<PAGE>
As filed with the Securities and Exchange Commission on May ___, 1996
REGISTRATION NO. 333-2648
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
______________________________
HARMONY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
------------------------------
DELAWARE 7812 95-4333330
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification
of Incorporation Classification Number)
or Organization) Code Number)
------------------------------
1990 WESTWOOD BOULEVARD, SUITE 310, LOS ANGELES, CALIFORNIA 90025-4676
TEL: (310) 446-7700
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
HARVEY BIBICOFF
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
1990 WESTWOOD BOULEVARD, SUITE 310
LOS ANGELES, CALIFORNIA 90025-4676
TEL: (310) 446-7700
FAX: (310) 446-7716
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
COPIES TO:
MARK E. EZELL, ESQ.
Haskell Slaughter & Young, L.L.C.
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, Alabama 35203
Tel: (205) 251-1000
Fax: (205) 324-1133
______________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT PRICE FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share... 329,050 Shares (1) $ 2.31 (2) $760,105.50 $262.11
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share... 57,000 Shares (3) $2.0625 (4) $117,562.50 $ 40.54
- ----------------------------------------------------------------------------------------------------------------------
Total --- --- $877,668.00 $302.65 (5)
======================================================================================================================
</TABLE>
(1) Shares of Common Stock underlying the Registrant's Class C Warrants.
(2) Computed in accordance with Rule 457(g)(1), solely for the purpose of
calculating the registration fee, based upon the exercise price of the Class
C Warrants.
(3) Shares of Common Stock being registered for the account of the Selling
Stockholders.
(4) Computed in accordance with Rule 457(c), solely for the purpose of
calculating the registration fee. The computation is based upon the last
sale price of the Common Stock on the Nasdaq SmallCap Market on May 22,
1996.
(5) $308.80 was paid at the time of the original filing of the Registration
Statement.
______________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
HARMONY HOLDINGS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT LOCATION OR CAPTION
ITEM NUMBER AND CAPTION IN PROSPECTUS
----------------------- --------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Facing Page of the Registration
Statement; Front Cover of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.......... Cover Page of Prospectus, Available
Information, Table of Contents
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price... Outside Front Cover Page of
Prospectus; Plan of Distribution;
Description of Securities
6. Dilution.......................... Not Applicable
7. Selling Security Holders.......... Selling Stockholders
8. Plan of Distribution.............. Prospectus Summary; Plan of
Distribution
9. Description of Securities to be
Registered........................ Description of Securities
10. Interests of Named Experts and
Counsel.......................... Legal Matters; Experts
11. Information with Respect to the
Registrant....................... Prospectus Summary; The Company; Risk
Factors; Dividend Policy; Selected
Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Relationships and Related
Transactions; Security Ownership of
Certain Beneficial Owners and
Management; Changes in Accountants;
Consolidated Financial Statements
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities....... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
HARMONY HOLDINGS, INC.
329,050 SHARES
COMMON STOCK
PAR VALUE $.01 PER SHARE
SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF COMMON STOCK PURCHASE WARRANTS
57,000 SHARES
COMMON STOCK
PAR VALUE $.01 PER SHARE
_______________
This Prospectus relates to 329,050 shares of Common Stock, par value $.01
per share (the "Common Stock") of Harmony Holdings, Inc., a Delaware corporation
(the "Company"), underlying the Class C redeemable warrants (the "Class C
Warrants") of the Company.
Each Class C Warrant entitles the holder thereof to purchase, at any time
prior to July 15, 1996, one share of the Company's Common Stock, at an exercise
price of $2.31, subject to adjustment. There can be no assurance, however, that
any of such rights to purchase will be so exercised. The Class C Warrants are
subject to redemption by the Company, on not less than thirty days' written
notice, at a price of $.01 per Class C Warrant at any time if the average of the
closing bid and asked prices of the Company's Common Stock equals or exceeds
$5.00 per share for twenty consecutive trading days ending within three days
prior to the 30-day notice of redemption. Holders of Class C Warrants will
automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Class C Warrants unless the Class C Warrants are
exercised before they are redeemed. The Company will not be able to call the
Class C Warrants unless a registration statement covering the securities
issuable upon exercise of the Class C Warrants is, and remains, current
throughout the period fixed for redemption. The Company has no present plans to
redeem the Class C Warrants and it is unlikely it will do so because of the
current market price for the Company's Common Stock and the short period between
the date of this Prospectus and the expiration of the Class C Warrants. See "The
Class C Warrants and Plan of Distribution", "Price Range of Common Stock" and
"Description of Securities-Class C Warrants".
This Prospectus also relates to the resale by the holders thereof (the
"Selling Stockholders") of up to 57,000 shares of the Common Stock of the
Company issued without registration under the Securities Act of 1933, as amended
(the "Securities Act"), in a transaction not involving a public offering.
Specifically, such shares were issued in connection with the private placement
of Units consisting of 7% Subordinated Notes having a face value of $1,000 (par)
and 200 shares of Common Stock of the Company (the "Units").
The shares of Common Stock held by the Selling Stockholders may be offered
from time to time in transactions on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") SmallCap Market, in negotiated
transactions or a combination of such methods of sale, at prices related to such
prevailing market prices, or at negotiated prices. The Selling Stockholders may
effect such transactions by selling the shares to or through broker-dealers, and
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of the shares for which such broker-dealer may act as agent or to whom they sell
as principal, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions).
None of the proceeds from the sale of the shares by the Selling
Stockholders will be received by the Company. The Company has agreed to bear all
expenses (other than underwriting discounts and selling commissions, and fees
and expenses of counsel and other advisors to the Selling Stockholders) in
connection with the registration of the shares being offered by the Selling
Stockholders. The Company has agreed to indemnify the Selling Stockholders
against certain liabilities, including liabilities under the Securities Act.
Securities held by the Selling Stockholders may be sold on the date of this
Prospectus and thereafter while this Registration Statement continues to be
effective and the resale of such securities are subject to Prospectus delivery
and other requirements of the Securities Act. Sales of such securities or the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby. See "Selling Stockholders".
The Common Stock is listed on the Nasdaq SmallCap Market. On May 22, 1996,
the last sale price of the Common Stock was $2 1/16 as reported by Nasdaq. See
"Price Range of Common Stock".
_______________
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
_______________
The date of this Prospectus is May ___, 1996
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act, with the Securities and Exchange Commission (the "Commission")
covering the shares of Common Stock underlying the Class C Warrants and certain
other shares of Common Stock covered thereby (the "Registration Statement"). As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information contained in the Registration Statement. For further
information pertaining to the securities offered hereby, reference is made to
the Registration Statement, including the Exhibits filed as a part thereof.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission relating to its business, financial statements and other matters.
The Registration Statement, as well as such reports, proxy statements and other
information, may be inspected at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W. Judiciary Plaza, Washington,
D.C., and should be available for inspection and copying at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New York, New
York and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois. Copies of such material can be obtained at prescribed rates by writing
to the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549. The Company's Common Stock is listed on the Nasdaq SmallCap Market,
and the reports, proxy statements and certain other information filed by the
Company may be obtained by calling the Nasdaq Public Reference Room Disclosure
Information Group at (800) 638-8241 or (202) 728-8298.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF
THE SECURITIES TO WHICH THIS PROSPECTUS RELATES SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION
CONCERNING THE COMPANY CONTAINED IN THIS PROSPECTUS SINCE THE DATE OF SUCH
INFORMATION.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................................... 2
PROSPECTUS SUMMARY.......................................................... 5
SUMMARY FINANCIAL DATA...................................................... 7
RISK FACTORS................................................................ 8
THE COMPANY................................................................. 10
General................................................................. 10
Proposed Acquisition of the Company..................................... 10
PLAN OF DISTRIBUTION........................................................ 12
Class C Warrants........................................................ 12
Selling Stockholders.................................................... 12
SELLING STOCKHOLDERS........................................................ 13
USE OF PROCEEDS............................................................. 14
PRICE RANGE OF COMMON STOCK................................................. 14
DIVIDEND POLICY............................................................. 15
SELECTED FINANCIAL DATA..................................................... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS....................................................... 18
General................................................................. 18
Seasonality............................................................. 18
Results of Operations................................................... 18
Nine Months Ended March 31, 1996 as Compared with Nine Months
Ended March 31, 1995............................................... 18
Year Ended June 30, 1995 as Compared with Year Ended June 30, 1994... 19
Year Ended June 30, 1994 as Compared with Year Ended June 30, 1993... 20
Liquidity and Capital Resources......................................... 21
Nine Months Ended March 31, 1996 as Compared with Nine Months
Ended March 31, 1995............................................... 21
Year Ended June 30, 1995 as Compared with Year Ended June 30, 1994... 22
Year Ended June 30, 1994 as Compared with Year Ended June 30, 1993... 22
Inflation............................................................... 23
New Accounting Standards................................................ 23
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
BUSINESS............................................................... 24
General.............................................................. 24
Commercial Television Production Industry............................ 24
Increase in Breadth of Experience of Company's Directors............. 25
Expansion into Ancillary Businesses.................................. 26
Music Videos....................................................... 26
Infomercials....................................................... 26
Marketing Strategy................................................... 26
The Making of a Commercial........................................... 27
Financing the Production of Commercials.............................. 28
Properties........................................................... 29
Employees............................................................ 30
Competition.......................................................... 30
Legal Proceedings.................................................... 31
MANAGEMENT............................................................. 32
Directors and Executive Officers..................................... 32
Executive Compensation............................................... 34
Compensation of Directors............................................ 35
Compensation Committee Interlocks and Insider Participation.......... 36
Employment Agreements................................................ 36
Stock Options........................................................ 36
Stock Option Plan.................................................. 36
Other Stock Options................................................ 38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 40
DESCRIPTION OF SECURITIES.............................................. 41
Common Stock......................................................... 41
Preferred Stock...................................................... 41
Class C Warrants..................................................... 42
Determination of the Exercise Price................................ 43
Delaware Anti-Takeover Law........................................... 43
Shares Eligible for Future Public Sale............................... 43
Transfer Agent and Warrant Agent..................................... 44
LEGAL MATTERS.......................................................... 44
CHANGES IN ACCOUNTANTS................................................. 44
EXPERTS................................................................ 45
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
</TABLE>
4
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere
in this Prospectus. Certain capitalized terms used in this summary are defined
in this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and financial statements contained in
this Prospectus. Each prospective investor is urged to carefully read this
Prospectus in its entirety, including but not limited to, the Risk Factors.
THE COMPANY
The historical business of Harmony Holdings, Inc. is the production of
television commercials which business continues to represent a preponderance of
its revenues. The Company has produced more than 2,500 commercials for national
advertisers, Fortune 500 companies, and well recognized product lines such as
Acura, Anheuser Busch, AT&T, Bank of America, Blue Cross, Cannon, Cap
Cities/ABC, Cellular One, Chrysler, Coca-Cola, Delta Airlines, Disney, Domino's
Pizza, Fox, General Mills, Gillette, General Motors, Hallmark, HBO, Hershey
Foods, Honda, JC Penney, K-Mart, Kellogg's, Kodak, Kraft Foods, McDonald's,
Nabisco, Nike, Nintendo, Nissan, Pepsi, Reebok, Sears, Sony, State Farm, and
Visa, among others. See "The Company" and "Business".
A small percentage of the Company's business is the production of music
videos through its operating subsidiary, The End, Inc. During January 1995, the
Company formed Harmony Media Communications, Inc., entering the long-form
advertising and infomercial business through this operating subsidiary. See
"Business--Expansion into Ancillary Businesses--Music Videos" and "Business--
Expansion into Ancillary Businesses--Infomercials".
On April 18, 1996, the Company and Capital Media Group Limited and
Unimedia S.A. signed a letter of intent that provides for the acquisition of the
Company by said entities acting jointly. See "The Company--Proposed Acquisition
of the Company".
THE OFFERING
Common Stock underlying
the Class C Warrants................. Up to 329,050 shares of Common Stock
upon exercise of the Class C Warrants,
each of which entitles the holder
thereof to purchase, on or before July
15, 1996, one share of Common Stock at
an exercise price of $2.31, subject to
adjustment.
Selling Stockholders................. 57,000 shares of Common Stock offered
for the account of the Selling
Stockholders.
Use of Proceeds...................... The net proceeds received by the Company
upon exercise of the Class C Warrants,
if any, will be added to the Company's
general corporate funds and will be used
to fund the Company's continuing
operations. There can be no assurance
that any of the Class C Warrants will be
exercised. The
5
<PAGE>
Company will receive no proceeds from
the sale of shares of Common Stock
acquired upon the exercise of the Class
C Warrants or from the sale of shares of
Common Stock by the Selling
Stockholders.
RISK FACTORS
The securities offered hereby involve substantial risks, including, but not
limited to, competition and negative industry trends, historical operating
losses, need for additional financing, accumulated deficit, lack of dividends,
dependence upon commercial directors, revenues affected by economy, effect of
outstanding options and warrants and lack of liquidity. See "Risk Factors".
6
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------------------- -------------------------
1995 1994(1) 1993(2) 1992(3) 1991(4) 1996 1995
-------- -------- -------- -------- -------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Contract Revenue $61,227 $42,602 $24,786 $18,558 $10,776 $50,395 $46,458
Cost of Production 50,920 35,291 20,299 14,759 8,562 43,056 40,389
------- ------- ------- ------- ------- ------- -------
Gross Profit 10,307 7,311 4,487 3,799 2,214 7,339 6,069
Selling Expenses 2,808 2,223 1,518 465 368 2,272 1,996
Operating Expenses 7,161 6,286 5,940 3,005 2,226 5,054 3,429
Write off of abandoned projects 0 0 0 0 0 622 0
Litigation expense 486 0 0 0 0 200 486
Severance salaries 0 0 0 0 0 186 0
Depreciation and amortization 528 399 323 262 293 419 395
------- ------- ------- ------- ------- ------- -------
Income (Loss) from operations (676) (1,597) (3,294) 67 (673) (1,415) (237)
Interest income (expense), net (9) 23 88 25 (67) (174) 6
------- ------- ------- ------- ------- ------- -------
Income (Loss) before taxes (685) (1,574) (3,206) 92 (740) (1,589) (231)
Income tax expense 0 0 0 22 0 0 0
------- ------- ------- ------- ------- ------- -------
Net Income (Loss) $ (685) $(1,574) $(3,206) $ 70 $ (740) $(1,589) $ (231)
======= ======= ======= ======= ======= ======= =======
Net Income (Loss) per share $(0.12) $(0.30) $(0.84) $0.03 $(0.37) $(0.28) $(0.04)
Average shares outstanding 5,567 5,316 3,800 2,765 2,033 5,693 5,511
</TABLE>
- -----------------
(1) The Company has reclassified the following for June 30, 1994, to make the
financials comparable with June 30, 1995: $994,579 profit participation to
commercial directors has been reclassified from operating expense to cost of
sales; $837,923 salesman commissions has been reclassified from operating
expenses to selling expense; $1,385,065 in other selling expense has been
reclassified from operating expenses to selling expense; $936,520 credit
representing certain fees earned in excess of the related expenses has been
reclassified from operating expense to revenue.
(2) The Company has reclassified the following for June 30, 1993, to make the
financials comparable with June 30, 1994: $254,394 profit participation to
commercial directors has been reclassified from operating expense to cost of
sales; $509,292 salesman commissions has been reclassified from operating
expenses to selling expense; $1,009,138 in other selling expense has been
reclassified from operating expenses to selling expense.
(3) The Company has reclassified the following for June 30, 1992, to make the
financials comparable with June 30, 1993: $451,614 in other selling expense
has been reclassified from operating expenses to selling expense.
(4) The Company has reclassified the following for June 30, 1991, to make the
financials comparable with June 30, 1992: $289,923 in other selling expense
has been reclassified from operating expenses to selling expense.
