SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2000; or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________.
Commission File Number 000-19577
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HARMONY HOLDINGS, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4333330
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5501 EXCELSIOR BLVD.
MINNEAPOLIS, MN 55416
(Address of Principal Executive Offices)
(Zip Code)
(612) 925-8840
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
Class Outstanding at May 10, 2000
----------------------- ---------------------------
COMMON STOCK, PAR VALUE 7,506,660 SHARES
$.01 PER SHARE
<PAGE>
INDEX
HARMONY HOLDINGS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2000 and June 30, 1999.
Consolidated Statements of Operations -- Three and nine months ended
March 31, 2000 and 1999.
Consolidated Statements of Cash Flows -- Nine months ended March 31,
2000 and 1999.
Condensed Notes to consolidated financial statements -- March 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
(UNAUDITED) (AUDITED)
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 2,910,618
Accounts receivable 2,849,861 6,365,303
Allowance for doubtful accounts (129,664) (253,381)
Compensation draws 422,505 642,530
Prepaid expenses 398,230 952,937
Other current assets 102,852 94,946
-------------------------------
Total Current Assets 3,643,784 10,712,953
Property and equipment, net 714,673 2,629,521
Investment in Curious Pictures 1,602,828 --
Goodwill, net 160,417 168,750
Other assets 195,287 610,231
-------------------------------
Total Assets $ 6,316,989 $ 14,121,455
===============================
LIABILITY & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,184,696 $ 3,232,125
Accrued liabilities 3,210,963 3,842,807
Checks drawn in excess of available funds 528,683 --
Line of credit -- 2,468,527
Due to Curious Pictures 2,026,591 --
Note payable - iNTELEFILM 3,193,615 2,729,342
Deferred income 709,963 3,429,794
-------------------------------
Total Current Liabilities 10,854,511 15,702,595
Total Liabilities 10,854,511 15,702,595
-------------------------------
Minority interest -- 2,700,000
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued & outstanding shares - 7,506,660
March 31, 2000 and June 30, 1999 75,067 75,067
Additional paid-in capital 17,257,278 15,682,245
Accumulated deficit (21,869,867) (20,038,452)
-------------------------------
Total Shareholders' Deficit (4,537,522) (4,281,140)
-------------------------------
Total Liabilities & Shareholders' Equity $ 6,316,989 $ 14,121,455
===============================
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
2000 1999 2000 1999
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues $ 9,722,266 $ 16,274,699 $ 29,532,540 $ 47,658,983
------------------------------- -------------------------------
Total revenues 9,722,266 16,274,699 29,532,540 47,658,983
Costs and expenses:
Cost of production 9,103,715 13,889,304 26,500,017 40,718,058
Selling 379,740 902,567 1,136,681 2,536,616
General and administrative (exclusive of items shown below) 661,177 1,948,157 2,693,314 5,169,196
Subsidiary stock option compensation -- 108,800 -- 326,400
Corporate 322,332 530,262 1,023,700 1,157,813
Depreciation & amortization 37,428 196,562 218,253 670,898
Restructuring cost & impairment of assets -- (175,000) -- 3,357,495
------------------------------- -------------------------------
Loss from operations (782,126) (1,125,953) (2,039,425) (6,277,493)
Gain on disposal of The End (London) -- -- 119,508 --
Equity gain in Curious Pictures 233,559 -- 521,978 --
Interest income net of interest (expense) (147,288) (79,089) (433,476) (266,374)
------------------------------- -------------------------------
Net loss before income taxes (695,855) (1,205,042) (1,831,415) (6,543,867)
Income taxes -- -- -- 9,601
------------------------------- -------------------------------
Net loss $ (695,855) $ (1,205,042) $ (1,831,415) $ (6,553,468)
=============================== ===============================
Net loss per share $ (0.09) $ (0.16) $ (0.24) $ (0.89)
=============================== ===============================
Weighted average number of shares outstanding 7,506,660 7,506,660 7,506,660 7,376,957
=============================== ===============================
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
2000 1999
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,831,415) $ (6,553,468)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation & amortization 218,253 670,898
Impairment of assets -- 2,215,175
Provision for doubtful accounts and director advances 686,569 --
(Gain) loss on disposal of The End (London) (119,508) --
(Gain) loss on equity investment in Curous Pictures (521,978) --
Issuance of non-cash compensation expense -- 326,400
Decrease (increase) in:
Accounts receivable 2,144,308 1,085,012
Other current assets (65,150) (644,526)
Other assets (51,717) (189,129)
Increase (decrease) in:
Accounts payable (834,627) 1,139,670
