1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1997; or
[ ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ___________.
Commission File Number 1-19577
HARMONY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4333330
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1990 Westwood Boulevard, Suite 310
Los Angeles, California 90025-4676
(Address of Principal Executive Offices)
(Zip Code)
(310) 446-7700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all
Reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such Reports),
and (2) has been subject to such filing requirements for the past 90
days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Class Outstanding at May 7, 1997
Common Stock, par value 6,693,198 shares
$.01 per share
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PART I--FINANCIAL INFORMATION
ITEM 1.
<TABLE>
<CAPTION>
Financial Statements Page
<S> <C>
Consolidated Balance Sheets:
March 31, 1997 (unaudited) and June 30, 1996 3
Consolidated Statements of Operations (unaudited):
Nine Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Operations (unaudited):
Three Months Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows (unaudited):
Nine Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
</TABLE>
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Harmony Holdings, Inc.
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
March 31, 1997 June 30, 1996
(unaudited)
- --------------------------------------------------------------------------------
Assets
<TABLE>
<S> <C> <C>
Current Assets:
Cash $372,898 $446,740
Accounts receivable - net of allowance
for doubtful accounts of $0 and 7,302,011 3,725,404
$75,629
Unbilled accounts receivable 1,859,751 376,811
Prepaid expenses and other current assets 984,780 437,153
------------- -----------------
Total current assets 10,519,440 4,986,108
Property and equipment, at cost,
less accumulated depreciation and
amortization 1,830,009 1,565,672
Goodwill, less accumulated amortization 2,810,610 2,969,446
Other assets 190,262 165,546
------------- -----------------
Total assets $15,350,321 $9,686,772
============= =================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $1,604,327 $1,242,517
Accrued liabilities 4,818,436 2,087,787
Bank line of credit 0 300,000
Deferred income 1,742,719 1,367,100
Subordinated notes payable 0 385,000
------------- -----------------
Total current liabilities 8,165,482 5,382,404
Stockholders' Equity:
Preferred Stock, $.01 par value,
authorized 10,000,000 shares; none issued
Common Stock, $.01 par value,
authorized 20,000,000 shares, issued and 66,933 56,933
outstanding 6,693,198 and 5,693,198
Additional paid-in capital 14,725,136 12,735,136
Accumulated deficit (7,607,230) (8,487,701)
------------- -----------------
Stockholders' equity 7,184,839 4,304,368
------------- -----------------
Total Liabilities and Stockholders' Equity $15,350,321 $9,686,772
============= =================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
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Harmony Holdings, Inc.
Consolidated Statement of Operations
(unaudited)
- --------------------------------------------------- -------------------
Nine Months Ended
March 31,
- -----------------------------------------------------------------------
1997 1996
<TABLE>
<S> <C> <C>
---------------- -----------------
Contract revenues $ 48,285,615 $ 50,395,467
Cost of production 39,257,842 43,056,478
------------ ---------------------
------------ ---------------------
Gross profit 9,027,773 7,338,989
Selling expenses 2,446,291 2,272,369
Operating expenses 5,143,452 5,054,417
Depreciation and amortization 448,864 419,389
Abandoned projects 0 621,528
Litigation expense 0 200,000
Severance salaries 0 186,488
------------ ---------------------
Income (loss) from operations 989,166 (1,415,202)
Interest income 121,332 4,620
Interest expense (97,090) (178,120)
------------ ---------------------
Net income (loss) before income taxes 1,013,408 (1,588,702)
Income taxes 132,937 0
------------ ---------------------
Net Income (loss) $ 880,471 $ (1,588,702)
============ =====================
Net income (loss) per share $ 0.13 $ (0.28)
Weighted average shares outstanding 6,682,772 5,693,198
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
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Harmony Holdings, Inc.
Consolidated Statement of Operations
(unaudited)
- -------------------------------------------------------------------------
Three Months Ended
March 31,
- -------------------------------------------------------------------------
1997 1996
<TABLE>
<S> <C> <C>
-------------- ---------------------
Contract revenues $ 18,747,745 $ 18,601,032
Cost of production 15,664,464 15,908,221
-------------- ---------------------
Gross profit 3,083,281 2,692,811
Selling expenses 901,040 813,891
Operating expenses 1,803,902 1,573,784
Depreciation and amortization 156,699 136,990
-------------- ---------------------
Income from operations 221,640 168,146
Interest income 82,946 3,488
Interest expense (69,430) (68,185)
-------------- ---------------------
Net income before income taxes 235,156 103,449
Income taxes 29,445 0
-------------- ---------------------
Net Income 205,711 103,449
============== =====================
Net income per share $ 0.03 0.02
Weighted average shares outstanding 6,853,062 5,693,198
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
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Harmony Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
Increase (decrease) in cash March 31,
- ------------------------------------------------------------------------------
1997 1996
--------------------------------
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 880,471 $ (1,588,698)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 448,864 419,389
Amortization of prepaid interest 0 68,819
Changes in assets and liabilities:
Accounts receivable (3,576,607) 146,360
Unbilled accounts receivable (1,482,940) 44,595
Prepaid expenses and other current assets (547,627) 371,361
Other assets (24,716) 184,004
Accounts payable 361,810 (1,118,950)
Accrued liabilities 2,730,649 (138,854)
Deferred income 375,619 (337,307)
-------------------------------
Net cash used by operating activities (834,477) (1,949,281)
--------------------------------
Cash flows from investing activities:
Capital expenditures (554,365) (280,232)
--------------------------------
Net cash used by investing activities (554,365) (280,232)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of stock 2,000,000 61,559
Repayments subordinated notes payable (385,000) 0
Bank line of credit (300,000) 2,000,000
--------------------------------
Net cash provided by financing activities 1,315,000 2,061,559
--------------------------------
Net decrease in cash (73,842) (167,954)
Cash, beginning of period 446,740 229,909
--------------------------------
Cash, end of period $ 372,898 $ 61,955
================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
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HARMONY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 1997
(1) Basis of Presentation
The financial information included herein is unaudited, however,
such information reflects all adjustments (consisting of normal
recurring accruals) which are, in the opinion of management, necessary
to present fairly the results of operations for the periods presented.
