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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER 0-21534
iNTELEFILM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 41-1663712
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
CROSSTOWN CORPORATE CENTER
6385 OLD SHADY OAK ROAD - SUITE 290
EDEN PRAIRIE, MINNESOTA 55344
(952) 925-8840
(Address of Principal Executive Offices, including Zip Code, and
Registrant's Telephone Number, including Area Code)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 July 23, 2001, the issuer had outstanding 6,782,646 shares of common
stock.
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TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION....................................................... 1
Item 1 Financial Statements.................................................. 1
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk............ 14
PART II OTHER INFORMATION........................................................... 14
Item 1 Legal Proceedings..................................................... 14
Item 2 Changes in Securities and Use of Proceeds............................. 15
Item 3 Defaults upon Senior Securities....................................... 15
Item 4 Submission of Matters to a Vote of Security Holders................... 15
Item 5 Other Information..................................................... 15
Item 6 Exhibits and Reports on Form 8-K...................................... 15
SIGNATURES.............................................................................. 16
EXHIBIT INDEX........................................................................... 17
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PART I
ITEM 1 Financial Statements
iNTELEFILM CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
(Unaudited) (Audited)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $1,401,546 $ 3,099,496
Accounts receivable, net of allowance for doubtful
accounts of $39,357 and $27,600, respectively 3,630,085 7,127,026
Unbilled accounts receivable 187,266 1,122,888
Accounts receivable - affiliates net allowance of
$324,835 and $324,835, respectively 61,550 82,448
Other accounts receivable 564,210 590,956
Prepaid expenses 1,082,658 1,138,738
Other current assets 194,639 676,294
----------- ------------
Total current assets 7,121,954 13,837,846
Property and equipment, net 2,747,038 3,373,844
Intangible assets, net 5,953,837 7,014,358
Other assets 733,609 471,862
----------- ------------
Total assets $16,556,438 $ 24,697,910
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,787,654 $ 4,921,347
Accounts payable - affiliates - 30,000
Accrued income taxes 30,000 30,000
Deferred revenue 1,844,748 2,938,268
Other accrued expenses 4,326,768 4,664,376
Line of credit 222,979 198,847
Short-term debt 400,000 1,087,731
Long-term debt - current maturities 113,411 115,134
----------- ------------
Total current liabilities 10,725,560 13,985,703
Long-term debt, less current maturities 502,431 610,332
----------- ------------
Total liabilities 11,227,991 14,596,035
----------- ------------
Commitments and Contingencies - -
Minority interest 1,172,483 1,002,580
Shareholders' equity:
Common stock 135,653 130,227
Additional paid-in capital 46,879,658 46,223,361
Accumulated deficit (42,502,472) (36,897,418)
Stock subscriptions receivable (356,875) (356,875)
----------- ------------
Total shareholders' equity 4,155,964 9,099,295
----------- ------------
Total liabilities and shareholders' equity $16,556,438 $ 24,697,910
=========== ============
See accompanying notes to the consolidated financial statements.
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iNTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
Contract revenues $10,524,702 $15,437,142 $22,979,933 $37,176,733
Costs and expenses:
Cost of production 8,459,766 12,368,178 18,975,543 30,865,415
Selling, general and administrative 2,411,836 3,042,033 5,267,703 6,094,079
(exclusive of all items shown below)
Corporate 610,051 1,195,622 1,552,937 2,356,935
Stock option compensation 84,951 135,393 169,903 225,745
Depreciation and amortization 738,377 524,048 1,417,961 1,040,299
Restructuring charges - - 1,202,006 -
----------- ----------- ----------- -----------
Loss from operations (1,780,279) (1,828,132) (5,606,120) (3,405,740)
Minority interest 160,000 - 160,000 -
Interest income (expense) - net 17,272 111,829 (157,970) 174,770
----------- ----------- ----------- -----------
Net loss from operations before income taxes (1,603,007) (1,716,303) (5,604,090) (3,230,970)
Income tax provision (1,287) (7,295) (964) (11,844)
----------- ----------- ----------- -----------
Net loss $(1,604,294) $(1,723,598) $(5,605,054) $(3,242,814)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.24) $ (0.27) $ (0.84) $ (0.51)
=========== =========== =========== ===========
Weighted average number of shares outstanding 6,760,000 6,423,000 6,673,000 6,379,000
=========== =========== =========== ===========
See accompanying notes to the consolidated financial statements.
