<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, 1997; 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)
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 24, 1997):
Common Stock, $.01 par value-$13,312,604
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 24, 1997
<S> <C>
Common Stock, par value 6,462,429 shares
$.01 per share
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive Proxy Statement related to its Annual Meeting of
Stockholders (incorporated by reference into Part III-Items 10, 11, 12 and 13)
Index to Exhibits at Page 38
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PART I
Special Note Regarding Forward Looking Statements
Certain statements constitute "forward-looking statements "within
the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements, expressed or implied by
such forward-looking statements.
ITEM 1. BUSINESS
General Development of Business
Harmony Holdings, Inc. (the "Company") conducts its operations
through its wholly owned subsidiaries, Harmony Pictures, Inc., Melody
Films, Inc., Lexington Films, Inc., The End Inc., The Beginning Inc., The
Moment, Inc., The End (London) Ltd., Velocity Film, Inc.(ceased operations,
March, 1996), Curious Pictures Corporation, Hollywood Business Solutions,
Inc., Harmony Entertainment, Inc. and Harmony Media Communications Inc.
(ceased operations, April, 1997) Unless the context indicates otherwise,
the term "Company" includes all of these subsidiaries. Curious Pictures
Corporation is 99% owned, the 1% minority interest is not presented
separately as the amounts are not significant.
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.
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. The client for music
videos is usually the record company or the performer directly.
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Contracts for the production of television commercials are
generally awarded by advertising 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.
The Company has produced commercials for national advertisers and
Fortune 500 companies such as AT&T, American Airlines, American Express, Bank of
America, Blue Cross, Budweiser, Burger King, Cadillac, Cartoon Network,
Chevrolet, Clorox, Coca-Cola, Coors, Crest, Disney World, Ford Motor Company,
Frito-Lay, General Mills, General Motors, Gerber, Hallmark, Honda, JC Penny,
Jeep, Jello, Kellogg's, Mattel, McDonald's, Mercedes, Michelob, Nestle,
Nintendo, Nissan, Panasonic, Pepsi, Phillip Morris, Quaker Oats, Reebok, Sears,
Sprint, Taco Bell, Texas Instruments, 3M, Toyota, Tylenol, United Airlines,
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 and does work and
provides services for 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 1997 or 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 both in-house and
independent 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.
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 internal sales efforts. 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.
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 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.
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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 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 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 1997, 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 cost plus bid's during fiscal 1996 were also approximately
5%.
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.
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.
5
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Employees
The Company employs 63 persons on a full-time basis. Additionally, the
Company has 33 directors of commercials under contract most of whom are
independent contractors and 9 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 one of the
largest companies 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
<TABLE>
<CAPTION>
The Company leases the following properties:
<S> <C> <C>
- ------------------------------------------------ -------------------------------- -----------------------------------
Company / Address Term of lease Summary of rental rates
- ------------------------------------------------ -------------------------------- -----------------------------------
Harmony Holdings, Inc. (Office) 2/1/95 - 1/31/00 Years 1-3: $7500/month
1990 Westwood Blvd. Suite 310 Remainder $8,250/month
Los Angeles, California 90025
Years 1-3: $3750/month
Space extension 4/1/95 - 1/31/00 Remainder $4125/month
................................................ ................................ ...................................
................................................ ................................ ...................................
Harmony Pictures, Inc. (Office) 12/1/94 - 11/30/01 $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 and 1/1/94 - 12/31/03 Years 1-4: $11034/month
Production) Remainder: $11979/month
440 Lafayette Street Annual rent increase of 31/2%
New York, New York 10003
Space extension 7/1/97 - 2/7/08
Curious Pictures Corporation (Production)
48 Great Jones Street
New York, New York 10003 4/1/95 - 8/31/97 Year one: $3,300/month
Year two: $3,400/month
Curious Pictures Corporation
28 East 10th Street Suite 2B
New York, NY 10017 11/16/96 - 8/31/98
Monthly $3,300/month
Curious Pictures Corporation 8/1/96 - 8/31/99
1360 Mission Street Suite 201 Monthly $2,245/month
San Francisco, Ca 94103
................................................ ................................ ...................................
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............................................. ................................ ...................................
The End, (London) Ltd. (Office) 11/29/96 - 11/28/2000 Annual $25,215
8 Golden Square
London, England W1RAF
............................................. ................................ ...................................
............................................. ................................ ...................................
The End, Inc. (Office) Suite 400: 5/1/94 -10/31/97 Monthly: $5,425
8060 Melrose Avenue 4th floor Suite 200: 5/1/94 -10/31/97 $1,020
Los Angeles, California 90046 Suite 205: 4/1/95 -10/31/97 $1,948
Suite 215: 4/1/95 -10/31/97 $ 775
Suite 230:12/1/94 10/31/97 $ 859
The End, Inc. (Production Facility) 2/24/97 - 2/24/98 Monthly $1,844
5036 N. Pico Blvd.
Los Angeles, California 90036
............................................. ................................ ...................................
............................................. ................................ ...................................
Harmony Media Communications, Inc. (Office) 4/1/95 - 1/31/2000 Years 1-3: $1,875/month
1990 Westwood Blvd. Suite 310 Remainder $2063/month
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 various leases listed above range in size from 500 square feet to
approximately 12,000 square feet.
8
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-19-
ITEM 3. LEGAL PROCEEDINGS
On October 9, 1996, Unimedia filed an action (served on October 13,
1996) in the United States District Court for the Central District of California
against the Company and its Chairman of the Board, seeking, among other things,
rescission of the purchase from the Company of 1,000,000 shares of its Common
Stock, specific performance requiring the Company to proceed with the
transaction, damages for violation of Rule 10b-5 adopted by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, fraud and breach
of contract, and declaratory and injunctive relief. The action was dismissed
with prejudice on August 4 1997 as part of the stock purchase agreement between
Unimedia, Childrens Broadcasting Corporation and the Company (see item 7,
management's discussion and analysis of financial condition and results of
operations on page 17).
A lawsuit was filed on March 22, 1996, (served August 12, 1996) in
Superior Court of the State of California, County of Los Angeles. 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 too early in the
discovery process to assess economic risk. Management has been advised by the
Company's insurance broker that there is adequate insurance to cover any damages
assessed against the Company.
A cross-complaint related to the preceding matter, was filed on
December 23, 1996 in Superior Court of the State of California, County of Los
Angeles. The complaint has been filed by Virgin Records Limited against The End,
Inc and Southern California Edison for contractual indemnity, equitable
indemnity, comparative contribution and declaratory relief. While it is too
early in the discovery process to assess economic risk or insurance coverage.
The Company's insurance broker has advised management 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.
The quotations may include inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year - 1996: High Low
Quarter Ended Trade Trade
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>
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal Year - 1997: High Low
Quarter Ended Trade Trade
September 30, 1996 2.31 1.44
December 31, 1996 2.00 1.19
March 31, 1997 2.38 1.28
June 30, 1997 2.31 1.59
</TABLE>
On September 24, 1997, the closing bid and asked prices were $ 2.06 and
$ 2.06 and the last trade was $ 2.06. On such date there were 62 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 Ended Year Ended Year Ended Year Ended Year Ended
6/30/97 6/30/96 6/30/95 6/30/94 6/30/93
- -------------------------------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Contract revenue $ 64,831 $ 60,415 $ 61,227 $ 42,602 $ 24,786
Cost of production 52,174 51,041 50,920 35,291 20,299
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
Gross profit 12,657 9,374 10,307 7,311 4,487
Selling expenses 3,238 3,001 2,808 2,223 1,518
Operating expenses 7,327 6,639 7,161 6,286 5,940
Depreciation and amortization 620 564 528 399 323
Abandoned projects - 652 - - -
Litigation expense - 200 486 - -
Severance salaries - 186 - - -
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
Income (loss) from operations 1,472 (1,868) (676) (1,597) (3,294)
Interest income (expense), net 40 (243) (9) 23 88
Income (loss) before taxes 1,511 (2,111) (685) (1,574) (3,206)
Income tax expense 179 20 0 0 0
-------------- ------------- ------------- ------------- -------------
============== ============= ============= ============= =============
Net income (loss) $ 1,332 $ (2,131) $ (685) $ (1,574) $ (3,206)
============== ============= ============= ============= =============
============== ============= ============= ============= =============
Net income (loss) per share $ 0.20 $ (0.37) $ (0.12) $ (0.30) $ (0.84)
Average shares outstanding 6,682 5,692 5,567 5,316 3,800
- -------------------------------------- -------------- ------------- ------------- ------------- -------------
</TABLE>
11
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<TABLE>
<CAPTION>
Balance Sheet Data
- ------------------------------------------------------------------------------------------------
6/30/97 6/30/96 6/30/95 6/30/94 6/30/93
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $ 2,355 $ 447 $ 230 $ 663 $ 1,917
Current assets 9,505 4,986 7,707 5,487 5,522
Goodwill, net (1) 2,758 2,969 3,181 3,393 3,611
Total assets 14,505 9,687 12,955 10,345 9,950
5,382
Current liabilities 6,748 6,196 3,931 4,325
Subordinated notes payable 0 385 385 0 0
Total liabilities 6,748 5,382 6,581 3,931 4,325
Stockholders ' equity $ 7,757 $ 4,304 $ 6,374 $ 6,414 $ 5,625
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) The goodwill is primarily associated with the acquisition of
Harmony Pictures, Inc. and Melody Films, Inc, 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
Special Note Regarding Forward Looking Statements
Certain statements constitute "forward-looking statements "within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements, expressed or implied by such
forward-looking statements.