The results of operations for the six months ended March 31, 1997 are
not necessarily indicative of a full year. The information contained
in this Quarterly Report on Form 10-Q should be read in conjunction
with the audited financial statements as of June 30, 1996 filed as
part of the Company's Annual Report on Form 10-K.
(2) Organization, Business, and Principles of Consolidation
Harmony Holdings, Inc. ("Company") was incorporated under the
laws of the State of Delaware on August 5, 1991 as a wholly owned
subsidiary of Ventura Entertainment Group Ltd. ("Ventura"). In
connection with the Company's formation and initial capitalization,
the Company issued 2,033,330 shares of its common stock to Ventura and
Ventura contributed all of the capital stock of its wholly owned
subsidiaries, Harmony Pictures, Inc. and Melody Films, Inc. to the
Company. During the nine months ended March 31, 1997, the Company had
six operating subsidiaries that contributed towards revenues: Harmony
Pictures, Inc., Melody Films, Inc., The End, Inc., The Beginning,
Inc., Curious Pictures Corporation and Harmony Media Communications.
All significant intercompany accounts and transactions have been
eliminated in consolidation. 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.
(3) Income (Loss) Per Share
Per share computations are based on the weighted average number of
common and common equivalent shares outstanding. 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. For the Nine months ended March 31, 1997, fully diluted net
income per share was the same as primary net income per share.
(4) Contingent Sale of a Subsidiary
The Company and Curious Pictures Corporation ("CPC") entered
into an Option and Share Transfer Agreement dated as of December 15,
1996 (the "Agreement") with the four members of the management of CPC.
The Agreement provides for the issue in the aggregate of shares
of Common Stock by CPC in a number equal to one (1%) per centum of the
presently outstanding shares of such Common Stock to all four members
of the management of CPC upon the signing of the Agreement which took
place on or about January 20, 1997. Such members have the right to
have issued to them, under the Agreement, options exercisable for a
five year period. At an exercise price of $1.00 per share of such
Common Stock, for a number of shares thereof not in excess of fifty
(50%) per centum of the presently outstanding shares of such Common
Stock. The issue of such stock options is tied to the performance of
CPC. Such options, if any, first become exercisable on January 1,1999.
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Upon the acquisition by such members of the management of CPC of
fifty-one (51%) per centum of the presently outstanding shares of such
Common Stock, thereafter the Company has the right to require such
member to purchase from it the remaining shares of such Common Stock
held by the Company at a price agreed upon, or in the absence of such
agreement, at a price determined by a neutral third party, subject to
a minimum valuation of $4,000,000 for all such shares then outstanding
(5) New Accounting Pronouncements Statements of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The statement
requires restatement of all prior period earnings per share (EPS)
data presented. The new standard requires a reconciliation of
numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. The
recalculated basic EPS is $0.14 per share for the nine months
ended March 31, 1997.
(6) Litigation
On July 27,1996, the Company, its Chairman of the Board and
Unimedia S.A., a French Corporation, executed an agreement which
provided, among other things, that (i) the parties would
negotiate before September 30, 1996, a definitive agreement
providing for the acquisition from Unimedia shareholders of all
the issued and outstanding ordinary shares of Unimedia in
exchange for 10,000,000 shares of Preferred Stock, and 10,000,000
shares of Common Stock, of the Company, and (ii) the Chairman of
the Board of the Company refrain from selling 80% of his shares
of stock of the Company prior to the completion of the Apurchase
of Unimedia@ by the Company, and, in any case, prior September
30, 1996. The agreement also contemplated the purchase by
Unimedia in the open market of a maximum of 1,000,000 shares of
Common Stock of the Company. The shareholders of Unimedia were
not parties to this agreement.
Since the definitive agreement had not been negotiated, much
less executed, before September 30, 1996, the Company considered
the transaction terminated and so notified Unimedia and the
public.
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. In view of the early stage of
this action, management of the Company is not in a position to
express an opinion with respect to the action, but believes it to
be without merit and will vigorously defend the action.
9
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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, 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.against the Company.
10
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months ended March 31, 1997 as compared with Nine Months ended March 31,
1996
For the Nine Months ended March 31, 1997, revenues decreased by 4%,
or $2,109,852, to $48,285,615 from $50,395,467 for the Nine Months ended March
31, 1996. The subsidiaries that ceased operations during 1996 accounted for
$4,331,986 or 9% of the Company's revenue for the Nine Months ended March 31,
1996. Revenues excluding those from ceased operations increased by $2,222,106.
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 Nine Months ended March 31, 1997, decreased by 9%, or
$3,798,636, to $39,257,842 from $43,056,478 for the Nine Months ended March 31,
1996. Expressed as a percentage of revenues, cost of production for the Nine
Months ended March 31, 1997, was 81% compared with 85% for the Nine Months ended
March 31, 1996 and resulted in gross profit percentages of 19% and 15%,
respectively. The decrease in cost of production and the increase in gross
profit for the Nine Months ended March 31, 1997, were primarily due to
management's continuing efforts to reduce costs and maximize purchasing power,
offset by the increased competitive factors within the commercial production
industry. Additionally, the Company discontinued two low profit margin
subsidiaries. Cost of production for operations ceased during the Nine Months
ended March 31, 1996 was $4,205,185 expressed as a percentage of revenue was 97%
and resulted in a gross profit of 3%.
Selling expenses consist of sales commissions, advertising and
promotional expenses, travel and other expenses incurred in the securing of
commercial contracts. Selling expenses for the Nine Months ended March 31, 1997,
increased to $2,446,291 from $2,272,369 for the Nine Months ended March 31,
1996, representing an increase of $173,922. Selling commissions increased by
$30,931, while other selling expenses increased by $142,991. $50,734 of the
increase in other selling expenses was attributable to an increase in costs
incurred for 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 Nine Months ended March 31, 1996, was $201,394
or 9% 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 Nine Months ended March 31, 1997, increased to
$5,143,452 from $5,054,417 for the Nine Months ended March 31, 1996,
representing a increase of $89,035 or 2%. Operating expenses of $161,707 relates
to subsidiaries that have ceased operations.
