U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For Quarterly period ended March 31, 2000 or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Transition period from _________ to _________
Commission File No. 0-21534
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iNTELEFILM Corporation
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-1663712
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5501 Excelsior Blvd., Minneapolis, MN 55416
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(Address of principal executive office, including zip code)
(612) 925-8840
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(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
As of May 10, 2000, there were outstanding 6,418,866 shares of common
stock, $.02 par value, of the registrant.
<PAGE>
INDEX
iNTELEFILM CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- March 31, 2000 and December 31, 1999.
Consolidated Statements of Operations -- Three months ended March 31,
2000 and 1999.
Consolidated Statements of Cash Flows -- Three months ended March 31,
2000 and 1999.
Condensed Notes to Consolidated Financial Statements -- March 31, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
<PAGE>
iNTELEFILM Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited) (audited)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,934,634 $ 15,986,385
Accounts receivable 5,725,994 8,965,467
Allowance for doubtful accounts (167,010) (339,216)
Accounts receivable - affiliates 433,074 373,239
Other accounts receivable 205,786 642,076
Prepaid expenses 621,255 1,563,122
-------------- --------------
Total current assets 19,753,733 27,191,073
Property and equipment, net 3,025,699 2,957,455
Goodwill, net 6,475,112 6,730,446
Other Assets 840,654 738,878
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Total assets $ 30,095,198 $ 37,617,852
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,280,317 $ 4,010,891
Accrued income taxes 367,777 1,032,520
Deferred revenue 1,654,901 2,392,785
Other accrued expenses 2,822,854 4,650,835
Line of credit -- 3,548,911
Short-term debt 1,500,000 1,500,000
Long-term debt - current portion 322,361 191,933
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Total current liabilities 10,948,210 17,327,875
Long-term debt, less current maturities 654,283 679,885
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Total liabilities 11,602,493 18,007,760
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Minority interest 248,226 139,447
Shareholders' equity
Common stock 129,686 125,772
Authorized shares - 50,000,000
Issued & outstanding shares - voting: 6,229,825
March 31, 2000 and 6,099,577 - December 31, 1999
Issued and outstanding shares - nonvoting:
189,041 - March 31, 2000 and December 31, 1999
Additional paid-in capital 45,896,904 45,625,300
Accumulated deficit (27,472,143) (25,952,927)
Stock subscriptions receivable (309,968) (327,500)
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Total Shareholders' Equity 18,244,479 19,470,645
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Total Liabilities & Shareholders' Equity $ 30,095,198 $ 37,617,852
============== ==============
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
iNTELEFILM Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------------------------------
<S> <C> <C>
Revenues:
Production contract revenues $ 21,739,591 $ 1,144,300
Broadcast related revenues -- 86,902
---------------------------------
Total revenues 21,739,591 1,231,202
Costs and expenses:
Cost of production 18,497,237 965,464
Selling 813,714 36,943
General and administrative (exclusive of items shown below) 2,238,332 263,081
Broadcast related expenses -- 180,315
Stock option compensation 90,352 --
Corporate 1,161,313 540,095
Depreciation and amortization 516,251 102,825
---------------------------------
Loss from operations (1,577,608) (857,521)
Gain/(loss) on sale of radio stations -- 16,545,507
Equity loss in Harmony -- (1,930,942)
Interest income net of interest (expense) 62,941 (502,806)
---------------------------------
Net income (loss) before income taxes (1,514,667) 13,254,238
Income tax provision (4,549) (3,100,000)
---------------------------------
Net income (loss) $ (1,519,216) $ 10,154,238
=================================
Basic and diluted net income (loss) per share $ (0.24) $ 1.56
=================================
Weighted average number of shares outstanding 6,336,000 6,492,000
=================================
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
iNTELEFILM Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---------------------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (1,519,216) $ 10,154,238
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Provision for doubtful accounts and director advances 548,558 (167)
Depreciation & amortization 516,251 102,825
Gain on sale of radio stations -- (16,545,507)
Stock option compensation 90,352 --
Amortization and write-off of deferred debt issue costs -- 742,737
