 1,777,624
$ 751,876 $2,629,521 $2,123,412
============ ============================
</TABLE>
Depreciation expense for the six months ended December 31, 1999
and the years ended June 30, 1999, 1998 and 1997 was $164,294,
$719,830, $488,365, and $405,900, respectively.
NOTE 5 INCOME TAXES
For the six months ended December 31, 1999, the company had no
income tax expense. For the year ended June 30, 1999 and 1998
income tax expense consisted of state taxes currently payable. The
Company had no current federal and no deferred income tax expense
in any period presented. For the year ended June 30, 1997, income
tax expense consisted of $39,234 federal alternative minimum taxes
and $139,529 state taxes currently payable.
At December 31. 1999, the Company has net federal operating
loss carryforwards as follows for income tax purposes:
Carryforward Expires Net Operating Loss
-------------------- ------------------
2005 $ 251,730
2006 1,721,893
2007 6,430
2008 2,709,559
2009 348,090
2011 1,366,208
2013 3,108,872
2019 2,428,813
2020 (approximately) 1,300,000
----------------
$ 13,241,595
================
F-13
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5 INCOME TAXES (CONTINUED)
The Company's ability to utilize the net operating loss
carryforwards is dependent upon the company's ability to generate
taxable income in future periods. Federal net operating losses of
approximately $7,400,000 million are limited to $792,000 per year,
due to ownership changes as defined under Section 382 of the
Internal Revenue Code of 1986. Any unused portion can be carried
forward and utilization of the net operating loss carry forward
may also be limited in any one year by alternative minimum tax
rules.
A reconciliation of the statutory federal income tax rate
(benefit) and the effective tax rate as a percentage of income
(loss) before taxes on income is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999 1998 1997
------------------------- ---------------------
<S> <C> <C> <C> <C>
Statutory rate (benefit) ( 34.0)% ( 34.0)% ( 34.0)% 34.0%
Operating losses generating no current tax benefit 34.0 11.8 27.4 -
Write-off intangible asset not recognized for tax purposes - 9.6 - -
Stock option compensation generating no current tax benefit - 9.1 3.0 1.7
Loss of foreign subsidiary - 3.5 3.6 -
Current benefit of fully reserved net operating
loss carryforward utilization - - - ( 33.1)
State taxes - 0.1 0.5 9.2
------------------------------------------------
Effective Rate 0.0% 0.1% 0.5% 11.8%
================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999 1998
------------------- ------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carry forwards 5,296,000 4,918,000 3,725,000
Other items not yet deductible for tax purposes 170,000 190,000 68,000
------------------- ------------------------------
5,466,000 5,108,000 3,793,000
Deferred tax liabilities:
Depreciation ( 18,000) ( 56,000) ( 50,000)
Valuation allowance 5,448,000 5,052,000 3,743,000
------------------- ------------------------------
Net deferred tax asset $ - $ - $ -
=================== ==============================
</TABLE>
As the Company has posted losses in most years since inception and
utilization of the net operating losses, the Company's primary
deferred tax asset, is limited by IRS Section 382, realization of
the tax benefit related to these net deferred tax asset is
uncertain. Accordingly, no deferred tax asset has been recorded to
reflect their potential value. The net change in the deferred tax
valuation allowance was an increase of $396,000 in the six months
ended December 31, 1999 and $1,309,000, $1,364,000 and ($848,000)
in the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
F-14
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999 1998
------------------- --------------------------------
<S> <C> <C>
Accrued production costs $ 431,405 $ 1,416,457$ 2,454,963
Accrued director fees 446,788 893,052 780,359
Other 1,006,092 1,533,298 1,170,692
------------------- --------------------------------
$ 1,884,285 $ 3,842,807$ 4,406,014
=================== ================================
</TABLE>
NOTE 7 LINE OF CREDIT
On June 30, 1998, the Company had a $3,000,000 asset based
revolving line of credit with a bank. On July 30, 1998, the bank
line of credit was replaced with an asset based loan and security
agreement due to a finance company. The loan and security
agreement, which was secured by virtually all assets, provided for
a revolving line of credit with maximum availability of $4,500,000
or a specified percentage of acceptable accounts receivable with
interest at a variable rate (10.00% at December 31, 1999).
Further, the line of credit was guaranteed by iNTELEFILM. At
December 31, 1999, $3,548,911 was outstanding on the line of
credit and the Company was in technical default. Subsequent to
December 31, 1999, the line of credit was repaid in full pursuant
to the lender's termination of the line of credit.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company is a party to a number of noncancelable operating
lease agreements involving buildings and equipment which expire
at various dates through August 2009. The future minimum lease
commitments are as follows for the years ending December 31:
2000 $ 341,736
2001 350,739
2002 361,862
2003 373,362
2004 385,244
Thereafter 1,377,743
--------------
Total minimum payments $ 3,190,686
==============
Total rental expense for the six months ended December 31, 1999
and the years ended June 30, 1999, 1998 and 1997 aggregated
$285,719, $813,542, $807,956 and $774,396. iNTELEFILM guarantees
a Company operating lease with future minimum lease payments
aggregating $1,182,496 payable through August 2009.