BALANCE SHEET DATA (AT END OF PERIOD)
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------- MARCH 31,
1995 1994 1993 1992 1991 1996
------ ------- ------ -------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 230 $ 663 $1,917 $1,268 $ 50 $ 62
Current assets 7,707 5,487 5,522 3,072 1,794 6,973
Goodwill, net (1) 3,181 3,393 3,611 3,560 3,638 3,022
Total assets 12,955 10,345 9,950 6,900 5,747 11,833
Current liabilities 6,196 3,931 4,325 1,826 3,006 6,601
Subordinated notes payable-Long Term 385 0 0 0 0 385
Total liabilities 6,581 3,931 4,325 1,826 3,063 6,986
Stockholders' equity 6,374 6,414 5,625 5,075 2,685 4,847
</TABLE>
- --------------------
(1) The goodwill is primarily associated with the acquisition of Harmony and
Melody by Ventura Entertainment Group Ltd. See Note 1 of "Notes to
Consolidated Financial Statements".
7
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and involve a high
degree of risk. Prior to making an investment decision with respect to such
securities, prospective investors should carefully consider, along with the
other matters discussed in this Prospectus, the following risk factors:
Operating Losses; Accumulated Deficit; Uncertainty of Future Results. The
Company has reported losses for four of the last five fiscal years. These losses
have ranged from a net loss of $3,206,097 for the fiscal year ended June 30,
1993, to a net loss of $685,898 for the fiscal year ended June 30, 1995. The
Company incurred a net loss of $1,588,702 for the nine months ended March 31,
1996. These losses, incurred over a number of years, have resulted in an
accumulated deficit of $7,945,162 at March 31, 1996. Management realizes that it
has been too slow to react meaningfully to competition and negative industry
trends. See "Risk Factors--Competition and Negative Industry Trends". While the
Company can make no assurances that its future operations will result in
consolidated profitable operations, management is actively pursuing ways to
reduce both selling and production costs so as to realize the financial benefits
to be gained from the Company's demonstrated revenue growth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Lack of Liquidity; Need for Additional Financing. Because of the extended
period during which the Company has experienced operating losses, the Company
has lacked liquidity for an extended period of time. As a result, the Company
may need additional financing to continue its operations at their present
levels. Such additional financing may be accomplished through one or more
offerings of equity securities or debt instruments, or a combination thereof.
There can be no guarantee that such additional financing (if needed) will be
available to the Company at the times, in the amounts or on acceptable terms,
when needed. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Consolidated Financial Statements".
Revenues Dependent on Commercial Directors. In the television commercial
production industry, commercial production contracts are awarded based on many
factors, including the expertise, reputation and creative vision of the
directors associated with the television commercial production company. As a
result, the Company's revenues are dependent upon its ability to attract and
retain established directors of commercials. Most of the directors who are
associated with the Company receive monthly draws against the directors'
compensation for shooting commercials. The monthly draws equal the minimum
guaranteed compensation payable to such directors. Although the draws are
recoverable by the Company out of compensation otherwise payable to such
directors, such directors are not obligated to repay such draws, if their fees
for commercials produced do not exceed the monthly draws that have been paid.
Consequently, the Company is obligated to provide a reduced level of
compensation to these directors whether or not they are directing commercials.
During the fiscal year ended June 30, 1995, the Company paid $1,192,804 in such
draws to these directors, which sum exceeded the directors' fees earned by such
directors by $65,039. The payment of these draws in excess of fees earned has
increased the Company's losses. In addition, all of the Company's directors are
free to provide services to third parties outside the area of television
commercials. As a result, the Company's revenues could also be adversely
affected by the unavailability of its directors due to their outside
commitments. However, the Company's agreements with its directors prohibit the
director from performing any service for television commercial production for
any outside company or from performing services in connection with theatrical
films or television episodes, if such services interfere with the director's
services to the Company. The impact of such potential unavailability is
difficult to quantify. See "Management's Discussion and Analysis of Financial
8
<PAGE>
Condition and Results of Operations" and "Business--Increase in Breadth of
Experience of Company's Directors".
Competition and Negative Industry Trends. The Company operates in a highly
competitive environment. In recent years the "mark-up" charged by the Company
and other television production companies has been reduced due to increased
competition in the industry and tighter advertising budgets. As a result, profit
margins have declined and competition has increased. There can be no assurance
that these trends will be reversed or that the Company will successfully adapt
to the changes in the industry. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Commercial
Production Television Industry".
Revenues Affected by Economy and Other Factors. The Company's business is
adversely affected by economic uncertainty and to a lesser extent recessionary
times as advertisers tend to reduce their advertising budgets during such
periods. In addition, the Company's business can be adversely affected by
strikes or threatened strikes by labor unions in the entertainment industry.
Historically, strikes or threatened strikes have not had a material effect on
the Company's operations.
Effect of Outstanding Options and Warrants. The Class C Warrants and
outstanding options granted to the Company's employees and others and the
warrants issued in connection with certain private placements provide the
holders thereof with an opportunity to profit from a rise in the market price of
the Company's Common Stock, with a resulting dilution in the interests of the
other stockholders. As of February 22, 1996, 2,998,223 shares of Common Stock
(or an additional 52.6% of the outstanding Common Stock) are issuable upon the
exercise of such securities. Further, the terms on which the Company may obtain
additional financing during the respective terms of these securities may be
adversely affected by the existence of the Class C Warrants and such stock
options and warrants. The holders of the Class C Warrants, and such stock
options and warrants, may exercise them at a time when the Company might be able
to obtain additional capital through a new offering of securities or other forms
of financing on terms more favorable than those provided by the Class C Warrants
and such stock options and warrants. See "Description of Securities--Class C
Warrants" and "Management--Stock Options".
No Dividends. The Company has never paid cash dividends on its Common Stock
and anticipates that for the foreseeable future all earnings, if any, will be
retained for the operation and expansion of the Company's business. See
"Dividend Policy".
Revolving Line of Credit. On May 10, 1995, the Company entered into a
$3,000,000 revolving line of credit agreement with a bank. As of April 30, 1996,
the Company had $1,000,000 outstanding under the line. In certain instances, the
Company has not been in compliance with certain financial covenants contained in
the line of credit agreement, which instances of noncompliance have been waived
by the bank. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources". There can be no
assurance that future failures to comply with the requirements of such line of
credit agreement (if any) will be waived by the bank. In the event of a default
under the line of credit agreement, the bank has the contractual right to
accelerate the repayment of all amounts then owed by the Company.
9
<PAGE>
THE COMPANY
GENERAL
The historical business of Harmony Holdings, Inc. is the production of
television commercials, which business continues to represent the preponderance
of its revenues. The Company has produced more than 2,500 commercials for
national advertisers, Fortune 500 companies, and well recognized product lines
such as Acura, Anheuser Busch, AT&T, Bank of America, Blue Cross, Cannon, Cap
Cities/ABC, Cellular One, Chrysler, Coca-Cola, Delta Airlines, Disney, Domino's
Pizza, Fox, General Mills, Gillette, General Motors, Hallmark, HBO, Hershey
Foods, Honda, JC Penney, K-Mart, Kellogg's, Kodak, Kraft Foods, McDonald's,
Nabisco, Nike, Nintendo, Nissan, Pepsi, Reebok, Sears, Sony, State Farm, and
Visa, among others. See "Business".
A small percentage of the Company's business is the production of music
videos through its operating subsidiary, The End, Inc., which also produces
television commercials. The production cycle for music videos is similar to that
of television commercials, but the budgets are generally smaller: $50,000 to
$100,000 and occasionally up to $1,000,000. The Company is also generally
involved in the post production phase of music video production which is not
typically the case in commercial production. The client for music videos is
usually the record label or the performer directly and not an advertising
agency. See "Business--Expansion into Ancillary Businesses--Music Videos".
The Company was incorporated under the laws of the State of Delaware on
August 5, 1991, as a wholly owned subsidiary of Ventura Entertainment Group Ltd.
("Ventura"). In connection with its formation and initial capitalization,
Ventura contributed all of the capital stock of Harmony Pictures, Inc.
("Harmony") and Melody Films, Inc. ("Melody") to the Company. Harmony and Melody
have been operating since 1979. In November 1991, the Company completed its
initial public offering of securities. As a result, Ventura's ownership was
reduced to approximately 59%. During the fiscal year ended June 30, 1995,
Ventura sold its remaining interest in the Company.
The Company's principal executive offices are located at 1990 Westwood
Blvd., Los Angeles, California 90025, and its telephone number is (310) 446-
7700. The Company conducts its operations through its wholly owned subsidiaries,
Harmony, Melody, The End Inc., Curious Pictures Corporation and Harmony Media
Communications Inc. On March 1, 1996 the Company's wholly owned subsidiary,
Velocity Film, Inc., ceased operations. Unless the context indicates otherwise,
the term the "Company" includes all of these subsidiaries.
PROPOSED ACQUISITION OF THE COMPANY
On April 18, 1996, the Company and Capital Media Group Limited ("Capital
Media") and Unimedia S.A. ("Unimedia") signed a letter of intent (the "Letter of
Intent") which provides for Capital Media and Unimedia to jointly acquire the
Company for a combination of cash and stock valued at approximately $21,000,000.
The Letter of Intent sets forth a purchase price for the Company of $3.50 per
share of its Common Stock. One-third of the consideration payable to
shareholders of the Company will be paid in cash, with the remaining two-thirds
payable in common stock of Capital Media. The value of the Capital Media common
stock to be issued in the transaction will be determined by reference to the
average closing price for the five trading days prior to the date of shareholder
approval. The proposed
10
<PAGE>
acquisition is subject to the satisfactory completion of due diligence review by
all involved parties, the execution of a definitive agreement and approval by
the directors and shareholders of both Capital Media and the Company.
Capital Media is an independent media holding company with interests in
emerging and developed European media markets. Its subsidiaries include ONYX
Television, an 18-hour-per-day music television station transmitting in Germany;
Blink T.V., a London-based producer and broadcaster of lifestyle programming at
large entertainment venues; and Tinerama, a Romanian-based print media group and
radio station operator. In addition, Capital Media is affiliated with AB
Productions ("ABP"), a leading French producer of television programming for the
European market. ABP, which holds a 12.6% stake in Capital Media, produces more
than 1300 hours of television programming per year. ABP also owns AB SAT
television, which recently launched eight satellite channels in France and is
expected to launch twenty additional channels in Europe via satellite and cable.
There can be no assurance that the proposed acquisition of the Company will
be completed or that such acquisition, if completed, will be effected in
accordance with the provisions of the Letter of Intent.
11
<PAGE>
PLAN OF DISTRIBUTION
The Company hereby offers: (i) 329,050 shares of Common Stock issuable upon
exercise of the Class C Warrants and (ii) 57,000 shares of Common Stock. The
57,000 shares of Common Stock are being offered for sale to the public by the
Selling Stockholders. The 329,050 shares that are issuable upon exercise of the
Class C Warrants and the 57,000 shares being offered are identical in all
respects to the Company's outstanding Common Stock. See "Selling Stockholders"
and "Description of Securities".
CLASS C WARRANTS
The holder of each Class C Warrant is entitled to purchase one share of
Common Stock at an exercise price of $2.31. At December 31, 1995, the Company
had 329,050 Class C Warrants outstanding. The Class C Warrants are exercisable
in full until July 15, 1996, provided that at such time a current prospectus
relating to the Common Stock underlying the Class C Warrants is in effect and
such Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws. The Class C Warrants may be exercised upon
surrender of the certificate therefor on or prior to the expiration or
redemption date at the offices of the Company's warrant agent, OTR Securities
Transfer Company, Portland, Oregon (the "Warrant Agent"), with the form of
"Election to Purchase" on the reverse side of the certificate filled out and
executed as indicated, accompanied by payment (in the form of certified or
cashier's check payable to the order of the Company) of the full exercise price
for the number of Class C Warrants being exercised.
Each Class C Warrant exercised will result in the holder of the Class C
Warrant receiving one share of the Company's Common Stock. Thus, up to 329,050
shares of Common Stock may be issued pursuant to the Registration Statement of
which this Prospectus forms a part.
SELLING STOCKHOLDERS
The securities offered hereby may be sold from time to time by the Selling
Stockholders. Alternatively, the Selling Stockholders may from time to time
offer such securities through underwriters, dealers or agents. The distribution
of securities by the Selling Stockholders may be affected in one or more
transactions that may take place on the over-the-counter market, including
ordinary broker's transactions, privately-negotiated transactions or through
sales of one or more broker-dealers for resale of such shares as principals at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Stockholders in connection with such sales of securities. The Selling
Stockholders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act, with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company cannot reasonably estimate the
number or amount of securities which will be sold by the Selling Stockholders
pursuant to this Prospectus.
At a time a particular offer of securities is made by or on behalf of a
Selling Stockholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered
12
<PAGE>
and the terms of the offering, including the name or names of any underwriters,
dealers or agents, if any, the purchase price paid by any underwriter for shares
purchased from the Selling Stockholder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged in
a distribution of the securities of the Company offered by this Prospectus may
not simultaneously engage in market-making activities with respect to such
securities of the Company during the applicable "cooling off" period (nine days)
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Stockholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation, Rule 10b-6 and 10b-7, in connection with
transactions in such securities, which provisions may limit the timing of
purchases and sales of such securities by the Selling Stockholders.
SELLING STOCKHOLDERS
The following table shows the names of the Selling Stockholders, the number
of shares of the Company's Common Stock beneficially owned by them and to be
sold by them under this Prospectus as of the date of this Prospectus. Certain of
such shares and other shares held by such Selling Stockholders not registered
for offering under this Prospectus may be or become eligible for sale under the
provisions of Rule 144 adopted by the Commission under the Securities Act. Any
such shares may be sold either under the Registration Statement of which this
Prospectus forms a part or under Rule 144.
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
------------------------------------ -----------------------------
NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES PERCENT OF
SELLING POSITION BENEFICIALLY COVERED BY BENEFICIALLY OUTSTANDING
STOCKHOLDERS WITH COMPANY OWNED THIS PROSPECTUS OWNED SHARES
- ------------------------------ ------------ ------------------ --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Alex Brown & Sons Incorporated * 4,000 4,000 0 **
Alex Moscowicz * 11,000 6,000 5,000 **
Arthur Edelman * 5,000 5,000 0 **
I Bibicoff, Inc.
Pension Trust Fund * 99,000 21,000 78,000 **
Paul Soll * 10,000 10,000 0 **
Philip Bibicoff * 12,000 4,000 8,000 **
Terri MacInnis Director of 2,000 2,000 0 **
Investor Relations
Warren D. Bagatelle * 55,000 5,000 50,000 **
</TABLE>
- ----------------------
* Denotes that such Selling Stockholder was not an executive officer, non-
executive employee or independent contractor or executive of the Company
within the last three years.
** Denotes less than one percent.
13
<PAGE>
USE OF PROCEEDS
The offering made hereby is essentially for the account of the holders of
the Class C Warrants and the Selling Stockholders, and unless certain of the
Class C Warrants are exercised, there will be no proceeds to the Company from
this offering. If all of the Class C Warrants are exercised, a total of
$760,105.50 would be received by the Company. There can be no assurance,
however, that any of such Class C Warrants will be so exercised. Any proceeds
received would be reduced by the expenses of this offering, estimated to be
approximately $____,000. See "Plan of Distribution" and "Description of
Securities".
Pending other application of the net proceeds, if any, the Company intends
to invest the net proceeds in short-term interest bearing obligations.
PRICE RANGE OF COMMON STOCK
Upon the completion of the Company's initial public offering in November
1991, its Common Stock began trading on Nasdaq SmallCap Market under the symbol
HAHO. The following table sets forth the high and low bid price per share of the
Common Stock for the periods indicated. The price for the Company's Common Stock
are as reported on Nasdaq in monthly reports provided to the Company by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR--1994; QUARTER ENDED BID BID
- -------------------------------- ------ ------
<S> <C> <C>
September 30, 1993 $6.250 $4.750
December 31, 1993 5.375 3.125
March 31, 1994 3.750 2.625
June 30, 1994 3.500 2.500
FISCAL YEAR--1995; QUARTER ENDED
- --------------------------------
September 30, 1994 3.750 2.750
December 31, 1994 3.500 2.880
March 31, 1995 3.750 2.690
June 30, 1995 4.190 3.750
QUARTER ENDED
- -------------
September 30, 1995 3.500 2.125
December 31, 1995 2.435 1.080
March 31, 1996 2.560 1.375
</TABLE>
On May 22, 1996, the closing bid and asked prices of the Common Stock were
$____ and $____, respectively. Bid and asked prices reflect inter-dealer prices,
without retail mark-up, mark-down or
14
<PAGE>
commission, may not necessarily represent actual transactions. On May 16, 1996,
there were 65 holders of record of the Common Stock.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends with respect to
its capital stock, and the current policy of the Board of Directors is to retain
earnings to provide for the growth of the Company. Consequently, no cash
dividends are expected to be paid on the Company's Common Stock in the
foreseeable future. Further, there can be no assurance that the proposed
operations of the Company will generate the revenues and cash flow needed to
declare a cash dividend or that the Company will have legally available funds to
pay dividends.
