U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For Quarterly period ended June 30, 2000 or
[ ] 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)
Minnesota 41-1663712
-------------------------- ----------------------
(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
--------------
(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 _______
As of August 4, 2000, there were outstanding 6,511,366 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 -- June 30, 2000 and December 31, 1999.
Consolidated Statements of Operations -- Three and six months ended
June 30, 2000 and 1999.
Consolidated Statements of Cash Flows -- Six months ended June 30,
2000 and 1999.
Condensed Notes to Consolidated Financial Statements -- June 30,
2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
iNTELEFILM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,996,289 $ 15,986,385
Accounts receivable 6,044,119 8,965,467
Allowance for doubtful accounts (129,664) (199,164)
Unbilled accounts receivable -- --
Accounts receivable - affiliates 373,301 373,239
Other accounts receivable 642,644 502,024
Prepaid expenses 1,787,784 1,563,122
-------------- --------------
Total current assets 16,714,473 27,191,073
Property and equipment, net 3,123,962 2,957,455
Goodwill, net 6,195,408 6,730,446
Other Assets 1,005,306 738,878
-------------- --------------
Total assets $ 27,039,149 $ 37,617,852
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,803,057 $ 4,010,891
Accrued income taxes 366,946 1,032,520
Deferred revenue 2,949,545 2,392,785
Other accrued expenses 3,168,503 4,650,835
Line of credit -- 3,548,911
Short-term debt -- 1,500,000
Long-term debt - current portion 255,865 191,933
-------------- --------------
Total current liabilities 9,543,916 17,327,875
Long-term debt, less current maturities 628,233 679,885
-------------- --------------
Total liabilities 10,172,149 18,007,760
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Commitments and Contingencies -- --
Minority interest 333,477 139,447
Shareholders' equity
Common stock 128,127 125,772
Authorized shares - 50,000,000
Issued & outstanding shares - voting: 6,217,325
June 30, 2000 and 6,099,577 - December 31, 1999
Issued and outstanding shares - nonvoting:
189,041 - March 31, 2000 and December 31, 1999
Additional paid-in capital 45,916,683 45,625,300
Accumulated deficit (29,195,741) (25,952,927)
Stock subscriptions receivable (315,546) (327,500)
-------------- --------------
Total Shareholders' Equity 16,533,523 19,470,645
-------------- --------------
Total Liabilities & Shareholders' Equity $ 27,039,149 $ 37,617,852
============== ==============
</TABLE>
See accompanying condensed notes to the consolidated financial statements
<PAGE>
iNTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues:
Production contract revenues $ 15,437,142 $ 23,457,601 $ 37,176,733 $ 24,619,824
Broadcast related revenues -- 10,418 -- 97,320
-------------------------------- --------------------------------
Total revenues 15,437,142 23,468,019 37,176,733 24,717,144
Costs and expenses:
Cost of production 12,368,178 19,557,110 30,865,415 20,836,738
Selling 780,278 908,017 1,593,992 1,081,787
General and administrative
(exclusive of items shown below) 2,261,755 2,115,366 4,500,087 2,611,130
Broadcast related expenses -- 13,004 -- 193,319
Stock option compensation 135,393 1,958,250 225,745 1,958,250
Corporate 1,195,622 880,560 2,356,935 1,520,655
Depreciation and amortization 524,048 408,197 1,040,299 557,428
-------------------------------- --------------------------------
Loss from operations (1,828,132) (2,372,485) (3,405,740) (4,042,163)
Gain/(loss) on sale of radio stations -- (7,551) -- 16,537,956
Equity loss in Harmony -- -- -- (1,118,785)
Interest income net of interest (expense) 111,829 388,715 174,770 (114,091)
-------------------------------- --------------------------------
Net income (loss) before income taxes (1,716,303) (1,991,321) (3,230,970) 11,262,917
Income tax provision (7,295) -- (11,844) (3,100,000)
-------------------------------- --------------------------------
Net income (loss) $ (1,723,598) $ (1,991,321) $ (3,242,814) $ 8,162,917
================================ ================================
Basic and diluted net income (loss) per share $ (0.27) $ (0.31) $ (0.51) $ 1.26
================================ ================================
Weighted average number of shares outstanding 6,423,000 6,490,000 6,379,000 6,491,000
================================ ================================
</TABLE>
See accompanying condensed notes to the consolidated financial statements
<PAGE>
iNTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
------------------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (3,242,814) $ 8,162,917
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Provision for doubtful accounts & director advances 571,639 109,039
Depreciation & amortization 1,040,299 557,428
Gain on sale of radio stations -- (16,537,956)
