<PAGE>
As filed with the Securities and Exchange Commission on July 17, 1996
REGISTRATION NO. 333-2648
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
HARMONY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
----------------------------------------
<TABLE>
<CAPTION>
DELAWARE 7812 95-4333330
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
---------------------------------------
</TABLE>
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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
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) $1.9375 (4) $110,437.50 $ 38.08
- -----------------------------------------------------------------------------------------------------------------------------------
Total --- --- $870,543.00 $300.19 (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
July 12, 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 December 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 July
12, 1996, the last sale price of the Common Stock was $1-15/16 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 July 17, 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 by 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................................. 17
General................................................................................... 17
Seasonality............................................................................... 17
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........................................................... 20
Nine Months Ended March 31, 1996 as Compared with Nine Months Ended March 31, 1995..... 20
Year Ended June 30, 1995 as Compared with Year Ended June 30, 1994..................... 21
Year Ended June 30, 1994 as Compared with Year Ended June 30, 1993..................... 22
Inflation................................................................................. 22
New Accounting Standards.................................................................. 22
BUSINESS.................................................................................... 23
General................................................................................... 23
Commercial Television Production Industry................................................. 23
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Increase in Breadth of Experience of Company's Directors.................................... 24
Expansion into Ancillary Businesses......................................................... 25
Music Videos............................................................................. 25
Infomercials............................................................................. 25
Marketing Strategy.......................................................................... 25
The Making of a Commercial.................................................................. 26
Financing the Production of Commercials..................................................... 27
Properties.................................................................................. 28
Employees................................................................................... 29
Competition................................................................................. 29
Legal Proceedings........................................................................... 30
MANAGEMENT.................................................................................. 30
Directors and Executive Officers.......................................................... 30
Executive Compensation.................................................................... 33
Compensation of Directors................................................................. 34
Compensation Committee Interlocks and Insider Participation............................... 35
Employment Agreements..................................................................... 35
Stock Options............................................................................. 35
Stock Option Plan..................................................................... 35
Other Stock Options................................................................... 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................................. 37
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 38
DESCRIPTION OF SECURITIES................................................................... 40
Common Stock.............................................................................. 40
Preferred Stock........................................................................... 40
Class C Warrants.......................................................................... 40
Determination of the Exercise Price................................................... 41
Delaware Anti-Takeover Law................................................................ 42
Shares Eligible for Future Public Sale.................................................... 42
Transfer Agent and Warrant Agent.......................................................... 43
LEGAL MATTERS............................................................................... 43
CHANGES IN ACCOUNTANTS...................................................................... 43
EXPERTS..................................................................................... 43
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 July 10, 1996, the Company and Unimedia S.A., a privately-
held French registered company, jointly announced a series of proposed
transactions that would result in the acquisition of Unimedia by the
Company. See "The Company--Proposed Acquisition by 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
December 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
5
<PAGE>
exercised. The 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.
<TABLE>
<CAPTION>
BALANCE SHEET DATA (AT END OF PERIOD)
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 Condition and Results of Operations" and
"Business--Increase in Breadth of Experience of Company's Directors".
8
<PAGE>
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.
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,
9
<PAGE>
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 BY THE COMPANY
10
<PAGE>
On July 10, 1996, the Company and Unimedia S.A., a privately-held
French registered company ("Unimedia"), jointly announced a series of
proposed transactions that would result in the acquisition of Unimedia by
the Company. Unimedia plans to initially invest $2,000,000 in the
Company by purchasing 1,000,000 shares of the Company's Common Stock
through a private placement. Upon the completion of the private
placement, Unimedia plans to purchase up to 1,000,000 shares of Common
Stock of the Company on the open market at prices ranging up to $2.50 per
share.
After the aforesaid purchases of Common Stock of the Company by
Unimedia, the parties intend for the Company to acquire Unimedia by
merger in exchange for a presently undetermined number of shares of
Common Stock of the Company. It is contemplated by the Company and
Unimedia that, after the completion of these proposed transactions, the
current shareholders of Unimedia would own more than fifty percent of the
Common Stock of the Company. The proposed transactions are subject to
the satisfactory completion of due diligence review by all involved
parties, the execution of a definitive agreement between the Company and
Unimedia and approval by the boards of directors of both Unimedia and the
Company.
