<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996; OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number 1-19577
-------
HARMONY HOLDINGS, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4333330
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1990 WESTWOOD BOULEVARD, SUITE 310
LOS ANGELES, CALIFORNIA 90025-4676
----------------------- ----------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (310) 446-7700
--------------
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Class C Common Stock Purchase Warrants
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant (based upon the average of the closing bid and
asked prices of such stock as reported on the National Association of Securities
Dealers Automated Quotation System as of September 16, 1996):
Common Stock, $.01 par value--$11,713,097
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at September 14, 1996
----- ---------------------------------
<S> <C>
COMMON STOCK, PAR VALUE 6,693,198 SHARES
$.01 PER SHARE
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Index to Exhibits Page 42
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Harmony Holdings, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on August 5, 1991 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 March 1990, Ventura
acquired Harmony and Melody from its co-founders, Stuart Gross and Robert
Lieberman. The Company conducts its operations through its wholly owned
subsidiaries, Harmony Pictures, Inc., Melody Films, Inc., The End Inc., The
Beginning Inc., Velocity Film, Inc.(ceased operations, March, 1996), Curious
Pictures Corporation and Harmony Media Communications Inc. Unless the context
indicates otherwise, the term "Company" includes all of these subsidiaries.
The Company's principal executive offices are located at 1990 Westwood
Blvd., Los Angeles, California 90025. Its telephone number is (310) 446-7700.
In November 1991, the Company completed its initial public offering of
securities, selling 525,000 Units at a price of $6.00 per Unit. Each Unit
consisted of two shares of Common Stock and one warrant. Each warrant entitled
the holder to purchase one share of Common Stock at a price of $4.00 per share
on or before November 1993. Net proceeds received by the Company from its
initial public offering were approximately $2,320,000. As a result of this
initial public offering, Ventura's ownership was reduced to approximately 59%.
During the year ended June 30, 1995, Ventura sold its remaining interest in the
Company. (See item 13, "Certain Relationships and Related Transactions")
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one reportable segment, producing television
commercials, music videos and related media.
NARRATIVE DESCRIPTION OF BUSINESS
The Company's historical business is the production of television
commercials which business continues to provide the preponderance of its
revenues.
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, ie. $50,000 to $100,000 and occasionally
up to $1,000,000. The Company is generally involved in the post production phase
of music videos which is not typically the case in commercial production. The
client for music videos is usually the record company or the performer directly
and not an advertising agency.
During January, 1995, the Company formed Harmony Media Communications,
Inc., and has entered the long-form advertising and infomercial business.
Infomercials, including interactive commercials, use a longer time format as a
vehicle for selling and demonstrating products and services. See "Infomercials"
in this item 1. Currently, the Company does an insignificant amount of
infomercial business.
Contracts for the production of television commercials are generally
awarded by advertsing agencies on behalf of their clients on the basis of
personal relationships between the advertising agency, the advertiser and the
television commercial production company, along with the expertise, reputation
and creative vision of the director and the budgeted cost of the commercial as
prepared by the production company.
2
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The Company has produced commercials for national advertisers and Fortune
500 companies such as ABC, AT&T, American Airlines, American Express, Bank of
America, BF Goodrich, Blue Cross/Blue Shield, Budweiser, Burger King, Anheuser
Busch Beer, Chevrolet, Chevron, Coca-Cola, Coors, Dodge, DuPont, Ford Motor
Company, Frito-Lay, General Dynamics, General Mills, General Motors, Goodyear,
Hallmark, Honda, Jeep, Kellogg's, Mattel, Mazda, McDonald's, Michelob, NASA,
NBC, Natural Light, Nissan, Panasonic, Pepsi, Phillip Morris, Quaker Oats,
Ralston/Purina, Sears, 7 Up, Texaco, Texas Instruments, 3M, Toyota, United
Airlines, and US Air, among others.
COMMERCIAL DIRECTORS
Each subsidiary company has under exclusive contract a group of
commercial television directors. These commercial television directors vary in
experience and in creative style. This varied talent pool results in the
Company's ability to produce a broad range of television commercials.
SALES AND MARKETING STRATEGY
The Company maintains excellent relationships with most of the major
advertising agencies, including Leo Burnett Advertising; Foote, Cone &
Belding; DDB Needham; Grey Advertising; Young & Rubicam; J. Walter Thomson;
McCann Erickson and Chiat/Day; among others. There were no agencies which
accounted for more than 10% of the Company's total revenue during 1996, while
one agency accounted for more than 15% of such total revenue of the Company
during 1995. In the event that the Company no longer receives contracts from
or through this agency, the Company does not consider that the loss would have
a material adverse effect on its business.
The Company has increased the breadth of experience of its of commercial
television directors by forming and building new commercial production
companies, each built around key management and commercial television
directors. The addition of the new commercial television directors filled
genre gaps within the Company. This has enhanced the Company's ability to bid
on advertising campaigns in different advertising areas.
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 budget for a commercial ranges from
$100,000 to $400,000 and occasionally may be 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 television directors. These efforts are usually directed
towards advertising agencies located in the major markets of New York, Los
Angeles, Chicago, Detroit, Dallas, San Francisco and in regional markets.
Like the commercial television directors, most sales personnel work
exclusively for a subsidiary from offices located in Los Angeles and New York.
The Company also employs independent sales representatives (or firms) on a
selected basis.
To sell the commercial television 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 television directors and highlighting different
creative areas and subject matter. These reels are constantly updated.
3
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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 or record company, or both. The End, Inc. has the
reputation and the relationships from which its business is derived.
INFOMERCIALS
During 1994, the Company entered into an infomercial 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. As of
June 30, 1996, the investment was $245,000 and has been written off as an
abandoned project.
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 corporate infomercial is designed to introduce new commercial brands,
sell products over television or retail outlets, or both reposition companies,
educate consumers, and demonstrate new technologies.
COMMERCIAL PRODUCTION PROCESS
The commercial production process is divided into several stages:
creating the concept; bidding; pre-production; principal photography; and
post-production. Commercial production companies producing live action
commercials usually enter the process at the bidding phase and leave the
process prior to the post production phase. Commercial production companies
like Curious Pictures Corporation which are involved in animation and special
effects will generally be involved in a job through post production. 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
a script and the visual story line. After the client approves the idea, the
agency approaches several production companies to determine how each company
and its director would bring the commercial concept to fruition. It is common
for the production companies to be selected for a bid based primarily on the
reputation and talent of commercial television 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 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 commercial production
company 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 advertising agency. The bid
includes the cost of shooting locations, actors (if applicable), technical
personnel, props and sets, and other production materials.
The advertising agency selects the production company. Several factors
contribute to this decision such as the director's creative ideas about how
the commercial would be shot, the bid submitted by the production
4
<PAGE>
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 or procured; and, if
applicable, characters are cast and wardrobe selected. At a formal meeting
preceding the principal photography, the advertising agency approves all of
the creative choices made in preparation for filming.
Principal Photography. Principal photography can require 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 process, the advertising agency and/or the client's
personnel approve each scene as it is shot.
