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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 0-21534
iNTELEFILM CORPORATION
(Name of Small Business Issuer in Its Charter)
Children's Broadcasting Corporation
(former name)
MINNESOTA 41-1663712
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5501 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA 55416
(Address of Principal Executive Offices, including Zip Code)
(612) 925-8840
(Issuer's Telephone Number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($.02 PAR VALUE)
COMMON STOCK PURCHASE RIGHTS
(Title of Class)
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
| |
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. | |
The issuer's revenues for its most recent fiscal year were $67,342,653.
The aggregate market value of the voting stock held by non-affiliates
of the issuer as of March 1, 2000 was approximately $20,409,920.
The number of shares of the common stock of the issuer outstanding as
of March 1, 2000 was 6,388,966.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the document listed below have been incorporated by
reference to the indicated part of this Form 10-KSB.
DOCUMENT INCORPORATED BY REFERENCE PART OF THE FORM 10-KSB
Definitive Proxy Statement for the Company's 2000 Item 10 of Part III
Annual Meeting of Shareholders
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TABLE OF CONTENTS
PAGE
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PART I .........................................................................................................2
ITEM 1 DESCRIPTION OF BUSINESS.......................................................................2
ITEM 2 DESCRIPTION OF PROPERTY.......................................................................8
ITEM 3 LEGAL PROCEEDINGS.............................................................................8
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................9
PART II ....................................................................................................... 10
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.....................................10
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................................10
ITEM 7 FINANCIAL STATEMENTS......................................................................18-51
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.........................................................................52
PART III ........................................................................................................52
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............................................52
ITEM 10 EXECUTIVE COMPENSATION.......................................................................54
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................55
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................56
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K.......................................................58
SIGNATURES.......................................................................................................61
EXHIBIT INDEX....................................................................................................62
</TABLE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements under the captions "Description of Business," "Legal
Proceedings," "Market for Common Equity and Related Shareholder Matters,"
"Management's Discussion and Analysis or Plan of Operation," and elsewhere in
this Form 10-KSB constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may be identified by the use of terminology such as "may," "will,"
"expect," "anticipate," "estimate," "should," or "continue" or the negative
thereof or other variations thereon or comparable terminology. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or from
those results presently anticipated or projected. Such factors are set forth
under the caption "Management's Discussion and Analysis or Plan of Operation -
Cautionary Statements."
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
Over the past year, iNTELEFILM(sm) Corporation (the "Company") has
transformed itself into a leading source of services for the television
commercial production and related media business industry through acquisitions
and the establishment of relationships in the industry, and now offers the most
extensive production capability for television commercials, music videos and
related media available in the United States and the exclusive services of
established talent (See General Overview of 1999 Events and Transactions). In
January 1999, the Company completed its exit from the children's radio business
when it sold the last of its radio stations to Radio Unica Corp.
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 significant opportunities
for the Company in traditional braodcast media and on the Internet.
During 1999, the Company increased its ownership interest in Harmony
Holdings, Inc. ("Harmony"), a company which produces television commercials,
music videos and related media, from 49.1% to 55.2%. For reporting purposes, the
Company now consolidates Harmony's financial statements under the purchase
method of accounting for the acquisition of a majority interest in a subsidiary.
On March 23, 2000, the Company announced its proposal to commence an exchange
tender offer to the shareholders of Harmony to acquire all of the outstanding
shares of Harmony not currently owned by the Company. The Company proposes to
offer one share of its common stock for every 13.75 shares of Harmony's common
stock.
In January 2000, the Company, through its relationships with AT&T,
Excalibur Technologies, The Source Maythenyi and Spot Rocket, announced the
formation of webADTV.com, Inc. ("webADTV"). webADTV, a wholly-owned subsidiary
of the Company, was organized to provide a complete web based source of
communications, commerce, solutions and services to advertising agencies and
other companies in the advertising campaign production industry.
The Company's services are usually directed towards advertising
agencies located in the major markets of New York, Los Angeles, Chicago,
Minneapolis, Detroit, Dallas and San Francisco as well as regional markets. The
Company provides commercial production services to such major advertisers as
Acura, Anheuser Busch, AT&T, Audi, Bank of America, Blue Cross, Coca Cola,
Canon, Disney, Kellogg's, Kodak, McDonald's, Motorola, Nike, Nintendo, Reebok,
Sears, Sony, State Farm and Visa. The Company also works with such major
advertising agencies as Leo Burnett, Bozell Worldwide, Foote, J. Walter
Thompson, DDB Needham, Young & Rubicam and Fallon McElligot.
The Company was incorporated under the Minnesota Business Corporation
Act on February 7, 1990. All references to the Company herein include its
subsidiaries, unless otherwise noted. The Company's executive office is located
at 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416, and its telephone
number is (612) 925-8840. The Company's website is http://www.intelefilm.com.
BUSINESS AND ACQUISITION STRATEGY
COMMERCIAL PRODUCTION STRATEGY
It is the Company's objective to provide an end-to-end commercial
production solution for advertising agencies enabling the Company to provide the
highest level of service to its clients. To do so, the Company intends to
further expand its television commercial production service business and
holdings through acquisitions
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and/or opportunities within its present divisions. The Company intends to seek
to acquire production service companies, such as rental, editing,
designing/marketing, post-production or music companies. The Company believes
that it can increase revenues and profits through the acquisition of production
companies and related service companies.
By creating this infrastructure, the Company believes it can also
create a community for creative talent including a highly effective and
cost-efficient professional support organization, experienced executive
producers and integrated production services. The Company believes key talent
will recognize that the Company will provide an environment conducive to
creativity by relieving them and production management of the responsibility of
business and financing operations while providing a measure of financial
stability. Key talent will also recognize the possibility of the Company taking
a long-term interest in their career that traditional, independent production
houses typically do not provide.
The Company believes the primary benefits of its strategy include:
- offering more extensive services than its competitors;
- attracting key talent;
- higher overall profit margins;
- economies of scale;
- centralization of accounting, legal and marketing functions; and
- the ability to receive support services at lower costs.
The Company believes it should have adequate capital to continue its
acquisition strategy and business plan over the next 12 months. 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. 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.
INTERNET STRATEGY
As the leader in television commercial production, the Company has
developed a high level of expertise in the development of short form video and
advertising. The Company has assessed its strengths in these areas and has
identified several Internet initiatives:
- utilization of the Internet for productivity gains;
- development of a global presence;
- creation of short form content via the Company's directorial talent
pool for use on the Internet;
- development of new advertising solutions for the Internet through
integration of character-based content; and
- creation of the leading business to business portal to serve the
advertising agency industry.
The Company believes the Internet can be used for greater communication
within each of its divisions, sales network and as a solution to provide lower
costs and improve productivity and information availability. Additionally, the
Company currently spends approximately $750,000 per year to dub and send
directorial reels to advertising agencies and their clients. The Company is
exploring the elimination of this process through Internet video systems
including a beta version of the inteleSource.org ("inteleSource") system
described below.
DEVELOPMENT OF SHORT FORM CONTENT AND ADVERTISING
The Company is also exploring the use and development of short form
video together with the development of new Internet advertising models. Recent
studies have shown that banner ads create only a 0.2%
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click through rate. It is the Company's belief that rich media advertising is a
key to developing greater advertising revenue models for the Internet. Although
the Company recognizes that current broadband parameters still limit the
development of rich media advertising for the mass market, the Company believes
that there will be solutions to these barriers. Additionally, the Company
believes that rich media advertising to individuals while they are at work is a
viable opportunity due to high speed access at most business locations. As such,
the Company has begun to establish relationships with broadband providers to
maintain an awareness and participate in seeking the solution to the advertising
revenue models. In February 2000, the Company announced a relationship with
Hitplay, an entertainment video delivery network, pursuant to which the Company
will develop, produce and deliver original and archival entertainment video to
Hitplay and Hitplay will deliver the video over the Internet.
The Company currently retains the exclusive services of approximately
60 commercial directors. The Company believes that this director pool has the
video expertise necessary to meet the growing demand for short form video on the
Internet. The Company intends to leverage its talent base to explore the
convergence of content and technology over the Internet.
DEVELOPMENT OF A BUSINESS TO BUSINESS PORTAL
In January 2000, the Company formed webADTV. webADTV will provide a
complete web based source of communications, commerce, solutions and services to
the advertising agencies and other companies in the advertising campaign
production industry including news and information from affiliate content
providers, an e- commerce business generated from a wide range of affiliated
design and production sources and its subscription based archiving and retrieval
service, inteleSource. Initially, the portal will focus on the workflow needs
critical to advertising agencies in the $60 billion television commercial
production arena. webADTV will later expand to meet the service needs of
advertising agencies in all areas including print, media, newspaper, magazines
and outdoor. The Company believes the portal will differentiate itself from
future competitors due to the uniqueness of its service oriented subscriber
based inteleSource archiving system. The Company also anticipates that the
portal will generate revenues through advertising and pay per view content
specifically created for advertising agencies.
In connection with the development of the business to business portal,
the Company, in development with AT&T and Excalibur Technologies Corporation
("Excalibur"), announced the creation of inteleSource, a digital video archiving
and retrieval service designed specifically for global advertising agencies, the
Company's core customer. AT&T and Excalibur will provide dynamic hosting,
connectivity and video content management technologies for the data-based
service and the Company will provide its relationships with advertising agencies
and its expertise in commercial production. The Company believes that there is a
great need for on-demand digital archiving and retrieval of video assets by
global advertising agencies and that the Company will be able to couple its
agency relationships with the AT&T infrastructure and the new Excalibur
architecture in order to manage video content over networks to take additional
steps in web-enabling its services. inteleSource is a web based digitized video
storage and retrieval service designed exclusively for use by global advertising
agencies and their clients. Utilizing Excalibur Screening Room technologies
powered by AT&T Labs technology, inteleSource encodes television commercials
with specific searchable criteria such as ISCI codes, clients, products,
directors, producers, and creatives, empowering agencies and their clients to
more efficiently manage and retrieve assets from their extensive video
libraries.
inteleSource provides an Internet solution to advertising agencies who
do not have a reliable or efficient manner to search their commercial video
library. Currently, advertising agencies collect and store the commercials
produced for their clients on 3/4 inch video tape. Because commercials are
stored on individual reels, the creative personnel do not have a system to
quickly review all the reels in their library by selected categories. Instead,
each reel would have to be viewed separately. inteleSource minimizes this
process to better serve the creative personnel's need to review past advertising
campaigns, specific director work or, for example, all the car commercials
produced by the agency. Additionally, inteleSource encodes and digitizes each
new commercial produced by the advertising agency and stores the commercial on
the agency's archive system. In addition to the
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need to archive commercials, webADTV intends to further develop the archiving
capabilities of the service to include agency specific programming. As an
example, the portal could utilize the system to archive various seminars, spots
of the week or interviews with various industry lumaries.
There can be no assurance that webADTV's business plan will be
completed or if completed, that the business plan will be successful.
BUSINESS DESCRIPTION
The Company's primary business is the production of television
commercials, music videos and related media. The expertise, reputation and
creative vision of the commercial director roster and the ability of the Company
to deliver the commercial in an efficient manner defines the production
company's role. The Company's customers are typically advertising agencies
acting on behalf of a television advertiser.
The Company's marketing efforts have focused on national and
multi-national advertisers, national network commercials and higher budget
commercials. Nationally, the advertising and commercial production industry has
experienced an increase in the number of markets for television commercials.
Generally, the Company's budgeted price for a commercial ranges from $200,000 to
$400,000 and occasionally exceeds $1,000,000.
The Company's services are marketed by a staff of sales representatives
who seek out available commercial projects suitable for the Company's commercial
directors. These efforts are usually directed towards advertising agencies
located in New York, Los Angeles, Chicago, Detroit, Dallas, San Francisco,
Minneapolis and other regional markets.
Sales personnel hired by the Company work exclusively for the Company
out of offices located in Los Angeles and New York. The Company also employs
independent sales representatives on a select basis. The Company is seeking to
coordinate its sales efforts in a more efficient manner to enhance revenues.
To sell a commercial director's work, the sales staff uses the
commercial director's reel as its primary tool which contains samples of the
director's work demonstrating the director's creativity and experience. The
reels are continuously updated and provided to the advertising agencies who
generally act as the decision maker.
The Company also advertises in trade publications and has sponsored
agency events 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 Company attracts and retains commercial directors by offering such
directors the opportunity to work in an organization with a highly effective
sales force and a high-quality staff of executive producers and support staff.
The Company offers directors the ability to work in an environment that fosters
creativity by relieving directors of the worry and burden of running a business
or financing the projects on which they work.
Ad agencies award jobs to commercial production companies with an
accompanying bid. The award bid contains all of the costs associated with that
particular commercial and is broken down into direct costs of production,
director's fees, insurance and the production company's fee. The production
company and producer of the commercial carefully monitor costs throughout the
filming process. The pre-approved bid is often altered during filming due to
agreed upon new creative options or unexpected occurrences such as inclement
weather. When this occurs, and the project costs exceed the original budget, the
increased cost is paid for by the agency and its client.
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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 the principal photography. The accounts receivable write
offs have traditionally been less than 2% of all business.
A small percentage of the Company's business is derived from the
production of music videos. The production cycles for music videos is similar to
that of television commercials, but the budgets are generally smaller. The
client for the music videos is usually the record company or the performer
directly.
The television commercial production industry is a highly fragmented
multi-billion dollar industry, with most of the Company's competitors being
relatively small operations. The Company believes that its large director roster
with its range of creative ability, expertise and wide experience coupled with
the Company's reputation and advertising agency relationships, provide the
Company with a competitive edge in its current markets.
GENERAL OVERVIEW OF 1999 EVENTS AND TRANSACTIONS
During 1999, the Company utilized its resources to purchase an
aggregate of 456,600 additional shares of common stock of Harmony at prices
ranging from $0.94 to $1.03 per share. Such purchases increased the Company's
ownership interest in Harmony, a company which produces television commercials,
music videos and related media, from 49.1% to 55.2%. For reporting purposes, the
Company consolidates Harmony's financial statements under the purchase method of
accounting for the acquisition of a majority interest in a subsidiary.
In January 1999, the Company completed the sale of the radio broadcast
licenses and certain other assets of its remaining three radio stations
KAHZ(AM), Dallas, KIDR(AM), Phoenix and WJDM(AM), New York to Radio Unica Corp.
The Company used a portion of the proceeds of that transaction to redeem 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. Upon the sale to Radio Unica Corp. the Company completed the exit from
its former business plan.
In February 1999, the Company incorporated a new subsidiary, Buffalo
Rome Films, Inc. ("Buffalo Rome") which will seek out independent film
opportunities. During 1999, the Company entered into an agreement regarding the
production of a picture entitled "True Rights" which was based on a screenplay
written by Meg Thayer. In exchange for providing certain financing of the
production, the Company acquired a one-third equity interest in the screenplay,
production of "True Rights" and any other material relating thereto. In
addition, the Company will receive a percentage of the net proceeds from the
distribution and exploitation of "True Rights" in all media and all sources
worldwide after the Company receives, the sum equal to 125% of its respective
contribution to the production of "True Rights." The Company's financing
obligation totaled $126,000 and was paid in full during the filming of the
project. The Company has no assurance as to the amount of return, if any, that
the investment will produce. Investment in independent films involves a high
degree of risk. As a result, the Company has limited its involvement in this
area.
In March 1999, the Company acquired Chelsea Pictures, Inc. ("Chelsea")
by merging it with Chelsea Acquisition, Inc., a newly formed subsidiary of the
Company with Chelsea as the surviving corporation. Chelsea engages in the
production of television commercials, independent films and related media. In
1999, Chelsea had revenues of approximately $16.7 million. In exchange for the
stock of Chelsea, the Company issued to Steve Wax, Chelsea's sole shareholder,
125,000 shares of the Company's Common Stock with an additional 75,000 shares to
be issued to Mr. Wax contingent upon Chelsea obtaining certain earnings before
interest, taxes, depreciation, and amortization ("EBITDA") levels. Subsequent to
the merger transaction, the Company repaid approximately $887,000 of Chelsea's
liabilities in existence at the time of the merger. Also, in connection with
this transaction, Chelsea entered into certain employment and commercial
production director agreements.
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In April 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock. The repurchases have
been made in accordance with Exchange Act Rule 10b-18, and are subject to the
availability of stock, trading price, market conditions and the Company's
financial performance. The repurchased shares are canceled and returned to the
Company's authorized capital stock. As of March 1, 2000, the Company had
repurchased an aggregate of 488,900 shares at prices ranging from $1.53 to $2.06
per share.
In June 1999, as part of its repositioning into the television
commercial production industry, the Company began doing business as
iNTELEFILM(sm) and changed its Nasdaq symbol from "AAHS" to "FILM." On September
30, 1999, the Company and Children's Radio of Kansas City, Inc., a subsidiary of
the Company, merged and in the process of the merger the Company changed its
name from Children's Broadcasting Corporation to iNTELEFILM Corporation.
Effective as of August 1, 1999, the Company purchased the Option and
Share Transfer Agreement ("Option Agreement") entered into by Harmony and the
four principal executives (collectively, "Curious Management") of Curious
Pictures Corporation ("Curious Pictures") dated December 15, 1996, from Curious
Management. Under the Option Agreement, Curious Management could earn the right
to purchase 50% of the outstanding stock of Curious Pictures from Harmony upon
the achievement of certain specified financial goals. Pursuant to the Company's
purchase agreement and based on the results of operations of Curious Pictures,
it was agreed by all parties that Curious Management's right to purchase the 50%
equity interest had fully vested and was exercisable for consideration totaling
$50. Following its purchase of the Option Agreement, the Company acquired 50% of
Curious Pictures through the exercise of stock options granted under the Option
Agreement. The Company also acquired a 1% equity interest in Curious Pictures
owned by Curious Management that was initially conveyed to Curious Management
upon signing the Option Agreement. The consideration paid to Curious Management
by the Company for the aforementioned acquisitions aggregated $3.0 million
consisting of $1.5 million in cash and $1.5 million note payable bearing an
interest rate of 8%, due May 31, 2000. The Company believes it has adequate
resources to satisfy the note payable. As a result of this transaction, the
Company currently owns 51% of the outstanding stock of Curious Pictures and
Harmony owns 49% of the outstanding stock of Curious Pictures.
In October 1999, the Company received payment in full on its $15.0
million note receivable from Catholic Radio Network ("CRN"). The Company
believes that with the sums received on this note, it should have adequate
capital to continue its acquisition strategy and business plan over the next 12
months.
SALE OF RADIO STATIONS ACQUIRED PURSUANT TO FORMER BUSINESS STRATEGY.
In August 1998, the shareholders of the Company approved the sale of
substantially all of the assets related to the Company's radio stations. During
the fall of 1998 and early 1999, the Company completed the sale of all of its
radio stations and exited its former business strategy.
TRADEMARKS, SERVICE MARKS AND COPYRIGHTS
The Company has pending service mark applications and claims trademark
and service mark rights to and ownership in a number of marks including, but not
limited to, iNTELEFILM(sm) Corporation, iNTELEFILM.com(sm), Chelsea
Pictures(sm), Wraparoni(sm), Populuxe Pictures(sm), inteleSource.org(sm),
webADTV.com(sm), Curious Pictures Corporation(sm), Harmony Holdings, Inc.(sm),
The End, Inc.(sm), Beginning Entertainment, Inc.(sm), The Moment Films,
Inc.(sm), Unscented, Inc.(sm) and Gigantic Entertainment, Inc.(sm). In addition,
the Company has trademark and service mark rights to a number of marks in
connection with its former business strategy.
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EMPLOYEES
The Company had 76 employees, including one part-time employee, at the
end of its last fiscal year. No employee is represented by a union. Some of the
Company's subsidiaries are signatory to several talent and collective bargaining
agreements related to the physical production of commercials. Personnel covered
by such agreements are hired on a freelance basis solely for a specific
production and do not have an employment relationship with the Company. The
Company believes its relations with employees are satisfactory. Also, see
"Certain Relationships and Related Transactions."
ITEM 2 DESCRIPTION OF PROPERTY
The Company's executive offices are located at 5501 Excelsior
Boulevard, Minneapolis, Minnesota. The Company pays for its executive office
space through its management fee with Media Management, LLC (" MMLLC"), an
entity owned by Messrs. Christopher T. Dahl and Richard W. Perkins, each a
director of the Company. See "Certain Relationships and Related Transactions."
Chelsea leases an office facility in New York City which consists of
approximately 5,000 square feet. This lease requires an annual rent of $132,000
and expires on September 30, 2002. Chelsea also leases an office facility in
Hollywood, California, at an annual rent of $59,760 and expires on March 31,
2000.
Curious Pictures leases two office spaces in New York City and one
office space in San Francisco, California. One New York office lease consists of
approximately 20,708 square feet which requires an annual rent of $290,731 and
expires on January 31, 2008. The other New York office lease requires an annual
rent of $151,500 and expires on November 30, 2004. The San Francisco office
lease consists of approximately 3,741 square feet, requires an annual rent of
$41,040 and expires on August 31, 2003.
The End, Inc.'s California facility is located at 433 South Beverly
Hills Drive in Beverly Hills, California. The lease is for ten years ending in
October 2008 at a monthly rate for $21,909. The End, Inc.'s current New York
facility is located at 75 Varick Street, New York, New York and is shared with
Populuxe Pictures, Inc. The lease is for ten years ending in August 2009 at a
monthly rate of $9,282.
Harmony Holdings, Inc. also leases office space located at 420 South
Beverly Hills Drive in Beverly Hills, California, on a month to month basis at a
monthly rate of $1,950.
The Company carries general commercial liability insurance coverage on
its leased property. The Company believes that such insurance is adequate to
cover any losses that may occur on such property.
ITEM 3 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. As of March 28,
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2000, 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.
Except as described above, the Company is not a party to any
material legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through
the solicitation of proxies or otherwise during the fourth quarter of the
Company's most recently completed fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to the
Company's executive officers as of March 1, 2000. Each executive officer has
been appointed to serve until his or her successor is duly appointed by the
Board of Directors or his or her earlier removal or resignation from office.
<TABLE>
NAME AGE POSITION
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Christopher T. Dahl 56 Chairman of the Board, President and Chief Executive Officer
James G. Gilbertson 38 Chief Operating Officer
Steven C. Smith 44 Chief Financial Officer
Jill J. Theis 29 Secretary and General Counsel
Michael N. Delgado 40 Executive Vice President of Marketing
</TABLE>
Christopher T. Dahl has been President, Chief Executive Officer and
Chairman of the Company since its inception in February 1990. Mr. Dahl also
serves as Chairman of the Board, President and Chief Executive Officer of
Harmony, a company which produces television commercials, music videos and
related media, of which the Company is the largest shareholder and is the
Chairman of the Board of webADTV. Messrs. Dahl and Perkins own MMLLC. Employees
of MMLLC provide certain administrative, legal and accounting services to the
Company and Harmony. From 1969 to 1979, Mr. Dahl was the founder and President
of a group of companies involved in photo finishing, retail photo sales, home
sewing notions, toy distribution and retail craft stores. He was employed by
Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969.
James G. Gilbertson has served as the Company's Chief Operating Officer
since April 1996 and its Chief Financial Officer from July 1992 until December
21, 1999. In January 2000, Mr. Gilbertson was appointed the Chief Executive
Officer, President and director of webADTV. From June 1988 to July 1992, he was
the Chief Financial Officer of Parker Communications, which operated a group of
radio stations. From 1985 to June 1988, he was Controller of the radio division
of Palmer Communications located in Des Moines, Iowa. Prior to joining Palmer
Communications, Mr. Gilbertson was a practicing certified public accountant with
the firm of Ernst & Young LLP. Mr. Gilbertson is also the Chief Operating
Officer of Harmony. Mr. Gilbertson is also a director of Founders Food &
Firkins, Ltd., a company which owns and operates Granite City Brewery, a
microbrewery restaurant in St. Cloud, Minnesota.
Steven C. Smith became the Chief Financial Officer of the Company on
December 21, 1999. Mr. Smith has been with the Company since October 1998.
Formerly the Chief Financial Officer of DIC Entertainment Animation Television
and the Vice President of Finance of Orion Television, Mr. Smith brings more
than 20 years experience with companies such as the Walt Disney Company. Mr.
Smith has also performed as a financial consultant to special effects houses, TV
and Satellite Broadcasters and technology companies. On December 21, 1999, Mr.
Smith also became the Chief Financial Officer of Harmony.
Jill J. Theis joined the Company in March 1997 and has served as the
General Counsel and Secretary since February 1999. From January 1996 to March
1997, Ms. Theis worked for the law firm of Holper, Welsh, Mitchell
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& Joanis, P.A. in Minneapolis, Minnesota. From 1993 to 1997, Ms. Theis attended
law school at William Mitchell School of Law in St. Paul, Minnesota. Ms. Theis
is also the General Counsel and Secretary of Harmony.
Michael N. Delgado oversees the marketing and sales efforts of the
Company and has been with the Company since March 1997. A graduate of the
University of Southern California School of Fine Arts, Mr. Delgado has
orchestrated national marketing campaigns and has been involved in worldwide
branding efforts for a variety of corporations including Patagonia and Lucky
Brand Clothing Companies. Mr. Delgado gained significant operations experience
in his capacity as President of SenDel Automotive Corporation, a manufacturer of
aluminum automotive wheels whose customers included Toyota Motor Company.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company, which currently trades under the
symbol "FILM", has been included in the Nasdaq National Market since February
1996, on the Nasdaq SmallCap Market between May 1993 and February 1996, and on
the over-the-counter Bulletin Board from the completion of the Company's public
offering in 1992 until May 1993. The following table sets forth the approximate
high and low closing prices for the Common Stock for the periods indicated as
reported by the Nasdaq National Market. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C>
1998
First Quarter...................................... $ 4.3125 $ 2.8125
Second Quarter..................................... 4.0625 3.0000
Third Quarter...................................... 3.3125 2.8750
Fourth Quarter..................................... 3.6875 2.8125
1999
First Quarter...................................... $ 3.0630 $ 1.7190
Second Quarter..................................... 2.1880 1.5000
Third Quarter...................................... 2.5630 1.5000
Fourth Quarter..................................... 5.2500 1.6250
</TABLE>
As of March 1, 2000, the Company had approximately 307 shareholders of
record and approximately 2,500 beneficial owners.
The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay cash dividends on its Common Stock
in the foreseeable future. The Company currently expects to retain any earnings
to finance its business. The declaration or payment by the Company of dividends,
if any, on its Common Stock in the future is subject to the discretion of the
Board of Directors and will depend on the Company's earnings, financial
condition, capital requirements and other relevant factors.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis contains certain forward-looking
terminology such as "believes," "anticipates," "expects," 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
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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 YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR
ENDED DECEMBER 31, 1998
The Company has transitioned itself out of the radio broadcasting
industry and into the commercial production services industry. The transition
from the radio broadcasting industry was effectively completed with the closing
of the sale of the Company's radio stations in January 1999. As such, in 1999
the broadcasting industry revenues and expenses, exclusive of the gain on the
sale of the radio stations, were insignificant.
The transition into the commercial production service industry occurred
with the Company's acquisition of a majority interest in Harmony, and Curious
Pictures, and a 100% interest in Chelsea. 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's results from operations are consolidated
for the period beginning April 1, 1999 (the "Consolidated Reporting Period").
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 traditional "Management's Discussion and Analysis" comparison of
the changes in the revenue and expense caterogies from 1998 to 1999 would not be
meaningful. Accordingly, information detailing the origin of the production
revenues and expenses has been provided.
The Company's total revenues increased $64,776,000 from $2,567,000 in
1998 to $67,343,000 in 1999. The Harmony production companies produced revenues
of $49,394,000 during the Consolidated Reporting Period while the Company's two
production companies added in the current year, Chelsea and Populuxe, provided
$17,849,000 of the 1999 revenues. The remaining $100,000 of revenues produced
were related to the broadcasting entities held by the Company until mid-January
1999. Populuxe is a start-up production company. The Company purchased and 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.
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%
during 1999. The Company believes the cost of production as a percentage of
revenues will decrease as its production companies retain more directors and
these directors become more established. Additionally, the Company believes it
will continue to realize greater cost benefits such as vendor discounts which
may lower the overall cost of production.
Selling expenses of the production companies consist of sales
commissions, advertising and promotional expenses, travel and other expenses
incurred in the securing of television commercial contracts. Harmony's selling
expenses were $1,987,000 during the Consolidated Reporting Period, while selling
expenses at Chelsea and Populuxe were $668,000 in 1999.
General and administrative expenses at the production companies consist
of overhead costs such as office rent and expenses, executive, general and
administrative payroll, and related items. Harmony's general and administrative
expenses were $4,881,000 during the Consolidated Reporting Period, while general
and administrative expenses at Chelsea and Populuxe were $2,186,000 in 1999.
Expenses related to the Company's broadcasting entities held until
mid-January 1999 were $91,000.
Stock option compensation was $2,121,000 in 1999 and includes the
following: (i) $50,000 of expense related to options granted to members of the
Company's Board of Directors, (ii) $1,908,000 of expenses related to previously
existing options granted to Curious Management, and (iii) $163,000 of expense
related to current options granted to Curious Management.
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Corporate charges decreased $1,941,000 during 1999 from $5,614,000 in
1998 to $3,673,000 in 1999. This decrease is attributable in part to a decrease
in legal, accounting and outside service fees which were elevated in 1998 due to
the activity related to the sale of the radio stations. Additionally, during
1999 there was a decrease in litigation expenses of $2,737,000 as the trial
against ABC/Disney was concluded in the last quarter of 1998. A less costly
appeals process continues at this time. Corporate charges of $1,001,000 during
the Consolidated Reporting Period are attributable to Harmony.
Depreciation and amortization decreased $285,000 in 1999 from
$1,949,000 in 1998 to $1,664,000 in 1999. Depreciation and amortization related
to Harmony was $599,000 for the Consolidated Reporting Period. The overall
decrease in depreciation and amortization is a result of the Company's sale of
its radio stations. The Company reported $675,000 of amortization expense during
the Consolidated Reporting Period related to the excess of the investment cost
over the value of the underlying net assets (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.
A net gain of $16,264,000 was realized in 1999 from the sale of three
of the Company's radio stations to Radio Unica. In the third quarter of 1999, a
gain of $120,000 was realized related to the sale of 90% of the common stock of
The End (London), a previously consolidated subsidiary of Harmony.
Interest income for 1999 was $1,555,000 compared to $300,000 in 1998.
This increase of $1,255,000 was due primarily to interest earned through October
1999 from the $15,000,000 note receivable due from CRN and the interest earned
from the advances made to Harmony prior to the Consolidated Reporting Period.
Interest expense decreased $4,336,000 from $5,485,000 in 1998 to $1,149,000 in
1999. This decrease in interest expense resulted from the payoff of the majority
of the Company's debt in existence at the time of the radio station sales in
October 1998 and January 1999.