Stock option compensation 225,745 1,958,250
Amortization and write-off of deferred debt issue costs -- 742,737
Equity loss in Harmony -- 1,118,785
Non-cash interest payment related to sale of stations -- 92,008
Decrease (increase) in:
Accounts receivable 2,921,348 (1,242,197)
Other receivables (781,821) (311,612)
Prepaid expenses (224,662) (246,169)
Increase (decrease) in:
Accounts payable (1,207,834) (3,319,958)
Deferred income 556,760 3,370,393
Other accrued expenses (2,147,906) 2,809,825
------------ ------------
Net cash (used in) operating activities (2,289,246) (2,736,510)
------------ ------------
Investing activities:
Sale/purchase of property & equipment (608,639) (860,795)
Net investment in & notes receivable from Harmony -- (215,657)
Other capital expendiures (329,557) (1,471,861)
Proceeds from sale of radio stations -- 14,034,415
------------ ------------
Net cash provided by (used in) investing activities (938,196) 11,486,102
------------ ------------
Financing activities:
Payment of line of credit (3,548,911) --
Payment of debt (1,679,173) (538,291)
Proceeds from debt financings 191,453 645,303
Redemption of convertible preferred stock -- (2,450,002)
Repurchase of common stock -- (260,145)
Proceeds from issuance of common stock 273,977 --
Proceeds from stock subscriptions receivable -- 21,500
------------ ------------
Net cash used in financing activities (4,762,654) (2,581,635)
------------ ------------
Increase (decrease) in cash and cash equivalents (7,990,096) 6,167,957
Cash and cash equivalents at beginning of period 15,986,385 253,905
------------ ------------
Cash and cash equivalents at end of period $ 7,996,289 $ 6,421,862
============ ============
</TABLE>
See accompanying condensed notes to the consolidated financial statements
<PAGE>
iNTELEFILM Corporation
Condensed Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
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 and six-month period ended June 30, 2000, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. 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, 1999.
Through the additional purchase of Harmony Holdings, Inc. ("Harmony")
common stock in April 1999, iNTELEFILM ("the Company") acquired a majority
interest in Harmony, thereby allowing the Company to consolidate Harmony, for
financial statement purposes, beginning April 1, 1999, rather than accounting
for the investment under the equity method as it had for all previous periods.
Note 2 Significant Transactions and Subsequent Events
The following significant transactions occurred during 2000 and are
considered non-recurring:
A. In January 2000, the Company formed webADTV.com, Inc. ("webADTV") under
the laws of the state of Minnesota. The Company is the principal
shareholder in webADTV. webADTV intends to offer an online digital
suite of tools designed to web-enable all aspects of the global
advertising process from conception of the media campaign, through
production, placement and fulfillment. By providing a series of
productivity features and through a wide array of e-commerce solutions
within webADTV's tools, specifically designed for transactions by the
advertising community, webADTV will enhance and streamline the business
processes for advertising agencies and their clients. Initially,
iNTELESOURCE will be the core of webADTV. iNTELESOURCE provides
agencies and production companies the opportunity to digitize, archive
and retrieve all television commercials produced by their firms.
B. In February 2000, webADTV adopted the 2000 Incentive Stock Option Plan
and the 2000 Non-Qualified Stock Option Plan whereby 5,000,000 shares
of the subsidiary's common stock have been reserved under each plan.
The options can be either incentive stock options or non-statutory
options as indicated by the plan name and are generally valued at the
fair market value of the stock on the date of grant. The plans allow
various vesting options and the ability for the employee to immediately
exercise the options for consideration of cash or a subscription
receivable. The subsidiary is able to repurchase stock issued on
<PAGE>
immediate exercises at the exercise price if the employee does not meet
certain service periods. As of August 4, 2000, approximately 3.9
million options had been granted under the plans of which approximately
2.8 million options had been exercised. Stock subscription receivable
related to these exercises aggregated $54,900. If all options were
exercised, the Company's ownership in webADTV would be diluted to 84%.
C. In March 2000, the Company proposed to commence an exchange tender
offer to the shareholders of Harmony to acquire all of the outstanding
shares of Harmony's common stock in exchange for shares of the
Company's common stock. The Company proposes to offer one share of its
common stock for every 13.75 shares of Harmony common stock. If the
Company is successful in its tender offer, Harmony will become a wholly
owned subsidiary of the Company.
