U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A2
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For Quarterly period ended March 31, 1999 or
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[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Transition period from _________ to _________
Commission File No. 0-21534
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Intelefilm Corporation
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(Exact name of small business issuer as specified in its charter)
Children's Broadcasting Corporation
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(former name)
Minnesota 41-1663712
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5501 Excelsior Blvd., Minneapolis, MN 55416
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(Address of principal executive office, including zip code)
(612) 925-8840
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(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of May 13, 1999, there were outstanding 6,503,142 shares of common
stock, $.02 par value, of the registrant.
<PAGE>
INDEX
INTELEFILM CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets-- March 31, 1999 and December 31, 1998.
Consolidated Statements of Operations -- Three months ended March 31,
1999 and 1998.
Consolidated Statements of Cash Flows -- Three months ended March 31,
1999 and 1998.
Notes to Consolidated Financial Statements -- March 31, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
<PAGE>
Intelefilm Corporation
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
Second Amendment
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,708,953 $ 253,905
Accounts receivable 894,455 39,000
Allowance for doubtful accounts (38,833) (39,000)
Unbilled accounts receivable 516,491 --
Accounts receivable - affiliates 349,473 280,438
Radio station assets available for sale -- 11,391,402
Other accounts receivable 273,724 331,527
Prepaid expenses 486,526 279,816
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Total current assets 8,190,789 12,537,088
Note receivable 15,000,000 15,000,000
Investment in & notes receivable from Harmony 5,930,517 5,421,322
Property and equipment, net 167,511 120,385
Goodwill, net 1,135,441 --
Deferred debt issue costs -- 742,737
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Total assets $ 30,424,258 $ 33,821,532
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 589,296 $ 2,205,212
Accounts payable - affiliates 44,831 363,727
Accrued interest 5,429 143,505
Accrued income taxes 3,297,750 328,000
Deferred revenue -- 2,675,556
Other accrued expenses 2,609,948 1,227,637
Line of credit -- 434,974
Long-term debt - current portion 159,187 10,665,792
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Total current liabilities 6,706,441 18,044,403
Long-term debt , less current maturities 821,505 848,111
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Total liabilities 7,527,946 18,892,514
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Commitments and Contingencies -- --
Redeemable convertible preferred stock -- 2,448,486
Shareholders' equity
Common stock 131,444 129,015
Authorized shares - 50,000,000
Issued & outstanding shares - voting: 6,386,701
1999 and 6,261,701 - 1998
Issued and outstanding shares - nonvoting:
189,041 - 1999 and 1998
Additional paid-in capital 46,008,134 45,773,584
Accumulated deficit (23,138,266) (33,292,504)
Stock subscriptions receivable (105,000) (129,563)
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Total Shareholders' Equity 22,896,312 12,480,532
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Total Liabilities & Shareholders' Equity $ 30,424,258 $ 33,821,532
============ ============
</TABLE>
<PAGE>
Intelefilm Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
Second Amendment
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<S> <C> <C>
Revenues:
Production contract revenues $ 1,144,300 $ --
Broadcast related revenues 86,902 835,995
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Total revenues 1,231,202 835,995
Cost of Production 965,464 --
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Gross profit $ 265,738 $ 835,995
Operating expenses:
Production divisions
Selling 36,943 --
General and administrative 263,081 --
Broadcast related expenses 180,315 1,284,981
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Income (loss) from operations before corporate,
depreciation and amortization (214,601) (448,986)
Corporate 540,095 1,207,726
Depreciation and amortization 102,825 546,891
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Income (loss) from operations (857,521) (2,203,603)
Gain on sale of radio station assets 16,545,507 --
Equity loss in Harmony (1,930,942) (472,841)
Interest expense net of interest income (502,806) (1,002,405)
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Net income (loss) before income taxes 13,254,238 (3,678,849)
Income tax provision (3,100,000) --
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Net income (loss) $ 10,154,238 $ (3,678,849)
============ ============
Basic net income (loss) per share $ 1.56 $ (0.55)