Accrued liabilities (24,320) (2,965,756)
Deferred income (813,654) (899,348)
Accrued restructuring costs -- 758,760
-------------------------------
Net cash used in operating activities: (1,213,238) (5,056,312)
INVESTING ACTIVITIES:
Capital (expenditures) divestitures (438,549) (1,126,730)
Equity investment in Curious Pictures (65,778) --
Other assets 8,333 230,755
-------------------------------
Net cash used in investing activities (495,994) (895,975)
-------------------------------
FINANCING ACTIVITIES:
Checks drawn in excess of available funds 528,683 --
Line of credit (2,468,527) (557,865)
Due to Curious Pictures 274,185 --
Payment of debt/debt proceeds 464,273 3,050,000
Proceeds from issuance of common stock -- 350,000
-------------------------------
Net cash provided by (used in) financing activities (1,201,386) 2,842,135
-------------------------------
Decrease in cash and cash equivalents (2,910,618) (3,110,152)
Cash and cash equivalents at beginning of period 2,910,618 3,834,023
-------------------------------
Cash and cash equivalents at end of period $ -- $ 723,871
===============================
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
Harmony Holdings, Inc. Condensed Notes to Consolidated Financial Statements
(unaudited)
March 31, 2000
Note 1--Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals with the exception of the adjustments
discussed in Note 2) considered necessary for a fair presentation have been
included. Operating results for the three and nine-month periods ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ended June 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended June 30, 1999.
The current operations of Harmony Holdings, Inc. ("the Company") are not
expected to be sufficient to fund its working capital needs and its debt service
obligations in the near future. Therefore, the Company will be dependent on
internal financing which, given current operating losses, may not be sufficient
to fund operations. Given these facts, the Company's independent certified
public accountants modified their opinion on the Company's June 30, 1999
Consolidated Financial Statements to contain a paragraph wherein they expressed
substantial doubt about the Company's ability to continue as a going concern.
Additionally, effective August 1, 1999, iNTELEFILM Corporation ("iNTELEFILM"),
the Company's majority shareholder, purchased 51% of the outstanding stock of
Curious Pictures Corporation ("Curious Pictures") from the four principal
executives of Curious Pictures (collectively, "Curious Management") (see Note
2B). As a result, for financial statement purposes, the Company will account for
Curious Pictures' operations under the equity method, rather than consolidating
their financial results as it has for all periods prior to August 1, 1999.
Note 2--Significant Transactions During Fiscal Year Ending June 30, 2000
The following significant transactions occurred during the first nine months of
the fiscal year ending June 30, 2000 and are considered non-recurring:
A. Effective July 1, 1999, the Company sold 90% of the issued and
outstanding shares of capital stock of The End (London), LTD ("The End
(London)") to a principal executive (the "Purchaser") of The End
(London) for nominal consideration. The End (London) is a commercial
production company based in London, England, and, prior to this sale,
was a wholly owned subsidiary of the Company. For the fiscal year ended
June 30, 1999 and 1998, The End (London) had gross revenues of
approximately $11.2 million and $3.7 million, and net losses of
approximately $862,000 and $591,000, respectively. The Company retained
all rights to the "The End (London)" name and logo. In connection with
the sale, the Company and the Purchaser entered into an agreement
granting the Purchaser the right, under certain circumstances, to
purchase the remaining 10% equity interest in The End (London) from the
Company for approximately $803,000.
B. Effective August 1, 1999, iNTELEFILM purchased the option and share
transfer agreement ("the Option Agreement") entered into by the Company
and Curious Management from Curious Management. Pursuant to the
purchase agreement and based on the results of operations of Curious
Pictures, it was agreed by all parties, including the Company, that the
underlying options to purchase the 50% equity interest in Curious
Pictures had fully
<PAGE>
vested and were exercisable for consideration totaling $50. iNTELEFILM
immediately exercised those options. iNTELEFILM also acquired a 1%
equity interest from Curious Management that was originally conveyed to
Curious Management upon signing the Option Agreement. The consideration
paid to Curious Management by iNTELEFILM for the aforementioned
acquisitions aggregated $3.0 million, consisting of $1.5 million in
cash and a $1.5 million note receivable. As a result of this
transaction, the Company currently owns 49% of the outstanding stock of
Curious Pictures and iNTELEFILM owns 51% of the stock.