A tax provision of $1,102,000 consisting of Alternative Minimum Tax and
state income taxes was reported in 1999. This represents taxes estimated to be
due as a result of the sale of the radio stations.
Net income of $7,340,000 was realized in 1999 compared to $6,890,000 in
1998. This increase was due primarily to the sale of the radio stations and the
reduction of those stations' operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as measured by its working capital, was
$9,863,000 at December 31, 1999, compared to a deficit of $5,507,000 at December
31, 1998. This increase in working capital was due to the sale of three radio
stations to Radio Unica, the payoff of related debt, and the receipt of
$15,000,000 upon payment of the note receivable from CRN.
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 $29,250,000 for the stations' assets which had a net book
value of approximately $11,304,000 at the time of the sale. The Company
recognized approximately $1,682,000 in transaction costs, including bonuses paid
to management, employees and Media Management, LLC, recorded a tax provision of
$1,102,000, and paid off all but $981,000 of its debt outstanding at the time of
closing. The following is a description of the non-operational use of the
proceeds, net of debt repayments, from the Radio Unica transaction:
- The Company redeemed 606,061 shares of Series B Convertible
Preferred Stock which were issued in June 1998 for an
aggregate of $2,450,000.
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<PAGE> 14
- The Company advanced Harmony $3,290,000 in cash payments to
unsecured note receivable agreements which are due on demand
and bear an interest rate of 14%. As of December 31, 1999,
approximately $3,326,000 (including interest) was outstanding.
These notes as well as the related interest are eliminated in
the Company's consolidation of Harmony for periods after April
1, 1999.
- The Company acquired all of the issued and outstanding common
stock of Chelsea for $1,135,000, representing 125,000 shares
of common stock with a value of $250,000 and the assumption of
approximately $885,000 of liabilities net of assets.
- The Company's Board of Directors authorized the repurchase of
up to 500,000 additional shares of its common stock. As of
December 31, 1999, the Company had repurchased an aggregate of
488,900 shares for an aggregate of approximately $918,000 at
prices ranging from $1.53 to $2.06.
- The Company purchased 51% of Curious Pictures, a commercial
production company, from Curious Management for $1,500,000 in
cash and $1,500,000 pursuant to a promissory note bearing 8%
interest, due May 31, 2000. Curious Pictures was a
majority-owned subsidiary of Harmony, which now owns 49% of
Curious Pictures.
In October 1999, the Company received payment in full on its
$15,000,000 note receivable due from CRN. Management believes that with this
replenishment of working capital (of which $9,863,000 remained available at
December 31, 1999) as the foundation of its acquisition capital, the Company
should have adequate capital to meet its ongoing working capital needs and
continue its new business plan and acquisition strategy in the near term.
Anticipated uses of cash in the near term include payment of the accrued radio
station income tax liability of $1,033,000 and payment of the short-term note
payable of $1,500,000 due to Curious Management in March and May 2000,
respectively. Additionally, the Company intends to further replenish its
acquisition capital by replacing the operating line of credit in existence at
December 31, 1999. This line of credit had outstanding borrowings of $3,549,000
at December 31, 1999, which have subsequently been repaid in full pursuant to
the lender's call of the debt. Such a line will provide working capital for the
Company's existing divisions which it 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 implementation of its full business plan.
The Company began executing its business plan to acquire production
companies with the acquisition of Chelsea in March 1999, a majority interest in
Harmony in April 1999, and the acquisition of 51% of Curious Pictures in August
1999. 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.
In January 2000, the Company continued the implementation of its
business plan through the incorporation of webADTV, a subsidiary of the Company
which will combine the digital archiving and retrieval service, inteleSource
with additional web enabled services, news, and information under development to
the global advertising industries and their clientele. webADTV currently seeks
to expand and brand its infrastructure to include numerous in-demand vertical
services such as research, media planning and buying, competitive monitoring,
video and print delivery and the services of agency business partners. In
addition, webADTV intends to create useful e-commerce based affiliates and
establish carriage relationships with recognized advertising industry news and
information content providers. There can be no assurance that webADTV's business
plan will
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<PAGE> 15
be completed, or if completed, that the business plan will be successful. In
February 2000, webADTV granted the right to purchase approximately 3,330,500
shares of webADTV common stock to various individuals. If all options were
exercised, the Company's ownership in webADTV would be diluted to 84%.
In November 1999, two of the principal officers of The End, a wholly
owned subsidiary of Harmony, 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 ended his exclusive
representation by The End. The departure of the two principal executives and of
the one commercial director, have not, to date, had any material impact on The
End's revenues. During the Consolidated Reporting Period, The End produced
revenues of $18,487,000 and an operating loss of $601,000. No assurance can be
given that these departures will not cause further negative impact on operations
or financial performance of The End. The impact of the departure 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.
Consolidated cash was $15,986,000 at December 31, 1999 and $254,000 at
December 31, 1998, an increase of $15,732,000.
Cash used in operating activities during 1999 was $5,673,000 and the
operating cash flows reflected are net of account increases occurring as a
result of acquisitions. Accounts receivable at December 31, 1999 increased
$2,720,000 from December 31, 1998, other receivables at December 31, 1999,
decreased $471,000 and prepaid expenses at December 31, 1999 increased $261,000
during that same time period. Accounts payable at December 31, 1999, decreased
$2,248,000 from December 31, 1998, accrued expenses at December 31, 1999
increased $530,000 from December 31, 1998, and deferred income increased
$950,000 during the same period.
During 1999, net cash obtained through investing activities was
$23,289,000 and was provided primarily by the sale of the radio stations to
Radio Unica net of proceeds utilized for the direct payment of outstanding debt.
Prior to the April 1, 1999, consolidation of Harmony's financial statements,
advances to Harmony under note receivable agreements were $2,986,000 net of
Harmony's repayments. Proceeds from the sale of radio stations totaled
$29,045,000, net of advance payments received prior to December 31, 1998.
Cash used in financing activities amounted to $1,884,000 during 1999.
This represents the redemption of the convertible preferred stock for
$2,448,000, the repurchase of the Company's common stock of $931,000, less the
increased borrowings under Harmony's line of credit.
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.
YEAR 2000 READINESS DISCLOSURE
Before the rollover of the year from 1999 to 2000, many installed
computer systems and software products were coded to accept only two digit date
entries and were unable to accept four digit date entries to distinguish 21st
century dates from the 20th century dates. As a result, computer systems and
software used by many companies prior to the rollover date required upgrading or
replacement to comply with such "Year 2000" requirements. The failure of the
Company, its vendors, suppliers or other critical third parties with whom the
Company conducts business to achieve Year 2000 compliance on a timely basis
could materially adversely affect the Company's business, operating results, and
financial condition.
As of March 1, 2000, the Company has not experienced and does not
anticipate any material adverse effects on its production equipment, systems or
operations as a result of Year 2000 issues. Business is continuing as usual, and
internal equipment and systems will continue to be monitored for any likely
disruptions. Further, as
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<PAGE> 16
of March 1, 2000, the Company has not experienced any operational difficulties
as a result of Year 2000 issues with its vendors, suppliers or other critical
third parties with whom the Company conducts business. However, Year 2000
compliance has many elements and potential consequences, some of which may not
be foreseeable or may be realized in future periods. Consequently, there can be
no assurance that unforeseen circumstances may not arise, or that the Company
will not in the future identify equipment or systems which are not Year 2000
compliant.
Although the transition to the Year 2000 did not have any significant
impact on the Company or its equipment, systems and operations, the Company will
continue to monitor the impact of the Year 2000 on its equipment and systems and
those of its vendors, suppliers and other critical third parties. The
contingency plans that were developed for use in the event of Year 2000-related
failures will be maintained and generalized for ongoing business use.
In the aggregate, the Company has spent approximately $8,000 to address
Year 2000 issues and does not anticipate spending any additional material
amounts relating to Year 2000 issues.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is
effective for financial statements with fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change.
Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to affect its financial
statements.
CAUTIONARY STATEMENTS
OUR VENTURE INTO TELEVISION COMMERCIAL PRODUCTION MAY NOT PROVE
ADVANTAGEOUS OR PROFITABLE. We have changed our business focus from the
programming of children's radio to the production of television commercials and
related media. Although we believe favorable opportunities exist in the
television commercial production industry, the industry is highly fragmented and
we cannot assure you that we will be successful in completing our revised
business plan, or if completed, that the revised business plan will be
advantageous or profitable. We cannot assure you that our competitors will not
try to consolidate commercial production companies and production service
companies. We cannot assure you that consolidation, if it occurs, will be
advantageous or profitable. We do not have any understandings, commitments or
agreements with respect to any future acquisitions or that any acquisitions, if
consummated, will be advantageous or profitable.
WE MAY LOSE MONEY ON OUR INVESTMENT IN HARMONY AND HAVE LITTLE ABILITY
TO CUT POTENTIAL LOSSES DUE TO THE ILLIQUID NATURE OF HARMONY'S STOCK. As of
March 1, 2000, we had invested approximately $9.7 million in purchasing Harmony
common stock and had advances receivable from Harmony and Curious Pictures of
approximately $3.7 million in cash. The excess of our investment in Harmony's
common stock over Harmony's net book value is primarily reflected as goodwill on
our consolidated balance sheet. Our advances to Harmony are eliminated through
financial statement consolidation for reporting purposes. Over the last year,
Harmony shut down Harmony Pictures, Inc. and sold 90% of The End (London). Ltd.,
each a former subsidiary, due to continued losses. In February 1999, Harmony's
common stock was removed from listing on the Nasdaq SmallCap Market and
currently trades on the OTC Bulletin Board. Until such time as Harmony receives
a new working line of
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credit, we have agreed to act as Harmony's lender and fund Harmony's operations
as necessary. At this time, we receive no additional compensation for providing
such lending services to Harmony. There can be no assurance that the notes
receivable will be repaid or that our investment in Harmony will not lose value
or that we will be able to dispose of our Harmony common stock should we decide
to do so.
WEBADTV.COM, INC. MAY BE UNABLE TO IMPLEMENT ITS BUSINESS PLAN. In
January 2000, we announced the formation of webADTV, a subsidiary which will
combine the digital archiving and retrieval service, inteleSource with
additional web enabled services, news, and information under development to the
global advertising industries and their clientele. webADTV seeks private
placement financing in order to expand and brand its infrastructure to include
numerous in-demand vertical services such as research, media planning and
buying, competitive monitoring, video and print delivery and the services of
agency business partners. As a result of such financing, our equity ownership in
webADTV may decrease. In addition, there can be no assurance that webADTV will
be successful in obtaining such financing or if obtained, such financing will be
sufficient to implement its business plan. Further, there can be no assurance
that webADTV's business plan will be completed or if completed, that the
business plan will be successful.
WE MAY BE UNABLE TO ACQUIRE ADDITIONAL TELEVISION COMMERCIAL PRODUCTION
COMPANIES OR PRODUCTION SERVICE COMPANIES WITHOUT ADDITIONAL FINANCING. The
availability of capital may impact our ability to consummate future acquisitions
as we try to consolidate commercial production companies and production service
companies. There can be no assurance that we will obtain such financing when
required, or if available, that the amount or terms of such financing would be
acceptable or favorable to us. Additional financing could require the sale of
equity securities, which could result in significant dilution to our
shareholders.
TELEVISION COMMERCIAL DIRECTORS AND OTHER KEY PERSONNEL COULD LEAVE US,
IMPAIRING OUR DEVELOPMENT AND PROFITABILITY. The television commercial
production business is driven by its personnel and creative talent. We recognize
that a major part of our success in this industry will depend upon the hiring
and continued engagement or employment of our directors and other key personnel.
To this end, we have entered into various director and employment agreements
which range from two to five years in length. However, there can be no assurance
that we will be able to retain such talent, nor that such directors and
employees will fulfill their obligations to us nor that they will seek renewal
at the end of their current agreements. In general, with one exception, we do
not maintain life insurance on any of our television commercial directors or
other key personnel.
WE MAY LOSE OUR APPEAL AGAINST ABC/DISNEY. On September 30, 1998, a
jury in the Court ruled in our favor in connection with litigation for breach of
contract and misappropriation of trade secrets that we had commenced against
ABC/Disney and awarded us $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
us and that ABC/Disney both misappropriated our trade secret information,
however, the Court disagreed with the jury's conclusion that the evidence showed
that those actions caused damages to us 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. We filed a Notice of Appeal in February 1999. On February 16, 2000,
we presented our oral argument to the 8th Circuit Court of Appeals. As of March
28 2000, the 8th Circuit Court of Appeals had not ruled on the appeal. We intend
to pursue our appeal of the judgment and to this end, certain personnel and
financial resources will be used. We cannot assure you that we will be
successful on our appeal.
OUR STOCK IS THINLY TRADED, CREATING POSSIBLE LIQUIDITY PROBLEMS FOR
SHAREHOLDERS WHO SEEK TO SELL. Our common stock is currently listed on the
Nasdaq National Market. We cannot assure you our common stock will ever be
actively traded on such market or that, if active trading does develop, it will
be sustained.
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OUR STOCK PRICE MAY BE VOLATILE. The market price of our Common Stock
has been subject to significant fluctuations in response to numerous factors,
including variations in the annual or quarterly financial results, changes by
financial research analysts in their estimates of our earnings, conditions in
the economy in general or in the television commercial production industry in
particular, unfavorable publicity or changes in applicable laws and regulations
(or judicial or administrative interpretations thereof) affecting us or the
television commercial production industry. During 1999, the market price of our
Common Stock ranged from a high of $5.25 on December 8, 1999, to a low of $1.50
on May 28, 1999. We cannot assure you that purchasers of our common stock will
be able to sell such stock at or above the prices at which it was purchased.
THE SALE OF OUR STOCK MAY CAUSE THE MARKET PRICE OF OUR STOCK TO FALL.
We had 6,388,966 shares of Common Stock outstanding as of March 1, 2000, and we
also had warrants and options outstanding to purchase additional Common Stock
totaling 3,450,616 common shares exercisable at prices ranging from $1.63 to
$13.00 per share. The sale of such shares and the sale of additional Common
Stock which may become eligible for sale in the public market from time to time
upon exercise of warrants and stock options could have the effect of depressing
the market price for our Common Stock.
WE DEPEND ON MANAGEMENT SERVICES RENDERED BY AN ENTITY WHICH MAY FAVOR
ITS OWN INTERESTS OVER OURS. We share with Harmony certain management services
provided by MMLLC which is owned by Messrs. Dahl and Perkins, each our director
and a director of Harmony. The management services consist of administrative,
legal and accounting services. Such arrangements may present conflicts of
interest in connection with the pricing of services provided.
OUR MANAGEMENT HAS THE ABILITY TO SIGNIFICANTLY AFFECT THE OUTCOME OF
SHAREHOLDER VOTING, INCLUDING THE POSSIBILITY OF TAKING ACTIONS CONTRARY TO THE
PREFERENCES OF SHAREHOLDERS AT LARGE. As of March 1, 2000, approximately 24.8%
of our outstanding Common Stock was beneficially owned by our current executive
officers and directors. Accordingly, such persons may be able to significantly
influence our business and affairs. This concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the Company.
THE EXISTENCE OF OUR SEVERANCE PLAN MAY PREVENT A CHANGE IN CONTROL OR
A LIQUIDATION OF OUR ASSETS. We adopted a severance plan which provides
significant benefits to two executive officers and one non-employee director
following a change in control. Christopher T. Dahl, our Chief Executive Officer,
President and Chairman of the Board, James G. Gilbertson, our Chief Operating
Officer, and Richard W. Perkins, one of our directors, are eligible to receive
lump sum severance payments under the plan. Based upon 1999 annual gross base
salaries, the plan participants would receive an aggregate of approximately $2.0
million following a change in control The plan also provides for accelerated
vesting of outstanding options and other benefits following a change in control.
The existence of our severance plan could deter or delay a takeover or other
change in control.
OUR ABILITY TO ISSUE PREFERRED STOCK MAY PREVENT A CHANGE OF CONTROL.
The Board of Directors, without any action by our shareholders, has the
authority to issue the remaining undesignated and unissued authorized shares and
to fix the powers, preferences, rights and limitations of such shares or any
class or series thereof, without shareholder approval. Persons acquiring such
shares could have preferential rights with respect to voting, liquidation,
dissolution or dividends over existing shareholders. We are subject to certain
provisions of the Minnesota Business Corporation Act which limit the voting
rights of shares acquired in "control share acquisitions" and restrict certain
"business combinations." Such provisions, as well as the ability to issue
undesignated shares, could have the effect of deterring or delaying a takeover
or other change in control, deny shareholders the receipt of a premium on their
Common Stock and depress the market price of our Common Stock.
OUR ABILITY TO DILUTE UNFRIENDLY POTENTIAL ACQUIRORS MAY PREVENT A
CHANGE IN CONTROL. On February 14, 1998, the Board of Directors declared a
dividend of one common share purchase right (a "Right") for each share of our
Common Stock outstanding as of the close of business on February 27, 1998. Each
Right will entitle the registered holder to purchase from us, after the
Distribution Date (as defined in the Rights Agreement),
17
<PAGE> 19
common shares at an initial price of $18.00. The Rights have certain
anti-takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire us without conditioning the offer on a
substantial number of Rights being acquired or redeemed. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors since the Board of Directors may, at its option and in its sole and
absolute discretion, redeem the Rights as provided in the Rights Agreement.
YEAR 2000 ISSUES MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS. As of
March 1, 2000, we have not experienced and do not anticipate any material
adverse effects on our equipment, systems and operations as a result of Year
2000 issues. However, our failure, or the failure of our vendors, suppliers or
other critical third parties with whom we conduct business to achieve Year 2000
compliance on a timely basis could materially adversely affect our business,
operating results and financial condition.
ITEM 7 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
iNTELEFILM CORPORATION
Independent Auditors' Report............................................................................19
Consolidated Financial Statements
Balance Sheets.................................................................................20
Statements of Operations.......................................................................21
Statement of Shareholders' Equity..............................................................22
Statements of Cash Flows....................................................................23-24
Notes to Consolidated Financial Statements...........................................................25-51
</TABLE>
18
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
Board of Directors
iNTELEFILM Corporation
We have audited the accompanying consolidated balance sheets of iNTELEFILM
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
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 consolidated financial position of iNTELEFILM
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Milwaukee, Wisconsin
February 8, 2000, except Note 8 and 10 dated March 17, 2000
-19-
<PAGE> 21
INTELEFILM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
ASSETS 1999 1998
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,986,385 $ 253,905
Accounts receivable, net of allowance for doubtful
accounts of $339,216 and $39,000, respectively 8,626,251 -
Accounts receivable - affiliates (Note 13) 373,239 280,438
Radio station assets available for sale (Note 2) - 11,391,402
Other accounts receivable 642,076 331,527
Prepaid expenses 1,563,122 279,816
--------------- ---------------
Total current assets 27,191,073 12,537,088
Note receivable (Note 2) - 15,000,000
Investment in and notes receivable from Harmony (Note 4) - 5,421,322
Property and equipment, net (Note 5) 2,957,455 120,385
Goodwill, net (Note 3 and 6) 6,730,446 -
Other assets 738,878 -
Deferred debt issue costs (Note 9) - 742,737
--------------- ---------------
Total assets $ 37,617,852 $ 33,821,532
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,835,891 $ 2,205,212
Accounts payable - affiliates (Note 13) 175,000 363,727
Accrued income taxes 1,032,520 328,000
Deferred revenue (Note 2) 2,392,785 2,675,556
Other accrued expenses 4,650,835 1,371,142
Line of credit (Note 8) 3,548,911 434,974
Short-term debt (Note 3 and 7) 1,500,000 -
Long-term debt - current portion (Note 9) 191,933 10,665,792
--------------- ---------------
Total current liabilities 17,327,875 18,044,403
Long-term debt, less current maturities (Note 9) 679,885 848,111
--------------- ---------------
Total liabilities 18,007,760 18,892,514
--------------- ---------------
Commitments and Contingencies (Note 10) - -
Redeemable convertible preferred stock (Note 11) - 2,448,486
Minority interest (Note 3) 139,447 -
Shareholders' equity (Note 12):
Common stock 125,772 129,015
Additional paid-in capital 45,625,300 45,773,584
Accumulated deficit ( 25,952,927) ( 33,292,504)
Stock subscriptions receivable (Note 13) ( 327,500) ( 129,563)
--------------- ---------------
Total shareholders' equity 19,470,645 12,480,532
--------------- ---------------
Total liabilities and shareholders' equity $ 37,617,852 $ 33,821,532
=============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
-20-
<PAGE> 22
INTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Production contract revenues $ 67,242,374 $ -
Broadcast related revenues 100,279 2,566,647
--------------- ---------------
Total revenues 67,342,653 2,566,647
Costs and expenses:
Cost of production 56,488,737 -
Selling, general and administrative
(exclusive of all items shown below) 9,722,084 -
Broadcast related expenses 90,776 4,151,665
Corporate 2,123,734 4,714,011
Corporate expenses paid to affiliated
management company (Note 13) 1,549,372 900,000
Stock option compensation 2,121,024 -
Depreciation and amortization 1,664,413 1,949,340
--------------- ---------------
Loss from operations (6,417,487) (9,148,369)
Gain on sale of assets and subsidiary stock (Note 2) 16,383,816 26,374,904
Equity loss in Harmony (Note 4) (1,930,942) (4,058,361)
Interest expense (1,096,660) (5,364,117)
Interest expense - related parties (Note 3 and 13) (51,945) (120,713)
Interest income 1,554,687 299,571
Other income (expense) - net - (82,883)
--------------- ---------------
Net income before income taxes 8,441,469 7,900,032
Income tax provision (Note 14) (1,101,892) (330,237)
---------------- ---------------
Net income 7,339,577 7,569,795
Accretion of preferred stock - (680,236)
--------------- ---------------
Net income available to common shareholders $ 7,339,577 6,889,559
=============== ===============
Basic net income per share $ 1.16 $ 1.03
=============== ===============
Diluted net income per share $ 1.14 $ 1.03
=============== ===============
Weighted average number of shares outstanding 6,343,000 6,676,000
=============== ===============
Weighted average number of shares outstanding - assuming dilution 6,448,000 6,676,000
=============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
-21-
<PAGE> 23
INTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK
------------------------ PAID-IN SUBSCRIPTIONS
SHARES AMOUNT CAPITAL RECEIVABLE
---------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 6,649,865 132,997 46,387,536 (529,563)
Issuance of common stock in connection with note payable 69,277 1,386 225,144 -
Issuance of common stock upon exercise of options 2,600 52 5,269 -
Repurchase of common stock (271,000) (5,420) (882,754) -
Accretion of redeemable convertible preferred stock - - (680,236) -
Issuance of warrants in connection with debt financing - - 622,625 -
Issuance of warrants in connection with preferred stock - - 96,000 -
Write-off of stock subscription receivable - - - 400,000
Net income - - - -
--------- --------- ------------ ----------
Balance at December 31, 1998 6,450,742 $ 129,015 $ 45,773,584 $ (129,563)
Issuance of common stock regarding purchase of Chelsea 125,000 2,500 247,500 -
Repurchase of common stock (488,900) (9,778) (907,836) -
Issuance of common stock upon exercise of options 205,316 4,106 474,602 (222,500)
Director options compensation - - 50,400 -
Receipt of stock subscription - - - 24,563
Other (3,540) (71) (12,950) -
Net income - - - -
--------- --------- ------------ ----------
Balance at December 31, 1999 6,288,618 $ 125,772 $ 45,625,300 $ (327,500)
========= ========= ============ ==========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------------- ---------------
<S> <C> <C>
Balance at December 31, 1997 (40,862,299) 5,128,671
Issuance of common stock in connection with note payable - 226,530
Issuance of common stock upon exercise of options - 5,321
Repurchase of common stock - (888,174)
Accretion of redeemable convertible preferred stock - (680,236)
Issuance of warrants in connection with debt financing - 622,625
Issuance of warrants in connection with preferred stock - 96,000
Write-off of stock subscription receivable - 400,000
Net income 7,569,795 7,569,795
-------------- --------------
Balance at December 31, 1998 $ (33,292,504) $ 12,480,532
Issuance of common stock regarding purchase of Chelsea - 250,000
Repurchase of common stock - (917,614)
Issuance of common stock upon exercise of options - 256,208
Director options compensation - 50,400
Receipt of stock subscription - 24,563
Other - (13,021)
Net income 7,339,577 7,339,577
-------------- --------------
Balance at December 31, 1999 $ (25,952,927) $ 19,470,645
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
-22-
<PAGE> 24
INTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,339,577 $ 7,569,795
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for doubtful accounts 191,010 (433,000)
Depreciation and amortization 1,664,413 1,949,340
Gain on sale of assets and subsidiary stock (16,383,816) (26,374,904)
Net barter activity - 2,767
Amortization and write-off of deferred debt issue costs 742,737 1,859,389
Write-off of stock subscription receivable - 400,000
Equity loss in Harmony 1,930,942 4,058,361
Stock option compensation expense 2,121,024 -
Issuance of common stock and use of sale proceeds
for payment of interest - 392,093
Decrease (increase) in (excluding subsidiary
acquisitions and sales):
Accounts receivable (2,720,445) 1,658,282
Other receivables 470,774 (469,097)
Prepaid expenses (261,273) (171,642)
Increase (decrease) in (excluding subsidiary acquisitions and
sales):
Accounts payable (2,248,106) 516,380
Deferred income 950,000 -
Other accrued expenses 530,497 170,817
---------- ------------
Net cash used in operating activities (5,672,666) (8,871,419)
---------- ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,236,515) (246,097)
Investment in Curious Pictures and Chelsea (1,750,382) -
Investment in and notes receivable from Harmony (2,986,152) (3,201,250)
Cash acquired net of cash relinquished in acquisitions
and sales 411,983 -
Proceeds from sale of radio stations 14,045,180 8,656,990
Proceeds from note receivable 15,000,000 -
Other capital expenses (195,309) -
----------- -------------
Net cash provided by investing activities 23,288,805 5,209,643
----------- -------------
FINANCING ACTIVITIES:
Increase (decrease) in line of credit 1,356,776 (18,864)
Repayment of debt (142,085) (1,454,390)
Proceeds from issuance of debt - 3,627,345
Proceeds from issuance of common stock 280,771 5,321
Payment of deferred debt issue costs - (32,792)
Issuance (redemption) of redeemable convertible
preferred stock (2,448,486) 1,768,250
Repurchase of common stock (930,635) (524,447)
----------- -------------
Net cash provided (used in) by
financing activities (1,883,659) 3,370,423
----------- -------------
Increase (decrease) in cash and cash equivalents 15,732,480 (291,353)
Cash and cash equivalents at beginning of year 253,905 545,258
----------- -------------
Cash and cash equivalents at end of year $15,986,385 $ 253,905
=========== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
-23-
<PAGE> 25
INTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 421,104 $ -
=============== ================
Cash paid during the year for interest $ 386,274 $ 3,414,837
=============== ================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1999:
The Company utilized radio station sale proceeds totaling $10,934,974 to
pay debt collateralized by the related assets.
The Company acquired all the issued and outstanding common stock of
Chelsea (Note 3) through the assumption of $885,441 in non-cash
liabilities net of non-cash assets. Additional consideration included
the issuance of 125,000 shares of the Company's common stock valued at
$250,000.
Consideration the Company paid to Curious Management for the acquisition
of 51% of the stock of Curious Pictures (Note 3), included a $1,500,000
note receivable due May 31, 2000.
The Company issued 125,000 shares of common stock and received a stock
subscription note receivable for $222,500.
During the year ended December 31, 1998:
The Company recognized revenues of $115,983 and expenses of $118,750
through barter activity.
The Company utilized radio station sale proceeds totaling $18,116,023 to
pay principal and interest due to lenders aggregating $17,916,023 and to
pay debt issue costs of $200,000. Additionally, a note receivable of
$15,000,000 was received in connection with the sale transactions.
The Company paid debt issuance costs totaling $400,000 by issuing
additional long-term debt.
The Company issued 69,277 shares of common stock valued at $226,530 for
the payment of installments due for the note payable outstanding to the
seller of WAUR-AM.
The Company issued warrants to purchase 662,500 shares of common stock
and cancelled warrants to purchase 150,000 shares of common stock with a
net value totaling $718,625 in connection with obtaining short and
long-term debt, and preferred stock.
At December 31, 1998, an account payable-affiliate of $363,727 remained
due related to the Company's purchase of 271,000 shares of its common
stock for consideration totaling $888,174.
See accompanying notes to the consolidated financial statements.
-24-
<PAGE> 26
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business:
iNTELEFILM Corporation (f/k/a Children's Broadcasting
Corporation) (the "Company") was incorporated under the
Minnesota Business Corporation Act on February 7, 1990.
Through a series of transactions, the Company believes it
has become the largest producer of television commercials in
the world. During the period from July 1997 through December
1999, the Company has utilized its resources to purchase a
55.2% ownership interest in Harmony Holdings, Inc.
("Harmony"), a corporation which produces television
commercials, music videos and related media. Further, in
April 1999, the Company became Harmony's majority
shareholder and began consolidating Harmony rather than
accounting for Harmony under the equity method.
Additionally, in August 1999, the Company acquired a
majority ownership interest in Curious Pictures Corporation
("Curious Pictures") by buying an existing option and share
transfer agreement from four principle executives ("Curious
Management") of Curious Pictures. As a result, Curious
Pictures, a former majority-owned subsidiary of Harmony,
became a direct subsidiary of the Company. The Company
typically directs its services towards large advertisers and
advertising agencies located in the major markets of New
York, Los Angeles, Chicago, Detroit, Dallas, San Francisco
and Minneapolis. In March 1999 the Company acquired Chelsea
Pictures, Inc. ("Chelsea"), which has offices in New York
and Hollywood. Chelsea produces television commercials,
independent films and related media.
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.
In 1999 and 1998, the Company also incorporated the
following new subsidiaries: Buffalo Rome Films, Inc. and
Populuxe Pictures, Inc. ("Populuxe"). Buffalo Rome Films,
Inc. seeks out independent film opportunities and Populuxe
produces television commercials with two directors and an
executive staff in New York.
In December 1999, the Company, in development with AT&T and
Excalibur Technologies Corporation ("Excalibur"), announced
the creation of inteleSource, a digital video archiving and
retrieval service designed specifically for global
advertising agencies, the Company's core customer. AT&T and
Excalibur will provide dynamic hosting, connectivity and
video content management technologies for the data-based
service and the Company will provide its relationships with
advertising agencies and its expertise in commercial
production. inteleSource is an Internet based digitized
video storage and retrieval service designed exclusively for
use by global advertising agencies and their clients.
-25-
<PAGE> 27
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Description of Business (Continued):
In January 2000, the Company incorporated webADTV.com,
Inc. ("webADTV"). webADTV will provide a complete web
based source of communications, commerce, solutions and
services to the advertising agencies and other companies
in the advertising campaign production industry.
