-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VIXO+cl3mP+IMDzGFCfiicoO9jKGBh7K5K0JvRYc4ZkN98S/PghB6kRCZueGeUbC YXLK4JafXDmyV76/QpEQ7A== 0000897101-00-000131.txt : 20000215 0000897101-00-000131.hdr.sgml : 20000215 ACCESSION NUMBER: 0000897101-00-000131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARMONY HOLDINGS INC CENTRAL INDEX KEY: 0000878246 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954333330 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19577 FILM NUMBER: 543945 BUSINESS ADDRESS: STREET 1: 5501 EXCELSIOR BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6129258840 MAIL ADDRESS: STREET 1: 724 FIRST STREET NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55401 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 1999; or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ___________. Commission File Number 000-19577 HARMONY HOLDINGS, INC. ---------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 95-4333330 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 5501 EXCELSIOR BLVD. MINNEAPOLIS, MN 55416 (Address of Principal Executive Offices) (Zip Code) (612) 925-8840 (Registrant's Telephone Number, Including Area Code) 724 1ST STREET NORTH - FOURTH FLOOR MINNEAPOLIS, MN 55401 (former address) Indicate by check mark whether the Registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at February 10, 2000 --------------------- -------------------------------- COMMON STOCK, PAR VALUE 7,506,660 SHARES $.01 PER SHARE INDEX HARMONY HOLDINGS, INC. PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- December 31, 1999 and June 30, 1999. Consolidated Statements of Operations -- Three and six months ended December 31, 1999 and 1998. Consolidated Statements of Cash Flows -- Six months ended December 31, 1999 and 1998. Notes to consolidated financial statements -- December 31, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements HARMONY HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1999 1999 (UNAUDITED) (AUDITED) ----------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,066,823 $ 2,910,618 Accounts receivable 4,328,541 6,365,303 Allowance for doubtful accounts (319,716) (253,381) Compensation draws 699,160 -- Prepaid expenses 370,105 -- Other current assets 106,112 1,690,413 ----------------------------- Total Current Assets 6,251,025 10,712,953 Property and equipment, net 751,876 2,629,521 Investment in Curious Pictures 1,369,269 -- Goodwill, net 162,500 168,750 Other assets 194,387 610,231 ----------------------------- Total Assets $ 8,729,057 $ 14,121,455 ============================= LIABILITY & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,094,832 $ 3,232,125 Accrued liabilities 1,884,285 3,842,807 Line of credit 3,548,911 2,468,527 Due to Curious Pictures 1,609,553 -- Note payable - iNTELEFILM 3,193,615 2,729,342 Deferred income 1,239,527 3,429,794 ----------------------------- Total Current Liabilities 12,570,723 15,702,594 Total Liabilities 12,570,723 15,702,594 ----------------------------- Minority interest -- 2,700,000 Shareholders' equity: Common stock, $.01 par value: Authorized shares- 20,000,000 Issued & outstanding shares- 7,506,660 December 31, 1999 and June 30, 1999 75,068 75,067 Additional paid-in capital 17,257,278 15,682,245 Accumulated deficit (21,174,012) (20,038,452) ----------------------------- Total Shareholders' Equity (3,841,666) (4,281,139) ----------------------------- Total Liabilities & Shareholders' Equity $ 8,729,057 $ 14,121,455 =============================
HARMONY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------------- ----------------------------- 1999 1998 1999 1998 ----------------------------- ----------------------------- Revenues: Contract revenues $ 7,886,708 $ 14,079,885 $ 19,810,274 $ 31,384,284 Cost of production 7,266,853 12,305,295 17,396,302 26,828,754 ----------------------------- ----------------------------- Gross profit 619,855 1,774,590 2,413,972 4,555,530 Operating expenses: Selling 358,965 817,365 756,941 1,634,049 General and administrative 1,007,353 1,502,414 2,032,137 3,221,040 ----------------------------- ----------------------------- Production service income (746,463) (545,189) (375,106) (299,559) Subsidiary stock option compensation -- 108,800 -- 217,600 Corporate 358,883 306,030 701,368 627,550 Depreciation & amortization 80,270 264,980 180,825 474,336 Restructuring cost & impairment of assets -- 3,532,495 3,532,495 ----------------------------- ----------------------------- Income (loss) from operations (1,185,616) (4,757,494) (1,257,299) (5,151,540) Gain (loss) on disposal of The End (London) (30,456) -- 119,508 -- Equity gain (loss) in Curious Pictures 266,220 -- 288,419 -- Interest income net of interest (expense) (145,914) (82,800) (286,188) (187,285) ----------------------------- ----------------------------- Net income (loss) before income taxes (1,095,766) (4,840,294) (1,135,560) (5,338,825) Income taxes -- -- -- 9,601 ----------------------------- ----------------------------- Net income (loss) $ (1,095,766) $ (4,840,294) $ (1,135,560) $ (5,348,426) ============================= ============================= Net income (loss) per share $ (0.15) $ (0.66) $ (0.15) $ (0.73) ============================= ============================= Weighted average number of shares outstanding 7,506,660 7,389,603 7,506,660 7,313,516 ============================= =============================