Litigation expenses for the Nine Months ended March 31, 1996, relate
to the termination of and settlement with a former chief operating officer of
the Company, Tara McCarthy.
For the Nine Months ended March 31, 1996, The Company had 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 $215,000 cost of production of
an infomercial, $224,000 for a screenplay writing project, $100,000 for a
director and salesperson who attempted to begin a new subsidiary and, $82,000
for placement of corporate products and a books-on-tape distribution system.
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Severance salaries for the Nine Months ended March 31, 1996, are the
costs associated with the termination of former employees of the Company.
Depreciation and amortization expense increased for the Nine Months
ended March 31, 1997, to $448,864 from $419,389 for the Nine Months ended March
31, 1996, representing an increase of $29,475. The change is due to the increase
in depreciable assets of $554,365.
Interest income increased for the Nine Months ended March 31, 1997,
to $121,332 from $4,620 for the Nine Months ended March 31, 1996, representing
an increase of $116,712, due to more cash held in short term investments
compared to the prior year.
Interest expense decreased for the Nine Months ended March 31, 1997,
to $97,090 from $178,120 for the Nine Months ended March 31, 1996, representing
a decrease of $81,030, due to a decrease in borrowings under the line of credit
and a payoff of the subordinated debt.
Income tax expense was $132,937 for the Nine Months ended March 31,
1997. The tax expense is attributable to federal alternative minimum taxes and
state taxes imposed by various states in which the companies conduct business. A
full valuation allowance has been established as it is more likely than not that
the deferred tax assets will not be realized. During the Nine Months ended March
31, 1997, the Company's effective income tax rate varied from the statutory
federal tax rate as a result of the utilization of operating losses for which no
tax benefit had been recognized due to the valuation allowance on the net
deferred tax asset.
Three Months ended March 31, 1997 as compared with Three Months ended March 31,
1996
For the Three Months ended March 31, 1997, revenues increased by 1%,
or $146,713, to $18,747,745 from $18,601,032 for the Three Months ended March
31, 1996. The subsidiaries that ceased operations during 1996 accounted for
$1,815,753 or 10% of the Company's revenue for the Three Months ended March 31,
1996.
Cost of production for the Three Months ended March 31, 1997,
decreased by 2%, or $243,757 to $15,664,464 from $15,908,221 for the Three
Months ended March 31, 1996. Expressed as a percentage of revenues, cost of
production for the Three Months ended March 31, 1997, was 84% compared with 86%
for the Three Months ended March 31, 1996 and resulted in gross profit
percentages of 16% and 14%, respectively. The decrease in cost of production and
increase in gross profit for the Three Months ended March 31, 1997, were
primarily due to management's continuing efforts to reduce costs and maximize
purchasing power, offset by the increased competitive factors within the
commercial production industry. Cost of production for operations ceased during
the year was $1,860,677, expressed as a percentage of revenue was 102% and
resulted in a loss of 2%.
Selling expenses for the Three Months ended March 31, 1997, increased
to $901,040 from $813,891 for the Three Months ended March 31, 1996,
representing an increase of $87,149. Selling commissions decreased by $61,018,
while other selling expenses increased by $148,167. Other selling expenses
increased by $13,349 which were attributable to an increase in costs incurred
for commercials produced to enhance existing directors show reels and not as a
result of a contract with an advertising agency, advertising and promotional
expenses increased by $92,248 and sales salaries increased by $27,898. Selling
expenses for the operations ceased during the Three Months ended March 31, 1996,
were $100,385 or 12% of the total selling expenses.
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Operating expenses for the Three Months ended March 31, 1997,
increased to $1,803,902 from $1,573,784 for the Three Months ended March 31,
1996, representing an increase of $230,118 or 15%. Operating expenses of
$161,707 relates to subsidiaries that have ceased operations.
Depreciation expense increased for the Three Months ended March 31,
1997, to $156,699 from $136,990 for the Three Months ended March 31, 1996,
representing an increase of $19,709.
Interest income increased for the Three Months ended March 31, 1997,
to $82,946 from $3,488 for the Three Months ended March 31, 1996, representing
an increase of $79,458, due to more cash held in short term investments compared
to the prior year.
Interest expense increased for the Three Months ended March 31, 1997,
to $69,430 from $68,185 for the Three Months ended March 31, 1996, representing
a increase of $1,245.
Income tax expense was $29,445 for the Three Months ended March 31,
1997. The tax expense is attributable to federal alternative minimum taxes and
state taxes imposed by various states in which the companies conduct business. A
full valuation allowance has been established as it is more likely than not that
the deferred tax assets will be not realized. During the Three Months ended
March 31, 1997, the Company's effective income tax rate varied from the
statutory federal tax rate as a result of the utilization of operating losses
for which no tax benefit had been recognized due to the valuation allowance on
the net deferred tax asset.
New Accounting Pronouncements
Statements of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS No. 128) issued by the Financial Accounting Standards Board (FASB)
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods. The statement requires restatement of all
prior period earnings per share (EPS) data presented. The new standard requires
a reconciliation of numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. The recalculated
basic EPS is $0.14 per share for the nine months ended March 31, 1997.
Liquidity and Capital Resources
Nine Months ended March 31, 1997 as compared with Nine Months ended March 31,
1996
At March 31, 1997, the Company's working capital was $2,353,958
including cash of $372,898 compared with working capital of $372,584, including
cash of $61,955 at March 31, 1996. Cash used by operating activities for the
Nine Months ended March 31, 1997, decreased $1,114,804 to $834,477 from cash
used in operating activities of $1,949,281 for the Nine Months ended March 31,
1996. The material decreases in the amount of cash used in operating activities
were $2,469,169 increase in net income; $5,250,502 increase in billed and
unbilled accounts receivable; $4,350,263 increase in accounts payable and
accrued expenses, $1,127,708 increase in prepaid expenses and other assets and a
increase in deferred income of $712,926.
Cash used in investing activities (i.e.: capital expenditures) for
the Nine Months ended March 31, 1997, increased 98% or $274,133 to $554,365 from
$280,232 for the Nine Months ended March 31, 1996.