F-15
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Contracts:
The Company has entered into various employment agreements with
its officers and commercial directors, which obligate it to make
minimum payments of $1,205,333. The payments due are $1,046,333
and $159,000, for the years ended December 31, 2000 and 2001,
respectively. Of these amounts $8,333 are for administrative
personnel and $1,197,000 are for commercial directors and
salespeople. Certain of these agreements provide for additional
compensation based on subsidiary revenues, defined subsidiary
operating profits or other incentives. This additional
compensation is payable whether or not the Company achieves an
operating profit as a whole. Some of the commercial directors
who are associated with the Company receive monthly draws
against the commercial directors' compensation for production of
commercials. The monthly draws equal the minimum guaranteed
compensation payable to such commercial directors which are
recoupable by the Company out of compensation otherwise payable
to such commercial directors. The Company accounts for
unrecouped draws as prepaid compensation to be offset against
future production by a given director. Additionally, prepaid
amounts are regularly evaluated and allowed for if considered
unrealizable by management. Most of the Company's sales
personnel receive monthly draws offset by their earned
commissions.
Lawsuits:
A lawsuit was filed on March 22, 1996, (served August 12, 1996)
in Superior Court of the State of California, County of Los
Angeles. A wrongful death claim has been made by the estate of
Henry Gillermo Urgoiti, his wife and three children for an
accident that occurred during the filming of a music video in
August 1995. The case was settled by the Company's insurance
carrier during the year ended June 30, 1999 with no additional
cost incurred by the Company.
On June 30, 1998, a complaint was filed by Rick Bieber against
Harmony Holdings, Inc. and Harmony Pictures, Inc. in the
Superior Court of the State of California, County of Los
Angeles. Mr. Bieber was the president of Harmony Pictures,
Inc. until his employment was terminated by Harmony Pictures,
Inc. effective April 23, 1998. Harmony Pictures, Inc.
terminated Mr. Bieber's employment for breaching his written
employment agreement with Harmony Pictures, Inc. and his
fiduciary obligations to the company. The termination date of
the employment agreement was December 31, 2000. However, the
employment agreement provided that it could be terminated
before the termination date by Harmony Pictures, Inc. (i) for
cause or (ii) if Harmony Pictures, Inc. was not profitable by
the quarter ended June 30, 1998.
Mr. Bieber alleged that the defendants, by terminating his
employment agreement before December 31, 2000, breached his
agreement. Mr. Bieber also alleged that defendants slandered and
libeled him with reference to the circumstances relating to his
termination. The court has dismissed the slander and libel
claims and has dismissed all claims against Harmony Holdings,
Inc. In December 1999, the Company settled the litigation on his
remaining breach of contract claim and labor code claims. 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.
F-16
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lawsuits (Continued):
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.
The Company is involved in other litigation on a number of
matters and is subject to certain claims which arise in normal
course of business, none of which, in the opinion of the
Company's management is expected to have a materially adverse
effect on the Company's financial position or results of
operations.
Subsidiary Share Transfer Agreement:
The Company entered into a option and share transfer agreement
("the Option Agreement") with four members of management of
Curious Pictures Corporation ("Curious") dated December 15,
1996. The agreement called for stock equaling one percent (1%)
of Curious outstanding common stock to be issued to the four
principle executives of management, (collectively "Curious
Management"), upon the signing of the agreement. Under the
agreement, the four members of management had the ability to
earn an additional fifty-percent (50%) of the company through
yearly stock option grants with an exercise price of $1.00 per
share beginning in calendar year 1997. Agreement was reached
that the stock options were fully earned and exercisable on
August 1, 1999. Effective August 1, 1999, the options were
exercised by iNTELEFILM after iNTELEFILM purchased the Option
Agreement from Curious Management (Note 3). The Company has the
right to put its remaining forty nine percent (49%) of Curious
Pictures Corporation to iNTELEFILM for a price to be determined
based on fair value at that time, but not to be less than
$1,960,000.
As a result of the Option Agreement and the intrinsic value
established by interim valuations of Curious and ultimately by
the subsequent iNTELEFILM purchase, the Company has recognized
compensation expense related to the stock options of $2,234,250,
$390,750 and $75,000 in the years ended June 30, 1999, 1998 and
1997, respectively. No compensation expense was recognized in
the six months ended December 31, 1999. The aggregate
compensation expense recognized is reflected on the accompanying
balance sheet as a minority interest totaling $2,700,000 and
$465,750 at June 30, 1999 and 1998, respectively.
401(k) Savings/Profit-Sharing Plan:
The Company has a 401(k) plan available to all employees meeting
certain service requirements. Eligible employees may contribute
a portion of their annual salary to the plan, subject to certain
limitations. The Company may make matching contributions and
also may provide profit-sharing contributions at the discretion
of its board of directors. Employees become fully vested in the
Company contributions after six years of service. There were no
Company contributions in the six months ended December 31, 1999
or the years ended June 30, 1999, 1998 and 1997.
F-17
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN
Common Stock:
Pursuant to a Stock Subscription Agreement entered into in July
1996, the Company sold to Unimedia, S.A., a French company
(Unimedia), 1,000,000 shares of Common Stock of the Company at a
purchase price of $2.00 per share. The purchase price was
received by the Company on August 16, 1996.
On July 21, 1997, iNTELEFILM and Unimedia entered into an
agreement whereby Unimedia agreed to sell, and iNTELEFILM agreed
to buy Unimedia's 1,000,000 shares of Common Stock of the
Company for $2,600,000 and Unimedia agreed to dismiss the
litigation entitled Unimedia S.A. V. Harmony Holdings, Inc. and
Harvey Bibicoff, Case No. CV 96-7109 JGD (RNBx), pending in the
United States District Court for the Central District of
California. iNTELEFILM assigned its right to buy 230,769 of the
Shares to the Company, thereby reducing the number of issued and
outstanding shares of common stock of the Company and resulting
in a purchase price of $2,000,000 and $600,000 to iNTELEFILM and
the Company, respectively. The closing of the purchase occurred
on July 25, 1997.