Equity loss in Harmony -- 1,930,942
Non-cash interest payment related to sale of stations -- 92,008
Decrease (increase) in:
Accounts receivable 3,239,473 (48,862)
Other receivables (344,309) (264,592)
Prepaid expenses 941,867 (193,780)
Increase (decrease) in:
Accounts payable 269,426 (1,934,812)
Deferred income (737,884) --
Other accrued expenses (2,492,724) 2,373,522
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Net cash provided by (used in) operating activities 511,794 (3,591,448)
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Investing activities:
Sale/purchase of property & equipment (282,286) (74,564)
Net investment in & notes receivable from Harmony -- (2,440,137)
Other capital expendiures (148,651) --
Proceeds from sale of radio stations -- 14,034,415
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Net cash provided by (used in) investing activities (430,937) 11,519,714
-------------- --------------
Financing activities:
Payment of line of credit (3,548,911) --
Payment of debt (86,627) (33,211)
Proceeds from debt financings 191,453 --
Redemption of convertible preferred stock -- (2,450,002)
Repurchase of common stock -- (11,505)
Proceeds from issuance of common stock 311,477 --
Proceeds from stock subscriptions receivable -- 21,500
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Net cash used in financing activities (3,132,608) (2,473,218)
-------------- --------------
Increase (decrease) in cash and cash equivalents (3,051,751) 5,455,048
Cash and cash equivalents at beginning of period 15,986,385 253,905
-------------- --------------
Cash and cash equivalents at end of period $ 12,934,634 $ 5,708,953
============== ==============
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
<PAGE>
iNTELEFILM Corporation
Condensed Notes to Consolidated Financial Statements (unaudited)
March 31, 2000
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals with the exception of the adjustments discussed in
Note 2) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 2000, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-KSB for the
year ended December 31, 1999.
Through the additional purchase of Harmony Holdings, Inc. ("Harmony")
common stock in April 1999, iNTELEFILM ("the Company") acquired a majority
interest in Harmony which allowed the Company to consolidate Harmony, for
financial statement purposes, beginning April 1, 1999, rather than accounting
for the investment under the equity method as it had for all previous periods.
Note 2 Significant Transactions during 2000
The following significant transactions occurred during 2000 and are
considered non-recurring:
A. In January 2000, the Company formed webADTV.com, Inc. ("webADTV") under
the laws of the state of Minnesota. The Company is the principal
shareholder in webADTV. webADTV intends to offer an online digital
suite of tools designed to web-enable all aspects of the global
advertising process from conception of the media campaign, through
production, placement and fulfillment. By providing a series of
productivity features and through a wide array of e-commerce solutions
within webADTV's tools, specifically designed for transactions by the
advertising community, webADTV will enhance and streamline the business
processes for advertising agencies and their clients. Initially,
iNTELESOURCE will be the core of webADTV. iNTELESOURCE provides
agencies and production companies the opportunity to digitize, archive
and retrieve all television commercials produced by their firms.
B. In February 2000, webADTV adopted the 2000 Incentive Stock Option Plan
and the 2000 Non-Qualified Stock Option Plan whereby 5,000,000 shares
of the subsidiaries common stock have been reserved under each plan.
The options can be either incentive stock options or non-statutory
options as indicated by the plan name and are generally valued at the
fair market value of the stock on the date of grant. The plans allow
various vesting options and the ability for the employee to immediately
exercise the options for consideration of cash or a subscription
receivable. The subsidiary is able to repurchase stock issued on
<PAGE>
immediate exercises at the exercise price if certain service periods
are not met by the employee. As Of May 10, 2000, approximately 3.3
million options have been granted under the plans of which
approximately 2.8 million options have been exercised. Stock
subscription receivable related to these exercises aggregates $54,400.
If all options were exercised, the Company's ownership in webADTV would
be diluted to 86%.
C. In March 2000, the Company proposed to commence an exchange tender
offer to the shareholders of Harmony to acquire all of the outstanding
shares of Harmony's common stock in exchange for shares of the
Company's common stock. The Company proposes to offer one share of its
common stock for every 13.75 shares of Harmony common stock. If the
Company is successful in its tender offer, Harmony will become a wholly
owned subsidiary of the Company.