D. On March 23, 2000, the Company called its notes payable due from
Harmony. As a result of Harmony's inability to repay the notes within
the 30-day demand period, on May 1, 2000, the Company granted Harmony a
forbearance for an indeterminate amount of time to allow the
independent directors of Harmony to further consider and propose cure
alternatives.
E. During the six months ended June 30, 2000, the Company recorded a
valuation allowance associated with commercial director advances in
excess of earnings totaling $641,000, of which $461,000 relates to
advances paid in 1999. Such advances are regularly paid to established
commercial directors on a monthly basis and are offset against the
actual earnings from commercial directorial services. The Company
capitalizes these monthly payments and recognizes them as an expense in
the period that they are offset against a commercial director's actual
earnings. Capitalized amounts were evaluated for impairment based on
anticipated future commercial project awards for individual commercial
directors and an allowance was established for capitalized amounts
believed to be impaired. The valuation allowance was primarily
necessitated by changes in the workflow and contractual relationships
of the majority of commercial directors at The End, Inc. ("The End"), a
wholly-owned subsidiary of Harmony, after the resignation of two
principal officers of The End.
F. On May 1, 2000, members of the Screen Actors Guild ("SAG") began a
strike against the advertising agencies that represent the Company's
customer base. This on-going strike has limited the Company's ability
to produce television commercials domestically. The Company has made an
effort to limit the effect that the strike may have on its operations
by utilizing non-union talent and continuing to produce its commercials
outside of the United States wherever possible. To date, the Company
has experienced some loss of business as a result of the strike. The
Company can give no assurance that an extended strike will not have a
significant adverse affect on its operations.
G. In June 2000, webADTV signed a letter of intent to acquire Cosmic
Inventions, LLC ("Cosmic Inventions"). Cosmic Inventions' leading
product, Spot Rocket, facilitates the transmittal of
<PAGE>
approval-quality video, CD-quality audio tracks, animatics,
photographs, storyboards, animations and various multimedia components.
Additionally, Cosmic Inventions has developed a product that enables
simplified delivery and receiving of large files via standard e-mail
addressing. These products provide high quality transmittal,
eliminating costly production errors, travel expenses and last minute
revisions.
H. In July 2000, the Company discontinued the operations of Populuxe
Pictures, Inc. ("Populuxe"). There are no significant continuing
obligations related to this subsidiary.
I. In July 2000, webADTV entered into a software license agreement with
Excalibur Technologies Corporation ("Excalibur"). Under the agreement,
Excalibur will receive 200,000 shares of webADTV's common stock, valued
at $2.50 per share, and $500,000 in cash. In return, webADTV will
receive a three-year, pre-paid license for, and the right to
exclusively market to advertising agencies through iNTELESOURCE, the
Excalibur Screening Room(R) and RetrievalWare(R) product lines. These
products will provide webADTV tools needed to provide its web-based
advertising services.
J. In August 2000, the Company signed an accounts receivable-based loan
and security agreement with General Electric Capital Corporation ("GE
Capital"). This loan and security agreement provides for borrowings for
working capital under a revolving line of credit with maximum
availability of $7 million based on acceptable accounts receivable. The
line of credit bears interest at a variable rate (10.29% at July 26,
2000). The agreement requires the Company to comply with certain
restrictive covenants and will provide financing for Curious Pictures
Corporation ("Curious Pictures"), Chelsea Pictures, Inc. ("Chelsea")
and The End.
K. Currently, $750,000 of the Company's cash balance secures a line to be
used to issue import letters of credit. At the date of this filing, the
Company is not exposed to a significant credit risk as a result of
these letters of credit.
Note 3 Investment in Harmony
The Company holds a majority interest in Harmony through the ownership
of 4,139,562 shares of Harmony's common stock. Harmony's most recent reported
fiscal year-end was June 30, 1999. Harmony's operations prior to the Company
consolidating Harmony's financial statements, are summarized as follows for the
quarter ended March 31, 1999:
Three Months
Ended 3/31/99
(in thousands)
--------------
Contract revenues $ 16,275
Cost of production 13,889
----------
Gross profit 2,386
Production expenses 2,851
----------
<PAGE>
Loss from productions (465)
Corporate, depreciation
& amortization 836
Restructuring cost &
impairment of assets (175)
----------
Loss from
Operations (1,126)
Interest expense (79)
----------
Net loss $ (1,205)
----------
Harmony's results from operations are consolidated for the period
beginning April 1, 1999 and all periods thereafter. Previous periods are
accounted for under the equity method.