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iNTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
----------------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net loss $(5,605,054) $(3,242,814)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Provision for doubtful accounts and director advances 38,357 571,639
Depreciation and amortization 1,417,961 1,040,299
Stock option compensation expense 169,903 225,745
Minority interest (160,000) -
Decrease (increase) in:
Accounts receivable 3,458,584 2,921,348
Other receivables 983,266 (781,821)
Prepaid expenses 93,480 (224,662)
Other assets 219,908 -
Increase (decrease):
Accounts payable (1,133,693) (1,207,834)
Accounts payable - affiliates (30,000) -
Deferred income (1,093,520) 556,760
Other accrued expenses 23,481 (2,147,906)
------------ -------------
Net cash used in operation activities (1,617,327) (2,289,246)
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INVESTING ACTIVITIES:
Purchase of property and equipment (232,647) (608,639)
Other capital expenses (314,753) (329,557)
------------ -------------
Net cash used in investing activities (547,400) (938,196)
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FINANCING ACTIVITIES:
Increase (decrease) in line of credit 24,132 (3,548,911)
Repayment of debt (147,355) (1,679,173)
Proceeds from debt financings - 191,453
Proceeds from issuance of subsidiary common stock 590,000 -
Proceeds from issuance of common stock - 273,977
------------ -------------
Net cash provided by (used in) financing activities 466,777 (4,762,654)
------------ -------------
Decrease in cash and cash equivalents (1,697,950) (7,990,096)
Cash and cash equivalents at beginning of year 3,099,496 15,986,385
------------ -------------
Cash and cash equivalents at end of period $ 1,401,546 $ 7,996,289
============ =============
See accompanying notes to the consolidated financial statements.
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iNTELEFILM Corporation
Condensed Notes to Consolidated Financial Statements (unaudited)
June 30, 2001
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-Q and Rule 10-01 of
Regulation S-K. Accordingly, they do not include all of 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) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2001,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. 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, 2000.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern; however, recurring losses, negative
working capital and negative cash flow from operations raise concerns as to the
Company's ability to continue as a going concern. As a result, the Company's
independent certified public accountants included an explanatory paragraph in
their opinion provided with the Company's December 31, 2000 Consolidated
Financial Statements wherein they expressed substantial doubt about the
Company's ability to continue as a going concern.
NOTE 2 BUSINESS SEGMENTS
The Company classifies its operations into two major business segments:
television commercial production and the operations of WebADTV. The television
commercial production operations consist of the Company's production companies:
Curious Pictures, Chelsea Pictures, and The End, which was discontinued in the
first quarter of 2001. The WebADTV operation is comprised of a web enabled
video asset management system that facilitates the digitization, ingestion,
archiving and streaming of video. The Company evaluates performance of its
segments based on several measurements. The primary financial measure used by
the Company is production service income, which is defined as earnings before
interest, taxes, stock-based compensation, corporate overhead, depreciation, and
amortization. Production service income measures the contribution margin
generated by each of its segments. The accounting policies of the segments are
the same as those described in Note 1.
Six months ended June 30, 2001 (in thousands)
----------------------------------------------------------------
Television
Commercial
Production WebADTV Corporate iNTELEFILM
---------- --------- ---------- ----------
Revenues from external sources $ 22,976 $ - $ 4 $22,980
Inter-segment Revenues - - - -
Production service income/(loss) $ 46 $(1,009) $(1,852) $(2,815)
Stock option compensation 170 - - 170
Depreciation and amortization 457 341 620 1,418
Restructuring costs and impaired assets 1,202 - - 1,202
Loss from operations (1,783) (1,350) (2,472) (5,605)
Additions to long-lived assets 213 19 - 232
Total Assets $ 8,396 $ 987 $ 7,173 $16,556
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NOTE 3: EXCHANGE OFFER
Prior to December 31, 2000, the Company commenced an exchange offer to the
shareholders of Harmony Holdings, Inc. ("Harmony") to acquire all of the
remaining outstanding shares of Harmony's common stock in exchange for shares of
the Company's common stock. This exchange offer was completed as of March 2,
2001. The Company exchanged 193,315 shares of its common stock for 2,658,081
shares of Harmony's common stock, thereby owning 90.4% of Harmony. Based on its
stock price of $1.13 per share on March 2, 2001 and $206,271 in transaction
costs, the Company recognized $423,750 of goodwill. On May 10, 2001, the Company
completed the Harmony acquisition by merging Harmony with a wholly owned
subsidiary of iNTELEFILM. In connection with the merger, the Company exchanged
51,565 shares of its common stock for the remaining 709,017 shares of Harmony
that remained outstanding. In addition, the Company incurred approximately
$15,000 in transactions costs and recognized $73,041 of goodwill.