At the same time, Curious Pictures entered new five-year employment
agreements with Curious Management which are retroactive to January 1,
1999. As part of the compensation to be paid to Curious Management,
each member of Curious Management was granted the right to purchase
from the Company one share (representing 1% of the capital stock of
Curious Pictures) of the Company's remaining 49 shares at the end of
each employment year. As a result, if all of the members of Curious
Management exercise all of the new options over the five-year term of
their employment agreements, iNTELEFILM will own 51% of the Curious
Pictures stock, Curious Management will collectively own 20%, and the
Company will own the remaining 29%. The Company, iNTELEFILM, and
Curious Management also entered a Stock Agreement effective as of
August 1, 1999. Under this agreement, the members of Curious Management
were granted the right to sell to iNTELEFILM the shares of Curious
Pictures that they earn from the Company (the put right), and
iNTELEFILM obtained the right to purchase such shares from Curious
Management (the call right). The price per share to be paid by
iNTELEFILM to Curious Management for each share under the put and call
rights is $96,774 per share.
C. In March 2000, iNTELEFILM publicly announced its future intention to
effect an exchange tender offer with the shareholders of the Company to
acquire all of the outstanding shares of the Company's common stock
that is not currently owned by iNTELEFILM in exchange for shares of
iNTELEFILM common stock. iNTELEFILM currently owns approximately 55% of
the Company's common stock. According to its announcement, iNTELEFILM
proposes to offer one share of its common stock for every 13.75 shares
of the Company's common stock. If iNTELEFILM is successful in acquiring
such shares, the Company will become a wholly owned subsidiary of
iNTELEFILM, and will no longer be an independent financial reporting
entity.
D. On March 23, 2000, iNTELEFILM demanded payment in full of the loans it
had made to the Company, which aggregated approximately $3.2 million at
March 31, 2000. However, on May 1, 2000, iNTELEFILM granted the Company
forbearance of its payment demand for an indeterminate amount of time
in order to enable the Company's independent directors to evaluate the
Company's position and possible alternatives.
E. During the quarter ended March 31, 2000, the Company recorded a
valuation allowance associated with commercial director advances in
excess of earnings totaling $574,000, of which $411,000 relates to
advances paid in 1999. Such advances are regularly paid to established
directors on a monthly basis and are offset against the actual earnings
from commercial
<PAGE>
directorial services. The Company capitalizes these monthly payments
and recognized them as an expense in the period that they are offset
against a director's actual earnings. Capitalized amounts were
evaluated for impairment based on anticipated future commercial project
awards for individual directors and an allowance was established for
capitalized amounts believed to be impaired. The valuation allowance
was primarily necessitated by changes in the workflow and contractual
relationships of the majority of The End's directors after the
resignation of two principal officers of The End.
F. 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 strike may limit the Company's ability to produce television
commercials domestically and in Canada until resolved. The Company will
take efforts to limit the effect that the strike will have on its
operations by utilizing non-union talent and continuing to produce its
commercials off shore wherever possible. To date, the Company has not
experienced a significant loss of business as a result of the strike.
However, the Company can give no assurance that an extended strike will
not have an adverse affect on its operations.
G. Through early-March 2000, the Company had funded a portion of its
working capital needs through a revolving line of credit with Finova
Capital Corporation ("Finova"), an unaffiliated institutional lender,
which provided for borrowings of up to $5.0 million, based on
acceptable accounts receivable. The Finova credit facility was
guaranteed by iNTELEFILM, the owner of approximately 55% of the
Company's outstanding common stock. In March 2000, Finova terminated
this line of credit and the Company repaid its indebtedness to Finova
in full.
Note 3--Investment in Curious Pictures
Effective August 1, 1999, the Company has a 49% equity
investment in Curious Pictures (see Note 2B). Curious Pictures'
operations are summarized as follows for the period of August 1, 1999
through March 31, 2000:
Three Months Eight Months
Ended 3/31/00 Ended 3/31/00
------------- -------------
Contract revenues $6,208,981 $17,111,218
Cost of production 4,305,393 12,524,028
---------- -----------
Gross profit 1,903,588 4,587,190
Operating expenses 1,427,424 3,526,847
---------- -----------
Income from operations 476,164 1,060,343
Interest income 486 4,919
---------- -----------
Net income $ 476,650 $ 1,065,262
---------- -----------
Curious Pictures' results from operations are accounted for
under the equity method for all periods after August 1, 1999. Previous
periods are consolidated in the Company's financial statements. As a
result of the transition to the equity method, the Company increased
paid-in capital by $1.6 million to state the investment at the
Company's prorata share of Curious Pictures' net assets.