HARMONY HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1999 1998 --------------------------- OPERATING ACTIVITIES: Net gain (loss) $(1,135,560) $(5,348,426) Adjustments to reconcile net gain (loss) to net cash provided by (used in) operating activities: Depreciation & amortization 180,825 474,336 Impairment of assets -- 2,215,175 Provision for doubtful accounts 66,335 -- (Gain) loss on disposal of The End (London) (119,508) -- (Gain) loss on equity investment in Curous Pictures (288,419) -- Issuance of non-cash compensation expense -- 217,600 Decrease (increase) in: Accounts receivable 665,629 2,855,638 Other current assets 45,935 (579,667) Other assets (50,817) -- Increase (decrease) in: Accounts payable (924,491) 543,314 Accrued liabilities (903,586) (3,344,794) Due to Curious Pictures (142,853) -- Deferred income (284,090) (553,297) Accrued restructuring costs -- 887,794 --------------------------- Net cash used in operating activities: (2,890,600) (2,632,327) INVESTING ACTIVITIES: Capital (expenditures) divestitures (438,324) (771,978) Equity investment in Curious Pictures (65,778) -- Other assets 6,250 230,555 --------------------------- Net cash used in investing activities (497,852) (541,423) --------------------------- FINANCING ACTIVITIES: Line of credit 1,080,384 (544,616) Payment of debt/debt proceeds 464,273 875,000 Proceeds from issuance of common stock -- 350,000 --------------------------- Net cash obtained in financing activities 1,544,657 680,384 --------------------------- Decrease in cash and cash equivalents (1,843,795) (2,493,366) Cash and cash equivalents at beginning of period 2,910,618 3,834,023 --------------------------- Cash and cash equivalents at end of period $ 1,066,823 $ 1,340,657 ===========================
Harmony Holdings, Inc. Notes to Consolidated Financial Statements (unaudited) December 31, 1999 Note 1--Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals with the exception of the adjustments discussed in Note 2) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended December 31, 1999 are not necessarily indicative of the results that may be expected for the year ended June 30, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June 30, 1999. Additionally, effective August 1, 1999, iNTELEFILM Corporation ("iNTELEFILM"), the Company's majority shareholder, purchased 51% of the outstanding stock of Curious Pictures Corporation ("Curious Pictures") (see Note 2B). As a result, for financial statement purposes, the Company will account for Curious Pictures' operations under the equity method, rather than consolidating their financial results as it has for all periods prior to August 1, 1999. Note 2--Significant Transactions During Fiscal Year Ending June 30, 2000 The following significant transactions occurred during the first six months of the fiscal year ending June 30, 2000 and are considered non-recurring: A. Effective July 1, 1999, the Company sold 90% of the issued and outstanding shares of capital stock of The End (London), LTD ("The End (London)") to a principal executive (the "Purchaser") of The End (London) for nominal consideration. The End (London) is a commercial production company based in London, England, and, prior to this sale, was a wholly owned subsidiary of the Company. For the fiscal year ended June 30, 1999 and 1998, The End (London) had gross revenues of approximately $11.2 million and $3.7 million, and net losses of approximately $862,000 and $591,000, respectively. The Company retained all rights to the "The End (London)" name and logo. In connection with the sale, the Company and the Purchaser entered into an agreement granting the Purchaser the right, under certain circumstances, to purchase the remaining 10% equity interest in The End (London) from the Company for approximately $803,000. B. Effective August 1, 1999, iNTELEFILM purchased the option and share transfer agreement ("the Option Agreement") entered into by the Company and the four principal executives of Curious Pictures (collectively, "Curious Management"). Pursuant to the purchase agreement and based on the results of operations of Curious Pictures, it was agreed by all parties, including the Company, that the underlying options to purchase the 50% equity interest in Curious Pictures had fully vested and were exercisable for consideration totaling $50. iNTELEFILM immediately exercised those options. iNTELEFILM also acquired a 1% equity interest from Curious Management that was originally conveyed to Curious Management upon signing the Option Agreement. The consideration paid to Curious Management