The commercial is shot on motion picture film which is developed at a
laboratory. The developed images are then viewed by the advertising agency,
the client 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 correction of the final video. This process may also involve
voice-over, titles, music and special effects. While the commercial
television 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 advertising 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 advertising agency. The edit is
then completed and approved by the advertising agency and the client. Most
typically, the Company is not involved in the post production process.
The post production phase for music videos is more akin to movie
production than commercial production with respect 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 "firm" bid",
a cost plus fixed-fee" bid, or a "cost plus" 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 the
Company is responsible for unapproved cost overages that exceed the budget.
During fiscal 1996, approximately 95% of the Company's television commercial
productions were "firm" bid and approximately 5% were "cost plus/fixed-fee"
bid or "cost plus". This increased from approximately 92% "firm" bid and
decreased from approximately 8% "cost plus/fixed-fee" bid or "cost plus bid
during fiscal 1995.
The production company and the producer of the commercial carefully
monitor costs throughout the filming process. The agreed upon bid is sometimes
altered because the agency, client and director agree upon a new creative
option or because of unexpected occurrences such as inclement weather.
5
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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.
EMPLOYEES
The Company employs 55 persons on a full-time basis. Additionally, the
Company has 33 directors of commercials under contract most of whom are
independent contractors and 13 salespersons, some of whom are independent
contractors. Of such persons, 9 are officers or other senior executives of the
Company. The Company does not anticipate any material change in the number of
its full-time employees in the near future. None of the Company's full-time
employees are represented by a labor union and the Company believes that it
has good relationships with its employees.
The Company, through certain of it's 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 determinable. Industry strikes in
the future by members of these unions could delay or disrupt the Company's
activities.
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's large director roster with its
range of creative ability, expertise and wide experience coupled with the
Company's reputation, advertising agency relationships and financial strength,
provide the Company with a competitive edge.
Due to the fragmentation of the competition in this 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 3%, there is potential for significant growth.
There is no one commercial production company or group of companies that
dominates the industry. Harmony Holdings, Inc. believes it is the largest
company in the industry. There are no published or reliable sources of
information on other television commercial production companies with which to
make a 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.
6
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ITEM 2. PROPERTY
PROPERTIES AND FACILITIES
The Company leases the following properties:
<TABLE>
<CAPTION>
COMPANY / ADDRESS TERM OF LEASE SUMMARY OF RENTAL RATES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harmony Holdings, Inc. (Office) 2/1/95 - 1/31/2000 Years 1-3: $7500/month
1990 Westwood Blvd. Suite 310 Remainder $8,250/month
Los Angeles, California 90025
Years 1-3: $1,875/month
Space extension 4/1/95 - 1/31/2000 Remainder $2063/month
- ------------------------------------------------------------------------------------------------------
Harmony Pictures, Inc. (Office) 12/1/94 - 11/30/2001 $10,530/month
6806 Lexington Ave. 6/1/97: Increase of 7-1/2%
Hollywood, California 90038 12/1/99: Increase of 7-1/2%
- ------------------------------------------------------------------------------------------------------
Curious Pictures Corporation (Office 1/1/94 - 12/31/2003 Years 1-4: $11034/month
and Production) Remainder: $11979/month
440 Lafayette Street Annual rent increase of 3 1/2%
New York, New York 10003
Curious Pictures Corporation 4/1/95 - 3/31/97 Year one: $3,300/month
(Production) Year two: $3,400/month
48 Great Jones Street
New York, New York 10003
- ------------------------------------------------------------------------------------------------------
The End, Inc. (Office) Suite 400: 5/1/94 - 4/30/97 Monthly: $5,425
8060 Melrose Avenue 4th floor Suite 200: 5/1/94 - 4/30/97 $1,020
Los Angeles, California 90046 Suite 205: 4/1/95 - 4/30/97 $1,948
Suite 215: 4/1/95 - 4/30/97 $ 775
Suite 230: 12/1/94 - 4/30/97 $ 859
- ------------------------------------------------------------------------------------------------------
Harmony Media Communications, Inc. 4/1/95 - 1/31/2000 Years 1-3: $1,875/month
(Office) Remainder $2063/month
1990 Westwood Blvd. Suite 310
Los Angeles, California 90025
- ------------------------------------------------------------------------------------------------------
Harmony Pictures, Inc. 1/1/94 - 10/23/98 1995 $10,429/month
The End, Inc.(Office) 1996 $10,742/month
119 5th Avenue. 6th floor 1997 $11,064/month
New York, New York 10017 1998 $11,396/month
- ------------------------------------------------------------------------------------------------------
</TABLE>
The Company also leases storage facilities in New York, New York; Los
Angeles, California; and Sun Valley, California.
The Company believes that its current facilities are sufficient for its
immediate needs.
7
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ITEM 3. LEGAL PROCEEDINGS
A lawsuit was filed on March 22, 1996, (served August 12, 1996) in
Superior Court of the State of California, County of Los Angeles, Case
Number BC146878. A wrongful death claim has been made by the estate of Henry
Gillermo Urgoiti, his wife and three children for an accident that occurred
during the filming of a music video in August, 1995. The complaint contains
six causes of action, three causes for negligence, one cause for negligent
product liability, one cause for strict liability and one cause for breach of
warranty. Harmony Holdings, Inc., has been named in all six causes of action,
Harmony Pictures Inc., The End Inc. and three of it's employees have been
named in one of the negligence claims. Other defendants include Southern
California Edison, Virgin Records America, Inc. Bell Helicopters and Helinet
Aviation Services. Management has been advised by the Company's insurance
broker that there is adequate insurance to cover any damages assessed against
the Company.
The Company is not a party to any other material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Upon the completion of the Company's initial public offering in November
1991, its Common Stock began trading on NASDAQ under the symbol "HAHO". The
following table sets forth the high and low bid (or trade) price per share of
the Common Stock for the fiscal periods indicated, as provided to the Company
in monthly reports from NASDAQ.
<TABLE>
<CAPTION>
Fiscal Year - 1995:
- ------------------- High Low
Quarter Ended Bid Bid
- ------------- --- ---
<S> <C> <C>
September 30, 1994 3.75 2.75
December 31, 1994 3.50 2.88
March 31, 1995 3.75 2.69
June 30, 1995 4.19 3.38
</TABLE>
The quotations may include inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year - 1996:
- ------------------- High Low
Quarter Ended Bid Bid
- ------------- --- ---
<S> <C> <C>
September 30, 1995 3.63 1.63
December 31, 1995 2.63 1.38
March 31, 1996 2.56 1.38
June 30, 1996 2.88 1.91
</TABLE>
On September 16, 1996, the closing bid and asked prices were $1.69 and
$1.81 and the last trade was $1.81. On such date there were 74 holders of
record of the Common Stock.