NOTE 4: FUNDING FOR WebADTV
In February and March 2001, a Company subsidiary, WebADTV, raised $590,000
through the issuance of 5,900,000 shares of WebADTV common stock and warrants to
purchase 5,900,000 shares of WebADTV common stock at $0.10 per share. As of June
30, 2001, approximately 68% of the outstanding shares of common stock of WebADTV
were held by the Company and approximately 32% of the outstanding shares of
WebADTV common stock had been issued directly to third parties, employees,
directors, and consultants pursuant to stock option plans, equity financing, and
purchase agreements. WebADTV has reserved an aggregate of 10,000,000 shares of
its common stock under its two stock option plans. As of June 30, 2001,
2,881,000 of the 4,550,500 options granted under the plans have been exercised.
If all options and warrants outstanding as of June 30, 2001 were exercised, the
Company's ownership in WebADTV would be reduced to approximately 55%.
Throughout 2000 and during January 2001, the Company funded the operations
of WebADTV. Effective January 31, 2001, the Company's board of directors agreed
to convert the amount due from the WebADTV to contributed capital concurrent
with the February and March 2001 equity financing. Accordingly, in February
2001, WebADTV's debt was converted and the Company's investment in WebADTV
increased by $2,605,000. In April 2001, the Company advanced to WebADTV an
additional $60,000 in exchange for 600,000 shares of WebADTV's common stock and
warrants to purchase an additional 600,000 shares for $0.10 per share. In May,
June and July 2001, the Company advanced to WebADTV an aggregate of $310,000.
These advances, if unpaid for a period of greater than 30 days, convert to
demand notes payable with interest at 12% and secured by WebADTV's assets. As of
July 23, 2001, $210,000 of such advances had been converted to notes payable. In
connection with these advances, the Company also received a warrant to purchase
310,000 shares of WebADTV's common stock at a price equal to that of WebADTV's
next equity financing. These amounts are eliminated in the consolidated
financial statements.
NOTE 5: DISCONTINUATION OF HARMONY'S SUBSIDIARY, THE END:
In February 2001, the operations of Harmony's subsidiary, The End, Inc.
("The End") were discontinued. The End consisted of The Beginning, Inc., The
Moment, Inc., Serial Dreamer, Inc., Gigantic Entertainment, Inc., and Unscented,
Inc. and had locations in Los Angeles and New York. The Company accrued closing
costs totaling $1,202,006. These costs consist of the following: continuing
contractual obligations of $735,000 and estimated office, legal, non-refundable
prepayments and other administrative costs of the closure of $467,006. As of
June 30, 2001, approximately, $200,000 of the continuing contractual obligations
and $334,955 of other closing costs had been incurred with no adjustment
necessary to the accrual. At June 30, 2001, $671,045 remained accrued. In March
2001, the Company was released from all obligations associated with the lease of
the End's New York facility in exchange for the forfeiture of a portion of the
security deposit. In addition to the restructure charge recognized in the first
quarter of 2001, the Company also recognized a long-lived asset impairment
charge of $895,500 related to The End in the last quarter of 2000. This charge
includes $150,000 for goodwill, $614,000 for property and equipment and $131,500
for lease deposits. Based upon the present value of future cash flows the fair
value of assets was reduced to $0. The End accounted for revenues of $0 and
$4,463,607 and operating losses of $0 and $394,313 for the quarters ended June
31, 2001 and 2000, respectively. The End accounted for revenues of $531,291 and
$14,171,350 and operating losses of $1,590,532 and $847,668 for the six months
ended June 30, 2001 and 2000, respectively.
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NOTE 6: LINE OF CREDIT FORBEARANCE AGREEMENT
The Company has failed to comply with certain financial covenants relating
to minimum net tangible worth, maximum operating losses, and certain reporting
requirements under its loan and security agreement with its senior lender,
General Electric Capital Corporation ("GE Capital"). On June 19, 2001, GE
Capital agreed to forbear from exercising its rights and remedies under the loan
and security agreement related to these defaults until September 30, 2001. In
connection with this forbearance agreement, the Company agreed to a 2%
prepayment fee through July 2002. This fee had previously been 1% for the period
August 2001 to July 2002.
NOTE 7: CHELSEA PICTURES OPERATING AGREEMENT AND EMPLOYMENT CONTRACT AMENDMENT
On June 20, 2001, the Company entered into an operating agreement and
employment contract amendment with members of the management of Chelsea
Pictures. Under the agreement and in exchange for concessions on existing
employment contract provisions, management of Chelsea Pictures received an
option to purchase 20% of the issued and outstanding common stock of Chelsea
Pictures. Such stock options vest as follows: 10% upon Chelsea reaching $300,000
of EBITDA for the period from July 1, 2001 to June 30, 2002; 10% upon Chelsea
reaching $500,000 of EBITDA for the period from July 1, 2002 to June 30, 2003.