============ ============
Weighted average number of shares outstanding 6,492,000 6,656,000
============ ============
</TABLE>
<PAGE>
Intelefilm Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
Second Amendment
---------------- -------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 10,154,238 $ (3,678,849)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Provision for doubtful accounts (167) (126,309)
Depreciation & amortization 102,825 546,891
Gain on sale of radio stations (16,545,507) --
Net barter activity -- 16,708
Amortization and write-off of deferred debt issue costs 742,737 176,934
Equity loss in Harmony 1,930,942 472,841
Non-cash interest payment related to sale of stations 92,008 --
Issuance of common stock for payment of interest -- 27,710
Decrease (increase) in:
Accounts receivable (48,862) 822,534
Other receivables (264,592) 19,013
Prepaid expenses (193,780) 46,449
Increase (decrease) in:
Accounts payable (1,934,812) 360,624
Accrued interest (8,362) 62,546
Other accrued expenses 2,381,884 65,714
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Net cash used in operating activities (3,591,448) (1,187,194)
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Investing activities:
Sale/purchase of property & equipment (74,564) (26,705)
Investment in & notes receivable from Harmony (2,440,137) --
Sale/purchase of intangible assets -- (122,906)
Proceeds from sale of radio stations 14,034,415 --
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Net cash provided by (used in) investing activities 11,519,714 (149,611)
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Financing activities:
Payment of debt (33,211) (60,195)
Proceeds from debt financings -- 1,511,000
Redemption of convertible preferred stock (2,450,002) --
Repurchase of common stock (11,505) --
Proceeds from issuance of common stock -- 5,000
Proceeds from stock subscriptions receivable 21,500 --
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Net cash provided by financing activities (2,473,218) 1,455,805
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Increase (decrease) in cash and cash equivalents 5,455,048 119,000
Cash and cash equivalents at beginning of period 253,905 545,258
------------ ------------
Cash and cash equivalents at end of period $ 5,708,953 $ 664,258
============ ============
</TABLE>
<PAGE>
Intelefilm Corporation
Notes to Consolidated Financial Statements (unaudited)
March 31, 1999
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals with the exception of the adjustments discussed in
Note 2) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-KSB for the
year ended December 31, 1998.
Note 2 Significant Transactions during 1999
The following significant transactions occurred during 1999 and are considered
non-recurring:
A. In January and February 1999, the Company advanced Harmony Holdings,
Inc. ("Harmony") $2,375,000 in cash pursuant to unsecured note
receivable agreements which bore interest at 10% and are due on demand.
Additionally, in February 1999, all notes with Harmony were amended to
provide for interest at 14%. It is management's belief that 14%
reflects the interest rate that would be charged to Harmony by other
junior and unsecured lenders. Notes outstanding with Harmony aggregated
$3.05 million as of May 11, 1999.
B. In January 1999, the Company closed on the sale of the radio broadcast
licenses and certain other assets of its radio stations KAHZ(AM),
Dallas, KIDR(AM), Phoenix, and WJDM(AM), New York, to Radio Unica Corp.
("Radio Unica"). The Company received gross proceeds of $29.25 million
for the stations' assets which had a net book value of approximately
$11.4 at the time of the sale. The Company incurred approximately $1.5
million of transaction costs including bonuses paid to management,
employees and Media Management, LLC.
C. In January 1999, the Company redeemed all of its 606,061 shares of
Series B Convertible Preferred Stock which were issued in June 1998.
The preferred stock was redeemed at $4.04 per share, or $2.45 million,
utilizing a portion of the proceeds from the Radio Unica transaction
(Note 2B).
D. In January 1999, the Company entered into an agreement regarding the
production of a picture titled "True Rights" based on a screenplay
written by Meg Thayer. In exchange for providing certain financing of
the production, the Company received a 33.33% equity interest in the
screenplay, production of "True Rights' and any other material relating
thereto. Also, the Company shall receive 30.0% of the net proceeds from
the distribution and exploitation of "True Rights" in all media and all
sources worldwide after the Company receives, on a parri passu basis
with other investors, the sum equal to 125% of its respective
contribution to the production of "True Rights". The Company's
<PAGE>
financing obligation totaled $126,000 and was paid in full during the
filming of the project.
E. In February 1999, the Company incorporated a new subsidiary, Buffalo
Rome Films, Inc. ("Buffalo Rome"). Buffalo Rome will seek out
independent film opportunities and is currently engaged in discussions
regarding an independent film.