The Company has never declared or paid cash dividends on its Common
Stock. The current policy of the Board of Directors is to retain earnings, if
any, to provide for the growth of the Company. Consequently, no cash dividends
are expected to be paid in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company is set forth below (000's
omitted except for per share data). This selected financial data should be
read in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited financial
statements included elsewhere in this Annual Report on Form 10-K.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
6/30/96 6/30/95 6/30/94 6/30/93 6/30/92
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract revenue $60,415 $61,227 $42,602 $24,786 $18,558
Cost of production 51,041 50,920 35,291 20,299 14,759
------- ------- ------- ------- -------
Gross profit 9,374 10,307 7,311 4,487 3,799
Selling expenses 3,001 2,808 2,223 1,518 465
Operating expenses 6,639 7,161 6,286 5,940 3,005
Depreciation and amortization 564 528 399 323 262
Abandoned projects 652 0 0 0 0
Litigation expense (1) 200 486 0 0 0
Severance salaries 186 0 0 0 0
------- ------- ------- ------- -------
Income (loss) from operations (1,868) (676) (1,597) (3,294) 67
Interest income (expense), net (243) (9) 23 88 25
Income (loss) before taxes (2,111) (685) (1,574) (3,206) 92
Income tax expense 20 0 0 0 22
------- ------- ------- ------- -------
Net income (loss) $(2,131) $ (685) $(1,574) $(3,206) $ 70
======= ======= ======= ======= =======
Net income (loss) per share $(0.37) $(0.12) $(0.30) $(0.84) $0.03
Average shares outstanding 5,692 5,567 5,316 3,800 2,765
</TABLE>
(1) The Company has reclassified litigation expense from the prior year shown as
non operating to current year shown as an operating expense.
10
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<TABLE>
<CAPTION>
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
6/30/96 6/30/95 6/30/94 6/30/93 6/30/92
- ------------------------------------------------------------------------------------
Cash $ 447 $ 230 $ 663 $ 1,917 $ 1,268
Current assets 4,986 7,707 5,487 5,522 3,072
Goodwill, net (1) 2,969 3,181 3,393 3,611 3,560
Total assets 9,687 12,955 10,345 9,950 6,900
Current liabilities 5,382 6,196 3,931 4,325 1,826
Subordinated notes payable 0 385 0 0 0
Total liabilities 5,382 6,581 3,931 4,325 1,826
Stockholders ' equity $ 4,304 $ 6,374 $ 6,414 $ 5,625 $ 5,075
</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".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
The Company's revenues have remained stable in recent years, due
primarily to management's goal of increasing profit margin. 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
continue increasing gross profits as a percentage of revenues and to increase
net income. The particular approaches or measures to increase profitability
include the following: revision of contractual arrangements with commercial
television directors to reduce the level of profit participation by such
directors with respect to individual commercial projects; increased
utilization of staff production personnel (as opposed to freelance personnel)
to reduce related costs of production; efforts to discourage the acceptance of
new projects on terms that are likely to result in low gross profit margins;
and a restructuring of sales commission arrangements to effect a sliding
scale reduction in such commissions that corresponds to reduced levels of
profitability of particular projects. During 1996, the Company ceased
operations of two businesses and several ventures that were not showing a
profit or potential for profit in the foreseeable future.
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, 1996, 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 on the following page.
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Year Ended June 30, 1996 as Compared with Year Ended June 30, 1995
------------------------------------------------------------------
For the year ended June 30, 1996, revenues decreased by approximately 1%,
or $812,124, to $60,414,694 from $61,226,818 for the year ended June 30, 1995.
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. The companies that ceased operations during
1996 accounted for $4,223,325 or 7% of the Company's revenue.
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, 1996, increased by
approximately .2%, or $120,507, to $51,040,839 from $50,920,332 for the year
ended June 30, 1995. Expressed as a percentage of revenues, cost of production
for fiscal 1996 was approximately 84% compared with 83% for fiscal 1995, and
resulted in a gross profit percentage of approximately 16% and 17%,
respectively. The fact that cost of production and gross profit remained
steady for the year ended June 30, 1996, was primarily due to management's
continuing efforts to reduce costs and maximize it's purchasing power,
countered by the increased competitive factors within the commercial
production industry. Cost of production for operations ceased during the year
was $4,120,503 expressed as a percentage of revenue was 98% and resulted in a
gross profit of 2%.
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, 1996,
increased to $3,000,549 from $2,807,902 for the year ended June 30, 1995
representing an increase of $192,647. Selling commissions decreased by
$30,221, while other selling expenses increased by $222,868, $120,101 of the
increase in other selling expenses was attributable to an increase in costs
incurred for speculation commercials produced to enhance existing directors
show reels and not as a result of a contract with an advertising agency.
Selling expenses for the operations ceased during the year was $201,403 or 7%
of the total selling expenses.
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, 1996, decreased to $6,638,908
from $7,161,205 for the year ended June 30, 1995, representing a decrease of
$522,297 or 7%. $587,651 relates to subsidiaries that have ceased operations.
The following account for the primary changes in operating expenses: decrease
in salaries $645,000, decrease in entertainment and travel $119,000 and a
decrease in office relocation costs $56,000, offset by an increase in outside
accounting fees $123,000, increase in bad debts $45,000, increase in legal
fees $64,000 and an increase in office expense $88,000.
Depreciation expense increased for the year ended June 30, 1996, to
$564,271 from $528,259 for the year ended June 30, 1995, representing a
increase of $36,012. The change is due to the increase in depreciable assets
of $336,272 and a one time write off of $24,887 in net book value, of assets,
due to the termination of operations of two of the Company's subsidiaries.
Litigation expense for June 30, 1996, and 1995, relate to the termination
of and settlement with a former chief operating officer of the Company, Tara
McCarthy. The $486,050 in litigation expense as of June 30, 1995, is net of an
expected insurance reimbursement of $283,950 of which $200,000 was reversed as
of June 30, 1996.
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 production of 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, $82,000 for placement of
corporate products and a book on tape distribution system.
Severance salaries are the costs associated with the termination of
former employees of the Company.
Interest income decreased for the year ended June 30, 1996, to $4,644
from $56,346 for the year ended June 30, 1995, representing a decrease of
$51,702. The decrease was a result of a less cash held in short term
investments.
12
<PAGE>
Interest expense increased for the year ended June 30, 1996, to $247,663
from $65,314 for the year ended June 30, 1995, representing an increase of
$182,349. The increase was a result of borrowings under a line of credit
agreement which accounted for $71,631 plus amortized loan fees of $54,072 and
interest and amortization of original issue discount for the subordinated debt
of $115,604.
Income tax expense was $20,000 for the year ended June 30, 1996. The tax
expense is attributable to state taxes imposed by various states in which the
companies conduct business. A full valuation allowance has been established as
it is more likely than not that the deferred tax assets will be not realized.
During the years ended June 30, 1996, 1995 and 1994, the Company's effective
income tax rate varied from the statutory federal tax rate as a result of
operating losses for which no tax benefit has been recognized due to the
change in the valuation allowance on the net deferred tax asset.
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. Due to increased sales. 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 television 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 it's purchasing power, not withstanding the
increased competition within the commercial production industry.
Selling expenses consist of salesman 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: $470,000 profit
participation included in salary expense relating to three profitable
subsidiaries; $180,000 increase in travel and entertainment expenses relating
to the higher sales volume; $100,000 increase rent expense relating to
expansion of Company facilities; and $125,000 increase in other operating
expenses. The decrease in reorganization costs from the prior year was offset
by an increase in labor costs of $330,000 and a one time cost of $125,000
relating to the reorganization of the accounting function.