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Cash provided by financing activities for the Nine Months ended March
31, 1997, decreased by $746,559 to $1,315,000 from $2,061,559 for the Nine
Months ended March 31, 1996. The decrease was due to a $385,000 decrease in
subordinated debt and a $2,300,000 decrease in net borrowings on the line of
credit agreement, offset by $1,938,441 increase in the proceeds from the
issuance of stock.
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 March 31, 1997 was 8.50%. The agreement has been renewed and
expires October 31, 1997. Borrowing is based upon certain percentages of
acceptable receivables. There were no amounts outstanding on the line of credit
as of March 31, 1997 and the Company was in compliance with all of the financial
covenants with the bank.
The Company, as of March 31, 1997, had entered into various
employment agreements with its officers and others, which obligate it to make
minimum payments of $5,688,099 over the next three years. The payments due are
$3,096,528, $2,044,821 and $546,750 for the twelve months ended March 31, 1998,
1999 and 2000, respectively. Of these amounts $2,833,200 are for administrative
personnel and $2,854,899 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, which
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 Nine Months ended March 31, 1997, the Company paid $
1,649,766 in such draws to these directors and sales people; they earned $
2,719,002 in fees, which sum exceeded the draws advanced by $ 1,201,549. On an
individual basis some of the director's and sales personnel's fees earned were
less then their draws and increased the Company's losses by $ 125,099.
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.
14
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PART II-- OTHER INFORMATION
ITEM 1. Legal Proceedings
Recent Litigation Related to Proposed Acquisition
On July 27,1996, the Company, its Chairman of the Board and Unimedia
S.A., a French Corporation, executed an agreement which provided, among other
things, that (i) the parties would negotiate before September 30, 1996, a
definitive agreement providing for the acquisition from Unimedia shareholders of
all the issued and outstanding ordinary shares of Unimedia in exchange for
10,000,000 shares of Preferred Stock, and 10,000,000 shares of Common Stock, of
the Company, and (ii) the Chairman of the Board of the Company refrain from
selling 80% of his shares of stock of the Company prior to the completion of the
"purchase of Unimedia" by the Company, and, in any case, prior September 30,
1996. The agreement also contemplated the purchase by Unimedia in the open
market of a maximum of 1,000,000 shares of Common Stock of the Company. The
shareholders of Unimedia were not parties to this agreement.
Since the definitive agreement had not been negotiated, much less
executed, before September 30, 1996, the Company considered the transaction
terminated and so notified Unimedia and the public.
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, for declaratory and injunctive relief. In view of the early stage
of this action, management of the Company is not in a position to express an
opinion with respect to the action, but believes it to be without merit and will
vigorously defend the action.
Litigation related to a Music Video Production at a Subsidiary
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. The Company's insurance
broker has advised management that there is adequate insurance to cover any
damages assessed against the Company. ITEM 5. Other Information
15
<PAGE>
Contingent sale of a subsidiary
The Company and Curious Pictures Corporation ("CPC") entered
into an Option and Share Transfer Agreement dated as of December 15, 1996 (the
"Agreement") with the four members of the management of CPC.
The Agreement provides for the issue in the aggregate of shares of
Common Stock by CPC in a number equal to one (1%) per centum of the presently
outstanding shares of such Common Stock to all four members of the management of
CPC upon the signing of the Agreement which took place on or about January 20,
1997. All four members of the management of CPC have the right to have issued to
them, under the Agreement, options exercisable for a five year period, at an
exercise price of $1.00 per share of such Common Stock, for a number of shares
thereof not in excess of fifty (50%) per centum of the presently outstanding
shares of such Common Stock. The issue of such stock options is tied to the
performance of CPC. Such options, if any, first become exercisable on January 1,
1999.
Upon the acquisition by such members of the management of CPC of
fifty-one (51%) per centum of the presently outstanding shares of such Common
Stock, thereafter the Company has the right to require such member to purchase
from it the remaining shares of such Common Stock held by the Company at a price
agreed upon, or in the absence of such agreement, at a price determined by a
neutral third party, subject to a minimum valuation of $4,000,000 for all such
shares then outstanding.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.31 Option share transfer agreement dated December 15,
1996 for the sale of Curious Pictures Corporation. .
(b) Reports on Form 8-K - None
No other Items of Part II of the Quarterly Report on Form 10-Q are applicable to
the period covered by this Quarterly Report on Form 10-Q.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARMONY HOLDINGS, INC.
Date: May 7, 1997
By/s/Harvey Bibicoff
Harvey Bibicoff
Chairman of the Board, Chief Executive Officer
Date: May 7, 1997
By/s/Brian Rackohn
Brian Rackohn
Chief Financial Officer, Secretary
(Principal Financial and Chief Accounting Officer)
<PAGE>
OPTION AND SHARE TRANSFER AGREEMENT (this "Agreement") dated as of
December 15, 1996 among SUSAN HOLDEN SQUIBB, RICHARD WINKLER, STEPHEN
OAKES and DAVID STARR (collectively the "Curious Management Group"),
HARMONY HOLDINGS, INC., a California corporation ("Harmony"), and
CURIOUS PICTURES CORPORATION, a New York corporation ("Curious").
Harmony is the record holder of 100 shares (the "Shares") of
common stock, no par value, of Curious ("Common Stock"), and the Shares
constitute all of the issued and outstanding Common Stock. There are, in the
aggregate, 200 authorized shares of Common Stock, and no shares of Common Stock
other than the Shares are issued and outstanding.
On or prior to the Closing Date (as defined below), each
member of the Curious Management Group is currently employed by Curious pursuant
to an employment contract. The Curious Management Group shall enter into a new
employment contract substantially in the form attached as Exhibit A hereto (each
an "Employment Contract" and together the "Employment Contracts") and having a
three year term (the "Renewal Term") commencing January 1, 1997. In
consideration of the renewal of their Employment Contracts, among other things,
Curious shall issue to each member of the Curious Management Group the number of
shares of Common Stock provided for herein, and shall also issue options to
acquire Common Stock ("Options"), to each member of the Curious Management Group
as provided for herein.