Initially, the Company's inteleSource will be the core of
webADTV. With inteleSource, webADTV will build a full
business to business portal for the advertising agency
industry which will include news and information from
affiliate content providers, e-commerce business generated
from a wide range of affiliated design and production
sources and the subscription based inteleSource archiving
and retrieval service. The Company also anticipates that
the portal will generate revenues through advertising and
pay per view content, specifically created for advertising
agencies.
In addition, webADTV intends to create useful, e-commerce
based affiliates and establish carriage relationships with
recognized advertising industry news and information
content providers.
As Children's Broadcasting Corporation, the Company
broadcast 24-hour children's radio programming, known as
Aahs World RadioSM*, via satellite to markets representing
approximately 40% of the U.S. population. Pursuant to its
former growth strategy, the Company acquired AM radio
broadcast licenses ("Radio Stations") in 14 U.S. markets.
On November 3, 1997, the Company announced that it would
terminate its network affiliation agreements and cease
distributing its full-time Aahs World Radio programming
format effective January 30, 1998. In 1998, the Company
focused on the process of selling its previously acquired
radio stations. The last of its radio stations were sold
on January 14, 1999.
Consolidated Financial Statements:
The financial statements include the accounts of the
Company and all majority-owned subsidiaries. All
references to the Company in these financial statements
relate to the consolidated entity. All significant
intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Property, Equipment and Intangible Assets:
Property, equipment and intangible assets are stated at
cost. Depreciation and amortization are computed using the
straight-line method and are charged to expense based upon
the estimated useful lives of the assets. Expenditures for
additions and improvements are capitalized, while repairs
and maintenance are expensed as incurred.
-26-
<PAGE> 28
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long Lived Assets:
The Company accounts for long-lived assets in accordance
with SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed
of". The standard establishes guidelines regarding when
impairment losses on long-lived assets, which include
property and equipment, certain identifiable intangible
assets and goodwill, should be recognized and how
impairment losses should be measured. The Company
evaluates the existence of long-lived asset impairment on
the basis of whether the asset net book value is fully
recoverable from projected, undiscounted net cash flows of
the related business unit. This standard did not have an
impact on the Company's financial position or results of
operations.
Investment in Harmony:
Prior to the Company becoming the majority shareholder of
Harmony, the investment in Harmony (Note 4) was accounted
for under the equity method of accounting. The equity
method of accounting is used to account for investments
made when the Company has the ability to exercise
significant influence over the operating and financial
policies of an investee, generally involving a 20% to 50%
interest in those investees.
Under the equity method, original investments are recorded
at cost, increased for subsequent investments in and
advances to the investee, and adjusted for the Company's
share of undistributed earnings and losses of the
investee. Additionally, the excess of the Company's
prorata share of the investee's net assets is amortized
over the estimated useful life of the underlying assets.
Goodwill:
Goodwill primarily represents the excess of the Company's
purchase price, including additional payments over the
fair market value of Harmony, Chelsea and Curious Pictures
net assets at the date of acquisition. Goodwill has been
amortized on a straight-line basis over seven years for
all periods.
Revenues:
The Company produces television commercials and music
videos under firm bid, cost plus or cost plus fixed fee
contracts, which are typically less than one month in
duration. At December 31, 1999 and 1998, 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.
The Company reports broadcast related revenue net of
commissions withheld by advertising agencies.
-27-
<PAGE> 29
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income (Loss) Per Share:
In February 1997, The Financial Accounting Standards Board
("FASB") issued SFAS No. 128, Earnings Per Share ("EPS").
SFAS No. 128 requires dual presentation of basic EPS and
diluted EPS on the face of all income statements issued
after December 15, 1997 for all entities with complex
capital structures. Basic EPS is computed as net income
available to common shareholders divided by the weighted
average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock
options and warrants. Outstanding options and warrants to
purchase 2,436,666 and 3,197,317 shares of the Company's
common stock at December 31, 1999 and 1998, respectively,
were not included in the diluted EPS calculation as they
were antidilutive. For 1999, the diluted EPS computation
reflected the potential increase in common shares
outstanding of 105,000, thereby diluting basic EPS by $.02
per share. For 1998 the Company's basic and diluted EPS
were the same as the effect of all outstanding options and
warrants were antidilutive. Additionally, the Company's
preferred stock outstanding at December 31, 1998 was not
included in the computation of diluted EPS as its effect
would be antidilutive.
Income Taxes:
The Company accounts for income taxes using the liability
method. Deferred income taxes are provided for temporary
differences between financial reporting and tax basis.
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. 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.
-28-
<PAGE> 30
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk:
Financial instruments which potentially subject the Company
to a concentration of credit risk principally consist of
cash, cash equivalents and trade receivables. The Company
invests available cash in money market securities of high
credit quality financial institutions. The Company's
accounts receivable were from customers primarily in the
advertising industry. To reduce credit risk, the Company
performs periodic credit evaluations of its customers, but
does not generally require advance payments or collateral.
Credit losses to customers operating in the advertising
industry have not been material.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Comprehensive Income:
The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. The Company does not have any components
of comprehensive income.
Segment Information:
The Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" as of January 1, 1998.
Following the provisions of this Statement, the Company is
reporting segment assets, liabilities, sales and operating
income in the same format reviewed by the Company's
management. In 1999 and 1998, the Company transitioned into
the commercial production and related media business.
New Accounting Pronouncements:
Statement of Financial Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No.
133) issued by the FASB is effective for financial
statements with fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS 133 requires companies to
recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset
or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in
the period of change.
-29-
<PAGE> 31
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements:
Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not
expect adoption of the new standard to affect its
financial statements.
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 loss previously reported.
NOTE 2: ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS
Radio Station Sale Transaction:
In 1997, the Company began the process of selling its owned
and operated radio stations. As of January 14, 1999, all of
the stations have been sold pursuant to the following
transactions:
1090 Radio Station Sale Transaction:
On September 8, 1998, the Company closed on the
sale of the radio broadcast license and certain
other assets of its radio station WCAR(AM),
Livonia, MI to 1090 Investments, LLC. ("1090").
The Company received gross proceeds of $2,000,000
in cash and incurred transaction expenses totaling
$138,051. The station assets had a net book value
totaling $1,431,609 and the Company realized a
gain on sale of $430,340.
Salem Radio Station Sale Transaction:
On October 30, 1998, the Company closed on the
sale of the radio broadcast licenses and certain
other assets of its radio stations KTEK(AM),
Alvin,TX and KYCR(AM), Golden Valley, MN to Salem
Communications Corporation ("Salem"). The Company
received gross proceeds of $2,700,000 in cash and
incurred transaction expenses totaling $229,135.
The station assets had a net book value totaling
$863,006 and the Company realized a gain on sale
of $1,607,859.
CRN Radio Station Sale Transaction:
On October 30, 1998, the Company closed on the
sale of the radio broadcast licenses and certain
other assets of its radio stations KCNW(AM),
Fairway, KS, KKYD(AM), Denver, CO, KPLS(AM)
Orange, CA, WAUR(AM), Sandwich, IL, WPWA(AM),
Chester, PA, WWTC(AM) Minneapolis, MN, and
WZER(AM), Jackson, WI, to Catholic Radio Network
LLC ("CRN"). The Company received gross proceeds
of $37,000,000 ($22,000,000 in cash and
$15,000,000 pursuant to a note receivable
agreement) and incurred transaction expenses
totaling $2,235,357. The station assets had a net
book value totaling $10,427,936 and the Company
realized a gain on sale of $24,336,707.
-30-
<PAGE> 32
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS (CONTINUED)
Radio Station Sale Transaction (Continued):
CRN Radio Station Sale Transaction:
The note receivable bore interest at 10% payable
monthly, was secured by the sold station assets
and virtually all of CRN's other property, whether
owned prior to or subsequent to the sale
transaction. The note was due in full on April 30,
2000. In October 1999, the Company received
payment in full on this note.
Unica Radio Station Sale Transaction:
On October 26, 1998, the Company entered into an
agreement to sell the radio broadcast licenses and
certain other assets of its radio stations
KAHZ(AM), Fort Worth, TX, KIDR(AM), Phoenix, AZ,
and WJDM(AM), Elizabeth, NJ, to Radio Unica Corp.
("Unica"). The stations assets had a net book
value totaling $11,391,402 at December 31, 1998
and are included on the accompanying 1998 balance
sheet as radio station assets held for sale. Under
the agreement, the Company received gross proceeds
of $29,250,000 in cash and incurred transaction
expenses totaling $1,682,180. At the time of the
sale, the asset net book value totaled $11,303,512
and the Company realized a gain on the sale of
$16,264,308.
The agreement provided for the stations to be
operated by Unica to the closing date under a
Local Programming and Marketing Agreement ("LMA").
Unica prepaid a total of $2,500,000 of the LMA
fees which were earned by the Company based on a
monthly LMA fee of $200,000. Unica also prepaid
$500,000 of the purchase price. The prepaid
purchase price and any unused portion of the
prepaid LMA fee was credited to the sales price at
closing. At December 31, 1998, deferred revenue
aggregating $2,675,556 was included on the
accompanying balance sheet related to these
prepayments. On January 14, 1999, the transaction
closed.
Included in the transaction costs for the transactions closed
in 1998 are bonuses paid to Company management, employees and
the Management Company (Note 13) totaling $1,930,000. An
additional bonus of approximately $825,000 was paid in 1999 on
the close of the Unica radio station sale transaction. This
additional bonus was reflected as a transaction expense for
the Unica radio station sale in 1999. The bonuses were
approved by the Company's board of directors and were
contingent upon completion of the sale transactions.
The End (London) Sale Transaction:
Effective July 1, 1999, Harmony sold 90% of the issued and
outstanding shares of capital stock of one of its
consolidated subsidiaries, The End (London), LTD ("The End
(London)"), to a principal executive (the "Purchaser") of
The End (London) for nominal consideration. The End
(London) is a commercial production company based in
London, England, and, prior to this sale, was a wholly
owned subsidiary of Harmony. In connection with the sale,
the Company and the Purchaser entered
-31-
<PAGE> 33
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS (CONTINUED)
The End (London) Sale Transaction:
into an agreement granting the Purchaser the right, under
certain circumstances, to purchase the remaining 10% equity
interest in The End (London) from Harmony for approximately
$803,000. As a result of the sale, Harmony was relieved of
liabilities in excess of assets forfeited, resulting in a
non-cash gain to the Company of $119,508.
NOTE 3: ACQUISITIONS
Chelsea Pictures:
On March 4, 1999, the Company acquired all of the issued
and outstanding common stock of Chelsea Pictures, Inc.
("Chelsea") for 125,000 shares of common stock with a value
of $250,000 and the assumption of approximately $885,441 of
liabilities net of assets. Chelsea is a television
commercial production company with principal operations in
New York, New York. The acquisition has been accounted for
as a purchase, whereby, the purchase price and related
acquisition expenses incurred of $250,382 were allocated
based upon the fair market value of the assets purchased
and liabilities assumed, consisting of goodwill of
$1,385,823, current accrued liabilities of $1,163,584 and
current assets of $278,143. Additionally, consideration for
the transaction may consist of up to an aggregate of
200,000 shares of the Company's common stock, 125,000 of
these shares were issued on the acquisition date. Issuance
of the remaining shares is contingent upon the level of
Chelsea's earnings before interest, taxes, depreciation and
amortization (EBITDA) in the first year following the
acquisition. If Chelsea achieves EBITDA within a range of
$0 - $410,000, the previous owner will receive a
proportionate number of shares up to a maximum of 50,000
shares. If Chelsea achieves EBITDA in excess of $500,000,
an additional 25,000 shares will be issued. The value of
the remaining shares will be treated as an adjustment to
the purchase price upon issuance.
Curious Pictures:
Effective as of August 1, 1999, the Company purchased the
Option and Share Transfer Agreement ("Option Agreement")
entered into by Harmony and the four principal executives
(collectively, "Curious Management") of Curious Pictures
Corporation ("Curious Pictures") dated December 15, 1996.
Under the Option Agreement, Curious Management could earn
the right to purchase 50% of the outstanding stock of
Curious Pictures from Harmony upon the achievement of
certain specified financial goals. Pursuant to the
Company's purchase agreement and based on the results of
operations of Curious Pictures, it was agreed by all
parties that Curious Management's rights to purchase the
50% equity interest in Curious Pictures had fully vested
and were exercisable for consideration totaling $50. As a
result of the intrinsic value established by interim
valuations of Curious Pictures and the Company's purchase
of the Option Agreement, compensation expense totaling
$1,907,850 has been recognized in the accompanying
statement of operations resulting from the consolidation
with Harmony.
-32-
<PAGE> 34
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3: ACQUISITIONS (CONTINUED)
Curious Pictures (Continued):
Following its purchase of the Option Agreement, the Company
acquired 50% of Curious Pictures through the exercise of
stock options granted under the Option Agreement. The
Company also acquired a 1% equity interest in Curious
Pictures owned by Curious Management that was initially
conveyed to Curious Management upon signing the Option
Agreement. The consideration paid to Curious Management by
the Company for the aforementioned acquisitions aggregated
$3,000,000 consisting of $1,500,000 in cash and a
$1,500,000 note payable bearing an interest rate of 8%, due
May 31, 2000. As a result of the aforementioned
transaction, the Company owns 51% of the outstanding stock
of Curious Pictures and Harmony owns 49% of the outstanding
stock of Curious Pictures.
In addition, as of January 1, 1999, Curious Pictures
entered into new five-year employment agreements with each
of the four members of Curious Management. As part of the
compensation to be paid to Curious Management, at the end
of each employment year, each member of Curious Management
was granted the right to purchase from Harmony, one share
of Curious Pictures, representing 1% of the capital stock
of Curious Pictures. As a result, if all of the members of
Curious Management exercise all of their new options over
the five-year term of their employment agreements, the
Company will own 51% of the Curious Pictures stock, Curious
Management will collectively own 20%, and Harmony will own
the remaining 29%. Additionally, the Company granted
Curious Management warrants to purchase an aggregate
300,000 shares of the Company's common stock for
approximately $1.92 per share.
The Company, Harmony, and Curious Management also entered
into a Stock Agreement effective as of August 1, 1999.
Under this agreement, the members of Curious Management
were granted the right to sell to the Company the shares of
Curious Pictures that they earn from Harmony (the put
right), and the Company obtained the right to purchase such
shares from Curious Management (the call right). The price
to be paid by the Company to Curious Management under the
put or call is $96,774 per share. These options have been
valued at their intrinsic value as of August 1, 1999
($54,000 per option). The related compensation expense will
be recognized ratably over the employment agreement service
period and reflected as a minority interest on the
Company's balance sheet. Further, the minority interest
will be ratably accreted to the value of management's put
right ($96,774 per share) over the time period from the
option vesting date to the date that the put right may be
exercised. During the six month period ended December 31,
1999, the Company recognized compensation expense of
$162,774. The minority interest valuation aggregated
$139,447 at December 31, 1999.
NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY
The Company's investment represents 55.2% and 49.1% of the
outstanding common stock of Harmony at December 31, 1999 and
1998, respectively. The aggregate purchase price paid of
$9,730,872 and transaction costs totaling $93,201 were
allocated based on the estimated fair market value of the
assets acquired consisting of common stock of $9,140,872 and
stock options valued at $590,000. With this increase of
ownership, the Company began to consolidate Harmony results
from
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<PAGE> 35
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED)
operations on April 1, 1999. All periods prior to this date
were accounted for under the equity method. Accordingly, the
excess of the purchase price over the Company's pro-rata share
of Harmony's net tangible assets discussed below was recast
from the investment in Harmony to Goodwill based on the
estimated fair market value of Harmony's assets.
The excess of the purchase price over the Company's prorata
share of Harmony's net tangible assets totaled $6,810,877 and
$6,245,996 at December 31, 1999 and 1998, respectively. This
excess purchase price relates to Harmony's intangible asset
value, principally technical know-how, industry reputation and
customer lists, and is being amortized on a straight line
basis over a seven-year estimated useful life. At December 31,
1999 and 1998, accumulated amortization of the excess purchase
price totaled $1,752,998 and $871,552, respectively.
The following schedule represents the Company's equity
investments in Harmony since January 1, 1998:
<TABLE>
<CAPTION>
Common Stock Stock Options
------------------------------------------------------------------
Number of Number of
Date Shares Consideration Shares Consideration
-------------------------------------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 2,188,731 6,149,150 750,000 590,000
June 30, 1998 (exercise of
stock options) 750,000 1,715,000 (750,000) (590,000)
July 2, 1998 250,000 432,500 - -
November 4, 1998 494,231 968,750 - -
----------- --------------- ----------- ----------
Balance at December 31, 1998 3,682,962 $ 9,265,400 - $ -
April 15, 1999 225,000 229,754 - -
May 21, 1999 40,000 39,304 - -
May 25, 1999 180,000 184,575 - -
June 25, 1999 1,600 1,622 - -
June 28, 1999 10,000 10,217 - -
---------- -------------- ------------ ----------
Balance at December 31, 1999 4,139,562 $ 9,730,872 - $ -
========== ============== ============ ==========
</TABLE>
The June 1998 stock option exercise at $1.50 per share and the
July 1998 purchase of outstanding common stock required
consideration totaling $1,557,500 in cash obtained through the
Company's issuance of redeemable convertible preferred stock
(Note 11). Consideration for the November 1998 stock
acquisitions of 269,231 newly issued shares and of 225,000
outstanding shares of common stock totaled $968,750 in cash
obtained in through the Company's sale of its radio stations
(Note 2).
The November 1998 purchases of 225,000 outstanding shares
occurred pursuant to an outstanding put option exercised by
the seller in February 1998. The put option required that the
Company purchase the shares for $2.50 per share by March 31,
1998. As the Company did not have the current financial
resources to meet this obligation by March 31, 1998, the
Company assigned the put option to two entities controlled by
a director, and another director individually (the "assigned
parties"). The assigned parties consummated the purchase of
shares required by the initial put and were granted a similar
option to put the shares to the Company at a price of $2.75
per share. The new put option was exercisable upon the
completion of the CRN sale transaction which occurred in
October 1998 (Note 2).
-34-
<PAGE> 36
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED)
Consideration for the April through June 1999 purchases of
456,600 outstanding shares totaled $465,472 in cash obtained
through the Company's sale of its radio stations (Note 2).
These purchases increase the Company's ownership in Harmony to
approximately 55.2%, and this additional ownership allows the
Company to consolidate Harmony, for financial statement
purposes, as of April 1, 1999, rather than accounting for the
investment under the equity method as it has for all previous
periods presented. No minority interest is currently shown
related to Harmony, as the minority shareholders no longer
have any equity basis in their investment. As of December 31,
1999, the Company has recognized losses in excess of its
prorata share totaling $2,214,013.
Unsecured demand notes payable due from Harmony totaling
$3,326,369 and $680,041 (including interest) are outstanding
at December 31, 1999 and 1998, respectively. At December 31,
1999, these notes as well as the related interest are
eliminated in Harmony's consolidation with the Company.
The following amounts represent Harmony's results from
operations for the periods presented that Harmony was
accounted for under the equity method. Such amounts have been
derived from Harmony's financial statements for the fiscal
years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, 1999 December 31, 1998
----------------- ------------------
<S> <C> <C>
Contract revenues $ 16,274,699 $ 62,019,148
Cost of production 14,300,552 51,779,753
----------------- ------------------
Gross profit 1,974,147 10,239,395
Operating expenses 3,620,554 18,089,550
----------------- ------------------
Loss from operations (1,646,407) (7,850,155)
Interest income (expense), net (79,089) (179,221)
----------------- ------------------
Loss before income taxes (1,725,496) (8,029,376)
Income taxes - (8,122)
----------------- ------------------
Net loss $ (1,725,496) $ (8,037,498)
================= ==================
Company's share of Harmony's
net loss $ (1,725,496) $ (3,398,841)
Amortization expense for the excess of the
investment cost over the underlying net
assets of Harmony (205,446) (659,520)
----------------- ------------------
Company's equity loss in Harmony $ (1,930,942) $ (4,058,361)
================= ==================
</TABLE>
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<PAGE> 37
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED)
The consolidated balance sheet of Harmony is summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------- ------------------
<S> <C> <C>
Current assets $ 8,416,156 $ 7,117,732
Non-current assets 3,159,354 3,001,164
----------------- ------------------
Total assets $ 11,575,510 $ 10,118,896
================= ==================
Current liabilities 13,223,368 10,150,060
Minority interest 792,150 -
Stockholders' deficit (2,440,008) (31,164)
------------------ ------------------
Total liabilities and stockholders' deficit $ 11,575,510 $ 10,118,896
================= ==================
</TABLE>
Harmony is a public company traded over-the-counter under the
symbol "HAHO". At December 31, 1999, the aggregate value of
the Harmony common stock held by the Company totaled $558,841.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December
31:
<TABLE>
<CAPTION>
Estimated
Useful Life
1999 1998 In Years
--------------- --------------- -----------
<S> <C> <C> <C>
Office equipment 840,476 198,352 5
Vehicles 39,014 50,514 5
Leasehold improvements 1,584,670 - 5
Computer & production equipment 2,828,543 - 3
--------------- ---------------
5,292,703 248,866
Less accumulated depreciation 2,335,248 128,481
--------------- ---------------
Property and equipment, net $ 2,957,455 $ 120,385
=============== ===============
</TABLE>
Depreciation expense was $687,514 and $670,748 for the
years ended December 31, 1999 and 1998, respectively.
NOTE 6: GOODWILL
Goodwill consisted of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Life
1999 1998 In Years
--------------- --------------- ------------
<S> <C> <C> <C>
Goodwill $ 8,746,640 $ - 7
Less accumulated amortization 2,016,194 -
--------------- ---------------
Goodwill, net $ 6,730,446 $ -
=============== ===============
</TABLE>
Amortization expense related to goodwill and other intangible
assets totaled $976,899 and $1,278,592 for the years ended
December 31, 1999 and 1998, respectively. The 1998
amortization expense relates primarily to the amortization of
radio broadcast licenses.
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<PAGE> 38
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: SHORT-TERM DEBT - AFFILIATES
Directors and Shareholders:
In July 1998, the notes payable aggregating $1,250,000
which were issued in July 1997, were extended four months
to October 22, 1998. As consideration for the extension,
the holders, a partnership controlled by a Company
director, a Company director individually and a less than
five-percent shareholder, were offered additional warrants
to purchase the Company's common stock or an increase in
the note payable interest rate from 10% to 20%. Two of the
holders representing $750,000 of the outstanding debt opted
to receive additional warrants to purchase an aggregate of
37,500 shares of the Company's common stock. The remaining
holder of outstanding debt totaling $500,000 opted for the
increased interest rate of 20%. The warrants vested
immediately and are exercisable at $3.06 per share for a
term of 5 years. The value of the warrants was determined
to be $62,625. The debt was repaid in full in October 1998
upon closing of the CRN radio station sales transaction
(Note 2).
Curious Picture's Management:
Effective August 1, 1999, the Company purchased the Option
and Share Transfer Agreement for the sum of $3,000,000
including cash consideration of $1,500,000 and this
issuance of a promissory note for a aggregate of $1,500,000
to the four members of Curious Management ($375,000 to each
member) payable on May 31, 2000 at an interest rate equal
to eight percent (8%) per annum (Note 3). The promissory
note requires the Company to pay interest quarterly through
May 31, 2000, at which time the principal balance will be
payable in full. In the event any member of Curious
Management's employment with Curious is terminated or any
member of Curious Management terminates his/her employment
agreement prior to the payment of the promissory note, the
principal amount of this promissory note will be reduced by
$375,000 for such member.
NOTE 8: LINE OF CREDIT
At December 31, 1998, the Company had outstanding short-term
borrowings totaling $434,974 under a discretionary line of
credit pursuant to the finance company credit agreement (Note
9). The line of credit was terminated upon its full repayment
in January 1999 (Note 9).
In July 1998, Harmony entered into an asset based loan and
security agreement due to a finance company, which is secured
by virtually all its assets, is guaranteed by iNTELEFILM, and
provides for the following borrowings: a revolving line of
credit with maximum availability of $4,500,000 or a specified
percentage of acceptable accounts receivable with interest at
a variable rate (10.0% at December 31, 1999). At December 31,
1999, $3,548,911 was outstanding on the line of credit.
Subsequent to December 31, 1999, the line of credit was repaid
in full pursuant to the lender's call.
-37-
<PAGE> 39
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Term note payable bearing interest at a variable rate (13.5% at
December 31, 1998). Due to the recurring requirement to meet
certain restrictive financial covenants, which had not been
met, this entire indebtedness was classified as current at
December 31, 1998. This note was paid in full in January 1999.
$ - $ 10,500,000
Covenant not-to-compete, non-interest bearing, payable in
quarterly installments of $37,500 through June 2006, less
unamortized discount at 9.25% ($197,035 and $255,531, at
December 31, 1999 and 1998, respectively).
777,965 869,469
Note payable bearing interest at 9%, subsequently paid in full in
February 2000. 57,069 80,433
Various other installment notes payable. 36,784 64,001
--------------- ---------------
871,818 11,513,903
Less current portion 191,933 10,665,792
--------------- ---------------
Long-term debt, less current portion $ 679,885 $ 848,111
=============== ===============
</TABLE>
In November 1996, the Company entered into an agreement with a
finance company (the "Credit Agreement") under which three
credit facilities (the "Facilities") were established. The
Facilities included a $11,500,000 term note payable, a
$1,000,000 line of credit (Note 8), and a $4,000,000
acquisition facility which was not utilized.
From July 1997 through October 1998, the Credit Agreement was
amended and restated pursuant to additional term note payable
advances received by the Company aggregating $15,000,000 in
1998. The provisions of the Credit Agreement remained
substantially unchanged as a result of these amendments and
restatements except that the $4,000,000 acquisition facility
was cancelled and the available line of credit (Note 8) was
reduced from $1,000,000 to $500,000 in favor of the increased
term note payable. In September and October 1998, the Company
repaid $1,300,000 and $14,700,000 in connection with the 1090
and CRN radio station sales transactions (Note 2),
respectively. Finally, the Credit Agreement was amended again
in October 1998, primarily to reschedule installment payments
due and to provide the lender a security interest in the note
receivable received by the Company in the CRN radio station
sale transaction (Note 2). In January 1999, the Facilities
were repaid in full upon completion of the Unica radio station
sale transaction (Note 2).
In connection with the original Credit Agreement and the
amendments, the Company incurred debt issuance costs
aggregating $1,310,000 in 1998. These costs included finance
company fees which reduced the proceeds of the term note
payable advances of $400,000 in 1998, the value of warrants
granted to the finance company net of the value of cancelled
previously granted warrants of $560,000 in 1998, and other
transaction costs of $350,000 in 1998. The debt issuance costs
have been deferred on
-38-
<PAGE> 40
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: LONG-TERM DEBT (CONTINUED)
the accompanying balance sheet and, prior to the complete
facility repayment in January 1999, were being amortized
utilizing the interest method over the remaining life of the
Credit Agreement. Additionally, with each of the
aforementioned facility repayments, the Company wrote-off
deferred debt issue costs based on the proportionate share of
principal repaid. At December 31, 1998 the unamortized value
of these costs totaled $742,737, and was written off in
January 1999.
The facilities were subject to certain restrictive covenants.
As of December 31, 1998, the Company had not met certain of
the covenant requirements; however, the violation was cured
with the Company's repayment of the Facilities in full in
January 1999.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 $ 191,933
2001 105,128
2002 112,682
2003 120,799
2004 129,458
Thereafter 211,818
---------------
$ 871,818
===============
</TABLE>
The Company believes that the carrying value of the debt
approximates its fair market value at December 31, 1999 and
1998.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Operating Leases and Other Commitments:
The Company leases various office and production studio
space. Future minimum lease and other commitment payments
are as follows for the years ending December 31:
<TABLE>
<S> <C>
2000 $ 1,054,672
2001 1,053,317
2002 1,028,896
2003 938,092
2004 925,840
Thereafter 2,693,664
---------------
$ 7,694,481
===============
</TABLE>
Total rent expense was $916,077 and $771,728 for the years
ended December 31, 1999 and 1998, respectively, and rent
expense to related parties totaled $0 and $234,984,
respectively.
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<PAGE> 41
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Contracts:
The Company has entered into various employment agreements
with its officers and commercial directors, which obligate
it to make minimum payments of approximately $9,914,047.
The payments due are $3,443,901, $2,219,696, $1,747,878,
$1,722,487, $499,046 and $281,039, for the years ended
December 31, 2000, 2001, 2002, 2003, 2004 and thereafter,
respectively. Of these amounts $6,344,220 are for
administrative personnel and $3,569,827 are for commercial
television directors and salespeople. Certain of these
agreements provide for additional compensation based on
subsidiary revenues, defined subsidiary operating profits
or other incentives. This additional compensation is
payable whether or not the Company achieves an operating
profit as a whole. 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.
Officers and Director Severance Plan:
In April 1999, a severance plan which covers two of the
Company's executive officers and one of the Company's
non-employee directors was adopted. As to the officers,
the plan provides for severance benefits in the event of
termination of employment under certain circumstances
following a change in control of the Company (as defined).
The applicable circumstances are (a) termination by the
Company without cause (as defined) other than because of
death, retirement or disability, (b) termination for good
reason (as defined), or (c) termination without good
reason if the date of termination is within 180 days after
a change in control. Following any such termination, in
addition to compensation and benefits already earned, such
individual will be entitled to receive a lump sum
severance payment equal to a multiple of such individual's
annual gross base salary as then in effect, including
amounts accrued but not paid. Based upon 1999 annual gross
base salaries, lump sum severance payments aggregating
$2,055,000 would be payable under the plan. The plan also
provides for the accelerated vesting of outstanding stock
options and certain other benefits following a change in
control.
The plan is in effect from April 1, 1999 through March 31,
2002. Thereafter, the plan automatically renews annually
unless the Company gives notice that it does not wish to
extend it. In addition, the plan will continue in effect
for three years after a change in control.
-40-
<PAGE> 42
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pending Litigation:
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 $20,000,000 for breach of contract
against ABC Radio, $10,000,000 for misappropriations of
trade secret by ABC Radio and $10,000,000 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. The Company intends to
pursue its appeal of the judgement and, to this end,
certain personnel and financial resources will be used.
Additionally, the Company has entered an agreement with its
primary counsel for this litigation. Under the agreement
the counsel has agreed to make twenty-five percent of their
fees contingent upon the successful outcome of this lawsuit
in exchange for seven and one half percent of any
settlement or judgement in favor of the Company. At
December 31, 1999 and 1998, the fees contingent under this
agreement totaled approximately $800,000 and $727,000,
respectively.
Except as described above, the Company is not a party to
any material proceedings. From time to time the Company is
a party to litigation which is incidental to its business,
including administrative proceedings.