Incentive and Non-Qualified Stock Option Plans:
During the year ended June 30, 1997, the Company issued 257,500
stock options to certain outside board of director members and
other consultants of the Company, at prices ranging from $1.50
to $2.00. The terms of the options are from three to five years
and compensation expense totaling $44,993 is included in the
statement of operations relating to these options.
The Company adopted a Stock Option Plan on August 7, 1991, as
amended and restated in February 1998. The purpose of the Stock
Option Plan is to secure for the Company and its stockholders
the benefits arising from stock ownership by selected employees
of the Company as the Board of Directors of the Company (the
"Board"), or a committee thereof constituted for that purpose,
may from time to time determine.
The Stock Option Plan provides for the granting of an aggregate
of incentive and non-incentive options to purchase a maximum of
3,250,000 shares of the Common Stock. The Stock Option Plan
authorizes the grant of options to employees intended to qualify
as incentive stock options ("Incentive Options") under Section
422 of the Internal Revenue Code, and the grant of options which
do not qualify ("Non-Qualified Options") as incentive stock
options under Section 422 of the Internal Revenue Code.
The Stock Option Plan is currently administered by the Board.
The Board, subject to the provisions of the Stock Option Plan,
has full power to select the individuals to whom awards will be
granted, to fix the number of shares that each optionee may
purchase, to set the terms, conditions, and vesting of each
option, and to determine all other matters relating to the Stock
Option Plan. The Stock Option Plan provides that the Board will
select grantees from among full-time employees, officers,
commercial directors and consultants of the Company or its
subsidiaries, and individuals or entities, subject to an
acquisition or management agreement with the Company.
The exercise price of each option shall be determined by the
Board, but shall not be less than 100% of the fair market value
of the shares on the date of grant. No Incentive Options may be
granted to any employee who owns, at the date of grant, stock
representing in excess of 10% of the combined voting power of
all classes of stock of
F-18
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN (CONTINUED)
Incentive and Non-Qualified Stock Option Plans (Continued):
the Company or of a parent or a subsidiary unless the exercise
price for stock subject to such options is at least 110% of the
fair market value of such stock at the time of grant and the
option term does not exceed five years.
The term of each option shall be fixed by the Board and may not
exceed ten years from the date of grant. If a participant who
holds options ceases, for any reason, to be an employee,
consultant or commercial director or otherwise affiliated with
the Company (the "Termination"), the options expire 30 days
after the Termination. Notwithstanding the foregoing, in the
event of Termination due to the optionee's death or incapacity,
the options will terminate 12 months following the date of such
optionee's death or incapacity. Options granted under the Stock
Option Plan may be exercisable in installments. The aggregate
fair market value of stock with regard to which Incentive
Options are exercisable by an individual for the first time in
any calendar year may not exceed $100,000.
Upon the exercise of options, the option exercise price must be
paid in full, either in cash or other form acceptable to the
Board. The Board may terminate the plan at its discretion.
A summary of the status of the Company's stock option plan as of
December 31, 1999 and June 30, 1999, 1998 and 1997, and the
changes during the years ending on those dates is presented
below:
All shares are shown in thousands (000).
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999 June 30, 1998 June 30, 1997
------------------- ---------------- ------------------ -----------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price Shares Price
-------------------------- ------ ---------- ------ ----- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 1,583 $ 1.52 2,527 $ 1.52 2,607 $ 2.04 1,315 $ 2.45
Granted -- -- 163 1.65 2,064 1.43 1,308 1.22
Exercised -- -- -- -- 775 1.51 -- --
Forfeited 463 $ 1.64 1,107 $ 1.58 1,369 2.40 15 2.13
------ ----- ----- -----
Outstanding at end of year 1,121 $ 1.46 1,583 $ 1.52 2,527 $ 1.52 2,607 $ 2.04
====== ===== ===== =====
Options exercisable at
period end 606 $ 1.47 1,068 $ 1.54 1,538 $ 1.58 2,198 $ 2.08
Weighted average fair
value of
options granted during
the year $ -- $ 1.02 $ 0.82 $ 0.17
</TABLE>
Additionally, on March 10, 1998, the Company repriced 989,000
options outstanding with varying exercise prices to $1.44 per
share. The repricing was considered a forfeiture of the existing
options and a grant of new options for the purposes of the table
above.
F-19
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN (CONTINUED)
Incentive and Non-Qualified Stock Option Plans (Continued):
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------------
Number of
Options Weighted Average Number of Options
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.91 - 1.50 913,000 2.99 $ 1.36 483,834 $ 1.37
1.50 - 2.00 207,500 2.28 1.93 122,500 1.88
------------ ------------
Total 1,120,500 2.86 $ 1.46 606,334 $ 1.47
</TABLE>
SFAS Statement 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding
net income (loss) and earnings (loss) per share as if
compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method
prescribed in SFAS Statement 123. The Company estimates the fair
value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and
1997, respectively: dividend yield of zero for all years;
expected volatility of 87.5, 59.5 and 5.2 percent; risk-free
interest rates of 4.9, 5.7 and 5.9 percent and an estimated
option life of 5.0, 5.0 and 3.0 years.