by iNTELEFILM for the aforementioned acquisitions aggregated $3.0 million, consisting of $1.5 million in cash and a $1.5 million note receivable. As a result of this transaction, the Company currently owns 49% of the outstanding stock of Curious Pictures and iNTELEFILM owns 51% of the stock. At the same time, Curious Pictures entered new five-year employment agreements with Curious Management which are retroactive to January 1, 1999. As part of the compensation to be paid to Curious Management, each member of Curious Management was granted the right to purchase from the Company one share (representing 1% of the capital stock of Curious Pictures) of the Company's remaining 49 shares at the end of each employment year. As a result, if all of the members of Curious Management exercise all of the new options over the five-year term of their employment agreements, iNTELEFILM will own 51% of the Curious Pictures stock, Curious Management will collectively own 20%, and the Company will own the remaining 29%. The Company, iNTELEFILM, and Curious Management also entered a Stock Agreement effective as of August 1, 1999. Under this agreement, the members of Curious Management were granted the right to sell to iNTELEFILM the shares of Curious Pictures that they earn from the Company (the put right), and iNTELEFILM obtained the right to purchase such shares from Curious Management (the call right). The price per share to be paid by iNTELEFILM to Curious Management for each share under the put and call rights is $96,774 per share. Note 3--Investment in Curious Pictures Effective August 1, 1999, the Company has a 49% equity investment in Curious Pictures (see Note 2B). Curious Pictures' operations are summarized as follows for the period of August 1, 1999 through December 31, 1999: Three Months Five Months Ended 12/31/99 Ended 12/31/99 -------------- -------------- Contract revenues $ 6,447,496 $ 10,902,237 Cost of production 4,711,873 8,218,636 ------------ ------------ Gross profit 1,735,623 2,683,601 Operating expenses 1,192,984 2,099,423 ------------ ------------ Income from operations 542,639 584,178 Interest (income) (668) (4,432) ------------ ------------ Net income $ 543,307 $ 588,610 ------------ ------------ Curious Pictures results from operations are accounted for under the equity method for all periods after August 1, 1999. Previous periods are consolidated in the Company's financial statements. As a result of the transition to the equity method, the Company increased paid-in capital by $1.1 million to state the investment at the Company's prorata share of Curious Pictures' net assets. Note 4--Reclassifications Certain amounts in the 1999 financial statements have been reclassified to conform with 2000 presentation. These reclassifications have no effect on the accumulated deficit or the net loss previously reported. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements in this report that are forward-looking are based on current expectations, and actual results may differ materially. Forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including, but not limited to, the possibilities that the demand for the Company's services may decline as a result of possible changes in general and industry specific economic conditions and the effects of competitive pricing and such other risks and uncertainties as are described in this report on Form 10-Q and other documents previously filed or hereafter filed by the Company from time to time with the Securities and Exchange Commission. Overview During the six months ended December 31, 1999, the Company operated through two major divisions. Each division consists of one of the Company's subsidiaries, which subsidiary in turn may operate one or more of its own subsidiaries. The two principal subsidiaries that represent the major operating divisions are The End, Inc. ("The End") and Curious Pictures. The End is a wholly owned subsidiary of the Company. Curious Pictures operated as a majority owned subsidiary during July 1999 only. Effective August 1, 1999, the Company's ownership of Curious Picture's was reduced to 49% (see Note 2B of the attached financial statements). As a result, the Company will hereafter recognize, as an equity investment, 49% of the income or loss produced by Curious Pictures. During the fiscal year ended June 30, 1999, the Company operated two additional divisions, Harmony Pictures, Inc. ("Harmony Pictures") and The End (London). Harmony Pictures discontinued operations during the second quarter of fiscal year 1999, and the Company sold 90% of the stock of The End (London) as of July 1, 1999 (see Note 2A of the attached financial statements). Accordingly, the results of operations for periods in the fiscal year ended June 30, 1999 reflect the operations of two subsidiaries that are not included in the results of operations in the current fiscal year. Results of Operations: Three and Six Months Ended December 31, 1999 Compared to Three and Six Months Ended December 