401(k) Savings/Profit-Sharing Plan:
The Company has a 401(k) plan available to all employees
meeting certain service requirements. Eligible employees
may contribute a portion of their annual salary to the
plan, subject to certain limitations. The Company may make
matching contributions and also may provide profit-sharing
contributions at the discretion of its board of directors.
Employees become fully vested in the Company contributions
after five years of service. There were no Company
contributions in 1999 or 1998.
-41-
<PAGE> 43
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 606,061 shares of $0.02 par value
Series B redeemable convertible preferred stock ("the
Series"). In June 1998, the Company issued 606,061 shares of
the Series with a $3.30 per share stated value and warrants to
purchase 100,000 shares of the Company's common stock. The
Series was initially recorded on the Company's financial
statements at $1,768,250 which represents the net proceeds
received totaling $1,864,250 ($2,000,000 aggregate stated
value less transaction costs totaling $135,750) discounted by
$96,000 for the value of the warrants granted. The preferred
stock carried the right of redemption or conversion into a
variable number of shares of the Company's common stock upon
expiration of the Company's right to redeem the series. Prior
to an amendment to the related securities agreement, the
Company had the right to redeem the Series for $4.04 per share
until October 22, 1998. Subject to the amendment, the Company
issued additional warrants to purchase 125,000 shares of the
Company's common stock. The warrant issuance allowed the
Company to extend its redemption right until January 1999. At
that time, the preferred stock was redeemed at $4.04 per
share, or $2,450,000, utilizing proceeds of the Unica radio
station sale transaction (Note 2). During 1998, the Company
recorded accretion of the preferred stock totaling $680,236.
NOTE 12: SHAREHOLDERS' EQUITY
Common Stock:
The Company has authorized 50,000,000 shares of common
stock at $.02 par value. The Company has voting shares of
6,099,577 and 6,261,701 issued and outstanding at December
31, 1999 and 1998, respectively, and nonvoting shares of
189,041 which are issued and outstanding at December 31,
1999 and 1998.
Repurchase of Common Stock:
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 outstanding common
stock at that time, 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 are canceled
and returned to the Company's authorized capital stock. As
of December 31, 1999, the Company had repurchased an
aggregate of 488,900 shares for an aggregate of $917,614 at
prices ranging from $1.53 to $2.06 per share.
Incentive and Non-Qualified Stock Options Plans:
In August 1998, the Company amended the 1994 Stock Option
Plan to allow the board of directors to amend the terms of
options issued under the plan at its discretion subject to
certain restrictions. Additionally, options issued under
the 1991 and 1994 Stock Option Plans were revised to
provide that the options would not automatically terminate
as a result of a sale of substantially all the Company's
assets. In October 1998 upon the closing of the CRN radio
station transaction (Note 2), all options outstanding under
the plans became fully vested to the holders.
-42-
<PAGE> 44
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued):
In 1991, the Company established the 1991 Stock Option Plan
to provide incentives to employees whereby 200,000 shares
of the Company's common stock have been granted. The
options are exercisable on the date of grant and are
generally valued at the fair market value of the stock on
the date of grant. The options expire on various dates
through January 2005.
In March 1994, the board adopted the 1994 Stock Option Plan
whereby 1,000,000 shares of the Company's common stock have
been reserved. The options can be either incentive stock
options or nonstatutory options and are generally valued at
the fair market value of the stock on the date of grant.
The options generally vest over a five-year period and
expire through January 2005.
In May 1994, the board adopted the 1994 Director Stock
Option Plan whereby 125,000 shares of the Company's common
stock have been reserved. The plan provided for automatic
grants of non-qualified options to purchase 3,750 shares to
outside directors upon first becoming a director and an
additional 3,750 shares upon each anniversary of the
original grant. In April 1999, the Plan was amended to
reserve 500,000 shares of the Company's common stock. At
that time 45,000 options, vesting equally over three years,
were granted to each of the three outside directors. All
options under this plan were valued under the Black-Scholes
option-pricing model resulting in $50,400 of compensation
expenses recorded in 1999. The options are generally valued
at the fair market value of the stock on the date of grant
and expire five years thereafter.
In December 1999, the board adopted the 1999 Broad-Based
Stock Incentive Plan whereby 400,000 shares of the
Company's common stock have been reserved. The options may
be granted to only non-officer employees and may be priced
at not less than 100% of the fair market value on the date
of grant. The options have varying vesting schedules and
generally expire within five years of the date of grant.
A summary of the status of the Company's stock option plans
as of December 31, 1999 and 1998 and changes during the
years ending on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
Weighted- Weighted-
Average Average
Fixed Options Shares Exercise Price Shares Exercise Price
--------------------------------- ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 984,276 3.19 1,372,401 5.76
Granted 1,003,749 2.08 1,063,552 3.20
Exercised ( 205,316) 2.33 ( 2,600) 2.05
Forfeited ( 181,032) 3.17 (1,449,077) 5.62
------------- ------------
Outstanding at end of year 1,601,677 2.61 984,276 3.19
============ ============
Options exercisable at year end 930,555 2.95 984,276 3.19
Weighted-average fair value of
options granted during the year $ 1.42 $ 1.16
</TABLE>
-43-
<PAGE> 45
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued):
On April 3, 1998, option holders were offered the
opportunity to receive a reduced number of options at an
exercise price of $3.19, the fair market value of the
Company's stock on that date. The number of new options
received by the option holders was determined ratably based
on the ratio of the existing option exercise price and the
new exercise price of $3.19. The forfeited and granted
option amounts in the table above include options
aggregating 1,289,972 and 817,302, respectively, that were
canceled and issued under this offer.
The following table summarizes information about stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices At 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.50 to 2.99 744,249 4.3 years $ 1.87 156,667 $ 1.79
$3.00 to 4.00 857,428 2.7 years $ 3.25 773,888 $ 3.19
--------- -------
1,601,677 3.4 years $ 2.61 930,555 $ 2.95
========= =======
</TABLE>
Included in the table above are certain options outstanding
which are performance based which become exercisable on the
achievement of certain goals reached, but no later than
2005. A summary of these performance-based options is
presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
Weighted- Weighted-
Average Average
Performance Options Shares Exercise Price Shares Exercise Price
--------------------------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 66,835 $ 3.19 158,750 $ 7.59
Granted 61,500 2.20 66,835 3.19
Forfeited ( 31,714) 3.19 (158,750) 7.59
----------- ------------ ------------ ------------
Outstanding at end of year 96,621 2.56 66,835 3.19
=========== ============ ============ ============
Options exercisable at year end 35,121 3.19 66,835 3.19
Weighted-average fair value of
options granted during the year $ 1.59 $ 1.16
</TABLE>
As of December 31, 1999 the performance options outstanding
under the Plans have exercise prices ranging from $1.88 to
$3.19 and a weighted-average remaining contractual life of
3.6 years.
-44-
<PAGE> 46
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Incentive and Non-Qualified Stock Options Plans (Continued):
FASB 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
and employment contract warrants had been determined in
accordance with the fair value based method prescribed in
FASB 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 1999 and
1998, respectively: no dividend yield for each year;
weighted average estimated option life 5.0; expected
volatility of 82.6 and 41.3 percent; and risk-free interest
rates of 5.3 and 5.4 percent.
Under the accounting provisions of FASB Statement 123, the
Company's net income and income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Net income:
As reported $ 7,339,577 $ 7,569,795
Pro forma 6,400,308 5,513,782
Basic net income per share:
As reported 1.16 1.03
Pro forma 1.01 0.72
Diluted net income per share:
As reported 1.14 1.03
Pro forma $ 0.99 $ 0.72
</TABLE>
Employee Stock Purchase Plan:
In May 1996, the Board adopted the 1996 employee stock
purchase plan whereby 400,000 shares of the Company's
common stock have been reserved. The reserved shares may
be purchased at their fair market value during specified
offering periods. No shares were issued under the plan
during 1999 and 1998. In 1999, they amended this plan to
update for various regulation compliance. The underlying
plan terms have not changed.
Shareholder Rights Plan:
In February 1998, the Company adopted a Shareholder Rights
Plan designed to enable the Company and its board to
develop and preserve long-term values for shareholders and
to protect shareholders in the event an attempt is made to
acquire control of Company through certain coercive or
unfair tactics or without an offer of fair value to all
shareholders. The Plan provides for distribution of a
common share purchase right to each shareholder of record
of the Company's Common Stock on February 27, 1998. Under
the Plan, these rights to purchase common shares will
generally be exercisable a certain number of days after a
person or group acquires or announces an intention to
acquire 20% or more of the Company's Common Stock. Each
right entitles the holder, after the rights become
exercisable, to receive shares of Company common stock
having a market value of two times the exercise price of
the right or securities of the acquiring entity at one-half
their market value at that time.
-45-
<PAGE> 47
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Finance Company Credit Agreement:
In connection with the original completion and subsequent
amendments of the Credit Agreement (Note 9), the Company
granted the finance company warrants to purchase an
aggregate of 600,000 shares of the Company's common stock
at exercise prices ranging from $3.68 to $3.76. The
warrants became immediately exercisable and expire through
May 2003. The warrants also are convertible into a variable
number of shares of common stock which, upon conversion,
allows the finance company to receive a benefit of an
amount equal to the amount obtainable if the options were
exercised without payment of the related exercise price.
Redeemable Convertible Preferred Stock:
In connection with the issuance and subsequent amendment of
the Redeemable Convertible Preferred Stock (Note 11), the
Company granted the investors warrants to purchase 225,000
shares of the Company's common stock at exercise prices
ranging from $2.68 to $3.77. The warrants became
immediately exercisable and expire through January 2004.
The following table summarizes the warrants to purchase
shares of the Company's common stock:
<TABLE>
<CAPTION>
Exercise
Warrants Price
Outstanding Exercisable Per Share
------------ ----------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1997 1,700,541 1,686,540 $ 2.40 - 13.80
Granted:
Credit agreement 200,000 200,000 3.68
Credit agreement 200,000 200,000 3.76
Short-term debt 37,500 37,500 3.06
Preferred stock 100,000 100,000 3.77
Preferred stock 125,000 125,000 2.68
Canceled:
Credit agreement ( 50,000) ( 50,000) 4.40
Credit agreement ( 100,000) ( 100,000) 5.29
-------------- -------------- -----------------
Balance at December 31, 1998 2,213,041 2,199,040 $ 2.40 - 13.80
Granted:
Employment agreement 300,000 - $ 1.92
Canceled:
Bridge loans and others ( 537,000) ( 522,999) $ 4.00 - $13.80
--------------- -------------- -----------------
Balance at December 31, 1999 1,976,041 1,676,041 $ 1.92 - $13.00
============== ============= =================
</TABLE>
-46-
<PAGE> 48
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED)
Redeemable Convertible Preferred Stock (Continued):
Included in the table above are warrants issued in
connection with the finance company Credit Agreement,
bridge loans and other short-term notes payable. The value
of these warrants is charged to interest expense over the
term of the related debt agreement and during the years
ended December 31, 1999 and 1998, the Company incurred
interest expense aggregating approximately $302,747 and
$725,378, respectively. The value of the warrants related
to the issuance of new debt was determined based on the
difference between the stated interest rate and the
Company's estimated effective borrowing rate.
Harmony Stock Options:
As of December 31, 1999, 1,120,500 Harmony stock options at
a weighted average exercise price of $1.47 per share were
outstanding. If all these options were exercised, the
Company's ownership in Harmony would be diluted to 48%.
NOTE 13: RELATED PARTY TRANSACTIONS
Management Agreement:
The Company has management services contracts with a
privately held affiliate (the "Management Company") related
to the Company through common control. The contracts, which
expire in December 2000 and are renewable annually
thereafter, require that the Company pay the Management
Company a fee aggregating of $180,000 per month for
services received. The management fees totaled $1,549,372
and $900,000 in 1999 and 1998, respectively. At December
31, 1999, $175,000 of these fees remained due and payable
to the Management Company.
The Management Company also provides services to another
privately held affiliate related to the Company through
common control. The management fee is based on estimated
usage of the Management Company's services by each company.
Management reviews the allocation periodically and believes
that the allocation method is reasonable.
Accounts Receivable/Payable - Affiliates:
At December 31, 1999 and 1998, accounts receivable
aggregating $373,239 and $280,438, respectively, were
outstanding from several affiliates related to Company
through common control or equity investment. These accounts
result primarily from the allocation of shared expenses.
At December 31, 1998, an account payable totaling $363,727
remained due to an officer and director of the Company
associated with their assistance in financing the Company's
repurchases of 271,000 shares of its common stock.
-47-
<PAGE> 49
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: RELATED PARTY TRANSACTIONS (CONTINUED)
Stock Subscriptions Receivable - Officers:
The Company's board of directors has, from time to time,
approved the non-cash exercise of options for employees,
officers and directors. At December 31, 1999 and 1998 stock
subscriptions receivable of $327,500 and $129,563,
respectively, remained outstanding from officers of the
Company as a result of such exercises.
Interest Expense - Related Parties:
At December 31, 1999, interest expense paid to Curious
Management related to the note payable resulting from the
purchase of 51% of Curious Pictures (Note 3) was $51,945.
Note Receivable - Director:
In April 1999, the Company advanced a director $12,000 as
evidenced by a promissory note signed by said director. The
note bears an interest rate of 8% per annum and is due in
full on or before April 13, 2001. As of December 31, 1999,
$12,000 of principal remained due to the Company, as well
as approximately $690 of related interest.
Payment to Officer
In connection with the sale of radio station KYCR(AM) (Note
2), Salem became the lessee for the KYCR tower site which
is leased from the president and chief executive officer of
the Company. The transaction was structured so that the
monthly tower lease payments decreased from $4,000 per
month to $2,000 per month. The Company reimburses its
president for the money he would have received had the
Company continued to be the lessee of the KYCR tower site.
NOTE 14: INCOME TAXES
At December 31, 1999, the Company has net operating loss
carryforwards for income tax purposes of $3,000,000 which
expire in 2012. Additionally, the federal net operating
loss carryforwards for subsidiaries not consolidated for
tax purposes are as follows:
<TABLE>
<CAPTION>
Carryforward Curious
Expires Pictures Harmony
------------ ------------------ ----------------
<S> <C> <C>
2005 $ - $ 251,730
2006 - 1,721,893
2007 - 6,430
2008 - 2,709,559
2009 - 348,090
2011 - 1,366,208
2013 - 3,108,872
2019 - 2,428,813
2020 (approximate) 2,150,000 1,300,000
----------------- ----------------
$ 2,150,000 $ 13,241,595
================= ================
</TABLE>
-48-
<PAGE> 50
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: INCOME TAXES (CONTINUED)
The Company's ability to utilize the net operating loss
carryforwards is dependent upon the ability to generate
taxable income in future periods. Additionally, federal net
operating losses of Harmony of approximately $7,400,000 are
limited to usage of $792,000 per year, due to ownership
changes as defined under Section 382 of the Standard Revenue
Code of 1986.
The income tax provisions (benefits) for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Current:
Federal $ 400,000 $ 183,867
State 701,892 146,370
--------------- ----------------
1,101,892 330,237
=============== ================
</TABLE>
A reconciliation of the statutory federal income tax rate
(benefit) and the effective tax rate as a percentage of income
(loss) before taxes on income is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Statutory rate (benefit) 34.0% 34.0%
Benefit of operating losses not previously recognized (28.0) (34.0)
State taxes 7.0 4.2
------- -------
Effective tax rate 13.0% 4.2%
======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of December
31 are as follows:
<TABLE>
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,111,000 $ 11,877,000
Net operating loss carryforward of
subsidiaries not consolidated for
tax purposes 6,288,000 -
Excess of subsidiary and equity-basis
investee stock tax basis over the
amount for financial reporting - 5,515,000
Other items not yet deductible for tax
purposes 220,000 20,000
--------------- ----------------
Total long-term deferred tax asset 7,619,000 17,412,000
Deferred tax liability:
Deferred installment gain - 3,650,000
Amortization and the excess of broadcasting
license financial reporting basis over the
amounts for taxes - 3,237,000
Depreciation 190,000 -
--------------- ----------------
Total net long-term deferred tax asset 7,429,000 10,525,000
Valuation allowance for net deferred tax assets ( 7,429,000) ( 10,525,000)
--------------- ----------------
Net deferred tax assets $ - $ -
=============== ================
</TABLE>
-49-
<PAGE> 51
INTELEFILM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: INCOME TAXES (CONTINUED)
As the Company has posted consistent operating losses since inception
exclusive of the radio station sale transactions, realization of the
tax benefit related to the net deferred tax asset is uncertain.
Accordingly, a valuation allowance has been recorded for the full value
of the net deferred tax asset. The net change in the deferred tax
valuation allowance was a decrease of $3,096,000 and $3,342,000 in 1999
and 1998, respectively.
NOTE 15: TRANSITION COMMERCIAL PRODUCTION SERVICE INDUSTRY
The Company has transitioned itself from the radio broadcasting
industry to the commercial production services industry. This
transformation was effectively completed with the closing of the sale
of the Company's radio stations in January 1999, and the Company's
acquisition of Chelsea and a majority interest of Harmony in March and
April 1999, respectively. The Company's operations between the
transitioned industries are as follows:
<TABLE>
<CAPTION>
Production Radio
Services Broadcasting Corporate Total
--------------- ---------------- --------------- ---------------
` <S> <C> <C> <C> <C>
1999
Revenues 67,242,374 100,279 - 67,342,653
Cost of production 56,488,737 - - 56,488,737
Operating expenses 13,353,119 213,462 3,704,822 17,271,403
--------------- ---------------- --------------- ---------------
Loss from operations ( 2,599,482) ( 113,183) ( 3,704,822) ( 6,417,487)
Gain on sale of assets and
subsidiary stock 119,508 16,264,308 - 16,383,816
Equity loss in Harmony ( 1,930,942) - - ( 1,930,942)
Interest income (expense) - - 406,082 406,082
Income tax provision - ( 1,101,892) - ( 1,101,892)
--------------- ---------------- --------------- ---------------
Net income (loss) ( 4,410,916) 15,049,233 ( 3,298,740) 7,339,577
=============== ================ =============== ===============
Assets 12,206,731 60,061 25,351,060 37,617,852
Depreciation and amortization 1,510,011 122,686 31,716 1,664,413
Additions to long lived assets 5,896,570 - 76,479 5,973,049
1998
Revenues - 2,566,647 - 2,566,647
Cost of production - - - -
Operating expenses - 6,093,350 5,621,666 11,715,016
--------------- ---------------- --------------- ---------------
Loss from operations - ( 3,526,703) ( 5,621,666) ( 9,148,369)
Gain on sale of assets and
subsidiary stock - 26,374,904 - 26,374,904
Equity loss in Harmony ( 4,058,361) - - ( 4,058,361)
Interest income (expense) - - ( 5,185,259) ( 5,185,259)
Other income (expense) - - ( 82,883) ( 82,883)
Income tax provision - ( 330,237) - ( 330,237)
--------------- ---------------- --------------- ---------------
Net income (loss) ( 4,058,361) 22,517,964 (10,889,808) 7,569,795
=============== ================ =============== ===============
Assets - 11,777,613 22,043,919 33,821,532
Depreciation and amortization - 1,941,685 7,655 1,949,340
Additions to long lived assets - 242,932 3,204,415 3,447,347
</TABLE>
-50-
<PAGE> 52
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-62402) pertaining to the 1991 Incentive Stock Option Plan,
Stock Grants and Non-Qualified Stock Option Agreements, the Registration
Statement on Form S-8 (No. 33-93546) pertaining to the 1994 Stock Option Plan,
1994 Director Stock Option Plan and the Written Compensation Agreement with R.
David Ridgeway, the Registration Statement on Form S-8 (No. 333-21699)
pertaining to the 1994 Stock Option Plan, the Registration Statement on Form S-8
(No. 333-21701) pertaining to the 1996 Employee Stock Purchase Plan and
Non-Qualified Stock Option Agreements, the Registration Statement on Form S-3
(No. 333-06865) pertaining to the registration of 1,614,802 shares of common
stock, the Registration Statement on Form S-3 (No. 333-14483) pertaining to the
registration of 1,125,580 shares of common stock, the Registration Statement on
Form S-3 (No. 333-21117) pertaining to the registration of 493,895 shares of
common stock, the Registration statement on Form S-3 (No. 333-28315) pertaining
to the registration of 318,607 shares of common stock, the Registration
Statement on Form S-4 (No. 333-18575) pertaining to the registration of
5,000,000 shares of common stock and $5,000,000 of debt securities, the
Registration Statement on Form S-3 (No. 333-53327) pertaining to the
registration of 421,528 shares of common stock, the Registration Statement on
Form S-3 (No. 333-60637) pertaining to the registration of 1,580,500 shares of
common stock, the Registration Statement on Form S-3 (No. 333-67381) pertaining
to the registration of 150,000 shares of common stock, of iNTELEFILM Corporation
of our report dated February 8, 2000, except for Note 8 and 10 dated March 17,
2000, with respect to the consolidated financial statements included in the
Annual Reports (Forms 10-KSB) for the years ended December 31, 1998 and December
31, 1999.
BDO Seidman, LLP
Milwaukee, Wisconsin
March 27, 2000
-51-
<PAGE> 53
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is certain information concerning the management of the
Company as of March 1, 2000. There are no family relationships among any
directors and any executive officers.
<TABLE>
<CAPTION>
MANAGEMENT
- -------------------------------- -----------------------------------------------------
Name Position
Age
<S> <C> <C>
Christopher T. Dahl 56 Chairman of the Board, President and Chief Executive
Officer
James G. Gilbertson 38 Chief Operating Officer
Steven C. Smith 44 Chief Financial Officer
Jill J. Theis 29 General Counsel and Secretary
Michael N. Delgado 40 Vice President of Marketing
Richard W. Perkins 69 Director
Michael R. Wigley 46 Director
William E. Cameron 55 Director
</TABLE>
Christopher T. Dahl has been President, Chief Executive Officer and
Chairman of the Company since its inception in February 1990. Mr. Dahl also
serves as Chairman of the Board, President and Chief Executive Officer of
Harmony, a company which produces television commercials, music videos and
related media, of which the Company is the largest shareholder and is the
Chairman of the Board of webADTV. Messrs. Dahl and Perkins own MMLLC. Employees
of MMLLC provide certain administrative, legal and accounting services to the
Company and Harmony. From 1969 to 1979, Mr. Dahl was the founder and President
of a group of companies involved in photo finishing, retail photo sales, home
sewing notions, toy distribution and retail craft stores. He was employed by
Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969.
James G. Gilbertson has served as the Company's Chief Operating Officer
since April 1996 and its Chief Financial Officer from July 1992 to December 21,
1999. In January 2000, Mr. Gilbertson was appointed the Chief Executive Officer,
President and director of webADTV. From June 1988 to July 1992, he was the Chief
Financial Officer of Parker Communications, which operated a group of radio
stations. From 1985 to June 1988, he was Controller of the radio division of
Palmer Communications located in Des Moines, Iowa. Prior to joining Palmer
Communications, Mr. Gilbertson was a practicing certified public accountant with
the firm of Ernst & Young LLP. Mr. Gilbertson is also the Chief Operating
Officer of Harmony. Mr. Gilbertson is also a director of Founders Food &
Firkins, Ltd., a company which owns and operates Granite City Brewery, a
microbrewery restaurant in St. Cloud, Minnesota.
Steven C. Smith became the Chief Financial Officer of the Company on
December 21, 1999. Mr. Smith has been with the Company since October 1998.
Formerly the Chief Financial Officer of DIC Entertainment Animation Television
and the Vice President of Finance of Orion Television, Mr. Smith brings more
than 20 years experience with companies such as the Walt Disney Company. Mr.
Smith has also performed as a financial consultant to special effects houses, TV
and Satellite Broadcasters and technology companies. On December 21, 1999, Mr.
Smith also became the Chief Financial Officer of Harmony.
52
<PAGE> 54
Jill J. Theis joined the Company in March 1997 and has served as the General
Counsel and Secretary since February 1999. From January 1996 to March 1997, Ms.
Theis worked for the law firm of Holper, Welsh, Mitchell & Joanis, P.A. in
Minneapolis, Minnesota. From 1993 to 1997, Ms. Theis attended law school at
William Mitchell School of Law in St. Paul, Minnesota. Ms. Theis is also the
General Counsel and Secretary of Harmony.
Michael N. Delgado oversees the marketing and sales efforts of the
Company and has been with the Company since March 1997. A graduate of the
University of Southern California School of Fine Arts, Mr. Delgado has
orchestrated national marketing campaigns and has been involved in worldwide
branding efforts for a variety of corporations including Patagonia and Lucky
Brand Clothing Companies. Mr. Delgado gained significant operations experience
in his capacity as President of SenDel Automotive Corporation, a manufacturer of
aluminum automotive wheels whose customers included Toyota Motor Company.
Richard W. Perkins has been a director of the Company since its
inception. For more than five years, Mr. Perkins has been President and Chief
Executive Officer of Perkins Capital Management ("PCM"), a registered investment
advisor. Mr. Perkins is also a director of the following publicly held
companies: Bio-Vascular, Inc., a medical products manufacturer; CNS, Inc., a
consumer products manufacturer; Eagle Pacific Industries, Inc., a manufacturer
of plastic pipe; Harmony; LifeCore Biomedical, Inc., a medical device
manufacturer; Nortech Systems, Inc., an electronic sub-systems manufacturer;
Quantech LTD., a developer of immunological tests; and Vital Images, Inc., a
medical visualization software company.
Michael R. Wigley was elected to the Company's Board of Directors in
February 1998. Mr. Wigley is President and Chief Executive Officer of Great
Plains Companies, Inc. ("Great Plains"), a building material and supply company
based in Roseville, Minnesota. He has served as its President since 1989. Mr.
Wigley is Chairman and Chief Executive Officer of four subsidiaries of Great
Plains, as well as Chairman and Chief Executive Officer of Great Plains
Properties, Inc. and TerraDek Lighting, Inc., two independent privately-held
companies. Mr. Wigley is also a director of Choicetel Communications, Inc., an
internet kiosk provider. He co- founded the Minnesota branch of McKinsey &
Company, where he managed various teams of consultants from 1986 to 1989. Mr.
Wigley holds a M.B.A. from Harvard University and a M.S. in Civil Engineering
from Stanford University.
William E. Cameron was elected to the Company's Board of Directors in
April 1998. Since 1993, Mr. Cameron has been the head of International Business
Development for Universal Health Communications, London, England, the largest
medical-health-wellness video library in the world. Mr. Cameron also runs
International Telemedicine Marketing for KZT Corporation. Mr. Cameron also
serves as a director of Harmony and RME Entertainment.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the SEC. Such officers, directors and
shareholders are required by the SEC to furnish the Company with copies of all
such reports. To the Company's knowledge, based solely on a review of copies of
reports filed with the SEC during 1999, all applicable Section 16(a) filing
requirements were satisfied except that one report on Form 5 setting forth the
November 5, 1999 exercise by Christopher T. Dahl, President, Chief Executive
Officer and Chairman of a stock option to purchase 125,000 shares was not filed
on a timely basis.
53
<PAGE> 55
ITEM 10 EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by
reference from the information set forth under the caption "Executive
Compensation" in the Definitive Proxy Statement for the Company's 2000 Annual
Meeting of Shareholders.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table contains certain information as of March 1, 2000,
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director, (iii) each executive officer, and (iv) the
executive officers and directors as a group, and as to the percentage of the
outstanding shares held by them on such date. Any shares which are subject to an
option or a warrant exercisable within 60 days are reflected in the following
table and are deemed to be outstanding for the purpose of computing the
percentage of Common Stock owned by the option or warrant holder but are not
deemed to be outstanding for the purpose of computing the percentage of Common
Stock owned by any other person. Unless otherwise noted, each person identified
below possesses sole voting and investment power with respect to such shares.
The business address of Messrs. Dahl, Wigley, Cameron, Gilbertson, Delgado,
Smith and Ms. Theis is 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
OWNED (1) CLASS
------------------------- -----------------
<S> <C> <C>
Christopher T. Dahl....................... 1,127,668(2) 15.0%
William Bednarczyk........................ 628,500(3) 9.0%
6908 Gleason Road
Edina, Minnesota 58439
Foothill Capital Corporation.............. 600,000(4) 8.6%
11111 Santa Monica Boulevard
Los Angeles, California 90025
Richard W. Perkins..................... 518,717(5) 7.3%
730 East Lake Street
Wayzata, Minnesota 55391
Perkins Capital Management, Inc........... 680,186(6) 9.6%
730 East Lake Street
Wayzata, Minnesota 55391
James G. Gilbertson................... 235, 976(7) 3.6%
Michael N. Delgado........................ 73,006(8) 1.1%
Jill J. Theis............................. 18,432(8) *
Steven C. Smith........................... 50,000(8) *
Michael R. Wigley......................... 68,750(9) 1.1%
William E. Cameron........................ 33,750(8) *
All Directors and Executive Officers
as a Group (8 persons).................... 2,111,299(10) 24.8%
</TABLE>
---------------
* Less than 1%
(1) Securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set
forth in the regulations of the SEC and, accordingly, may
include securities owned by or for, among others, the spouse,
children or certain other relatives of such person as well as
other securities as to which the person has or shares voting
or investment power or has the option or right to acquire
Common Stock within 60 days.
(2) Mr. Dahl has the sole right to sell and has sole voting power
over such shares. Includes 434,682 shares purchasable upon
the exercise of options and warrants.
(3) Based upon statements filed on a Schedule 13D with the SEC as
of July 23, 1999, Mr. Bednarczyk has the sole right to sell
such shares and has sole voting power over such shares.
(4) Represents shares purchasable upon the exercise of warrants.
54
<PAGE> 56
(5) Represents shares held by Mr. Perkins as trustee for various
trusts of which he is sole trustee. Mr. Perkins has the sole
right to sell such shares and has sole voting power over
336,460 of such shares. Includes 167,257 shares purchasable
upon the exercise of options and warrants.
(6) Based upon statements filed with the SEC as of February 2,
2000, PCM is a registered investment adviser of which Richard
W. Perkins, a director of the Company, is President. As set
forth in Schedule 13 D filed with the SEC on February 2, 2000,
PCM has the sole right to sell such shares and has sole voting
power over 149,051 of such shares. Mr. Perkins and PCM
disclaim any beneficial interest in such shares. This excludes
shares beneficially owned by Mr. Perkins.
(7) Includes 231,476 shares purchasable upon the exercise of
options.
(8) Represents shares purchasable upon the exercise of options.
(9) Includes 33,750 shares purchasable upon exercise of options.