The $486,050 in litigation expense is net of a 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.
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.
Interest income increased $21,843 during fiscal 1995 due to a better cash
management program placed in effect during the fourth quarter of fiscal 1994.
Additionally, the companie's excess cash had been held in demand
13
<PAGE>
accounts or passbook accounts and a change has been made to invest in a daily
liquid money market fund.
Interest expense increased from zero to $53,448 during fiscal 1995 due to
the issue of subordinated notes.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of "
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December
15, 1995. The new standard establishes new guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment, and
certain identifiable intangible assets, should be recognized and how
impairment losses should be measured. The Company does not expect adoption to
have a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation": (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into
after December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December
15, 1995. The new standard establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity
acquires goods or services from non-employees in exchange for equity
instruments. At the present time, the Company does not plan to change its
accounting policy for stock based compensation but will provide the required
financial statement disclosures. The Company does not expect adoption to have
a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 125, :"Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS No. 125) issued by the Financial Accounting Standards Board
(FSAB) is effective for transfers and servicing of financial assets and
extinguisments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive applications is not permitted.
The new standard provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
does not expect adoption to have a material effect on its financial position
or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Year Ended June 30, 1996 as Compared with Year Ended June 30, 1995
------------------------------------------------------------------
As of June 30, 1996, the Company's current liabilities exceed current
assets by $396,296 including cash of $446,740 compared to working capital of
$1,510,959, including cash of $229,909 at June 30, 1995. Cash provided by
operating activities for the year ended June 30, 1996, increased 131% or
$812,192 to $191,544 from cash used in operations of $620,648 for the year
ended June 30, 1995. The material increases in the amount of cash provided by
operations were $1,445,343 increase in loss from operations; $5,124,793
decrease in billed and unbilled accounts receivable; $3,821,663 decrease in
accounts payable and accrued expenses and $810,570 decrease in prepaid
expenses and other assets.
Cash used in investing activities (ie:capital expenditures) for the year
ended June 30, 1996, decreased 52% or $369,343 to $336,272 from $705,615 for
the year ended June 30, 1995. The decrease was primarily due to a decrease in
the amount of capital expenditures.
Cash provided by financing activities for the year ended June 30, 1996
decreased 60% or $531,836 to $361,559 from $893,395 for the year ended June
30, 1995. The material decrease in the amount of cash provided by financing
activities were $446,836 decrease in the proceeds from the issuance of stock,
$385,000 decrease in subordinated debt and a $300,000 increase in net
borrowings on the line of credit agreement.
14
<PAGE>
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, 1996 was 8.25%. The agreement expires October 31, 1996.
Borrowing is based upon certain percentages of acceptable receivables. There
were $300,000 outstanding on the line of credit as of June 30, 1996. The loan
agreement has certain financial covenants, two of which are to maintain
profitability on a quarterly basis and maintain a minimum working capital, net
of accounts receivable reserves of $1,250,000. As of June 30, 1996, the
Company was not in compliance with these requirements 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, as of June 30, 1996
had entered into various employment agreements with its officers and others
which obligate it to make minimum payments of approximately $3,932,209 over
the next three years. The payment due are $2,529,876 and $882,333 and $520,000
for the years ended June 30, 1997, 1998 and 1999. Of these amounts $1,911,005
is for administrative personnel and $2,021,204 are for commercial television
directors and salespeople. 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.
Some of the television directors who are associated with the Company receive
monthly draws against the directors' compensation for production of
commercials. The monthly draws equal the minimum guaranteed compensation
payable to such directors. Although the draws are recoupable 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 compensation to these directors whether or not they are
directing commercials. Most of the Company's sales personnel receive monthly
draws offset by their earned commissions. During the fiscal year ended June
30, 1996, the Company paid $1,931,359 in such draws to these directors and
sales people; they earned $2,580,179 in fees, which sum exceeded the draws
advanced by $835,495. On a individual basis some of the directors and sales
personnel's fees earned were less then their draws and increased the
Company's losses by $158,227.
Pursuant to a Stock Subscription Agreement entered into in July 1996, the
Company sold to Unimedia, S.A., a French company ("Unimedia"), 1,000,000
shares of Common Stock of the Company at a purchase price of $2.00 per share.
The purchase price was received by the Company on August 16, 1996, and the
certificates representing such shares were issued in the name of Unimedia on
August 20, 1996. The shares were not included in an effective Registration
Statement under the Securities Act of 1933, as amended ("the "Act"), but were
issued pursuant to the exemption set forth in Section 4(2) of the Act and the
Rules and Regulations issued thereunder by the Securities and Exchange
Commission ("SEC").
The Company, its Chairman of the Board and Unimedia entered into an
agreement dated July 27, 1996, requiring the parties to negotiate in good
faith before September 30, 1996, an agreement providing for the sale of all
the ordinary shares of Unimedia by the holders thereof in exchange for
10,000,000 shares of Preferred Stock and 10,000,000 shares of Common Stock of
the Company. Such an agreement was not negotiated before September 30, 1996,
and accordingly the transaction, although previously publicly announced, will
not be consummated.
The Company has no material commitments for capital expenditures and has
not made any arrangements for external sources of financing other than what
has been disclosed. 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 decreases in the amount of cash
used in operations were $888,808 decrease in loss from operations; $1,460,064
increase in billed and unbilled accounts receivable and $2,624,064 increase in
accounts
15
<PAGE>
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 were
$1,717,522 decrease in the proceeds from the issuance of stock and $385,000
increase in subordinated debt.
INFLATION Inflation has not had a significant effect on the Company.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants....... 18-19
Consolidated Balance Sheets as of June 30, 1996
and 1995.............................................. 20
Consolidated Statements of Operations for the
years ended June 30, 1996, 1995 and 1994............... 21
Consolidated Statement of Stockholders' Equity
for the years ended June 30, 1996, 1995 and 1994...... 22
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994.................... 23
Notes to Consolidated Financial Statements............... 24-33
Financial Statement Schedule II - Valuation and
Qualifying Accounts................................... 34
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Harmony Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Harmony
Holdings, Inc. as of June 30, 1996 and June 30, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years then ended. We have also audited the schedule listed in the
accompanying index. These consolidated financial statements and schedule 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements and schedule. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation
of the financial statements and schedule. 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, 1996 and June 30, 1995 and the
consolidated results of its operations and its cash flows for each of the
years then ended in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
August 16, 1996
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Harmony Holdings, Inc.