15
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in conjunction with the financial statements and notes related
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operation" included elsewhere in this Prospectus. The selected
financial data as of and for the five years ended June 30, 1995 have been
derived from the audited financial statements of the Company. The selected
financial data for the nine months ended March 31, 1996 and 1995 is derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. The results of operations for the nine
months ended March 31, 1996, are not necessarily indicative of the results that
may be expected for the entire fiscal year ending June 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------------------- -------------------------
1995 1994(1) 1993(2) 1992(3) 1991(4) 1996 1995
-------- -------- -------- -------- -------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Contract Revenue $61,227 $42,602 $24,786 $18,558 $10,776 $50,395 $46,458
Cost of Production 50,920 35,291 20,299 14,759 8,562 43,056 40,389
------- ------- ------- ------- ------- ------- -------
Gross Profit 10,307 7,311 4,487 3,799 2,214 7,339 6,069
Selling Expenses 2,808 2,223 1,518 465 368 2,272 1,996
Operating Expenses 7,161 6,286 5,940 3,005 2,226 5,054 3,429
Write off of abandoned projects 0 0 0 0 0 622 0
Litigation expense 486 0 0 0 0 200 486
Severance salaries 0 0 0 0 0 186 0
Depreciation and amortization 528 399 323 262 293 419 395
------- ------- ------- ------- ------- ------- -------
Income (Loss) from operations (676) (1,597) (3,294) 67 (673) (1,415) (237)
Interest income (expense), net (9) 23 88 25 (67) (174) 6
------- ------- ------- ------- ------- ------- -------
Income (Loss) before taxes (685) (1,574) (3,206) 92 (740) (1,589) (231)
Income tax expense 0 0 0 22 0 0 0
------- ------- ------- ------- ------- ------- -------
Net Income (Loss) $ (685) $(1,574) $(3,206) $ 70 $ (740) $(1,589) $ (231)
======= ======= ======= ======= ======= ======= =======
Net Income (Loss) per share $(0.12) $(0.30) $(0.84) $0.03 $(0.37) $(0.28) $(0.04)
Average shares outstanding 5,567 5,316 3,800 2,765 2,033 5,693 5,511
</TABLE>
(1) The Company has reclassified the following for June 30, 1994, to make the
financials comparable with June 30, 1995: $994,579 profit participation to
commercial directors has been reclassified from operating expense to cost of
sales; $837,923 salesman commissions has been reclassified from operating
expenses to selling expense; $1,385,065 in other selling expense has been
reclassified from operating expenses to selling expense; $936,520 credit
representing certain fees earned in excess of the related expenses has been
reclassified from operating expense to revenue.
(2) The Company has reclassified the following for June 30, 1993, to make the
financials comparable with June 30, 1994: $254,394 profit participation to
commercial directors has been reclassified from operating expense to cost of
sales; $509,292 salesman commissions has been reclassified from operating
expenses to selling expense; $1,009,138 in other selling expense has been
reclassified from operating expenses to selling expense.
(3) The Company has reclassified the following for June 30, 1992, to make the
financials comparable with June 30, 1993: $451,614 in other selling expense
has been reclassified from operating expenses to selling expense.
(4) The Company has reclassified the following for June 30, 1991, to make the
financials comparable with June 30, 1992: $289,923 in other selling expense
has been reclassified from operating expenses to selling expense.
16
<PAGE>
BALANCE SHEET DATA (AT END OF PERIOD)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------- MARCH 31,
1995 1994 1993 1992 1991 1996
------- ------- ------ -------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash $ 230 $ 663 $1,917 $1,268 $ 50 $ 62
Current assets 7,707 5,487 5,522 3,072 1,794 6,973
Goodwill, net (1) 3,181 3,393 3,611 3,560 3,638 3,022
Total assets 12,955 10,345 9,950 6,900 5,747 11,833
Current liabilities 6,196 3,931 4,325 1,826 3,006 6,601
Subordinated notes payable-Long Term 385 0 0 0 0 385
Total liabilities 6,581 3,931 4,325 1,826 3,063 6,986
Stockholders' equity 6,374 6,414 5,625 5,075 2,685 4,847
</TABLE>
- ---------------------
(1) The goodwill is primarily associated with the acquisition of Harmony and
Melody by Ventura. See Note 1 of "Notes to Consolidated Financial
Statements".
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is primarily engaged in the production of television commercials.
Contract revenues are recognized using the percentage of completion method.
Although the Company's revenues have increased dramatically in recent years,
due primarily to growth in the volume and diversity of projects undertaken by
the Company, the ratio of gross profits to revenues during such period has
declined. Management of the Company has instituted and is actively pursuing a
number of measures to increase production efficiencies and decrease operating
overhead in order to increase gross profits as a percentage of revenues and to
increase net income. The particular approaches or measures to increase
profitability include the following: (i) revision of contractual arrangements
with commercial directors to reduce the level of profit participation by such
directors with respect to individual commercial projects; (ii) increased
utilization of staff production personnel (as opposed to freelance personnel) to
reduce related costs of production; (iii) efforts to discourage the acceptance
of new projects on terms that are likely to result in low gross profit margins;
and (iv) a restructuring of sales commission arrangements to effect a sliding
scale reduction in such commissions that corresponds to reduced levels of
profitability for particular projects.
SEASONALITY
There is not a consistent pattern to the level of monthly business from one
year to the next. During the year ended June 30, 1995, revenue was the highest
during the third quarter which was consistent with the prior year. The Company
is not aware of any seasonal factors which may affect the comparability of the
results of operations as set forth below.
RESULTS OF OPERATIONS
Nine Months Ended March 31, 1996 as Compared with Nine Months Ended March 31,
1995
For the nine months ended March 31, 1996, revenues increased by approximately
8%, or $3,653,594 to $50,395,467 from $46,741,873 for the nine months ended
March 31, 1995. The increase in revenues is primarily attributable to a 40%, or
$4,825,000, increase in revenues by one of the Company's subsidiaries, offset by
a 6%, or $1,303,000, decrease in revenues by another subsidiary.
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 directors' fees. Cost of
production for the nine months ended March 31, 1996, increased by approximately
7%, or $2,667,268 to $43,056,478 from $40,389,210 for the nine months ended
March 31, 1996. Expressed as a percentage of revenues, cost of production for
the nine months ended March 31, 1996, was approximately 85% as compared to
approximately 86% for the nine months ended March 31, 1995, and resulted in a
gross profit percentage of approximately 15% and 14% for these periods,
respectively. The decrease in cost of production expressed as a percentage of
revenues and the
18
<PAGE>
resultant increase in gross profit for the nine months ended March 31, 1996, was
primarily due to management's continued efforts to increase the gross margin.
Selling expenses consist of sales commissions, advertising and promotional
expenses, travel and other expenses incurred in the securing of commercial
contracts. Selling expenses for the nine months ended March 31, 1996, increased
to $2,272,369 from $1,996,398 for the nine months ended March 31, 1995,
representing an increase of $275,971. Selling commissions increased by $14,874
while other selling expenses increased by $261,097. The increase in other
selling expenses is primarily attributable to a $153,000 increase in sample
reels and speculation pieces, a $45,000 increase in advertising expense and
$50,000 related to the two new subsidiaries.
Operating expenses consist of overhead costs such as office rent and
expenses, executive, general and administrative payroll, and related items.
Operating expenses for the nine months ended March 31, 1996 increased to
$5,054,417 from $3,428,795 for the nine months ended March 31, 1995,
representing an increase of $1,625,622. Approximately $944,000 relates to
subsidiaries that have been closed or are in the process of winding down. The
following account for the primary additional increases in operating expenses:
Salaries $210,000, Legal and accounting $190,000, Rent and miscellaneous office
expenses $195,000 and $60,000 related to bad debts incurred from receivables
with former employees and affiliates of the Company.
Litigation expense for nine months ended March 31, 1996, and 1995 relates
to the termination and settlement with a former officer of the Company. The
$200,000 expense at March 31, 1996, was due to a revision of an insurance
reimbursement receivable.
Interest expense for the nine months ended March 31, 1996, increased by
$146,338 to $178,120 from $31,782 for the nine months ended March 31, 1995. The
increase was due to the increased utilization of the bank line of credit.
Net income (loss) for the nine months ended March 31, 1996, and March 31,
1995, include losses of $1,735.643 and $286,077 related to subsidiaries that
have been closed or are in the process of closing.
Year Ended June 30, 1995 as Compared with Year Ended June 30, 1994
For the year ended June 30, 1995 revenues increased by approximately 44%,
or $18,625,239, to $61,226,818 from $42,601,579 for the year ended June 30,
1994. The level of revenues earned by the Company from the production of
television commercials is, to a large extent, dependent on the number and
availability of its commercial directors. During fiscal 1995, the Company
realized growth both within its acquired subsidiaries as well as those formed
during the last three years.
Cost of Production is directly related to revenues and includes all direct
costs incurred in connection with the production of television commercials
including film, crews, location fees and commercial directors' fees. Cost of
production for the year ended June 30, 1995 increased by approximately 44%, or
$15,629,256, to $50,920,332 from $35,291,076 for the year ended June 30, 1994.
Expressed as a percentage of revenues, cost of production for fiscal 1995 was
approximately 83%, the same as fiscal 1994, and resulted in a gross profit
percentage of approximately 17% for both years. The fact that cost of production
and gross profit remained steady for the year ended June 30, 1995 was primarily
due to management's continuing efforts to reduce costs and maximize its
purchasing power, countered by the increased competitive factors within the
commercial production industry.
19
<PAGE>
Selling expenses consist of sales commissions, advertising and promotional
expenses, travel and other expenses incurred in the securing of commercial
contracts. Selling expenses for the year ended June 30, 1995 increased to
$2,807,902 from $2,222,988 for the year ended June 30, 1994 representing an
increase of $584,914. Selling commissions increased by $680,505, while other
selling expenses decreased by $95,591.
Operating expenses consist of overhead costs such as office rent and
expenses, executive, general and administrative payroll, and related items.
Operating expenses for the year ended June 30, 1995 increased to $7,161,205 from
$6,285,979 for the year ended June 30, 1994 representing an increase of
$875,226. This increase was primarily attributable to: a $470,000 profit
participation included in salary expense relating to three profitable
subsidiaries; a $180,000 increase in travel and entertainment expenses relating
to the higher sales volume; a $100,000 increase rent expense relating to
expansion of Company facilities; and a $125,000 increase in other operating
expenses. The decrease in reorganization costs from the prior year was offset by
an increase in labor of $330,000 and a one time cost of $125,000 relating to the
reorganization of the accounting function.
Depreciation expense increased by $129,380 due to the increase in
depreciable assets and a one time write off of $62,428 in net book value of
assets due to the relocation of the Company's facilities.
The $486,050 in litigation expense is net of an insurance reimbursement of
$283,950. The majority of the $486,050 in litigation expense relates to an
arbitration with a former employee. The Company considers this cost unusual and
not in the ordinary course of business and does not believe that the outcome of
this matter will have a material adverse effect on the operations of the
Company.
Interest income increased $21,843 during fiscal 1995 due to a better cash
management program put in place during the fourth quarter of fiscal 1994
combined with a higher return on invested funds.
Interest expense increased $53,448 during fiscal 1995 relating to the
subordinated notes payable.
Year Ended June 30, 1994 as Compared with Year Ended June 30, 1993
For the year ended June 30, 1994 revenues increased by approximately 72%,
or $17,815,478, to $42,601,579 from $24,786,101 for the year ended June 30,
1993.
Cost of production is directly related to revenues and includes all direct
costs incurred in connection with the production of television commercials
including film, crews, location fees and commercial directors' fees. Cost of
production for the year ended June 30, 1994 increased by approximately 74% or
$14,992,235 to $35,291,076 from $20,298,841 for the year ended June 30, 1993.
Expressed as a percentage of revenues, cost of production for fiscal 1994 was
approximately 83% as compared to approximately 82% for fiscal 1993 and resulted
in a gross profit percentage of approximately 17% and 18% for these years,
respectively. The increase in cost of production expressed as a percentage of
revenues and the resultant decrease in gross profit for the year ended June 30,
1994 was primarily due to increased competitive factors which were somewhat
offset by management's continuing efforts to reduce costs.
Selling expenses consist of sales commissions, advertising and promotional
expenses, travel and other expenses incurred in the securing of commercial
contracts. Selling expenses for the year ended
20
<PAGE>
June 30, 1994 increased to $2,222,988 from $1,518,430 for the year ended June
30, 1993 representing an increase of $704,558. Selling commissions increased by
$328,631, while other selling expenses increased by $375,927.
Operating expenses consist of overhead costs such as office rent and
expenses, executive, general and administrative payroll, and related items.
Operating expenses for the year ended June 30, 1994 increased to $6,285,979 from
$5,939,717 for the year ended June 30, 1993 representing an increase of
$346,262. Included in operating expenses is a one time restructuring charge of
$440,000, consisting of lease termination, severance payments and the related
legal fees.
The approximate $65,000 decrease in net interest income in fiscal 1994 was
primarily due to lower interest earned on funds on hand and a reduced cash
balance available to invest.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended March 31, 1996 as Compared with Nine Months Ended March 31,
1995
As of March 31, 1996, the Company had working capital of $372,584,
including cash of $61,955, compared with $1,914.085 including cash of $220,251
at March 31, 1995. Cash used in operating activities for the nine months ended
March 31, 1996 increased approximately 129% or $1,100,689 to $1,949,281 from
$848,592 for the nine months ended March 31, 1995. The material increases in the
amount of cash used in operations were $1,357,266 increase in loss from
operations; $4,171,741 decrease in billed and unbilled accounts receivable; and
$4,105,828 decrease in accounts payable and accrued expenses. Cash used in
investing activities for the nine months ended March 31, 1996 decreased
approximately 50%, or $283,985, to $280,232 from $564,217 for the nine months
ended March 31, 1995. Cash provided by financing activities for the nine months
ended March 31, 1996 increased approximately $1,091,276 to $2,061,559 from
$970,283 for the nine months ended March 31, 1995. The material increase in the
amount of cash provided by financing activities consisted of a $523,724 decrease
in the proceeds from the issuance of stock, a $2,000,000 increase in borrowings
under the Company's bank line of credit agreement and a $385,000 decrease in
issuance of subordinated notes payable.
On May 10, 1995, the Company entered into a $3,000,000 asset based
revolving line of credit with a bank, with interest at the bank's prime rate
plus 1.0% per annum, collateralized by the assets of the Company. The bank prime
rate at March 31, 1996 was 8.50%. The agreement expires October 31, 1996.
Borrowing is based upon certain percentages of acceptable receivables. As of
March 31, 1996, the Company had $2,000,000 outstanding under the line. The loan
agreement has certain financial covenants, one of which is to maintain
$1,250,000 of net worth on a quarterly basis. As of March 31, 1996 the Company
was not in compliance with this requirement and the noncompliance was waived by
the bank.
To the extent that future revenues and related gross profits from the
Company's operations do not provide sufficient funds to offset operating costs,
the Company's present resources will decrease. The Company has entered into
various employment agreements with its commercial directors, salespeople and
corporate and subsidiary officers which obligate it to make minimum payments of
approximately $2,411,660 during the twelve months ending March 31, 1997. Certain
of these agreements provide for additional compensation based on revenues and
other items. Other agreements provide for additional compensation based on
certain defined operating profits. This additional compensation is payable
whether or not the Company has a profit. The Company has no material commitments
for capital expenditures.