D. On March 23, 2000, the Company called its notes payable due from
Harmony. As a result of Harmony's inability to repay the notes within
the 30-day demand period, on May 1, 2000, the Company granted Harmony a
forbearance for an indeterminate amount of time to allow the
independent directors of Harmony to further consider and propose some
cure alternatives.
E. During the quarter ended March 31, 2000, the Company recorded a
valuation allowance associated with commercial director advances in
excess of earnings totaling $624,000, of which $461,000 relates to
advances paid in 1999. Such advances are regularly paid to established
commercial directors on a monthly basis and are offset against the
actual earnings from commercial directorial services. The Company
capitalizes these monthly payments and recognizes them as an expense in
the period that they are offset against a commercial director's actual
earnings. Capitalized amounts were evaluated for impairment based on
anticipated future commercial project awards for individual commercial
directors and an allowance was established for capitalized amounts
believed to be impaired. The valuation allowance was primarily
necessitated by changes in the workflow and contractual relationships
of the majority of The End's commercial directors after the resignation
of two principal officers of The End.
F. On May 1, 2000, members of the Screen Actors Guild began a strike
against the advertising agencies that represent the Company's customer
base. This strike may limit the Company's ability to produce television
commercials domestically and in Canada until resolved. The Company will
take efforts to limit the effect that the strike will have on its
operations by utilizing non-union talent and continuing to produce its
commercials off-shore wherever possible. To date, the Company has not
experienced a significant loss of business as a result of the strike,
however, the Company can give no assurance that an extended strike will
not have an adverse affect on its operations.
Note 3 Investment in Harmony
The Company holds a majority interest in Harmony through the ownership
of 4,139,562 shares of Harmony's common stock. Harmony's most recent fiscal
<PAGE>
year end was June 30, 1999. Harmony's operations prior to the Company
consolidating Harmony's financial statements, are summarized as follows for the
quarter ended March 31, 1999:
Three Months
Ended 3/31/99
(in thousands)
--------------
Contract revenues $ 16,275
Cost of production 13,889
--------
Gross profit 2,386
Production expenses 2,851
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Income from productions (465)
Corporate, depreciation
& amortization 836
Restructuring cost &
impairment of assets (175)
--------
Loss from
Operations (1,126)
Interest expense (79)
--------
Net loss $ (1,205)
--------
Harmony's results from operations are consolidated for the period
beginning April 1, 1999 and all periods thereafter. Previous periods are
accounted for under the equity method.
No minority interest is currently shown related to Harmony, as the
minority shareholders no longer have any equity basis in their investment. As of
March 31, 2000, the Company had recognized losses in excess of its prorata share
totaling $2.5 million.
Note 4 Reclassifications
Certain amounts in the 1999 financial statements have been reclassified
to conform to the 2000 presentation. These reclassifications have no effect on
the accumulated deficit or net income or loss previously reported.
Note 5 Business Segments
The Company classifies its operations into two major business segments:
television commercial production and webADTV. The television commercial
production segment consists of the Company's production companies: Curious
Pictures, Chelsea Pictures, Populuxe, The End and its subsidiaries through
Harmony, and Buffalo Rome Films. The webADTV segment is comprised of the
Company's online digital tools and Internet content initiatives.
The Company evaluates performance based on several factors, of which
the primary financial measure is production service income, excluding non-cash
charges and non-recurring charges, since this measure approximates the cash flow
generated by each segment. Production service income is defined as earnings
before interest, taxes, stock-based compensation, corporate overhead, and
depreciation and amortization. The accounting policies of the segments are the
same as those described in the summary of significant accounting
<PAGE>
policies contained in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999.
Three months ended March 31, 2000 (in thousands)
Television
Commercial Total
Production webADTV Corporate iNTELEFILM
---------- ------- --------- ----------
Revenues
from external
sources $21,740 $ -- $ -- $21,740
Inter-segment
Revenues -- -- 300 300
Production
service income/
(loss) 272 (382) 300 190
Depreciation and
amortization 269 -- 247 516
Income (loss) from
operations (82) (382) (1,114) (1,578)
Additions to long-
lived assets $ 247 $ 7 $ 29 $ 283
The Company has not presented segment information for the three months
ended March 31, 1999 as the Company only operated the television commercial
production segment for that period. Revenues, production service loss and loss
from operations for the television commercial production segment was $1,144,300,
$(121,186), and $(121,344), respectively.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains certain non-historical
forward-looking terminology such as "believes," "expects," "anticipates," and
"intends," or comparable terminology. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. Potential purchasers of the Company's securities are
cautioned not to place undue reliance on such forward-looking statements which
are qualified in their entirety by the cautions and risks described herein.