We have audited the accompanying consolidated statements of operations, cash
flows and stockholders' equity of Harmony Holdings, Inc. for the year ended June
30, 1994. 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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above of
Harmony Holdings, Inc. present fairly, in all material respects, the
consolidated results of its operations and its cash flows for the year ended
June 30, 1994 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
19
<PAGE>
<TABLE>
<CAPTION>
HARMONY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
----------------------------
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current Assets:
Cash $ 446,740 $ 229,909
Accounts receivable - net of allowance for doubtful account of
$75,629 and $25,864 (Note 8) 3,725,404 5,294,213
Unbilled accounts receivable 376,811 1,434,402
Prepaid expenses and other assets 437,153 748,330
----------- -----------
Total current assets 4,986,108 7,706,854
Property and equipment, at cost, less accumulated depreciation and amortization (Note 2) 1,565,672 1,581,891
Goodwill, less accumulated amortization of $1,242,862 and $1,031,082 2,969,446 3,181,226
Other assets 165,546 484,974
----------- -----------
Total Assets $ 9,686,772 $12,954,945
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,242,517 $ 2,267,134
Accrued liabilities (Note 7) 2,087,787 2,815,721
Deferred income 1,367,100 1,113,040
Bank line of credit (Note 8) 300,000 0
Current portion of subordinated notes payable 385,000 0
----------- -----------
Total current liabilities 5,382,404 6,195,895
Subordinated notes payable (Note 9) 0 385,000
----------- -----------
Total Liabilities 5,382,404 6,580,895
Commitments and contingencies (Note 10)
Stockholders' Equity (Notes 11 and 12):
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 (8,487,701) (6,356,460)
----------- -----------
Stockholders' equity 4,304,368 6,374,050
----------- -----------
Total Liabilities and stockholders' equity $ 9,686,772 $12,954,945
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Contract revenues $60,414,694 $61,226,818 $42,601,579
Cost of production 51,040,839 50,920,332 35,291,076
----------- ----------- -----------
Gross profit 9,373,855 10,306,486 7,310,503
Selling expenses 3,000,549 2,807,902 2,222,988
Operating expenses 6,638,908 7,161,205 6,285,979
Depreciation and amortization 564,271 528,259 398,879
Abandoned projects (Note 4) 651,861 0 0
Litigation expense (Note 3) 200,000 486,050 0
Severance salaries (Note 5) 186,488 0 0
----------- ----------- -----------
Loss from operations (1,868,222) (676,930) (1,597,343)
----------- ----------- -----------
Interest income 4,644 56,346 34,503
Interest expense (247,663) (65,314) (11,866)
----------- ----------- -----------
Loss before income taxes (2,111,241) (685,898) (1,574,706)
Income tax expense (Note 6) 20,000 0 0
----------- ----------- -----------
Net loss $(2,131,241) $ (685,898) $(1,574,706)
=========== =========== ===========
Net loss per share $ (0.37) $ (0.12) $ (0.30)
Weighted average shares outstanding 5,692,120 5,567,242 5,315,934
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------ ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID IN CAPITAL DEFICIT EQUITY
------ ------ --------------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1993 4,635,730 $46,357 $ 9,674,565 $(4,095,856) $ 5,625,066
Sale of common stock 791,590 7,916 2,355,639 0 2,363,555
Net loss 0 0 0 (1,574,706) (1,574,706)
--------- ------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1994 5,427,320 54,273 12,030,204 (5,670,562) 6,413,915
Sale of common stock 232,900 2,335 643,698 0 646,033
Net Loss 0 0 0 (685,898) (685,898)
--------- ------- ----------- ----------- -----------
BALANCE AT JUNE 30,1995 5,660,220 56,608 12,673,902 (6,356,460) 6,374,050
Sale of common stock 32,978 325 61,234 0 61,559
Net Loss 0 0 0 (2,131,241) (2,131,241)
--------- ------- ----------- ----------- -----------
BALANCE AT JUNE 30,1996 5,693,198 $56,933 $12,735,136 $(8,487,701) $ 4,304,368
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE>
HARMONY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------
Increase (Decrease) in cash 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,131,241) $ (685,898) $(1,574,706)
Adjustments to reconcile net loss to cash used by operating
activities:
Depreciation and amortization 564,271 528,259 398,879
Amortization of prepaid interest 91,759 42,056 0
Changes in operating assets and liabilities:
Accounts receivable 1,568,809 (1,795,182) (1,222,802)
Unbilled accounts receivable 1,057,591 (703,211) 184,473
Prepaid expenses and other assets 311,177 (153,991) (159,179)
Other assets 227,669 (117,733) (158,486)
Accounts payable (1,024,617) 763,302 108,718
Accrued liabilities (727,934) 1,305,810 (663,670)
Deferred income 254,060 195,940 160,534
----------- ----------- -----------
Net cash provided by (used in) operating activities 191,544 (620,648) (2,926,239)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (336,272) (732,259) (669,613)
Net Loans to Ventura - line of credit 0 26,644 (22,110)
----------- ----------- -----------
Net cash used by investing activities (336,272) (705,615) (691,723)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 61,559 508,395 2,363,555
Issuance of subordinated notes payable 0 385,000 0
Net Borrowings under bank line of credit 300,000 0 0
----------- ----------- -----------
Net cash provided by financing activities 361,559 893,395 2,363,555
----------- ----------- -----------
Net increase (decrease) in cash 216,831 (432,868) (1,254,407)
Cash, beginning of year 229,909 662,777 1,917,184
----------- ----------- -----------
Cash, end of year $ 446,740 $ 229,909 $ 662,777
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 71,631 $ 10,632 $ 11,867
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.
</TABLE>
See accompanying notes to consolidated financial statements
23
<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. to the Company. During the year ended June
30,1996, the Company had six operating subsidiaries: Harmony Pictures,
Inc., Melody Films, Inc., The End, Inc., Velocity Film, Inc., Curious
Pictures Corporation and Harmony Media Communications. 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, 1996 and 1995, the Company had no long-
term contracts. Contract revenues are recognized using the percentage of
completion method. The percentage of contract revenues recognized is
computed at that percentage of estimated total revenues that incurred costs
to date bears to total estimated costs, after giving effect to the most
recent estimate of costs to complete. Revisions in costs and revenue
estimates are reflected in the period in which the facts which require the
revision become known. Deferred income represents amounts billed in excess
of revenues earned.
Property and Equipment
----------------------
Property and equipment are stated at cost. Major improvements and
replacements of property and equipment are capitalized. Maintenance and
repairs are expensed. Upon retirement or other disposition of property,
applicable cost and accumulated depreciation and amortization are removed
from the accounts and any gains or losses are included in operations.
Depreciation of property and equipment is computed using the straight-
line method based on estimated useful lives ranging from three to seven
years. Leasehold improvements are amortized using the straight-line method
over the term of the lease or the life of the related improvements,
whichever is shorter.
Reclassifications
-----------------
The Company has reclassified litigation expense from the prior year
shown as non operating to current year shown as an operating expense.
24
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
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.
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.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards No. 121, "Accounting of
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of" (SFAS No. 121) issued by the Financial Accounting Standards
Board (FASB) is effective for financial statements for fiscal years
beginning after December 15, 1995. The new standard establishes new
guidelines regarding when impairment losses on long-lived assets, which
include plant and equipment, and certain identifiable intangible assets,
should be recognized and how impairment losses should be measured. The
Company does not expect adoption to have a material effect on its financial
position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation": (SFAS No. 123) issued by the Financial
Accounting Standards Board (FASB) is effective for specific transactions
entered into after December 15, 1995, while the disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years
beginning after December 15, 1995. The new standard establishes a fair
value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from non-
employees in exchange for equity instruments. At the present time, the
Company does not plan to change its accounting policy for stock based
compensation but will provide the required financial statement disclosure.