F. On March 4, 1999, the Company acquired all of the issued and
outstanding common stock of Chelsea Pictures, Inc. ("Chelsea") for
consideration totaling approximately $1,135,000, representing 125,000
shares of common stock with a value of $250,000 and the assumption of
approximately $885,000 liabilities net of assets. Chelsea is a
television commercial production company with principal operations in
New York. The acquisition has been accounted for as a purchase,
whereby, all assets purchased and liabilities assumed were recorded at
their fair market value. Additional consideration for the transaction
may consist of issuance of up to an aggregate of 75,000 additional
shares of the Company's common stock. Any future issuance is dependent
on Chelsea meeting certain performance goals, and the value of shares
issued will be treated as an adjustment to the purchase price at the
time of issuance.
The unaudited pro forma results of operations which follow assume that
the acquisition of Chelsea had occurred at January 1, 1998. In addition
to combining the historical results operations of the Company and the
acquired business, the pro forma calculations include adjustments for
the estimated effect on the historical results of operations for
depreciation, interest and issuances of common stock related to the
business acquisition.
Three months ended
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3/31/99 3/31/98
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Revenues $2,752,300 $4,087,568
Gross profit 432,012 1,189,194
Loss from operations (1,080,583) (2,202,304)
Net income 11,314,614 (3,671,148)
Net income per share 1.71 (0.54)
Weighted average number of
shares outstanding 6,617,000 6,781,000
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the
acquisition occurred on January 1, 1998 or of future results of
operations of the consolidated entities.
G. In April 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock, representing
approximately 7.6% of the then outstanding common stock, over a period
of 12 months. Repurchases have been and will be made in accordance with
Exchange Act Rule 10b-18, and will be subject to the availability of
stock, trading price, market conditions and the Company's financial
performance. The repurchased shares will be canceled and returned to
the Company's authorized capital stock. As of May 11, 1999, the Company
had repurchased an aggregate of 72,600 shares at a prices ranging from
$1.63 to $1.88 per share.
<PAGE>
H. In April 1999, the Company made a purchase of 225,000 shares of
Harmony's common stock at a price of $1.03 per share including
commissions. This purchase increased the Company's ownership in Harmony
to approximately 52.1%. For reporting purposes, the Company will
prepare consolidated financial statements under the purchase method of
accounting for the acquisition of a majority interest in a subsidiary.
Note 3 Investment in Harmony
With the purchase of 225,000 shares of Harmony's common stock (see Note
2H), the Company holds a majority interest in Harmony through the
ownership of 3,907,962 shares of Harmony's common stock. As of May 11,
1999, the Company's investment represented 52.1% of Harmony's
outstanding common stock. Harmony's most recent fiscal year end was
June 30, 1998. Harmony's operations are summarized as follows for the
quarter and nine months ended March 31, 1999:
*Three Months Nine Months
Ended 3/31/99 Ended 3/31/99
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Contract revenues $16,274,699 $47,658,983
Cost of production 13,889,304 40,718,058
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Gross profit 2,385,395 6,940,925
Operating expenses 3,686,348 9,860,923
Restructuring cost &
impairment of assets (175,000) 3,357,495
Loss from
operations (1,125,953) (6,277,493)
Interest expense (79,089) (266,374)
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Loss before
income taxes (1,205,042) (6,543,867)
Income taxes - 9,601
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Net loss $(1,205,042) $(6,553,468)
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* Harmony shut down its Harmony Pictures division during the
quarter ended December 31, 1998, resulting in a one-time
restructuring cost of $3,357,495.
Note 4 Reclassifications
Certain amounts in the 1998 financial statements have been reclassified
to conform with the 1999 presentation. These reclassifications have no
effect on the accumulated deficit or net income or loss previously
reported.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This discussion and analysis contains certain forward-looking
terminology such as "believes," "expects," "anticipates," and
"intends," or comparable terminology. Such statements are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those projected. Potential purchasers of the
Company's securities are cautioned not to place undue reliance on such
forward-looking
<PAGE>
statements which are qualified in their entirety by the cautions and
risks described herein.
General
The Company currently engages in the television commercial
production and related media business. During 1998, the Company focused
on the sale of the radio stations it had acquired pursuant to its
former business strategy. The last of such were sold on January 14,
1999. In exchange for its radio stations, the Company obtained
approximately $55.0 million in cash and a note receivable for $15
million, yielding 10% per annum, due April 2000. The Company intends to
reposition itself through additional acquisitions in the television
commercial production industry. The Company believes that the expanded
number of television channels, advances in digital technology and the
demand for effective advertising concepts and efficient delivery of
production services create potential opportunities for the Company in
television commercial production.