No minority interest is currently shown related to Harmony, as the
minority shareholders no longer have any equity basis in their investment. As of
June 30, 2000, the Company had recognized losses in excess of its prorata share
totaling $2.8 million.
Note 4 Reclassifications
Certain amounts in the 1999 financial statements have been reclassified
to conform to the 2000 presentation. These reclassifications have no effect on
the accumulated deficit or net income or loss previously reported.
Note 5 Business Segments
The Company classifies its operations into two major business segments:
television commercial production and webADTV. The television and commercial
production segment consists of the Company's production companies: Curious
Pictures, Chelsea, and The End and its subsidiaries through Harmony. The webADTV
segment is comprised of the INTELESOURCE and other online digital tools designed
to web-enable all aspects of the advertising campaign process.
The Company evaluates performance based on several factors, of which
the primary financial measure is production service income, excluding non-cash
charges and non-recurring charges, since this measure approximates the cash flow
generated by each segment. Production service income is defined as earnings
before interest, taxes, stock-based compensation, corporate overhead, and
depreciation and amortization. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
Six months ended June 30, 2000 (in thousands)
Television
Commercial Total
Production webADTV Corporate iNTELEFILM
---------- ------- --------- ----------
Revenues
from external
sources $ 37,161 $ 16 $ -- $ 37,177
Inter-segment
Revenues -- -- 600 600
<PAGE>
Production
service income/
(loss) $ 441 $ (823) $ 600 $ 218
Stock option
compensation 170 -- 56 226
Depreciation and
amortization 527 2 511 1,040
-------- -------- -------- --------
Income (loss) from
operations $ (349) $ (826) (2,231) (3,406)
-------- -------- -------- --------
Additions to long-
lived assets $ 501 $ 75 $ 33 $ 609
-------- -------- -------- --------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains certain non-historical
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 statements, which
are qualified in their entirety, by the cautions and risks described herein.
Results of Operations for the Three and Six Months Ended June 30, 2000
Compared to the Three and Six Months Ended June 30, 1999:
General Overview
The Company has changed its focus within the media and entertainment
industry from children's entertainment to commercial production services. The
transition was finalized with the completion of the sale of the Company's radio
stations in January 1999. As such, broadcasting revenues and expenses in 1999,
exclusive of the gain on the sale of the radio stations, were insignificant. The
complete transition to commercial production service within the media and
entertainment industry occurred in 1999 with increases in the Company's
ownership in Harmony to 55%, in Curious Pictures to 51%, and in Chelsea to 100%.
The Company believes it is one of the leading sources of services for
the television commercial production within the entertainment industry, offering
extensive production capability and the exclusive services of established
industry talent. The Company intends to seek additional acquisitions to further
broaden its offering of services with the objective of enhancing overall profit
margins and leveraging its pool of talent and technical expertise to capitalize
on the convergence of short-form video content and technologies of broadband
Internet delivery systems.
The Company is also expanding services offered through its subsidiary,
webADTV. webADTV intends to offer an online digital suite of tools that will
web-enable all aspects of the global advertising process. webADTV will enhance
and streamline the business process for advertising agencies and their clients
by providing a series of tools and a wide array of e-commerce solutions designed
for transactions within the advertising community. webADTV's first tool,
iNTELESOURCE, is an Internet based, video asset management system that provides
agencies and production companies with the
<PAGE>
ability to digitize, encode, archive and stream television commercials that they
produce.
As a result of acquiring a majority interest in Harmony and Curious
Pictures, the Company began consolidating these companies under the purchase
method of accounting for the acquisition of majority-owned subsidiaries. Harmony
and Curious Pictures' results from operations are consolidated for the period
beginning April 1, 1999. Previous periods are accounted for under the equity
method. Chelsea's operations are consolidated for the period beginning March 1,
1999. Because of this transition, a comparison of the changes in the revenue and
expense categories from the first half of 1999 to the first half of 2000 would
not be meaningful without including additional information related to Harmony's
results of operations for the first quarter of 1999. Accordingly, information
related to Harmony's first quarter 1999 performance has been provided.