Results of Operations for the Three Months Ended March 31, 2000
Compared to the Three Months Ended March 31, 1999:
General Overview
The Company has completed a transition out of the radio broadcasting
industry into the commercial production services industry. The transition from
the radio broadcasting industry was finalized with the completion of the sale of
the Company's radio stations in January 1999. As such, broadcasting industry
revenues and expenses in 1999, exclusive of the gain on the sale of the radio
stations, were insignificant. The complete transition into the commercial
production service industry occurred in 1999 with increases in the Company's
ownership in Harmony to 55%, in Curious Pictures to 51%, and in Chelsea to 100%.
The Company is now a leading source of services for the television
commercial production industry, offering extensive production capability and
<PAGE>
the exclusive services of established industry talent. The Company intends to
seek additional acquisitions to further broaden its offering of services with
the objective of enhancing overall profit margins and leveraging its pool of
talent and technical expertise to capitalize on the convergence of short-form
video content and technologies of broadband Internet delivery systems.
The Company is also expanding services offered through its subsidiary,
webADTV. webADTV intends to offer an online digital suite of tools that will
web-enable all aspects of the global advertising process. webADTV will enhance
and streamline the business process for advertising agencies and their clients
by providing a series of tools and a wide array of e-commerce solutions designed
for transactions within the advertising community. webADTV also operates
iNTELESOURCE, an Internet based, video asset management system that provides
agencies and production companies with the ability to digitize, encode, archive
and stream television commercials which they produce.
As a result of acquiring a majority interest in Harmony and Curious
Pictures, the Company began consolidating these companies under the purchase
method of accounting for the acquisition of majority-owned subsidiaries.
Harmony's and Curious Pictures' results from operations are consolidated for the
period beginning April 1, 1999. Previous periods are accounted for under the
equity method. Chelsea's operations are consolidated for the period beginning
March 1, 1999. Because of this transition, a comparison of the changes in the
revenue and expense categories from the first quarter of 1999 to the first
quarter of 2000 would not be meaningful without including additional information
related to Harmony's results of operations for the first quarter of 1999.
Accordingly, information related to Harmony's first quarter 1999 performance has
been provided.
The Company's total revenues increased $20,509,000 from $1,231,000 in
the first quarter of 1999 to $21,740,000 in the first quarter of 2000. Revenues
at Chelsea and Populuxe increased $4,664,000 from $1,144,000 in the first
quarter of 1999 to $5,808,000 in the first quarter of 2000. The End, the
operating division of Harmony, and Curious Pictures produced revenues of
$15,931,000 in the first quarter of 2000, an increase of $2,410,000 over the
same period last year, although those revenues were not consolidated in the
Company's financial statements at that time. These increases were due primarily
to the improved ability of the Company's production companies to attract and
retain directors. Revenues of $87,000 were produced by the broadcasting entities
in the first quarter of 1999. These entities were sold in mid-January 1999.
Cost of production is directly related to revenues and includes all
direct costs incurred in connection with the production of television
commercials including film, crews, location fees and commercial directors' fees.
Cost of production as a percentage of production contract revenues was 85%
during the first quarter of 2000. Included in the cost of production for the
first quarter of 2000 is the $461,000 one-time charge related to the Company's
change in method of accounting for the advances paid to its commercial
production directors (see Note 2E to the financial statements). The Company
believes the cost of production, as a percentage of revenues, will decrease as
its production companies retain more directors and are able to charge greater
premiums for these directors as the demand for their work increases.
Additionally, the Company believes it will continue to realize greater cost
benefits on a consolidated basis, such as vendor discounts, which may lower the
overall cost of production.