Since July 1997, the Company has utilized its resources to
increase its ownership interest in Harmony to 52.1%. Harmony produces
television commercials, music videos and related media. In July 1998
and February 1999, the Company incorporated two new subsidiaries;
Populuxe Pictures, Inc. ("Populuxe"), and Buffalo Rome. Populuxe is
based in New York and currently is comprised of two directors along
with an executive staff. Populuxe produces television commercials and
related media. Buffalo Rome will seek out independent film
opportunities and is currently engaged in discussions regarding an
independent film. In January 1999, the Company acquired a 33.3% equity
interest in the screenplay, production of, and any other material
relating to the film "True Rights"(see Note 2D). In March 1999, the
Company acquired the stock of Chelsea, which is based in New York and
engages in the production of television commercials, independent films
and related media.
Results of Operations:
Three Months ended March 31, 1999 compared to Three Months
ended March 31, 1998.
The Company's total revenues increased $395,000 or 47% from
$836,000 in first quarter of 1998 to $1,231,000 in the first quarter of
1999. During in the first quarter of 1999, Chelsea and Populuxe, two of
the Company's new production companies, provided $1,144,000 of this
revenue while the remaining revenues were related to the broadcasting
entities the Company held until mid-January 1999. Populuxe is a
start-up company which is building a new base of talent and directors
with which to produce revenues. Management believes that revenues will
increase over time as this base becomes fully developed. The Company
began operating Chelsea in March 1999. Chelsea currently has a base of
talent and directors from which to draw, but intends to continue to
build that base to increase revenues.
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 as a percentage of
production contract revenues was 84% at the production companies during
the first quarter of 1999. Management believes the cost of production
as a percentage of revenues will
<PAGE>
decrease as the production companies retain more directors and these
directors become more established.
Selling expenses at Populuxe and Chelsea consist of sales
commissions, advertising and promotional expenses, travel and other
expenses incurred in the securing of television commercial contracts.
These expenses were $37,000 during the first quarter of 1999.
General and administrative expenses at the Populuxe and
Chelsea consist of overhead costs such as office rent and expenses,
executive, general and administrative payroll, and related items. These
expenses were $263,000 during the first quarter of 1999.
Expenses related to the Company's broadcasting entities held
until mid-January 1999 were $180,000. These expenses decreased
$1,105,000 from $1,285,000 in the first quarter of 1998. These expenses
decreased as the radio stations were sold and the network discontinued
producing programming.
Corporate charges were $540,000 in the first quarter of 1999
compared to $1,208,000 in the first quarter of 1998, representing a
decrease of 55%. This decrease is attributable in part to a decrease of
$76,000 in legal, accounting, and outside service fees which were
elevated in the first quarter if 1998 due to the activity related to
the sale of the radio stations. Additionally, there was a decrease in
litigation expenses of $619,000 as the trial against ABC/Disney was
concluded in the last quarter of 1998. A less costly appeals process
continues at this time.
Depreciation and amortization decreased $444,000 in the first
quarter of 1999 compared to the first quarter of 1998. The decrease in
depreciation and amortization is a result of the Company's sale of its
radio stations.
A net gain of $16,546,000 was realized in the first quarter of
1999 from the sale of three of the Company's radio stations to Radio
Unica.
For the period ended March 31, 1999, the equity loss in
Harmony totaled $1,931,000. This amount includes amortization of
$206,000, the Company's prorata share of Harmony's losses of $847,000,
and losses of $878,000 attributed to the minority ownership interest,
which are in excess of the minority ownership's prorata share of
Harmony's equity capital. In the event that Harmony reports net income
in the future, the Company will recognize income in excess of its
prorata share until such time as the cumulative amount of losses
recognized that are attributed to the minority ownership are fully
offset.
Net interest expense for the first quarter of 1999 was
$503,000, a decrease of $500,000 compared to the same period in 1998,
as a result of the payoff of the Foothill debt and all but $981,000 of
the Company's other debt in January 1999. Interest expense was offset
primarily by the $375,000 interest earned from the $15.0 million note
receivable due from CRN in April 2000.
A tax provision of $3,100,000 was recorded in the first
quarter of 1999. This represents approximately $700,000 of federal
income tax and $2,400,000 of state taxes estimated to be due as a
result of the sale of the radio stations.