The Company's total revenues decreased $8,031,000 from $23,468,000 in
the second quarter of 1999 to $15,437,000 in the second quarter of 2000, while
in the first half of 2000 revenues increased $12,460,000 or 50% from $24,717,000
in 1999 to $37,177,000 in 2000. During the second quarter of 2000, revenues at
Curious Pictures and Chelsea increased $2.9 million while revenues at The End
and Populuxe decreased $8.8 million. A decrease in revenues of $2.0 million
during the second quarter is attributable to The End (London), which Harmony
sold July 1, 1999. The End and Curious Pictures produced revenues of $13.5
million in the first quarter of 1999, although those revenues were not
consolidated in the Company's financial statements at that time. The Company
believes that the decrease in revenues at The End resulted from the effects of
the SAG strike, which began in May 2000. In reaction to the initial strike
announcement, many agencies withheld production as they assessed the situation
in an attempt to determine when a settlement might be reached. Although the
agencies are gradually sending more jobs into production, there continued to be
fewer jobs on which to bid through August 4, 2000. The strike has had a lesser
effect on Curious Pictures as Curious Pictures' productions primarily use
animation and digigraphics. Chelsea has been able to avoid some of the strike's
impact by producing commercials outside of the United States. Additionally, a
portion of the decrease in revenues at The End may be attributed to the
commercial director contracts that were not renewed. Revenues of $97,000 were
produced by the broadcasting entities in the first half of 1999. These entities
were sold in mid-January 1999.
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, production insurance and
commercial directors' fees. Cost of production as a percentage of production
contract revenues decreased to 80% and 83% during the second quarter and first
half of 2000, respectively, from 84% and 85% during the second quarter and first
half of 1999, respectively. Included in the cost of production for the first
half of 2000 is $641,000 in charges related to the Company's change in estimated
valuation for the advances paid to its commercial production directors (see Note
2E to the financial statements). Of this amount, $461,000 is related to advances
paid in 1999. The Company believes the cost of production, as a percentage of
revenues, will decrease as its production companies retain more directors and
are able to charge greater premiums for these directors as the demand for their
work increases. Additionally, the Company believes it will continue to realize
greater cost benefits on a
<PAGE>
consolidated basis, such as vendor discounts, which may lower the overall cost
of production.
Selling expenses at the production companies consist of sales
commissions, advertising and promotional expenses, travel and other expenses
incurred in the securing of television commercial contracts. Selling costs
decreased $128,000 from $908,000 during the second quarter of 1999 to $780,000
during the second quarter of 2000, and increased $512,000 during the first half
of 2000 compared to the same period in 1999. Expenses recorded related to The
End (London) during the second quarter of 1999 amounted to $275,000, while The
End and Curious Pictures incurred selling costs of $526,000 in the first quarter
of 1999, which were not consolidated in the Company's financial statements at
that time. Additionally, during the first half of 2000, the Company's newest
subsidiary, webADTV, incurred $65,000 in selling costs associated with
iNTELESOURCE, its subscription based video asset management system.
General and administrative expenses at the divisions consist of
overhead costs such as office rent and expenses, executive, general and
administrative payroll, and related items. During the second quarter of 2000,
general and administrative expenses increased $147,000 from $2,115,000 during
the second quarter of 1999 to $2,262,000 during the second quarter of 2000, and
increased $1,889,000 during the first half of 2000 compared to the same period
in 1999. Expenses recorded related to The End (London) during the second quarter
of 1999 amounted to $205,000, while The End and Curious Pictures incurred
general and administrative costs of $1,453,000 during the first quarter of 1999,
although those expenses were not consolidated in the Company's financial
statements at that time. webADTV's general and administrative costs during the
first half of 2000 were $728,000. These costs include a management fee of
$600,000. This fee is eliminated in the consolidated financial statements.
Expenses related to the Company's broadcasting entities held until
mid-January 1999 were $193,000 during the first half of 1999.
Stock option compensation decreased $1,823,000 during the second
quarter of 2000 and $1,733,000 during the first half of 2000 compared to the
respective periods of 1999. Stock option compensation expense in the first half
of 2000 and 1999 includes expense related to options granted to members of the
Company's Board of Directors in the amount of $56,000 and $50,000, respectively,
and expense related to options granted to Curious Management of $170,000 and
$1,908,000, respectively.
Corporate charges incurred in the second quarter of 2000 were
$1,196,000 and $881,000 in the second quarter of 1999. During the first half of
2000, corporate charges increased from $1,521,000 in 1999 to $2,357,000 in 2000.
Corporate charges related to the Harmony divisions were $530,000 in the first
quarter of 1999 and were not consolidated in the Company's financial statements
for that period. Overall, the increase in corporate charges on a comparable
basis was $306,000 from the first half of 1999 to the first half of 2000. This
increase was due primarily to the start-up activities related to webADTV.