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 margins. 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 potential for profit in the foreseeable
future. The Company produced 260 jobs, 235 jobs and 249 jobs for the years ended
June 30 1997, 1996 and 1995, respectively. At average revenues of $249,000,
$257,000 and $246,000, respectively and at average costs of $201,000, $217,000
and $205,000 respectively.
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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, 1997, 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.
Year Ended June 30, 1997 as Compared with Year Ended June 30, 1996
For the year ended June 30, 1997, revenues increased by approximately
7%, or $4,416,224, to $64,830,918 from $60,414,694 for the year ended June 30,
1996. 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 $4,252,634 or 7% of the Company=s revenue. The remaining companies increase
in revenue for fiscal 1997 was $8,668,858. The growth in revenue was primarily
attributed to The End, Inc. and Curious Pictures Corporation.
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, 1997, increased by approximately
2%, or $1,133,533, to $52,174,372 from $51,040,839 for the year ended June 30,
1996. Expressed as a percentage of revenues, cost of production for fiscal 1997
was approximately 80% compared with 84% for fiscal 1996, and resulted in a gross
profit percentage of approximately 20% and 16%, respectively. Cost of production
decreased as a percentage of revenue and gross profit increased for the year
ended June 30, 1997, primarily due to management's continuing efforts to reduce
costs and maximize it=s purchasing power. Cost of production for operations
ceased during 1996 was $4,120,503. The remaining companies net increase in cost
of production was $5,254,036 and was attributed to the increase in revenue.
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, 1997,
increased to $3,237,854 from $3,000,549 for the year ended June 30, 1996
representing an increase of $237,305. Selling commissions increased by $107,749,
while other selling expenses increased by $129,556. Selling expenses for the
operations ceased during 1996 was $245,668. The remaining companies net increase
in selling expenses was $482,973. The following account for the primary changes
in selling expense; Selling expenses for the two new subsidiaries, The End
(London) Ltd. and Harmony Entertainment, Inc. $139,915, the remaining companies
had the following: increases in selling commissions of $223,685, sales salaries
of $81,889, costs incurred for speculation commercials produced to enhance
existing directors show reels and not as a result of a contract with an agency
of $37,552, promotional and entertainment cost of $57,669 and a decrease in
advertising expense of $60,936.
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, 1997, increased to $7,326,757 from
$6,638,908 for the year ended June 30, 1996, representing a increase of $687,849
or 10%. Operating expenses for the operations ceased during 1996 was $594,399.
The remaining companies net increase in operating expenses was $1,275,367. The
increases in operating expense was primarily attributable to an increase in
profit participation's at the subsidiary level and salaries of $767,794, rent
$107,463, advertising $83,799, telephone $75,126 and entertainment $54,125
offset by decreases in accounting fees $64,482, bad debts $59,005, insurance
$54,234 and licenses $38,573. The increase in operating expense from The End
(London) Ltd. and Harmony Entertainment was $220,346.
13
<PAGE>
Depreciation and amortization expense increased for the year ended June
30, 1997, to $620,400 from $564,271 for the year ended June 30, 1996,
representing an increase of $56,129. The change is due to the increase in
depreciable assets of $793,292. The primary increase in fixed assets related to
leasehold improvements, computers and furniture and fixtures at Curious Pictures
Corporation.
Interest income increased for the year ended June 30, 1997, to $78,708
from $4,644 for the year ended June 30, 1996, representing an increase of
$74,064. The increase was a result of more cash held in short-term investments.
Interest expense decreased for the year ended June 30, 1997, to $39,053
from $247,663 for the year ended June 30, 1996, representing a decrease of
$208,610. The decrease was primarily attributed to less borrowings under the
line of credit.
Income tax expense was $178,763 for the year ended June 30, 1997. The
tax expense is primarily attributable to federal alternative minimum tax and
state taxes imposed by various states in which the companies conduct business. A
full valuation allowance has been established as the Company cannot determine
that it is more likely than not that the deferred tax assets will be realized.
During the year ended June 30, 1997, the Company's effective income tax rate
varied from the statutory federal tax rate as a result of state taxes of
$139,529 and a $782,000 benefit from the utilization of fully reserved operating
loss carry forwards, of which $134,850 related to state operating carry
forwards.
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 $4,252,634 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 its 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.
14
<PAGE>
Depreciation and amortization 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.
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 the Company cannot determine that it is more likely than not that the
deferred tax assets will be 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.
New Accounting Pronouncements
The Statement of Financial Accounting Standard Number 128 (SFAS No.
128), "Earnings Per Share" ("EPS"), issued by the Financial Accounting Standards
Board is effective for financial statements issued for the periods ending after
December 15, 1997, including interim periods. The SFAS No. 128 requires
restatement of all prior period EPS data presented. The new standard also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation. The
Company does not expect the adoption will have a material effect on its EPS
calculation.
Statements of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the SFAS is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129
to have a material effect, if any, on its financial position or results of
operations.
15
<PAGE>
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the SFAS is effective for
financial statements with fiscal years beginning after December 15,1997. Earlier
application is permitted. SFAS No 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations, if any, from the adoption of
this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
SFAS is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company does not expect
adoption of SFAS No. 131 to have a material effect, if any, on its Results of
Operations.
Liquidity and Capital Resources
Year Ended June 30, 1997 as Compared with Year Ended June 30, 1996
As of June 30, 1997, the Company had working capital of $2,756,364
including cash of $2,354,625 compared to current liabilities in excess of
current assets of $396,296, including cash of $446,740 at June 30, 1996. Cash
provided by operating activities for the year ended June 30, 1997, increased
$1,403,521 to $1,595,065 from cash provided by operations of $191,544 for the
year ended June 30, 1996. The material items relating to the net increase in
cash provided by operations were: $3,463,668 increase in income from operations;
$4,642,662 increase in billed and unbilled accounts receivable; $4,347,134
increase in accounts payable and accrued expenses, $1,023,445 increase in other
current assets and other assets and an increase in deferred income of $797,789.
Cash used in investing activities (ie: capital expenditures) for the year
ended June 30, 1997, increased $665,908 to $1,002,180 from $336,272 for the year
ended June 30, 1996. The increase was primarily due to an increase in the amount
of capital expenditures at Curious Pictures Corporation and cash disbursements
made to an officer recorded as a note receivable.
Cash provided by financing activities for the year ended June 30, 1997,
increased $953,441 to $1,315,000 from $361,559 for the year ended June 30, 1996.
The material increase in the amount of cash provided by financing activities
were: $2,000,000 of proceeds from the issuance of stock, $385,000 paydown on
subordinated debt and a $600,000 decrease in net borrowings on the line of
credit agreement.
Year Ended June 30, 1996 as Compared with Year Ended June 30, 1995
As of June 30, 1996, the Company=s current liabilities exceeded 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.
16
<PAGE>
On May 10, 1995, the Company originally 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, 1997 was 8.50%. The maximum outstanding balance
during the year ended June 30, 1997 was $600,000 and the weighted average
interest rate was 8.33%. The agreement expires October 31, 1997. Borrowing is
based upon certain percentages of acceptable receivables. There was nothing
outstanding on the line of credit as of June 30, 1997. The loan agreement has
certain financial covenants and the Company was in compliance with these
requirements as of June 30, 1997.
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, 1997 had
entered into various employment agreements with its officers and others which
obligate it to make minimum payments of approximately $7,856,674 over the next
five years. The payments due are $3,814,473, $2,545,151, $1,258,550, $159,000
and $79,500 for the years ended June 30, 1998, 1999, 2000, 2001 and 2002. Of
these amounts $4,679,600 are for administrative personnel and $3,177,074 are for
commercial television directors and salespeople. Certain of these agreements
provide for additional compensation based on revenues and other items of the
subsidiaries. Other agreements provide for additional compensation based on
certain defined operating profits of the subsidiaries. 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, 1997, the Company paid
$2,068,599 in such draws to these directors and sales people; they earned
$4,064,294 in fees, which sum exceeded the draws advanced by $2,102,339. On a
individual basis some of the directors and sales personnel's fees earned were
less than their draws and decreased the Company's profits by $43,824.