The Company does not expect adoption to have a material effect on its
financial position or results of operations.
25
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED:
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS No. 125) issued by the Financial Accounting Standards
Board (FSAB) is effective for transfers and servicing of financial assets
and extinguisments of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive applications is not
permitted. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The Company does not expect adoption to have a material effect
on its financial position or results of operations.
2. PROPERTY AND EQUIPMENT:
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Furniture and fixtures $ 793,984 $ 709,626
Computer equipment 1,004,781 859,089
Leasehold improvements 681,721 617,308
---------- ----------
2,480,486 2,186,023
Less: accumulated depreciation and 914,814 604,132
amortization
---------- ----------
$1,565,672 $1,581,891
========== ==========
</TABLE>
26
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
3. LITIGATION EXPENSE:
Litigation expense for June 30, 1996, and 1995, relate the termination
and settlement with a former chief operating officer of the Company, Tara
McCarthy. The $486,050 in litigation expense as of June 30, 1995, is net of
an expected insurance reimbursement of $283,950 of which $200,000 was
reversed as of June 30, 1996.
4. RELATED PARTY TRANSACTIONS:
During 1994, the Company entered into an informal arrangement to loan
money to 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. As of June 30 , 1996, the infomercial was
determined not to have value and is included in abandoned projects.
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. SEVERANCE SALARIES
Severance salaries are the costs associated with the termination of
former employees of the Company.
27
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
6. INCOME TAXES:
For the year ended June 30, 1996 income tax expense consisted of state
taxes currently payable. For the years ended June 30, 1995 and 1994, the
Company had no current and deferred income tax expense.
The primary component of temporary differences which give rise to the
Company's net deferred asset at June 30, is as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 3,103,000 $ 2,388,000
Accrued vacation 63,000 0
Accounts receivable reserve 30,000 0
Prepaid interest 54,000 0
Other temporary differences 7,000 12,000
----------- -----------
3,257,000 2,400,000
Deferred tax liabilities (30,000) (83,000)
Valuation allowance (3,227,000) (2,317,000)
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========
</TABLE>
A full valuation allowance has been established as it is more likely
than not that the deferred tax assets will be not realized.
During the years ended June 30, 1996, 1995 and 1994, 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 due
to the change in the valuation allowance on the net deferred tax asset.
At June 30, 1996, the Company has federal and California net operating
loss carry forwards for tax purposes of approximately $8.2 million and $3.0
million which expire during fiscal year 2011. The Company's ability to
utilize the net operating loss carry forwards are dependant upon the
Companies ability to generate taxable income in future periods and is
limited to $1.3 million per year, due to ownership changes as defined under
Section 382 of the Internal Revenue Code of 1986 (the "Code"). Any unused
portion can be carried forward and utilization of the net operating loss
carry forward may be limited in any one year by alternative minimum tax
rules.
28
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
7. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Accrued production costs $ 806,289 $1,118,296
Accrued director fees 652,983 953,108
Other 628,515 744,317
---------- ----------
$2,087,787 $2,815,721
========== ==========
</TABLE>
8. 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
bank's prime rate at June 30, 1996, was 8.25%. The maximum outstanding
during the year ended June 30, 1996 was $2,200,000 and the weighted average
interest rate paid during the year ended June 30, 1996 was 8.23%. The
agreement expires October 31, 1996. Borrowing is based upon certain
percentages of acceptable receivables. There was $300,000 outstanding on
the line of credit as of June 30, 1996. The carrying amount approximates
fair value. The loan agreement has certain financial covenants, two of
which are to maintain profitability on a quarterly basis and maintain a
minimum working capital, net of accounts receivable reserves of $1,250,000.
As of June 30, 1996, the Company was not in compliance with these
requirements and the noncompliance was waived by the bank.
9. 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 closing of the Company's next underwritten public
offering of securities. These notes are subordinated to any future
institutional lender. Due to the relatively short-term maturity, the
carrying amount approximates fair value. These notes were paid on July 10,
1996.
Additionally, in connection with the issuance of the subordinated
notes, 77,000 shares of restricted common stock were issued in February,
1996.
The value assigned to the restricted stock is recorded as prepaid
interest and is being amortized over the period of the subordinated notes.
29
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES:
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, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 645,448
1998 532,486
1999 468,000
2000 372,154
2001 289,773
Thereafter 420,214
----------
Total minimum payments $2,728,075
==========
</TABLE>
Total rental expense for the years ended June 30, 1996, 1995 and 1994
aggregated $696,110, $670,285 and $574,425.
The Company has entered into various employment agreements with its
officers and others which obligate it to make minimum payments of
approximately $3,932,209 as of June 30, 1996. Of this amount $1,911,005 is
for administrative personnel and $2,021,204 are for television directors
and salespeople. 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. Some of the directors who are associated with the Company receive
monthly draws against the directors' compensation for production of
commercials. The monthly draws equal the minimum guaranteed compensation
payable to such directors. Although the draws are recoupable 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 compensation to these directors whether or
not they are directing commercials. Most of the Company's sales personnel
receive monthly draws offset by their earned commissions. During the fiscal
year ended June 30, 1996, the Company paid $1,931,359 in such draws to
these directors and sales people; they earned $2,580,179 in fees, which sum
exceeded the draws advanced by $835,495. On a individual basis some of the
directors and sales personnel's fees earned were less then their draws and
increased the Company's losses by $158,227.
A lawsuit was filed on March 22, 1996, (served August 12, 1996) in
Superior Court of the State of California, County of Los Angeles, Case
Number BC146878. A wrongful death claim has been made by the estate of
Henry Gillermo Urgoiti, his wife and three children for an accident that
occurred during the filming of a music video in August, 1995. The complaint
contains six causes of action, three causes for negligence, one cause for
negligent product liability, one cause for strict liability and one cause
for breach of warranty. Harmony Holdings, Inc., has been named in all six
causes of action, Harmony Pictures Inc., The End Inc. and three of it's
employees have been named in one of the negligence claims. Other defendants
include Southern California Edison, Virgin Records America, Inc. Bell
Helicopters and Helinet Aviation Services. While it is to early in the
discovery process to assess economic risk or insurance coverage. Management
has been advised by the Company's insurance broker that there is adequate
insurance to cover any damages assessed against the Company.
30
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
11. STOCKHOLDERS' EQUITY:
At June 30, 1996, the Company had 329,050 class C Warrants
outstanding. Each C Warrant is exercisable through December 15, 1996 into
one share of common stock at a price of $2.31 each.
12. STOCK OPTION PLAN:
The Company adopted a Stock Option Plan on August 7, 1991, as amended
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 as the Board of Directors of the
Company (the "Board"), or a committee thereof constituted for that purpose,
may from time to time determine.