Under the accounting provisions of SFAS Statement 123, the
Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Six Months Ended Twelve Months Ended June 30,
December 31, 1999 1999 1998 1997
--------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss):
As reported $( 1,135,560) $( 8,394,598) $( 4,488,580) $ 1,332,427
===================== =======================================================
Pro forma $( 1,221,826) $( 8,572,481) $( 4,780,327) $ 1,218,362
===================== =======================================================
Basic and diluted earnings
(loss) per share:
As reported $( 0.15) $( 1.13) $( 0.69) $ 0.20
===================== =======================================================
Pro forma $( 0.16) $( 1.16) $( 0.73) $ 0.18
===================== =======================================================
</TABLE>
F-20
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 CONCENTRATION OF CREDIT RISKS
The Company's cash is deposited with various financial
institutions, and is insured up to a maximum of $100,000 at each
institution by the Federal Deposit Insurance Corporation ("FDIC").
At December 31, 1999, the Company's deposits with two financial
institutions exceeded the maximum amount insured by the FDIC by
$722,386. The Company believes it has its cash deposits at
high-quality financial institutions and that no significant credit
risk exists with respect to these deposits.
The Company grants credit to advertising agencies, principally
based in the United States. The Company performs ongoing credit
evaluations of its customers' financial condition, and generally
requires no collateral from its customers. The Company's credit
losses are subject to the general economic conditions of the
advertising industry.
NOTE 11 RELATED PARTY TRANSACTIONS
Notes Receivable:
In January 1998, the Company entered into a $650,000 note
receivable agreement with iNTELEFILM. Pursuant to the note, the
Company advanced $611,000 of proceeds to iNTELEFILM and applied
the remaining $39,000 of the note balance to a loan fee for the
note origination. Interest was accrued at 15%. The note was
repaid in full with two installments (May 1998, $322,863 and
June 1998, $327,137).
During the year ended June 30, 1998, the Company recognized
interest and loan fee income aggregating $80,305, respectively,
related to this note receivable.
Notes Payable:
During the six months ended December 31, 1999 and the year ended
June 30, 1999, iNTELEFILM made operating advances to the Company
aggregating $915,000 and $3,050,000, respectively, pursuant to
unsecured demand note agreements which bear a fixed interest
rate of 14.0%. At December 31, 1999 and June 30, 1999, advances
totaling $3,193,615 and $2,729,342, respectively, remain
outstanding and the Company has incurred interest expense
totaling $176,793 and $184,577 in the six months ended December
31, 1999 and the year ended June 30, 1999, respectively.
iNTELEFILM demanded payment of its notes but agreed to forbear
taking any action on collection of such 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 repayment demand (Note 14).
Accounts Receivable/Payable - Affiliates:
At December 31, 1999 and June 30, 1999, accounts receivable
aggregating $18,187 and $34,650, respectively, were outstanding
from two affiliates related to the Company through common control
or equity investment. These accounts result primarily from the
allocation of shared expenses.
At December 31, 1999 and June 30, 1999, accounts payable
aggregating $224,660 and $148,744, respectively, remained due to
two affiliates related to the Company through common control or
equity investment. These accounts result primarily from the
allocation of shared expenses and management fee due.
There were no related party receivables or payables for the year
ended June 30, 1998.
F-21
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 RELATED PARTY TRANSACTIONS (CONTINUED)
Management Services Contracts:
In October 1997, the Company entered into a management services
contract with a privately held affiliate (the "Management
Company") related to the Company through common control. In
1998, this contract was transferred to another related company
under identical terms. The contract, which is on a month to
month basis, is cancelable with a 60-day notice. The Company has
not independently priced the services provided by the Management
Company and, therefore, cannot represent that the services
provided are on terms as fair as those which could have been
obtained from unrelated third parties through arms-length
negotiations. The management fees aggregated $325,000, $463,720
and $174,348 during the six months ended December 31, 1999 and
the years ended June 30, 1999 and 1998. Effective August 1,
1999, the contract was amended to increase the monthly
management fee to $55,000.
The Management Company also provides services for iNTELEFILM and
another privately held affiliate each related to the Company
through common control. The management fee is based on estimated
usage of the Management Company's services.
In May 1998, the Management Company advanced the Company
$225,000 pursuant to a note payable with interest at 10%. In
June 1998, the Company repaid the note in full together with
accrued interest of $3,051.
NOTE 12 DISCONTINUATION OF HARMONY PICTURES DIVISION
In November 1998, the Company announced and began the process of
discontinuing operations of its Harmony Pictures division (the
"Division"). The Division consisted of Harmony Pictures, Inc.,
Melody Films, Inc., Lexington Films, Inc., and Pure Films, Inc. In
connection with discontinuing the Division's operations,
management has estimated and accrued restructuring costs totaling
$1,142,495. These costs were accrued when the discontinuance
decisions were made and the restructure costs could be reasonably
estimated. These costs primarily consist of general office closing
logistics, however also include amounts which in aggregate are not
significant in nature, such as severance payments, contract
buyouts, lease obligations, and non-refundable prepayments. All
closing obligations have been met as of December 31, 1999 without
the need for adjustment to management's original estimates of the
closing liability. Further, upon reaching the decision to
discontinue the Division's operations, management determined that
the goodwill associated with the Division was fully impaired.
Accordingly, an impairment charge equaling the net book value of
the goodwill, $2,215,000 was recognized in the year ended June 30,
1999.
NOTE 13 PRIOR YEAR COMPARABLE TRANSITION PERIOD DATA:
The following sets forth the unaudited results of operations for
the six months ended December 31, 1998:
Revenues $ 31,384,284
Gross profits 4,555,530
Restructuring costs and impairment of assets 3,532,495
Income taxes 9,601
Loss from operations ( 5,151,540)
Net loss ( 5,348,426)
Net loss per share $ (0.73)
Weighted average number of shares outstanding 7,313,516
F-22
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 SUBSEQUENT EVENTS
Line Of Credit:
In August 2000, The End, in conjunction with iNTELEFILM, entered
into an accounts-receivable-based loan and security agreement
with General Electric Capital Corporation. This loan and
security agreement has a maximum availability of $7.0 million
for the combined group, 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 8, 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 which limit capital expenditures
and require minimum EBITDA and tangible net worth. The Company
had no outstanding balance at September 8, 2000.
iNTELEFILM's Proposed Exchange Tender Offer:
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.
