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.
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.
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.
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.
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.
ITEM 2.
ITEM 2. PROPERTY
Properties and Facilities
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.
ITEM 3.
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.
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.
PART II
ITEM 5.
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.
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.
ITEM 6.
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:
(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.
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.
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.
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.
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.
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.
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.
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOUSERS ABOUT MARKET RISK
Inapplicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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:
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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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:
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
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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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:
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:
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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10. Stockholders Equity and Stock Option Plan continued:
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.
Harmony Holdings, Inc. Notes to Consolidated Financial Statements
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
MANAGEMENT
ITEM 10.
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.
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.
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.
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.
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.
(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.
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.
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:
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."
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.
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.
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.
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.
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.
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.
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.
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.
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
Exhibit 21