Unimedia is a designer of multimedia interactive software. It is
currently investing to provide leisure consumers and businesses with a
new generation of entertainment programs and online services available on
both the Internet and television. These programs and services, of
broadcast quality and original design, are to be used mainly for gaming,
entertainment, education and shopping on the Internet and Digital
Interactive Television, with an emphasis on transparency, rapidity and
security.
Unimedia, through its affiliates and subsidiaries, has developed
complementary expertise in security, sales automation, contactless smart
card technology, Internet service providing, graphic animation, on-line
programming, virtual reality technologies and special effects. Some
award-winning programs that combine creative storytelling and high-
quality interface design are already being provided through the Internet,
video games, CD-ROMS and TV media. Clients and partners include Compaq
Computers, Bertelsmann Music Group, HarperCollins Publishing, GT
Interactive, Thomas Nelson Publishing, Nederlander, Tiger Electronics,
and several U.S. and European television channels.
Unimedia is being actively supported in its growth by its main
industrial shareholder and strategic partner, AB Productions ("AB"),
which owns 25% of Unimedia. AB is Europe's largest TV production company
and a leader in children's programming. AB has just launched AB SAT, a
digital bouquet of 30 thematic TV channels. It also produces and
distributes feature films.
There can be no assurance that the proposed acquisition by the
Company will be completed or that such acquisition, if completed, will be
effected in accordance with the foregoing summary description.
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 December 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 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.
12
<PAGE>
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 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.
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
approx imately $58,000. See "Plan of Distribution" and "Description of
Securities".
13
<PAGE>
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 3.875 2.750
December 31, 1994 3.500 2.875
March 31, 1995 3.750 2.375
June 30, 1995 4.5625 3.175
FISCAL YEAR--1996; QUARTER ENDED
- --------------------------------
September 30, 1995 3.5625 1.6875
December 31, 1995 2.500 1.375
March 31, 1996 2.4375 1.250
June 30, 1996 2.750 1.875
</TABLE>
On July 12, 1996, the closing bid and asked prices of the Common Stock
were $1-29/32 and $1-15/16, respectively. Bid and asked prices reflect inter-
dealer prices, without retail mark-up, mark-down or 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
14
<PAGE>
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".
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.
17
<PAGE>
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 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.
18
<PAGE>
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.
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.
19
<PAGE>
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 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.
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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. 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
21
<PAGE>
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. 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.
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.
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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" (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%.
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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.
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.
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<PAGE>
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 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
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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 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.
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<PAGE>
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".
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
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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
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.
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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.
LEGAL PROCEEDINGS
There are no material lawsuits pending or, to the Company's
knowledge, threatened against the Company.
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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 July 16,
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
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 CPAs and the American Institute of
CPAs.
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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 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.
31
<PAGE>
As a result of the recent resignation of Jonathan Miller as a
Director, there is now a vacancy on the Company's Board of Directors.
Such vacancy may be filled, for the remainder of the current term, by the
remaining members of the Board.
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, 1996, 1995 and
1994:
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) 1996 $181,042 -- -- 225,000
1995 $302,500 $ 25,000 $ -- 150,000(4)
1994 213,000 -- 90,000(2) 250,000(4)
Harvey Bibicoff, Chairman(3) 1996 165,000 -- -- --
1995 165,288 -- -- --
1994 170,313 -- -- 250,000
Jonathan Miller 1996 250,000 228,731 -- --
President, Harmony Pictures, Inc. 1995 302,077 20,000 100,000
1994 108,200 -- -- --
Brian Rackohn, CFO, Secretary 1996 114,900 -- -- --
1995 101,923 -- -- 25,000
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.
(4) Retired during 1996 fiscal year.