Depreciation and amortization increased to $524,000 in the second
quarter of 2000 from $408,000 in the second quarter of 1999, and increased
$483,000 during the first half of 2000 compared to the same period in 1999.
Depreciation and amortization related to the Harmony divisions was $197,000 in
the first quarter of 1999 and was not consolidated in the Company's financial
statements for that period. Overall, the increase in depreciation and
amortization on a comparable basis was $286,000. This increase was related to
the excess of the investment cost over the value of the underlying net assets
<PAGE>
(goodwill) of Harmony. Prior to the Company obtaining a majority interest in
Harmony, this expense was reported as a portion of the equity loss in Harmony.
Net interest income was $112,000 in the second quarter of 2000 compared
to $389,000 in the second quarter of 1999. Interest income of $175,000 was
reported in the first half of 2000 compared to interest expense of $114,000 in
the same period of 1999. The interest income in 2000 was due primarily to
interest earned on the Company's cash, while the interest expense in the first
half of 1999 was related to the debt and debt-issue costs remaining prior to the
sale of the last three radio stations the Company held until mid-January 1999.
A tax provision of $3,100,000 consisting of alternative minimum tax and
state income taxes was recorded in the first quarter of 1999. This represented
taxes estimated to be due as a result of the sale of the radio stations at the
time. This estimate was subsequently reduced to approximately $1,102,000 in the
fourth quarter of 1999 by employing certain income tax strategies not in place
in the first three quarters of 1999.
A net loss of $1,724,000 was recognized in the second quarter of 2000
compared to a net loss of $1,991,000 in the second quarter of 1999. A net loss
of $3,243,000 was recognized in the first half of 2000, while net income of
$8,163,000 was recognized in the first half of 1999. The net income realized in
1999 was due to the sale of the radio stations.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was
$7,171,000 at June 30, 2000, compared to $9,863,000 at December 31, 1999.
In January 2000, the Company organized webADTV as a subsidiary. webADTV
intends to offer an online digital suite of tools designed to web-enable all
aspects of the global advertising process from conception of the media campaign,
through production, placement, and fulfillment. Initially, iNTELESOURCE will be
the core of webADTV. iNTELESOURCE provides agencies and production companies the
opportunity to digitize, archive, and retrieve all television commercials that
they produce. webADTV will focus on the workflow needs critical to advertising
agencies in the $250 billion advertising arena. webADTV believes the development
of its tools for the advertising agency will generate revenues through a tiered
subscription model, service income and commissions. webADTV will continue to
differentiate itself from competitors by applying the depth of its industry
expertise, incorporating its various proprietary tools, and by increasing the
range of its strategic relationships. In June 2000, webADTV signed a letter of
intent to acquire Cosmic Inventions. Cosmic Inventions' leading product, Spot
Rocket, facilitates the transmittal of approval-quality video, CD-quality audio
tracks, animatics, photographs, storyboards, animations and various multimedia
components. Additionally, Cosmic Inventions has developed a product that enables
simplified delivery and receiving of large files via standard e-mail addressing.
These products provide high quality transmittal, eliminating costly production
errors, travel expenses and last minute revisions. Currently, approximately 88%
of the outstanding shares of common stock of webADTV are held by iNTELEFILM and
approximately 12% of the outstanding shares of webADTV common stock have been
issued to employees and consultants pursuant to stock option plans. The Company
is seeking separate financing for webADTV. However, no assurance can be given
that webADTV will be able to obtain financing or that the terms of such
financing will be favorable to webADTV. In that event, webADTV may have to seek
alternative methods of financing, including the continued use of iNTELEFILM
funds. Additionally, outside financing may result in the issuance
<PAGE>
of additional shares, thereby diluting the Company's investment. There can be no
assurance that webADTV's business plan will be completed, or if completed, that
the business plan will be successful.
In April 2000, all advances made through the credit facility
established between Finova Capital Corporation ("Finova") and Harmony were paid
in full as Finova terminated its relationship with Harmony. As a result, all of
the Company's obligations as a guarantor of this facility have been fulfilled.
In March 2000, the Company proposed to commence an exchange tender
offer to the shareholders of Harmony to acquire all of the remaining outstanding
shares of Harmony's common stock in exchange for shares of the Company's common
stock. The Company proposes to offer one share of its common stock for every
13.75 shares of Harmony common stock. If the tender offer were fully completed
according to these terms, the Company would exchange approximately 244,880
shares of its common stock for 3,367,098 shares of Harmony's common stock,
thereby owning 100% of Harmony. Based on the stock prices of Harmony and the
Company at August 4, 2000, and assuming approximately $200,000 of transaction
costs, the Company would recognize approximately $690,000 of goodwill. No
assurance can be given that the Harmony shareholders will accept the offer once
it is made.