The Stock Option Plan provides for the granting of an aggregate of
incentive and non-incentive options to purchase a maximum of 3,250,000
shares of the Common Stock. The Stock Option Plan authorizes the grant of
options to employees intended to qualify as incentive stock options
("Incentive Options") under Section 422 of the Code, and the grant of
options which 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 of a parent or a subsidiary unless the exercise
price for stock subject to such options is at least 110% of the fair market
value of such stock at the time of grant and the option term does not
exceed five years.
The term of each option shall be fixed by the Board and may not exceed
ten years from the date of grant. If a participant who holds options
ceases, for any reason, to be an employee, consultant or director of
otherwise affiliated with the Company (the "Termination"), the option
expires 90 days after the 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 in any calendar year may not exceed $100,000.
Upon the exercise of options, the option exercise price must be paid
in full, either in cash or other form acceptable to the Board, including
delivery of a full recourse promissory note, delivery of shares of Common
Stock already owned by the option holder or delivery of other property.
Unless terminated earlier, the Stock Option Plan will terminate on August
7, 2001.
31
<PAGE>
HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
12. STOCK OPTION PLAN CONTINUED:
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>
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>
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>
STOCK OPTIONS
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>
13. BUSINESS SEGMENT INFORMATION:
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,
respectively. During fiscal 1996 no one customer accounted for more than
10% of revenues.
32
<PAGE>
14. CONCENTRATION OF CREDIT RISKS:
The Company's cash is deposited 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, 1996, the
Company's deposits with two financial institutions exceed the maximum
amount insured by the FDIC by $568,134 as of June 30, 1996. Two customers
accounted for 20% and 11% of accounts receivable as of June 30, 1996.
15. SUBSEQUENT EVENT:
Pursuant to a Stock Subscription Agreement entered into in July 1996,
the Company issued 1,000,000 shares of common stock for $2.00 per share.
33
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED DEDUCTIONS BALANCE AT
BEGINNING OF YEAR TO COSTS AND EXPENSES END OF YEAR
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Allowance for
doubtful
accounts 0 25,864 0 25,864
1996
Allowance for
doubtful
accounts 25,864 49,765 0 75,629
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<PAGE>
PART III
MANAGEMENT
PART III
MANAGEMENT
ITEM 10. 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 June 30, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Harvey Bibicoff 57 Chairman of the Board, Chief Executive
Officer, Director and Acting Chief
Executive Officer and President of Harmony
Pictures, Inc.
Brian Rackohn 36 Chief Financial Officer, Secretary
Stephen Oakes 41 President of Curious Pictures, Inc.
Elizabeth Silver 35 President of The End, Inc.
Ivan Berkowitz 50 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. Since May 1996, Mr. Bibicoff has acted as Chief Executive
Officer of Harmony Pictures, Inc. 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 Science degree from Bowling Green State University in 1960 in
business and finance and a J.D. degree from Columbia University School of Law in
1963. He was previously admitted to the practice of law in New York State.
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.
Stephen Oakes has been President of Curious Pictures Corporation since
January 1993. Prior to that, Mr. Oakes founded Broadcast Arts in 1981. He has
directed over 270 mixed-media commercials, was creative director and producer
for the original season of "Pee-Wee's Playhouse" for CBS, and was designer,
director or producer of on-air graphics and program openings for networks and
cable groups, including CBS, MTV, HBO, Cinemax and Showtime.
35
<PAGE>
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.
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 stock holders. There are no family relationships
between any of the officers and Directors.
36
<PAGE>
ITEM 11. 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 (6)
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 (5) 1996 250,000 235,172 -- --
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.
(5) On June 30, 1996, Mr. Miller's contract expired and was not renewed.
(6) On August 15, 1996, Mr. Horowitz exercised a put to Mr. Bibicoff for all
225,000 options that was part of the settlement agreement.
37
<PAGE>
Stock Option Grants in Fiscal Year ended June 30, 1996. The following table
contains information concerning the grant of stock options under the Stock
Option Plan to the Named Executive Officers, as that term is defined by Rule
402(a)(3) of Regulation S-K of the Rules and Regulations adopted by the SEC
under the Act, in the fiscal year ended June 30, 1996:
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
----------------- ---------------
% OF TOTAL
OPTIONS
OPTIONS GRANTED IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ------- ----------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Gary Horowitz 225,000 51% $1.50 02/12/01 $93,000 $206,000
</TABLE>
Stock Option Exercises in Fiscal Year ended June 30, 1996 and Option Values at
June 30, 1996. The following table provides information on the Named Executive
Officers' unexercised options at June 30, 1996. None of the Named Executive
Officers exercised any options during the fiscal year ended June 30, 1996:
STOCK OPTION VALUES AT JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 6/30/96
NAME SHARES ACQUIRED DOLLAR VALUE NUMBER OF VALUE OF
FROM OPTIONS REALIZED ON UNEXERCISED IN-THE-MONEY
EXERCISED EXERCISE OPTIONS/SARS OPTIONS/SARS
AT FY-END (#) AT FY-END ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary Horowitz 0 0 275,000 (e) 141,750 (e)
Harvey Bibicoff 0 0 275,000 (e) 0 (e)
Jonathan Miller 0 0 100,000 (e) 0 (e)
Brian Rackohn 0 0 37,500 (e) 0 (e)
12,500 (ue) 0 (ue)
</TABLE>
EXERCISABLE (E)
UNEXERCISABLE (UE)
COMPENSATION OF DIRECTORS
No fees were 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 non-officer or
non-employee Directors during the fiscal year ending 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.
38
<PAGE>
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
officers' 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 was 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. There was no bonus due for fiscal 1996 and $235,172 was paid for
fiscal 1995.
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
contractual 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 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 the services of Mr. Horowitz
as its President and Chief Executive Officer.
STOCK OPTIONS
The Company has a Stock Option Plan, which was adopted on August 7,
1991, and amended at the 1996 Annual Meeting of Shareholders held 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
employees intended to qualify as incentive stock options ("Incentive Options")
under Section 422 of the Code, and the grant of options which 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
39
<PAGE>
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 in any calendar year may not
exceed $100,000.