Accordingly, in consideration of the premises set forth
herein, the execution and delivery by the parties of Employment Contracts, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Curious Management Group, Harmony and Curious agree
as follows:
SECTION 1. Transfer of Initial Shares and Employment
Contracts: Closing. Subject to the satisfaction of the conditions specified in
Section 7 below and the other terms and conditions of this Agreement, the
closing of the transactions contemplated hereby shall be held on December 15,
1996, or such earlier date as may be agreed by each of the parties hereto (such
date, the "Closing Date"). At the Closing (i) each member of the Curious
Management Group shall execute and deliver their respective Employment Contract,
and such contracts shall also be executed by Curious and Harmony, and (ii)
Curious shall issue to each member of the Curious Management Group [a number of
shares of Common Stock which, following the issuance of such shares, will equal
one quarter of one percent (.25%) of the then outstanding Common Stock] (the
"Initial Shares"), for an aggregate number of Initial Shares being issued to the
Curious Management Group equal to one per cent (1%) of the Common Stock.
SECTION 2. 0ptions For Additional Common Stock. (a) Within I0 days
after the last day of each calendar year in which any of the Employment
Contracts remain in effect (commencing with the Calendar Year 1997), the Curious
Management Group will be granted Options in the manner and at the rate set forth
in Section 2(b) below. The Options shall be nontransferable options to acquire
shares of Common Stock exercisable for 5 years at an exercise price equal
to$1.00 per share. Each Option shall represent the right to acquire one share of
Common Stock (each an "Option Share") at the exercise price. The aggregate
number of Option Shares shall not exceed 50% of the Common Stock. Accordingly,
the number of Initial Shares and Option Shares shall not exceed, in the
aggregate, 51 % of the number of shares of Common Stock (the "Aggregate Limit").
Exhibit 10.31
<PAGE>
(b) Subject to the Aggregate Limit, the number of Options to
be to be granted to the Curious Management Group following a calendar year shall
be determined as follows: for each $20,000 in net income before taxes (as
calculated pursuant to GAAP) in excess of $150,000 earned by Curious during the
applicable calendar year, the Curious Management Group shall be granted Options
to acquire one per cent of the Common Stock; provided, however, that for
purposes of calculating the number of Options earned by the Curious Management
Group pursuant to this subsection only, net income before taxes shall be reduced
during each calendar year by an aggregate allocation of corporate overhead of
Harmony equal to $100,000 per annum.
(c) In the event that the Curious Management Group has not
earned Options to acquire 50% of the Common Stock by the conclusion of the
Renewal Term (or by the conclusion of any additional renewal term provided for
herein) each member of the Curious Management Group shall have the right to
renew their Employment Contract for an additional one year term.
(d) Options granted pursuant to this Section shall be issued
pro rata in the names of the members of the Curious Management Group
employed by Curious at the conclusion of the applicable calendar year.
(e) Options granted pursuant to this Agreement shall not be
exercisable until the conclusion of the second year of the Renewal Term.
SECTION 3. Actions Following Change in Control. As soon as
practicable following the date (the "Change in Control Date") on which the
aggregate number of shares of Common Stock owned by the Curious Management
Group, plus the number of share of Common Stock which would be issued upon
exercise of any Options held by the Curious Management Group equals 51 % of the
shares of Common Stock (a "Change in Control"):
(a) Curious shall remit to Harmony all cash on hand on the Change in
Control Date (the "Closing Cash Balance"), in excess of $150,000 (which shall be
retained by Curious as a contribution from Harmony). Six months following the
Change in Control Date, Curious shall determine the amount of working capital
possessed by Curious as of the Change in Control Date (the "Closing Working
Capital") and, as the case may be, either (i) Curious shall pay to Harmony the
amount by which the Closing Working Capital Balance exceeded the Closing Cash
Balance, or (ii) Harmony shall pay to Curious the amount by which the Closing
Cash Balance exceeded the Closing Working Capital Balance. For purposes of this
subsection, "working capital" means working capital as defined by GAAP,
excluding any intercompany receivables to be canceled by Curious on the Change
in Control Date pursuant to the following subsection;
(b) except for loans made by Harmony to Curious pursuant to
Section 4 below, Curious shall cancel the intercompany account balances between
Curious and Harmony;
Exhibit 10.31
<PAGE>
(c) Harmony shall have the right to require the members of the
Curious Management Group then owning Common Stock, or an entity directly or
indirectly controlled by them, to purchase its 49% interest in Curious at a
price to be agreed among the parties; provided, however, that such right shall
not be exercisable by Harmony until after the conclusion of the initial Renewal
Term (whether or not a Change in Control has occurred prior to such time). In
the event that the parties cannot agree on a purchase price, the price for the
acquisition of such interest shall be established by a neutral third party
mutually acceptable to the parties; provided, however, that the minimum price
for the acquisition of such interest shall be based on a valuation of $4 million
for 100% of the Common Stock.
(d) In the event that Harmony elects to require Curious to purchase
Harmony's Shares pursuant to subsection (c), Curious shall issue a note to
Harmony in payment for such Shares which shall have a one year term, a
seven-year amortization schedule and an interest rate equal to Harmony's
cost of borrowing plus one per cent (the "Curious Note"). Curious shall use
its reasonable best efforts to refinance the Curious Note at the conclusion
of its term. In the event that Curious cannot refinance the Curious Note at
such time, Harmony will guarantee a loan to Curious from a lending
institution which loan will be secured by the receivables of Curious (this
type of financing is typically called a "receivables line" or a "revolving
receivables line"). The amount of the guarantee will not exceed the amount
of the Curious Note, and the guarantee will be for a period of no more than
two years.
(e) In the event that the Options are exercised at the conclusion of the
second year of the Renewal Term, Harmony shall be paid as dividends 49% of
the Net Income (unless otherwise noted, defined in this Agreement to mean
Net Income as defined by GAAP) earned by Curious during the third year of
the Renewal Term. During the third year of the Renewal Term the
compensation of the Curious Management Group shall be maintained at the
levels provided for in the Employment Contracts and capital expenditures
shall be made only as provided for in this Agreement.