On March 23, 2000, the Company demanded payment on the notes payable
from Harmony, aggregating approximately $3.2 million at March 31, 2000. On May
1, 2000, the Company granted Harmony a forbearance for an indeterminate amount
of time to allow the independent directors of Harmony to consider and propose
cure alternatives.
On May 1, 2000, members of SAG began a strike against the advertising
agencies that represent the Company's customer base. This on-going strike has
limited the Company's ability to produce television commercials domestically.
The Company has made an effort to limit the effect that the strike may have on
its operations by utilizing non-union talent and continuing to produce its
commercials outsie of the United States wherever possible. To date, the Company
has experienced some loss of business as a result of the strike. The Company can
give no assurance that an extended strike will not have a significant adverse
affect on its operations.
In November 1999, two of the principal officers of The End resigned.
Under their agreements with The End, certain of the commercial directors of The
End now have the right to terminate their agreement with The End. To date, one
of the End's commercial directors has exercised his right to terminate his
agreement and has ended his exclusive representation by The End. Subsequent to
the departures of the aforementioned officers, the Company appointed a long-time
executive with The End as executive producer of The End, and appointed a new
chief operating officer who is a known talent as an executive in the financial,
administrative, production and marketing arena of the entertainment industry.
During the quarters ended June 30, 2000 and March 31, 2000, The End produced
revenues of $4.5 million and $9.7 million, respectively, and operating losses of
$394,000 and $453,000, respectively, compared to revenues of $7.9 million and an
operating loss of $814,000 for the quarter ended December 31, 1999. No assurance
can be given that these departures will not cause material adverse impact on
operations or financial performance of The End. The impact of the departures of
the foregoing individuals of The End on the Company's liquidity and
profits/losses is not currently ascertainable; however, it has reduced The End's
overhead and
<PAGE>
necessitated the valuation allowance for director advances in excess of earnings
discussed fully in Note 2E to the financial statements.
The Company intends to further expand its television commercial
production business and holdings through acquisitions and opportunities within
its present divisions. The Company seeks to explore the consolidation of
commercial production companies in an effort to increase its commercial
production director pool. In addition, the Company intends to acquire production
service companies, such as rental, editing, design/marketing, post-production
and music companies. The Company believes that gross revenues and profits can be
increased through the acquisition of private production companies and related
service companies. 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.
Management believes that with $7,171,000 of working capital as the
foundation of its acquisition capital, the Company should have adequate capital
to meet its ongoing working capital needs and continue its business plan and
acquisition strategy in the near term. Anticipated uses of cash in the near term
include funding operating losses and funding costs incurred by webADTV, which is
currently in its initial start-up phase. Additionally, the Company further
replenished its acquisition capital in August 2000 by entering into an accounts
receivable-based loan and security agreement with GE Capital. This loan and
security agreement provides for borrowings for working capital under a revolving
line of credit (see note 2J to the financial statements), thereby enabling the
divisions to operate their business through a line of credit instead of
depending on the Company to fund their operations. The line will provide working
capital for all of the Company's existing divisions, excluding webADTV, which
the Company currently finances internally. However, should a potential
acquisition require greater capital than the Company's 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 full implementation of its business plan.
Consolidated cash was $7,996,000 at June 30, 1999 and $15,986,000 at
December 31, 1999, a decrease of $7,990,000.
Cash provided by operating activities during the first half of 2000 was
$2,289,000. Accounts receivable at June 30, 2000 decreased $2,921,000 from
December 31, 1999, other receivables at June 30, 2000 increased $782,000 from
December 31, 1999 and prepaid expenses at June 30, 2000 increased $225,000
during the same period. Accounts payable at June 30, 2000 decreased $1,208,000
from December 31, 1999, accrued expenses at June 30, 2000 decreased $2,148,000
from December 31, 1999, and deferred income increased $557,000 during the same
period.
During the first half of 2000, net cash used in investing activities
was $938,000 and was used for capital expenditures.
Cash used in financing activities amounted to $4,763,000 during the
first half of 2000. This represents primarily the payoff of the line of credit
and the short-term note payable to the four principals of Curious Pictures, net
of the proceeds from the exercise of options to purchase common stock.