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Based on the availability of the line of credit, subject to the qualifications
of the preceding paragraph, management believes that the Company's present cash
and other resources are sufficient for its needs for at least the next twelve
months.
Year Ended June 30, 1995 as Compared with Year Ended June 30, 1994
As of June 30, 1995 the Company had working capital of $1,510,959,
including cash of $229,909, compared to $1,556,493, including cash of $662,777,
at June 30, 1994. Cash used in operating activities for the year ended June 30,
1995, decreased approximately 79%, or $2,305,591, to $620,648 from $2,926,239
for the year ended June 30, 1994. The material decrease in the amount of cash
used in operations was due to an $888,808 decrease in loss from operations; a
$1,460,064 increase in billed and unbilled accounts receivable and a $2,624,064
increase in accounts payable and accrued expenses. Cash used in investing
activities for the year ended June 30, 1995 decreased approximately 2% or
$13,892 to $705,615 from $691,723 for the year ended June 30, 1994. Cash
provided by financing activities for the year ended June 30, 1995 decreased
approximately 62% or $1,470,160 to $893,395 from $2,363,555 for the year ended
June 30, 1994. The material decrease in the amount of cash provided by financing
activities was due to a $1,717,522 decrease in the proceeds from the issuance of
stock and a $385,000 increase in subordinated debt.
On May 10, 1995 the Company entered into a $3,000,000 asset based revolving
line of credit with a bank, with interest at the bank's prime rate plus 1.0% per
annum, collateralized by the assets of the Company. The bank's prime rate at
June 30, 1995 was 9.0%. The agreement expires October 31, 1996. Borrowing is
based upon certain percentages of acceptable receivables. There were no
borrowings outstanding as of June 30, 1995. The loan agreement has certain
financial covenants, one of which is to maintain profitability on a quarterly
basis. As of June 30, 1995 the Company was not in compliance with the
requirement and the noncompliance was waived by the bank.
To the extent that future revenues and related gross profits from these
operations do not provide sufficient funds to offset operating costs, the
Company's present resources will decrease. The Company has entered into various
employment agreements with its officers and others which obligate it to make
minimum payments of approximately $4,329,796 during the year ending June 30,
1996. Certain of these agreements provide for additional compensation based on
revenues and other items. Other agreements provide for additional compensation
based on certain defined operating profits. This additional compensation is
payable whether or not the Company has a profit. The Company has no material
commitments for capital expenditures and has not made any arrangements for
external sources of financing. Management believes that the Company's present
cash and other resources are sufficient for its needs for at least the next
twelve months.
Year Ended June 30, 1994 as Compared with Year Ended June 30, 1993
As of June 30, 1994 the Company had working capital of $1,556,493,
including cash of $662,777, compared to $1,196,864, including cash of
$1,917,184, at June 30, 1993. Cash used in operating activities for the year
ended June 30, 1994 increased approximately 28%, or $639,701, to $2,926,239 from
$2,286,538 for the year ended June 30, 1993. The material increase in the amount
of cash used in operations was due to a $1,631,391 decrease in loss from
operations; a $569,088 decrease in billed and unbilled accounts receivable; a
$2,530,037 decrease in accounts payable and accrued expenses and a $384,050
decrease in deferred income. Cash used in investing activities for the year
ended June 30, 1994 decreased approximately 16% or $129,360 to $691,723 from
$821,083 for the year ended June 30, 1993.
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<PAGE>
The material decrease in the amount of cash used in investing activities was due
to a $250,000 decrease in acquisition costs relating to the acquisition of The
End, Inc. Cash provided by financing activities for the year ended June 30, 1994
decreased approximately 37% or $1,393,052 to $2,363,555 from $3,756,607 for the
year ended June 30, 1993. The material decrease in the amount of cash provided
by financing activities was due to a $1,393,052 decrease in the proceeds from
the issuance of stock.
INFLATION
Management believes that inflation has not had a significant effect on the
Company's result of operations.
NEW ACCOUNTING STANDARDS
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of" and
SFAS No. 123 "Accounting for stock-based compensation". Neither SFAS No. 121 or
No. 123 is expected to have a material effect on the Company's financial
statements.
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<PAGE>
BUSINESS
GENERAL
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 director and the budgeted cost of the
commercial prepared by the production company. 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, including Leo Burnett Advertising, Foote, Cone & Belding, DBD Needham,
Grey Advertising, Young & Rubicam, J. Walter Thomson, McCann Erickson and
Chiat/Day, among others. One agency, Leo Burnett Advertising, accounted for more
than 15% and 13% of the total revenues of the Company during 1995 and 1994,
respectively. In the event that the Company were to lose its relationship with
this agency, the Company does not believe that the loss would have a material
adverse effect on its business.
In light of the importance of the directors in this industry, the Company
has worked to build a roster of approximately 26 directors with specialties in
varied broadcast advertising categories.
The Company has produced over 2,500 commercials for national advertisers,
Fortune 500 companies, and well recognized product lines such as Acura, Anheuser
Busch, AT&T, Bank of America, Blue Cross, Cannon, Cap Cities/ABC, Cellular One,
Chrysler, Coca-Cola, Delta Airlines, Disney, Domino's Pizza, Fox, General Mills,
Gillette, General Motors, Hallmark, HBO, Hershey Foods, Honda, JC Penney, K-
Mart, Kellogg's, Kodak, Kraft Foods, McDonald's, Nabisco, Nike, Nintendo,
Nissan, Pepsi, Reebok, Sears, Sony, State Farm, and Visa, among others.
COMMERCIAL TELEVISION PRODUCTION INDUSTRY
The television commercial production industry is a highly fragmented $2
billion industry, with most of the Company's competitors being relatively small
operations. There is no one commercial production company or group of companies
that dominates the industry. Harmony Holdings, Inc. believes it may be the
largest company in the industry; however, being the only public company in the
industry, there is no reliable source of information with which to make an
accurate comparison. The leaders in the business are, in general, larger
companies like the Company and companies such as: Propaganda Films, Partners
USA, Ridley Scott Associates (RSA) and Industrial Light and Magic.
Nationally, the advertising and commercial production industry has recently
experienced a dramatic increase in the number of markets for television
commercials. At the same time, the television commercial production industry has
experienced shrinking profits as a direct result of pressure by the ad agencies
on profit margins.
The advertisers have become more aware of what the costs of production are
and are tightening the reins on ad agency budgets. In turn, the ad agencies are
passing on the budget squeeze to the production companies. Ad agencies are
demanding more efficient production in order to get the most for the
advertiser's money. The combination of competitive pressures from other
television commercial production companies and cost saving efforts by
advertisers have caused a reduction in the "mark-up"
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(also known as the production fee) and gross profit margin in the industry from
a traditional mark-up of 30% to a recent average of 25% to 28%.
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 (pre-
production and wrap, crew labor, location and travel, props, wardrobe, studio
rental, set construction, equipment rental, raw film stock and development,
director's fees and insurance) and indirect costs (the production company's fee,
talent and editorial post-production).
The bid mark-up is based on a percentage of direct costs excluding director
fees and insurance. The bid mark-ups are typically in the range of 25-28% which
are down from 28-30% over the past several years and down from 30-32% of five
years ago. According to the American Association of Advertising Agencies, Inc.
Survey dated June 1995, the average mark-up charged by production companies has
declined over the last decade from 35% to approximately 28% in 1995.
Gross profits are affected by the original bid mark-up and the efficiencies
of each production. The gross profit as a percentage of total revenue on a 28%
mark-up equates to approximately 16.5% gross profit before director
participations. After director participations the gross profit is approximately
13-15%.
The above factors have led to cost cutting, mergers of commercial
production companies and the cessation of operations by some commercial
production companies. The company has instituted measures to increase production
efficiencies and decrease operating overhead in order to increase its gross
profit margins as a percentage of revenues under the existing market conditions.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -General."
INCREASE IN BREADTH OF EXPERIENCE OF COMPANY'S DIRECTORS
Historically, the Company has increased the breadth of experience of the
Company's directors by expanding the number of directors who are associated with
the Company by forming and building new commercial production companies, each
built around key management and commercial directors. Management has attempted
to employ directors who fill genre gaps such as table top items (i.e., food,
packaged goods, and small items), dance and music, cosmetics, fashion and
comedy, rather than directors who duplicate existing areas of expertise. By
increasing the number of directors associated with the Company and by increasing
the breadth of experience of the Company's directors, the Company increases the
types of commercials that the Company is able to produce. This enhances the
Company's ability to bid on entire advertising campaigns consisting of
commercials in many advertising genres as opposed to bidding on just individual
commercials within a campaign.
The Company attracts and retains commercial directors by offering such
directors the opportunity to work in an organization with a highly effective
sales force and a high-quality staff of executive producers and back-office
support. The Company offers directors the ability to work in an environment that
fosters creativity by relieving directors of the worry and burden of running a
business or financing the projects on which they work. The Company also provides
directors with a measure of financial stability that traditional, independent
operations are unable to match. The director's fees payable by the Company for
specific commercial projects tend to fall within the range of $5,000 to $15,000
per shooting day.
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EXPANSION INTO ANCILLARY BUSINESSES
Music Videos
The Company is in the music video production business through its
subsidiary, The End, Inc. Currently, the Company does a small percentage of its
business in music videos. The production cycle for music videos is similar to
that of television commercials, but the budgets are generally smaller: $50,000
to $100,000 and occasionally up to $1,000,000. The Company is also generally
involved in the post production phase of music video production which is not
typically the case in commercial production. The client for music videos is
usually the record label or the performer directly and not an advertising
agency.
Infomercials
During January 1995, the Company entered the infomercial business through a
new subsidiary, Harmony Media Communications, Inc. Infomercials, including
interactive commercials, use a longer time format as a vehicle for selling and
demonstrating products and services. The average half-hour infomercial costs
between $250,000 and $1,000,000 to produce and takes approximately three months
to complete through post production. The production of infomercials currently
accounts for an extremely small percentage of the Company's business.
MARKETING STRATEGY
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. The "spots", as they are
called in the business, are placed by the advertiser through its advertising
agency.
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.
The Company's subsidiaries' 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 and other regional markets.
Like the commercial directors, most sales personnel work exclusively for a
subsidiary out of offices located in Los Angeles, New York, Chicago and Dallas.
The Company also employs independent sales representatives on a select basis.
To sell the commercial director's work, the sales staff uses as its primary
tool the commercial director's reel. This reel is a visual "resume" containing
samples of a particular director's work (most frequently in the form of
commercials) demonstrating the director's creativity and experience. Several
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reels are developed by each company (company reels) featuring its commercial
directors and highlighting different creative areas and subject matter. These
reels are consistently updated.
The companies also advertise in trade publications on an occasional basis
to maintain visibility among advertisers and advertising agencies and to
publicize specific information such as additions to the directorial roster,
completion of a significant commercial, or the recognition of awards and
achievements.
The marketing of music videos is done by The End, Inc. and is achieved
through its very specialized expertise. Music videos are marketed directly to an
individual artist and/or record company. The End, Inc. has the reputation and
the relationships from which the business is derived.
THE MAKING OF A COMMERCIAL
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. The
creation of music videos is divided into similar stages, except most music video
contracts include post production.
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. 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
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
director and his 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 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. The time frame from submission of a budget to
completion and delivery of a commercial usually ranges from three weeks to six
weeks.
A final bid is then submitted to the agency. The bid includes 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 director's ideas about how the commercial would be
shot, the bid submitted by the production company, the reputation of the
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 director to produce
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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. Typically, for a one spot commercial, principal
photography will last one to two days.
Throughout the shooting process, agency personnel approve each scene as
shot.
The commercial is shot on motion picture film which is 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. Whereas the commercial director may or may
not be an active part of the post production process, the director of music
videos does take on the post production responsibility.
Most often the agency independently edits the commercial. The production
company 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.
The post production phase for music videos is more akin to movie production
then commercial production as relates to the involvement of the director. The
director plays an active role in the complete process, delivering to the artist
or record company a complete and totally finished product.
FINANCING THE PRODUCTION OF COMMERCIALS
The bid submitted to the client takes one of three forms: a "cost plus
fixed-fee" bid, a "cost plus" bid or a "firm" bid. If a commercial is produced
within the framework of a "firm" bid, the production company is responsible for
variations within the budget. If the commercial is filmed under a "cost
plus/fixed-fee" bid, production costs are charged to the client as incurred
within the limits of the budget and the production company receives a
predetermined fixed fee for its work. If the commercial is filmed under "cost
plus" bid, production costs are charged to the client as incurred within the
limits of the budget and the production company receives a percentage of the
final costs for its work.
Despite the differences in the structure of the forms of bid, the risk of
cost overages to the Company of a "firm" bid as opposed to a "cost plus/fixed-
fee" bid or a "cost plus" bid are not substantially different because in each
case the Company is responsible for unapproved cost overages that exceed the
budget. During fiscal 1995, approximately 92% of the Company's television
commercial productions were "firm" bid and approximately 8% were "cost
plus/fixed-fee" bid or "cost plus".
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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 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.
PROPERTIES
The Company leases the following properties:
Harmony Holdings, Inc. (Office)
Harmony Media Communications, Inc. (Office)
1990 Westwood Blvd., Suite 310
Los Angeles, Ca. 90025
(310) 446-7700
Harmony Pictures, Inc. - Los Angeles (Production facility/Office)
6806 Lexington Ave.
Hollywood, Ca. 90038
(213) 960-1400
Harmony Pictures, Inc. - New York (Office)
The End, Inc. - New York (Office)
119 Fifth Avenue, 6th Floor
New York, NY 10003
(212) 475-7400
Curious Pictures Corp. (Production facility/Office)
440 Lafayette Street
New York, NY 10003
(212) 966-1020
Curious Pictures Corp. (Production facility)
48 Great Jones Street
New York, NY 10003
(212) 966-1020
The End, Inc. - Los Angeles (Production facility/Office)
8060 Melrose Ave., 4th Floor
Los Angeles, Ca. 90046
(213) 782-9000
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The Company also leases storage facilities in New York, New York;
Hollywood, California; Los Angeles, California; and Sun Valley, California.
The Company believes that its current facilities are sufficient for its
immediate needs.
EMPLOYEES
As of February 15, 1996, the Company employed sixty-seven persons on a
full-time basis, seven of whom were officers or other senior executives. The
Company also had twenty-four directors of commercials under contract, some of
whom were independent contractors. Additionally, ten salespersons worked for the
Company either as employees or independent contractors. The Company does not
anticipate any material change in the number of its full-time employees in the
near future. 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, Screen Actors Guild
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. 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
accurately determinable. Industry strikes in the future by members of these
unions could delay or disrupt the Company's activities. Currently, none of the
Company's employees are represented by these or any other labor unions.
COMPETITION
The television commercial production industry is a highly fragmented $2
billion dollar industry, with most of the Company's competitors being relatively
small operations. The Company believes that its large director roster with its
range of creative ability, expertise and wide experience coupled with the
Company's reputation, ad agency relationships and financial strength, provide
the Company with a competitive edge.
Due to the fragmentation of the competition in the industry, it is possible
for the Company to increase market share even if the market should contract.
Since the market is approximately $2 billion, with no company currently having
more than a 3% share, there is potential for significant growth. To realize this
growth the Company will continue to diversify into exploitable arenas as they
develop.
There is no one commercial production company or group of companies that
dominates the industry. Harmony Holdings, Inc. believes it may be the largest
company in the industry; however, being the only public company in the industry,
there is no reliable source of information with which to make an accurate
comparison. The leaders in the business are, in general, larger companies like
Harmony Holdings, Inc. such as: Propaganda Films, Partners USA, Ridley Scott
Associates (RSA) and Industrial Light and Magic.
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LEGAL PROCEEDINGS
While there are no material lawsuits pending or, to the Company's
knowledge, threatened against the Company, the Company terminated its President
and Chief Executive Officer on January 19, 1996, pursuant to his contract. The
Company has been negotiating a settlement with respect to this matter and
expects a resolution by no later than June 21, 1996.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of
the Directors and executive officers of the Company at February 22, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- ------------------------------------------------
<S> <C> <C>
Harvey Bibicoff 56 Chairman of the Board, Chief Executive Officer
and Director
Brian Rackohn 36 Chief Financial Officer, Secretary
Jonathan Miller 48 Director and President of Harmony Pictures, Inc.