SECTION 4. Loans by Harmony. From January 1, 1997 until the date one
year after the Change in Control Date, Harmony shall make loans to Curious to
the extent reasonably necessary to (i) meet the reasonable working capital needs
of Curious, or (ii) enable Curious to make the amount of capital expenditures
permitted by the following Section. Any such loans shall bear interest at
Harmony's cost of borrowing plus one per cent and, to the extent such loans are
outstanding at the first anniversary of the Change in Control Date, shall be
repaid in equal monthly installments of principal and interest paid in the
following calendar year.
Exhibit 10.31
<PAGE>
SECTION 5. Capital Expenditures. In each calendar year Curious
shall be permitted to make capital expenditures equal to the greater of (i)
$100,000, or (ii) 50% of Net Income (which, for purposes of this Section only,
shall be determined exclusive of any corporate overhead allocated to Curious) in
excess of $300,000 earned by Curious during the preceding calendar year. The
amount of investment permitted pursuant to this Section during calendar year
1997 shall be based on Net Income earned by Curious during calendar 1996. Monies
invested by Curious pursuant to this Section shall be invested in capitalized
assets of Curious; or, in the discretion of the Curious Management Group, in the
development of a "content" business within Curious. In the event that the
Curious Management Group seeks to invest in the current or proposed business of
Curious in an amount greater than the amount provided for by this Section,
Harmony will negotiate with the Curious Management Group in good faith
concerning such possible investment. In making capital expenditures pursuant to
this Section the Curious Management Group, in exercising its business judgment,
will give first consideration to the expenditures needed to maintain the
business of Curious as conducted on the date hereof and a reasonable rate of
growth.
SECTION 6. Harmony Options for New Curious Employees. Prior to
the Change in Control Date and with the consent of Harmony, which shall not be
unreasonably withheld, the Curious Management Group will be allowed to offer
potential employees of Curious options (in an amount and at an exercise price to
be agreed) to acquire common shares of Harmony.
SECTION 7. Conditions Precedent. The Closing of the transactions
contemplated hereby shall be subject to the satisfaction (or waiver by the
appropriate party) of the following conditions precedent:
(a) with respect to Curious and/or Harmony, as appropriate:
(i) Harmony shall have delivered on or prior to the Closing Date original
share certificates evidencing the Initial Shares duly issued on or before
the Closing Date in the name of the appropriate member of the Curious
Management Group or such person's designee, against the execution and
delivery by each member of the Curious Management Group of their Employment
Contract;
(ii) The representations and warranties made by Harmony and
Curious (together the "Transferors") herein shall be true and correct on and as
of the date hereof and shall be deemed to be restated and remade on and as of
the Closing Date;
(iii) Transferors shall not have issued or agreed to issue
(conditionally or otherwise) any new Common Stock (other than pursuant to this
Agreement) or new securities directly or indirectly convertible, exchangeable or
exercisable into Common Stock; and
Exhibit 10.31
<PAGE>
(iv) Transferors shall have delivered evidence, in a form
reasonably satisfactory to the Curious Management Group, that Curious has duly
authorized additional Common Stock sufficient to allow Curious to consummate the
transactions provided for in this Agreement.
(b) The Closing of the transactions contemplated hereby shall
be further subject to the satisfaction (or waiver by unanimous action of the
Curious Management Group and Harmony) of the following conditions precedent:
(i) There shall not be any pending or seriously threatened
injunction or restraining order issued by a court of competent jurisdiction
against the consummation of the issuance of the Common Stock pursuant to this
Agreement or against any of the transactions contemplated hereby;
(ii) Each member of the Curious Management Group shall execute
and deliver to Harmony an Employment Contract substantially in the form of
Exhibit A hereto; and
(iii) All conditions set forth in subsection (a) above shall
have been satisfied (or waived by unanimous action of the Curious Management
Group) on or before the Closing Date (or such later date as the parties hereto
may specify in writing).
SECTION 8. General Representations and Warranties. Each Transferor
represents and warrants to each member of Curious Management Group, as of
the date hereof and the Closing Date, that:
(a) it has full corporate power and corporate authority, and
has taken all corporate action necessary to execute and deliver this Agreement
and all documents required to be executed and delivered by it hereunder, and to
fulfill its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby;
(b) the execution, delivery and performance by it of this
Agreement and the transactions contemplated hereby does not and will not violate
(i) any law or regulation of the jurisdiction under which it exists, (ii) to its
knowledge, any other law, statute, order, judgment, rule or regulation
applicable to it or (iii) any other agreement to which it is a party or by which
it or its assets is bound;
(c) this Agreement has been duly executed and delivered by it
and constitutes its legal, valid and binding obligation, enforceable in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, reorganization, fraudulent transfer, moratorium or other
similar laws relating to creditors' rights generally);
(d) all approvals or consents of, authorizations or other
actions by, or filings with, any governmental authority or other person or
entity necessary for the validity or enforceability of its obligations under
this Agreement, and all documents required to be executed and delivered by it
hereunder, have been obtained and are in full force and effect;
(e) no broker, finder or other person or entity acting
pursuant to the authority of either Transferor is entitled to any broker's fee
or other commission in connection with the transactions contemplated hereby;
(f) in the case of Harmony only, it is the sole legal and
beneficial owner and holder of the Shares (which constitute all of the issued
and outstanding shares of Common Stock), and it has good and marketable title to
the Shares;
Exhibit 10.31
<PAGE>
(g) the Initial Shares are duly authorized, validly issued,
fully-paid, non-assessable and free and clear of all liens, claims, charges,
restrictions, adverse claims, encumbrances or security interests of any kind;
and
(h) no litigation or adversarial proceedings are pending or,
to the knowledge of the Transferors, threatened which would adversely affect the
consummation or performance of the transactions contemplated by this Agreement.
SECTION 9. No Additional Shares. Except as otherwise permitted
by this Agreement, Transferors shall not issue or agree to issue (conditionally
or otherwise) any new Common Stock or new securities directly or indirectly
convertible, exchangeable or exercisable into shares of Common Stock.
SECTION 10. Purchase and Sale Representations and
Acknowledgments. Each member of the Curious Management Group represents and
warrants to Harmony that such person is acquiring Common Stock hereunder for
investment purposes and not with a view to distribution or resale in a manner
which would violate Federal securities laws.