31, 1998: The Company's total revenues decreased $6,193,000 or 44% from $14,080,000 in the second quarter of fiscal year 1999 to $7,887,000 in the second quarter of fiscal year 2000. During the six months ended December 31, 1999, revenues decreased $11,574,000 or 37% compared to the same period of fiscal year 1999. Of the decrease in revenues, $8.3 million is from the two divisions no longer operated by the Company, while $8.1 million is from revenues of Curious Pictures which is no longer consolidated in the Company's financial statements. Revenues at The End increased $4.8 million in the first half of fiscal year 2000 compared to the same period in the prior year. These increases were due primarily to the improved resources with which The End is able to attract and retain directors. Cost of production is directly related to revenues and includes all direct costs incurred in connection with the production of television commercials and music videos including film, crews, location fees and commercial directors' fees. Cost of production as a percentage of revenues increased from approximately 87% to 92% in the second quarter of fiscal year 2000 compared to the same period of fiscal year 1999, and from 85% to 88% in the first half of fiscal year 2000 compared to the same period of the prior year. Exclusive of Curious Pictures and the two divisions on longer operated by the Company, The End's cost of production increased from 84% to 86% during the first half of fiscal 2000 compared to the same period of the prior fiscal year. The addition of several new directors led to the submission of lower bids by the Company in an attempt to increase operating revenues and to gain work for newly signed directors. The Company believes the cost of production as a percentage of revenue will decrease as new directors become more established. Selling expenses consist of sales commissions, advertising and promotional expenses, travel and other expenses incurred in the securing of production contracts. Selling expenses totaled $359,000 and $757,000 in the second quarter and first half of fiscal year 2000, respectively, compared to $817,000 and $1,634,000 in the second quarter and first half of fiscal year 1999, respectively. Of this 54% decrease during these comparative six month periods, a $1.02 million decrease is related to Curious Pictures and the two divisions no longer operated by the Company while selling expense at The End increased $147,000. General and administrative expenses consist of overhead costs such as office rent and expenses, general and administrative payroll, and related items. General and administrative expenses decreased $495,000 in the second quarter of fiscal year 2000 to $1,007,000 as compared to $1,502,000 for the second quarter of fiscal year 1999. These expenses decreased $1,189,000 or 37% during the first half of fiscal year 2000 compared to the same period of the prior year. General and administrative expenses increased $709,000 at The End due primarily to the increased activities at The End's subsidiaries as new directors were signed. The decrease of $1.9 million is related to Curious Pictures and the two divisions no longer operated by the Company. The $218,000 stock option compensation expense reported during the six months ended December 31, 1999 represented a non-cash charge resulting from certain managers of Curious Pictures earning stock options of Curious Pictures. This agreement terminated upon iNTELEFILM's exercise of the options granted (see Note 2B to the financial statements). Corporate charges increased $53,000 and $74,000 in the second quarter and first half of fiscal year 2000, respectively, compared to respective periods in fiscal 1999. This 12% increase is due primarily to additional professional fees incurred in litigation, renegotiating contracts, and negotiations with Finova Capital Corporation ("Finova") (see Liquidity and Capital Resources). Depreciation and amortization expense decreased in the second quarter of fiscal year 2000 by $185,000 or 70% compared to the second quarter of fiscal year 1999. Depreciation and amortization decreased by 62% in the first half of the current fiscal year compared to the first half of fiscal 1999. This expense decreased primarily due to the two divisions no longer operated by the Company and Curious Pictures. As a result of the sale of 90% of the Company's interest in The End (London) (see Note 2A to the financial statements), the Company was relieved of liabilities in excess of assets forfeited, resulting in a non-cash gain to the Company of $120,000. Interest expense increased $63,000 during the second quarter of fiscal year 2000 compared to fiscal year 1999, and increased $99,000 during the first half of fiscal year 2000 compared to the same period in fiscal year 1999. This increase was a result of increased borrowings by the Company under its credit facility, as well as the interest incurred as a result of borrowings from iNTELEFILM. No income tax expense has