Note 4--Reclassifications
Certain amounts in the 1999 financial statements have been
<PAGE>
reclassified to conform with 2000 presentation. These reclassifications
have no effect on the accumulated deficit or the net loss previously
reported.
Note 5--Pending Litigation
On October 20, 1999, Imperial Bank, a California banking
corporation, filed a lawsuit against Cinequanon Pictures
International, Inc., the Company; Jennifer Peckham, an individual, and
Daniel Sales, an individual, in Los Angeles Superior Court, Case No.
BC218753. Imperial Bank alleges that the Company guaranteed $250,000 of
Cinequanon's obligations to Imperial Bank. The Company denies that it
has any liability to Imperial Bank and intends to vigorously defend
this lawsuit.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's services may decline as a result of the
recently commenced Screen Actors Guild strike, possible changes in general and
industry specific economic conditions, and the effects of competitive pricing
and such other risks and uncertainties as are described in this report on Form
10-Q and other documents previously filed or hereafter filed by the Company from
time to time with the Securities and Exchange Commission.
Overview
During the last eight months of the current fiscal year, the Company
operated through only one major division, The End, Inc. ("The End"). The End, a
wholly owned subsidiary of the Company, operates several of its own
subsidiaries. During the current fiscal year, Curious Pictures operated as a
majority owned subsidiary for only the month of July 1999. Effective August 1,
1999, the Company's ownership of Curious Pictures was reduced to 49% (see Note
2B of the attached financial statements). As a result, the Company will
hereafter recognize, as an equity investment, 49% of the income or loss produced
by Curious Pictures. During the fiscal year ended June 30, 1999, the Company
operated The End, Curious Pictures, and two additional divisions, Harmony
Pictures, Inc. ("Harmony Pictures") and The End (London). Harmony Pictures
discontinued operations during the second quarter of fiscal year 1999, and the
Company sold 90% of the stock of The End (London) as of July 1, 1999 (see Note
2A of the attached financial statements). Accordingly, the results of operations
for periods in the fiscal year ended June 30, 1999 reflect the operations of
three subsidiaries that are not included in the results of operations in the
current fiscal year.
Results of Operations:
Three and Nine Months Ended March 31, 2000 Compared to Three and Nine
Months Ended March 31, 1999:
The Company's total revenues for the three and nine-month periods
decreased compared to the prior year's results because of elimination of three
subsidiaries from the currently reported revenues. However, revenues from The
End, the only subsidiary operating both this year and last year, increased. As
indicated in the financial statements, total revenue decreased $6,553,000 or 40%
from $16,275,000 in the third quarter of fiscal year 1999 to $9,722,000 in the
third quarter of fiscal year 2000. During the nine months ended March 31, 2000,
revenues decreased $18,126,000 or 38% compared to the same period of fiscal year
1999. Of the nine-month decrease in revenues, $11.1 million is from the two
<PAGE>
divisions no longer operated by the Company, while $13.4 million is from
revenues of Curious Pictures, which is no longer consolidated in the Company's
financial statements. However, revenues at The End increased $6.4 million in the
first nine months of fiscal year 2000 compared to the same period in the prior
year. These increases were due primarily to significant sales efforts at lower
bids to build a base of directorial work portfolio.
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 85% to 94% in the third quarter of fiscal year 2000 compared to
the same period of fiscal year 1999, and from 85% to 90% in the first nine
months of fiscal year 2000 compared to the same period of the prior year.
Included in The End's cost of production for the third quarter of fiscal year
2000 is the $461,000 one-time charge related to the Company's change in method
of accounting for the advances paid to its commercial production directors (see
Note 2E to the financial statements). The addition of several new directors led
to the submission of lower bids by the Company in an attempt to increase
operating revenues and to build the work portfolio for newly signed directors.