Notes Payable - iNTELEFILM:
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 December 31, 1999. However, on May 1, 2000,
iNTELEFILM granted the Company temporary 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.
Advances Payable - iNTELEFILM:
Independent of the notes payable to iNTELEFILM, the Company has
received advances from iNTELEFILM during the period from January
1, 2000 to September 8, 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 8, 2000, $2,510,535 of these advances remain due and
payable to iNTELEFILM.
Change in Estimate:
During the six months ended June 30, 2000, the Company recorded
a valuation allowance associated with commercial director
advances in excess of earnings totaling approximately $700,000,
for a total valuation allowance of approximately $840,000 for
the period. Of this amount, $411,000 of the additional amount
relates to advances paid prior to December 31, 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
F-23
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 SUBSEQUENT EVENTS (CONTINUED)
Change in Estimate (Continued):
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 changes in the workflow and contractual
relationships of the majority of The End's commercial directors
after the resignation of two principal officers of The End.
Screen Actors Guild Strike:
On May 1, 2000, members of the Screen Actors Guild 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 commercials outside
the United States whenever possible. To date, the Company has
lost business as a result of the strike. No assurance can be
given that an extended strike will not have a significant
adverse affect on the Company's operations and liquidity. In
addition, 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.
F-24
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schedule II - Valuation and Qualifying Accounts
Additions
Balance at charged to
Beginning of costs and Balance at
Year expenses Deductions End of Year
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Year Ended June 30, 1997
Allowance for doubtful accounts $ 75,629 $ 97,646 $ 75,629 $ 97,646
============== ============== =============== ==============
Year Ended June 30, 1998
Allowance for doubtful accounts $ 97,646 $ 30,167 $ 84,096 $ 43,717
============== ============== =============== ==============
Year Ended June 30, 1999
Allowance for doubtful accounts $ 43,717 $ 226,868 $ 17,204 $ 253,381
============== ============== =============== ==============
Six Months Ended December 31, 1999
Allowance for doubtful accounts $ 253,381 $ - $ 73,717 $ 179,664
============== ============== =============== ==============
Six Months Ended December 31, 1999
Allowance for commercial director
advances $ - $ 140,052 $ - $ 140,052
============== ============== =============== ==============
</TABLE>
There was no activity in the allowance for commercial director advances during
the years ended June 30, 1997, 1998 and 1999.
F-25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company as of September 1, 2000. There are no family
relationships between any directors and any executive officers. Mr. Gilbertson,
Chief Operating Officer of the Company and Ms. Theis, General Counsel and
Secretary of the Company are married.
Name Age Position
--------------------- ----- ---------------------------
Christopher T. Dahl 56 Chairman of the Board,
Chief Executive Officer and
President
Richard W. Perkins 69 Director
William E. Cameron 55 Director
Gerald Germain 58 Director
William M. Toles 53 Director
25
<PAGE>
James G. Gilbertson 39 Chief Operating Officer
Steven C. Smith 44 Chief Financial Officer
Jill J. Theis 30 General Counsel and
Secretary
CHRISTOPHER T. DAHL has been Chief Executive Officer and Chairman of
the Company since July 22, 1997. Since its inception in February, 1990, Mr. Dahl
has been the President, Chief Executive Officer and Chairman of the Board of
Directors of iNTELEFILM, a publicly traded company and the Company's largest
shareholder. Mr. Dahl serves as the managing partner of Media Management, L.L.C.
("MMLLC"), a company that provides corporate, legal, accounting and financial
services to the Company and iNTELEFILM. Mr. Dahl is also the Chairman of the
board of webADTV.com, Inc., a subsidiary of iNTELEFILM ("webADTV"). From 1985 to
1999, Mr. Dahl served as Chairman and Chief Executive Officer of Community
Airwaves Corporation ("CAC"), a company which formerly owned and operated radio
stations. Prior to founding CAC, Mr. Dahl managed his private investments. From
1969 to 1979, he was the founder and President of a group of companies involved
in photo finishing, retail photo sales, home sewing notions, toy distribution
and retail craft stores. He was employed by Campbell-Mithun and Knox Reeves
Advertising from 1965 through 1969.
RICHARD W. PERKINS has been a director of the Company since July 22,
1997. Mr. Perkins has also been a director of iNTELEFILM since its inception.
For more than five years, Mr. Perkins has been President and Chief Executive
Officer of Perkins Capital Management, Inc., a registered investment advisor.
Mr. Perkins is also a director of CAC and a partner of MMLLC, as well as the
following publicly held companies: iNTELEFILM, Bio-Vascular, Inc., a medical
products manufacturer; CNS, Inc., a consumer products manufacturer; Lifecore
Biomedical, Inc., a medical device manufacturer; Nortech Systems, Inc., an
electronic sub-systems manufacturer; PW Eagle, Inc., a manufacturer of plastic
pipe; Quantech LTD., a developer of immunological tests; Vital Images, Inc., a
medical visualization software company; and Paper Warehouse, Inc., a retailer of
party supplies.