been reported since the period ended September 30, 1998. The Company's effective income tax rate varied from the statutory federal tax rate as a result of state taxes and an increase in the valuation allowance booked against the deferred tax asset. A valuation allowance has been established for the full amount of the Company's net deferred tax asset, as the Company cannot determine that it is more likely than not that the deferred tax assets (primarily net operating loss carryforwards) will be realized. The Company incurred net losses of $1,136,000 and $5,348,000 for the six-month periods ended December 31, 1999 and 1998, respectively. The net losses for the periods ended December 31, 1999 included a one-time charge for restructuring costs and the impairment of assets related to discontinuing the operations of Harmony Pictures. Liquidity and Capital Resources The Company's liquidity, as measured by its working capital, was a deficit of $6,320,000 at December 31, 1999 compared to a deficit of $4,990,000 at June 30, 1999. Consolidated cash was $1,067,000 at December 31, 1999 and $2,911,000 at June 30, 1999, a decrease of $1,844,000. Although the Company's net loss for the six months ended December 31, 1999 was $1,136,000, cash used in operating activities for the six months ended December 31, 1999 was $2,891,000. Net of the effect of the sale of the End (London) and the effect of not consolidating Curious Pictures, accounts receivable at December 31, 1999 decreased $666,000 from June 30, 1999, and other assets at December 31, 1999 increased $5,000 from June 30, 1999. Accounts payable at December 31, 1999 decreased $924,000 from June 30, 1999, other liabilities decreased $1,046,000 from June 30, 1999 to December 31, 1999, and deferred income decreased $284,000 during that same period. During the six months ended December 31, 1999, cash used in investing activities was $498,000. This represents cash used for capital expenditures incurred in the normal course of operations, and cash forfeited in the transactions involving The End (London) and Curious Pictures (see Note 2A & 2B to the financial statements). Cash obtained in financing activities during the six months ended December 31, 1999 was $1,545,000, which was a result of increased use of the line of credit and borrowings from iNTELEFILM. To date, the Company has funded a portion of its working capital needs through a revolving line of credit with Finova, which provided for borrowings of up to $5.0 million, based on acceptable accounts receivable. This line of credit bears interest at a variable rate (10.0% at December 31, 1999) and is secured by a lien on all of the Company's assets. The loan and security agreement requires the Company to comply with certain restrictive covenants, one of which is that the Company maintains a minimum shareholders' equity of $3.0 million. As of December 31, 1999, the Company had negative shareholder's equity of $3.8 million, and accordingly, is in default of the agreement. As a result, the Company and Finova entered into a forbearance agreement whereby Finova agreed to forbear its right to declare the Company's obligation immediately due and payable until March 1, 2000. However, the Company is no longer able to borrow against the line of credit. The Company's obligations under the credit facility are guaranteed by iNTELEFILM. As the Company's operations have not been able to support its working capital needs, iNTELEFILM, the Company's principal stockholder, has historically provided the Company with such funds as necessary to meet its working capital requirements. Such additional funds have to date been in the form of loans or the purchase of securities. Of the advances made to the Company by iNTELEFILM as evidenced by promissory notes, each due within 30 days of demand and each bearing interest at a rate of 14% per annum, $3.3 million remained outstanding at December 31, 1999. For nominal consideration, effective July 1, 1999, the Company sold 90% of the issued and outstanding shares of capital stock of The End (London). Prior to this sale, The End (London) was a wholly owned subsidiary of the Company. For the fiscal year ended June 30, 1998 and 1999, The End (London) had gross revenues of $3.7 million and $11.2 million and net losses of $591,000 and $862,000, respectively. In connection with the sale of the stock, the purchaser, under certain circumstances, may purchase the remaining 10% equity interest in The End (London) from the Company for approximately $803,000. As a result of this transaction, the Company was relieved of approximately $1.5 million in liabilities and forfeited approximately $1.3 million of assets, including $314,000 of cash. The disposal of this subsidiary will relieve the Company of the need to financially support this subsidiary and should improve future liquidity. Effective as of August 1, 1999, iNTELEFILM purchased, from Curious Management, the Option Agreement entered into by the Company and Curious Management dated