Further, the cost of established directorial talent increased for many of the
existing directors because The End increased their compensation in order to
retain the directors when their contracts became terminable. The termination
provisions of many existing contracts were triggered by a management resignation
at The End. Negotiations to secure several of these directors to longer-term
contracts are ongoing and may, therefore, further increase the Company's future
cost of production with respect to these directors. The Company believes the
overall cost of production, as a percentage of revenue, will not increase as new
directors become more established and the established directorial pool is
stabilized.
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
production contracts. Selling expenses totaled $380,000 and $1,137,000 in the
third quarter and first nine months of 2000, respectively, compared to $903,000
and $2,537,000 in the third quarter and first nine months of fiscal year 1999,
respectively. Of this 55% decrease during these comparative nine-month periods,
a $1.6 million decrease is related to Curious Pictures and the two divisions no
longer operated by the Company while selling expense at The End increased
$203,000.
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 $1,287,000 in the third quarter of
fiscal year 2000 to $661,000 as compared to $1,948,000 for the third quarter of
fiscal year 1999. These expenses decreased $2,476,000 or 48% during the first
nine months of fiscal year 2000 compared to the same period of the prior year.
General and administrative expenses increased $510,000 at The End due primarily
to the increased activities at The End's subsidiaries as new directors were
signed. The decrease of $3.0 million is related to Curious Pictures and the two
divisions no longer operated by the Company.
The $326,000 stock option compensation expense reported during the nine
months ended March 31, 2000 represented a non-cash charge resulting from Curious
<PAGE>
Management earning stock options of Curious Pictures. This agreement terminated
upon iNTELEFILM's exercise of the options granted (see Note 2B to the financial
statements).
Corporate charges decreased $208,000 and $134,000 in the third quarter
and first nine months of fiscal year 2000, respectively, compared to respective
periods for fiscal year 1999. This 12% decrease can be attributed to the
consolidation of corporate duties of the Company and iNTELEFILM.
Depreciation and amortization expense decreased in the third quarter of
fiscal year 2000 by $159,000 or 81% compared to the third quarter of fiscal year
1999. Depreciation and amortization decreased by 67% in the first nine months of
the current fiscal year compared to the first nine months of fiscal 1999. This
expense decreased primarily due to Curious Pictures and the two divisions no
longer operated by the Company.
As a result of the sale of 90% of the Company's interest in The End
(London) (see Note 2A to the financial statements), the Company was relieved of
liabilities in excess of assets forfeited, resulting in a non-cash gain to the
Company of $120,000.
Interest expense increased $68,000 during the third quarter of fiscal
year 2000 compared to fiscal year 1999, and increased $167,000 during the nine
months of fiscal year 2000 compared to the same period in fiscal year 1999. This
increase was a result of increased borrowings by the Company under its credit
facility, as well as the interest incurred as a result of borrowings from
iNTELEFILM.
No income tax expense has been reported since the period ended
September 30, 1998. The Company's effective income tax rate varied from the
statutory federal tax rate as a result of state taxes and an increase in the
valuation allowance booked against the deferred tax asset. A valuation allowance
has been established for the full amount of the Company's net deferred tax
asset, as the Company cannot determine that it is more likely than not that the
deferred tax assets (primarily net operating loss carryforwards) will be
realized.
The Company incurred net losses of $1,831,000 and $6,553,000 for the
nine-month periods ended March 31, 2000 and 1999, respectively. The net losses
for the periods ended March 31, 1999 included a one-time charge for
restructuring costs and the impairment of assets related to discontinuing the
operations of Harmony Pictures.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was a
deficit of $7,211,000 at March 31, 2000 compared to a deficit of $4,990,000 at
June 30, 1999. The Company had no cash at March 31, 2000 compared to $2,911,000
at June 30, 1999.
Through early-March 2000, the Company had funded a portion of its
working capital needs through a revolving line of credit with Finova, an
unaffiliated institutional lender, which provided for borrowings
<PAGE>
of up to $5.0 million, based on acceptable accounts receivable. The Finova
credit facility was guaranteed by iNTELEFILM, the owner of approximately 55% of
the Company's outstanding common stock. In March 2000, Finova terminated this
line of credit and the Company repaid its indebtedness to Finova in full.