In the event that no vesting occurs in the period July 1, 2001 to June 30, 2002,
full vesting may still occur if Chelsea reaches $800,000 of EBITDA for the
period July, 1, 2002 to June 30, 2003. The stock options have an exercise price
of $1 for each 1% purchased. Upon vesting, management of Chelsea Pictures may
exchange the options to purchase Chelsea Pictures common stock for warrants to
purchase up to 270,000 shares of iNTELEFILM common stock. Such warrants will
have an exercise price of $.01 per share and expire in five years from the grant
date. Further, once vested, management may require Chelsea Pictures to
repurchase such stock options beginning July 2003 at a valuation of Chelsea
Pictures of three times the prior two year average EBITDA.
NOTE 8: RESCISSION OF COSMIC INVENTIONS ACQUISITION
In May 2001, the sellers of Cosmic Inventions ("Cosmic") notified the
Company of its default of the payment provisions of the seller note payable
entered into in connection with the Company's acquisition of Cosmic. Under the
note payable agreement, the seller's only remedy of the default was to affect a
rescission of the acquisition transaction, which occurred effective April 30,
2001. Under the terms of the rescission, WebADTV returned 100% of the acquired
Cosmic membership interests and the sellers cancelled the $650,000 note payable
and returned 560,000 of 660,000 shares of WebADTV common stock issued in the
acquisition transaction. Cosmic's results from operations were not material to
the Company's ongoing results from operations.
NOTE 9: CHANGE IN ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
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As a result of the adoption of SFAS 141 and 142, all future business
combinations will be accounted for under the purchase method, which may result
in the recognition of goodwill and other intangible assets, some of which will
be recognized through operations, either by amortization or impairment charges,
in the future. For purchase business combinations completed prior to June 30,
2001, the net carrying amount of goodwill is $5,287,170. Amortization expense
during the six-month period ended June 30, 2001 was $716,676. Currently, the
Company is assessing but has not yet determined how the adoption of SFAS 141 and
SFAS 142 will impact its financial position and results of operations.
NOTE 10 LEGAL PROCEEDINGS
On August 26, 1997, a former employee of Harmony Pictures commenced legal action
in California against Harmony and Harmony Pictures alleging breach of
employment contract. Summary judgment in favor of Harmony and Harmony Pictures
was granted by the trial court and subsequently reversed by the Court of
Appeals. A judgment was rendered against Harmony and Harmony Pictures for
$309,000 at trial on July 24, 2001. Harmony and Harmony Pictures intend to
appeal the judgment.
A bank that was a former lender to Harmony filed suit against Harmony alleging
default on a $250,000 guaranteed line of credit on October 20, 1999. On
February 27, 2001, the Los Angeles Superior Court entered final judgment
against Harmony in the amount of $328,208.
To date, the Company has accrued $575,000 for the aforementioned judgments.
In 1999, the Company filed suit against Oklahoma Sports Properties, Inc. and
Fred Weinberg ("the Defendants") seeking recovery of five promissory notes,
aggregating $495,000, plus interest and attorney costs for a total of
approximately $670,000. The United States District Court for the District of
Minnesota granted summary judgment for the Company. Upon appeal by the
Defendants, in February 2001, the United States Court of Appeals for the Eighth
Circuit affirmed the lower courts decision holding the Defendants liable for the
notes. These promissory notes had previously been written off as
un-collectable, however, the Company is aggressively pursuing collection of this
judgment.
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ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains various forward-looking statements within
the meaning of Section 21E of the Exchange Act. Although the Company believes
that, in making any such statement, its expectations are based on reasonable
assumptions, any such statement may be influenced by factors that could cause
actual outcomes and results to be materially different from those projected.
When used in the following discussion, the words "anticipates," "believes,"
"expects," "intends," "plans," "estimates" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. These forward-looking statements are subject to
numerous risks and uncertainties that could cause actual results to differ
materially from those anticipated. Factors that could cause actual results to
differ materially from those anticipated, certain of which are beyond its
control, are set forth in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000, under the caption "Management's Discussion
and Analysis or Plan of Operation - Cautionary Statement." Accordingly, the
Company cannot be certain that any of the events anticipated by forward-looking
statements will occur or, if any of them do occur, what impact they will have on
it. The Company cautions you to keep in mind the risks described in its
Cautionary Statement and to refrain from attributing undue certainty to any
forward-looking statements, which speak only as of the date of the document in
which they appear.