December 15, 1996. In order to keep Curious Pictures and Curious Management together in the Company, the Company's board of directors agreed to allow iNTELEFILM to purchase this agreement for the benefit of both parties, and consented to the final agreement whereby, immediately following the purchase of the Option Agreement, iNTELEFILM exercised these options and also acquired a 1% equity interest owned by Curious Management. As a result of this transaction, the Company currently owns 49% of the outstanding stock of Curious Pictures and iNTELEFILM owns 51% of the stock. Prior to the acquisition, the Company owned 99% of the outstanding shares of Curious Pictures, and Curious Management owned 1%. Additionally, the members of Curious Management entered into new five-year employment agreements whereby their compensation includes the right to purchase from the Company an additional 20% of the Curious Pictures shares held by the Company. In turn Curious Management may sell these shares to iNTELEFILM, thereby, decreasing the Company's ownership in Curious Pictures and increasing iNTELEFILM's ownership in Curious Pictures (see Note 2B to the financial statements). By having its interest in Curious Pictures reduced to below 50%, the Company no longer consolidates the revenues and expenses of this division, rather it accounts for Curious Pictures as an equity investment. Additionally, the Company now reflects on its balance sheet, the amount due to Curious Pictures, which totaled $1.8 million and $1.6 million at August 1, and December 31, 1999, respectively. Prior to the aforementioned transaction, this payable was eliminated through the consolidation of Curious Pictures. During the six months ended December 31, 1999, the Company incurred a net loss of $1.1 million and a cash flow from operations deficit of $2.9 million, resulting in a working capital deficit of $6.3 million and an accumulated deficit totaling $21.2 million at December 31, 1999. At this time the Company's only external financing resources are its notes payable with iNTELEFILM which are due on demand. As the Company is currently in default of its agreement with Finova, Finova is no longer advancing the Company funds through its credit facility. The Company and Finova have entered into a forbearance agreement whereby Finova agreed to forbear its right to declare the Company's obligations immediately due and payable until March 1, 2000. As of January 31, 2000, $667,000 was due Finova. While management is actively pursuing alternative financing, the Company has not obtained a commitment from any lender or other financing source for a facility that will either replace the Finova credit facility or result in the repayment of the Finova loan. In the interim, iNTELEFILM has indicated its willingness to make additional advances which, when combined with advances currently outstanding, are not to exceed $4.0 million. These advances have substantially replaced the Finova credit facility as of January 31, 2000. In the event that Finova is not repaid by March 1, 2000 and they demand payment, Finova will be entitled to foreclose on all of the Company's assets. In addition, even if the Company is able to repay the Finova loan in full, unless the Company obtains an alternate credit facility, the Company may not be able to fund its working capital needs if it exceeds iNTELEFILM's current advances which, in turn, will materially and adversely affect the Company's future liquidity and operation. No assurance can be given that the Company will be able to repay the Finova loan by March 1, 2000, or that the Company will be able to find an alternative source of financing to fund its future working capital needs. Given these circumstances, the Company will be dependent on continued financing from iNTELEFILM until other financing options become available. However, no legally binding commitment for continued financing exists between the Company and iNTELEFILM, and no assurance can be given that financing will be offered by iNTELEFILM or that said financing, if offered, will be in a form acceptable to the Company. Primarily as a result of these items, the Company's independent certified public accountants modified their opinion on the Company's June 30, 1999 Consolidated Financial Statements to contain a paragraph wherein they expressed substantial doubt about the Company's ability to continue as a going concern. Management expects that the amount of cash required in its future operations will be substantially diminished as a result of the benefits derived from the discontinuation of Harmony Pictures and the sale of 90% of The End (London). Harmony Pictures and the End (London) incurred losses of $4.4 million and $862,000 for the year ended June 30, 1999, respectively. This $4.4 million loss of Harmony Pictures includes $3.4 million of restructuring and impairment of asset charges recognized in connection with the closing of Harmony Pictures. Additionally, The End recorded revenues of $35.1 million