WILLIAM E. CAMERON has been a director of the Company since July 22,
1997. Mr. Cameron has also been a director of iNTELEFILM since April 2, 1998.
Formerly a Vice President with J. Walter Thompson, Omnicom and the NBC
Television Network, Mr. Cameron brings over 30 years experience in the fields of
advertising and broadcast television. Since 1993, Mr. Cameron has been the head
of International Business Development for Universal Health Communications,
London, England, the largest medical-health-wellness video library in the world.
A broadcast journalism graduate of Drake University, Mr. Cameron also serves as
a director of RME Entertainment.
WILLIAM M. TOLES has been a director of the Company since July 22,
1997. For more than five years, Mr. Toles has been the President and Chief
Executive Officer of Tol-O-Matic, a privately held manufacturer of motion
control products.
GERALD GERMAIN has been a director of the Company since May 13, 1998.
For the past four years, Mr. Germain has been recognized as an industry
authority on a large variety of financial and operations issues. From 1984 to
1994, he served as Chief Financial Officer and, towards the end, as Vice
Chairman of Doyle Dane Bernbach (now known as DDB Needham). In 1978, Mr. Germain
became Chief Financial Officer of Compton Communications, Inc. (now known as
Saatchi & Saatchi Worldwide) and became its Executive Vice President in 1982. In
1967, Mr. Germain was also a staff accountant with the advertising agency
D'Arcy, Masius, Benton & Bowles, where he eventually became Senior Vice
President, Worldwide Treasurer. Mr.
26
<PAGE>
Germain graduated from Brooklyn College and received a J.D. degree from the New
York University Law School.
JAMES G. GILBERTSON has served as the Company's Chief Operating Officer
since November, 1997. Mr. Gilbertson is also the President, Chief Executive
Officer and board member of webADTV. Mr. Gilbertson is also the President of
the Internet Division of iNTELEFILM and has served as iNTELEFILM's Chief
Operating Officer since April 1996 and its Chief Financial Officer from July
1992 through December 1999. From June 1988 to July 1992, he was the Chief
Financial Officer of Parker Communications, which operated a group of radio
stations. From 1985 to June 1988, he was a Controller of Palmer Communications
which operated radio, television and cable divisions. Prior to joining Palmer
Communications, Mr. Gilbertson was a practicing certified public accountant
with the firm of Ernst & Young LLP. Mr. Gilbertson is also an executive
officer of CAC. Mr. Gilbertson is the spouse of Ms. Theis, our General Counsel
and Secretary.
STEVEN C. SMITH has served as the Chief Financial Officer of the
Company since December 21, 1999. He is also the Chief Financial Officer of
iNTELEFILM and webADTV. Mr. Smith has been with the Company since October 1998.
Formerly the Chief Financial Officer of DIC Animation and the Vice President and
Controller of Orion Pictures Television Division, Mr. Smith brings more than 20
years experience with companies such as the Walt Disney Company. Mr. Smith has
also performed as a financial consultant to special effects houses, TV and
satellite broadcasters and technology companies.
JILL J. THEIS has served as the Secretary and General Counsel of the
Company since February, 1999. Ms. Theis is also the General Counsel and
Secretary of webADTV. Ms. Theis has also served as iNTELEFILM's and CAC's
Secretary and General Counsel since February 1999. Ms. Theis received her B.A.,
cum laude, from Hamline University and received a J.D. degree from William
Mitchell College of Law.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the SEC. Such officers, directors and
shareholders are required by the SEC to furnish the Company with copies of all
such reports. To the Company's knowledge, based solely on a review of copies of
reports filed with the SEC during 2000, all applicable Section 16(a) filing
requirements were satisfied except that iNTELEFILM filed a late Form 5 for 1999
and a late Form 5 for 2000 in June 2000 regarding purchases of the Company's
common stock.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid to
or accrued by all persons who served as the Company's Chief Executive Officer
during the last calendar year and by each of the Company's other executive
officers receiving in excess of $100,000 (the "Named Executive Officers") for
services rendered to the Company and its subsidiaries during the calender years
ending December 31, 1999, 1998 and 1997.
27
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
Long-Term
Annual Compensation Compensation Awards
Name and Principal Position Year Salary(1) Bonus Securities Underlying Options
--------------------------- ------ --------- ------- -----------------------------
<S> <C> <C> <C> <C>
Christopher T. Dahl (1) 1999 81,000 - -
Chief Executive Officer 1998 81,000 - 375,000(2)
President and Chairman 1997 31,250 15,000 -
of the Board
James G. Gilbertson
Chief Operating Officer 1999 175,000 - -
1998 137,439 - 75,000(2)
1997 130,000 7,500 -
Steven C. Smith
Chief Financial Officer 1999 177,917 - -
1998 43,750 - -
1997 - - -
</TABLE>
(1) Includes payment by MMLLC and Harmony for services rendered
(2) Non-qualified grants of options at $1.38 per share.
The following table sets forth the number of securities underlying
options granted in calendar year 1999 to the Named Officers, the percent the
grant represents of the total options granted to employee during such calendar
year, the per-share exercise price of the options granted, the expiration date
of the options for the Named Executive Officers, and the potential realized
value.
OPTION GRANTS IN CALENDAR YEAR 1999
No options were granted to the Named Executive Officers during the
calender year ending December 31, 1999.
The following table sets forth certain information regarding options
exercised by the Named Executive Officers during calendar year 1999 and the
number and value of unexercised in-the-money options for the Named Executive
Officers at December 31, 1999.