Stephen Oakes 40 President of Curious Pictures, Inc.
Ivan Molomut 43 President of Velocity Film, Inc.
Elizabeth Silver 34 President of The End, Inc.
Ivan Berkowitz 49 Director
Harry Shuster 60 Director
</TABLE>
Harvey Bibicoff has served as Chief Executive Officer since January 19,
1996 and as Chairman of the Board of Directors and as a director of the Company
since August 1991. Mr. Bibicoff served as the Chairman of the Board, Chief
Financial Officer, Secretary and as a director of Ventura from May 1988 through
April 1995. From 1989 until March 1995, he served as an officer and director of
The Producers Entertainment Group Ltd., a subsidiary of Ventura whose stock is
traded on Nasdaq as "TPEG". Since 1981, Mr. Bibicoff has been the sole
shareholder of Bibicoff & Associates, Inc., a financial consulting firm that is
engaged in the representation of public companies in their relationships with
the investment banking and brokerage communities. Mr. Bibicoff received a
Bachelor of Sciences degree from Bowling Green State University in 1960 as a
business and finance major and a J.D. degree from Columbia University of Law in
1963. He was previously a member of the New York State Bar.
Brian Rackohn has been the Chief Financial Officer of the Company since
March 1994 and Secretary since December 1, 1995. Previously, Mr. Rackohn served
five years as the General Manager and Chief Financial Officer of Superior Stamp
& Coin Co., Inc. of Beverly Hills, California. Mr. Rackohn is a California CPA
(December 1984) and spent seven and one-half years in public practice, including
being employed by the national accounting firm of Deloitte & Touche. Mr. Rackohn
received a Bachelor of Science degree in business administration with an
emphasis in accounting from California State University Northridge in 1982. Mr.
Rackohn is a member of the California Society of CPA's and the American
Institute of CPA's.
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Jonathan Miller has been a Director of the Company since February 1994 and
has been President of Harmony since August 1993. From August 1992 to May 1993,
he was Senior Executive Producer of Harmony Pictures, Inc. In 1986, Mr. Miller
founded Image Point, a division of the Cannell Studios, and served as its
President through July 1992. In those six years, Mr. Miller built Image Point
into one of the largest commercial production companies in the United States. In
his 20-year career, Mr. Miller has had experience in both the agency and
production areas. He produced for agencies, including Foote, Cone & Belding and
Leo Burnett, and was executive producer for companies, including Summerhouse
Films, Earl Rath and Associates, and Jenkins, Covington, Newman, Rath Inc.
Stephen Oakes has been President of Curious Pictures, Inc. since January
1993. Prior to that, Mr. Oakes founded Broadcast Arts in 1981. He has directed
over 250 mixed-media commercials, was creative director and producer for the
original season of "Pee-Wee's Playhouse" for CBS, and was designer, director
and/or producer of on-air graphics and program openings for networks and cable
groups, including CBS, MTV, HBO, Cinemax and Showtime.
Ivan Molomut founded Velocity Film in 1992. As Executive Vice
President/Executive Producer, he co-ran the commercial production company until
1995 when he was promoted to President and given full responsibility for its
operations. Mr. Molomut began his career in advertising and production in 1976
at Cadwell Davis Savage where he served as an art director/executive producer.
After nine years on the advertising agency side, he moved over to the production
company side of the business at Close-Up Productions as head of sales, serving
in that capacity for a year before moving to Paisley Productions as executive
producer/head of sales, while running its New York office. Four years later, he
went to Image Point Productions as executive producer/head of sales, a post he
held for four years until founding Velocity Film.
Elizabeth Silver has been President of The End, Inc. since April 1993. Ms.
Silver founded The End, Inc. along with The End's Vice President and Senior
Executive Producer, Luke Thornton, in March 1991. Previously, Ms. Silver and Mr.
Thornton headed several major production companies' music video divisions. Ms.
Silver and Mr. Thornton each have over a decade of musical film production and
programming experience. They have produced over 400 music videos, long-form home
video, television specials, documentaries and a feature film. Their efforts have
been awarded numerous honors, including MTV Music Video Awards for Best
Conceptual Video, Best New Artist and Billboard Award for Best Video.
Ivan Berkowitz has served as Managing General Partner of Steib & Company,
an investment partnership based in New York, New York, since 1993. In addition,
Mr. Berkowitz acts as President of Great Court Holdings Corporation and is
Chairman of Migdalei Schekel, also investment companies, located in New York and
Tel Aviv, respectively, positions which he has held since 1989 and 1990,
respectively. Mr. Berkowitz is also a Director of Polyvision Corp., a company
engaged in the information display, and Propierre I, a Paris, France, mutual
fund.
Harry Shuster has been Chairman of the Board, President and Chief Executive
Officer of United Leisure Corporation, a publicly-traded company, for over 20
years. Mr. Shuster also acts as an independent consultant and as chairman of the
board, president and chief executive officer of United Restaurants, Inc., a
publicly-traded restaurant owner-operator company founded in 1993, whose offices
are located in Los Angeles, California. In 1990, Lion Country Safari, Inc.--
California, a subsidiary of United Leisure Corporation, in connection with major
litigation with its landlord, was forced to seek protection under the United
States Bankruptcy Code by the filing of a Petition for Reorganization under
33
<PAGE>
Chapter 11 of such Code. By filing the Petition, the subsidiary was able to
protect its assets from the claims of the landlord and finally obtained a jury
verdict in excess of $42 million against the landlord. A new trial of this
matter has been ordered, but the Petition for Reorganization has been dismissed
by stipulation between the parties.
Directors of the Company are elected to an annual term that expires at the
Company's annual meeting of stockholders. The underwriter of the Company's
initial public offering has the right to nominate one director. If the
underwriter does not exercise this right, it has the right to allow an
individual to observe the meetings of the Board of Directors. There are no
family relationships between any of the officers and Directors.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or awarded to the
Chief Executive Officer and each of the four most highly compensated executive
officers of the Company whose aggregate cash compensation exceeded $100,000 for
all services rendered to the Company and its subsidiaries in its fiscal years
ended June 30, 1995, 1994 and 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
FISCAL YEAR SALARY BONUS OTHER OPTIONS/SARS
NAME AND PRINCIPAL POSITION ENDED AMOUNT AMOUNT AMOUNTS (NUMBER)
- ------------------------------------ ----------- --------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
Gary Horowitz, CEO(1) 1995 $302,500 $25,000 $ -- 150,000
1994 213,000 -- 90,000(2) 250,000
1993 -- -- -- --
Harvey Bibicoff, Chairman(3) 1995 165,288 -- -- --
1994 170,313 -- -- 250,000
1993 -- -- --
Jonathan Miller 1995 302,077 20,000 100,000
President, Harmony Pictures, Inc. 1994 108,200 -- -- --
1993 182,692 -- -- --
Brian Rackohn, CFO, Secretary 1995 101,923 -- -- --
1994 35,019 -- -- 25,000
</TABLE>
- ----------------------
(1) On January 19, 1996, the Company terminated Mr. Horowitz.
(2) Payment for consulting services prior to becoming CEO.
(3) On January 19, 1996, Mr. Bibicoff became the interim CEO of the Company as a
result of Mr. Horowitz's termination.
Stock Option Grants in Fiscal Year ended June 30, 1995. The following table
contains information concerning the grant of stock options under the Stock
Option Plan to the Named Executive Officers in the fiscal year ended June 30,
1995:
34
<PAGE>
STOCK OPTIONS/GRANTS IN FISCAL YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- --------------------------------------------------------------------------- ---------------------
% OF TOTAL
OPTIONS
OPTIONS GRANTED IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- -------- ----------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gary Horowitz 150,000 28% $3.00 12/15/99 $125,000 $275,000
Jonathan Miller 100,000 18% $3.00 07/15/99 $ 83,000 $183,000
</TABLE>
Stock Option Exercises in Fiscal Year ended June 30, 1995 and Option Values at
June 30, 1995. The following table provides information on the Named Executive
Officers' unexercised options at January 25, 1995. None of the Named Executive
Officers exercised any options during the fiscal year ended June 30, 1995:
STOCK OPTION VALUES AT JUNE 30, 1995
<TABLE>
<CAPTION>
EXERCISABLE (E)
UNEXERCISABLE (UE)
---------------------------------
NUMBER OF VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
NAME AT FY-END (#) AT FY-END ($)
---- ------------ ------------
<S> <C> <C>
Gary Horowitz 174,000 (E) 0 (E)
275,000 (UE) 0 (UE)
Harvey Bibicoff 275,000 (E) 0 (E)
Jonathan Miller 50,000 (E) 0 (E)
50,000 (UE) 0 (UE)
Brian Rackohn 12,500 (E) 0 (E)
12,500 (UE) 0 (UE)
</TABLE>
COMPENSATION OF DIRECTORS
No fees are paid to members of the Board of Directors of the Company who
are also officers or employees of the Company for their services as members of
the Board of Directors. In the fiscal year ended June 30, 1995, the Company
issued 25,000 options to purchase the Common Stock of the Company to its
"outside" directors, Mr. Shuster and Mr. Berkowitz, for their services as
members of the Board of
35
<PAGE>
Directors during that period. It is the policy of the Company to reimburse all
Directors for reasonable travel and lodging expenses incurred in attending
meetings of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company currently has no compensation committee or other board
committee performing equivalent functions. Mr. Horowitz and Mr. Bibicoff, both
of whom were officers and employees of the Company, participated in
deliberations of the Board of Directors of the Company concerning executive
officer's compensation during the fiscal year ended June 30, 1995.
EMPLOYMENT AGREEMENTS
On July 1, 1994, Jonathan Miller entered into a two-year employment
contract with the Company, which expires on June 30, 1996. Under the agreement,
Mr. Miller earns a salary of $250,000 and received a $20,000 signing bonus.
Additionally, he was granted five-year stock options to purchase 100,000 shares
of the Common Stock at an exercise price of $3.00 per share. Mr. Miller has a
bonus plan in which he will be paid a bonus of 15% of the pre-tax profits of
Harmony Pictures if the pre-tax profits exceed $250,000, and 20% if they exceed
$500,000.
On December 1, 1995, Mr. Rackohn entered into a one year employment
contract with the Company which expires on December 31, 1996. Under the
contract, Mr. Rackohn earns a salary of $123,800.
On May 2, 1994, Mr. Bibicoff entered a four year employment contract with
the Company, which expires on June 30, 1998, unless extended, based on the
contracted provisions. Mr. Bibicoff earns a salary of $165,000 and was granted
five-year options to purchase 250,000 shares of the Company's Common Stock at an
exercise price of $2.50 per share.
Mr. Horowitz was employed under an agreement that was set to expire on June
30, 1997. Mr. Horowitz earned a salary of $325,000 per year, received a $25,000
bonus. On January 19, 1996, the Company terminated Mr. Horowitz as its President
and Chief Executive Officer.
STOCK OPTIONS
Stock Option Plan
The Company has a Stock Option Plan, which was adopted on August 7, 1991,
and amended at the 1996 Annual Meeting of Shareholders in December 1995. 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 or its subsidiaries 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 up to 3,250,000 shares of the
Common Stock. The Stock Options Plan authorized the grant of options to
purchasers of Common Stock intended to qualify as incentive stock options
36
<PAGE>
("Incentive Options") under Section 422 of the Code, and the grant of options do
not qualify ("Non-Qualified Options") as incentive stock options under Section
422 of the 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 and conditions 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, directors and consultants of the Company or its
subsidiaries, and individual or entities subject to an acquisition or management
agreement with the Company.
The option 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 in the case of Incentive Options and not less than 85% of the fair
market value of the shares on the date of grant in the case of Non-Qualified
Options granted to employees. 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 the Company or 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 director of otherwise affiliated with
the Company (the "Termination"), the option expires 90 days after such
Termination. Notwithstanding the foregoing, in the event of Termination due to
the optionee's death or incapacity, the option 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 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, including delivery
of a full recourse promissory note, delivery of shares of Common Stock already
owned by the options or delivery of other property. Unless terminated earlier,
the Stock Option Plan will terminate on August 7, 2001.
As of December 31, 1995, the Company had granted options under the Stock
Option Plan at exercise prices ranging from $2.00 to $6.00 per share to acquire
a total of 2,001,800 shares of Common Stock, of which 80,300 have been exercised
and 540,400 are currently exercisable.
37
<PAGE>
The following table contains information concerning the Stock Option Plan
for the years ended June 30, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
INCENTIVE
STOCK
OPTIONS 1995 1994 1993
------- --------- -------
<S> <C> <C> <C>
Options Granted 375,500 1,300,550 613,650
Options Exercised 20,550 59,750 0
Options Exercisable 540,400 273,150 117,500
</TABLE>
Other Stock Options
The Company has also granted an aggregate of 1,076,000 other stock options
which expire through March 1, 1998, and are exercisable at prices ranging from
$2.00 to $5.75 per share, of which 491,500 have been exercised and 85,000 are
exercisable. None of these options were granted pursuant to the Stock Option
Plan.
Activity for the years ended June 30, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Options Granted 166,500 743,000 787,000
Options Exercised 0 491,500 0
Options Exercisable 85,000 145,000 215,000
</TABLE>
38
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of the
Company beneficially owned as of March 19, 1996, by: (i) each person who
beneficially owns more than five percent of the Company's Common Stock; (ii)
each Director and Named Executive Officer of the Company as that term is defined
by Rule 402(a)(3); and (iii) all executive officers and Directors of the Company
as a group. Except as noted, the person named as sole voting and dispositive
power over the total number of shares beneficially owned:
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND NATURE OF PERCENTAGE
ADDRESS OF BENEFICIAL OF OUTSTANDING
BENEFICIAL OWNER (1) OWNERSHIP (2) COMMON STOCK
- -------------------- ---------------- ---------------
<S> <C> <C>
Harvey Bibicoff 1,060,000(4) 18.6%
Gary Horowitz (3) 312,500(4)(5) 5.4%
Jonathan Miller 100,000(4) 1.7%
Brian Rackohn 25,000(6) 0%
Ivan Berkowitz 25,000(6) 0%
Harry Shuster 25,000(6) 0%
All officers and Directors as a group
(6 persons) 1,547,500(6) 27.1%
</TABLE>
- -------------------
(1) The address of all executive officers and Directors is 1990 Westwood
Boulevard, Suite 310, Los Angeles, California 90025, except for Mr.
Horowitz, whose address is 13032 Sky Valley Road, Los Angeles, California
90049.
(2) Except as noted below, beneficial owners of Common Stock possess sole voting
and investment power with respect to the shares listed opposite their names.
(3) On January 24, 1996, the Company terminated Mr. Horowitz as its President
and Chief Executive Officer. On January 30, 1996, Mr. Horowitz resigned from
the Board of Directors of the Company.
(4) Consists of 300,000 immediately exercisable options for Mr. Horowitz,
275,000 immediately exercisable options for Mr. Bibicoff and 100,000
immediately exercisable options for Mr. Miller.
(5) Mr. Horowitz's 300,000 options shall become void and of no further force and
effect 30 days after his termination.
(6) Consists of immediately exercisable options. Does not include options to
purchase Common Stock that are not immediately exercisable held by the
following persons: Mr. Rackohn--25,000; Mr. Horowitz--150,000; Mr. Miller--
50,000; Mr. Oakes--75,000.
39
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An employment contract with one of the Company's former officers provided
for additional compensation based on contract revenues. During the year ended
June 30, 1993, $135,000 was earned pursuant to these provisions. In June 1993,
the Company and this officer agreed to terminate this employment agreement. At
June 30, 1993, the Company accrued the termination settlement of $436,860, which
was subsequently paid to this officer. In connection with this agreement and
upon payment of this amount, this officer exercised an aggregate of 355,000
stock options and paid the Company $960,000.
During 1994, the Company entered into an informal arrangement with Ventura
to produce an infomercial. As of June 30, 1995, the project had not been
completed and costs of approximately $184,000 are included under the line item
in "other assets" on the Company's consolidated balance sheet.