OVERVIEW
The Company believes it is one of the leading independent sources of
services for television commercial production within the entertainment industry,
offering extensive production capability and the exclusive directorial services
of certain established industry talent. Its commercial production strategy is to
offer an end-to-end commercial production solution for advertising agencies,
enabling them to provide the highest level of service to their clients. To do
so, the Company plans to continue to seek expansion opportunities for its
television commercial production service business and holdings through strategic
partnerships, financed acquisitions of rental, editing, designing/marketing,
post-production or music companies, and/or opportunities within its present
divisions. Subject to the availability of necessary financing, the Company
intends to combine a diversified group of production companies with related
service companies.
In April 2001, consistent with its efforts to explore all possible
strategic alternatives and in response to an unsolicited offer for the sale of
the divisions, the Company engaged an investment banker to assist in
investigating and negotiating the potential sale of its production subsidiaries,
Curious Pictures and Chelsea Pictures. The investigation led to the
determination that Curious Pictures has greater market value than Chelsea
Pictures and accordingly the Company is currently devoting its divestiture
efforts on the sale of Curious Pictures. If the Company is unable to sell
Curious Pictures on acceptable terms, it intends to continue to advance
business in the industry.
The Company is concentrating on the growth of its partially-owned
subsidiary, WebADTV, a vertical market software company the applications of
which are designed to reduce costs and increase productivity between
advertising agencies and their clients. WebADTV has developed its first
product, InteleSource, a web-enabled, video asset management system that
provides agencies and production companies with the ability to digitize, encode,
archive and stream television commercials. Before the introduction of digital
management of creative libraries using InteleSource, most advertising agencies
and their clients managed their entire creative libraries using bulky and
costly reels of film. WebADTV also plans to develop a related set of tools
aimed at specific aspects of the advertising campaign workflow. Via the
development of hosted applications for the advertising agency industry, WebADTV
anticipates generating revenues through software licensing and hardware sales,
on-line digital storage and service income and commissions.
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SIX-MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
The Company's operating results, expressed as a percentage of total revenue,
were as follows:
Six-Months Ended
June 30,
--------------------------
2001 2000
-------- --------
Net sales:
Commercial income 99.7% 99.7%
Insurance income 0.1% 0.1%
New system sales - -
Other sales 0.2% 0.2%
------ ------
Television commercial production 99.9 99.9
WebADTV 0.1 0.1
Corporate - -
------ ------
Total net sales 100.0 100.0
Cost of sales 82.6 83.0
------ ------
Gross Profit 17.4 17.0
Selling, general and administrative 22.9 16.4
Corporate 6.8 6.3
Stock option compensation 0.7 0.6
Depreciation and amortization 6.2 2.8
Restructuring charges 5.2 -
------ ------
Loss from operations (24.4) (9.1)
Interest income (expense) - net (0.6) 0.5
Income tax provision (0.0) (0.0)
------ ------
Net loss (25.0)% (8.6)%
====== ======
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RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2001 AND JUNE 30, 2000
The Company's total revenues decreased $4,912,000 from $15,437,000 in the
second quarter of 2000 to $10,525,000 in the second quarter of 2001. The
Company's revenues for the six-months ended June 30, 2001 decreased from
$37,177,000 in 2000 to $22,980,000 in 2001, a $14,197,000 reduction. The End,
which discontinued operations in February 2001, accounted for revenues totaling
$4,464,000 and $14,171,000 during the three and six-months ended June 30, 2000,
respectively. During the second quarter of 2001, revenues at Curious Pictures
and Chelsea Pictures decreased $1,585,000 from $11,529,000 in the second quarter
of 2000 to $9,413,000 in 2001. DCode had total revenue in the second quarter of
2001 of $573,000 compared to $126,000 in the same quarter of 2000. For the
six-months ended June 30, 2001, Curious Pictures sales decreased by $844,000
from revenues of $22,316,000 in 2000 to 21,472,000 in 2001. Chelsea Pictures
revenues increased by $282,000 and DCode increased by $784,000 from the six
months ended June 30, 2000 compared to the same period in 2001.
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 80.4% in the
second quarter 2001 compared to 80.1% in the second quarter of 2000. Year to
date, cost of production was 82.6% in 2001 representing a 0.4% decrease in the
overall cost over the first half results of 2000 of 83.0%.