Upon the exercise of options, the option exercise price must be paid in
full, either in cash or other form acceptable to the Board, 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:
INCENTIVE STOCK OPTIONS
<TABLE>
<CAPTION>
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>
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:
OTHER STOCK OPTIONS
<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>
40
<PAGE>
COMPARISON OF FIVE YEAR CUMULATIVE STOCKHOLDER RETURN
The following graph shows the cumulative return experienced by the
Company's stockholders during the period July 1, 1992 through June 30, 1996 as
compared with the NASDAQ Total Return Index (U.S.) And the NASDAQ Tele-
communications Stock Index. The graph assumes $100 on July 1, 1992 in the
Company's Common Stock and each of the indices. Total return calculations
assume the reinvestment of all dividends. Harmony Holdings, Inc. has never paid
dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE STOCKHOLDER RETURN AMONG
HARMONY HOLDINGS, INC., NASDAQ TOTAL RETURN INDEX & NASDAQ FINANCIAL
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period HARMONY NASDAQ NASDAQ
(Fiscal Year Covered) HOLDINGS Total Return Financial
- ------------------- -------- ------------ ---------
<S> <C> <C> <C>
Measurement Pt- 7/1/92 $100.00 $100.00 $100.00
FYE 6/30/93 $208.00 $126.00 $131.00
FYE 6/30/94 $ 92.00 $127.00 $148.00
FYE 6/30/95 $117.00 $170.00 $169.00
FYE 6/30/96 $ 90.00 $218.00 $220.00
</TABLE>
41
<PAGE>
ITEM 12. 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 and (iii) all executive
officers and Directors of the Company as a group. Except as noted, the person
named has sole voting and dispositive power over the total number of shares
beneficially owned:
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND NATURE OF PERCENTAGE
ADDRESS OF BENEFICIAL OF OUTSTANDING
BENEFICIAL OWNER (1) OWNERSHIP (2) COMMON STOCK
- -------------------- ------------- --------------
<S> <C> <C>
Harvey Bibicoff 1,060,000 (4) 18.6%
Gary Horowitz 225,000 (3)(4)(5)(7) 5.4%
Jonathan Miller 100,000 (4)(6) 1.7%
Brian Rackohn 37,500 (5) 0.0%
Ivan Berkowitz 25,000 0.0%
Harry Shuster 25,000 0.0%
All officers and Directors
as a group
(6 persons) 1,472,500 (5) 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 the services of 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) Includes 225,000 immediately exercisable options for Mr. Horowitz, 275,000
immediately exercisable options for Mr. Bibicoff and 100,000 immediately
exercisable options for Mr. Miller.
(5) 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.
(6) On July 15, 1996, Mr. Miller resigned from the Board of Directors of the
Company.
(7) On August 22, 1996, Harvey Bibicoff purchased Gary Horowitz options to
purchase 225,000 shares.
42
<PAGE>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. As of June 30,
1996 the cost of the investment was $245,000 and has been written off as an
abandoned project.
On February 25, 1994 (amended on April 8, 1994), the Company entered
into a revolving line of credit arrangement to loan money to 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 the note was paid in full on May 12, 1994.
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 carry forwards 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 carry forwards aggregating $1,788,781
because these tax loss carry forwards have a remaining term of thirteen years,
Harmony's management believes it can utilize these tax loss carry forwards in
less than thirteen years. The tax loss carry forwards 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 carry forwards 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 carry forwards during the then current tax year. Since there is no
assurance that Harmony will ever be able to utilize the tax loss carry forwards,
Harmony wrote-off the value of the tax loss carry forward rather than carry such
value on its books.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The audited consolidated financial statements of Harmony Holdings, Inc. and
Subsidiaries filed as a part of this Annual Report on Form 10-K are listed
in the "Index to Consolidated Financial Statements" preceding the Company's
Consolidated Financial Statements contained in item 8 of this Annual Report
on Form 10-K, which "Index to Consolidated Financial Statements" is hereby
incorporated herein by reference.
(b) Reports on Form 8-K
Harmony Holdings, Inc. filed no Current Report on Form 8-K during or with
respect to the last quarter of the fiscal year ended June 30, 1996.
(c) Exhibits
The following documents required by Item 601 of Regulation S-K are filed as
exhibits or are incorporated by reference herein.
(d) The following financial statement schedule is included in Item 8 of
this report:
Schedule II - Valuation and Qualifying Accounts
All other schedules required by form 10-K Annual Report have been omitted
because they were not applicable, were included in the Notes to the
Consolidated Financial Statements, or were otherwise not required under the
instructions contained in Regulation S-X.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3. 1 Restated Certificate of Incorporation of Company, filed in the office
of the Secretary of State of the State of Delaware, filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 (Registration
No. 33-3342193), is hereby incorporated by reference.
3. 3 By-laws of Registrant, filed in the office of the Secretary of State
of the State of Delaware, filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-3342193), is
hereby incorporated by reference.
3.3.1 Amendment No. 1 to By-laws of Registrant, filed in the office of the
Secretary of State of the State of Delaware, filed as Exhibit 3.3.1 to
the Company's Registration Statement on Form S-1 (Registration No. 33-
3342193), is hereby incorporated by reference.
10. 1 1991 Stock Option Plan, filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-3342193), is
hereby incorporated by reference.
10. 3 Form of Employment Agreement dated as of May 2, 1994 by and between
Registrant and Harvey Bibicoff, filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-3342193), is
hereby incorporated by reference.
10.23 Settlement Agreement and Release dated August 1, 1993 by and among
Stuart Gross, Harmony Holdings, Inc. 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.
</TABLE>
44
<PAGE>
<TABLE>
<S> <C>
10.24 Employment agreement dated September 1, 1993, between Harmony Holdings
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.
10.25 Employment agreement dated July 1, 1994, between Harmony Pictures and
Mr. 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.
10.25 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, 1994 is hereby incorporated by reference.
10.26 Subscription agreement dated July, 1996 by and among Unumedia, S.A., a
company whose siege social is the Republic of France and Harmony
Holdings, Inc. filed as Exhibit A to the Company's Current Report on
Form 8-K dated August 16, 1996, is hereby incorporated by reference.
10.27 Purchase agreement dated July 27, 1996 by and among Unumedia, S.A., a
company whose siege social is the Republic of France, Harmony
Holdings, Inc. and Harvey Bibicoff, filed as Exhibit B to the
Company's Current Report on Form 8-K dated August 16, 1996, is hereby
incorporated by reference.
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-
3342193), is hereby incorporated by reference and the change filed on
the Current Report on Form 8-K dated January 5, 1996, is hereby
incorporated by reference.
22 Subsidiaries of the Registrant filed as Exhibit 22 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993, is
hereby incorporated by reference.
</TABLE>
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Harmony Holdings, Inc.
By: /s/ Harvey Bibicoff Dated: September 30, 1996
- --------------------------
Harvey Bibicoff
CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chief Financial Officer September 30, 1996
/s/ Brian Rackohn (Chief Accounting Officer)
- -------------------
Brian Rackohn
/s/ Harvey Bibicoff Director September 30, 1996
- -------------------
Harvey Bibicoff
/s/ Harry Shuster Director September 30, 1996
- -------------------
Harry Shuster
/s/ Ivan Berkowitz Director September 30, 1996
- -------------------
Ivan Berkowitz
</TABLE>
46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM "HARMONY
HOLDINGS INC." AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1995
<CASH> 447,000
<SECURITIES> 0
<RECEIVABLES> 4,102,000
<ALLOWANCES> 76,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,986,000
<PP&E> 1,566,000
<DEPRECIATION> 564,000
<TOTAL-ASSETS> 9,687,000
<CURRENT-LIABILITIES> 5,382,000
<BONDS> 0
0
0
<COMMON> 57,000
<OTHER-SE> 4,247,000
<TOTAL-LIABILITY-AND-EQUITY> 9,687,000
<SALES> 60,415,000
<TOTAL-REVENUES> 60,415,000
<CGS> 51,041,000
<TOTAL-COSTS> 11,241,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243,000
<INCOME-PRETAX> (2,111,000)
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,131,000)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> 0
</TABLE>