(10) Includes 1,042,353 shares purchasable upon exercise of options
and warrants.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES
Until October 30, 1998, the studios and tower site of WWTC(AM) and
KYCR(AM) were located in St. Louis Park, Minnesota. The studio facility
consisted of approximately 12,000 square feet. The tower site included four
200-foot towers, a transmitter building and a storage garage on approximately 16
acres. The tower site was leased from Mr. Dahl at a total annual rent of
approximately $114,000, and the studio site was leased from 5501 Building
Partnership, a partnership consisting of Messrs. Dahl and Perkins at an annual
rent of approximately $132,000. In connection with the sale of radio station
KYCR(AM), Salem became the lessee for the KYCR(AM) tower site lease. The
transaction was structured so that the monthly tower lease payments decreased
from $4,000 a month to $2,000 a month. The Related Party Transaction Committee
has approved the Company's reimbursement to Mr. Dahl for the money he would have
received had the Company continued to be the lessee of the KYCR(AM) tower site
through October 31, 2008.
Until February 28, 1999, the Company leased certain office space at 724
First Street North, Minneapolis, Minnesota, the Company's former executive
offices, from 724 Associates, a partnership consisting of Messrs. Dahl, Perkins
and Stephen L. Wallack, a shareholder of the Company. These facilities were
leased at annual rental of $54,000. The arrangements were approved by the
Related Party Transaction Committee of the Company's Board of Directors, which
is comprised of disinterested directors, and the Company believes such
arrangements were on terms at least as favorable as could have been obtained
from unaffiliated third parties. On March 1, 1999, the Company assigned all of
its rights and obligations under the lease to 5501 Building Partnership, an
entity owned by Dahl and Perkins.
MANAGEMENT SERVICES FROM AN AFFILIATE
From July 1993 through July 1998 the Company received administrative,
legal and accounting services from RMC, an entity owned by Messrs. Dahl,
Perkins, and Russell Cowles II. Mr. Cowles, a former director-elect of the
Company, is a beneficiary and trustee of John Cowles Family Trust, a shareholder
of the Company. Since August 1998, the Company has received such services from
MMLLC, an entity owned by Messrs. Dahl and Perkins. MMLLC provides corporate,
legal, accounting and financial services to the Company, CAC and Harmony. The
Company also subleases its executive offices from MMLLC. The Company pays a set
monthly fee of $125,000 for the services listed above. All outside services
directly attributable to the Company are billed directly to the Company. The
Company paid MMLLC an aggregate of $1,095,000 for such services during the
fiscal year ended December 31, 1999 and an aggregate of $ 375,000 for such
services during the fiscal year ended December 31, 1998. Harmony pays a set
monthly fee of $55,000 for services provided to it. Harmony paid MMLLC an
aggregate of $463,720 for such services during its fiscal year ending June 30,
1999 and $0 for its fiscal year ending June 30, 1998. The Company paid RMC an
aggregate of $525,000 for such services during
55
<PAGE> 57
fiscal year ended December 31, 1998. The salaries of three of the Company's
officers, Messrs. Gilbertson, Smith and Ms. Theis are paid by MMLLC. The
services of the Chief Operating Officer, Chief Financial Officer and the General
Counsel are also rendered by Messrs. Gilbertson, Smith and Ms. Theis,
respectively, on a shared basis with Harmony. Additionally, MMLLC received
additional payments of $550,000 in connection with the closing of the sale of
the radio stations to 1090, Salem, CRN and Radio Unica Corp.
HARMONY-RELATED TRANSACTIONS
In connection with the July 1997 acquisition by the Company of shares
of common stock of Harmony, the Company borrowed an aggregate of $1.25 million
from three parties: Rodney P. Burwell, a former director of the Company, Pyramid
Partners, L.P., an entity of which PCM is the managing partner, and William M.
Toles, a shareholder of the Company. Mr. Perkins, a director of the Company, is
President and Chief Executive Officer of PCM. Messrs. Perkins and Toles are
members of the Board of Directors of Harmony. Their loans were evidenced by
notes bearing interest at 10% per year, payable on July 25, 1998. Additionally,
warrants to purchase an aggregate of 125,000 shares of Common Stock at $4.00 per
share were issued to those lenders. In June 1998, the Company received
extensions from Messrs. Toles and Burwell and Pyramid Partners in exchange for
an option for either additional warrants or for an increase in the interest rate
on the outstanding balance of the loan. Mr. Toles and Pyramid Partners elected
to receive additional warrants to purchase 12,500 and 25,000 shares of the
Company's common stock at a price of $3.06 per share for a term of five years,
respectively, and Mr. Burwell elected to receive an increase in the interest
rate to 20%. On November 3, 1998, the Company repaid Messrs.
Toles and Burwell and Pyramid Partners in full.
Messrs. Dahl and Perkins are directors of Harmony, an entity of which
the Company is the largest shareholder. In January 1998, the Company received
proceeds of $611,000 and paid debt issuance costs of $39,000 through the
issuance of a note payable to Harmony on face amount of $650,000. The Company
repaid the entire note along with accrued interest in June 1998.
In April 1998, the Company assigned to Pyramid Partners, L.P.; Perkins
& Partners, Inc., Profit Sharing Plan & Trust and Christopher T. Dahl & State
Bank of New Prague Joint Account all of its right to purchase 225,000 shares of
common stock of Harmony at $2.50 per share from Glenn B. Laken, a shareholder of
Harmony. In October 1998, the Company repurchased the 225,000 shares of common
stock of Harmony at $2.75 per share from Pyramid Partners, L.P., Perkins &
Partners, Inc. Profit Sharing Plan & Trust and Christopher T. Dahl & State Bank
of New Prague Joint Account.
From November 1998 to March 2000, the Company has advanced Harmony
operating funds under notes receivable of which approximately $3.7 million
remain outstanding as of March 1, 2000. The notes receivable bear an interest
rate of 14%. Also, until such time as Harmony receives a new working line of
credit, the Company has agreed to fund Harmony's operations as necessary. At
this time, the Company receives no additional compensation for providing such
services to Harmony.
OTHER
In connection with the sale of the assets to CRN, Christopher T. Dahl,
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company entered into a three (3) year Consulting and Non- Circumvention
Agreement with CRN, pursuant to which Mr. Dahl received payment of $750,000.
Also, in connection with the sale of the assets to Radio Unica, Mr. Dahl entered
into a two (2) year Non-Competition Agreement with Radio Unica, pursuant to
which Mr. Dahl received payment of $750,000. The fees provided for under these
agreements are payable whether or not CRN or Radio Unica requests Mr. Dahl to
perform any services thereunder.
In April 1999, after consulting with an outside consulting firm, the
Board of Directors adopted a severance plan which covers two of the Company's
executive officers, Christopher T. Dahl and James G. Gilbertson, and
56
<PAGE> 58
one of the Company's non-employee directors, Richard W. Perkins. As to the
officers, the plan provides for severance benefits in the event of termination
of employment under certain circumstances following a change in control of the
Company (as defined in the plan). The applicable circumstances are (a)
termination by the Company without cause (as defined in the plan) other than
because of death, retirement or disability (only as it pertains to Messrs. Dahl
and Perkins), (b) termination for good reason (as defined in the plan), or (c)
termination without good reason if the date of termination is within 180 days
after a change in control. Following any such termination, in addition to
compensation and benefits already earned, such individual will be entitled to
receive a lump sum severance payment equal to a multiple of such individual's
annual gross base salary from MMLLC, Harmony and the Company as then in effect,
including amounts accrued but not paid. The applicable multiples for Messrs.
Dahl and Perkins are five and for Mr. Gilbertson two. Based upon 1999 annual
gross base salaries, Messrs. Dahl and Gilbertson would be eligible to receive
lump sum severance payments of $1,455,000 and $350,000, respectively. As to Mr.
Perkins, he would be entitled to receive a lump sum severance payment of
$250,000. Mr. Perkins is participating in the plan in consideration of his
status as a founding director of the Company and his ongoing consulting with
management, for which he has not received separate compensation. The plan also
provides for the accelerated vesting of outstanding stock options and certain
other benefits following a change in control. The plan is in effect from April
1, 1999 through March 31, 2002. Thereafter, the plan automatically renews
annually unless the Company gives notice that it does not wish to extend it. In
addition, the plan will continue in effect for three years after a change in
control.
In November 1999, Mr. Dahl exercised his right to purchase 125,000
shares of the Company's common stock at a price equal to $1.625 per share by
executing a note receivable to the Company for the principal amount of $203,125
at an interest rate equal to 6% per annum. The Company's Board of Directors
approved the loan and exercise of the options.
In August 1998, the Board of Directors of the Company authorized the
repurchase of up to 400,000 shares of common stock pursuant to Exchange Act Rule
10b-18 whereby such repurchase was to be made through a broker through purchases
of common stock in the open market in the Company's name and on its behalf. The
Company subsequently determined that the broker did not follow the Company's
instructions with respect to the purchase of such shares and canceled its
authorization for the repurchase of shares. The broker then advised the Company
that it has accumulated 385,000 shares of common stock for its own account and
presented Company with the opportunity to purchase such shares, but the Company
was unable to effect such purchase because of delays in connection with the
closing of the sale of assets to CRN and restrictions placed upon the Company by
its lender. Two of the Company's directors, Christopher T. Dahl and Richard W.
Perkins, with the consent of the Board, initiated negotiations with the broker
to acquire the broker's shares and financed the acquisition of 171,000 shares of
the Company's common stock from the broker for their own account and assumed all
market and other risks associated therewith. Upon the closing of the sale of the
assets to CRN, the Company purchased 171,000 shares of the Company's common
stock from Messrs. Dahl and Perkins at their actual cost, including financing
expenses associated therewith in the amount of approximately $563,000 and
assumed the financing obligations of Messrs. Dahl and Perkins at Key Community
Bank. In January 1999, the Company repaid in full along with interest its
indebtedness with Key Community Bank. The Company canceled the repurchase of
shares pursuant to its 1998 repurchase plan.
Lance W. Riley, former Secretary and General Counsel of the Company,
had an of counsel relationship with Hessian & McKasy, P.A. ("HMPA"), one of the
law firms which represented the Company in connection with the ABC/Disney
litigation. During 1997, the Company paid HMPA legal fees of $883,749 and
disbursements of $106,480. During 1998, the Company paid HMPA legal fees of
$419,299 and disbursements of 50,735 in connection with the ABC/Disney
litigation.
57
<PAGE> 59
<TABLE>
<CAPTION>
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
<S> <C>
3.1 Articles of Incorporation, as amended and
restated (incorporated by reference to the
Company's Form 8-K filed October 1, 1999).
3.2 Amended and Restated Bylaws (incorporated by
reference to the Company's Registration
Statement on Form S-18 (File No. 33-44412)
filed on December 5, 1991).
4.1 Rights Agreement between the Company and
Norwest Bank Minnesota, National
Association, as Rights Agent, dated as of
February 19, 1998 (incorporated by reference
to the Company's Registration Statement on
Form 8-A (File No. 0-21534) filed on
February 20, 1998).
10.1 1991 Incentive Stock Option Plan (incorporated
by reference to the Company's Registration
Statement on Form S-18 (File No. 33-44412)
filed on December 5, 1991).
10.2 1994 Stock Option Plan (incorporated by
reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-21534) filed
on March 31, 1997, as amended by Definitive
Schedule 14A (Proxy Statement) filed on July
9, 1998).
10.3 1994 Director Stock Option Plan
(incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994 (File No.
0-21534) filed on March 31, 1995, as amended
by Form 10-KSB/A filed on October 4, 1995
and as amended by Definitive Proxy Schedule
14A filed on April 29, 1999).
10.4 Common Stock Purchase Warrant issued by the
Company to Foothill Capital Corporation,
dated November 7, 1996 (incorporated by
reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-21534) filed
on March 31, 1997).
10.5 Management Services Agreement between the
Company and Media Management, L.L.C. (f/k/a
Radio Management, L.L.C.) dated July 31, 1998
and effective August 1, 1998.
10.7 Common Stock Purchase Warrant issued by the
Company to Foothill Capital Corporation,
dated September 25, 1997 (incorporated by
reference to the Company's Current Report on
Form 8-K/A (File No. 0-21534) filed on
October 1, 1997, relating to the Company
acquiring a 40.7% beneficial interest in
Harmony Holdings, Inc.).
10.8 Common Stock Purchase Warrant issued by the
Company to Foothill Capital Corporation,
dated as of March 13, 1998 (incorporated by
reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1997 (File No. 0-21534 filed on
March 31, 1998).
10.9 Amended and Restated Common Stock Purchase
Warrant issued by the Company to Foothill
Capital Corporation, dated March 13, 1998
(incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 (File No.
0-21534 filed on March 31, 1998).
10.10 Purchase Agreement with Catholic Radio
Network, LLC dated April 17, 1998
(incorporated by reference to the
Registrant's Definitive Schedule 14A (Proxy
Statement) filed on July 8, 1998).
10.11 First Amendment to the Purchase Agreement
with Catholic Radio Network, LLC, dated
September 29, 1998 (incorporated by
reference to the Registrant's Current Report
on Form 8-K filed on October 2, 1998).
</TABLE>
58
<PAGE> 60
<TABLE>
<S> <C>
10.12 Second Amendment to Purchase Agreement with
Catholic Radio Network, LLC, dated October
26, 1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.13 Asset Purchase Agreement by and between the
Company and Radio Unica Corp., dated October
27, 1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.14 First Amendment to the Asset Purchase
Agreement by and between the Company and
Radio Unica Corp., dated October 27, 1998
(incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.15 Amendment No. 1 to Securities Purchase
Agreement by and between the Company,
Talisman Capital Opportunity Fund Ltd.,
Dominion Capital Limited and Sovereign
Partners, L.P dated October 22, 1998
(incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16, 1998).
10.16 Form of Common Stock Purchase Warrant issued
by the Company to Talisman Capital
Opportunity Fund Ltd. (incorporated by
reference to the Registrant's Current Report
on Form 8-k filed on July 6, 1998).
10.17 Form of Common Stock Purchase Warrant issued
by the Company to Dominion Capital Limited
(incorporated by reference to the
Registrant's Current Report on Form 8-K
filed on July 6, 1998).
10.18 Form of Common Stock Purchase Warrant issued
by the Company to Sovereign Partners LP
(incorporated by reference to the
Registrant's Current Report on Form 8-k
filed on July 6, 1998).
10.19 Promissory Note issued by Catholic Radio
Network, LLC to the Company, dated October
30, 1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.20 Loan Agreement by and between the Company
and CRN Broadcasting, LLC, dated October 30,
1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.21 Amendment No. 4 to the Amended and Restated
Loan and Security Agreement by and between
the Company and Foothill Capital
Corporation, dated as of October 1, 1998
(incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.22 Asset Purchase Agreement by and between the
Company and 1090 Investments, L.L.C. dated
May 1, 1998 (incorporated by reference to
the Registrant's Definitive Schedule 14A
(Proxy Statement) filed on July 8, 1998).
10.23 Amendment No. 3 to the Amended and Restated
Loan and Security Agreement by and between
the Company and Foothill Capital
Corporation, dated as of May 21, 1998, and
effective as of April 17, 1998 (incorporated
by reference to the Registrant's Form 8-K
filed on June 5, 1998).
10.24 Securities Purchase Agreement by and between
the Company, Talisman Capital Opportunity
Fund, Ltd., Dominion Capital Limited and
Sovereign Partners, LP dated June 25, 1998
(incorporated by reference to the
Registrant's Form 8-K filed on July 6,
1998).
10.25 Registration Rights Agreement by and between
the Company, Talisman Capital Opportunity
Fund, Ltd., Dominion Capital Limited and
Sovereign Partners, LP
</TABLE>
59
<PAGE> 61
<TABLE>
<S> <C>
dated June 25, 1998 (incorporated by
reference to the Registrant's Form 8-K filed
on July 6, 1998).
10.26 Common Stock Purchase Warrant issued by the
Company to Talisman Capital dated June 26,
1998 (incorporated by reference to the
Registrant's Form 8-K filed on July 6,
1998).
10.27 Common Stock Purchase Warrant issued by the
Company to Dominion Capital Limited dated
June 26, 1998 (incorporated by reference to
the Registrant's Form 8-K filed on July 6,
1998).
10.28 Common Stock Purchase Warrant issued by the
Company to Sovereign Partners LP, dated June
26, 1998 (incorporated by reference to the
Registrant's Form 8-K filed on July 6,
1998).
10.29 Guaranty by and between the Company and
Heller Financial, Inc., dated July 30, 1998
(incorporated by reference to Registrant's
Form 10QSB for quarter ended June 30, 1998
and filed August 13, 1998).
10.30 Asset Purchase Agreement by and between the
Company and Salem Communications Corporation
for the sale of two of the Company's radio
stations (incorporated by reference to the
Registrant's Definitive Schedule 14A (Proxy
Statement) filed on July 8, 1998).
10.31 Guaranty by and between the Company and The
Rector, Church-Wardens and Vestrymen of
Trinity Church dated July 8, 1998
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.32 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated November 13, 1998
(incorporated by reference to the
Registrant's Form 10- KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.33 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated November 18, 1998
(incorporated by reference to the
Registrant's Form 10- KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.34 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated December 17, 1998
(incorporated by reference to the
Registrant's Form 10- KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.35 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January 7, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.36 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January 15, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.37 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.38 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.39 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated February 8, 1999
(incorporated by reference to the Registrant's
Form 10- KSB for fiscal year ending December
31, 1998 and filed on March 31, 1999).
10.40 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated February 18, 1999
(incorporated by reference to the Registrant's
Form 10-KSB for fiscal year ending December
31, 1998 and filed on March 31, 1999).
10.41 Form of Promissory Note issued by Harmony
Holdings, Inc. to the Company.
10.42 1999 Broad-Based Stock Incentive Plan.
10.43 1996 Employee Stock Purchase Plan as amended
and restated.
</TABLE>
60
<PAGE> 62
<TABLE>
<S> <C>
10.44 1999 Company's Severance Policy.
10.45 Memorandum of Understanding by and among the
Company, AT&T, and Excalibur Technologies.
21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
(1) The Company's Current Report on Form 8-K
filed on October 1, 1999, relating to the
Company's name change from Children's
Broadcasting Corporation to iNTELEFILM
Corporation.
(2) The Company's Current Report on Form 8-K
filed on December 10, 1999, relating to the
Company's announcement of inteleSource.
</TABLE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota on March 28, 2000.
iNTELEFILM CORPORATION
By /s/ Christopher T. Dahl
------------------------------------------
Christopher T. Dahl
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Christopher T. Dahl President, Chief Executive Officer March 28, 2000
------------------------- and Director
Christopher T. Dahl (principal executive officer)
/s/ Steven C. Smith Chief Financial Officer March 28, 2000
-------------------------
Steven C. Smith
/s/ Richard W. Perkins Director March 28, 2000
-------------------------
Richard W. Perkins
/s/ Michael R. Wigley Director March 28, 2000
-------------------------
Michael R. Wigley
/s/ William E. Cameron Director March 28, 2000
-------------------------
William E. Cameron
</TABLE>
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<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBITS
<S> <C>
3.1 Articles of Incorporation, as amended and
restated (incorporated by reference to the
Company's Form 8-K filed October 1, 1999).
3.2 Amended and Restated Bylaws (incorporated by
reference to the Company's Registration
Statement on Form S-18 (File No. 33-44412)
filed on December 5, 1991).
4.1 Rights Agreement between the Company and
Norwest Bank Minnesota, National
Association, as Rights Agent, dated as of
February 19, 1998 (incorporated by reference
to the Company's Registration Statement on
Form 8-A (File No. 0-21534) filed on
February 20, 1998).
10.1 1991 Incentive Stock Option Plan
(incorporated by reference to the Company's
Registration Statement on Form S-18 (File
No. 33-44412) filed on December 5, 1991).
10.2 1994 Stock Option Plan (incorporated by
reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-21534) filed
on March 31, 1997, as amended by Definitive
Schedule 14A (Proxy Statement) filed on July
9, 1998).
10.3 1994 Director Stock Option Plan
(incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994 (File No.
0-21534) filed on March 31, 1995, as amended
by Form 10-KSB/A filed on October 4, 1995
and as amended by Definitive Proxy Schedule
14A filed on April 29, 1999).
10.4 Common Stock Purchase Warrant issued by the
Company to Foothill Capital Corporation,
dated November 7, 1996 (incorporated by
reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-21534) filed
on March 31, 1997).
10.5 Management Services Agreement between the
Company and Media Management, L.L.C.
(f/k/a Radio Management, L.L.C.) dated July
31, 1998 and effective August 1, 1998.
10.7 Common Stock Purchase Warrant issued by the
Company to Foothill Capital Corporation,
dated September 25, 1997 (incorporated by
reference to the Company's Current Report on
Form 8-K/A (File No. 0-21534) filed on
October 1, 1997, relating to the Company
acquiring a 40.7% beneficial interest in
Harmony Holdings, Inc.).
10.8 Common Stock Purchase Warrant issued by the
Company to Foothill Capital Corporation,
dated as of March 13, 1998 (incorporated by
reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended
December 31, 1997 (File No. 0-21534 filed on
March 31, 1998).
10.9 Amended and Restated Common Stock Purchase
Warrant issued by the Company to Foothill
Capital Corporation, dated March 13, 1998
(incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997 (File No.
0-21534 filed on March 31, 1998).
10.10 Purchase Agreement with Catholic Radio
Network, LLC dated April 17, 1998
(incorporated by reference to the
Registrant's Definitive Schedule 14A (Proxy
Statement) filed on July 8, 1998).
10.11 First Amendment to the Purchase Agreement
with Catholic Radio Network, LLC, dated
September 29, 1998 (incorporated by
reference to the Registrant's Current Report
on Form 8-K filed on October 2, 1998).
</TABLE>
62
<PAGE> 64
<TABLE>
<S> <C>
10.12 Second Amendment to Purchase Agreement with
Catholic Radio Network, LLC, dated October
26, 1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.13 Asset Purchase Agreement by and between the
Company and Radio Unica Corp., dated October
27, 1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.14 First Amendment to the Asset Purchase
Agreement by and between the Company and
Radio Unica Corp., dated October 27, 1998
(incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.15 Amendment No. 1 to Securities Purchase
Agreement by and between the Company,
Talisman Capital Opportunity Fund Ltd.,
Dominion Capital Limited and Sovereign
Partners, L.P dated October 22, 1998
(incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.16 Form of Common Stock Purchase Warrant issued
by the Company to Talisman Capital
Opportunity Fund Ltd. (incorporated by
reference to the Registrant's Current Report
on Form 8-k filed on July 6, 1998).
10.17 Form of Common Stock Purchase Warrant issued
by the Company to Dominion Capital Limited
(incorporated by reference to the
Registrant's Current Report on Form 8-K
filed on July 6, 1998).
10.18 Form of Common Stock Purchase Warrant issued
by the Company to Sovereign Partners LP
(incorporated by reference to the
Registrant's Current Report on Form 8-k
filed on July 6, 1998).
10.19 Promissory Note issued by Catholic Radio
Network, LLC to the Company, dated October
30, 1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.20 Loan Agreement by and between the Company
and CRN Broadcasting, LLC, dated October 30,
1998 (incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.21 Amendment No. 4 to the Amended and Restated
Loan and Security Agreement by and between
the Company and Foothill Capital
Corporation, dated as of October 1, 1998
(incorporated by reference to the
Registrant's Form 10QSB for quarter ended
September 30, 1998 and filed on November 16,
1998).
10.22 Asset Purchase Agreement by and between the
Company and 1090 Investments, L.L.C. dated
May 1, 1998 (incorporated by reference to
the Registrant's Definitive Schedule 14A
(Proxy Statement) filed on July 8, 1998).
10.23 Amendment No. 3 to the Amended and Restated
Loan and Security Agreement by and between
the Company and Foothill Capital
Corporation, dated as of May 21, 1998, and
effective as of April 17, 1998 (incorporated
by reference to the Registrant's Form 8-K
filed on June 5, 1998).
10.24 Securities Purchase Agreement by and between
the Company, Talisman Capital Opportunity
Fund, Ltd., Dominion Capital Limited and
Sovereign Partners, LP dated June 25, 1998
(incorporated by reference to the
Registrant's Form 8-K filed on July 6,
1998).
10.25 Registration Rights Agreement by and between
the Company, Talisman Capital Opportunity
Fund, Ltd., Dominion Capital Limited and
Sovereign Partners, LP
</TABLE>
63
<PAGE> 65
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<S> <C>
dated June 25, 1998 (incorporated by
reference to the Registrant's Form 8-K filed
on July 6, 1998).
10.26 Common Stock Purchase Warrant issued by the
Company to Talisman Capital dated June 26,
1998 (incorporated by reference to the
Registrant's Form 8-K filed on July 6,
1998).
10.27 Common Stock Purchase Warrant issued by the
Company to Dominion Capital Limited dated
June 26, 1998 (incorporated by reference to
the Registrant's Form 8-K filed on July 6,
1998).
10.28 Common Stock Purchase Warrant issued by the
Company to Sovereign Partners LP, dated June
26, 1998 (incorporated by reference to the
Registrant's Form 8-K filed on July 6,
1998).
10.29 Guaranty by and between the Company and
Heller Financial, Inc., dated July 30, 1998
(incorporated by reference to Registrant's
Form 10QSB for quarter ended June 30, 1998
and filed August 13, 1998).
10.30 Asset Purchase Agreement by and between the
Company and Salem Communications Corporation
for the sale of two of the Company's radio
stations (incorporated by reference to the
Registrant's Definitive Schedule 14A (Proxy
Statement) filed on July 8, 1998).
10.31 Guaranty by and between the Company and The
Rector, Church-Wardens and Vestrymen of
Trinity Church dated July 8, 1998
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.32 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated November 13, 1998
(incorporated by reference to the
Registrant's Form 10- KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.33 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated November 18, 1998
(incorporated by reference to the
Registrant's Form 10- KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.34 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated December 17, 1998
(incorporated by reference to the
Registrant's Form 10- KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.35 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January 7, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.36 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January 15, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.37 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.38 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated January, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.39 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated February 8, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on March
31, 1999).
10.40 Promissory Note issued by Harmony Holdings,
Inc. to the Company dated February 18, 1999
(incorporated by reference to the
Registrant's Form 10-KSB for fiscal year
ending December 31, 1998 and filed on
March 31, 1999).
10.41 Form of Promissory Note issued by Harmony
Holdings, Inc. to the Company.
10.42 1999 Broad-Based Stock Incentive Plan.
10.43 1996 Employee Stock Purchase Plan as amended
and restated.
</TABLE>
64
<PAGE> 66
<TABLE>
<S> <C>
10.44 1999 Company's Severance Policy.
10.45 Memorandum of Understanding by and among the
Company, AT&T, and Excalibur Technologies.
21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
27.1 Financial Data Schedule.
</TABLE>
65
<PAGE> 1
EXHIBIT 10.5
SERVICE AGREEMENT
THIS AGREEMENT made this 31st day of July, 1998, and effective August
1, 1998, by and between RADIO MANAGEMENT, L.L.C., a Minnesota limited liability
company (hereinafter "RMLLC"), and CHILDREN'S BROADCASTING CORPORATION, a
Minnesota Corporation (hereinafter "CBC").
WHEREAS, RMLLC engages in business of providing administrative, general
and legal services for companies and CBC engages primarily in television
commercial production; and
WHEREAS, CBC intends to retain RMLLC to provide administrative, general
and legal services for its television commercial production operations and in
connection with the wrapping up of its radio station interests according to the
terms and provisions set forth herein.
NOW, THEREFORE, based upon the mutual premises contained herein, and
other good and valuable consideration, the parties hereby agree as follows:
1. SERVICES. During the term hereof, RMLLC shall perform general and
administrative services for CBC, including, but not limited to, payroll
services, general accounting services, general legal services and such other
services as the parties may mutually agree to from time to time.
2. COMPENSATION. In consideration for the services performed by RMLLC hereunder,
CBC shall pay RMLLC Seventy-five Thousand and no/100 Dollars ($75,000.00) per
month payable within thirty (30) days from the end of each calendar month. The
compensation paid to RMLLC hereunder shall not include any fees or expenses for
accounting, legal or other services performed for CBC by third parties.
<PAGE> 2
3. QUARTERLY REVIEW. The parties agree that they will review the services
provided by RMLLC hereunder and the compensation set forth herein at the end of
each calendar quarter during the term hereof, and at such time the services and
compensation may be adjusted upon the mutual agreement of the parties.
4. EXPENSES. In addition to the compensation set forth in Section 2 above, CBC
shall pay all reasonable and necessary expenses incurred by RMLLC in connection
with the services performed hereunder, including, but not limited to, travel and
lodging expenses and ay other expenses directly attributable to the services
performed by RMLLC hereunder. RMLLC shall bill CBC on a monthly basis for such
expenses and CBC shall pay the same within thirty (30) days from the date CBC
receives any such invoice.
5. INDEPENDENT CONTRACTOR. The parties hereby acknowledge that (i) RMLLC, while
performing services hereunder, at all times acting as an independent contractor
and not as an employee of CBC; (ii) RMLLC shall be solely responsible for all
federal, state and local income taxes, employment taxes, self-employment taxes,
workers' compensation insurance premiums and any and all other similar payments
RMLLC is required to make as a result of the services RMLLC performs hereunder.
CBC shall approve the engagement of any officer of RMLLC who shall pursuant to
such engagement also serve as an officer of CBC, and CBC shall affirm and agree
to the terms of such engagement.
6. LIMITATIONS ON LIABILITY. CBC hereby agrees that in no event shall RMLLC be
liable to CBC for any indirect, special or consequential damages or lost profits
arising out of or in any way related to the Agreement or the performance of
services hereunder or any breach thereof and that RMLLC's liability to CBC
hereunder, if any, shall in no even exceed the total compensation paid to RMLLC
hereunder.
7. TERM. This Agreement shall remain in effect for a period of one (1) year from
the date hereof; provided, however, the term of the Agreement shall
automatically renew for successive one (1) year periods unless terminated by
either party, by written notice delivered to the other party, within sixty (60)
days from the end of the then current term.
8. TERMINATION. Notwithstanding Section 7 above, the Agreement shall terminate
upon the occurrence of any of the following events:
a. by RMLLC if CBC is more than sixty (60) days delinquent in its payment
of compensation or expenses pursuant to the Sections 2 or 3 above;
b. by either party if the other party is in default under any provision
hereunder and such default is not cured within sixty (60) days after
notice thereof is given to the defaulting party;
<PAGE> 3
c. by either party if the other party becomes insolvent or seeks
protection, voluntarily or involuntarily, under any bankruptcy law; or
d. upon the mutual agreement of both parties.
A termination of this Agreement pursuant to this Section 8 or Section 7
above shall not relieve CBC of its obligation to pay RMLLC compensation or
expenses for any services rendered or expenses incurred prior to the date of
termination.
9. GOVERNING LAW. This Agreement shall be construed and enforced in accordance
with the laws of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as
of the day and year first above written.
RADIO MANAGEMENT, L.L.C.