Selling expenses at the production companies consist of sales commissions,
advertising and promotional expenses, travel and other expenses incurred in
securing television commercial contracts. Selling costs for the Company as a
whole decreased $171,000 and $620,000 during the three and six-months ended June
30, 2001, respectively. The End, which discontinued operations in February 2001,
incurred selling expense of $48,000 and $620,000 in the six months ended June
30, 2001 and 2000, respectively. The End incurred no selling costs in the second
quarter of 2001. The Company's subsidiary, WebADTV, incurred $62,000 in selling
expenses in the second quarter 2001, a decrease from $117,000 for the first
quarter of 2001 resulting primarily from a reduction of salary expense. Chelsea
Pictures selling expenses decreased $39,000 from $262,000 in the first quarter
of 2001 to $223,000 in the second quarter of 2001, resulting from a decrease in
sales commissions.
General and administrative expenses at the operating company level consist
of overhead costs such as office rent and expenses, executive, general and
administrative payroll, and related items. General and administrative costs for
the Company as a whole decreased $459,000 and $206,000 for the three and
six-months ended June 30, 2001, respectively. General and administrative
expenses for The End, discontinued in the first quarter of 2001, were $254,000
and $1,392,000 in the six-months ending June 30, 2001 and 2000, respectively.
The End incurred no general and administrative expenses in the second quarter of
2001. General and administrative expenses at Chelsea Pictures decreased to
$600,000 in the second quarter of 2001 from $705,000 in the first quarter of
2001, for a total expense of $1,305,000 in the first half of 2001. WebADTV
realized a decrease of $14,000 in the first half of 2001 in general and
administrative expenses compared to the same period of 2000. WebADTV's total
expense decreased from $448,000 in the first quarter of 2000 to $270,000 in the
second quarter of 2001. The majority of this decrease was due to a decrease in
payroll expense and a decrease in consulting fees.
Stock option compensation was $85,000 in the first quarter of 2001 and was
the same in the second quarter of 2001 for a total of $170,000 in the first half
of 2001. The total expense for all periods shown was related to stock options
granted to Curious Pictures management.
Corporate charges incurred in the second quarter of 2001 were $610,000 and
$1,196,000 in the second quarter of 2000. During the first half of 2001,
corporate charges decreased from $2,357,000 in 2000 to $1,553,000. The decrease
was related to restructuring plans implemented in January 2001. Corporate
salaries and related benefits were significantly reduced through the elimination
of several positions as part of a restructuring plan that management began
implementing in January 2001.
Depreciation and amortization expenses incurred in the second quarter of
2001 were $738,000 and $524,000 in the second quarter of 2000. The $214,000
increase was primarily a result of amortizing WebADTV software licenses
capitalized subsequent to second quarter 2000.
Net interest income was $17,000 in the second quarter of 2001 compared to
$112,000 in the second quarter of 2000. The interest expense in the second
quarter of 2001 was due to the Company utilizing its line of credit. The
interest income in 2000 was earned on the Company's excess working cash balance.
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A tax provision of $1,000 and $12,000 for state tax minimum fees was
recorded in the first half of 2001 and 2000, respectively.
A restructuring charge was incurred in the first quarter of 2001 in the
amount of $1,202,000. This is a one-time charge relating to the discontinuation
of operations of Harmony's operating division, The End.
A net loss of $1,604,000 was recognized in the second quarter of 2001
compared to a net loss of $1,724,000 in the second quarter of 2000. Year to
date, the Company has incurred a $5,605,000 net loss. The magnitude of the 2001
net loss was impacted significantly by the following factors: a net loss of
$1,590,000 associated with Harmony's subsidiary, The End, operations of which
ceased in February 2001; a net loss of $1,333,000 associated with WebADTV which
was, in part self-funded by a private placement of the subsidiary's common
stock; and a net loss of $586,000 at Chelsea Pictures related to decreased
advertising demand as a result of the first quarter economic slow-down.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
During the six months ended June 30, 2001, the Company incurred a net loss
of $5,605,054 and used $1,617,000 in cash for operations resulting in a working
capital deficit of $3,604,000 compared to a deficit of $148,000 at December 31,
2001. Additionally, the Company has failed to comply with certain financial
covenants relating to minimum net tangible worth, maximum operating losses, and
certain reporting requirements under its loan and security agreement with its
senior lender, General Electric Capital Corporation. On June 19, 2001, GE
Capital agreed to forbear from exercising its rights and remedies under the loan
and security agreement related to these defaults until September 30, 2001. As a
result of the Company's recurring losses, negative working capital and negative
cash flow from operations, the Company's independent certified public
accountants included an explanation paragraph in their opinion on the Company's
December 31, 2000 Consolidated Financial Statements wherein they expressed a
substantial doubt about its ability to continue as a going concern.