As the Company's operations have not been able to support its working
capital needs, iNTELEFILM, the Company's principal stockholder, has historically
provided the Company with such funds as necessary to meet its working capital
requirements. Such additional funds have to date been in the form of loans or
the purchase of securities. Of the advances made to the Company by iNTELEFILM as
evidenced by promissory notes, each due within 30 days of demand and each
bearing interest at a rate of 14% per annum, $3.2 million remained outstanding
at March 31, 2000. On March 23, 2000, iNTELEFILM made a demand for the full
repayment of the promissory notes and related accrued interest. On May 1, 2000,
iNTELEFILM notified the Company that it would forbear taking any action on the
collection of such promissory notes for an indeterminate amount of time in order
to permit the independent directors of the Company to evaluate the Company's
financial condition and its response to the repayment demand.
During the nine months ended March 31, 2000, the Company incurred a net
loss of $1.8 million and a cash flow from operations deficit of $1.2 million,
resulting in a working capital deficit of $7.2 million and an accumulated
deficit totaling $21.9 million at March 31, 2000. At this time the Company's
only external financing resources are its notes payable with iNTELEFILM, the
repayment of which iNTELEFILM demanded on March 23, 2000. On May 1, 2000,
iNTELEFILM agreed to forbear its right to collect on the notes for an
undetermined amount of time. Management is considering alternative financing in
order to provide working capital for the Company. However, to date Company has
not obtained a commitment from any lender or other financing source for a
facility that will provide the working capital needs that are currently being
funded through iNTELEFILM. Unless the Company obtains an alternate credit
facility, the Company will not be able to fund its working capital needs, which
in turn, will materially and adversely affect the Company's future liquidity and
its ability to continue to operate as a going concern. No assurance can be given
that the Company will be able find an alternative source of financing to fund
its future working capital needs or that the Company will be able to cure
iNTELEFILM's note payable call at the expiration of the forbearance. Further, it
is anticipated that iNTELEFILM's call of its notes payable will have to be cured
prior to a new lender advancing funds. Such a cure may include conversion of the
iNTELEFILM notes to common stock and substantial dilution to existing
shareholders. Given these circumstances, the Company will be dependent on
internal financing which, given current operating losses, may not be sufficient
to fund operations. Primarily as a result of these items, the Company's
independent certified public accountants modified their opinion on the Company's
June 30, 1999 Consolidated Financial Statements to contain a paragraph wherein
they expressed substantial doubt about the Company's ability to continue as a
going concern.
Management has taken steps to reduce the Company's operating cash flow
deficit, including the closure last year of Harmony Pictures, a subsidiary that
incurred losses of $4.4 million, and the disposition of most of its interest in
The End (London), a subsidiary that incurred losses of $862,000. Nevertheless,
the Company's current operations are not expected to be sufficient to fund the
<PAGE>
Company's working capital needs and its debt service obligations in the near
future. Accordingly, the Company will have to obtain additional financing from
outside sources to fund it liquidity needs until the Company's operations
improve and the Company becomes financially self-sufficient. However, the
Company has not been able to obtain the necessary funding from any unaffiliated
sources, and the only credit facility that the Company had with an outside
financing source, Finova, has been terminated. As a result, the Company is now
dependent upon financing from iNTELEFILM. Although iNTELEFILM still is providing
the Company with some financing, iNTELEFILM is not obligated to make any
additional advances to the Company and has demanded the repayment of its prior
$3.2 million loan. Should iNTELEFILM cease making additional advances to the
Company, the Company would be unable to fund its operations and would have to
consider drastically reducing or terminating its operations.
On March 23, 2000, iNTELEFILM publicly announced that it intends to
begin a tender offer for all of the outstanding shares of the Company that it
does not already own. The independent directors of the Company have asked
iNTELEFILM to forbear on its demand to have the $3.2 million loan repaid in
order to permit the directors to evaluate the Company's financial alternatives
and the effect that the announced tender offer will have on the Company and its
financing alternatives. As of the date of this report, the Company had not
decided what action it would take in response to the repayment demand by
iNTELEFILM, the pending financial circumstances, or the announcement of a future
tender offer. Although the Company is continuing to operate in a manner
consistent with past practices, additional advances it is receiving from
iNTELEFILM are funding its current operations. However, iNTELEFILM could cease
making such advances at any time.
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 strike may limit the Company's ability to produce television commercials
domestically and in Canada until resolved. The Company will take efforts to
limit the effect that the strike will have on its operations by utilizing
non-union talent and continuing to produce its commercials off shore wherever
possible. To date, the Company has not experienced a significant loss of
business as a result of the strike. However, the Company can give no assurance
that an extended strike will not have an adverse affect on its operations.