On February 25, 1994 (amended on April 8, 1994), the Company entered into a
revolving line of credit arrangement with Ventura. The amount of the note was
$700,000 and bore interest at 8% per annum. A $20,000 commitment fee was paid to
the Company. On August 17, 1994, the note was paid in full.
On April 15, 1994, the Company entered into an additional revolving line of
credit arrangement with Ventura. The amount of the note was $250,000 and bore
interest at 8% per annum. A $5,000 commitment fee was paid to the Company for
the note and was paid in full on May 12, 1994.
In June 1993, the Company and Mr. Stuart Gross (then President and Chief
Executive Officer of the Company) agreed to terminate Mr. Gross' employment
agreement. Pursuant to an agreement dated August 1, 1993, the Company paid Mr.
Gross $436,860 representing the amount he would have received for the unexpired
term of the employment agreement and Mr. Gross exercised stock options that he
owned for an aggregate of 355,000 shares of the Company's Common Stock and paid
the Company $960,000. Concurrently with the execution of this agreement, Mr.
Gross resigned as an officer and Director of the Company.
In connection with its acquisition of Harmony, Ventura had agreed to make
additional payments to Mr. Lieberman of up to $400,000 based on certain future
billing of Harmony. By June 30, 1992, all of these payments had been earned and
paid by Harmony. Ventura agreed to reimburse Harmony for amounts so paid on or
before April 1, 1994. This obligation, which aggregated $325,000 at June 30,
1992 plus interest thereon at the annual rate of 10% was secured by 108,000
shares of Harmony's common stock owned by Ventura. Ventura's obligation to
Harmony was nonrecourse and, if Ventura had failed to make the required payment,
Harmony would have been entitled solely to such 108,000 shares of common stock
with no additional obligation of Ventura. As of June 30, 1993, Harmony agreed to
cancel all amounts due from Ventura to Harmony (which aggregated approximately
$475,000 including the nonrecourse notes and interest thereon) as consideration
for the certain tax losses received by Harmony as a result of Harmony's
inclusion in Ventura's consolidated federal income tax returns for 1990 and
1991. Subsequent to Harmony's initial public offering in November 1991,
Ventura's ownership of Harmony was reduced to below 80%. As a result, tax year
1991 was the last tax year for which Harmony could be included in Ventura's
consolidated federal income tax returns. Since Harmony and Ventura could no
longer file consolidated tax returns, the tax laws require an allocation of
Ventura's tax loss carryforwards between Ventura and Harmony. As result of these
tax provisions, Ventura was required to allocate to Harmony for tax years 1990
and 1991, tax losses of Ventura and its subsidiaries
40
<PAGE>
of $1,788,781 in excess of those that Harmony would have had if it had filed tax
returns separate from Ventura for those tax years. Conversely, Ventura therefore
lost $1,788,781 of tax loss carryforwards aggregating $1,788,781 because these
tax loss carryforwards have a remaining term of thirteen years, Harmony's
management believes it can utilize these tax loss carryforwards in less than
thirteen years, the tax loss carryforwards represent a benefit that Harmony
would not have received if it had not filed consolidated returns with Ventura.
Ventura could not have repaid its obligations to Harmony unless Ventura sold
some of the shares of Harmony stock that are owned by Ventura, and the
obligations were nonrecourse therefore, Harmony's sole recourse in the event of
a default by Ventura would have been to foreclose against the 108,000 shares of
Harmony stock that secured these obligations. For purposes of this cancellation
of debt, the $1,788,781 of tax loss carryforwards were valued at approximately
$457,000 based on an assumed tax savings of $608,000 assuming a 34% federal tax
rate would be applicable to Harmony and applying a 25% discount to the assumed
tax savings of $608,000 in light of Harmony's inability to use the tax loss
carryforwards during the then current tax year. Since there is no assurance that
Harmony will ever be able to utilize the tax loss carryforwards, Harmony wrote-
off the value of the tax loss carryforward rather than carry such value on its
books.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's authorized capital stock includes 20,000,000 shares of Common
Stock, $.01 par value per share. As of March 19, 1996, there were 5,693,198
shares of Common Stock outstanding.
The holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by the Board of Directors out of legally available
funds. However, the current policy of the Board of Directors is to retain
earnings for the operation and expansion of the Company. See "Dividend Policy".
The holders of Common Stock are entitled to one vote per share on all matters
submitted to stockholders for a vote. Upon liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets of the Company which are legally available for distribution, after
payment of or provision for all debts and liabilities. The holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the Common Stock offered hereby will
be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's authorized capital stock includes 10,000,000 shares of
Preferred Stock, $.01 par value per share. As of the date of this Prospectus,
the Company had no shares of Preferred Stock outstanding. The Board of Directors
has the authority, without stockholder approval, to issue the Preferred Stock in
one or more series and to fix the relative rights and preferences thereof. The
terms of such Preferred Stock could include the right to vote, separately or
with any other series of Preferred Stock, on any proposed amendment to the
Company's Certificate of Incorporation or any other proposed corporate action,
including business combinations and other transactions. Such rights could
adversely affect the voting power of the holders of Common Stock. The Board of
Directors does not presently contemplate the issuance of any Preferred Stock
except in connection with the acquisition of other television commercial
production companies or ancillary businesses. However, the Company has not
identified any potential
41
<PAGE>
candidates for acquisition. In addition, the ability of the Company to issue the
authorized but unissued shares of Preferred Stock could be utilized to impede
potential take-overs of the Company.
CLASS C WARRANTS
In January 1993, the Company revised the terms of its 525,000 publicly
traded Class A Warrants which were issued in its initial public offering. With
the exercise of these warrants, the Company issued one share of Common Stock and
one Class B Warrant, which was exercisable through November 30, 1994. In
connection with the exercise of the Class B Warrants, the Company issued one
share of Common Stock and one Class C Warrant.
The holder of each Class C Warrant is entitled to purchase one share of
Common Stock at an exercise price of $2.31. At December 31, 1995, the Company
had 329,050 Class C Warrants outstanding. The Class C Warrants are immediately
exercisable until July 15, 1996, provided that at such time a current prospectus
relating to the Common Stock underlying the Class C Warrants is in effect and
such Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws. The Class C Warrants are transferable
separately from the Common Stock which could be acquired upon exercise thereof.
The Class C Warrants are subject to redemption, as described below.
The Class C Warrants are subject to redemption by the Company, on not less
than thirty days' written notice, at a price of $.01 per Class C Warrant at any
time with the consent of the underwriter of the Company's initial public
offering or if the average of the closing bid and asked prices of the Company's
Common Stock equals or exceeds $5.00 per share for twenty consecutive trading
days ending within three days prior to the 30-day notice of redemption. Holders
of Class C Warrants will automatically forfeit their rights to purchase the
shares of Common Stock issuable upon exercise of such Class C Warrants unless
the Class C Warrants are exercised before they are redeemed. The Company shall
not be able to call the Class C Warrants unless a registration statement
covering the securities issuable upon exercise of the Class C Warrants is, and
remains, current throughout the period fixed for redemption. The Company has no
present plans to redeem the Class C Warrants.
The Class C Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration or redemption date at the offices of the
Warrant Agent with the form of "Election to Purchase" on the reverse side of the
certificate filled out and executed as indicated, accompanied by payment of the
full exercise price for the number of Class C Warrants being exercised.
The Class C Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the exercise price in certain events, such as
stock dividends, stock splits, mergers, sale of stock at below the exercise
price, and for other unusual events (other than employee benefit and stock
option plans for employees or consultants to the Company).
The holder of a Class C Warrant will not possess any rights of a
stockholder of the Company unless and until he exercises the Class C Warrant.
42
<PAGE>
Determination of the Exercise Price
The exercise price of the Class C Warrants was set at $2.31 by the Board of
Directors of the Company at a special meeting of the Board of Directors held on
August 29, 1995. In determining the exercise price the Board of Directors
considered the following factors to be important: (i) the Company's desire to
realize the revenue that the exercise of the Class C Warrants would result in,
(ii) the strong probability that the Class C Warrants would not be exercised at
the existing exercise price and (iii) the desire to give value to the publicly
traded Class C Warrants.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporate Law. That section provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate or associate of such person who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting in
a person's becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder, (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares held by Directors, officers
and certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3%
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined to include any person, and the affiliates and associates
of such person, that (i) is the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an interested
stockholder.
SHARES ELIGIBLE FOR FUTURE PUBLIC SALE
There are outstanding shares of Common Stock which are "restricted
securities" held by affiliates within the meaning of Rule 144 under the
Securities Act. Such shares, if held by such affiliates for at least two years,
may be eligible for sale in the public market in reliance upon Rule 144
thereunder.
Any affiliate or other person who sells restricted securities of an issuer
for his own account shall be deemed not to be engaged in a distribution of such
securities and therefor not to be an underwriter thereof within the meaning of
Section 2(11) of the Securities Act if all of the following conditions are met.
First, there must be available adequate current, public information with respect
to the issuer of the securities. If the issuer has securities registered
pursuant to Section 12 of the Exchange Act or has securities registered pursuant
to the Securities Act and has been subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act for a period of at least 90 days
immediately preceding the sale of the securities and has filed all reports
required to be filed thereunder during the 12 months preceding such sale (or for
such shorter period that the issuer is required to file such reports), such
issuer is deemed to have adequate current, public information available. Second,
a minimum of two years must elapse between the later of the date of the
acquisition of the securities from the issuer or from an affiliate of the
43
<PAGE>
issuer, and any resale of such securities in reliance on Rule 144. Third, there
are limitations on the amount of the securities that may be sold pursuant to
Rule 144. Fourth, the securities must be sold in "brokers' transactions" within
the meaning of Section 4(4) of the Securities Act or in transactions directly
with a "market maker," as that term is defined in Section 3(a)(38) of the
Exchange Act, and the person selling the securities shall not (i) solicit or
arrange for the solicitation of orders to buy the securities in anticipation of
or in connection with such transactions, or (ii) make a payment in connection
with the offer or sale of the securities to any person other than the broker who
executes the order to sell the securities. Last, certain notice requirements are
imposed upon the seller if sales of the securities exceed certain volume and/or
amount limits.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent for the Common Stock and the Class C Warrants is OTR
Securities Transfer Company, Portland, Oregon, which is also the Warrant Agent.
The address of the Transfer Agent is 1130 Southwest Morrison, #250, Portland,
Oregon 92705.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Haskell Slaughter & Young, L.L.C., Birmingham, Alabama.
CHANGES IN ACCOUNTANTS
On January 5, 1995 the Company, with the approval of the Board of
Directors, advised Coopers & Lybrand, LLP that it was dismissing such accounting
firm and was retaining the accounting firm of BDO Seidman, LLP as independent
public accountants for the Company and its subsidiaries for the fiscal year
ended June 30, 1995. The decision to retain BDO Seidman, LLP was not motivated
by any disagreements between the Company and Coopers & Lybrand, LLP concerning
any accounting matter. Coopers & Lybrand, LLP had been retained since the
Company's inception (August 1, 1991) and during the entire period of their
engagement with the Company relative to accounting principles or practices,
financial statement disclosure, auditing scope of procedures, there were no
disagreements which, if not resolved to Coopers & Lybrand, LLPs satisfaction,
would have resulted in a reference to the subject matters of the disagreement in
connection with its report. The Coopers & Lybrand, LLP reports on the Company's
financial statements have not contained an adverse opinion or a disclaimer of
opinion, nor were the opinions qualified or modified as to uncertainty, audit
scope, or accounting principles, nor were there any events of the type requiring
disclosure under item 304(a)(1)(v) of Regulation S-K. During the two-year period
prior to January 5, 1995, the Company did not consult BDO Seidman, LLP
concerning any matter.
44
<PAGE>
EXPERTS
The Company's consolidated balance sheet at June 30, 1994 and the
consolidated statements of operations, cash flows and stockholders' equity for
the fiscal years ended June 30, 1994 and 1993 included in this Prospectus and
Registration Statement, have been included herein in reliance on the report of
Coopers & Lybrand, LLP, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
The Company's consolidated balance sheet at June 30, 1995 and the
consolidated statements of operations, cash flows and stockholders' equity for
the fiscal year ended June 30, 1995 included in this Prospectus and Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants and are included in reliance upon such report, given upon the
authority of said firm as experts in accounting and auditing.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HARMONY HOLDINGS, INC. AND SUBSIDIARIES AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Certified Public Accountants.................... F-2
Report of Independent Public Accountants.............................. F-3
Consolidated Balance Sheets as of June 30, 1995 and 1994.............. F-4
Consolidated Statements of Operations for the
years ended June 30, 1995, 1994 and 1993............................ F-5
Consolidated Statement of Stockholders' Equity
for the years ended June 30, 1995, 1994 and 1993.................... F-6
Consolidated Statements of Cash Flows for the years
ended June 30, 1995, 1994 and 1993.................................. F-7
Notes to Consolidated Financial Statements............................ F-8
CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Interim Balance Sheet as of March 31, 1996............... F-17
Consolidated Interim Statements of Operations for the Nine Months
Ended March 31, 1996 and 1995...................................... F-18
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended March 31, 1996............................................... F-19
Consolidated Interim Statements of Cash Flows for the Nine Months
Ended March 31, 1996 and 1995...................................... F-20
Notes to Consolidated Interim Financial Statements.................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Harmony Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Harmony Holdings,
Inc. as of June 30, 1995 and the related consolidated statements of operations,
cash flows and stockholders' equity for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Harmony
Holdings, Inc. as of June 30, 1995, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 25, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Harmony Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Harmony
Holdings, Inc. as of June 30, 1994 and the related consolidated statements of
operations, cash flows and stockholders' equity for the years ended June 30,
1994 and 1993. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Harmony
Holdings, Inc. as of June 30, 1994, and the consolidated results of its
operations and its cash flows for the years ended June 30, 1994 and 1993 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements effective July
1, 1993, the Company changed its method of accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109.