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, was not consummated.
On July 21, 1997, Children's Broadcasting Corporation ("CBC"), Harvey
Bibicoff ("Bibicoff") and the Company entered into an agreement (the "Bibicoff
Stock Purchase Agreement"), whereby Bibicoff agreed to sell, and CBC agreed to
buy, 600,000 shares of the Company's Common Stock (the "Bibicoff Shares"),
together with options to purchase 550,000 shares of the Company's Common Stock
at an exercise price of $1.50 per share (the "Options"), for $1,760,000. CBC
also issued 60,000 shares of its Common Stock to Bibicoff. Such shares had a
fair market value of $247,500 in the aggregate, based upon the last reported
sale price for such stock on the date of closing. The closing on the purchase of
the Bibicoff Shares and the Options occurred on July 22, 1997. The Bibicoff
Stock Purchase Agreement further provides that Bibicoff will not acquire any
securities of the Company for a period of three years, other than shares of the
Company's Common Stock to be acquired upon the exercise of stock options held by
him as of July 22, 1997.
17
<PAGE>
On July 21, 1997, CBC and Unimedia, entered into an agreement, ( the
"Unimedia Agreement") whereby Unimedia agreed to sell, and CBC agreed to buy,
1,000,000 shares of Common Stock of the Company (the "Unimedia Shares") for
$2,600,000 and Unimedia agreed to dismiss the litigation entitled Unimedia S.A.
V. Harmony Holdings, Inc. and Harvey Bibicoff, Case No. CV 96-7109 JGD (RNBx),
pending in the United States District Court for the Central District of
California,. CBC assigned its right to buy 230,769 of the Unimedia Shares to the
Company, thereby reducing the number of issued and outstanding shares of Common
Stock of the Company and resulting in a purchase price to CBC of $2,000,000. The
closing of the purchase of the Unimedia Shares occurred on July 25, 1997.
As a result of CBC's acquisition of the Bibicoff Shares and the
Unimedia Shares, CBC acquired a 27.4% beneficial interest in the Common Stock of
the Company. Prior to the change in control Bibicoff had a beneficial interest
in the Common Stock of the Company of 19.2% and Unimedia had a beneficial
interest in the Common Stock of the Company of 15.0%.
Immediately following the closing of the transactions described in the
Bibicoff Agreement and the Unimedia Agreement, Bibicoff resigned as Chairman of
the Board and as a director of the Company. The other members of the Board of
Directors of the Company, before resigning, elected Christopher T. Dahl a
director of the Company and appointed him Chairman of the Board of the Company.
Mr. Dahl appointed two directors, Richard W. Perkins, a director of CBC, and
William M. Toles, a shareholder of CBC, to fill the vacancies on the Board of
Directors of the Company. The new Board of Directors then and appointed William
E. Cameron to fill an additional available director position. Prior to the
closing of the purchase of the Bibicoff Shares and the Options, Bibicoff entered
into an amended and restated employment agreement with the Company to serve as
the Company's Chief Executive Officer for a period of two years.
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
Inflation Inflation has not had a significant effect on the Company.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOUSERS ABOUT MARKET RISK
Inapplicable
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants................20
Consolidated Balance Sheets as of June 30, 1997
and 1996 21
Consolidated Statements of Operations for the
years ended June 30, 1997, 1996 and 1995.........................22
Consolidated Statement of Stockholders' Equity
for the years ended June 30, 1997, 1996 and 1995..................23
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995................................24
Notes to Consolidated Financial Statements........................25-35
Schedule II - Valuation and Qualifying Accounts...................36
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Harmony Holdings, Inc.
We have audited the accompanying balance sheets of Harmony Holdings, Inc.
as of June 30, 1997 and 1996 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended June 30, 1997. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the 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 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
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 financial statements referred to above present fairly,
in all material respects, the financial position of Harmony Holdings, Inc.
as of June 30, 1997and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1997 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 29, 1997
20
<PAGE>
<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Balance Sheets
------------------------------------------------------------------------------- ------------------ -----------------
June 30, 1997 June 30, 1996
------------------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
Assets
Current Assets:
Cash $ 2,354,625 $ 446,740
Accounts receivable - net of allowance for doubtful accounts of $97,646 5,280,665 3,725,404
and $75,629
Unbilled accounts receivable 865,560 376,811
Other current assets 794,883 437,153
208,889 -
Note receivable from officer (note 12)
------------------ -----------------
------------------ -----------------
9,504,622
Total current assets 4,986,108
1,953,064
Property and equipment, at cost, net of accumulated depreciation and 1,565,672
amortization (note 2)
2,757,665
Goodwill, net of accumulated amortization of $1,454,643 and $1,242,862 2,969,446
289,695
Other assets 165,546
------------------ -----------------
================== =================
$ 14,505,046
Total assets $ 9,686,772
================== =================
================== =================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,694,219 $ 1,242,517
Accrued liabilities (note 6) 4,230,668 2,087,787
Bank line of credit (note 7) - 300,000
Deferred income 823,371 1,367,100
Subordinated notes payable (note 8) - 385,000
------------------ -----------------
------------------ -----------------
6,748,258
Total current liabilities 5,382,404
Commitments and Contingencies (note 9)
Stockholders' Equity: (note10)
Preferred Stock, $.01 par value, authorized 10,000,000 shares; none issued
Common Stock, $.01 par value, authorized 20,000,000 shares, issued and 66,933 56,933
outstanding 6,693,198 and 5,693,198
Additional paid-in capital 14,845,129 12,735,136
Accumulated deficit (7,155,274) (8,487,701)
------------------ -----------------
------------------ -----------------
7,756,788
Stockholders' equity 4,304,368
------------------ -----------------
================== =================
Total Liabilities and Stockholders' Equity $ 14,505,046 $ 9,686,772
================== =================
------------------ -----------------
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE>
<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Statement of Operations
-------------------------------------------------- ------------------------------------------------------------
Years Ended June 30,
1997 1996 1995
-------------------------------------------------- ------------------- -------------------- -------------------
-------------------------------------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C>
Contract revenues $ 64,830,918 $ 60,414,694 $ 61,226,818
Cost of production 52,174,372 51,040,839 50,920,332
------------------- -------------------- -------------------
-------------------- -------------------
Gross profit 12,656,546 9,373,855 10,306,486
Selling expenses 3,237,854 3,000,549 2,807,902
Operating expenses 7,326,757 6,638,908 7,161,205
Depreciation and amortization 620,400 564,271 528,259
Abandoned projects - 651,861 -
Litigation expense (note 3) - 200,000 486,050
Severance salaries (note 4) - 186,488 -
-------------------
-------------------- -------------------
Income (loss) from operations 1,471,535 (1,868,222) (676,930)
Interest income 78,708 4,644 56,346
Interest expense (39,053) (247,663) (65,314)
------------------- -------------------- -------------------
Net income (loss) before income taxes 1,511,190 (2,111,241) (685,898)
Income tax expense (note 5) 178,763 20,000 -
------------------- -------------------- -------------------
-------------------- -------------------
Net Income (loss) $ 1,332,427 $ (2,131,241) $ (685,898)
===================
=================== ==================== ===================
Net income (loss) per share $ 0.20 $ (0.37) $ (0.12)
Weighted average shares outstanding 6,681,529 5,692,120 5,567,242
-------------------------------------------------- ------------------- -------------------- -------------------
See accompanying notes to consolidated financial statements
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Statements of Stockholders' Equity
<S> <C> <C> <C> <C> <C>
--------------------------------
-------------------- -----------
Shares Amount Paid in Capital Deficit Equity
------------------------------ -------------------- ----------- ------------------- -------------------- --------------------
------------------------------ -------------------- ----------- ------------------- -------------------- --------------------
Balance at July 1, 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 - 646,033
Net Loss - - - (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 - 61,559
Net Loss - - - (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
Sale of common stock 1,000,000 10,000 1,990,000 - 2,000,000
Issuance of stock options - - 44,993 - 44,993
(note 10)
Subsidiary share transfer - - 75,000 - 75,000
(note 9)
Net Income - - - 1,332,427 1,332,427
-------------------- ----------- ------------------- -------------------- --------------------
==================== =========== =================== ==================== ====================
Balance at June 30, 1997 6,693,198 $ 66,933 $ 14,845,129 $ (7,155,274) $ 7,756,788
==================== =========== =================== ==================== ====================
-------------------- ----------- ------------------- -------------------- --------------------
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE>
<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Consolidated Statements of Cash Flows
----------------------------------------------------------------- ------------------------------------------------------
Years Ended June 30,
1997 1996 1995
----------------------------------------------------------------- ------------------- ---------------- -----------------
----------------------------------------------------------------- ------------------- ---------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in cash Cash flows from operating activities:
Net Income (Loss) $ 1,332,427 $ (2,131,241) $ (685,898)
Adjustments to reconcile net income (loss) to cash from
operating activities:
Depreciation and amortization 620,400 564,271 528,259
Amortization of prepaid interest - 91,759 42,056
Provision for doubtful accounts 22,017 49,765 75,629