and $18.5 million for the year ended June 30, 1999 and the six months ended December 31, 1999, respectively. Although the Company believes that its operating expenses will be significantly reduced in the future due to the reorganization it has now completed, the Company does not expect that, in the near future, its operations will generate sufficient cash to fund its working capital needs and to repay its outstanding indebtedness. Accordingly, the Company will continue to be dependent upon iNTELEFILM for financing. In the event that the Company is unable to obtain funding from iNTELEFILM, the Company will need to obtain alternate financing. However, no assurance can be given that the Company will, in fact, be able to obtain alternate financing or that the terms of such financing will be favorable to the Company. In that event, the Company may have to take additional steps to further reduce its operating expenses, which may negatively impact the Company's operations. In November 1999, two of the principal officers of The End resigned from the Company. Under their agreements with The End, certain of the commercial directors of The End have the right to terminate their employment at The End in the event that the foregoing two principals resign from the Company. To date, one of The End's commercial directors has exercised his right to terminate his employment with The End, and certain other directors are holding discussions with The End regarding their future employment with The End. The departure of the two principal executives and of the one commercial director has not, to date, had any material impact on The End's revenues. However, no assurance can be given that their departure will not cause other directors to terminate their relationships with The End or that these departures will not cumulatively negatively impact the operations and financial performance of The End in the future. Should any additional commercial directors leave the employ of The End, the Company's liquidity may be negatively impacted until The End is able to replace the lost commercial directors. The impact of the departure of the foregoing employees of The End on the Company's liquidity and profits/losses is not currently ascertainable. Inflation Inflation has not had a significant effect on the Company. Year 2000 Compliance The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure of miscalculations causing disruptions or operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities. Management has made an assessment of its systems and has been advised by its computer consultant that its systems are Year 2000 compliant. To date, the Company has experience no ill effects related to the Year 2000 Issue. Management also believes that its television production equipment will not be impacted by the Year 2000 Issue because the equipment is not date sensitive. Additionally, management believes it will not be materially impacted by the Year 2000 compliance of third parties with which it conducts business. PART II--OTHER INFORMATION Item 1. Legal Proceedings. On October 20, 1999, Imperial Bank, a California banking corporation, filed a lawsuit against Cinequanon Pictures International, Inc.; the Company; Jennifer Peckham, an individual, and Daniel Sales, an individual, in Los Angeles Superior Court, Case No. BC218753. Imperial Bank alleges that the Company guaranteed $250,000 of Cinequanon's obligations to Imperial Bank. The Company denies that it has any liability to Imperial Bank and intends to vigorously defend this lawsuit. In December 1999, the Company settled the litigation between Rick Bieber and Harmony Pictures, Inc. In connection with the settlement, the Company paid Mr. Bieber and Mr. Bieber's counsel a total of $65,000, the parties entered into a mutual release agreement, and the lawsuit was dismissed with prejudice. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Although the Company has not defaulted on any of its payment obligations under its existing credit facility, the Company currently is in default of certain of its covenants under its loan agreement with Finova Capital Corporation. Finova has agreed to forbear its right to declare the Company's obligations immediately due and payable under the credit facility until March 1, 2000. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," above. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. Exhibits. 27.1 Financial Data Schedule Reports on Form 8-K. Not applicable. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on February 11, 2000. HARMONY HOLDINGS, INC. BY: /s/ Steven C. Smith ----------------------------------- Steven C. Smith ITS: Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 1,066,823 0 4,328,541 (319,716) 0 6,251,025 1,304,446 (552,570) 8,729,057 12,570,723 0 0 0 75,068 (3,916,734) 8,729,057 19,810,274 19,810,274 17,396,302 20,185,380 882,193 (319,716) 286,188 (1,135,560) 0 (1,135,560) 0 0 0 (1,135,560) (0.15) (0.15)
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