Components of Working Capital Deficit
On June 30, 2001, $2,289,000 of the Company's working capital deficit
related to the discontinuance of operations of The End. Additionally, $400,000
of the Company's short-term debt relates to an alleged payment due on the
Company's software license agreement. The Company disputes the software
license vendor's May 10, 2001 assertion that the amount has come due in
connection with the completion of the WebADTV private placement in February
2001. The software license vendor has not taken any action to collect
the amount alleged to be due except to assert the termination of the exclusivity
provision of the agreement. The Company anticipates continuing
negotiations with the software vender to redefine both the exclusivity and
payment terms of the software agreement.
Short-Term Liquidity Plans
In response to these adversities, management is implementing the following
plans. During the first quarter of 2001, the Company began executing
restructuring plans to eliminate all non-profitable commercial production
subsidiaries and to significantly reduce corporate and WebADTV operating
expenses. During the first quarter of 2001, the Company began the process of
discontinuing the operations of The End. The End had been adversely affected by
the SAG strike as the well as by the non-renewal of several key commercial
director contracts. The Company has also reduced corporate and WebADTV operating
expenses during the first quarter of 2001 by eliminating several positions,
thereby reducing payroll and benefits costs. The Company moved to smaller,
less expensive corporate and WebADTV facilities to accommodate its smaller staff
in August 2001. Additionally, WebADTV funded its own operations for the
period from February 1 to April 15 as a result of a private placement of its
common stock that generated net proceeds of approximately $590,000. However,
WebADTV will require additional financing in 2001 to continue its operations and
iNTELEFILM has provided $310,000 of such funding to date in April, May, June and
July 2001 (See Note 4).
The Company may also seek to advance its business strategy by diversifying
or selling its existing business holdings, or by seeking to raise capital
directly or through its subsidiary WebADTV. The Company has engaged an
investment banker to assist in negotiating the potential sale of its production
subsidiaries and its divestiture efforts are now concentrated primarily on the
sale of Curious Pictures. The investment banking firm has initiated a general
market solicitation from the sale of Curious Pictures and is in the process of
responding to inquiries. If the Company is unable to sell Curious Pictures on
acceptable terms, it plans to maintain and grow the business of Curious Pictures
in the industry.
The Company will require additional financing to continue its operations to
support its commercial production operations and the advancement of the lawsuit
against ABC/Disney. There can be no assurance that the Company will obtain such
financing when required, or that such financing, if available, will be on terms
acceptable or favorable to us. Additional financing could require the Company to
sell additional equity securities, which would result in dilution to its current
shareholders. If such financing is not available, the Company may be forced to
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further reduce or terminate its operations or potentially default on obligations
to creditors, all of which may be materially adverse to its operations and
prospects. Further, the Company estimates that the advancement of WebADTV will
require minimum additional financing during 2001 ranging from $1.0 to $2.0
million. Such financing may be provided by iNTELEFILM or through the direct sale
of WebADTV equity securities that would further dilute the Company's ownership
interest. If WebADTV is not able to obtain such financing, or financing on
acceptable terms, it could cause a delay in the implementation of WebADTV's
strategy. If WebADTV is not able to obtain additional working capital, it may be
forced to cease operations.
As more fully described in Part II, Item 1 "Legal Proceedings", the Company
has outstanding judgment awards that total $637,000. The payment of these
judgments will have an adverse affect on the Company's cash position. To date,
the Company has accrued $575,000 for the aforementioned judgments.
Consolidated cash was $1,402,000 at June 30, 2001 and $3,099,000 at
December 31, 2000 a decrease of $1,697,000.
Cash used in operating activities during the second quarter of 2001 was
$1,617,000. Accounts receivable at June 30, 2001 decreased $3,497,000 from
December 31, 2000. Other receivables at June 30, 2001 decreased $983,000 from
December 31, 2000, and prepaid expenses at June 30, 2001 decreased $94,000
during the same period. Accounts payable at June 30, 2001 decreased $1,133,000
from December 31, 2001, accrued expenses at June 30, 2001 increased $23,000 from
December 31, 2001, and deferred income decreased $1,094,000 during the same
period. The changes in the balance sheet that affect cash-flow occured primarily
because the Company's operations are derived from large contracts that typically
range from $100,000 to $1,000,000 and these contracts are at various stages of
completion at any given point in time. Additionally, the discontinuation of
operations of The End accounted for a significant portion of the difference
between the net loss from operations of $5,604,000 and the cash used in
operations of $1,617,000 as collections of existing receivables at the End were
utilized primarily to fund current discontinuation expenses with limited
payments to existing vendors.
During the second quarter 2001, net cash used in investing activities was
$547,000 and was used for capital expenditures.
Cash provided by financing activities amounted to $467,000 during the
second quarter of 2001. This amount related to the use of a bank line of credit
and the issuance of subsidiary common stock.