<PAGE>
Net income of $10,154,000 was realized in the first quarter of
1999 compared to a net loss of $3,679,000 in the first quarter of 1998.
This increase of $13,833,000 is due primarily to the sale of the radio
stations and the reduction of operating losses.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital,
was $1,484,000 at March 31, 1999 compared to a deficit of $5,507,000 at
December 31, 1998. This increase in working capital is due to the sale
of three radio stations to Radio Unica and the payoff of related debt.
In January 1999, the Company closed on the sale of the radio
broadcast licenses and certain other assets of its radio stations
KAHZ(AM), Dallas, KIDR(AM), Phoenix, and WJDM(AM), New York, to Radio
Unica. The Company received gross proceeds of $29.25 million for the
stations' assets which had a net book value of approximately $11.4
million at the time of the sale. The Company recognized approximately
$1.5 million in transaction costs including bonuses paid to management,
employees and Media Management, LLC, recorded a tax provision of $3.1
million, and paid off all but $981,000 of its remaining debt.
Utilizing the proceeds from the Radio Unica transaction, the
Company redeemed 606,061 shares of Series B Convertible Preferred Stock
which were issued in June 1998. An aggregate of $2.45 million was used
to redeem this stock at $4.04 per share.
In January and February 1999, the Company advanced Harmony
$2,375,000 in cash pursuant to unsecured note receivable agreements
which are due on demand and bear an interest rate of 14% annually (see
Note 2A). As of May 11, 1999, the Company had note receivable
agreements with Harmony totaling $3.05 million. In April 1999, the
Company purchased 225,000 shares of Harmony's common stock for
$231,750. This purchase increased the Company's ownership in Harmony to
52.1% (see Note 2H and Note 3).
In March 1999, the Company acquired all of the issued and
outstanding common stock of Chelsea for consideration totaling
approximately $1,135,000, representing 125,000 shares of common stock
with a value of $250,000 and the assumption of approximately $885,000
liabilities net of assets. Additional consideration for the transaction
may consist of issuance of up to an aggregate of 75,000 additional
shares of the Company's common stock. Any future issuance is dependent
on Chelsea meeting certain performance goals, and the value of shares
issued will be treated as an adjustment to the purchase price at the
time of issuance. Of the assumed liabilities, the Company placed
$605,000 in an escrow account to be used to pay the directors working
on jobs in production at the time of the transaction. To date, director
fees of approximately $332,000 have been paid from that escrow account
leaving a balance of approximately $273,000 in the account.
In April 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 additional shares of its common stock. As
of May 11, 1999, the Company has repurchased an aggregate of 72,600
shares of common stock at prices ranging from $1.63 to $1.88 per share
(see Note 2G).
The Company intends, either directly or through Harmony, to
further expand its television commercial production business and
holdings through acquisitions of commercial production companies
<PAGE>
in an effort to increase its commercial production director pool. The
Company believes that it can substantially increase gross revenues, and
ultimately profits, through the acquisition of private production
companies. The Company intends to build on Harmony's expertise and
established reputation for quality to consolidate additional commercial
production companies, enabling the resulting entity to realize benefits
from economies of scale, centralization of accounting, marketing and
sales functions, and the ability to receive more competitive rates from
support service providers.
The Company believes it has adequate capital to initiate this
new acquisition strategy and business plan over the course of the next
12 months. The Company believes that a number of potential acquisitions
similar in nature to its most recent acquisition exist. However, should
a potential acquisition be greater than the Company's current cash
sources, the Company may need to obtain additional financing. If the
Company is not able to obtain adequate financing, or financing on
acceptable terms, it could possibly cause a delay in the implementation
of its full business plan until such time it is able to collect on its
$15.0 million note receivable due from CRN in April 2000. If for any
reason there is a delay in collecting on the CRN note, the Company may
be forced to slow the pace of or discontinue its future acquisitions or
other projects. In the interim, the Company has begun to execute the
initial phase of its business plan to acquire production companies
through the acquisition of Chelsea in March 1999. There can be no
assurance that the Company will consummate any additional acquisition
or that any acquisition, if consummated, will ultimately be
advantageous or profitable for the Company.
Consolidated cash was $5,709,000 at March 31, 1999 and
$254,000 at December 31, 1998, a increase of $5,455,000.