SECTION 1 1. Restrictions on Transfer.
(a) Transfer/Issuance. The Initial Shares and, upon
payment of the exercise price required by Section 2 at a
time permitted under this Agreement, the Option Shares
(together, 44 restricted Common Stock7') will be promptly
issued or transferred to, and a certificate or certificates
for such restricted Common Stock shall be issued in the name
of, the appropriate member of the Curious Management Group
(each a "Recipient"). In addition to members of the Curious
Management Group to whom shares of restricted Common Stock
are issued or transferred under this Agreement, the term
"Recipient" shall refer to such individual's designated
beneficiary, surviving spouse, estate, or legal
representative. For purposes of this Agreement, however, any
such beneficiary, spouse, estate, or legal representative
shall be considered as one person with the appropriate
member of the Curious Management Group.
(b) Shareholder Status. Upon issuance of restricted
Common Stock as provided for in the preceding subsection,
the Recipients shall be shareholders of all of the shares of
restricted Common Stock represented by the certificate or
certificates. As such, the Recipients will have all the
rights of shareholders with respect to such shares of
restricted Common Stock, including the right to vote such
shares and to receive all dividends and other distributions
(subject to Section 1 1 (c)) paid with respect to them;
provided, however, that such shares of restricted Common
Stock shall be subject to the restrictions in Section 11(e).
Stock certificates representing restricted Common Stock will
be imprinted with a legend stating that the Common Stock
represented thereby may not be sold, exchanged, transferred,
pledged, hypothecated, or otherwise disposed of except in
accordance with the terms of this Agreement, and each
transfer agent (if any) for Common Stock shall be instructed
to like effect in respect of such shares of restricted
Common Stock.
Exhibit 10.31
<PAGE>
(c) Stock Splits, Dividends, etc. If, due to a stock
split, stock dividend, combination of shares of Common
Stock, or any other change or exchange for other securities
by reclassification, reorganization, merger, consolidation,
recapitalization or otherwise, the Recipients, as the owners
of shares of restricted Common Stock subject to restrictions
hereunder, shall be entitled to new, additional, or
different shares of stock or securities, the certificate or
certificates for, or other evidences of, such, new
additional, or different shares of stock or securities,
together with a stock power or other instrument of transfer
appropriately endorsed, also shall be imprinted with a
legend as provided in Section 1 1 (b). When and if the
event(s) described in the preceding sentence occur, all
provisions of this Agreement relating to restrictions and
lapse of restrictions will apply to such new, additional, or
different shares of stock or securities to the extent
applicable to the shares of restricted Common Stock with
respect to which they were distributed; provided, however,
that if the Recipient shall receive rights, warrants or
fractional interests in respect of any of such shares of
restricted Common Stock, such rights or warrants may be
held, exercised, sold or otherwise disposed of, and such
fractional interests may be settled, by the Recipient free
and clear of the restrictions hereafter set forth.
(d) Restricted Period. The term "Restricted Period"
with respect to restricted Common Stock (after which
restrictions shall lapse) and Options means a period
starting on the date of issuance (the "Date of Issuance") of
such restricted Common Stock or Options to the Recipient and
ending on such date three years after the Date of Issuance;
provided, however, that the Restricted Period shall be
terminated simultaneously with (i) a public offering of any
of the Common Stock, (ii) a sale of all or substantially all
of the assets of Curious, or (iii) the sale transfer or
exchange of a controlling interest in the Common Stock.
(e) Restrictions on 0ptions, Initial Shares and Option Shares.
The restrictions to which restricted Common Stock and Options shall be
subject are:
(i) During the Restricted Period applicable to such
restricted Common Stock and Options, and except as otherwise
specifically provided in this Agreement, none of such
restricted Common Stock shall be sold, exchanged,
transferred, pledged, encumbered, hypothecated, or otherwise
disposed of,
(ii) If a Recipient's employment is terminated for any reason,
including such Recipient's death or disability, at any time before the
Restricted Period ends, the Company shall so notify each of the
Recipients. Upon such termination, the Company shall have the right to
repurchase all restricted Common Stock (for $0.50 per share) and/or
Options (for $0.49 per Option) held by such Recipient.
(f) Transfers Upon Death of Recipient. Nothing in this Plan will
preclude the transfer of restricted Common Stock, on the Recipient's
death, to the Recipient's legal representatives or estate, nor
preclude such representatives or estate from transferring any of such
Common Stock to the person(s) entitled thereto by will or the laws of
descent and distribution; provided, however, that any restricted
Common Stock so transferred as to which such restrictions have not
lapsed will remain subject to all restrictions and obligations imposed
on them by this Agreement.
Exhibit 10.31
<PAGE>
SECTION 12. Accounting. Commencing on or before January 1, 1997, and
continuing until any Change In Control:
(a) the Curious Management Group shall perform at Curious
certain accounting functions including, but not limited to: (i) operating a
general ledger system separate from the general ledger system operated by
Harmony; (ii) submitting to Harmony monthly (within two weeks of the conclusion
of each month) current, accrual-based financial statements; (iii) maintaining at
Curious the original documentation relating to the financial statements provided
for in the preceding subsection, which shall made available to Harmony (and
which Harmony may copy during the course of any audit), on reasonable notice,
for an audit to be conducted at the offices of Curious in New York following any
calendar quarter; provided, however, that any such audit shall be concluded not
later than 60 days following the conclusion of the preceding quarter; (iv)
preparing and delivering to the Curious Board for its approval annual operating
and capital expenditures budgets; and (v) preparing and submitting to Harmony on
a quarterly basis a commitment analysis with respect to Curious employees then
being paid draws. Harmony shall not request that Curious submit to Harmony
original documentation underlying the reports, financial statements and analyses
to be provided to Harmony pursuant to this subsection. "Original documentation"
includes, but is not necessarily limited to, originals or copies of checks,
vendor invoices, purchase orders, Curious invoices, contracts, bids and job
actuals. Notwithstanding the foregoing, however, Original documentation will be
made available to Harmony in connection with any audit conducted pursuant to
this subsection and Harmony shall be permitted to make and retain copies of such
Original documentation.