In November 1999, two of the principal officers of The End resigned
from the Company. Under their agreements with The End, certain of the commercial
directors of The End now have the right to terminate their agreement with The
End. To date, one of The End's commercial directors has exercised his right to
terminate his agreement and ended his exclusive representation by The End. The
departure of the two principal executives and of the one commercial director,
have not, to date, had any material adverse impact on The End's revenues.
Subsequent to the departure of the aforementioned officers, the Company
appointed a long-time executive with the Company as president of The End, and
appointed a new chief operating officer who is a known talent as an executive in
the financial, administrative, production and marketing arena of the
entertainment industry. During the quarter ended March 31, 2000 The End produced
revenues of $9.7 million and an operating loss of $453,000 compared to revenues
of $7.9 million and an operating loss of $814,000 for the quarter ended December
31,
<PAGE>
1999. No assurance can be given that these departures will not cause further
negative impact on operations or financial performance of The End. The impact of
the departure of the foregoing individuals of The End on the Company's liquidity
and profits/losses is not currently ascertainable; however, it has reduced The
End's overhead and necessitated the valuation allowance for director advances in
excess of earnings discussed fully in Note 2E to the financial statements.
Cash used in operating activities for the nine months ended March 31,
2000 was $1,213,000. Net of the effect of the sale of The End (London) and the
effect of not consolidating Curious Pictures, accounts receivable at March 31,
2000 decreased $2,144,000 from June 30, 1999, and other assets at March 31, 2000
increased $117,000 from June 30, 1999. Accounts payable at March 31, 2000
decreased $835,000 from June 30, 1999, other liabilities decreased $24,000 from
June 30, 1999 to March 31, 2000, and deferred income decreased $814,000 during
that same period.
During the nine months ended March 31, 2000, cash used in investing
activities was $496,000. This represents cash used for capital expenditures
incurred in the normal course of operations and cash forfeited in the
transactions involving The End (London) and Curious Pictures (see Note 2A & 2B
to the financial statements).
Cash used in financing activities during the nine months ended March
31, 2000 was $1,201,000, which was a result of the payoff of the line of credit
with Finova net of cash used that Curious Pictures produced and the advances
received from iNTELEFILM.
Inflation
Inflation has not had a significant effect on the Company.
Year 2000 Readiness Disclosure
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 for 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. The failure of the
Company, its vendors, suppliers or other critical third parties with whom the
Company conducts business to achieve Year 2000 compliance on a timely basis
could materially adversely affect the Company's business, operating results, and
financial condition.
As of April 25, 2000, the Company has not experienced and does not
anticipate any material adverse effects on its 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 April 25, 2000, the Company has not experienced any
operational difficulties as s result of Year 2000 issues with its vendors,
suppliers or other critical third parties with whom the Company conducts
business. However, Year 2000 compliance has many elements and potential
consequences, some of which may not be foreseeable or may be realized in future
<PAGE>
periods. Consequently, there can be no assurance that unforeseen circumstances
may not arise, or that the Company 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 the Company or its equipment, systems and operations, the Company will
continue to monitor the impact of the Year 2000 on its equipment and systems and
those of its 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.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Since November 1998, iNTELEFILM has, from time to time, made loans to
the Company in order to fund the Company's working capital needs. These
loans were made because of limitations on the Company's ability to
obtain additional loans from Finova, its third party institutional
lender. As of March 31, 2000, the aggregate outstanding balance of
these loans was $3.2 million. The loans were evidenced by unsecured
promissory notes that permitted iNTELEFILM to demand the repayment of
the notes at any time on 30 days' notice. On March 23, 2000, iNTELEFILM
sent the Company a notice demanding the repayment of the notes. On May
1, 2000, iNTELEFILM granted the Company a temporary forbearance in
order to enable the Company's independent directors to evaluate the
Company's response to the demand notice. See, "Item 2-Management's
Discussion and Analysis of Financial Condition and results of
Operations-Liquidity and Capital Resources" above.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits.
27.1 Financial Data Schedule
Reports on Form 8-K.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on May 15, 2000.
HARMONY HOLDINGS, INC.
BY: /s/ Steven C. Smith
-----------------------------------
Steven C. Smith
ITS: Chief Financial Officer
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