Seasonality and Inflation
The Company does not believe that seasonality or inflation have affected
the results of its operations, and does not anticipate that inflation will have
an impact on its future operations.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life.
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An intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to
be applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS 142 requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS 142.
As a result of the adoption of SFAS 141 and 142, all future business
combinations will be accounted for under the purchase method, which may result
in the recognition of goodwill and other intangible assets, some of which will
be recognized through operations, either by amortization or impairment charges,
in the future. For purchase business combinations completed prior to June 30,
2001, the net carrying amount of goodwill is $5,287,170. Amortization expense
during the six-month period ended June 30, 2001 was $716,676. Currently, the
Company is assessing but has not yet determined how the adoption of SFAS 141 and
SFAS 142 will impact its financial position and results of operations.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
On August 26, 1997, Ron Hoffman, a former Harmony Pictures employee,
commenced legal action in Superior Court of the State of California against
Harmony Holdings and Harmony Pictures alleging breach of employment contract.
Summary judgment in favor of Harmony Holdings and Harmony Pictures was granted
by the trial court and subsequently reversed by the Court of Appeals. Judgment
for $309,000 was rendered against Harmony Holdings and Harmony Pictures at trial
on July 24, 2001. Appeal of the judgment has commenced.
The Company filed suit against ABC/Disney in the United States District
Court for the District of Minnesota on September 26, 1996. On September 30,
1998, a jury in the United States District Court for the District of Minnesota
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 Radio and Disney and awarded the Company $20 million for breach of
contract against ABC Radio, $10 million for misappropriation of trade secrets by
ABC Radio and $10 million for misappropriation of trade secrets 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 Radio and Disney
misappropriated its trade secret information; however, the court disagreed with
the jury's conclusions that the evidence showed that those actions caused the
Company damages and 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, 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. Following its February 16,
2000 oral argument to the Eighth Circuit Court of Appeals in St. Paul,
Minnesota, on April 10, 2001, the Eighth Circuit Court of Appeals reversed the
grant of judgment as a matter of law for ABC Radio and Disney and affirmed the
grant of a new trial limited to the issue of quantifying damages. The Company
intends to vigorously pursue its claim in a trial for damages and, to this end,
certain personnel and financial resources will be used. A scheduling conference
has been set for August 21, 2001.
The Company filed suit against Oklahoma Sports Properties, Inc. and Fred
Weinberg to collect on several unpaid promissory notes and guarantees totaling
$495,999 on June 2, 1999. On March 31, 2000, United States District Court
entered summary judgment in favor of the Company in the amount of $495,000 plus
interest and collection costs. On May 10, 2000, an additional $163,818 in
accrued interest and $14,017 in attorneys' fees was awarded. On appeal, the
Eighth Circuit affirmed the award. Collection of this judgment has commenced.
Imperial Bank filed suit against Harmony Holdings alleging default on a
$250,000 guaranteed line of credit on October 20, 1999. On February 27, 2001,
the Los Angeles Superior court entered final judgment against
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Harmony Holdings in the amount of $328,208. On July 2, 2001 Harmony Holdings
received notice of entry of foreign judgment in Minnesota.
Except as described above, the Company was not a party to any material
legal proceedings as of July 20, 2001.
ITEM 2 Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3 Defaults upon Senior Securities
The Company has failed to comply with certain financial covenants relating
to minimum net tangible worth, losses, and certain reporting requirements under
its loan and security agreement with its senior lender, General Electric Capital
Corporation ("GE Capital"). On June 19, 2001, GE Capital agreed to forbear from
exercising its rights and remedies under the loan and security agreement related
to these defaults until September 30, 2001. In connection with this forbearance
agreement, the Company agreed to a 2% prepayment fee through July 2002. This fee
had previously been 1% for the period August 2001 to July 2002.
ITEM 4 Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5 Other Information
Not applicable.
ITEM 6 Exhibits and Reports on Form 8-K
See "Index to Exhibits."
(b) Reports on Form 8-K
On February 26, 2001, the Company filed a Current Report on Form 8-K
relating to the discontinuation of operations of The End, a subsidiary of
Harmony Holdings, Inc. On May 15, 2001 the Company filed Current Reports on Form
8-K relating to the Nasdaq delisting notice and the Company's completion of the
acquisition of Harmony Holdings, Inc.
The Company filed no other Current Reports on Form 8-K during the quarter
ended June 30, 2001.
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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 thereunto duly authorized.
iNTELEFILM Corporation
Date: August 14, 2001 By /s/ Richard A. Wiethorn
--------------------------------------
Richard A. Wiethorn
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
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10.33 June 19, 2001 General Electric Capital Corporation Forbearance Agreement
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