BY: /s/ James G. Gilbertson
ITS: /s/ Chief Operating Officer
CHILDREN'S BROADCASTING CORPORATION
BY: /s/ Patrick Grinde
ITS: /s/ Chief Financial Officer
<PAGE> 1
EXHIBIT 10.41
A FORM OF PROMISSORY NOTE
$ MINNEAPOLIS, MINNESOTA
-----------------
FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS
HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned
promises to pay to the order of INTELEFILM CORPORATION the sum of
($ ) with interest on the unpaid balance of this Note which shall
accrue at the rate of 14% per annum from the date hereof through the due date,
and shall accrue on the basis of actual days based on a 365-day year. The
undersigned reserves the right to prepay all or any part of the principal of the
Note at any time without penalty.
Notwithstanding any provision to the contrary contained in this Note,
the undersigned shall not be required to pay, and the holder of this Note (the
"Holder") shall not be permitted to collect any amount of interest in excess of
the maximum amount of interest permitted by law ("Excess interest"). If any
Excess Interest is provided for or determined by a court of competent
jurisdiction to have been provided for in this Note, then in such event: 1) the
provisions of this paragraph shall govern and control; 2) the undersigned shall
not be obligated to pay any Excess Interest; 3) and Excess Interest that the
Holder may have received hereunder shall be, at the Holder's option, (a) applied
as a credit against the outstanding principal balance of the Note or the accrued
and unpaid interest (not to exceed the maximum amount permitted by law), (b)
refunded to the payor thereof, or (c) any combination of the foregoing; 4) the
interest rate provided for herein shall be automatically reduced to the maximum
lawful rate allowed from time to time under applicable law (the "Maximum Rate"),
and this Note shall be deemed to have been and shall be, reformed and modified
to reflect such reduction; and 5) the undersigned shall not have any action
against the Holder for any damages arising out of the payment or collection of
any Excess Interest. Notwithstanding the foregoing, if for any period of time
interest on this Note is calculated at the Maximum Rate rather than the
applicable rate under this Note, and thereafter the Maximum Rate exceeds the
applicable rate, the rate of interest payable on this Note shall become the
Maximum Rate until the Holder shall have received the amount of interest which
the Holder would have received during such period on this Note had the rate of
interest not been limited to the Maximum Rate during such period.
The undersigned hereby acknowledges that this Note is entered into in
the State of Minnesota and is governed by Minnesota law. The undersigned further
consents to the jurisdiction and venue of
<PAGE> 2
the courts of the County of Hennepin, State of Minnesota, for any and all
disputes which may arise under this Note.
The makers, endorsers and guarantors hereof waive presentment for
payment, notice of non-payment, protest and notice of protest, and consent that
the time of payment may be extended without notice. If any part of the principal
or interest of this note is not paid when due, then the whole principal sum
shall immediately become due and payable at the option of the holder without
notice. And the maker and all other parties liable hereon agree to pay the cost
of collection of this note, including a reasonable attorney fee.
HARMONY HOLDINGS, INC.
BY:
----------------------------
ITS:
<PAGE> 1
EXHIBIT 10.42
INTELEFILM CORPORATION
1999 BROAD-BASED STOCK INCENTIVE PLAN
SECTION 1. PURPOSE.
The purpose of the iNTELEFILM CORPORATION 1999 Broad-Based Stock
Incentive Plan (the "Plan") is to (a) aid in attracting and retaining
non-officer personnel of iNTELEFILM CORPORATION (the "Company") capable of
assuring the future success of the Company, (b) to offer certain non-officer
employees a personal financial incentive for their work in increasing the
Company's business, and (c) to afford such personnel an opportunity to acquire a
proprietary interest in the Company. The plan is intended to be a broad-based
stock plan established to reward key non-officer employees.
SECTION 2. DEFINITIONS.
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean (i) any entity that, directly or indirectly
through one or more
intermediaries, is controlled by the Company and (ii) any entity in which the
Company has a significant equity interest, as determined by the Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right, Restricted
Stock, Restricted Stock Unit, Performance Award or other Stock-Based Award
granted under the Plan.
(c) "Award Agreement" shall mean any written agreement evidencing any
Award granted under the Plan.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and any regulations promulgated thereunder.
(e) "Committee" shall mean a committee of the Board of Directors of the
Company designated by such Board to administer the Plan and composed of not less
than three directors, each of whom is a "disinterested person" within the
meaning of Rule 16b-3. Each member of the Committee shall be an "outside
director" within the meaning of Section 162(m) of the Code.
(f) "Eligible Person" shall mean any non-officer employee or
independent contractor providing services to either the Company or an Affiliate.
(g) "Fair Market Value" shall mean, with respect to any property
(including, without limitation, any Shares or other securities), the fair market
value of such property determined by such methods or procedures as shall be
established from time to time by the Committee. Notwithstanding
<PAGE> 2
the foregoing, for purposes of the Plan, the Fair Market Value of Shares on a
given date shall be the closing price of the Shares as reported on the Nasdaq
Stock Market on such date, if the Shares are then quoted on the Nasdaq Stock
Market or, if the market is closed on that date, the closing price of the Shares
on the previous trading date.
(h) "Option" shall mean a non-qualified stock option, defined as any
compensatory stock option that does not satisfy the requirements under Code
Section 422 for incentive stock options, and such Option is granted under
Section 6(a) of the Plan.
(i) "Other Stock-Based Award" shall mean any right granted under
Section 6(e) of the Plan.
(j) "Participant" shall mean an Eligible Person designated by the
Committee to be granted an Award under the Plan.
(k) "Performance Award" shall mean any right granted under Section 6(d)
of the Plan.
(l) "Person" shall mean any individual, corporation, partnership,
association or trust.
(m) "Restricted Stock" shall mean any Share granted under Section 6(c)
of the Plan.
(n) "Restricted Stock Unit" shall mean any unit granted under Section
6(c) of the Plan evidencing the right to receive a Share (or a cash payment
equal to the Fair Market Value of a Share) at some future date.
(o) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934.
(p) "Shares" shall mean shares of common stock, $.02 par value, of the
Company or such other securities or property as may become subject to Awards
pursuant to an adjustment made under Section 7(c) of the Plan.
(q) "Stock Appreciation Right" shall mean any right granted under
Section 6(b) of the Plan.
SECTION 3. ADMINISTRATION.
The Plan shall be administered by the Committee. Subject to the terms
of the Plan and applicable law, the Committee shall have full power and
authority to: (i) designate Participants; (ii) determine the type or types of
Awards to be granted to each Participant under the Plan; (iii) determine the
number of Shares to be covered by each Award; (iv) determine the terms and
conditions of any Award or Award Agreement; (v) amend the terms and conditions
of any Award or Award Agreement and accelerate the exercisability of Options;
(vi) determine whether, to what extent and under what circumstances Awards may
be exercised in cash, Shares, other securities, other Awards or other property,
or canceled, forfeited or suspended; (vii) determine whether, to what extent and
under what
<PAGE> 3
circumstances cash, Shares, other securities, other Awards, other property and
other amounts payable with respect to an Award under the Plan shall be deferred
either automatically or at the election of the holder thereof or the Committee;
(viii) interpret and administer the Plan and any instrument or agreement
relating to, or Award made under, the Plan; (ix) establish, amend, suspend or
waive such rules and regulations and appoint such agents as it shall deem
appropriate for the proper administration of the Plan; and (x) make any other
determination and take any other action that the Committee deems necessary or
desirable for the administration of the Plan. Unless otherwise expressly
provided in the Plan, all designations, determinations, interpretations and
other decisions under or with respect to the Plan or any Award shall be within
the sole discretion of the Committee, may be made at any time and shall be final
and binding upon any Participant, any holder or beneficiary of any Award and any
employee of the Company or any Affiliate. No member of the Committee shall be
personally liable for any action or determination made with respect to the Plan.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) Shares Available. Subject to adjustment as provided in Section
8(c), the number of Shares available for granting Awards under the Plan shall be
four hundred thousand (400,000). If any Shares covered by an Award are not
purchased or are forfeited, or if an Award otherwise terminates without delivery
of any Shares, then the number of Shares counted against the aggregate number of
Shares available under the Plan with respect to such Award, to the extent of any
such forfeiture or termination, shall again be available for granting Awards
under the Plan. In addition, any Shares that are used by a Participant as full
or partial payment to the Company of the purchase price relating to an Award, or
in connection with satisfaction of tax obligations relating to an Award in
accordance with the provisions of Section 6 of the Plan, shall again be
available for granting Awards under the Plan.
(b) Accounting for Awards. For purposes of this Section 4, if an Award
entitles the holder thereof to receive or purchase Shares, the number of Shares
covered by such Award or to which such Award relates shall be counted on the
date of grant of such Award against the aggregate number of Shares available for
granting Awards under the Plan.
(c) Award Limitations Under the Plan. No Eligible Person may be granted
any Award or Awards, the value of which Awards are based solely on an increase
in the value of the Shares after the date of grant of such Awards, for more than
100,000 Shares, in the aggregate, in any calendar year beginning with the
effective date of this Plan. The foregoing limitation specifically includes the
grant of any "performance-based" Awards within the meaning of ss.162(m) of the
Code.
<PAGE> 4
SECTION 5. ELIGIBILITY.
The Committee may designate any Eligible Person to be a Participant by
granting an Award to such Eligible Person.
SECTION 6. AWARDS.
(a) Options. The Committee is hereby authorized from time to time to
grant Options to purchase Shares to Participants pursuant to the following terms
and conditions and with such additional terms and conditions not inconsistent
with the provisions of the Plan as the Committee shall determine:
(i) Exercise Price. The purchase price per Share under an
Option shall be determined by the Committee; provided, however, that
such purchase price shall not be less than 100% of the Fair Market
Value of a Share on the date of grant of such Option. The exercise
price shall be payable in cash or by tendering by either actual
delivery of Shares or attestation, Shares acceptable to the Committee,
and valued at Fair Market Value as of the day of exercise, or in any
combination thereof, as determined by the Committee. Each grant of an
Option under the Plan shall be evidenced by a Stock Option Agreement,
substantially in the form set forth in Exhibit A, between the Company
and the Participant setting forth the terms and conditions, not
inconsistent with the Plan, under which the Option so granted may be
exercised pursuant to the Plan and contain such other terms with
respect to the Options as the Committee in its sole discretion may
determine.
(ii) Option Term. The term of each Option shall be fixed by
the Committee.
(iii) Time and Method of Exercise. The Committee shall
determine the time at which an Option may be exercised in whole or in
part and the method by which payment of the exercise price may be made
or deemed to have been made. The Committee shall also determine the
acceptable forms of payment, including, without limitation, cash,
Shares, other securities, other Awards or other property, or any
combination thereof, having a Fair Market Value on the exercise date
equal to the relevant exercise price with respect thereto.
(iv) Reload Options. The Committee may grant "reload" options,
separately or together with another Option, pursuant to which, subject
to the terms and conditions established by the Committee and any
applicable requirements of Rule 16b-3 or any other applicable law, the
Participant would be granted a new Option when the payment of the
exercise price of a previously granted Option is made by the delivery
of shares of the Company's Common Stock owned by the Participant
pursuant to Section 6(a)(ii) hereof or the relevant provisions of
another plan of the Company, and/or when shares of the Company's Common
<PAGE> 5
Stock are tendered or forfeited as payment of the amount to be withheld
under applicable income tax laws in connection with the exercise of an
Option, which new Option would be an Option to purchase the number of
Shares not exceeding the sum of (A) the number of shares of the
Company's Common Stock provided as consideration upon the exercise of
the previously granted Option to which such "reload" option relates and
(B) the number of shares of the Company's Common Stock tendered or
forfeited as payment of the amount to be withheld under applicable
income tax laws in connection with the exercise of the Option to which
such "reload" option relates. "Reload" options may be granted with
respect to Options granted under this Plan or any other stock option
plan of the Company. Such "reload" options shall have a per share
exercise price equal to the Fair Market Value as of the date of grant
of the new Option.
(v) Vesting. Participants shall vest in all Options granted by
the Company according to terms and conditions of an option agreement entered
into by and between the Participant and the Company.
(b) Stock Appreciation Rights. The Committee is hereby authorized to
grant Stock Appreciation Rights to Participants subject to the terms of the Plan
and any applicable Award Agreement. A Stock Appreciation Right granted under the
Plan shall confer on the holder thereof a right to receive upon exercise thereof
the excess of (i) the Fair Market Value of one Share on the date of exercise
(or, if the Committee shall so determine, at any time during a specified period
before or after the date of exercise) over (ii) the grant price of the Stock
Appreciation Right as specified by the Committee, which price shall not be less
than 100% of the Fair Market Value of one Share on the date of grant of the
Stock Appreciation Right. Subject to the terms of the Plan and any applicable
Award Agreement, the grant price, term, methods of exercise, dates of exercise,
methods of settlement and any other terms and conditions of any Stock
Appreciation Right shall be as determined by the Committee. The Committee may
impose such conditions or restrictions on the exercise of any Stock Appreciation
Right as it may deem appropriate.
(c) Restricted Stock and Restricted Stock Units. The Committee is
hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units
to Participants pursuant to the following terms and conditions and with such
additional terms and conditions not inconsistent with the provisions of the Plan
as the Committee shall determine:
(i) Restrictions. Shares of Restricted Stock and Restricted Stock Units
shall be subject to such restrictions as the Committee may impose (including,
without limitation, any limitation
<PAGE> 6
on the right to vote a Share of Restricted Stock or the right to
receive any dividend or other right or property with respect thereto),
which restrictions may lapse separately or in combination at such time
or times, in such installments or otherwise as the Committee may deem
appropriate.
(ii) Stock Certificates. Any Restricted Stock granted under
the Plan shall be evidenced by issuance of a stock certificate(s),
which certificate(s) shall be held by the Company. Such certificate(s)
shall be registered in the name of the Participant and shall bear an
appropriate legend referring to the restrictions applicable to such
Restricted Stock. In the case of Restricted Stock Units, no Shares
shall be issued at the time such Awards are granted.
(iii) Forfeiture; Delivery of Shares. Except as otherwise
determined by the Committee, upon termination of employment (as
determined under criteria established by the Committee) during the
applicable restriction period, all Shares of Restricted Stock and all
Restricted Stock Units at such time subject to restriction shall be
forfeited and reacquired by the Company; provided, however, that the
Committee may, when it finds that a waiver would be in the best
interest of the Company, waive in whole or in part any or all remaining
restrictions with respect to Shares of Restricted Stock or Restricted
Stock Units. Shares representing Restricted Stock that is no longer
subject to restrictions shall be delivered to the holder thereof
promptly after the applicable restrictions lapse or are waived. Upon
the lapse or waiver of restrictions and the restricted period relating
to Restricted Stock Units evidencing the right to receive Shares, such
Shares shall be issued and delivered to the holders of the Restricted
Stock Units.
(d) Performance Awards. The Committee is hereby authorized to grant
Performance Awards to Participants subject to the terms of the Plan and any
applicable Award Agreement. A Performance Award granted under the Plan (i) may
be denominated or payable in cash, Shares (including, without limitation,
Restricted Stock), other securities, other Awards or other property and (ii)
shall confer on the holder thereof the right to receive payments, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee shall establish. Subject to the terms of the Plan and
any applicable Award Agreement, the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
Performance Award granted and the amount of any payment or transfer to be made
pursuant to any Performance Award shall be determined by the Committee.
(e) Other Stock-Based Awards. The Committee is hereby authorized to
grant to Participants such other Awards that are denominated or payable in,
valued in whole or in part by reference to, or
<PAGE> 7
otherwise based on or related to, Shares (including, without limitation,
securities convertible into Shares), as are deemed by the Committee to be
consistent with the purpose of the Plan; provided, however, that such grants
must comply with Rule 16b-3 and applicable law. Subject to the terms of the Plan
and any applicable Award Agreement, the Committee shall determine the terms and
conditions of such Awards. Shares or other securities delivered pursuant to a
purchase right granted under this Section 6(e) shall be purchased for such
consideration, which may be paid by such method or methods and in such form or
forms (including without limitation, cash, Shares, other securities, other
Awards or other property or any combination thereof), as the Committee shall
determine, the value of which consideration, as established by the Committee,
shall not be less than 100% of the Fair Market Value of such Shares or other
securities as of the date such purchase right is granted.
(f) General. Except as otherwise specified by the Plan:
(i) No Cash Consideration for Awards. Awards shall be granted for
no cash consideration or for such minimal cash consideration as may be
required by applicable law.
(ii) Forms of Payment under Awards. Subject to the terms of the
Plan and of any applicable Award Agreement, payments or transfers to be
made by the Company or an Affiliate upon the grant, exercise or payment
of an Award may be made in such form or forms as the Committee shall
determine (including, without limitation, cash, Shares, other
securities, other Awards or other property or any combination thereof),
and may be made in a single payment or transfer, in installments or on
a deferred basis, in each case in accordance with rules and procedures
established by the Committee. Such rules and procedures may include,
without limitation, provisions for the payment or crediting of
reasonable interest on installment or deferred payments.
(iii) Limits on Transfer of Awards. An Award is not transferable
unless the Participant receives written approved by the Committee in
accordance with any rules and regulations the Committee may establish
with respect to Award transfers.
(iv) Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee.
(v) Restrictions; Securities Exchange Listing. All certificates
for Shares or other securities delivered under the Plan pursuant to any
Award or the exercise thereof shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under
the Plan or the rules, regulations and other requirements of the
Securities and Exchange Commission and any applicable federal or state
securities laws, and the Committee may cause a legend or
<PAGE> 8
legends to be placed on any such certificates to make appropriate
reference to such restrictions. If the Shares or other securities are
traded on a securities exchange, the Company shall not be required to
deliver any Shares or other securities covered by an Award unless and
until such Shares or other securities have been admitted for trading on
such securities exchange.
SECTION 7. CHANGE IN CONTROL
(a) Impact of Event. Notwithstanding any other provision of the Plan to
the contrary, in the event of a Change in Control (as defined in Section 7(b)),
any Options outstanding as of the date such Change in Control is determined to
have occurred and not then exercisable and vested shall become fully exercisable
and vested in the full extent of the original grant unless in the case of a
merger with the Company, the surviving corporation assumes the obligations of
the Company under the Plan.
(b) Definition of Change in Control. For purposes of the Plan, a
"Change in Control" shall mean the happening of any of the following events:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of thirty percent (30%) or more of
either (1) the then outstanding Shares of common stock of the Company
or (2) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors; provided, however, that the following acquisitions shall not
constitute a Change in Control: (1) any acquisition directly from the
Company; (2) any acquisition by the Company; (3) any acquisition by a
Person including the Participant or with whom or with which the
Participant is affiliated; (4) any acquisition by a Person or Persons
one or more of which is a member of the Board or an officer of the
Company or an affiliate of any of the foregoing on the date the Plan is
adopted by the Company, (5) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company; or (6) any acquisition by any
corporation pursuant to a transaction described in clauses (A), (B) and
(C) of paragraph (iii) of this Section 7; or
(ii) During any period of twenty-four (24) consecutive months,
individuals who, as of the beginning of such period, constituted the
entire Board cease for any reason to constitute at least a majority of
the Board, unless the election, or nomination for election, by the
Company's stockholders, of each new director was approved by a vote of
at least two-thirds (2/3) of the Continuing Directors, as hereinafter
defined, in office on the date of such election
<PAGE> 9
or nomination for election for the new director. For purposes hereof,
"Continuing Director" shall mean:
A. any member of the Board at the close of business
on the date the Plan is adopted by the Company; or
B. any member of the Board who succeeded any
Continuing Director described in clause (A) above if such
successor's election, or nomination for election, by the
Company's stockholders, was approved by a vote of at least
two-thirds (2/3) of the Continuing Directors then still in
office. The term "Continuing Director" shall not, however,
include any individual whose initial assumption of office
occurs as a result of either an actual or threatened election
contest (as such term is used in Rule 14a-11 of Regulation 14A
of the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a
person other than the Board; or
(iii) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless,
following such reorganization, merger or consolidation, (A) more than
60% of the then outstanding securities having the right to vote in the
election of directors of the corporation resulting from such
reorganization, merger or consolidation is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners of the outstanding
securities having the right to vote in the election of directors of the
Company immediately prior to such reorganization, merger or
consolidation, (B) no Person (excluding the Company, any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization,
merger or consolidation, directly or indirectly, 30% or more of the
then outstanding securities having the right to vote in the election of
directors of the Company) beneficially owns, directly or indirectly,
30% or more of the then outstanding securities having the right to vote
in the election of the corporation resulting from such reorganization,
merger or consolidation, and (C) at least a majority of the members of
the board of directors of the corporation resulting from such
reorganization, merger are Continuing Directors at the time of the
execution of the initial agreement providing for such reorganization,
merger or consolidation; or
(iv) Approval by the stockholders of the Company of (A) a
complete liquidation or dissolution of the Company or (B) the sale or
other disposition of all or substantially all of the
assets of the Company, other than to a corporation, with respect to
which following such sale
<PAGE> 10
or other disposition, (1) more than 60% of the then outstanding
securities having the right to vote in the election of directors of
such corporation is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
beneficial owners of the outstanding securities having the right to
vote in the election of directors of the Company immediately prior to
such sale or other disposition of such outstanding securities, (2) no
Person (excluding the Company and any employee benefit plan (or related
trust) of the Company or such corporation and any Person beneficially
owning, immediately prior to such sale or other disposition, directly
or indirectly, 30% or more of the outstanding securities having the
right to vote in the election of directors of the Company) beneficially
owns, directly or indirectly, 30% or more of the then outstanding
securities having the right to vote in the election of directors of
such corporation and (3) at least a majority of the members of the
board of directors of such corporation are Continuing Directors at the
time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company.
(c) Change in Control Price. For purposes of the Plan, "Change in
Control Price" means the highest price per share (i) paid in any transaction
reported on NASDAQ, or (ii) paid or offered in any bona fide transaction related
to a potential or actual Change in Control of the Company at any time during the
preceding sixty (60) day period as determined by the Committee.
SECTION 8. AMENDMENT AND TERMINATION; ADJUSTMENTS.
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue or terminate the Plan; provided, however, that, notwithstanding any
other provision of the Plan or any Award Agreement, without the approval of the
stockholders of the Company, no such amendment, alteration, suspension,
discontinuation or termination shall be made that, absent such approval:
(i) would cause Rule 16b-3 to become unavailable with
respect to the Plan; or
(ii) would violate the rules or regulations of any
securities exchange or the Nasdaq
Stock Market that are applicable to the Company.
(b) Amendments to Awards. The Committee may waive any conditions of or
rights of the Company under any outstanding Award, prospectively or
retroactively. The Committee may not amend, alter, suspend, discontinue or
terminate any outstanding Award, prospectively or retroactively,
<PAGE> 11
without the consent of the Participant or holder or beneficiary thereof, except
as otherwise herein provided.
(c) Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Shares, other securities or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase or exchange of Shares
or other securities of the Company or other similar corporate transaction or
event affecting the Shares would be reasonably likely to result in the
diminution or enlargement of any of the benefits or potential benefits intended
to be made available under the Plan or under an Award (including, without
limitation, the benefits or potential benefits of provisions relating to the
term, vesting or exercisability of any Option, the availability of any tandem
stock appreciation rights or "reload" option rights, if any, contained in any
Option Award) the Committee shall, in such manner as it shall deem equitable or
appropriate in order to prevent such diminution or enlargement of any such
benefits or potential benefits, adjust any or all of (i) the number and type of
Shares (or other securities or other property) which thereafter may be made the
subject of Awards, (ii) the number and type of Shares (or other securities or
other property) subject to outstanding Awards and (iii) the purchase or exercise
price with respect to any Award; provided, however, that the number of Shares
covered by any Award or to which such Award relates shall always be a whole
number.
(d) Correction of Defects, Omissions and Inconsistencies. The Committee
may correct any defect, supply any omission or reconcile any inconsistency in
the Plan or any Award in the manner and to the extent it shall deem desirable to
carry the Plan into effect.
SECTION 9. INCOME TAX WITHHOLDING.
The Company may take such action as it deems appropriate to ensure that
all applicable federal or state payroll, withholding, income or other taxes,
which are the sole and absolute responsibility of a Participant, are withheld or
collected from such Participant. In order to assist a Participant in paying all
federal and state taxes to be withheld or collected upon exercise or receipt of
(or the lapse of restrictions relating to) an Award, the Committee, in its
discretion and subject to such additional terms and conditions as it may adopt,
may permit the Participant to satisfy such tax obligation by (i) electing to
have the Company withhold a portion of the Shares otherwise to be delivered upon
exercise or receipt of (or the lapse of restrictions relating to) such Award
with a Fair Market Value equal to the amount of such taxes or (ii) delivering to
the Company Shares other than Shares issuable upon exercise or receipt of (or
the lapse of restrictions relating to) such Award with a Fair Market Value equal
to the
<PAGE> 12
amount of such taxes. The election, if any, must be made on or before the date
that the amount of tax to be withheld is determined.
SECTION 10. GENERAL PROVISIONS.
(a) Award Agreements. No Participant will have rights under an Award
granted to such Participant unless and until an Award Agreement shall have been
duly executed on behalf of the Company.
(b) No Limit on Other Compensation Arrangements. Nothing contained in
the Plan shall prevent the Company or any Affiliate from adopting or continuing
in effect other or additional compensation arrangements, and such arrangements
may be either generally applicable or applicable only in specific cases.
(c) Right to Employment. This Plan shall not be construed to create any
right in the Participant to continued employment with the Company or to grant to
the Participant any other rights or to impose any obligations on the Company
other than those set forth in this Plan.
(d) Construction. In the event an ambiguity or question of intent or
interpretation arises, this Plan shall be construed as if drafted jointly by the
parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any of the provisions of
this Plan.
(e) Headings. The headings of the sections and subsections of this Plan
are intended for the convenience of the parties only and shall in no way be held
to explain, modify, construe, limit, amplify or aid in the interpretation of the
provisions hereof.
(f) Binding Plan. The provisions of this Plan once approved by the
Board of Directors and executed by a corporate officer, are binding on and inure
to the benefit of the Company and its successors, unless otherwise provided by
amendment to this Plan. Similarly, the provisions of the Plan are binding on and
inure to the benefit of the Participant, his or her estate, personal
representative, heirs, beneficiaries, and if any, permitted assigns.
(g) Beneficiaries. A Participant may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid or transferred in case of death.
Each designation will revoke all prior designations, shall be in a form
prescribed by the Committee, and will be effective only when filed by the
Participant in writing with the Committee during his or her lifetime. In the
absence of any such designation, benefits outstanding at the Participant's death
shall be paid or transferred to his or her estate. There shall be no third party
beneficiaries of or to this Plan. Any beneficiary of the Participant shall have
only a claim to such
<PAGE> 13
benefits as may be determined to be payable hereunder, if any, and shall not,
under any circumstances other than the right to claim such benefits, be deemed a
third party beneficiary of or to this Plan.
(h) Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Minnesota,
without regard to the principles of comity or the conflicts of law provisions of
any jurisdiction.
(i) Severability. If any portion or provision of this Plan shall be
deemed invalid or unenforceable, in whole or in part, than such provision or
portion shall be deemed to be modified or restricted to the extent and in the
manner necessary to render the same valid and enforceable, or shall be deemed
excised from this Agreement, as the case may require, and this Plan shall be
construed and enforced to the intent permitted by federal and Minnesota law, as
if so modified or restricted, or as if such provision or portion had not been
originally incorporated herein, as the case may be.
(j) Entire Agreement. This Plan and the Stock Option Agreement (the
"Agreement") shall constitute the entire agreement between the Company and the
Participant as to the subject matter hereof. No rights are granted to the
Participant by virtue of the Plan and the Agreement other than those
specifically set forth herein.
DATE: DECEMBER 21, 1999 INTELEFILM CORPORATION
BY /S/ JILL J. THEIS
-------------------------------
ITS GENERAL COUNSEL
<PAGE> 1
EXHIBIT 10.43
INTELEFILM CORPORATION
AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the Amended and Restated
Employee Stock Purchase Plan of INTELEFILM CORPORATION (the "Company"), a
Minnesota corporation. This Plan is intended to amend and restate the Company's
original Employee Stock Purchase Plan that was approved by the Board and the
shareholders in 1996.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2 Definitions.
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(c) "Committee" shall mean a committee of the Board, as
described in Section 14.
(d) "Common Stock" shall mean the Common Stock, $.01 par
value, of the Company.
(e) "Company" shall mean iNTELEFILM CORPORATION, a
Minnesota corporation.
(f) "Compensation" shall mean total cash compensation received
by an Employee from the Company or a Designated Subsidiary. By way of
illustration, but not limitation, Compensation includes regular compensation
such as salary, wages, overtime, shift differentials, bonuses, commissions and
incentive compensation, but excludes relocation, expense reimbursements, tuition
or other reimbursements and income realized as a result of participation in any
stock option, stock purchase, or similar plan of the Company or any Designated
Subsidiary.
(g) "Continuous Status as an Employee" shall mean the absence
of any interruption or termination of service as an Employee. Continuous Status
as an Employee shall not be considered interrupted in the case of (i) sick
leave; (ii) military leave; (iii) any other leave of absence approved by the
Committee, provided that such leave is for a period of not more than 90 days,
unless reemployment upon the expiration of such leave is guaranteed by contract
or statute, or unless provided otherwise
<PAGE> 2
pursuant to Company policy adopted from time to time; or (iv) in the case of
transfers between locations of the Company or between the Company and its
Designated Subsidiaries.
(h) "Contributions" shall mean all amounts credited to the
account of a participant pursuant to the Plan.
(i) "Corporate Transaction" shall mean a sale of all or
substantially all of the Company's assets, or a merger, consolidation or other
capital reorganization of the Company with or into another corporation.
(j) "Designated Subsidiaries" shall mean the Subsidiaries that
have been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(k) "Employee" shall mean any person, including an Officer,
who is customarily employed for at least twenty (20) hours per week and more
than five (5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(l) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(m) "Exercise Date" shall mean the last day
of each offering period of the Plan.
(n) "Offering Date" shall
mean the first business day of each offering period of the Plan.
(o) "Plan" shall mean this Employee Stock Purchase Plan.
(p) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who is an Employee as of the Offering Date of a
given offering period shall be eligible to participate in such offering period
under the Plan, subject to the requirements of paragraph 5(a) and the
limitations imposed by Section 423(b) of the Code. Anyone who meets the
eligibility criteria and becomes an Employee during the offering period but
after the Offering Date may begin participation at the beginning of the next
payroll period. All eligible Employees who elect to participate in this Plan
shall have the same rights and privileges except as provided in Subparagraph (b)
below.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) if,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 425(d) of the Code)
would own stock and/or hold outstanding options to purchase stock possessing
five percent (5%) or
<PAGE> 3
more of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) which permits his or her
rights to purchase stock under all employee stock purchase plans (described in
Section 423 of the Code) of the Company and its subsidiaries to accrue at a rate
which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of
such stock (determined at the time such option is granted) for each calendar
year in which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by one offering
during each 12 month period of the Plan, commencing on or about January 1 and
continuing thereafter to a date no later than December 31 of the same twelve
consecutive month period or until terminated in accordance with Section 20
hereof. The Board shall have the power to change the duration and/or the
frequency of offering periods with respect to future offerings without
shareholder approval if such change is announced at least fifteen (15) days
prior to the scheduled beginning of the first offering period to be affected.