Cash used in operating activities during the three months
ended March 31, 1999 was $3,591,000 and the operating cash flows
reflected are net of account increases occurring as a result of
acquisitions. Accounts receivable at March 31, 1999 increased $49,000
from December 31, 1998, other receivables at March 31, 1999 increased
$265,000, and prepaid expenses at March 31, 1999 increased $194,000
from December 31, 1998. Accounts payable At March 31, 1999 decreased
$1,935,000 from December 31, 1998, accrued interest at March 31, 1999
decreased $8,000, and other accrued expenses at March 31, 1999
increased $2,382,000 from December 31, 1998.
During the three months ended March 31, 1999, net cash
obtained through investing activities was $11,520,000 and was provided
primarily by the sale of the radio stations to Radio Unica net of
proceed utilized for the direct payment of outstanding debt. As of
March 31, 1999, advances made to Harmony under note receivable
agreements were $2,440,000. Proceeds from the sale of radio stations
totaled $14,034,000, net of advance payments received prior to December
31, 1998.
Cash used in financing activities amounted to $2,473,000
during the three months ended March 31, 1999. This represents the
redemption of the convertible preferred stock for $2,450,000 and the
cash used to repay debt.
Year 2000 Readiness Disclosure
<PAGE>
The term "Year 2000" is used to describe general problems that
may result from improper processing of dates and date-sensitive
calculations by computers or other machinery as the year 2000 is
approached and reached. This problem stems from the fact that many of
the world's computer hardware and software applications have
historically used only the last two digits to refer to a year. As a
result, many of these computer programs do not or will not properly
recognize a year that begins with "20" instead of the familiar "19". If
not corrected, this could result in a system failure or miscalculations
which may cause disruptions in operations, including among other
things, a temporary inability to process transactions, send invoices,
or engage in similar business activities.
State of Readiness
To operate its business, the Company relies on certain
information technology ("IT") and non-technology systems, including its
payroll, accounts payable, banking and general ledger systems. The
Company does not maintain any proprietary IT systems and has not made
any modifications to any of the IT systems provided to it by outside
vendors. The Company has hired an outside IT consultant to assess the
readiness of its hardware and software. This assessment has been
completed and it is anticipated that any remediation needed to bring
our systems into compliance, including the replacement of the Company's
voice-mail system, will be completed by July 31, 1999.
The Company also relies upon certain suppliers and service
providers, over which it can assert little control. The Company is in
the process of contacting critical suppliers and service providers to
assess the readiness of such parties and to determine the extent to
which the Company may be vulnerable to such parties' failure to resolve
their own Year 2000 issues. This effort is expected to be completed by
July 31, 1999.
Costs to Address Year 2000 Issues
The Company anticipates that it may incur up to approximately
$40,000 in costs to bring the internal telecommunications system into
Year 2000 compliance. Based on the results of the Company's assessment,
the Company believes that any future expenses that may be incurred,
will not have a material adverse effect on the Company's business,
operating results or financial condition.
Risks of Year 2000 Issues
The Company recognizes that Year 2000 issues constitute a
material known uncertainty. The Company also recognizes the importance
of ensuring that Year 2000 issues will not adversely affect its
operations. The Company believes that the processes described above
will be effective to manage the risks associated with the problem.
However, there can be no assurance that the processes can be completed
on the timetable described above or that remediation will be fully
effective. The failure to identify and remediate Year 2000 issues, or
the failure of key vendors, suppliers and service providers or other
critical third parties who do business with the Company to timely
remediate their Year 2000 issues could cause an interruption in the
business operations of the Company. At this time, however, the Company
does not possess information necessary to estimate the overall
potential financial impact of Year 2000 compliance issues.
<PAGE>
Seasonality and Inflation
In the past, the Company's revenues generally followed retail
sales trends, with the fall season, September through December,
reflecting the highest revenues for the year, due primarily to
back-to-school and holiday season retail advertising, and the first
quarter reflecting the lowest revenues for the year. Presently, the
Company has not determined the impact of seasonality on its future
revenues. The Company does not believe inflation has affected the
results of its operations, and does not anticipate that inflation will
have an impact on its future operations.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on October 8, 1999.
INTELEFILM CORPORATION
BY: /s/ James G. Gilbertson
----------------------------------
James G. Gilbertson
ITS: Chief Operation Officer and
Chief Financial Officer
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