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:
32
<PAGE>
STOCK OPTIONS/GRANTS IN FISCAL YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ------------------------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
% OF TOTAL
OPTIONS
OPTIONS GRANTED IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ----------------------- ------- ----------- -------- ---------------- ------- --------
Gary Horowitz 225,000 51% $1.50 02/12/01 $93,000 $206,000
</TABLE>
Stock Option Exercises in Fiscal Year ended June 30, 1995 and Option Values at
June 30, 1995. The following table provides information on the Named Executive
Officers' unexercised options at June 30, 1996. None of the Named Executive
Officers exercised any options during the fiscal year ended June 30, 1996:
STOCK OPTION VALUES AT JUNE 30, 1996
<TABLE>
<CAPTION>
EXERCISABLE (E)
UNEXERCISABLE (UE)
--------------------------------------
NUMBER OF VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
NAME AT FY-END (#) AT FY-END ($)
- ------------------------- ------------- -------------
<S> <C> <C>
Gary Horowitz 275,000(E) 141,750(E)
Harvey Bibicoff 275,000(E) 0(E)
Jonathan Miller 100,000(E) 0(E)
Brian Rackohn 37,500(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. No options were issued to the Company's outside
Directors during the fiscal year ending
33
<PAGE>
June 30, 1996. 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, 1996.
EMPLOYMENT AGREEMENTS
On July 1, 1994, Jonathan Miller entered into a two-year employment
contract with the Company, which expired on June 30, 1996. Under the
agreement, Mr. Miller earned 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 ("Incentive Options")
34
<PAGE>
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 June 30, 1996, 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 1,920,050 shares of Common Stock, of which 60,300 have
been exercised and 475,000 are currently exercisable.
The following table contains information concerning the Stock Option
Plan for the years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
INCENTIVE
STOCK
Options 1996 1995 1994
------- ------- ---------
<S> <C> <C> <C>
Options Granted 215,750 375,500 1,300,550
Options Exercised 300 20,550 59,750
Options Exercisable 475,000 540,400 273,150
</TABLE>
35
<PAGE>
Other Stock Options
The Company has also granted an aggregate of 1,154,500 other stock
options which expire through February 12, 2001, and are exercisable at
prices ranging from $1.50 to $5.75 per share, of which 491,500 have been
exercised and 262,000 are exercisable. None of these options were granted
pursuant to the Stock Option Plan.
Activity for the years ended June 30, 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Options Granted 229,000 166,500 743,000
Options Exercised 0 0 491,500
Options Exercisable 262,000 85,000 145,000
</TABLE>
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 June 30, 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:
36
<PAGE>
<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 (7) 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.
(7) On July 15, 1996, Mr. Miller resigned from the Board of Directors of
the Company.
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.
37
<PAGE>
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 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.
38
<PAGE>
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 June 30, 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 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 December 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
39
<PAGE>
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.
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
40
<PAGE>
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 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.
41
<PAGE>
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.
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.
42
<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 financial 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.
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
F-8
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 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.
F-9
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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, 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.
F-10
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 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
F-14
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 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>
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.
(6) Litigation expense
------------------
Litigation expense represents a revision in the insurance proceeds
receivable estimated at June 30, 1995.
F-21
<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 $ 308.80*
Blue Sky fees and expenses 5,640.00
Accounting fees and expenses 20,000.00
Legal fees and expenses 30,000.00
Printing and engraving expenses 0.00
Transfer Agent, Warrant Agent and Registrar's
fees and expenses 250.00
Miscellaneous 2,000.00
----------
Total $58,198.80
==========
</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.
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.
II-2
<PAGE>
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
-------- -----------
<S> <C>
(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.
(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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
(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.
(23)-2* Consent of Coopers & Lybrand, LLP.
(23)-3 Consent of Haskell Slaughter & Young, L.L.C. Contained
in the opinion of counsel previously filed as Exhibit
5 to the Registration Statement.
(24) Powers of Attorney. See the signature page to original
filing of this Registration Statement on Form S-1.
___________________
*Previously filed.
(b) Financial Statements and Schedules: NONE
----------------------------------
</TABLE>
II-4
<PAGE>
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. 3 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 July 17,
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. 3 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 July 17, 1996
- -------------------------
Harvey Bibicoff Chief Executive Officer
* Chief Financial Officer July 17, 1996
- -------------------------
Brian Rackohn (Principal Financial and Chief
Accounting Officer); Secretary
* Director July 17, 1996
- -------------------------
Harry Shuster
* Director July 17, 1996
- -------------------------
Ivan Berkowitz
</TABLE>
*By /s/ Harvey Bibicoff
--------------------
Harvey Bibicoff
Attorney-in-Fact
II-6