The first offering period shall commence on a date determined by the Board which
follows the date on which the Company's Common Stock has been registered under
the Exchange Act.
5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deduction, on the
form provided by the Company, and any other required documents ("Enrollment
Documents") and submitting such documents to the Company's payroll office prior
to the applicable Offering Date, unless a later time for filing the subscription
agreement is set by the Board for all eligible Employees with respect to a given
offering period. The Enrollment Documents and their submission may be
electronic, as directed by the Company.
(b) Payroll deductions for a participant shall commence on the
first full payroll following the Offering Date and shall end on the Exercise
Date of the offering to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 11. Payroll deductions must
be whole dollar amounts only and may not be less than $10.00 per pay period.
6. Method of Payment of Contributions.
(a) A participant shall elect to have payroll deductions made
on each payday during the offering period in an amount not less than ten dollars
($10.00) per payday and not more than ten percent (10%) of such participant's
Compensation on each payday during the offering period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
<PAGE> 4
(b) A participant may discontinue his or her participation in
the Plan as provided in Section 11, or, on one occasion only during an offering
period may increase or decrease the rate of his or her Contributions with
respect to the offering period by completing and filing with the Company new
Enrollment Documents authorizing a change in the payroll deduction rate. The
change in rate shall be effective as of the beginning of the next payroll period
following the date of filing of the new Enrollment Documents, if the documents
are completed at least five (5) business days prior to such date and, if not, as
of the beginning of the next succeeding payroll period.
(c) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) herein, a
participant's payroll deductions may be decreased during any offering period
scheduled to end during the current calendar year to 0%. Payroll deductions
shall re-commence at the rate provided in such participant's Enrollment
Documents at the beginning of the first offering period that is scheduled to end
in the following calendar year, unless terminated by the participant as provided
in Section 11.
7. Grant of Option.
(a) On the Offering Date of each offering period, each
eligible Employee participating in the Plan shall be granted an option to
purchase (at the per share option price) up to a number of shares of the
Company's Common Stock determined by dividing such Employee's Contributions to
be accumulated during such offering period (not to exceed an amount equal to ten
percent (10%) of his or her anticipated Compensation for the offering period, or
the remainder of the offering period if the election is made upon employment
after the Offering Date, to be determined as of the date of the commencement of
the applicable offering period) by eighty-five percent (85%) of the fair market
value of a share of the Company's Common Stock on the Offering Date, subject to
the limitations set forth in Sections 3(b) and 13 hereof. Fair market value of a
share of the Company's Common Stock shall be determined as provided in Section
7(b) herein.
(b) The fair market value of the Company's Common Stock on a
given date (the "Fair Market Value") shall be determined by the Board in its
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market, or, if such
price is not reported, the mean of the bid and asked prices per share of the
Common Stock as reported by Nasdaq, or, in the event the Common Stock is listed
on a stock exchange, the Fair Market Value per share shall be the closing sales
price on such exchange on such date (or, in the event that the Common Stock is
not traded on such
<PAGE> 5
date, on the immediately preceding trading date), as reported in The Wall Street
Journal.
(c) Options to purchase Common Stock granted on the Offering
Date expire as of the Exercise Date.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in paragraph 11, his or her option for the purchase of shares will be
exercised automatically on the Exercise Date of the offering period, and the
maximum number of full shares subject to option will be purchased for the
participant at the applicable option price with the accumulated Contributions in
the participant's account. The shares purchased upon exercise of an option
hereunder shall be deemed to be transferred to the participant on the Exercise
Date. During his or her lifetime, a participant's option to purchase shares
hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after the Exercise Date of eac
offering period, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the number of whole shares purchased
upon exercise of his or her option. Any cash remaining to the credit of a
participant's account under the Plan after a purchase by him or her of full
shares at the termination of each offering period, or which is insufficient to
purchase a full share of Common Stock of the Company, shall be returned to the
participant.
10. Expenses. All costs of maintaining records and executing transfers
will be borne by the Company. Brokerage expenses incurred in connection with the
purchase of shares shall be included as part of the costs of the shares to the
participating employees.
11. Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all of
the Contributions credited to his or her account under the Plan at any time
prior to the Exercise Date of the offering period by giving 5 days prior written
notice to the Company. All of the participant's Contribution credited to his or
her account will be paid to the participant promptly after receipt of his or her
notice of withdrawal, and the participant's option for the current period will
be automatically terminated. Upon a participant's submission of his or her
notice of withdrawal, the Company shall make no further payroll deductions for
the purchase of shares during the offering period.
(b) Upon the termination of the participant's Continuous
Status as an Employee prior to each Exercise Date of the offering period for any
reason, whether voluntary or involuntary, including retirement or death, the
Contributions credited to his or her account will be returned to the participant
or, in the case of his or her death, to the person or persons entitled thereto
under Section 15, and his or her option will be automatically terminated.
<PAGE> 6
(c) In the event an Employee fails to remain in Continuous
Status as an Employee of the Company for at least twenty (20) hours per week
during the offering period in which the employee is a participant, he or she
will be deemed to have elected to withdraw from the Plan and the Contributions
credited to his or her account will be returned to him or her and his or her
option will be terminated.
(d) A Participant who withdraws from an offering may not
revoke that withdrawal and recommence payroll deductions during the same
offering period.
(e) A participant's withdrawal from an offering will not have
any effect upon his or her eligibility to participate in a succeeding offering
or in any similar plan which may hereafter be adopted by the Company.
12. Interest. No interest shall accrue on the payroll deductions
of a participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 400,000 shares,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 19. If the total number of shares which would otherwise be subject to
options granted pursuant to Section 7(a) hereof on the Offering Date of an
offering period exceeds the number of shares then available under the Plan
(after deduction of all shares for which options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the shares of
Common Stock available for purchase on such Offering Date or Exercise Date, as
applicable, in as uniform a manner as shall be practicable and as it shall
determine in its sole discretion to be equitable. In such event, the Company
shall give written notice of such reduction in the number of shares subject to
the option to each Employee affected thereby and shall similarly reduce the rate
of payroll deductions, if necessary.
(b) The participant will have no interest or voting right in shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the
Board of the Company or a committee of members of the Board appointed by the
Board. The administration, interpretation or application of the Plan by the
Board or its Committee shall be final, conclusive and binding upon all
participants. The Board or its Committee shall have full power to adopt, amend,
and rescind any rules deemed desirable and appropriate for the administration of
the Plan. Members of the Board who are
<PAGE> 7
eligible Employees are permitted to participate in the Plan, provided that:
(a) Members of the Board who are eligible to participate in
the Plan may not vote on any matter affecting the administration of the Plan or
the grant of any option pursuant to the Plan.
(b) If a Committee is established to administer the Plan, no
member of the Board who is eligible to participate in the Plan may be a member
of the Committee.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to the end of the offering period but prior to delivery to him or her
of such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to the
Exercise Date of the offering period.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither Contributions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 11.
17. Use of Funds. All Contributions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees promptly following the Exercise Date, which statements will set forth
the amounts of Contributions, the per share purchase price, the number
<PAGE> 8
of shares purchased and the remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of shares of Common Stock
covered by each option under the Plan that has not yet been exercised, the
number of shares of Common Stock that have been authorized for issuance under
the Plan but have not yet been placed under option (collectively, the
"Reserves"), the maximum member of shares of Common Stock that may be purchased
by a participant in an offering period, the number of shares of Common Stock set
forth in Section 13 above, as well as the price per share of Common Stock
covered by each option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
In the event of a dissolution or liquidation of the Company, any
offering period then in progress will terminate immediately prior to the
consummation of such action, unless otherwise provided by the Board. In the
event of a Corporate Transaction, each option under the Plan shall be assumed or
an equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation. In the event that the
successor corporation refuses to assume or substitute for outstanding options,
each offering period then in progress shall be shortened and a new Exercise Date
shall be set (the "New Exercise Date"), as of which date any offering period
then in progress will terminate. The New Exercise Date shall be on or before the
date of consummation of the transaction and the Board shall notify each
participant in writing, at least ten (10) days prior to the New Exercise Date,
that the Exercise Date for his or her option has been changed to the New
Exercise Date and that his or her option will be exercised automatically on the
New Exercise Date, unless prior to such date he or she has withdrawn from the
offering period as provided in Section 11. For purposes of this Section 19, an
option granted under the Plan shall be deemed to be assumed, without limitation,
if, at the time of issuance of the stock or other consideration upon a Corporate
Transaction, each holder of
<PAGE> 9
of an option under the Plan would be entitled to receive upon exercise of the
option the same number and kind of shares of stock or the same amount of
property, cash or securities as such holder would have been entitled to receive
upon the occurrence of the transaction if the holder had been, immediately prior
to the transaction, the holder of the number of shares of Common Stock covered
by the option at such time (after giving effect to any adjustments in the number
of shares covered by the option as provided for in this Section 19); provided,
however that if the consideration received in the transaction is not solely
common stock of the successor corporation or its parent (as defined in Section
424(e) of the Code), the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
option to be solely common stock of the successor corporation or its parent
equal in fair market value to the per share consideration received by holders of
Common Stock in the transaction.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
20. Amendment or Termination. The Board may at any time terminate or
amend the Plan. Except as provided in Section 19, no such termination of the
Plan may affect options previously granted, provided that the Plan or an
offering period may be terminated by the Board on an Exercise Date or by the
Board's setting of a New Exercise Date with respect to an offering period then
in progress if the Board determines that termination of the Plan and/or the
offering period is in the best interests of the Company and the stockholders or
if the continuation of the Plan and/or the offering period would cause the
Company to incur adverse accounting charges as a result of a change after the
effective date of the Plan and after applying the generally accepted accounting
rules applicable to the Plan. No amendment to the Plan shall make any change in
any option previously granted that adversely affects the rights of any
participant, nor may an amendment be made without prior approval of the
shareholders of the Company (obtained in the manner described in Section 22) if
such amendment would:
(a) Increase the number of shares that may be issued under
the Plan;
(b) Permit payroll deductions at a rate in excess of ten percent
(10%) of the participant's Compensation;
(c) Change the designation of the employees (or class of employees)
eligible for
<PAGE> 10
participation in the Plan; or
(d) If the Company has a class of equity securities registered
under Section 12 of the Exchange Act at the time of such amendment, materially
increase the benefits which may accrue to participants under the Plan.
If any amendment requiring shareholder approval under this Section 20
of the Plan is made subsequent to the first registration of any class of equity
securities by the Company under Section 12 of the Exchange Act, such shareholder
approval shall be solicited as described in Section 22 of the Plan.
21. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
22. Shareholder Approval.
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. If such shareholder approval is obtained at a duly held
shareholders' meeting, it must be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company, or if such
shareholder approval is obtained by written consent, it must be obtained by the
unanimous written consent of all shareholders of the Company; provided, however,
that approval at a meeting or by written consent may be obtained by a lesser
degree of shareholder approval if the Board determines, in its discretion after
consultation with the Company's legal counsel, that such a lesser degree of
shareholder approval will comply with all applicable laws and will not adversely
affect the qualification of the Plan under Section 423 of the Code.
(b) If and in the event that the Company registers any class of
equity securities pursuant to Section 12 of the Exchange Act, any required
approval of the shareholders of the Company obtained after such registration
shall be solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder.
(c) If any required approval by the shareholders of the Plan itself
or of any amendment thereto is solicited at any time otherwise than in the
manner described in Section 22(b) hereof, then the Company shall, at or prior to
the first annual meeting of shareholders held subsequent to the later of (1) the
first registration of any class of equity securities of the Company under
Section 12 of the Exchange Act or (2) the granting of an option hereunder to an
officer or director after such registration, do the following:
<PAGE> 11
(i) furnish in writing to the holders entitled to vote for the Plan
substantially the same information which would be required (if proxies to be
voted with respect to approval or disapproval of the Plan or amendment were then
being solicited) by the rules and regulations in effect under Section 14(a) of
the Exchange Act at the time such information is furnished; and (ii) file with,
or mail for filing to, the Securities and Exchange Commission four copies of the
written information referred to in subsection
(ii) hereof not later than the date on which such information is
first sent or given to shareholders.
23. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the afore mentioned applicable provisions of law.
24. Term of Plan. The Plan shall become effective upon approval by
the Board and shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20. The Company shall acquire shareholder
approval of the Plan within twelve (12) months from the date of the Board's
approval of the Plan.
25. Additional Restrictions of Rule 16b-3. The terms and conditions
of options granted hereunder to, and the purchase of shares by, persons subject
to Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
<PAGE> 1
EXHIBIT 10.44
INTELEFILM CORPORATION
SEVERANCE POLICY
January 2000
And effective as of April 1, 1999
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
ARTICLE I - ESTABLISHMENT
<S> <C> <C>
1.1 Purpose...........................................................................1
ARTICLE II - DEFINITIONS
2.1 Affiliate.........................................................................1
2.2 Base Salary.......................................................................1
2.3 Benefit Period....................................................................1
2.4 Board of Directors................................................................1
2.5 Cause.............................................................................1
2.6 Change in Control.................................................................2
2.7 Company...........................................................................4
2.8 Date of Termination...............................................................5
2.9 Disability........................................................................5
2.10 Good Reason.......................................................................5
2.11 Notice of Termination.............................................................6
2.12 Participant.......................................................................6
2.13 Policy............................................................................6
2.14 Retirement........................................................................6
2.15 Welfare Benefits..................................................................7
ARTICLE III - DURATION
3.1 Duration of the Policy............................................................7
ARTICLE IV - PARTICIPATION
4.1 Eligibility.......................................................................7
4.2 Termination of Participation......................................................7
ARTICLE V - SEVERANCE COMPENSATION
5.1 Termination by the Company without Cause, Termination by the Participant for Good
Reason, and Special Termination...................................................8
5.2 Other Termination.................................................................9
5.3 Security.........................................................................10
ARTICLE VI - U.S. EXCISE TAX INDEMNIFICATION
6.1 Indemnification..................................................................10
6.2 Determination of Amount..........................................................10
6.3 Procedural Aspects...............................................................11
6.4 Refunds..........................................................................12
ARTICLE VII - AMENDMENT
7.1 Amendments.......................................................................12
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE VIII - INDEMNIFICATION
<S> <C> <C>
8.1 Indemnification..................................................................13
8.2 Limitations......................................................................13
ARTICLE IX - CLAIMS PROCEDURE
9.1 Claim for Payment................................................................13
ARTICLE X - MISCELLANEOUS
10.1 Assumption of Policy.............................................................14
10.2 Successors and Assigns...........................................................14
10.3 Arbitration......................................................................14
10.4 Governing Law....................................................................15
10.5 Offsets, Withholding.............................................................15
10.6 Non-alienation of Payment........................................................15
10.7 Facility of Payment..............................................................15
10.8 Effect of Return of Benefit Checks...............................................15
10.9 Non-exclusivity of Rights........................................................16
10.10 Severability.....................................................................16
10.11 Notices..........................................................................16
10.12 Reimbursement of Expenses in Enforcing Rights....................................16
10.13 Interest on Unpaid Amounts.......................................................16
10.14 No Contract of Employment........................................................16
10.15 Beneficiaries....................................................................17
10.16 No General Waivers...............................................................17
10.17 No Obligation to Mitigate........................................................17
10.18 Authority........................................................................17
10.19 Counterparts.....................................................................17
10.20 Headings and Gender..............................................................17
</TABLE>
<PAGE> 4
INTELEFILM CORPORATION
SEVERANCE POLICY
ARTICLE I
ESTABLISHMENT
1.1 Purpose. iNTELEFILM Corporation (the "Company") Severance Policy
is hereby established by the Company. The purpose of the Policy is to provide
severance benefits to persons covered by the Policy who incur a termination of
employment or provision of services as a member of the Board. The Policy is
adopted effective as of April 1, 1999.
ARTICLE II
DEFINITIONS
For purposes of this Policy, the following terms shall have the
following meanings (unless expressly indicated to the contrary) and the term
shall be capitalized when the meaning is intended:
2.1 "Affiliate" means any individual, corporation, partnership,
association, limited liability company, joint-stock company, trust,
unincorporated association or other entity (other than the Company) that
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with, the Company.
2.2 "Base Salary" means the annual (gross) base salary of the
Participant from Media Management, LLC, Harmony Holdings, Inc., and/or the
Company as in effect at the commencement of the Term or as the same may be
increased from time to time during the Term, including amounts accrued but not
paid. The annual (gross) base salary for Richard W. Perkins shall be deemed to
be $50,000.00.
2.3 "Benefit Period" means the period commencing on the Date of
Termination and continuing for 36 consecutive months.
2.4 "Board of Directors" or "Board" means the Board of Directors of
the Company.
2.5 "Cause" shall mean as to the Participant any of the following:
(a) the Participant's committing a felony or entering a plea of
no contest to a felonious crime in a court of law which results in
material damage to the Company or any of its Affiliates or materially
impairs the value of the Participant's services to the Company or its
Affiliates; or
(b) the Participant's willfully engaging in one or more acts, or
willfully omitting to act (except for sickness, a disability, vacation
or authorized leave of absence),
<PAGE> 5
which is demonstrably willful and materially damaging to the Company or
any of its Affiliates committed in bad faith or with reasonable belief
that such act or omission to act was damaging to the Company or an
Affiliate, including acts and omissions that constitute gross
negligence in the performance of the Participant's duties as in effect
immediately prior to the commencement of the Term.
Notwithstanding the foregoing, the Participant may not be
terminated for Cause unless and until there shall have been delivered
to the Participant a copy of a resolution duly adopted by a majority
affirmative vote of the membership of the Board of Directors of the
Company (excluding the Participant, if the Participant is then a
member) at a meeting of the Board called and held for such purpose
(after giving the Participant reasonable notice specifying the nature
of the grounds for such termination and not less than thirty (30) days
to correct the acts or omissions complained of, if correctable, and
affording the Participant the opportunity, together with the
Participant's counsel, to be heard before the Board) finding that, in
the good faith opinion of the Board, the Participant was guilty of
conduct which constitutes Cause. An act or omission shall not be Cause
if such act or omission was directed by the Board or approved by the
Company's legal counsel.
2.6 "Change in Control" shall mean the occurrence of any of the
following events:
(a) Individuals who on the Effective Date constitute the
Board (the "Incumbent Directors") cease for any reason to constitute at
least a majority of the Board, provided that any person who becomes a
member of the Board subsequent to the Effective Date, whose election or
nomination for election was approved by a vote of at least two-thirds
of the Incumbent Directors then on the Board (either by a specific vote
or by approval of the proxy statement of the Company in which such
person is named as a nominee for membership on the Board, without
written objection to such nomination) shall be an Incumbent Director;
provided, however, that no individual initially elected or nominated as
a member of the Board as a result of an actual or threatened election
contest with respect to the Board of Directors or as a result of any
other actual or threatened solicitation of proxies or consents by or on
behalf of any person other than the Board shall be deemed to be an
Incumbent Director;
(b) Any "person" (as such term is defined in Section 3(a)(9)
of the Securities and Exchange Act of 1934, as amended, hereinafter the
"Exchange Act", and as used in Sections 13(d)(3) and 14(d)(2) of the
Exchange Act) is or becomes a "beneficial owner" as defined in Rule
13d-3 under the Exchange Act, directly or indirectly, of securities of
the Company representing 20% or more of the combined voting power of
the Company's then outstanding securities eligible to vote for the
election of the Board (the "Company Voting Securities"); provided,
however, that the event described in this definition shall not be
deemed to be a Change in Control by virtue of any of the following
acquisitions: (A) by the Company; (B) by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any Affiliate;
(C) by any underwriter temporarily holding securities pursuant to an
offering of such securities; (D) pursuant to a Non-Qualifying
Transaction (as defined in (c) below); or (E) a transaction (other than
one described in (c) below) in which Company Voting Securities are
acquired from the Company, if a majority of the Incumbent Directors
approves a resolution providing expressly that the acquisition pursuant
to this
<PAGE> 6
clause (E) does not constitute a Change in Control under this
definition. For purposes of this definition a "beneficial owner" of a
security of the Company includes any person, company, government (or
political subdivision, agency, or instrumentality of a government),
either alone or acting together in a partnership, limited partnership,
syndicate, or other group that, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise, that
has or shares the power to (A) vote or to direct the voting of
securities of the Company and/or the power to invest or to dispose or
to direct the disposition of securities of the Company, whether
directly or through a trust, proxy, power of attorney, pooling
arrangement or other contract or arrangement or (B) has the right to
acquire the beneficial ownership of a security of the Company within
sixty (60) days, including but not limited to the right to acquire such
through the exercise of any option.
(c) The Company consummates a merger, amalgamation,
consolidation, statutory share exchange or similar form of corporate
transaction involving the Company or any of its Affiliates that
requires the approval of the Company's shareholders, whether for such
transaction or the issuance of securities in the transaction (a
"Business Combination"), unless immediately following such Business
Combination:
(i) More than 80% of the total voting power of (A) the
corporation resulting from such Business Combination (the
"Surviving Corporation"), or (B) if applicable, the ultimate
parent corporation that directly or indirectly has beneficial
ownership of 100% of the voting securities eligible to elect
directors of the Surviving Corporation (the "Parent Corporation"),
is represented by Company Voting Securities that were outstanding
immediately prior to such Business Combination (or, if applicable,
is represented by shares into which such Company Voting Securities
were converted pursuant to such Business Combination), and such
voting power among the holders thereof is in substantially the
same proportion as the voting power of such Company Voting
Securities among the holders thereof immediately prior to the
Business Combination;
(ii) No person (other than any employee benefit plan (or
related trust) sponsored or maintained by the Surviving
Corporation or the Parent Corporation or any person which
beneficially owned, immediately prior to such Business
Combination, directly or indirectly, 20% or more of the Company
Voting Securities (a "Company 20% Shareholder")) would become the
beneficial owner, directly or indirectly, of 20% or more of the
total voting power of the outstanding voting securities eligible
to elect directors of the Parent Corporation (or, if there is no
Parent Corporation, the Surviving Corporation) and no Company 20%
Shareholder would increase its percentage of such total voting
power; and
(iii) At least a majority of the members of the board of
directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) following the consummation
of the Business Combination were Incumbent Directors at the time
of the Board's approval of the execution of the initial plan
providing for such Business Combination (any Business Combination
which satisfies all of the criteria specified in (i), (ii), and
(iii) above shall be deemed to be a "Non-Qualifying Transaction");
<PAGE> 7
(d) The Company consummates a plan of complete liquidation
or dissolution of the Company or a sale of all or substantially all of
the Company's assets other than where with respect to which,
immediately after such sale or other disposition:
(i) More than 80% of the combined voting power of the then
outstanding securities thereof entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Voting Securities immediately prior to such
sale or other disposition;
(ii) No Person (other than the Company, any employee
benefit plan (or related trust) sponsored or maintained by the
Company or such corporation (or any corporation controlled by the
Company) and any Person which beneficially owned, immediately
prior to such sale or other disposition, directly or indirectly,
20% or more of the Outstanding Company Voting Securities)
beneficially owns, directly or indirectly, 20% or more of the
combined voting power of the then outstanding securities thereof
entitled to vote generally in the election of directors; and
(iii) At least a majority of the members of the board of
directors thereof were members of the Incumbent Board at the time
of the execution of the initial Policy or action of the Board
providing for such sale or other disposition;
or
(e) The Company makes a distribution or a series of distributions
within a consecutive 24-month period (whether as a liquidation, a
substantial dividend, or otherwise) whereby the Company distributes to
shareholders cash or other property equal to at least 50% of the value
of the Company as of the date of the initial distribution.
Notwithstanding the foregoing, a Change in Control of the Company shall
not be deemed to occur solely because any person acquires beneficial
ownership of more than 20% of the Company Voting Securities as a result
of the acquisition of Company Voting Securities by the Company which
reduces the number of Company Voting Securities outstanding; provided,
that if after such an acquisition by the Company such person becomes
the beneficial owner of additional Company Voting Securities that
increases the percentage of outstanding Company Voting Securities
beneficially owned by such person, a Change in Control of the Company
shall then occur.
Section 2.6(e) shall not apply with respect to James G. Gilbertson.
2.7 "Company" means iNTELEFILM Corporation, a company which engages in
the television commercial production and related commercial services, and any
successor or assignee of all or substantially all of its business, or of all or
substantially all of its assets, whether such succession or assignment is direct
or indirect, by purchase, merger, consolidation, assignment, or otherwise and
does not effectuate a Change in Control.
2.8 "Date of Termination" shall mean (i) if the Participant's
employment is terminated by the Company for Cause, the date on which Notice of
Termination is given; or (ii) if the
<PAGE> 8
Participant's employment is terminated by the Company without Cause or by the
Participant for Good Reason, or in the case of Christopher T. Dahl for any other
reason during the period specified in Section 5.1, the date thirty (30) days
after the date on which a written Notice of Termination is given or, if no such
Notice of Termination is given, the date thirty (30) days after the date the
Participant ceases to render services. If the Participant is not an officer or
an employee of the Company and only a member of the Board of Directors, the
"Date of Termination" shall mean (i) if the Participant is removed from the
Board due to Cause, the date on which Notice of Termination is given; or (ii) if
the Participant ceases to be a member of the Board at the request of the Company
(but other than due to Cause) (including, without limitation, failure of the
Company to nominate such person for continued membership on the Board) or the
person resigns from the Board for Good Reason or for any other reason during the
period specified in Section 5.1, the date thirty (30) days after the date on
which a written Notice of Termination is given, or if no such Notice of
Termination is given, the date 30 days after the date the Participant ceases to
be a member of the Board.
2.9 "Disability" means a disability which results in benefits to the
Participant under any long-term disability arrangement of the Company or an
Affiliate, or if there is no such arrangement or the Participant is not a
participant therein, then it means the failure of the Participant to render and
perform the substantial services required of the Participant for a total of 180
days or more during any consecutive 12-month period, because of any physical or
mental incapacity or disability as determined by a physician or physicians
selected by the Company and reasonably acceptable to the Participant; provided
that, if within thirty (30) days after the Participant has received written
notice from the Company of a proposed Date of Termination due to a disability,
the Participant shall have returned to the full performance of the Participant's
duties and shall have presented to the Company a written certificate of the
Participant's good health prepared by a physician selected by the Company and
reasonably acceptable to the Participant, the disability shall be disregarded.
2.10 "Good Reason" shall mean the occurrence of any of the following
events during the Term, unless the event occurs with the Participant's express
prior written consent; unless the event is an isolated, insubstantial and
inadvertent action or failure to act which was not taken in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given by the
Participant; unless the event occurs in connection with the termination of the
Participant's employment or provision of services as a member of the Board for
Cause, Disability, Retirement or death; or unless the event occurs as a result
of the voluntary termination of employment or voluntary termination of service
as a member of the Board of the Participant and not in connection with the
occurrence of any of the following:
(a) the assignment to the Participant of any duties inconsistent
in any respect with the Participant's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities in effect immediately prior to the Term or any other
action by the Company which results in a diminution in such position,
authority, duties or responsibilities (including, without limitation,
the requirement of the Participant to report to any person or entity
other than the Board of Directors of the Company); or
(b) the Company's requiring the Participant to be based at any
office or location more than 25 miles from the location of such office
at the commencement of the Term, or the Company's requiring the
Participant to travel on Company business to a
<PAGE> 9
substantially greater extent than required immediately prior to the
commencement of the Term; or
(c) a reduction by the Company in the Participant's rate of
annual Base Salary as in effect immediately prior to the commencement
of the Term or the failure by the Company to provide adjustments in the
Participant's Base Salary which are comparable both as to frequency and
percentage adjustment to the adjustments of other Participants; or
(d) the failure of the Company to continue in effect the
Company's Welfare Benefits Plans, schemes, practices, policies and
programs in respect of benefits, perquisites and expense reimbursements
as in effect at the commencement of the Term, and if applicable,
failing to continue in effect the Participant's and the Participant's
family participation and coverage in the Company's benefits,
perquisites and expense reimbursements at a level substantially
equivalent in value to and on a basis consistent with the relative
levels of participation of other Participants or as in effect at the
commencement of the Term (whichever is greater); or
(e) the failure of the Company to obtain from a successor
(including a successor to a material portion of the business or assets
of the Company or an Affiliate) a satisfactory assumption in writing of
the Company's obligations under this Policy; or
(f) any failure to maintain reasonable and adequate
indemnification in respect of the Participant's services as an officer
or member of the Board.
For purposes of this Section, any good faith determination of
"Good Reason" made by the Participant shall be conclusive.
2.11 "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Policy relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Participant's employment or membership on the Board
under the provision so indicated.
2.12 "Participant" shall mean a person designated to participate by the
Company in accordance with the terms of the Policy.
2.13 "Policy" means the Company's Severance Policy, as herein set forth
and as may be amended from time to time.
2.14 "Retirement" means the date the Participant attains an age of
superannuation upon which the Company may, under all applicable laws, force the
Participant's termination of employment or services as a member of the Board due
to age.
2.15 "Welfare Benefits" means as to any Participant such benefits as
medical, hospitalization, prescription drug, dental, vision, life insurance,
accidental death, travel accident, disability and retiree health benefits as are
provided to the Participant by the Company or an Affiliate, or by any plan,
contract, or other arrangement to which the Company contributes on
<PAGE> 10
behalf of the Participant, including such material features of the plan,
contract, or other arrangement as the rate of Participant contributions,
co-payments, deductibles and the level of coverage, in effect on the date on
which the person most recently became a Participant in the plan.
In addition, certain other terms used herein have definitions given to
them in the first place in which they are used.
ARTICLE III
DURATION
3.1 Duration of the Policy. The Policy shall be and become effective
as of April 1, 1999 (the "Effective Date") and shall cease to be effective on
March 31, 2002 (such period to be known as the "Term"). On each anniversary of
the Effective Date, the Term shall be automatically extended, upon the same
terms and conditions, for an additional period of one (1) year unless at least
ninety (90) days prior to the anniversary of the Effective Date as of which the
Term would be extended, the Company shall give written notice to the
Participants of its intention not to extend the Term. If a Change in Control
occurs during the original or extended Term of the Policy, the Term shall not
end prior to the end of the second anniversary of the Change in Control,
notwithstanding any written notice given by the Company to the contrary.
Anything herein to the contrary notwithstanding, the payment obligation of the
Company or an Affiliate occurring during the Term shall be continued to the
extent that any obligation of the Company or an Affiliate remains unpaid (or
otherwise not fully discharged) as of the end of the Term.