Issuance of non-cash compensation expense 119,993 - -
Changes in operating assets and liabilities:
Accounts receivable (1,577,278) 1,519,044 (1,870,811)
Unbilled accounts receivable (488,749) 1,057,591 (703,211)
Other current assets (357,730) 311,177 (153,991)
Other assets (126,869) 227,669 (117,733)
Accounts payable 451,702 (1,024,617) 763,302
Accrued liabilities 2,142,881 (727,934) 1,305,810
Deferred income (543,729) 254,060 195,940
------------------- ---------------- -----------------
------------------- ---------------- -----------------
Net cash provided by (used in) operating activities 1,595,065 191,544 (620,648)
------------------- ---------------- -----------------
------------------- ---------------- -----------------
Cash flows from investing activities:
Capital expenditures (793,291) (336,272) (732,259)
Net loans to Ventura - line of credit - - 26,644
(208,889) - -
Note receivable from officer (note 12)
------------------- ---------------- -----------------
------------------- ---------------- -----------------
Net cash used by investing activities (1,002,180) (336,272) (705,615)
------------------- ---------------- -----------------
------------------- ---------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of stock 2,000,000 61,559 508,395
Issuance of subordinated notes payable (385,000) - 385,000
Net borrowings under bank line of credit (300,000) 300,000 -
------------------- ---------------- -----------------
------------------- ---------------- -----------------
Net cash provided by financing activities 1,315,000 361,559 893,395
------------------- ---------------- -----------------
------------------- ---------------- -----------------
Net increase (decrease) in cash 1,907,885 216,831 (432,868)
Cash, beginning of year 446,740 229,909 662,777
------------------- ---------------- -----------------
=================== ================ =================
Cash, end of year $ 2,354,625 $ 446,740 $ 229,909
=================== ================ =================
=================== ================ =================
Supplemental disclosures of cash flow information:
Cash paid for interest 62,905 71,631 10,632
Income taxes 57,289 43,900 25,389
Non-cash compensation expense 119,993 - -
----------------------------------------------------------------- ------------------- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies:
Organization, Business, and Principles of Consolidation
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.,
Lexington Films, Inc., The End Inc., The Beginning Inc., The Moment
Inc., The End (London) Ltd., Velocity Film, Inc.(ceased operations,
March, 1996), Curious Pictures Corporation, Hollywood Business
Solutions, Inc., Harmony Entertainment, Inc. and Harmony Media
Communications Inc. Unless the context indicates otherwise, the term
"Company" includes all of these subsidiaries. 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. Curious Pictures Corporation
is 99% owned, the 1% minority interest is not presented separately as
the amounts are not significant.
The Company operates in one reportable segment, producing
television commercials, music videos and related media. The Company's
services 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.
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, 1997 and 1996, 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.
25
<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. Amortization expense for the year ended June 30, 1997,
1996 and 1995 was $211,780 for all years.
Income Taxes
The Company applies 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.
Income (Loss) Per Share
Income (loss) per share computations are based on the weighted
average number of common and common equivalent shares outstanding.
Income (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.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" SFAS 123 establishes a fair
value method of accounting for stock-based compensation plans and for
transactions in which a company acquires goods or services from
non-employees in exchange for equity instruments. The Company adopted
this accounting standard on July 1, 1996. SFAS 123 also gives the
option to account for stock-based employee compensation in accordance
with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock issued to Employees," or SFAS 123. The Company has chosen to
account for stock-based compensation utilizing the intrinsic value
method prescribed in APB 25. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market price of
the Company's stock at the measurement date over the amount an employee
must pay to acquire stock.
If SFAS 123 is not adopted related to stock-based employee
compensation, SFAS 123 for footnote purposes requires that companies
measure the cost of stock-based employee compensation at the grant date
based on the value of the award and recognize this cost over the
service period. The value of the stock-based award is determined using
a pricing model whereby compensation cost is the excess of the fair
value of the stock as determined by the model at grant date or other
measurement date over the amount an employee must pay to acquire the
stock.
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.
26
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies Continued:
New Accounting Pronouncements
The Statement of Financial Accounting Standard Number 128
(SFAS No. 128), "Earnings Per Share" ("EPS"), issued by the Financial
Accounting Standards Board is effective for financial statements issued
for the periods ending after December 15, 1997, including interim
periods. The SFAS No. 128 requires restatement of all prior period EPS
data presented. The new standard also requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The Company does not
expect the adoption will have a material effect on its EPS calculation.
Statements of Financial Accounting Standards No. 129 "Disclosure
of Information about Capital Structure" (SFAS No. 129) issued by the
SFAS is effective for financial statements ending after December 15,
1997. The new standard reinstates various securities disclosure
requirements previously in effect under Accounting Principles Board
Opinion No. 15, which has been superseded by SFAS No. 128. The Company
does not expect adoption of SFAS No. 129 to have a material effect, if
any, on its financial position or results of operations.
Statements of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130) issued by the SFAS is
effective for financial statements with fiscal years beginning after
December 15,1 997. Earlier application is permitted. SFAS No 130
establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial
statements. The Company has not determined the effect on its financial
position or results of operations, if any, from the adoption of this
statement.
Statements of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131) issued by the SFAS is effective for financial statements
beginning after December 15, 1997. The new standard requires that
public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and
in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic
areas in which they operate and their major customers. The Company does
not expect adoption of SFAS No. 131 to have a material effect, if any,
on its Results of Operations.
27
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2. Property and Equipment:
Property and equipment is summarized as follows:
-------------------------------------------------------- --------------------------------------
June 30,
-------------------------------------------------------- --------------------------------------
<S> <C> <C>
1997 1996
Furniture and fixtures $ 905,697 $ 793,984
Computer equipment 1,602,756 1,004,781
Leasehold improvements 765,325 681,721
------------------- ------------------
------------------- ------------------
3,273,778 2,480,486
Less: accumulated depreciation and amortization 1,320,714 914,814
------------------- ------------------
=================== ==================
$ 1,953,064 $ 1,565,672
=================== ==================
------------------- ------------------
</TABLE>
Depreciation and amortization expense for the years ended June
30,1997, 1996 and 1995 was $405,900, $352,491 and $316,479.
3. Litigation Expense:
Litigation expense for June 30, 1996, and 1995, relates to the
termination and settlement with a former chief operating officer of the
Company. The $486,050 in litigation expense as of June 30, 1995, was
net of an expected insurance reimbursement of $283,950 of which
$200,000 was reversed during the year ended June 30, 1996.
4. Severance Salaries
Severance salaries are the costs associated with the termination
of former employees of the Company.
28
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Income Taxes:
For the year ended June 30, 1997, income tax expense consisted
of $ 39,234 federal alternative minimum taxes and $139,529 state taxes
currently payable. For the year ended June 30, 1996 income tax expense
consisted of state taxes currently payable and for the year ended June
30, 1995, the Company had no current and deferred income tax expense.
The primary components of temporary differences which give
rise to the Company's net deferred asset at June 30, is as follows:
<TABLE>
<CAPTION>
---------------------------------------- ----------------- ----------------
1997 1996
---------------------------------------- ----------------- ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 2,321,000 $ 3,103,000
Accrued vacation 59,000 63,000
Accounts receivable reserve - 30,000
Prepaid interest - 54,000
Other temporary differences - 7,000
----------------- ----------------
----------------- ----------------
2,419,000 3,257,000
Deferred tax liabilities:
Depreciation (40,000) (30,000)
Valuation allowance (2,379,000) (3,227,000)
----------------- ----------------
================= ================
Net deferred tax asset $ 0 $ 0
================= ================
----------------- ----------------
</TABLE>
A full valuation allowance has been established as the Company
cannot determine that it is more likely than not that the deferred tax
assets will be realized.
During the year ended June 30, 1997, the Company's effective
income tax rate varied from the statutory federal tax rate as a result
of state taxes of $139,529 and a $782,000 benefit from the utilization
of fully reserved operating loss carry forwards, of which $134,850
related to state operating carry forwards.
During the years ended June 30, 1996 and 1995, 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.
At June 30, 1997, the Company has federal and California net
operating loss carry forwards for tax purposes of approximately $6.5
million and $1.4 million which expire from fiscal 2005 through 2011.
The Company's ability to utilize the net operating loss carry forwards
are dependent upon the Company's ability to generate taxable income in
future periods. Federal net operating loss of $5.1 million are 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.