AGGREGATED OPTION EXERCISED IN CALENDAR YEAR ENDED DECEMBER 31, 1999
AND TRANSITION PERIOD-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at in the money Options
Shares Value Transition Period Ended (#) Transition Period Ended (1)($)
Acquired on Realized --------------------------- --------------------
Name Exercise (#) ($) Exercisable/Unexercisable Exerc./Unexercisable
--------- ------------ ----------- --------------------------- --------------------------------
<S> <C> <C> <C> <C>
Christopher T. Dahl - - 150,000/225,000 -/-
James G. Gilbertson - - 25,000/50,000 -/-
Steven C. Smith - - -/- -/-
</TABLE>
(1) Market value of underlying securities at fiscal year-end minus the
exercise price.
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COMPENSATION OF DIRECTORS
No fees are paid to Directors of the Company for their services as
members of the Board of Directors. The Company reimbursed all Directors for
reasonable travel and lodging expenses incurred in attending meetings of the
Board of Directors.
Concurrently with his election as a Director and Chairman of the
Board of the Company on July 22, 1997, Christopher T. Dahl was appointed the
Company's President. Mr. Dahl presently receives an annual salary of $75,000
for his services as President.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information as of September 1,
2000, regarding the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director of the Company, (iii) the executive
officers of the Company and directors as a group, and (iv) each Named Executive
Officer, and as to the percentage of the outstanding shares held by them on such
date. Any shares which are subject to an option or a warrant exercisable within
60 days are reflected in the following table and are deemed to be outstanding
for the purpose of computing the percentage of Common Stock owned by the option
or warrant holder but are not deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by any other person. The business
address of Messrs. Dahl, Cameron, Gilbertson and Smith and Ms. Theis is 5501
Excelsior Boulevard, Minneapolis, Minnesota 55416.
Percent
Shares Beneficially Of
Owned (1) Class
------------------- --------
iNTELEFILM Corporation 4,139,562(2) 55.2%
5501 Excelsior Boulevard
Minneapolis, Minnesota 55416
Christopher T. Dahl 175,000(3)(4) 2.3%
Richard W. Perkins 75,000(3)(4) 1.0%
William E. Cameron 75,000(3)(4) 1.0%
William M .Toles 75,000(3) 1.0%
Gerald Germain 75,000(3) 1.0%
James G. Gilbertson 25,000(3)(4) *
Steven C. Smith - *
Jill J. Theis 1,667(3)(4) *
All Directors
and Executive Officers as a Group(8) 501,667(3) 6.3%
1. Securities "beneficially owned" by a person are determined in accordance
with the definition of "beneficial ownership" set forth in the
regulations of the Commission and, accordingly, may include
securities owned by or for, among others, the spouse, children or
certain other relatives of such person as well as other securities as
to which the person has or shares voting or investment power or has
the option or right to acquire Common Stock within 60 days.
2. Based upon statement's filed with Commission, iNTELEFILM Corporation has
the sole right to sell such shares and has sole voting power over
such shares.
29
<PAGE>
3. Shares purchasable upon the exercise of options.
4. Although this stockholder is also an officer and/or director of iNTELEFILM
Corporation, the stockholder disclaims beneficial ownership of the
shares owned by iNTELEFILM Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since August, 1998, the Company has received administrative,
legal, accounting and financial services from MMLLC. MMLLC is a limited
liability company which is owned by Mr. Dahl, the Chairman of the Board,
President and Chief Executive Officer and Mr. Perkins, a director of the
Company. MMLLC provides corporate, legal, accounting and financial services to
the Company and iNTELEFILM. The Company also leases its corporate office space
from MMLLC as part of its monthly service fee. From October 1, 1997 to July,
1998, the Company received identical administrative, legal, accounting and
financial services from Radio Management Corporation ("RMC"). The Company paid
RMC an aggregate of$174,000 for such services during the fiscal year ended June
30, 1998. The Company paid MMLLC and RMC an aggregate of $464,000 for such
services during the fiscal year ended June 30, 1999. The Company paid MMLLC an
aggregate of $325,000 for such services during the Transition Period. The
salaries of three officers of the Company, Messrs. Gilbertson, Smith and Ms.
Theis, are paid by MMLLC. The services of Chief Operating Officer, Chief
Financial Officer and General Counsel are rendered by Messrs. Gilbertson, Smith
and Ms. Theis, respectively, on a shared basis with iNTELEFILM. These
arrangements were approved by the Related Party Transaction Committee of the
Company's Board of Directors, which is comprised of disinterested directors, and
the Company believes such arrangements were on terms at least as favorable as
could have been obtained from unaffiliated third parties.
On August 1, 1997, the Company entered into an independent contractor
agreement with William Cameron, a Director of the Company. Under the agreement,
Mr. Cameron provides non-exclusive services to the Company, including, without
limitation, the initiation, promotion, development and maintenance of business
and investment contacts relating to increasing the Company's sales, marketing
and investment opportunities. The contract is at will and compensation under the
contract is $3,000 for every month that it is in force.
From November 1998 to March 2000, iNTELEFILM advanced the Company an
aggregate of approximately $3.2 million under notes receivable bearing interest
at 14% per annum. Additionally, iNTELEFILM has provided the Company with a
working line of credit. As of September 7, 2000, the Company owed iNTELEFILM
approximately $2.5 million under that working line of credit. For a total
indebtedness of approximately $5.7 million. Management believes that such
advances will continue as necessary through January 1, 2001.
The Company and iNTELEFILM and their subsidiaries are parties to the
loan agreement with GE Capital. Further, iNTELEFILM guarantees The End's New
York office lease.