<PAGE>
Selling expenses at the production companies consist of sales
commissions, advertising and promotional expenses, travel and other expenses
incurred in the securing of television commercial contracts. Selling costs at
Chelsea and Populuxe increased $144,000 from $37,000 in the first quarter of
1999 to $181,000 in the first quarter of 2000. The End and Curious Pictures
incurred selling costs of $611,000 in the first quarter of 2000, an increase of
$85,000 over the same period in 1999, although those expenses were not
consolidated in the Company's financial statements at that time. Additionally,
the Company's newest subsidiary, webADTV, incurred $22,000 in selling costs
through iNTELESOURCE, its subscription based video asset management system.
General and administrative expenses at the divisions consist of
overhead costs such as office rent and expenses, executive, general and
administrative payroll, and related items. General and administrative expenses
at Populuxe and Chelsea increased $389,000 from $263,000 in the first quarter of
1999 to $652,000 in the first quarter of 2000, as the Company owned Chelsea only
one month of the first quarter of 1999. The End and Curious Pictures incurred
general and administrative costs of $1,522,000 during the first quarter of 2000,
an increase of $69,000 over the same period of 1999, although those expenses
were not consolidated in the Company's financial statements at that time.
webADTV's general and administrative costs during the first quarter of 2000 were
$60,000.
Expenses related to the Company's broadcasting entities held until
mid-January 1999 were $180,000 during the first quarter of 1999.
Stock option compensation was $90,000 in the first quarter of 2000 and
includes $5,000 of expense related to options granted to members of the
Company's Board of Directors, and $85,000 of expense related to current options
granted to Curious Management.
Corporate charges incurred in the first quarter of 2000 were $1,161,000
and $540,000 in the first quarter of 1999. Corporate charges related to the
Harmony divisions were $530,000 in the first quarter of 1999 and were not
consolidated in the Company's financial statements for that period. Overall, the
increase in corporate charges on a comparable basis was $91,000 from the first
quarter of 1999 to the first quarter of 2000. This increase is due primarily to
the start-up activities related to webADTV.
Depreciation and amortization incurred in the first quarter of 2000 was
$516,000 and $103,000 in the first quarter of 1999. Depreciation and
amortization related to the Harmony divisions was $197,000 in the first quarter
of 1999 and was not consolidated in the Company's financial statements for that
period. Overall, the increase in depreciation and amortization on a comparable
basis was $216,000. This increase is 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.
Net interest income was $63,000 in the first quarter of 2000 compared
to net interest expense of $503,000 in the first quarter of 1999. The interest
income in 2000 was due primarily to interest earned on the Company's cash, while
the interest expense of the first quarter of 1999 was related to the debt and
debt-issue costs remaining prior to the sale of the last three radio stations
the Company held until mid-January 1999.
<PAGE>
A tax provision of $3,100,000 consisting of alternative minimum tax and
state income taxes was recorded in the first quarter of 1999. This represents
taxes estimated to be due as a result of the sale of the radio stations at the
time. This estimate was subsequently reduced to approximately $1,102,000 in the
fourth quarter of 1999 by employing certain income tax strategies not in place
in the first three quarters of 1999.
A net loss of $1,519,000 was realized in the first quarter of 2000
compared to net income of $10,154,000 in the first quarter of 1999. The net
income realized in 1999 was due to the sale of the radio stations.
Liquidity and Capital Resources
The Company's liquidity, as measured by its working capital, was
$8,806,000 at March 31, 2000, compared to $9,863,000 at December 31, 1999.