29
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6. Accrued Liabilities:
Accrued liabilities consisted of the following:
----------------------------------------------------------------------
June 30,
----------------------------------------------------------------------
<S> <C> <C>
1997 1996
Accrued production costs $ 1,717,261 $ 806,289
Accrued director fees 1,085,024 652,983
Other 1,428,383 628,515
----------------------------------------
========================================
$ 4,230,668 $ 2,087,787
========================================
----------------------------------------
</TABLE>
7. Bank Line of Credit:
On May 10, 1995, the Company entered into a $3,000,000 asset
based revolving line of credit with a bank, with interest at the bank's
prime rate plus 1.0% per annum, collateralized by the assets of the
Company. The bank=s prime rate at June 30, 1997 was 8.50%. The maximum
outstanding during the year ended June 30, 1997 was $600,000 and the
weighted average interest rate was 8.33%. The agreement expires October
31, 1997. Borrowing is based upon certain percentages of acceptable
receivables. There was nothing outstanding on the line of credit as of
June 30, 1997. The loan agreement has certain financial covenants and
the Company was in compliance with these requirements as of June 30,
1997.
8. Subordinated Notes Payable:
On January 10, 1995, the Company received $385,000 from the
issuance of long-term subordinated notes. The notes bear interest at
the rate of 7% per annum and were 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 were subordinated to any
future institutional lender. These notes were re-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 was recorded as
prepaid interest and amortized over the period of the subordinated
notes.
30
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. 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, 1997
are as follows:
<TABLE>
<CAPTION>
<S> <C>
------------------------------ --------------------------------
Year Amount
------------------------------ --------------------------------
1998 $ 741,272
1999 657,833
2000 538,873
2001 446,487
2002 360,296
Thereafter 1,982,933
--------------------------------
================================
Total minimum payments $ 4,727,694
================================
--------------------------------
</TABLE>
Total rental expense for the years ended June 30, 1997, 1996 and
1995 aggregated $774,396, $696,110 and $670,285.
The Company has entered into various employment agreements
with its officers and others which obligate it to make minimum payments
of approximately $7,856,674 over the next five years. The payments due
are $3,814,473, $2,545,151, $1,258,550, $159,000 and $79,500 for the
years ended June 30, 1998, 1999, 2000, 2001 and 2002. Of these amounts
$4,679,600 are for administrative personnel and $3,177,074 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, 1997, the Company
paid $2,068,599 in such draws to these directors and sales people; they
earned $4,064,294 in fees, which sum exceeded the draws advanced by
$2,102,339. On a individual basis some of the directors and sales
personnel's fees earned were less then their draws and decreased the
Company's profits by $43,824.
A lawsuit was filed on March 22, 1996, (served August 12,
1996) in Superior Court of the State of California, County of Los
Angeles. 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 too early in the discovery process to assess
economic risk, management has been advised by the Company's insurance
31
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. Commitments and Contingencies Continued:
broker that there is adequate insurance to cover any damages assessed
against the Company. The probability of an unfavorable outcome and
range of possible loss is unknown. Accordingly no amounts have been
accrued at June 30, 1997.
A cross-complaint related to the preceding matter, was filed on
December 23, 1996 in Superior Court of the State of California, County
of Los Angeles. The complaint has been filed by Virgin Records Limited
against The End, Inc. and Southern California Edison for contractual
indemnity, equitable indemnity, comparative contribution and
declaratory relief. While it is too early in the discovery process to
assess economic risk or insurance coverage. The Company's insurance
broker has advised management that there is adequate insurance to cover
any damages assessed against the Company. The probability of an
unfavorable outcome and range of possible loss is unknown. Accordingly
no amounts have been accrued at June 30, 1997.
The Company entered into a share transfer agreement with four members
of management of Curious Pictures Corporation dated December 15, 1996. The
agreement calls for stock equaling one percent (1%) of Curious Pictures
Corporation outstanding common stock to be issued to the four members of
management, collectively, upon the signing of the agreement. The four
members of management have the ability to earn an additional fifty percent
(50%) of the company through yearly stock option grants statring with
calendar year 1997 that are tied to the performance of Curious Pictures
Corporation. The stock options are not exercisable until after December 31,
1998. After the four members of management have acquired stock and options
representing fifty one percent (51%) of Curious Pictures Corporation, the
Company has the right to put its remaining forty nine percent 49% of
Curious Pictures Corporation to the four members of management for a price
to be determined based on fair value at that time, but not to be less than
$1,960,000. Based on a recent valuation of Curious Pictures Corporation,
$75,000 of compensation expense is included in the statement of operations
for the year ended June 30, 1997.
On June 18, 1997, the Company guaranteed a $250,000 line of credit
between Cinequanon Pictures International, Inc. and Imperial Bank. The line
of credit matures on September 30, 1997.
32
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Stockholders' Equity and Stock Option Plan:
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.
During the year ended June 30, 1997, the Company has issued
257,500 stock options to certain outside board of director members and
other consultants of the Company, at prices ranging from $1.50 to
$2.00. The terms of the options are from three to five years. $44,993
is included in compensation expense on the statement of operations
relating to these options.
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.
33
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Stockholders' Equity and Stock Option Plan continued:
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.
SFAS Statement 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding net
income and earnings per share as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS Statement 123. The Company
estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996,
respectively: dividend yield of zero for all years; expected volatility
of 5.2 percent; risk-free interest rates of 5.9 percent and ranging
from 1 to 3 years.
Under the accounting provisions of SFAS Statement 123, the
Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
----------------------------------------- ------------------ -------------------
June 30, 1997 June 30, 1996
----------------------------------------- ------------------ -------------------
<S> <C> <C>
Net Income (Loss)
As reported $ 1,332,427 $ (2,131,241)
Pro forma 1,218,362 (2,173,801)
Earnings (loss) per share
As reported .20 (.38)
Pro forma .18 (.37)
----------------------------------------- ------------------ -------------------
</TABLE>
A summary of the status of the Company's stock option plan as
of June 30, 1996 and 1997, and the changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
------------------------------------- -------------------------------- -------------------------------
June 30, 1997 June 30, 1996
------------------------------------- -------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shares Weighted- Shares Weighted-
average average
exercise price exercise price
Outstanding at beginning of year 1,314,500 2.45 867,000 2.87
Granted 1,307,500 1.22 464,500 1.68
Exercised - - - -
Forfeited 15,000 2.13 17,000 2.47
Outstanding at end of year 2,607,000 2.04 1,314,500 2.45
Options exercisable at year end 2,198,000 2.08 1,128,750 2.39
Weighted average fair value of $0.17 $0.13
options granted during the year
------------------------------------- -------------- ----------------- ------------- -----------------
</TABLE>
34
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Stockholders Equity and Stock Option Plan continued:
<TABLE>
<CAPTION>
The following table summarizes information about stock options
outstanding at June 30, 1997:
------------------ -------------------------------------------------------- -------------------------------------
Options Outstanding Options Exercisable
------------------ -------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Range of Number Weighted Weighted Average Number Weighted Average
Exercise Prices Outstanding Average Exercise Price Exercisable at Exercise Price
At 6/30/97 Remaining 6/30/97
Contractual Life
$1.50 - 2.00 1,905,500 3.66 $ 1.59 1,565,500 $ 1.57
2.01 - 3.00 438,000 2.64 2.75 394,250 2.79
3.01 - 5.63 263,500 1.08 4.18 238,250 4.25
------------------ ----------------- ------------------ ------------------- ---------------- --------------------
------------------ ----------------- ------------------ ------------------- ---------------- --------------------
Total 2,607,000 3.18 $ 2.04 2,198,000 $ 2.08
------------------ ----------------- ------------------ ------------------- ---------------- --------------------
</TABLE>
11. 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, 1997, the Company's deposits with three financial institutions
exceeded the maximum amount insured by the FDIC by $2,237,640 as of
June 30, 1997. At June 30, 1997 the Company had bank accounts at three
foriegn banks with deposits of $72,661. One customer accounted for 12%
of accounts receivable as of June 30, 1997. The Company grants credit
to advertising agencies, principally based in the United States. During
fiscal 1997 and 1996 no one customer accounted for more than 10% of
revenues. One customer accounted for 15% of revenues during fiscal
1995.
12. Related Party Transactions:
As of June 30, 1997, the Company has a $208,889 note receivable
from Harvey Bibicoff ,CEO of the Company , in connection with Harvey
Bibicoff's purchase of stock options from its previous CEO. The note
is due May 31, 1998 and accrues interest at the rate of Imperial Bank
prime plus 1 1/2 percent.
The Company has entered into an agreement with Bibicoff &
Associates, Inc., whereby they will provide investor relation services
to the Company through September 30, 2000, for a flat rate of $75,000
paid upon execution of the agreement. The Company's CEO is also the
president of Bibicoff & Associates, Inc.
13. Subsequent Event:
On July 25, 1997, the Company re-purchased 230,769 shares
(originally issued in July 1996, note 10) of its common stock at $2.60
per share for a total purchase price of $600,000.
35
<PAGE>
Harmony Holdings, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Harmony Holdings, Inc.