COOPERS & LYBRAND, LLP
Sherman Oaks, California
September 16, 1994
F-3
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 229,909 $ 662,777
Accounts receivable 5,294,213 3,499,030
Unbilled accounts receivable 1,434,402 731,191
Prepaid expenses and other assets 748,330 594,338
----------- -----------
Total current assets 7,706,854 5,487,336
Property and equipment, at cost, less accumulated
depreciation and amortization (Note 2) 1,581,891 1,161,701
Goodwill, less accumulated amortization of
$1,031,082 and $819,302 3,181,226 3,393,006
Other assets 484,974 302,715
----------- -----------
Total assets $12,954,945 $10,344,758
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 2,267,134 1,503,832
Accrued liabilities (Note 6) 2,815,721 1,509,911
Deferred income 1,113,040 917,100
----------- -----------
Total current liabilities 6,195,895 3,930,843
Subordinated notes payable (Note 8) 385,000 0
----------- -----------
Total liabilities 6,580,895 3,930,843
Commitments and contingencies (Note 9)
Stockholders' Equity (Notes 10 and 11):
Preferred Stock, $.01 par value, authorized 10,000,000 shares;
none issued
Common Stock, $.01 par value, authorized 20,000,000 shares; 56,608 54,273
issued and outstanding 5,660,220 and 5,427,320
Additional paid-in capital 12,673,902 12,030,204
Accumulated deficit (6,356,460) (5,670,562)
----------- -----------
Stockholders' equity 6,374,050 6,413,915
----------- -----------
Total Liabilities and stockholders' equity $12,954,945 $10,344,758
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues $61,226,818 $42,601,579 $24,786,101
Cost of production 50,920,332 35,291,076 20,298,841
----------- ----------- -----------
Gross profit 10,306,486 7,310,503 4,487,260
Selling expenses 2,807,902 2,222,988 1,518,430
Operating expenses 7,161,205 6,285,979 5,939,717
Litigation expense (Note 3) 486,050 0 0
Depreciation and amortization 528,259 398,879 323,037
----------- ----------- -----------
Loss from operations (676,930) (1,597,343) (3,293,924)
Interest income 56,346 34,503 98,020
Interest expense (65,314) (11,866) (10,193)
----------- ----------- -----------
Loss before income taxes (685,898) (1,574,706) (3,206,097)
Income tax expense (Note 5) 0 0 0
Net loss $ (685,898) $(1,574,706) $(3,206,097)
=========== =========== ===========
New loss per share $(0.12) $(0.30) $(0.84)
=========== =========== ===========
Weighted average shares outstanding 5,567,242 5,315,934 3,800,301
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 30,
ADDITIONAL
COMMON STOCK PAID IN ACCUMULATED DUE FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT VENTURA EQUITY
--------- ------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1992 3,073,330 $30,733 $ 6,258,582 $ (889,759) $(325,000) $ 5,074,556
Exchange of tax loss carry-
forwards for amount due
from Ventura 0 0 (325,000) 0 325,000 0
Sale of common stock 1,562,400 15,624 3,740,983 0 0 3,756,607
New Loss 0 0 0 (3,206,097) 0 (3,206,097)
--------- ------- ----------- ----------- --------- -----------
BALANCE AT JUNE 30, 1993 4,635,730 46,357 9,674,565 (4,095,856) 0 5,625,066
Sale of common stock 791,590 7,916 2,355,639 0 0 2,363,555
Net loss 0 0 0 (1,574,706) 0 (1,574,706)
--------- ------- ----------- ----------- --------- -----------
BALANCE AT JUNE 30, 1994 5,427,320 54,273 12,030,204 (5,670,562) 0 6,413,915
Sale of common stock 232,900 2,335 643,698 0 0 646,033
Net loss 0 0 0 (685,898) 0 (685,898)
--------- ------- ----------- ----------- --------- -----------
BALANCE AT JUNE 30, 1995 5,660,220 $56,608 $12,673,902 $(6,356,460) $ 0 $ 6,374,050
========= ======= =========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (685,898) $(1,574,706) $(3,206,097)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH USED BY
OPERATING ACTIVITIES:
Depreciation and amortization 528,259 398,879 323,037
Amortization of prepaid interest 42,056 0 0
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable (1,795,182) (1,222,802) (907,363)
Unbilled accounts receivable (703,211) 184,473 (700,054)
Prepaid expenses and other assets (153,991) (159,179) (193,713)
Other assets (117,733) (158,486) (101,667)
Accounts payable 763,302 108,718 658,480
Accrued liabilities 1,305,810 (663,670) 1,316,605
Deferred income 195,940 160,534 544,584
Income taxes payable 0 0 (20,350)
----------- ----------- -----------
Net cash used by operating activities (620,648) (2,926,239) (2,286,538)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (732,259) (669,613) (571,083)
Acquisition of The End, Inc. 0 0 (250,000)
Loans to Ventura--line of credit (500,000) (950,000) 0
Repayments from Ventura--line of credit 526,644 927,890 0
----------- ----------- -----------
Net cash used by investing activities (705,615) (691,723) (821,083)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 508,395 2,363,555 3,756,607
Issuance of subordinated notes payable 385,000 0 0
Borrowings under bank line of credit 100,000 0 0
Repayments of bank line of credit (100,000) 0 0
----------- ----------- -----------
Net cash provided by financing activities 893,395 2,363,555 3,756,607
Net increase (decrease) in cash (432,868) (1,254,407) 648,986
Cash, beginning of year 662,777 1,917,184 1,268,198
=========== =========== ===========
Cash, end of year $ 229,909 $ 662,777 $ 1,917,184
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 10,632 $ 11,867 $ 10,194
</TABLE>
During fiscal 1995, the Company issued restricted common stock with a value of
$137,638 to note holders in conjunction with the issuance of subordinated debt.
See accompanying notes to consolidated financiala statements
F-7
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization, Business, and Principles of Consolidation
-------------------------------------------------------
Harmony Holdings, Inc. ("Company") was incorporated under the laws of the
State of Delaware on August 5, 1991 as a wholly owned subsidiary of Ventura
Entertainment Group Ltd. ("Ventura"). In connection with the Company's
formation and initial capitalization, the Company issued 2,033,330 shares of
its common stock to Ventura and Ventura contributed all of the capital stock
of its wholly owned subsidiaries, Harmony Pictures, Inc. and Melody Films,
Inc. (collectively "Harmony") to the Company. Accordingly the accompanying
consolidated financial statements include the accounts of Harmony for all
periods presented. The Company has seven operating subsidiaries: Harmony
Pictures, Inc., Melody Films, Inc., The End, Inc., Velocity Film, Inc.,
Curious Pictures Corporation, Harmony Media Communications and Upon A Star
Entertainment Group, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation. As of June 30, 1994,
Ventura owned approximately 27 percent of the Company's common stock. As of
June 30, 1995, Ventura had sold its entire interest in the Company.
The Company operates in one reportable segment, producing television
commercials, music videos and related media.
Contract Revenues
-----------------
The Company produces television commercials and music videos under firm bid
or cost plus fixed fee contracts, which are typically less than one month in
duration. At June 30, 1995 and 1994, 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.
Reclassifications
-----------------
During 1995, the Company reclassified certain expenses from June 30, 1994 and
1993 that had previously been included in operating expenses as follows:
The Company has reclassified the following for June 30, 1994 to make the
financials comparable with June 30, 1995; $994,579 profit participation to
commercial directors has been reclassed from operating expense to cost of
sales; $837,923 salesman commissions has been reclassified from operating
expenses to selling expense; $1,385,065 in other selling expense have been
reclassified from operating expenses to selling expense; $936,520 credit has
been reclassed from operating expense to revenue.
F-8
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Company has reclassified the following for June 30, 1993 to make the
financials comparable with June 30, 1994; $254,394 profit participation to
commercial directors has been reclassed from operating expense to cost of
sales; $509,292 salesman commissions has been reclassified from operating
expenses to selling expense; $1,009,138 in other selling expense have been
reclassified from operating expenses to selling expense.
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. During 1995, the Company switched certain assets to straight line
from the declining-balance method. The cumulative effect did not have a
significant impact on the Company's consolidated results of operations for
the year ended June 30, 1995 or cumulative consolidated results of
operations and accordingly no cumulative effect was recorded.
Goodwill
--------
Goodwill primarily represents the excess of Ventura's purchase price,
including additional payments over the fair market value of Harmony
Pictures and Melody Films net assets at the date of acquisition. Goodwill
is being amortized on a straight line basis over 20 years. The Corporation
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.
Income Taxes
------------
Effective July 1, 1993, the Company adopted 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 future tax
laws and rates. The liability method replaces the deferred method which
focused on differences between financial income and taxable income using
the current tax laws and rates. The cumulative effect of the implementation
of this Statement did not have a significant impact on the Company's
consolidated results of operations, and accordingly no cumulative effect
was recorded.
Loss Per Share
--------------
Loss per share computations are based on the weighted average number of
common and common equivalent shares outstanding. Loss per share
computations also include the potential dilution
F-9
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
resulting from the assumed exercise of stock options and warrants utilizing
the treasury stock method when the effect of such common equivalent shares
is dilutive.
2. PROPERTY AND EQUIPMENT:
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Furniture and fixtures $ 709,626 $ 848,623
Computer equipment 859,089 227,209
Leasehold improvements 617,308 498,519
---------- ----------
2,186,023 1,574,351
Less: accumulated depreciation and
amortization 604,132 412,650
---------- ----------
$1,581,891 $1,161,701
========== ==========
</TABLE>
3. LITIGATION EXPENSE:
Litigation expense includes the settlement of a claim with a former officer
for $620,000 plus $150,000 in legal costs less an insurance receivable of
$283,950. The claim of such former officer was based on an alleged breach
of an employment agreement by the Company and certain other related alleged
acts by the Company.
4. RELATED PARTY TRANSACTIONS:
In connection with Ventura's acquisition of Harmony, Ventura had agreed to
make additional payments to one of Harmony's owners up to a maximum of
$400,000 based on certain future net billings. The Company paid this amount
and had been reimbursed $75,000 by Ventura as of June 30, 1992. Ventura had
agreed to reimburse the Company for the balance of these payments.
Ventura's $325,000 obligation was collateralized by 108,000 shares of the
Company's common stock held by Ventura. As of June 30, 1993 the Company
agreed to exchange this note receivable of $325,000, as well as
approximately $131,000 of accounts receivable from Ventura for the
additional net operating loss carryforwards received by the Company.
As a result of the Company being included in Ventura's consolidated federal
income tax returns for the tax years ended October 31, 1990 and 1991, the
Company's net operating loss carryforward is approximately $1,800,000 more
than if it had filed its own consolidated federal income tax returns. The
utilization of this additional net operating loss carryforward by the
Company is uncertain and,
F-10
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
accordingly, the amount of such debt ($325,000) previously collateralized
by shares of the Company's common stock has been charged to additional
paid-in capital and the balance (approximately $131,000) has been charged
to operations as of June 30, 1993.
A former officer of the Company receives fees for directing services. These
fees, which are included in cost of sales, aggregated $480,061, $242,218
for the years ended June 30, 1994 and 1993, respectively. At June 30, 1993
$53,363 of such director's fees were due and included in accrued directors
fees (see Note 6). Subsequent to June 30, 1993 this individual resigned as
an officer of the Company.
An employment contract with one of the Company's officers provided for
additional compensation based on contract revenues. During the year ended
June 30, 1993, $135,000 was earned pursuant to these provisions. In June
1993, the Company and this officer agreed to terminate this employment
agreement. At June 30, 1993, the Company accrued the termination settlement
of $436,860, which was subsequently paid to this officer. In connection
with this agreement and upon payment of this amount, this officer exercised
an aggregate of 355,000 stock options and paid the Company $960,000.
During 1994, the Company entered into an informal arrangement with Ventura
to produce an infomercial. As of June 30, 1995 the project had not been
completed and costs of approximately, $184,000 are included in other
assets.
On February 25, 1994, (amended on April 8, 1994) the Company entered into a
revolving line of credit arrangement with Ventura. The amount of the note
is $700,000 and bears interest at 8% per annum. A $20,000 commitment fee
was paid to the Company. As of June 30, 1994, the balance was $22,110 and
is included in prepaid expenses and other assets. On August 17, 1994 the
note was paid in full.
On April 15, 1994, the Company entered into an additional revolving line of
credit arrangement with Ventura. The amount of the note is $250,000 and
bears interest at 8% per annum. A $5,000 commitment fee was paid to the
Company for the note and was paid in full on May 12, 1994.
5. INCOME TAXES:
For the years ended June 30, 1995, 1994, and 1993, the Company has no
current or deferred income tax expense.
F-11
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The primary component of temporary differences which give rise to the
Company's net deferred asset at June 30, is as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards $ 2,388,000 $ 2,356,000
Other temporary differences 12,000 0
----------- -----------
2,400,000 2,356,000
Deferred tax liabilities (83,000) 0
Valuation allowance (2,317,000) (2,356,000)
----------- -----------
Net deferred tax asset 0 0
=========== ===========
</TABLE>
A full valuation allowance has been established as it is not more likely
than not that the deferred tax assets will be realized.
The Company's effective income tax rate varies from the statutory federal
tax rate as a result of operating losses for which no tax benefit has been
recognized.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994 1993
---------- ---------- ------------
<S> <C> <C> <C>
Computed "expected" tax (benefit) $(233,200) $(535,400) $(1,900,000)
Amortization of goodwill 72,000 67,750 67,750
Accrued vacation 57,500 0 0
Other items 28,500 0 0
Losses with no current benefit 75,200 467,650 1,022,250
--------- --------- -----------
Total $ 0 $ 0 $ 0
========= ========= ===========
</TABLE>
At June 30, 1995, the Company has federal and California net operating loss
carryforwards for tax purposes of approximately $6.1 million and $2.1
million which expire through fiscal year 2010. The Company's ability to
utilize the net operating loss carryforwards is limited to $1.3 million 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 carryforward may be limited in any
one year by alternative minimum tax rules.
F-12
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
Accrued production costs $1,118,296 $ 648,175
Accrued director fees 953,108 366,906
Other 744,317 494,830
---------- ----------
$2,815,721 $1,509,911
========== ==========
</TABLE>
7. BANK LINE OF CREDIT:
On May 10, 1995 the Company entered into a $3,000,000 asset based revolving
line of credit with a bank, with interest at the bank's prime rate plus
1.0% per annum, collateralized by the assets of the Company. The banks
prime rate at June 30, 1995 was 9.0%. The agreement expires October 31,
1996. Borrowing is based upon certain percentages of acceptable
receivables. There were no borrowings outstanding as of June 30, 1995. The
loan agreement has certain financial covenants, one of which is to maintain
profitability on a quarterly basis. As of June 30, 1995 the Company was not
in compliance with the requirement and the noncompliance was waived by the
bank.
8. SUBORDINATED NOTES PAYABLE:
The Company has received $385,000 from the issuance of long-term
subordinated notes. The notes bear interest at the rate of 7% per annum
starting January 10, 1995 and are due upon the earlier of July 10, 1996 or
ten days after the close of the Company's next underwritten public
offering. These notes are subordinated to any future institutional lender.
Additionally, in connection with the issuance of the subordinated notes,
77,000 shares of restricted common stock were issued in February, 1995.
The value assigned to the restricted stock is recorded as prepaid interest
and is being amortized over the period of the subordinated notes.
F-13
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. COMMITMENTS:
The Company is a party to a number of noncancelable operating lease
agreements involving buildings and equipment which expire at various dates.
The future minimum lease commitments as of June 30, 1995 are as follows:
<TABLE>
<S> <C>
1996 $ 679,263
1997 645,449
1998 532,235
1999 467,998
2000 372,153
Thereafter 709,986
----------
Total minimum payments $3,407,084
==========
</TABLE>
Total rental expense for the years ended June 30, 1995, 1994 and 1993
aggregated $670,285, $574,425 and $363,442.
The Company has entered into various employment contracts with its officers
and others which obligate it to make minimum payments of approximately
$2,973,000 during the year ending June 30, 1996. Certain of these
agreements provide for additional compensation based on revenues and other
items. Other agreements provide for additional compensation based on
certain defined operating profits.
10. STOCKHOLDERS EQUITY:
In September 1991, the Company completed a bridge financing of $300,000
notes and 100,000 warrants, each of which was exercisable for one share of
common stock at a price of $2.00. All of these warrants were exercised
during the year ended June 30, 1993.
In November 1991, the Company completed an initial public offering of its
securities, selling 525,000 Units at a price of $6.00 each. Net proceeds
aggregated $2,319,607. Each Unit consisted of two shares of common stock
and one redeemable warrant, each of which entitled the holder to purchase
one share of common stock at a price of $4.00 through November 1993. In
connection with this offering, the underwriter received a five-year warrant
to purchase up to 52,500 Units at a price of $7.20 each. During 1993, the
underwriter exercised these warrants and the warrants included in the
Units.
In October and November 1992, the Company completed private placements
whereby it sold an aggregate of 375,000 units to unrelated parties at a
price of $2.00 per unit for proceeds of $750,000. Each unit consisted of
one share of unregistered common stock and one three-year warrant, each of
which entitles the holder to purchase one share of common stock at a price
of $2.00 per share. During 1993 all of these warrants were exercised. In
January 1993, the Company revised the terms of its 525,000 publicly traded
class A warrants which were issued in its initial public offering. This
F-14
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
revision reduced the exercise price of these warrants from $4.00 to $3.00
per share through March 29, 1993. With the exercise of these warrants, the
Company issued one share of common stock and a class B warrant, which was
exercisable through November 30, 1994 at a price of $3.30. In connection
with the exercise of the class B warrant, the Company issued one share of
common stock and a class C warrant. Each class C warrant is exercisable
through April 30, 1996 for one share of common stock at a price of $3.65
each. As a result of these transactions, through June 30, 1995 the Company
issued an aggregate of 1,877,050 shares of common stock and received net
proceeds of $ 4,808,627. At June 30, 1995, the Company had 329,050 class C
warrants outstanding. On August 29, 1995 the Company lowered the exercise
price of it's C warrants to $ 2.31.
11. STOCK OPTION PLAN:
The Company's stock option plan (the "Plan"), adopted on August 7, 1991,
and amended in July 1992, provides for the granting of an aggregate of
incentive and non-incentive options to purchase 2,500,000 shares of the
Company's common stock. The exercise price of incentive stock options must
be at least 100% of the fair market value of the common stock on the date
of grant. Options granted under the Plan expire no later than ten years
from the date of their grant. Each outstanding option under the Plan
provides that vesting ranges from immediate to 50% of the shares subject to
the option vest in two years and the balance vest in three years from the
date of grant. As of June 30, 1995, options to purchase 1,626,300 shares of
common stock had been granted at prices ranging from $ 2.00 to $ 6.00 per
share of which 80,300 have been exercised and 540,400 are exercisable.