In January 2000, the Company organized webADTV as a subsidiary. webADTV
intends to offer an online digital suite of tools designed to web-enable all
aspects of the global advertising process from conception of the media campaign,
through production, placement, and fulfillment. Initially, iNTELESOURCE will be
the core of webADTV. iNTELESOURCE provides agencies and production companies the
opportunity to digitize, archive, and retrieve all television commercials that
they produce. webADTV will focus on the workflow needs critical to advertising
agencies in the $250 billion advertising arena. webADTV believes the development
of its tools for the advertising agency will generate revenues through a tiered
subscription model, service income and commissions. webADTV will continue to
differentiate itself from competitors by applying the depth of its industry
expertise, incorporating its various proprietary tools, and by increasing the
range of its strategic relationships. However, there can be no assurance that
webADTV's business plan will be completed, or if completed, that the business
plan will be successful. To date, approximately 88% of the outstanding shares of
common stock of webADTV are held by iNTELEFILM and approximately 12% of the
outstanding shares of webADTV common stock has been issued to employees and
consultants pursuant to stock option plans. The Company intends to seek
separate, private financing for webADTV. However, no assurance can be given that
webADTV will be able to obtain financing or that the terms of such financing
will be favorable to webADTV. In that event, webADTV may have to seek
alternative methods of financing including the continued use of iNTELEFILM
funds. Additionally, outside financing may result in the issuance of additional
shares, thereby diluting the Company's investment.
In February 2000, all advances made through the credit facility
established between Finova Capital Corporation ("Finova") and Harmony were paid
in full as Finova terminated its relationship with Harmony. As a result, all of
the Company's obligations as a guarantor of this facility have been fulfilled.
In March 2000, the Company proposed to commence an exchange tender
offer to the shareholders of Harmony to acquire all of the remaining outstanding
shares of Harmony's common stock in exchange for shares of the Company's common
stock. The Company proposes to offer one share of its common stock for every
13.75 shares of Harmony common stock. If the tender offer were fully completed
according to these terms, the Company would exchange approximately 244,880
shares of its common stock for 3,367,098 shares of Harmony's common stock,
thereby owning 100% of Harmony. As part of such transaction, the Company would
recognize approximately $719,000 of goodwill. No assurance can be given that the
Harmony shareholders will accept the offer once it is made.
<PAGE>
On March 23, 2000, the Company demanded payment on the notes payable
from Harmony, aggregating approximately $3.2 million at March 31, 2000. On May
1, 2000, the Company granted Harmony a forbearance for an indeterminate amount
of time to allow the independent directors of Harmony to consider and propose
some cure alternatives.
On May 1, 2000, members of the Screen Actors Guild began a strike
against the advertising agencies that represent the Company's customer base.
This strike may limit the Company's ability to produce television commercials
domestically and in Canada until resolved. The Company will take efforts to
limit the effect that the strike will have on its operations by utilizing
non-union talent and continuing to produce its commercials off-shore wherever
possible. To date, the Company has not experienced a significant loss of
business as a result of the strike, however, the Company can give no assurance
that an extended strike will not have an adverse affect on its operations.
In November 1999, two of the principal officers of The End resigned
from the Company. 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 adverse impact on The End's revenues.
Subsequent to the departure of the aforementioned officers, the Company
appointed a long-time executive with the Company as president of The End, and
appointed a new chief operating officer who is a known talent as an executive in
the financial, administrative, production and marketing arena of the
entertainment industry. During the quarter ended March 31, 2000, The End
produced revenues of $9.7 million and an operating loss of $453,000 compared to
revenues of $7.9 million and an operating loss of $814,000 for the quarter ended
December 31, 1999. No assurance can be given that these departures will not
cause 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 and necessitated the valuation allowance for
director advances in excess of earnings discussed fully in Note 2E to the
financial statements.
The Company intends to further expand its television commercial
production business and holdings through acquisitions and opportunities within
its present divisions. The Company seeks to explore the consolidation of
commercial production companies in an effort to increase its commercial
production director pool. In addition, the Company intends to acquire production
service companies, such as rental, editing, design/marketing, post-production
and music companies. The Company believes that gross revenues and profits can be
increased through the acquisition of private production companies and related
service companies. There can be no assurance that the Company will consummate
any additional acquisition or that any acquisition, if consummated, will
ultimately be advantageous or profitable for the Company.
Management believes that with $8,806,000 of working capital as the
foundation of its acquisition capital, the Company should have adequate capital
to meet its ongoing working capital needs and continue its new business plan and
acquisition strategy in the near term. Anticipated uses of cash in the near term
include payment of the short-term note payable of $1,500,000 due to Curious
Management in May 2000, funding operating losses and funding costs incurred by
webADTV which is currently in its initial start-up
<PAGE>
phase. Additionally, the Company intends to further replenish its acquisition
capital by replacing the Finova operating line of credit, thereby enabling
Harmony to operate its business through a line of credit instead of depending on
the Company to fund its operations. Such a line would provide working capital
for the all of 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 full implementation of
its business plan.