Schedule II - Valuation and Qualifying Accounts
--------------------- ----------------------- --------------------------- --------------- ----------------
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
1997
Allowance for
doubtful accounts
75,629 97,646 75,629 97,646
--------------------- ----------------------- --------------------------- --------------- ----------------
</TABLE>
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item is hereby incorporated
by reference to the Company's definitive Proxy Statement to be utilized
in connection with its annual meeting of stockholders at which
Directors will be elected, which will be filed with the Commission
within 120 days of the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated
by reference to the Company's definitive Proxy Statement to be utilized
in connection with its annual meeting of stockholders at which
Directors will be elected, which will be filed with the Commission
within 120 days of the end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is hereby incorporated
by reference to the Company's definitive Proxy Statement to be utilized
in connection with its annual meeting of stockholders at which
Directors will be elected, which will be filed with the Commission
within 120 days of the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is hereby incorporated
by reference to the Company's definitive Proxy Statement to be utilized
in connection with its annual meeting of stockholders at which
Directors will be elected, which will be filed with the Commission
within 120 days of the end of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Financial Statement Schedules
and Exhibits
(1) 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 AIndex to
Consolidated Financial Statements@ preceding the Company's
Consolidated Financial Statements contained in Item 8 of
this Annual Report on Form 10-K, which AIndex to
Consolidated Financial Statements@ is hereby incorporated
herein by reference.
37
<PAGE>
(2) Registrant's Schedule II - Valuation and Qualifying
Accounts is included with Registrant's Consolidated
Financial Statements in Item 8 hereof.
(3) The following documents required by Item 601 of
Regulation S-K are filed as exhibits or are incorporated by
reference herein:
Exhibit Number Description
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.
10.4 Third amended and restated employment agreement dated
as of July 22,1997 by and between Registrant and Harvey
Bibicoff.
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.
10.25 Employment agreement dated July 1, 1994, between
Harmony Pictures and Jonathan Miller, filed as Exhibit 10.25
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994, is hereby incorporated by
reference.
10.26 Amended and restated employment agreement dated December
5, 1994, between Harmony Holdings, Inc. and Gary 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.
10.27 Subscription agreement dated July, 1996 by and among
Unimedia, 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.
10.28 Purchase agreement dated July 27, 1996 by and among
Unimedia, 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.
38
<PAGE>
10.29 Stock Purchase Agreement among Children's Broadcasting
Corporation, Harvey Bibicoff and Harmony Holdings, Inc.,
dated July 21, 1997, filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated August 5, 1997,
is hereby incorporated by reference.
10.30 Stock Purchase Agreement among Children's Broadcasting
Corporation and Unimedia S.A., dated July 21, 1997, filed
as Exhibit 10.2 to the Company's Current Report on Form
8-K dated August 5, 1997, is hereby incorporated by
reference.
10.31 Mutual General Release among, Unimedia, Harvey Bibicoff
and Harmony Holdings, Inc., filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated August 5, 1997,
is hereby incorporated by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Harmony Holdings, Inc. filed two Current Reports on Form 8-K dated as
of July 22, 1997. The first was an item 5. Other Event, filed on July 30,
1997 and the second was an item 1. Change in Control of Registrant, filed
on August 5, 1997.
39
<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 25, 1997
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>
<S> <C> <C>
Signature Title Date
/s/Harvey Bibicoff Chief Executive September 25, 1997
------------------ Officer
Harvey Bibicoff
/s/Brian Rackohn
Brian Rackohn Chief Financial Officer September 25, 1997
(Principal Accounting Officer and
Principal Financial Officer)
/s/Christopher T. Dahl
Christopher T. Dahl Director September 25, 1997
/s/Richard W. Perkins
---------------------
Richard W. Perkins Director September 25, 1997
/s/William M. Toles
-------------------
William M. Toles Director September 25, 1997
/s/William E. Cameron
---------------------
William E. Cameron Director September 25, 1997
</TABLE>
40
<PAGE>
Exhibit 10.4
THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made and
entered into as of July 22, 1997, by and between HARMONY HOLDINGS, INC, a
corporation duly organized and existing under the laws of the State of Delaware,
hereinafter referred to as "Harmony," and MR. HARVEY BIBICOFF, hereinafter
referred to as "Bibicoff."
RECITALS
1. The following recitals shall be considered a part of this Agreement,
and explain the general nature and purposes of Harmony's business and Bibicoff's
rights and obligations under this Agreement. Any interpretation or construction
of this Agreement shall be considered in light of these recitals.
2. Harmony is a Delaware corporation engaged in the business of
producing television commercials, music videos and films.
3. Bibicoff & Associates, Inc., a California corporation, and Harmony
previously entered into an Agreement, dated July 1, 1991 (the "First
Agreement"), pursuant to which Bibicoff was to and did provide services to
Harmony.
4. On or about May 2, 1994, Harmony, Bibicoff and Bibicoff &
Associates, Inc. entered into an Amended and Restated Employment Agreement (the
"Second Agreement") which terminated the obligations of Bibicoff & Associates,
Inc. under the First Agreement and amended certain other terms and provisions
thereof.
5. On or about October 1, 1996, Harmony and Bibicoff entered into a
Second Amended and Restated Employment Agreement (the "Third Agreement") which
further amended and restated the terms of the Second Agreement.
6. This Agreement is intended, and by execution hereof, Harmony and
Bibicoff acknowledge that the terms of this Agreement shall supersede all terms
of all other agreements, whether oral or written, entered into between Harmony,
Bibicoff and Bibicoff & Associates, Inc., including, but not limited to, the
First, Second and Third Agreements, and that upon execution hereof, all such
prior agreements shall be immediately terminated.
7. Bibicoff has been engaged in and has had a great deal of experience
and expertise in Harmony's above-designated business.
8. On or about July 22, 1997, Bibicoff anticipates that he will sell
600,000 shares of common stock of Harmony ("Common Stock"), together with
certain options to purchase in the aggregate 550,000 shares of Harmony's Common
Stock, to Children's Broadcasting Corporation, a Minnesota corporation
("Children's"). Bibicoff understands that this Agreement shall be effective
against Harmony and Bibicoff only upon completion of such acquisition. The
shares of Common Stock and the options mentioned above which are owned by
Bibicoff and which are to be transferred to Children's shall be collectively
referred to herein as the "Securities."
1
<PAGE>
9. Harmony desires to continue to employ Bibicoff and Bibicoff desires
to continue to be employed by Harmony, on the terms, covenants and conditions
set forth in this Agreement.
10. In addition, in connection with the foregoing aspects of its
business, Harmony develops, from time to time, confidential business data and
trade secrets which it desires to protect from disclosure to competitors, such
information collectively being referred to herein, and being more specifically
defined below as "Confidential Information."
11. Harmony and Bibicoff acknowledge that Harmony's Confidential
Information has value to Harmony only to the extent that it is not disclosed to
Harmony's competitors.
12. For the purposes of this Agreement, a "competitor" shall mean any
firm, person, partnership, corporation, or any other entity, whether legal or
natural, engaged in the same or similar business as Harmony, whether that
particular business comprises a part of or all of such competitor's business.
13. For the reasons set forth above, and in consideration of the mutual
promises and agreements set forth in this Agreement, Harmony and Bibicoff agree
as follows:
ARTICLE 1
EMPLOYMENT
1.01. Harmony hereby employs, engages and hires Bibicoff as its Chief
Executive Officer and Bibicoff hereby accepts and agrees to such hiring,
engagement and employment, subject to the general supervision and pursuant to
the orders, advice and direction of Harmony's Chairman of the Board, or in the
event that there shall be no person occupying the position of Harmony's Chairman
of the Board, or if such person shall be unavailable, Harmony's Board of
Directors.
1.02. Bibicoff shall perform such other duties as are customarily
performed by one holding such position in other, same, or similar businesses or
enterprises as engaged in by Harmony, and shall also additionally render similar
services and duties as may be assigned to him from time to time by Harmony's
Chairman of the Board; provided, however, that Harmony may, at the sole
discretion of its Board of Directors, suspend Bibicoff's obligations and
authority set forth hereunder upon ten (10) days advance written notice to
Bibicoff, in which case Bibicoff shall continue to receive all remuneration due
him hereunder during the term hereof.
1.03. During the term of this Agreement, except as provided in Article
5, Bibicoff shall devote whatever time is necessary to advance the interests of
Harmony. During the term hereof, Bibicoff shall not become financially
interested in or associated with, directly or indirectly, any other person or
entity engaged in the production of television commercials and music videos;
provided, that Bibicoff may invest in up to 5% of the capital stock or other
securities of any such corporation whose stock or other securities are publicly
owned or are regularly traded on any securities exchange or in the
over-the-counter market.