(b) Harmony shall serve as the payroll service with respect to
the staff and freelance payroll of Curious. In exchange for such service Curious
will pay to Harmony a handling fee equal to 0.05% of the gross freelance wages
(exclusive of any payroll, tax, pension and welfare payments) paid on behalf of
Curious. In addition, Curious shall pay to Harmony its share of workers
compensation and production insurance.
(c) Curious shall pay the reasonable actual costs of any
audits of Curious; provided, however, that, so long as there is no final
determination finding the existence of material irregularities with respect to
the finances of Curious, Curious shall not be obligated to pay more than $8,000
per calendar year in respect of audits performed pursuant to this subsection.
(d) All cash management relating to the business of Curious
shall be performed by Curious in New York. Harmony shall have the right to
remove from the accounts of Curious from time-to-time cash of Curious which is
in excess of the amount needed for the reasonable working capital needs of
Curious and to make the capital expenditures authorized by Section 5 above.
Notwithstanding the foregoing, in the event that the Curious Management Group
contends that Harmony has removed from Curious cash in an amount greater than is
permitted by this subsection, Harmony acknowledges that, if the contentions of
the Curious Management Group are true, Harmony's conduct would cause Curious
irreparable harm (provided, however, that this statement shall not be admissable
with respect to any claim by the Curious Management Group due to Harmony's
conduct). Accordingly, Harmony consents to an expedited review of its conduct by
a mutually acceptable third party in the event that Curious contends that
Harmony has removed cash from Curious in excess of the amount permitted pursuant
to this subsection; provided, however, that any "Big Six" accounting firm shall
be deemed acceptable for such purpose..
Exhibit 10.31
<PAGE>
SECTION 13. Curious Board. A board of directors shall be
established to oversee the business of Curious and shall consist of one member
to be designated by Harmony and two members to be designated by the Curious
Management Group; provided, however, that Harmony shall not be entitled to
designate a member of the Curious Board if it ceases to be a shareholder of
Curious.
SECTION 14. Notices. All notices and communications between
the parties hereto shall be given or confirmed in writing and shall be delivered
either personally, by registered or certified mail, by overnight courier
service, or by telecopy transmitted to each party at the addresses or telecopy
numbers specified on the signature page hereto or to such other or additional
addresses or telecopy numbers as either such party may hereafter specify to the
other in writing, and shall be effective when received.
SECTION 15. Entire Agreement; Amendments. This Agreement shall
constitute the complete agreement of the parties hereto with respect to the
subject matter hereof and supersede all prior or contemporaneous negotiations,
promises, covenants, agreements or representations. This Agreement may not be
amended, modified or supplemented, except by an instrument in writing executed
by both parties hereto.
SECTION 16. No Relationship . Other than as expressly set
forth herein, nothing in this Agreement shall establish any fiduciary,
partnership, joint venture or similar relationship between or among the parties
hereto.
SECTION 17. Further Assurances. From and after the date
hereof, Harmony and Curious and each member of the Curious Management Group
covenant and agree to execute and deliver, at the request and expense of the
other, all such agreements, instruments and documents and to take all such
further actions as the other party hereto may reasonably deem necessary from
time to time to carry out the intent and purposes of this Agreement and to
consummate the transactions contemplated hereby.
SECTION 18. Binding Effect. The terms of this Agreement shall
be binding upon, shall inure to the benefit of, and shall be enforceable by, the
Curious Management Group, Harmony and Curious and their respective permitted
successors and assigns.
SECTION 19. Specific Performance. The parties agree that
irreparable damage would occur in the event any of the provisions of this
Agreement were not to be performed in accordance with the terms hereof or were
otherwise breached and, accordingly, that the parties shall be entitled to
specific performance of the terms hereof and to an injunction or injunctions to
prevent breaches of this Agreement, in addition to any other remedies at law or
in equity to which they may otherwise be entitled.
Exhibit 10.31
<PAGE>
SECTION 20. Counterpart Execution; Telecopies. This Agreement
may be executed in any number of counterparts, each of which, when so executed
and delivered, shall be an original, but all of which together shall constitute
one agreement binding on the parties hereto. Transmission by telecopier of an
executed counterpart of this Agreement shall be deemed to constitute due and
sufficient delivery of such counterpart, provided that the party so delivering
such counterpart shall, promptly after such delivery, deliver the original of
such counterpart of this Agreement to the other party.
SECTION 21. Governing Law. THIS AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REFERENCE TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
Exhibit 10.31
<PAGE>
SECTION 22. Captions. The captions and headings hereunder are for
convenience only and shall not affect the interpretation or
construction of this Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be executed and delivered as of the date first above stated.
CURIOUS PICTURES CORPORATION
by:/S/Harvey Bibicoff
Address for Notice
440 Lafayette Street
New York, N.Y. 10003
Telephone No.: (212) 674-1400
Facsimile No.: (212) 674-0081
HARMONY HOLDINGS, INC.
by:/S/Harvey Bibicoff
Address for Notice:
1990 Westwood Boulevard, Suite 3 1 0
Los Angeles, CA 90025
Telephone No.: (310) 446-7700
Facsimile No.: (310) 446-7711
Exhibit 10.31
<PAGE>
MEMBERS OF THE CURIOUS
MANAGEMENT GROUP:
by:/s/Susan Holden Squibb
Address for Notice
33 Windsor Road
Hastings-on-Hudson, N.Y. 10706
Telephone No.: (914) 478-5381
Facsimile No.: (212) 674-0081
By:/s/Richard Winkler
Address for Notice
605 West I I I th Street #52
New York, N.Y. 10025
Telephone No.: (212) 222-7930
Facsimile No.: (212) 674-0081
By:/s/Stephen Oakes
Address for Notice
147 West I 5th Street # 1 03
New York, N.Y. 10013
Telephone No.: (212) 645-2542
Facsimile No.: (212) 674-0081
By:/s/Stephen Oakes
Address for Notice
241 West 4th Street #4A
New York, N.Y. 100 14
Telephone No.: (212) 929-4861
Facsimile No.: (212) 674-0081
Exhibit 10.31
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<FISCAL-YEAR-END> Jun-30-1997
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