Consolidated cash was $12,935,000 at March 31, 1999 and $15,986,000 at
December 31, 1999, a decrease of $3,051,000.
Cash provided by operating activities during the first quarter of 2000
was $512,000. Accounts receivable at March 31, 2000 decreased $3,239,000 from
December 31, 1999, other receivables at March 31, 2000 increased $344,000 from
December 31, 1999 and prepaid expenses at March 31, 2000 decreased $942,000
during the same period. Accounts payable at March 31, 2000 increased $269,000
from December 31, 1999, accrued expenses at March 31, 2000 decreased $2,493,000
from December 31, 1999, and deferred income decreased $738,000 during the same
period.
During the first quarter of 2000, net cash used in investing activities
was $431,000 and was used for capital expenditures.
Cash used in financing activities amounted to $3,133,000 during the
first quarter of 2000. This represents primarily the payoff of the Finova line
of credit, net of the proceeds from the exercise of options to purchase common
stock.
Seasonality and Inflation
The Company does not believe that seasonality or inflation has affected
the results of its operations, and does not anticipate that inflation will have
an impact on its future operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 30, 1998, a jury in the United States District Court
for the District of Minnesota (the "Court") ruled in favor of the
Company in connection with litigation for breach of contract and
misappropriation of trade secrets that the Company had commenced
against ABC/Disney and awarded the Company $20 million for breach
of contract against ABC Radio, $10 million for misappropriations 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 was
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.
<PAGE>
On February 16, 2000, the Company presented its oral argument to
the 8th Circuit Court of Appeals in St. Paul, Minnesota. To date,
the 8th Circuit Court of Appeals has not ruled on the appeal. The
Company intends to pursue its appeal of the judgment and, to this
end, certain personnel and financial resources will be used.
Item 2. Changes in Securities.
a. Not applicable.
b. Not applicable.
c. Not applicable.
d. Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27 Financial Data Schedule
b. Current Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K
(File No. 0-21534) with the Securities and Exchange Commission
during the quarter for which this report is filed:
1. The Company's Current Report on Form 8-K filed on
January 19, 2000, relating to the Company's
announcement of the formation of webADTV.com, Inc.
2. The Company's Current Report on Form 8-K filed on
February 29, 2000, relating to the engagement of Brian
Kenner as a member of the Advisory Committee of
webADTV.com, Inc.
3. The Company's Current Report on Form 8-K filed on March
3, 2000, relating to the engagement of Spot Rocket for
the digital encoding for iNTELESOURCE.org.
4. The Company's Current Report on Form 8-K filed on March
23, 2000, relating to the proposal to commence an
exchange tender offer to shareholders of Harmony to
acquire all of the outstanding shares of Harmony common
stock not currently owned by the Company in exchange
for the Company's common stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on May 15, 2000.
iNTELEFILM CORPORATION
BY: /s/ Steven C. Smith
-----------------------------------
Steven C. Smith
ITS: Chief Financial Officer
EXHIBIT INDEX
27 Financial Data Schedule
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,934,634
<SECURITIES> 0
<RECEIVABLES> 5,725,994
<ALLOWANCES> (167,010)
<INVENTORY> 0
<CURRENT-ASSETS> 19,753,733
<PP&E> 5,574,462
<DEPRECIATION> (2,546,422)
<TOTAL-ASSETS> 30,095,198
<CURRENT-LIABILITIES> 10,948,210
<BONDS> 2,476,644
0
0
<COMMON> 129,686
<OTHER-SE> 18,114,793
<TOTAL-LIABILITY-AND-EQUITY> 30,095,198
<SALES> 21,739,591
<TOTAL-REVENUES> 21,739,591
<CGS> 18,497,237
<TOTAL-COSTS> 21,549,283
<OTHER-EXPENSES> 1,767,916
<LOSS-PROVISION> (167,010)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,514,667)
<INCOME-TAX> 4,549
<INCOME-CONTINUING> (1,519,216)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,519,216)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
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