2
<PAGE>
ARTICLE 2
BEST EFFORTS OF BIBICOFF
2.01. Bibicoff agrees that he will at all times faithfully,
industriously, and to the best of his ability, experience and talents, perform
all of the duties that may be required of and from him pursuant to the express
and implicit terms of this Agreement, all to the reasonable satisfaction of
Harmony.
ARTICLE 3
TERM OF EMPLOYMENT AND AGREEMENT
3.01. The terms of Bibicoff's employment by Harmony pursuant to this
Agreement and the term of this Agreement shall be a period of two (2) years,
commencing on the date that Children's acquires the Securities from Bibicoff
(the "Effective Date") subject, however, to the provisions set forth in Article
6 of this Agreement. This Agreement shall not prevent Bibicoff from being
transferred, promoted or changed to any other appropriate executive position,
and any such transfer, promotion or change shall not affect the enforcement of
this Agreement.
3.02. Bibicoff shall be based in Los Angeles, California, and shall
undertake such reasonable travel for Harmony's business purposes as shall be
deemed necessary by Harmony's Chairman of the Board.
3.03. This Agreement shall be binding upon Bibicoff and Harmony as of
the Effective Date.
ARTICLE 4
COMPENSATION AND BENEFITS
4.01. Bibicoff will be paid a base salary of Two Hundred Sixty-Five
Thousand and no/100 Dollars ($265,000.00) per year for a period of two years.
Bibicoff's compensation shall be payable in equal installments in accordance
with Harmony's current payroll policies and practices.
4.02. In addition to cash compensation, Bibicoff shall be eligible to
receive such fringe benefits as are, and may be, made available to other
executive employees of Harmony from time to time in the exclusive discretion of
Harmony's Board of Directors. Such benefits may include, but are not limited to,
a medical and dental plan, disability plan, life insurance plan, a 401(k) plan
and a profit sharing plan. Harmony is not obligated to provide or continue any
of these benefits and may, without any prior notice, discontinue any benefit
already provided or as may be provided in the future, within the exclusive
discretion of Harmony's Board of Directors.
3
<PAGE>
4.03. Bibicoff shall be reimbursed for authorized travel and other
out-of-pocket business expenses, provided they have been reasonably incurred in
the performance of Bibicoff's duties for Harmony pursuant to the terms of this
Agreement. Bibicoff shall submit to Harmony an itemized account detailing any
such expenses, which shall be accompanied by appropriate receipts. Harmony
reserves the right to reject reimbursement of expense submissions not in
compliance with the terms set forth in this Article or which are not in
compliance with Internal Revenue Service statutes, rules, regulations or other
controlling or interpretive authority.
4.04. Harmony shall also provide Bibicoff with a monthly car allowance
of Eight Hundred and no/100 Dollars ($800.00) for the term of his employment
under this Agreement.
ARTICLE 5
VACATION AND LEAVE OF ABSENCE
5.01. Bibicoff shall be entitled to twenty (20) days of vacation per
year. Vacation time will be scheduled taking into account Bibicoff's duties and
obligations at and to Harmony. Sick leave, holiday pay and all other leaves of
absence will be in accordance with Harmony's stated personnel policies and
practices.
ARTICLE 6
TERMINATION
6.01. If Bibicoff suffers any physical or mental disability (a
"Disability") which renders him unable to perform the essential functions of his
duties hereunder, whether with or without reasonable accommodation, for a period
of one hundred eighty (180) days during any nine (9) month period, Harmony may,
at its sole option and subject to applicable law, terminate this Agreement by
giving Bibicoff ten (10) days written notice to that effect. Such termination
shall terminate any and all of Harmony's obligations to Bibicoff hereunder. In
the event that Bibicoff believes he does not suffer a Disability, Bibicoff
agrees to subject himself to a physical examination by a physician appointed by
Harmony and the decision regarding Bibicoff's Disability will be made based upon
such physician's report. If Bibicoff objects to such determination, Bibicoff may
engage a physician, at his expense, to perform a physical examination. If the
two physicians do not concur regarding Bibicoff's Disability, the two physicians
shall select a third physician to perform a physical examination of Bibicoff. In
such event, the final determination as to whether Bibicoff suffers a Disability
will be made by a majority decision of the three physicians.
4
<PAGE>
6.02. In the event that Bibicoff dies during the term of this
Agreement, such death shall, except as specifically provided below, terminate
any and all of Harmony's obligations to Bibicoff under this Agreement effective
automatically on the date of Bibicoff's death; provided, however, that such
termination shall not be applicable to any rights accrued by Bibicoff pursuant
to this Agreement prior to his death.
6.03. Any other provision of this Agreement notwithstanding, Harmony
may immediately terminate Bibicoff's employment hereunder without notice if the
termination is for Cause. "Cause" shall mean (i) conviction of Bibicoff of a
felony or a crime involving moral turpitude, (ii) the commission by Bibicoff of
an act or acts of dishonesty which result, directly or indirectly, in his gain
or personal enrichment at the expense of Harmony or any of its subsidiaries or
affiliates, (iii) certification by a physician that Bibicoff is an alcoholic or
is a narcotic addict, (iv) Bibicoff's breach of any of the provisions of this
Agreement; provided, however, that Bibicoff may not be terminated for his
failure to undertake different duties materially outside the scope of those set
forth in this Agreement, or (v) Bibicoff's commission of fraud, embezzlement,
securities law violation, sexual harassment of other of Harmony's employees or
other gross misconduct involving moral turpitude.
In the case of an event described in clause (iv) above, Harmony may
terminate Bibicoff's employment hereunder only by giving Bibicoff 30 days' prior
written notice, during which period Bibicoff shall have the opportunity to cure
any such breach. If such breach is cured, in the sole discretion of Harmony's
Board of Directors, such notice shall be deemed rescinded. Should such breach
not be cured, the giving of such notice of termination shall terminate all of
Harmony's obligations to Bibicoff hereunder (except those obligations which by
their terms survive the termination of this Agreement) effective 30 days after
such written notice, except that Bibicoff shall be entitled to any rights
accrued by Bibicoff pursuant to this Agreement prior to said termination.
Notwithstanding any provision contained herein to the contrary, upon
the death or Disability of Bibicoff during the term of this Agreement, any
amounts due and payable to Bibicoff by Harmony as of the date of such death or
Disability shall be payable to Bibicoff or the person(s) designated by Bibicoff
or his estate, successors, heirs, successors or assigns.
6.04. Upon the expiration of the term of this Agreement as set forth in
Article 3.01 above, and provided that the Agreement is not renewed or a new
agreement is not entered into by and between Harmony and Bibicoff, Bibicoff's
employment will be deemed terminated upon the expiration of the term of this
Agreement.
5
<PAGE>
ARTICLE 7
CONFIDENTIAL INFORMATION AND
NON-SOLICITATION
7.01. Bibicoff acknowledges that during the course of his employment by
Harmony, he may gain, and prior to the date hereof he has gained, receive or
otherwise have access to, or contribute to the production of Confidential
Information concerning Harmony's business which is of commercial value to
Harmony. "Confidential Information" shall mean information that is proprietary
to or in the unique knowledge of Harmony (including information discovered or
developed in whole or in part by Bibicoff); or information that derives
independent economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use, and is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
7.02. Confidential Information includes, but is not limited to,
Harmony's product research and development, its agreements, its financial plans
and arrangements, its method of operation, its sales and marketing strategies,
its manuals, policies, plans and reports, its personnel and payroll records, its
customer lists, in whole or in part, and its inventory, costs and pricing.
Confidential Information excludes all of Bibicoff's mental processes as to
operations and industry common practices. Bibicoff understands and acknowledges
that all such information that he obtains in the course of his employment by
Harmony shall constitute Confidential Information. The provisions of this
Article 7 apply to any form in which the subject Confidential Information may
appear, whether written, oral or any other form of recording or storage.
7.03. Bibicoff further acknowledges and agrees that the Confidential
Information constitutes a valuable asset of Harmony providing opportunity for
competitive advantage and that Harmony intends any such information to remain
secret and confidential. Bibicoff therefore specifically agrees that except to
the extent required by Bibicoff's duties to Harmony or as permitted by the
express written consent of Harmony's Board of Directors, Bibicoff shall never,
either during his employment by Harmony or at any time thereafter, directly or
indirectly use, discuss or disclose any of Harmony's Confidential Information or
otherwise use such information to his own or a third party's benefit. The
restrictions of this Article 7 do not apply to information that:
(a) is generally and publicly known in the industry, or
(b) becomes publicly known through means other than the act or
omission of Bibicoff.
Bibicoff hereby acknowledges that any additions, improvements or innovations in
or to Harmony's Confidential Information that are made by Bibicoff become the
property of Harmony and become part of its Confidential Information.