<PAGE>
Seasonality and Inflation
The Company does not believe that seasonality or inflation has affected
the results of its operations, and does not anticipate that inflation will have
an impact on its future operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 30, 1998, a jury in the United States District Court for the
District of Minnesota (the "Court") ruled in favor of the Company in connection
with litigation for breach of contract and misappropriation of trade secrets
that the Company had commenced against ABC/Disney and awarded the Company $20
million for breach of contract against ABC Radio, $10 million for
misappropriation of trade secret by ABC Radio and $10 million for
misappropriation of trade secret against Disney. On January 15, 1999, the Court
upheld the jury's findings that ABC Radio had breached its contract with the
Company and that ABC/Disney both misappropriated the Company's trade secret
information, the Court disagreed with the jury's conclusion that the evidence
showed that those actions caused the Company's damages or that the amount of
damages awarded by the jury was supported by the evidence, and set aside the
jury's verdict. The Court further ruled that in the event that the decision is
reversed or remanded on appeal, that the defendants be granted a new trial on
the issues of causation and damages. The Company filed a Notice of Appeal in
February 1999. On February 16, 2000, the Company presented its oral argument to
the 8th Circuit Court of Appeals in St. Paul, Minnesota. To date, the 8th
Circuit Court of Appeals had not yet ruled on the appeal. The Company intends to
pursue its appeal of the judgment and, to this end, certain personnel and
financial resources will be used.
Item 2. Changes in Securities.
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
(a) The Company held its Annual Meeting of Shareholders on June 22,
2000.
(b) The following directors were elected and continued their terms of
office at the Annual Meeting:
Christopher T. Dahl
Richard W. Perkins
Michael R. Wigley
William E. Cameron
(c) The following matters were voted upon at the Annual Meeting of
Shareholders:
(1) To elect four directors for the ensuing year and until their
successors shall be elected and duly qualified:
FOR AGAINST
Christopher T. Dahl 4,882,563 941,009
Richard W. Perkins 4,919,133 904,439
Michael R. Wigley 4,924,988 898,584
William E. Cameron 4,921,988 901,584
<PAGE>
(2) To consider and vote upon adoption of the Company's 2000
Stock Option Plan; and
FOR 2,606,035
AGAINST 604,693
ABSTAIN 20,375
BROKER NON-VOTE 2,592,469
(3) To ratify the appointment of BDO Seidman, LLP as the
Company's independent public accountants for the fiscal year
ending December 31, 2000.
FOR 5,696,959
AGAINST 120,378
ABSTAIN 5,875
(d) Not applicable
Item 5. Other Information.
a. On August 9, 2000, webADTV.com, Inc. ("webADTV"), a subsidiary of
the Registrant, issued a press release announcing that it signed
an exclusive licensing agreement with CDCX Corporation, a leading
digital asset management company, to provide print and audio
digital archiving as part of webADTV's inteleSource product.
Under the agreement, webADTV has the exclusive right to market
the CDXC Solution to the top 100 U.S. advertising agencies.
b. On August 10, 2000, webADTV issued a press release announcing the
appointment of James Bergeson to its Board of Advisors. Mr.
Bergeson is currently the Chief Executive Officer of Colle and
McVoy, one of the top 100 advertising agencies in the world.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27.1 Financial Data Schedule
99.1 Online System Software License Agreement Between Excalibur
Technologies Corporation and webADTV.com, Inc. dated July
31, 2000
b. Current Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K (File
No. 0-21534) with the Commission during the quarter for which this
report is filed:
1. The Company's Current Report on Form 8-K filed on April 26,
2000 regarding the online availability of inteleSOURCE.ORG
through webADTV.com, Inc.
2. The Company's Current Report on Form 8-K filed on April 27,
2000 regarding the execution of a joint operating agreement
by webADTV.com, Inc. and Post Production Services, Inc. to
provide encoding service expertise to webADTV.com, Inc.
3. The Company's Current Report on Form 8-K filed on June 22,
2000 regarding a letter of intent executed by webADTV.com,
Inc. to acquire Cosmic Inventions, LLC, a subsidiary of Post
Production Services, Inc.
<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 August 14, 2000.
iNTELEFILM CORPORATION
BY: /s/ Steven C. Smith
-----------------------------------
Steven C. Smith
ITS: Chief Financial Officer
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule
99.1 Online System Software License Agreement Between Excalibur Technologies
Corporation and webADTV.com, Inc. dated July 31, 2000