Activity under the plan for the years ended June 30, 1995, 1994 and 1993 is
as follows:
<TABLE>
<CAPTION>
QUALIFIED 1995 1994 1993
------- --------- -------
<S> <C> <C> <C>
Options granted 375,500 1,300,550 613,650
Options exercised 20,550 59,750 0
Options exercisable 540,400 273,150 117,500
</TABLE>
At June 30, 1995, the Company had also granted options, which expire
through March 1, 1998, to purchase an aggregate of 909,500 shares of common
stock at prices ranging from $2.00 to $5.75 per share of which 471,500 have
been exercised and 85,000 are exercisable. These options were not granted
under the Plan.
F-15
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NON-QUALIFIED 1995 1994 1933
------- ------- -------
<S> <C> <C> <C>
Options granted 166,500 743,000 787,000
Options exercised 0 491,500 0
Options exercisable 85,000 145,000 215,000
</TABLE>
12. BUSINESS SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISKS:
The Company operates in one reportable segment, producing television
commercials, music videos and related media. The Company grants credit to
advertising agencies, principally based in the United States. One customer
accounted for 15% and 13% of revenues in fiscal 1995 and 1994.
The Company's cash deposits are with various financial institutions, and
are insured up to a maximum of $100,000 at each institution by the Federal
Deposit Insurance Corporation ("FDIC"). At June 30, 1995, the Company's
deposits with one financial institution exceed the maximum amount insured
by the FDIC.
F-16
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------- -----------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 61,955 $ 229,909
Accounts receivable 5,147,853 5,294,213
Unbilled accounts receivable 1,389,807 1,434,402
Prepaid expenses and other assets 373,753 748,330
----------- -----------
Total current assets 6,973,368 7,706,854
Property and equipment, at cost, less accumulated
depreciation and amortization 1,604,785 1,581,891
Goodwill, less accumulated amortization 3,022,391 3,181,226
Other assets 232,147 484,974
----------- -----------
Total assets $11,832,691 $12,954,945
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,148,184 $ 2,267,134
Accrued liabilities 2,676,867 2,815,721
Bank line of credit 2,000,000 0
Deferred income 775,733 1,113,040
----------- -----------
Total current liabilities 6,600,784 6,195,895
Subordinated notes payable 385,000 385,000
----------- -----------
Total Liabilities 6,985,784 6,580,895
Commitments and contingencies
Stockholders' Equity:
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 5,693,198 and 5,660,220 56,933 56,608
Additional paid-in capital 12,735,136 12,673,902
Accumulated deficit (7,945,162) (6,356,460)
----------- -----------
Stockholders' equity 4,846,907 6,374,050
----------- -----------
Total Liabilities and stockholders' equity $11,832,691 $12,954,945
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Contract revenues $50,395,467 $46,457,923
Cost of production 43,056,478 40,389,210
----------- -----------
Gross profit 7,338,989 6,068,713
Selling expenses 2,272,369 1,996,398
Operating expenses 5,054,417 3,428,795
Write off of abandoned projects 621,528 0
Litigation expense 200,000 486,050
Severance salaries 186,488 0
Depreciation and amortization 419,389 394,824
----------- -----------
Gain (loss) from operations (1,415,202) (237,354)
Interest income 4,620 37,704
Interest expense (178,120) (31,782)
----------- -----------
Net income (loss) $(1,588,702) $ (231,432)
=========== ===========
Net income (loss) per share $(0.28) $(0.04)
Weighted average shares outstanding 5,693,198 5,511,394
</TABLE>
See accompanying notes to consolidated financial statements
F-18
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 5,660,220 $56,608 $12,673,902 $(6,356,460) $ 6,374,050
Sale of common stock 32,978 330 61,229 0 61,559
Net loss 0 0 0 (1,588,702) (1,588,702)
--------- ------- ----------- ----------- -----------
BALANCE AT MARCH 31, 1996 5,693,198 $56,938 $12,735,131 $(7,945,162) $ 4,846,907
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,588,698) $ (231,432)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization 419,389 394,824
Amortization of prepaid interest 68,819 0
Changes in assets and liabilities:
Accounts receivable 146,360 (2,695,341)
Unbilled accounts receivable 44,595 (1,285,445)
Prepaid expenses and other assets 371,361 145,990
Other assets 184,004 (211,866)
Accounts payable (1,118,950) 725,761
Accrued liabilities (138,854) 2,122,263
Deferred income (337,307) 186,654
----------- -----------
Net cash used by operating activities (1,949,281) (848,592)
----------- -----------
Cash flows from investing activities:
Capital expenditures (280,232) (564,217)
----------- -----------
Net cash used by investing activities (280,232) (564,217)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 61,559 585,283
Borrowings under bank line of credit 10,400,000 0
Repayments of bank line of credit (8,400,000) 0
Subordinated notes payable 0 385,000
----------- -----------
Net cash provided by financing activities 2,061,559 970,283
----------- -----------
Net decrease in cash (167,954) (442,526)
----------- -----------
Cash, beginning of period 229,909 662,777
----------- -----------
Cash, end of period $ 61,955 $ 220,251
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
(1) Basis of presentation
---------------------
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
accruals) which are, in the opinion of management, necessary to present fairly
the results of operations for the periods presented.
This information should be read in conjunction with the audited financial
statements as of June 30, 1995 filed as part of the Company's Annual Report on
Form 10-K.
(2) Investment in Infomercial
-------------------------
During the quarter ended September 30, 1995, the Company issued 32,678
shares of restricted stock to buy out the interest of certain outside investors
in an infomercial produced by the Company. The stock was issued at its fair
market value at that date. The Company now owns the entire interest in the
project with its former affiliate, Ventura Entertainment Group, Inc. As of
December 31, 1995, The Company has determined that there is zero realizable
value for the infomercial and accordingly has written off the balance of
approximately $245,000, which is included in write off of abandoned projects.
(3) Reclassifications
-----------------
The Company has reclassified the following at March 31, 1995 (as reported on
the Quarterly report on Form 10-Q at March 31, 1995) to make the financials
comparable with March 31, 1996; $1,215,089 and $487,112 in sales commissions and
$781,309 and $298,368 of other selling expenses for the nine months and three
months ended March 31, 1995, respectively, have been reclassified from operating
expense to selling expense.
Litigation expense has been reclassified to operating expense and a $283,950
insurance receivable has been reclassified from revenue to reduce the litigation
expense at March 31, 1995.
(4) Write off of abandoned projects
-------------------------------
The Company has booked a one time charge to write off the cost of projects
that no longer are considered to have a realizable value. The charge includes
$245,000 investment in an infomercial, $224,000 for a screenplay writing
project, $100,000 for a director and salesperson that attempted to start a toy
commercial division and approximately $52,000 from projects for corporate
placement and a books on tape distribution system.
(5) Severance salaries
------------------
Severance salaries are the costs associated with the termination of former
employees during the reorganization of the Company.
F-21
<PAGE>
(6) Litigation expense
------------------
Litigation expense represents a revision in the insurance proceeds
receivable estimated at June 30, 1995.
F-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a schedule of the estimated expenses to be incurred by the
Registrant in connection with the offering of the securities registered hereby.
Expenses which may be incurred in connection with offering of the Common Stock
are dependent on the number of such offerings and other factors that cannot be
wholly determined at this time.
<TABLE>
<CAPTION>
TOTAL
-------
<S> <C>
Registration Fee $ *
Blue Sky fees and expenses
Accounting fees and expenses 20,000
Legal fees and expenses
Printing and engraving expenses 0
Transfer Agent, Warrant Agent and Registrar's
fees and expenses 250
Miscellaneous 0
-------
Total $
=======
</TABLE>
* Actual amount
The Company has agreed to bear all expenses (other than underwriting
discounts and selling commissions, and fees and expenses of counsel and
other advisors to the Selling Stockholders) in connection with the
registration and sale of the shares being offered by the Selling
Stockholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, in part, as
follows:
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, has reasonable cause to believe that his conduct was unlawful.
II-1
<PAGE>
A corporation also may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. However, in such an action by or on behalf of a corporation, no
indemnification may be made in respect of any claim, issue or matter as to which
the person is adjudged liable to the corporation unless and only to the extent
that the court determines that, despite the adjudication of liability but in
view of all the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
The indemnification in advancement of expenses provided by, or granted
pursuant to, Section 145, shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall enure to the benefit of the heirs, executors and
administrators of such a person.
In addition, the indemnification provided by Section 145 shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Company shall indemnify, in the manner and to the fullest extent permitted
by law, any person (or the estate of any person) who was or is a party to, or is
threatened to be made a party to, any threatened, pending or completed action,
suit or proceeding, whether or not by or in the right of the Company and whether
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or enterprise. The Restated Certificate of Incorporation also provides
that the indemnification provided therein shall not be deemed exclusive of any
other rights to which any person seeking indemnification from the Company may be
entitled under any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
The Company's Restated Certificate of Incorporation also provides that the
Company's directors have no personal liability to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except: (i) for any breach of the duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) for liability
under Section 174 of the Delaware General Corporation Law (involving certain
unlawful dividends or stock repurchases), or (iv) for any transaction from which
the director derived an improper personal benefit.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In October and November 1992, the Company completed two private placements
of Units, each Unit consisting of one share of unregistered Common Stock and
one, three-year warrant, which entitles the holder to purchase one share of
Common Stock at a price of $2.00 per share. During 1993, all of these warrants
were exercised.
Between December 1, 1994, and January 10, 1995, the Company received
$385,000 from the issuance of long-term subordinated notes (the "Notes"). The
Notes bear interest at the rate of 7% per annum starting January 10, 1995 and
are due upon the earlier of July 10, 1996 or ten days after the close of the
Company's next underwritten public offering. The Notes are subordinated to any
future institutional lender. Additionally, in connection with the issuance of
the Notes, 77,000 shares of restricted Common Stock were issued in February,
1995.
No underwriters were involved in these transactions. The Company relied on
the exemption from registration provided by Section 4(2) of the Securities Act
in issuing these securities. The above referenced purchasers had full access to
information concerning the Company and had the opportunity to verify the
information supplied. Such purchasers represented to the Company that they were
acquiring their shares of Common Stock for investment and not with a view to
distribution, and the certificates evidencing these securities contained
restrictive legends.
The Company has not made any further sales of securities in reliance upon
any exemption from registration under the Securities Act.
ITEM 16. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
(a) Exhibits
--------
The following documents required by Item 601 of Regulation S-K are filed as
Exhibits or are incorporated by reference herein.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
(3)-1 Restated Certificate of Incorporation of the Company, filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 (Registration
No. 33-42193), is hereby incorporated by reference.
(3)-2 By-laws of the Company, filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-42193), is
hereby incorporated by reference.
(3)-3 Amendment No. 1 to By-laws of the Company, filed as Exhibit 3.3.1 to
the Company's Registration Statement on Form S-1 (Registration
No. 33-42193), is hereby incorporated by reference.
(5) Opinion of Haskell Slaughter & Young, L.L.C., as to the legality of
the securities being registered (to be filed by Amendment).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
(10)-1 1991 Stock Option Plan of Harmony Holdings, Inc., filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1
(Registration No. 33-42193), is hereby incorporated by reference.
(10)-2 Form of Incentive Stock Option Agreement of the Company.
(10)-3 Form of Non-Qualified Stock Option Agreement of the Company.
(10)-4 Employment Agreement, dated as of May 2, 1994 by and between the
Company and Harvey Bibicoff, filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-42193), is
hereby incorporated by reference.
(10)-5 Settlement Agreement and Release, dated August 1, 1993 by and among
Stuart Gross, the Company and others, filed as Exhibit 10.23 to the
Company's Current Report on Form 8-K, dated July 31, 1993, is
hereby incorporated by reference.
(10)-6 Employment agreement, dated July 1, 1994, between Harmony Pictures,
Inc. and Jonathan Miller, filed as Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994,
is hereby incorporated by reference.
(10)-7 Employment agreement, dated September 1, 1993, between the Company
and Mr. Horowitz, filed as Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994, is
hereby incorporated by reference.
(10)-8 Amended and Restated Employment Agreement, dated December 5, 1994,
between Harmony Holdings, Inc. and Mr. Horowitz, filed as Exhibit
10.25 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995, is hereby incorporated by reference.
(10)-9 Employment Agreement, dated December 1, 1995, between the Company
and Brian Rackohn.
(11) Statement re Computation of Per Share Earnings.
(16)-1 Letter re: changes in certifying accountant, filed as Exhibit 16.1
to the Company's Registration Statement on Form S-1 (Registration
No. 33-42193), is hereby incorporated by reference and the change
filed on the Current Report on Form 8-K dated January 5, 1995, is
hereby incorporated by reference.
(21) Subsidiaries of the Company.
(23)-1 Consent of BDO Seidman, LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-2 Consent of Coopers & Lybrand, LLP. See pages immediately following
signature pages to the Registration Statement.
(23)-3 Consent of Haskell Slaughter & Young, L.L.C. Contained in the
opinion of counsel filed as Exhibit 5 to the Registration
Statement.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
<C> <S>
(24) Powers of Attorney. See the signature page to original filing of
this Registration Statement on Form S-1.
</TABLE>
(b) Financial Statements and Schedules: NONE
----------------------------------
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to (i)
include any prospectus required by section 10(a)(3) of the Securities Act
of 1933, (ii) reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, and (iii) include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, office or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on May ___, 1996.
HARMONY HOLDINGS, INC.
By /s/ Harvey Bibicoff
---------------------------------------
Harvey Bibicoff
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
/s/ Harvey Bibicoff Chairman of the Board and May ___, 1996
- ------------------------ Chief Executive Officer
Harvey Bibicoff
* Chief Financial Officer May ___, 1996
- ------------------------ (Principal Financial and Chief
Brian Rackohn Accounting Officer); Secretary
* Director May ___, 1996
- ------------------------
Harry Shuster
* Director May ___, 1996
- ------------------------
Ivan Berkowitz
* Director May ___, 1996
- ------------------------
Jonathan Miller
</TABLE>
*By /s/ Harvey Bibicoff
-------------------
Harvey Bibicoff
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT 11
HARMONY HOLDINGS, INC.
COMPUTATIONS OF NET EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- ------------------
1995 1994 1993 1996 1995
-------- ---------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Earnings (Loss)............................. $ (686) $(1,575) $(3,206) $(1,589) $ (231)
====== ======= ======= ======= ======
Weighted average common shares outstanding.... 5,567 5,316 3,800 5,683 5,511
Net common shares issuable on exercise of
certain stock options(1)(2)................ -- -- -- -- --
------ ------- ------- ------- ------
Average common and common equivalent shares
outstanding................................ 5,567 5,316 3,800 5,683 5,511
====== ======= ======= ======= ======
Per share amounts............................. $ (.12) $ (.30) $ (.84) $ (.28) $ (.04)
------ ------- ------- ------- ------
</TABLE>
- ---------------------
(1) Net common shares issuable on exercise of certain stock options is
calculated based on the treasury stock method using the average market price
for the primary calculation and the ending market price, if higher than the
average, for the fully diluted calculation.
(2) Common shares issuable on exercise of certain stock options were not
included in the calculation of average common and common equivalent shares
outstanding since the effect of inclusion would be antidilutive.
<PAGE>
EXHIBIT (23)-1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Harmony Holdings, Inc.
Los Angeles, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated August 25, 1995, relating to the
consolidated financial statements of Harmony Holdings, Inc., which is contained
in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
May ___, 1996
<PAGE>
EXHIBIT (23)-2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to inclusion in this Registration Statement on Form S-1 of our
report dated September 16, 1994, on our audits of the financial statements of
Harmony Holdings, Inc. We also consent to the reference to our firm under the
caption "Experts."
COOPERS & LYBRAND, LLP
Sherman Oaks, California
May ___, 1996