7.04. Bibicoff agrees that upon the termination of his employment by
Harmony, he will immediately return to Harmony the originals and all copies of
any and all documents (including computer data, disks, programs, media, or
printouts) that contain any information, including financial information,
product information, or other information that in any way relates to Harmony,
its products or services, its clients, its suppliers, or other aspects of its
business or any other Confidential Information. Bibicoff further agrees to not
retain any summary of such information.
6
<PAGE>
7.05. Bibicoff further covenants and agrees that he will faithfully
abide by all rules and regulations established by Harmony for insuring the
confidentiality of all Confidential Information and data, including, but not
limited to, rules and regulations:
(a) Limiting access to authorized personnel;
(b) Limiting copying of any writing or recording;
(c) Requiring storage of documents in secure facilities
provided by Harmony and limiting safe or vault lock
combinations or keys to authorized personnel; and
(d) Checkout and return or other procedures or
regulations promulgated by Harmony from time to time.
The obligations of this Article 7 shall survive Bibicoff's employment by Harmony
and continue until the information at issue is no longer confidential and
becomes generally publicly known, other than as a direct or indirect result of
the breach of this Agreement by Bibicoff or a breach of a confidentiality
obligation owed to Harmony by any other person or entity.
7.06. Bibicoff further covenants that he will not, during the term of
employment by Harmony hereunder or for twenty-four (24) months thereafter (the
"Post-Termination Period"), directly or indirectly through his own actions or
through the actions of any other person or entity, whether for his own benefit
or for the benefit of any another person or entity, solicit, divert, induce,
take away or employ, or attempt to solicit, divert, induce, take away or employ
any individual who or entity which renders services to Harmony, including, but
not limited to, producers and sales representatives, or advise, induce,
encourage or entice, or attempt to advise, induce, encourage or entice any such
individual to either terminate or curtail his, her or its employment or service
relationship with Harmony or to enter into an employment or service relationship
with any person other or entity. This restriction set forth in this Article
shall apply to individuals who have rendered services to or been employed by
Harmony during the six (6) month period immediately preceding the Effective
Date.
ARTICLE 8
COVENANT NOT TO COMPETE
8.01. In view of the substantial economic benefit Bibicoff is receiving
from the acquisition by Children's of the Securities, together with the
compensation and benefits set forth herein, Bibicoff agrees that he will not,
during the term of this Agreement, directly or indirectly, without the prior
written consent of Harmony's Board of Directors, (a) solicit or engage in
competitive business with any person or entity that is or was a customer or
vendor of Harmony during the twelve (12) months prior to the date of
termination, or (b) engage within (i) each of the 58 counties in the State of
California, it being hereby agreed to by Harmony and Bibicoff that Harmony
currently conducts business or has established goodwill in each of such
counties, (ii) any county in the United States or provincial subdivision in
Canada in which Harmony has conducted its business or established goodwill prior
to the date hereof, or (iii) each state and county in which Harmony conducts
business during the term of this Agreement, in any business producing television
commercials, music videos or films in competition with Harmony or have any
direct or indirect interest, whether as a proprietor, partner, employee,
shareholder, principal, agent, consultant, director, officer or in any other
capacity or manner whatsoever, in any enterprise that shall so engage; provided,
however, that nothing contained in this Article 8.01 shall preclude Bibicoff
from rendering services to Children's, so long as neither he nor Children's
engages in activity directly or indirectly in competition with Harmony. Bibicoff
recognizes and agrees that the geographic scope of this restriction is
reasonable because Harmony's business is conducted on a national and
international scale and is not limited to a particular geographic area within
the United States or Canada.
7
<PAGE>
ARTICLE 9
INJUNCTIVE RELIEF
9.01. Bibicoff and Harmony acknowledge that Harmony will suffer
irreparable harm if Bibicoff breaches any term of this Agreement, either during
or after its term. Accordingly, Harmony shall be entitled, in addition to any
other rights and remedies it may have, at law or equity, to any injunction,
without the posting of a bond or other security, enjoining or restraining
Bibicoff from any violation of this Agreement, and Bibicoff hereby consents to
Harmony's right to the issuance of such injunction. In any proceeding by Harmony
to enforce any provision of Articles 7 or 8 hereof, Harmony shall, in addition
to any injunctive relief to which it may be entitled, be awarded damages to be
determined by a court of competent jurisdiction as well as all court costs,
disbursements, expenses and attorneys' fees incurred by Harmony.
9.02. In the event Bibicoff violates the terms of Article 8, the period
of the restrictive covenant shall be extended for two (2) years from and after
the later of:
(a) The date which Bibicoff ceases any such violation; or
(b) The date on which a court issues an order or judgment
enforcing the terms of the covenant set forth
therein.
9.03. In the event a court of competent jurisdiction determines that a
provision of Article 8.01 above is unreasonable, it may limit such provision to
the extent it deems reasonable, without declaring the provision invalid in its
entirety. This provision shall not be construed as an admission by Harmony, but
is only included to provide Harmony with the maximum possible protection
consistent with the right of Bibicoff to earn a livelihood subsequent to the
termination of his employment by Harmony.
8
<PAGE>
ARTICLE 10
MISCELLANEOUS
10.01. Governing Law. This Agreement shall be governed according to the
laws of the State of California.
10.02. Successors. This Agreement is personal to Bibicoff and Bibicoff
may not assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person or entity.
This Agreement may be assigned by Harmony.
10.03. Waiver. The waiver by Harmony of the breach or nonperformance of
any provision of this Agreement by Bibicoff will not operate or be construed as
a waiver of any future breach or nonperformance under any such provision of this
Agreement or any similar agreement with any other employee of Harmony.
10.04. Modification. This Agreement supersedes and replaces any and all
prior oral or written understandings between Harmony and Bibicoff relating to
the subject matter of this Agreement, including any previous employment
contract, the First, Second and Third Agreements, all of which are hereby
revoked and terminated. The parties agree that this Agreement (a) is the entire
understanding and agreement between the parties, and (b) is the complete and
exclusive statement of the terms and conditions thereof, and there are no other
written or oral agreements in regard to the subject matter of this Agreement.
This Agreement shall not be changed or modified except by a written document
signed by the parties hereto.
10.05. Indemnification. This Agreement shall be in addition to, and
not in substitution of, any rights of indemnification provided or required
by law.
10.06. Attorney Fees. In the event of any dispute or controversy
arising out of this Agreement, the court or other tribunal adjudicating the same
shall award reasonable attorney fees and costs to a prevailing party therein.
9
<PAGE>
IN WITNESS WHEREOF the following parties have executed this Agreement
on the day and year first above written.
HARMONY HOLDINGS, INC.,
a Delaware corporation
By /s/Brian Rackohn
Its:Chief Financial Officer
HARVEY BIBICOFF
By /s/Harvey Bibicoff
10
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
---------------------------------------- ------------------------------------ ---------------
SUBSIDIARY STATE OF INCORPORATION % OWNED
---------------------------------------- ------------------------------------ ---------------
<S> <C> <C>
Harmony Holdings, Inc. Delaware 100%
........................................ .................................... ...............
........................................ .................................... ...............
Harmony Pictures, Inc. Delaware 100%
........................................ .................................... ...............
........................................ .................................... ...............
Melody Films, Inc. Delaware 100%
........................................ .................................... ...............
........................................ .................................... ...............
Curious Pictures Corporation New York 99%
........................................ .................................... ...............
........................................ .................................... ...............
Harmony Entertainment, Inc. Delaware 100%
........................................ .................................... ...............
........................................ .................................... ...............
The End, Inc. California 100%
........................................ .................................... ...............
........................................ .................................... ...............
The Beginning, Inc. California 100%
`
........................................ .................................... ...............
........................................ .................................... ...............
Hollywood Business Solutions, Inc California 100%
........................................ .................................... ...............
........................................ .................................... ...............
Lexington Films, Inc. California 100%
........................................ .................................... ...............
........................................ .................................... ...............
The Moment, Inc. California 100%
........................................ .................................... ...............
---------------------------------------- ------------------------------------ ---------------
The End (London), Ltd UK 100%
</TABLE>
<PAGE>
<TABLE> <S> <C>
<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> 12-Mos
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-START> Jul-1-1996
<PERIOD-END> Jun-30-1997
<CASH> $2,355,000
<SECURITIES> 0
<RECEIVABLES> 6,146,000
<ALLOWANCES> 98,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,505,000
<PP&E> 1,953,000
<DEPRECIATION> 620,000
<TOTAL-ASSETS> 14,505,000
<CURRENT-LIABILITIES> 6,748,000
<BONDS> 0
0
0
<COMMON> 67,000
<OTHER-SE> 7,690,000
<TOTAL-LIABILITY-AND-EQUITY> 14,505,000
<SALES> 64,831,000
<TOTAL-REVENUES> 64,831,000
<CGS> 52,174,000
<TOTAL-COSTS> 11,185,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,000
<INCOME-PRETAX> 1,511,000
<INCOME-TAX> 179,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,332,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