30
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Financial Statement Schedules and Exhibits
(1) The audited consolidated financial statements of Harmony Holdings,
Inc. and Subsidiaries filed as a part of this Transition Report on Form 10-K are
listed in the Index to Consolidated Financial Statements preceding the Company's
Consolidated Financial Statements contained in Item 8 of this Transition Report
on Form10-K, which Index to Consolidated Financial Statements is hereby
incorporated herein by reference.
(2) Registrant's Schedule II-Valuation and Qualifying Accounts is
included with Registrant's Consolidated Financial Statements in Item 8 hereof.
(3) The following documents required by Item 601 of Regulation S-K are
filed as exhibits or are incorporated by reference herein:
<TABLE>
Exhibit Number Description
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Company, filed
in the office of the Secretary of State of the State of
Delaware, filed as Exhibit 3. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-3342193), is hereby
incorporated by reference.
3.3 By-Laws of Registrant, filed in the office of the
Secretary of State of the State of Delaware, filed as
Exhibit 3.3 to the Company's Registration Statement on Form
S-1 (Registration No. 33-3342193), is hereby incorporated by
reference.
3.3.1 Amendment No. 1 to By-laws of Registrant, filed in the
office of the Secretary of State of the State of Delaware,
filed as Exhibit 3. 3. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-3342193), is
hereby incorporated by reference.
10.1 1991 Stock Option Plan, filed as Exhibit 10. 1 to the
Company's Registration Statement on Form S-1 (Registration No.
33-3342193), is hereby incorporated by reference.
10.2 Loan and Security Agreement by and between the Company and
Heller Financial, Inc., dated July 30, 1998, filed as
Exhibit 10.1 to the Form 8-K filed on August 26, 1998,
is hereby incorporated by this reference.
10.3 Service Agreement by and between the Company and Radio
Management, L.L.C., dated as of August 1, 1998, is hereby
incorporated by this reference.
</TABLE>
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10.4 Curious Stock Agreement dated as of July 27, 1999
and effective as of August 1, 1999 by and among
iNTELEFILM Corporation; Harmony Holdings, Inc.;
Curious Pictures Corporation; Susan Holden; Stephen
Oakes; Richard Winkler; and David Starr, filed as
an Exhibit to the Company's Current Report on Form
8-K dated August 6, 1999 and incorporated herein by reference.
10.5 Purchase Agreement dated as of July 23, 1999,
effective as of July 1, 1999 by and between Harmony
Holdings, Inc. and Julia Reed, filed as an Exhibit
to the Company's Current Report on Form 8-K dated
August 6, 1999 and incorporated herein by reference.
10.6 Loan and Security Agreement dated as of July 31,
2000 among General Electric Capital
Corporation as Lender and Curious Pictures Corporation,
Chelsea Pictures, Inc. and The End, Inc. as Borrowers.
21 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HARMONY HOLDINGS, INC.
By: /s/ Christopher T. Dahl
----------------------------------
Dated: September 27, 2000 Christopher T. Dahl
Chairman of the Board, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
Chairman of the Board, September 27, 2000
Chief Executive Officer
and President
/s/ Christopher T. Dahl
-----------------------
Christopher T. Dahl
Director September 27, 2000
/s/ Richard W. Perkins
-----------------------
Richard W. Perkins
Director September 27, 2000
/s/ William E. Cameron
-----------------------
William E. Cameron
Director September 27, 2000
/s/William M. Toles
-----------------------
William M. Toles
Director September 27, 2000
/s/ Gerald Germain
-----------------------
Gerald Germain
Chief Financial Officer September 27, 2000
/s/ Steven C. Smith
-----------------------
Steven C. Smith
33
<PAGE>
Exhibit Index
3.1 Restated Certificate of Incorporation of Company, filed in the office
of the Secretary of State of the State of Delaware, filed as Exhibit 3.
1 to the Company's Registration Statement on Form S-1 (Registration No.
33-3342193), is hereby incorporated by reference.
3.3 By-Laws of Registrant, filed in the office of the Secretary of State of
the State of Delaware, filed as Exhibit 3. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-3342193), is
hereby incorporated by reference.
3.3.1 Amendment No. 1 to By-laws of Registrant, filed in the office of the
Secretary of State of the State of Delaware, filed as Exhibit 3. 3. 1
to the Company's Registration Statement on Form S-1 (Registration No.
33-3342193), is hereby incorporated by reference.
10.1 1991 Stock Option Plan, filed as Exhibit 10. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-3342193), is
hereby incorporated by reference.
10.2 Loan and Security Agreement by and between the Company and Heller
Financial, Inc., dated July 30, 1998, filed as Exhibit 10.1 to the Form
8-K filed on August 26, 1998, is hereby incorporated by this reference.
10.3 Service Agreement by and between the Company and Radio Management,
L.L.C., dated as of August 1, 1998, is hereby incorporated by this
reference.
10.4 Curious Stock Agreement dated as of July 27, 1999 and effective as of
August 1, 1999 by and among iNTELEFILM Corporation; Harmony Holdings,
Inc.; Curious Pictures Corporation; Susan Holden; Stephen Oakes;
Richard Winkler; and David Starr, filed as an Exhibit to the Company's
Current Report on Form 8-K dated August 6, 1999 and incorporated herein
by reference.
10.5 Purchase Agreement dated as of July 23, 1999, effective as of July 1,
1999 by and between Harmony Holdings, Inc. and Julia Reed, filed as an
Exhibit to the Company's Current Report on Form 8-K dated August 6,
1999 and incorporated herein by reference.
10.6 Loan and Security Agreement dated as of July 31, 2000 among General
Electric Capital Corporation as Lender and Curious Pictures
Corporation, Chelsea Pictures, Inc. and The End, Inc. as Borrowers.
21 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule.
34
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