ARTICLE IV
PARTICIPATION
4.1 Eligibility. Subject to the limitations herein, the Company has
selected and designated Christopher T. Dahl, James G. Gilbertson, and Richard W.
Perkins as eligible Participants. The selection of the previously named persons
as Participants for any Term shall not require the selection of any other person
as a Participant. In the event a person ceases to be a Participant for any
reason, the Company shall determine, in its sole discretion, whether such person
shall again, at any time, become a Participant.
4.2 Termination of Participation. A person shall cease to be a
Participant on the earliest of (a) the first date following the Date of
Termination the Participant receives all compensation and benefits provided to
the Participant hereunder; (b) any date mutually agreed to by the Participant
and the Company; or (c) the date on which the Policy terminates as provided
herein.
<PAGE> 11
ARTICLE V
SEVERANCE COMPENSATION
5.1 Termination by the Company without Cause, Termination by the
Participant for Good Reason, and Special Termination. Subject to Sections 3.1
and 7.1, if the Participant incurs a Date of Termination during the Term that is
initiated by the Company without Cause (and is not due to death, Retirement, or
Disability) but only with respect to Christopher T. Dahl or Richard W. Perkins
(and not James G. Gilbertson), or is initiated by the Participant for Good
Reason during the Term, or is initiated by the Participant without Good Reason
(and is not due to death, Retirement or Disability) but only if such Date of
Termination is within the 180-day period after a Change in Control as defined in
2.6(e), the Company shall pay the Participant, and the Participant shall be
entitled to receive, the following:
(a) Compensation. The Company shall pay to Participants
Christopher T. Dahl and Richard W. Perkins, as applicable, an amount
equal to five (5) times the Participant's Base Salary; and shall pay to
James G. Gilbertson an amount equal to two (2) times the Participant's
Base Salary, plus the aggregate of the following amounts:
(i) subject to any terms of any long-term incentive plan,
scheme, practice, policy or program which would provide for
greater compensation upon the Date of Termination, any and all
outstanding awards of compensation (including stock options) shall
be fully vested, nonforfeitable and exercisable as of the Date of
Termination, and any obligation (whether cash, stock or otherwise)
shall be paid or distributed immediately;
(ii) to the extent not previously described, all vested,
nonforfeitable amounts owing or accrued at the Date of Termination
under any and all other compensation, benefit, perquisite, or
expense reimbursement plans, schemes, practices, policies and
programs in which the Participant theretofore participated, under
the terms and conditions of the plans, schemes, practices,
policies and programs pursuant to which such compensation,
benefits, perquisite, or expense reimbursement were accrued.
Subject to Article IX, the aggregate amount of all payments to be
made under (a) shall be paid in a single sum on the Date of Termination
or as soon as administratively possible thereafter.
(b) Other Benefits. For the Benefit Period, or such longer period
as may be provided by the terms of the appropriate plan, scheme,
program, practice or policy, the Company shall continue Welfare
Benefits to the Participant and/or the Participant's family at least
equal to those which would have been provided to them in accordance
with the plans, schemes, programs, practices and policies as in effect
on the commencement of the Term if the Participant's employment had not
been terminated or, if more favorable to the Participant, as in effect
generally at any time thereafter with respect to other Participant
employees of the Company and its Affiliates and their families,
provided, however, that if the Participant is employed with another
company and is eligible to receive Welfare Benefits under another
company-provided plan, the
<PAGE> 12
Welfare Benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility. For
purposes of determining eligibility and benefit accrual (but not the
time of commencement of benefits) of the Participant for retiree
medical benefits pursuant to such plans, schemes, practices, programs
and policies, the Participant shall be considered to have remained
employed until the end of the Benefit Period and to have retired on the
last day of such period. The Participant's coverage and/or the
Participant's family's coverage for the Benefit Period shall not be
included in the calculation of the period of coverage to be provided
pursuant to any statutory continuation of benefits obligation and the
Participant's right to statutory continuation coverage shall commence
on the first day following the end of the Benefit Period. The benefits
provided hereunder shall either be provided on a non-taxable basis or
the Participant shall be entitled to an additional payment to indemnify
the Participant for any tax obligation with respect to such benefits
and the indemnification thereof. If such Welfare Benefit Plans,
schemes, practices, policies and programs do not allow the
Participant's continued participation, a cash payment equivalent on an
after-tax basis to the value of the additional benefits the Participant
and the Participant's family would have received under such benefit
plans, schemes, practices, policies and programs in which the
Participant was participating immediately prior to the Date of
Termination, with such benefits payable by the Company at the same
times and in the same manner as such benefits would have been received
by the Participant under such plans (it being understood that the value
of any insurance-provided benefits will be based on the premium cost to
the Participant, which shall not exceed the highest risk premium
charged by a carrier having an investment grade or better credit
rating);
(c) Notice of Termination. Any purported termination of the
Participant's employment or membership on the Board (other than by
reason of death, Retirement, Disability or Cause) shall be communicated
by a written "Notice of Termination" from one party hereto to the other
party hereto.
(d) Limitation. A Date of Termination for Good Reason shall be
permitted hereunder only if the Participant provides the Notice of
Termination not later than six (6) months after the date the
Participant first knew or should have known of the act or omission to
act giving rise to the Date of Termination for Good Reason. The
six-month period shall be tolled during any permitted period of
correction or administrative procedure.
5.2 Other Termination. Upon the Participant's Date of Termination
during the Term which is initiated for any reason other than a reason specified
in Section 5.1, and subject to any other plan, scheme, practice, policy or
program, the Company shall pay the Participant, and the Participant shall be
entitled to receive, the following:
(a) Any accrued, unpaid portion of Base Salary through the Date
of Termination; and
(b) All vested, nonforfeitable amounts owing and accrued at the
Date of Termination under any and all compensation, benefit, perquisite
and expense plans,
<PAGE> 13
schemes, practices, policies and programs in which the Participant
theretofore participated under the terms and conditions of the plans,
schemes, practices, policies and programs pursuant to which such
compensation, benefits, perquisites and expenses were accrued.
Amounts which are immediately payable above will be paid as promptly as
practicable after the Participant's Date of Termination.
5.3 Security. At any time but not later than thirty (30) days prior to
a Change in Control, the Board of Directors may require that the Company
establish an irrevocable, grantor trust in a form reasonably acceptable to the
Company, and provide to such trust an irrevocable letter of credit or transfer
to the trust marketable securities with a fair market value equal to 110% of the
present value of all amounts that would be paid to all Participants or payable
on behalf of all Participants and/or their family members assuming all
Participants incurred a Date of Termination under Section 5.1 upon commencement
of the Term. Each January 1 thereafter, until all potential obligations of the
Policy are fully satisfied, discharged and paid, the Company shall increase the
amount of the letter of credit or contribute cash or marketable securities equal
to the net increase in value of the obligation under Section 5.1. The Company or
an Affiliate shall remain expressly, absolutely and unconditionally liable for
all compensation, benefits or other things of value under this Policy, and
failure of the trust for any reason to fully discharge the obligations shall not
relieve the Company or any Affiliate of its obligations.
ARTICLE VI
U.S. EXCISE TAX INDEMNIFICATION
6.1 Indemnification. Anything in this Policy to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company or an Affiliate to or for the benefit of the
Participant (whether paid or payable or distributed or distributable pursuant to
the terms of this Policy or otherwise, but determined without regard to any
additional payments required under this Article VI) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the United States Internal
Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are
incurred by the Participant with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then the Participant shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Participant of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income and employment taxes (and any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the
Participant retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
6.2 Determination of Amount. Subject to the provisions of Section 6.3,
all determinations required to be made under this Article VI, including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination, shall be
made by the Company's public accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and
<PAGE> 14
the Participant within fifteen (15) business days of the receipt of notice from
the Participant that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the change
in control transaction resulting in the tax recognition, the Participant shall
appoint another nationally recognized public accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the "Accounting Firm" hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. The Company, as determined pursuant
to this Article VI, shall pay any Gross-Up Payment, to the Participant within
five (5) days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Participant, it
shall furnish the Participant with a written opinion that failure to report the
Excise Tax on the Participant's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the Participant. As
a result of the uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts its
remedies pursuant to Section 6.3 and the Participant thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Participant.
6.3 Procedural Aspects. The Participant shall notify the Company in
writing of any claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten (10) business days
after the Participant is informed in writing of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid. The Participant shall not pay such claim prior to the
expiration of the 30-day period following the date on which the Participant
gives such notice to the Company (or such shorter period ending on the date that
any payment of taxes with respect to such claim is due). If the Company notifies
the Participant in writing prior to the expiration of such period that it
desires to contest such claim, the Participant shall:
(a) give the Company any information reasonably requested by the
Company relating to such claim;
(b) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company;
(c) cooperate with the Company in good faith in order effectively
to contest such claim; and
(d) permit the Company to participate in any proceedings relating
to such claim.
Provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall
<PAGE> 15
indemnify and hold the Participant harmless, on an after-tax basis, for any
Excise Tax or other tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and expenses.
Without limitation on the foregoing provisions of this Section 6.3(c), the
Company shall control all proceedings taken in connection with such contest and,
at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Participant to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Participant agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine; provided further, that if
the Company directs the Participant to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Participant on an
interest-free basis and shall indemnify and hold the Participant harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and provided
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Participant with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Participant shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
6.4 Refunds. If, after the receipt by the Participant of an amount
advanced by the Company pursuant to Section 6.3, the Participant becomes
entitled to receive, and receives, any refund with respect to such claim, the
Participant shall (subject to the Company's complying with the requirements of
Section 6.3) promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable thereto). If,
after the receipt by the Participant of an amount advanced by the Company
pursuant to Section 6.3, a determination is made that the Participant shall not
be entitled to any refund with respect to such claim and the Company does not
notify the Participant in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
ARTICLE VII
AMENDMENT
7.1 Amendments. The Board of Directors may modify, waive or discharge
the Policy, but only if such modification, waiver or discharge is agreed to in
writing by the Participants. The Board of Directors may terminate the Policy by
terminating the Term in accordance with Section 3.1.
<PAGE> 16
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. The Company shall indemnify and hold harmless
each officer and each employee (the "Indemnified Person") to whom is delegated
duties, responsibilities and authority with respect to the Policy against all
claims, liabilities, fines and penalties, and against all expenses reasonably
incurred by or imposed upon such Indemnified Person, that arise in connection
with the operation and administration of the Policy to the extent lawfully
allowable and to the extent that such claims, liabilities, fines, penalties or
expenses are not otherwise paid for by liability insurance, including but not
limited to reasonable attorneys' fees.
8.2 Limitations. No obligation under this Article VIII shall arise if
the action or failure to act for which indemnification is sought resulted from
gross negligence or bad faith on the part of the Indemnified Person. Promptly
after an Indemnified Person receives notice of the commencement of any action,
proceeding or investigation, such Indemnified Person will notify the Company in
writing of the commencement of such action, proceeding or investigation. The
Company shall have the right to participate in and, to the extent the Company so
elects, to assume the defense of such claim with counsel selected by the Company
and reasonably satisfactory to the Indemnified Person. The assumption of the
defense of any such claim by the Company shall not limit the right of an
Indemnified Person to participate, at his or her own expense, in the defense of
such claim with counsel selected by such Indemnified Person. The failure to
notify the Company promptly of the commencement of any such action, proceeding
or investigation if prejudicial to its ability to defend such action, proceeding
or investigation shall relieve the Company of any liability to the Indemnified
Person under this Section with respect to the settlement or compromise of any
action, proceeding, or investigation entered into without its prior written
consent.
ARTICLE IX
CLAIMS PROCEDURE
9.1 Claim for Payment. Unless otherwise agreed between the Company and
the Participant, a written Notice of Termination shall constitute a claim for
payment. If there is no Notice of Termination or the Participant and the Company
agree such notice is not a claim, then the Participant shall submit a written
claim for payment to the Company on a form approved by the Company. The claim
shall state the basis for payment and all other facts deemed necessary to
determine the right to payment. When any claim for benefits is submitted, the
Company shall approve or reject the claim within five business days after its
receipt of the claim. Upon approval or rejection of the claim, the Company shall
notify the Participant of its determination and, if the claim is approved, the
Company will pay or commence payment pursuant to the Policy within five business
days after the claim is approved and arrange for the provision of other benefits
and outplacement services. The Company shall establish and maintain a procedure
by which a Participant may appeal any denial of a claim for benefits. Such
procedure shall be set forth in the rules of the Company and shall be provided
to any Participant whose initial claim is denied and shall be available to all
Participants upon request.
<PAGE> 17
ARTICLE X
MISCELLANEOUS
10.1 Assumption of Policy. The Company will require any successor (by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
reasonably satisfactory to the Participant, to expressly assume and agree to
perform this Policy in the same manner and to the same extent that Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Policy and shall entitle the Participant to
compensation from the Company in the same amount and on the same terms as the
Participant would be entitled hereunder if the Participant incurred a Date of
Termination for Good Reason as contemplated by Article V, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Policy, the term "Company" shall mean the Company as herein previously defined
and any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Policy by operation of law, written agreement, or
otherwise.
10.2 Successors and Assigns. This Policy shall inure to the benefit of
and be enforceable by the Participant and the Participant's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees, and the Policy shall be binding upon and inure to the
benefit of the Company and its permitted successors and assigns as provided in
Section 10.1. This Policy is not a personal contract and the rights and
interests of the Participant hereunder may not be sold, transferred, assigned,
pledged, encumbered, margined, gifted, conveyed, alienated, or hypothecated by
the Participant, except as otherwise expressly permitted by the provisions of
this Policy.
10.3 Arbitration. Any dispute or controversy arising under or in
connection with this Policy (except in connection with any request for
injunctive relief) shall be resolved by binding arbitration. The arbitration
shall be held in the City of Minneapolis and except to the extent inconsistent
with this Policy, shall be conducted in accordance with the principal rules of
arbitration applied in the previously mentioned location for the arbitration of
commercial disputes then in effect at the time of the arbitration, and otherwise
in accordance with principles which would be applied by a court of law or
equity. The arbitrator(s) shall apply Minnesota law. The arbitrator shall be
acceptable to both Company and the Participant. If the parties cannot agree on
the acceptable arbitration rules or arbitrator, the dispute shall be heard by a
panel of three arbitrators, one appointed by each of the parties and the third
appointed by the other two arbitrators. Any expense of arbitration shall be
borne by the party who incurs such expense and joint expenses shall be shared
equally. The Company and the Participant hereby waive, to the fullest extent
permitted by applicable law, any objection, which either may now, or hereafter
have to such jurisdiction and any defense of inconvenient forum. The Company and
the Participant hereby agree that a judgment upon an award rendered by the
arbitrators may be enforced in other jurisdictions by suit on the judgment or in
any other manner provided by law. Notwithstanding any provision in this Section
10.3, the Participant shall be entitled to seek specific performance of the
Participant's right to be paid during the pendency of any dispute or controversy
arising under or in connection with this Policy.
<PAGE> 18
10.4 Governing Law. This Policy is governed by and is to be construed,
administered, and enforced in accordance with the laws of the State of
Minnesota, without regard to Minnesota's conflicts of law principles, except in
so far as federal laws and regulations may be applicable. If under the governing
law, any portion of this Policy is at any time deemed to be in conflict with any
applicable statute, rule, regulation, ordinance, or other principle of law, such
portion shall be deemed to be modified or altered to the extent necessary to
conform thereto or, if that is not possible, to be omitted from this Policy. The
invalidity of any such portion shall not affect the enforceability, or the
validity of the remaining portion hereof.
10.5 Offsets, Withholding. Subject to Article V, the amounts required
to be paid or benefits to be provided by the Company to the Participant pursuant
to this Policy shall not be subject to offset. The foregoing and other
provisions of this Policy notwithstanding, all payments to be made to the
Participant under this Policy, will be subject to required withholding taxes and
other required deductions, and the Participant shall provide the Company such
information as the Company reasonably requests so that the Company may implement
and verify the operation of this Section 10.5.
10.6 Non-alienation of Payment. Severance benefits payable under the
Policy shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, or encumbrance, whether voluntary or involuntary,
including any such liability for alimony or other payments for the support of a
spouse, former spouse, or children of the Participant, or for any other relative
of a Participant prior to actually being received by the person entitled to the
benefit under the terms of the Policy, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge, garnish, execute or levy upon,
or otherwise dispose of any right to benefits payable hereunder, shall be void.
The Company shall not in any manner be liable for, or subject to the debts,
contracts, liabilities, engagements or torts of any person entitled to severance
benefits under the Policy.
10.7 Facility of Payment. If a Participant is declared as incompetent
or is a minor and if a conservator, guardian or other person legally charged
with the Participant's care has been appointed, any benefits to which such
Participant is entitled shall be payable to such conservator, guardian or other
person legally charged with the Participant's care. The decision of the Company
in such matters shall be final, binding and conclusive upon the Company, each
Participant, and any other interested or concerned person or party. Neither the
Company nor an Affiliate shall be under any duty to see to the proper
application of such payments. All benefits under the Policy shall be paid to the
person entitled thereto either by a check which shall be endorsed personally by
the person or, if the person makes a written request on a form approved by the
Company, by a deposit in the personal savings account or checking account of the
person; provided that if any such deposit shall be made in error or in excess of
the amount due, the person shall be liable to return any such payment or
excessive portion of any payment.
10.8 Effect of Return of Benefit Checks. Each person entitled to
benefits under this Policy shall furnish the Company with the address to which
his or her benefit checks shall be mailed. If any benefit check mailed by
regular U.S. mail to the last address appearing on the Company's records is
returned because the addressee is not found at that address, the mailing of
benefit checks will stop. Thereafter, if the Company receives written notice of
the proper address of the person entitled to receive such benefit checks and is
furnished with evidence satisfactory to the Company that such person is living,
all amounts then due shall be forwarded to such person.
<PAGE> 19
10.9 Non-exclusivity of Rights. Nothing in this Policy shall prevent or
limit the Participant's continuing or future participation in any Policy,
scheme, practice, policy or program or compensation, benefits, perquisites or
expense reimbursements Policy, scheme, policy, practice or program provided by
the Company or any of its Affiliates and for which the Participant and/or the
Participant's family may have under any other Plans with the Company or any of
its Affiliates. Amounts which are vested benefits or which the Participant
and/or the Participant's family is otherwise entitled to receive under any
Policy, scheme, policy, practice, program of the Company or any of its
Affiliates at or subsequent to the Date of Termination shall be payable in
accordance with such Policy, scheme, policy, practice or program.
10.10 Severability. In the event that any one or more of the provisions
of this Policy shall be or become invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not be affected thereby.
10.11 Notices. Any notice or other communication required or permitted
to be delivered under this Policy shall be in writing, delivered personally, by
courier service or by certified or registered mail, first-class postage prepaid
and return receipt requested, deemed to have been received on the date of
delivery or on the third business day after the mailing thereof, and addressed
as follows (or to such other address as the party entitled to notice shall
hereafter designate in accordance with the terms hereof ):
(a) if to the Company, to the attention of the Chairman of its
Board of Directors at its corporate headquarters; and
(b) if to the Participant, to the Participant at the
Participant's address.
10.12 Reimbursement of Expenses in Enforcing Rights. All reasonable
costs and expenses (including, without limitation, fees and disbursements of
actuaries, accountants and counsels) incurred by the Participant in seeking to
enforce rights pursuant to this Policy shall be paid on behalf of or reimbursed
to the Participant promptly by the Company, whether or not the Participant is
successful in asserting such rights. If there shall be any dispute between the
Company and the Participant, then unless and until the dispute is decided, the
Company shall pay or provide, as applicable, all reasonably undisputed amounts
or benefits as are then payable to the Participant or the Participant's
beneficiary pursuant to this Policy.
10.13 Interest on Unpaid Amounts. Any amounts that have become payable
pursuant to the terms of this Policy or any decision by arbitrators or any
judgment by a court of law, but which are not timely paid shall bear interest,
payable by the Company, at the lower of (a) the highest lawful rate or (b) the
prime rate in effect at the time such payment first becomes payable, as quoted
by The Wall Street Journal.
10.14 No Contract of Employment. The Policy is entirely voluntary on
the part of the Company and is not intended to create, nor shall it be construed
as creating, a contract of employment between the Company or its successors and
any employee or as an obligation to nominate a person as a member of the Board,
nor shall it be construed as a term of employment with respect to binding effect
after a Change in Control.
<PAGE> 20
10.15 Beneficiaries. The Participant shall be entitled to designate
(and change, to the extent permitted under applicable law) a beneficiary or
beneficiaries to receive any compensation or benefits payable hereunder
following the Participant's death. If the Participant should die while any
amount would still be payable to the Participant under the Policy had the
Participant continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Policy to the
Participant's devises, legates or other designee or, if there is no such
designee, to the Participant's estate.
10.16 No General Waivers. The failure of any party at any time to
require performance by any other party of any provision hereof or to resort to
any remedy provided herein or at law or in equity shall in no way affect the
right of such party to require such performance or to resort to such remedy at
any time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
10.17 No Obligation to Mitigate. The Participant shall not be required
to seek other employment or otherwise to mitigate the Participant's damages on
or after the Participant's Date of Termination, but the provisions regarding
offset and the reduction of certain benefits as expressly provided herein shall
apply.
10.18 Authority. The Company represents and warrants that this Policy
has been authorized by all necessary corporate action of the Company and is a
valid and binding Policy of the Company enforceable against the Company in
accordance with its terms. The Participant represents and warrants that the
Participant is not a party to any Policy or instrument, which would prevent the
Participant from entering into or performing the Participant's duties in any way
under this Policy.
10.19 Counterparts. This Policy may be executed in counterparts, each
of which shall be deemed an original and all of which together shall constitute
one and the same instrument.
10.20 Headings and Gender. The section and other headings contained in
this Policy are for the convenience of the parties only and are not intended to
be a part hereof or to affect the meaning or interpretation hereof. Except where
the context indicates to the contrary, when used herein, masculine terms shall
be deemed to include the feminine, singular the plural, and plural the singular.
IN WITNESS WHEREOF, Company has duly executed this Policy by its authorized
representatives effective as of the date first above written.
iNTELEFILM CORPORATION
By:/s/ Jill J. Theis
Name: Jill J. Theis
Title: General Counsel/Secretary
<PAGE> 1
EXHIBIT 10.45
MEMORANDUM OF UNDERSTANDING
This Agreement dated this 22nd day of November, 1999 by and between AT&T, a
Corporation ("AT&T"), iNTELEFILM Corporation ("iNTELEFILM"),
and Excalibur Technologies Corporation ("Excalibur").
RECITALS
WHEREAS, iNTELEFILM has developed a unique opportunity to enhance the
video production service process of global advertising agencies and through
capitalizing on its expertise in video commercial production and its
relationship with advertising agencies, iNTELEFILM intends to act as the
Application Service Provider (ASP) of the InteleSource video master retrieval
service designed for advertising agencies.
WHEREAS, AT&T is desirous of providing the web hosting infrastructure
of the InteleSource service under the terms of a Dedicated Hosting Services
co-location agreement, to enable the development of this internet based service.
WHEREAS, Excalibur has designed and developed a proprietary software
product ("Screening Room") that provides end users with the ability to index and
archive video and has licensed Screening Room to iNTELEFILM via the attached
Software License Agreement (attachment B). Excalibur is desirous of introducing
the Screening Room to the advertising agency community via its co-marketing
agreement with AT&T and via the proprietary product called InteleSource.
WHEREAS, all parties are desirous of entering into this memorandum of
understanding to define each parties role in developing and implementing such
services;
NOW, THEREFORE, in consideration of $1.00 and other good and valuable
consideration, the receipt and sufficiency of which is hereby expressly
acknowledged, the parties hereby agree as follows:
1. AT&T shall provide the web hosting infrastructure
which shall include the following: (a) conditioned
rack space and power; (b) bandwidth: AT&T will
provide this service as outlined in attachment A.
2. Excalibur will provide services and technical support
as described in paragraph 9 of their terms and
conditions (attachment "B"). Excalibur will refrain
from marketing "Screening Room" or related products
to advertising agencies for six months from the date
of the delivery of the InteleSource product. In this
same period, iNTELEFILM will use best efforts to
secure no less than 5 clients from top 100
advertising agencies as ranked in the 1999 edition of
Adweek's "Redbook".
<PAGE> 2
3. iNTELEFILM shall provide its expertise in video
commercial production and its relationship with
advertising agencies in order to sell the
InteleSource service. iNTELEFILM will collect all
revenue related to the iNTELEFILM service and remit
to AT&T and Excalibur the costs as outlined in
attachment A & B depending upon the service required
in those contracts.
4. Collectively, the parties agree that iNTELEFILM will
operate as a value added service provider, marketing
an end to end digital video encoding, archiving,
retrieval solution as well as the physical storage of
video masters. The product will be based on
Excalibur/DVL technologies and will be housed in the
AT&T infrastructure as outlined in attachment "B".
5. Confidential Information. The parties agree to keep
all information received from the other party
confidential and will not disclose any confidential
information now or hereafter received or obtained
from each other or its representatives to any third
party, except as required by applicable law or legal
process, without prior written consent of the party
whose confidential information may be disclosed to
such third parties who need to know information for
the purpose of the Memorandum of Understanding and
who agree to keep such information confidential.
Neither party will make any commercial use, in whole
or in part, of any confidential information.
6. Parties shall not issue or approve any public
statement concerning this Memorandum of Understanding
without the prior written approval of the other party
as to its contents and its release unless such
disclosure is required by law.
7. In the event a conflict arises between the terms of
this Agreement and the Software License Agreement
between iNTELEFILM and Excalibur dated
, the terms and conditions of the
latter shall prevail.
IN WITNESS WHEREOF, the parties have executed this Memorandum
of Understanding as of the date and year first written above.
AT&T iNTELEFILM
By: /s/ Andrew Cravero By: /s/ James G. Gilbertson
Its: General Manager Its: Chief Operating Officer
Excalibur
By: /s/ Dan C. Stroman
Its: Director of Contract
<PAGE> 1
EXHIBIT 21.1
AS OF DECEMBER 31, 1999, THE SUBSIDIARIES OF THE COMPANY WERE AS FOLLOWS:
<TABLE>
<CAPTION>
Name State of Incorporation
- ------------------------------------------------------- -------------------------------------------------------
<S> <C>
Children's Radio of Los Angeles, Inc. Minnesota
Children's Satellite Network, Inc. Minnesota
Children's Radio of New York, Inc. New Jersey
Children's Radio of Minneapolis, Inc. Minnesota
Children's Radio of Golden Valley, Inc. Minnesota
Children's Radio of Dallas, Inc. Minnesota
Children's Radio of Houston, Inc. Minnesota
Children's Radio of Milwaukee, Inc. Minnesota
Children's Radio of Denver, Inc. Minnesota
Children's Radio of Detroit, Inc. Minnesota
Children's Radio of Philadelphia, Inc. Minnesota
Children's Radio of Chicago, Inc. Minnesota
Children's Radio of Phoenix, Inc. Minnesota
Children's Radio of Tulsa, Inc. Minnesota
KAHZ-AM, Inc. Minnesota
KCNW-AM, Inc. Minnesota
KIDR-AM, Inc. Minnesota
KKYD-AM, Inc. Minnesota
KMUS-AM, Inc. Minnesota
KPLS-AM, Inc. Minnesota
KTEK-AM, Inc. Minnesota
KYCR-AM, Inc. Minnesota
WAUR-AM, Inc. Minnesota
WCAR-AM, Inc. Minnesota
WJDM-AM, Inc. Minnesota
WPWA-AM, Inc. Minnesota
WWTC-AM, Inc. Minnesota
WZER-AM, Inc. Minnesota
Populuxe Pictures, Inc. Minnesota
Buffalo Rome Films, Inc. Minnesota
Chelsea Acquisition, Inc. Minnesota
Chelsea Pictures, Inc. Massachusetts
Curious Pictures Corporation New York
Furious Pictures Corporation New York
Delirious Pictures Corporation New York
Harmony Holdings, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-62402) pertaining to the 1991 Incentive Stock
Option Plan, Stock Grants and Non-Qualified Stock Option Agreements, the
Registration Statement on Form S-8 (No. 33-93546) pertaining to the 1994 Stock
Option Plan, 1994 Director Stock Option Plan and the Written Compensation
Agreement with R. David Ridgeway, the Registration Statement on Form S-8 (No.
333-21699) pertaining to the 1994 Stock Option Plan, the Registration Statement
on Form s-* (No. 333-21701) pertaining to the 1996 Employee Stock Purchase Plan
and Non-Qualified Stock Option Agreements, the Registration Statement on Form
S-3 (No. 333-06865) pertaining to the registration of 1,614,802 shares of common
stock, the Registration Statement on Form S-3 (No. 333-14483) pertaining to the
registration of 1,125,580 shares of common stock, the Registration Statement on
Form S-3 (No. 333-21117) pertaining to the registration of 493,895 shares of
common stock, the Registration Statement on Form S-3 (No. 333-28315) pertaining
to the registration of 318,607 shares of common stock, the Registration
Statement on Form S-4 (No. 333-18575) pertaining to the registration of
5,000,000 shares of common stock and $5,000,000 of debt securities, the
Registration Statement on Form S-3 (No. 333-53327) pertaining to the
registration of 421,528 shares of common stock, the Registration Statement on
Form S-3 (No. 333-60637) pertaining to the registration of 1,580,500 shares of
common stock, the Registration Statement on Form S-3 (No. 333-67381) pertaining
to the registration of 150,000 shares of common stock, the Registration
Statement on Form S-3 (No. 333-86867) pertaining to the registration of 425,000
shares of common stock, of INTELEFILM Corporation of our report dated February
8, 2000, except for notes 8 and 10 dated March 17, 2000 with respect to the
consolidated financial statements included in the Annual Reports (Forms 10-KSB)
for the years ended December 31, 1999 and December 31, 1998.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Milwaukee, Wisconsin
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,986,385
<SECURITIES> 0
<RECEIVABLES> 8,965,467
<ALLOWANCES> (339,216)
<INVENTORY> 0
<CURRENT-ASSETS> 27,191,073
<PP&E> 5,292,703
<DEPRECIATION> (2,335,248)
<TOTAL-ASSETS> 37,617,852
<CURRENT-LIABILITIES> 17,327,875
<BONDS> 871,818
0
0
<COMMON> 125,772
<OTHER-SE> 19,344,873
<TOTAL-LIABILITY-AND-EQUITY> 37,617,852
<SALES> 67,342,653
<TOTAL-REVENUES> 67,342,653
<CGS> 56,488,737
<TOTAL-COSTS> 66,301,597
<OTHER-EXPENSES> 7,415,769
<LOSS-PROVISION> (339,216)
<INTEREST-EXPENSE> 1,148,605
<INCOME-PRETAX> 8,484,243
<INCOME-TAX> 1,101,892
<INCOME-CONTINUING> 7,382,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,339,577
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.14
</TABLE>
