================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
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 MARCH 31, 2002.
[ ] 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.)
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 May 1, 2002, the issuer had outstanding 6,832,646 shares of common
stock.
================================================================================
PART I FINANCIAL INFORMATION.............................................................1
Item 1 Financial Statements.........................................................1
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................7
Item 3 Quantitative and Qualitative Disclosures About Market Risk..................11
PART II OTHER INFORMATION................................................................11
Item 1 Legal Proceedings...........................................................11
Item 2 Changes in Securities and Use of Proceeds...................................12
Item 3 Defaults upon Senior Securities.............................................12
Item 4 Submission of Matters to a Vote of Security Holders.........................12
Item 5 Other Information...........................................................12
Item 6 Exhibits and Reports on Form 8-K............................................12
SIGNATURES.................................................................................13
EXHIBIT INDEX..............................................................................14
i
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
iNTELEFILM CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
(UNAUDITED) (AUDITED)
ASSETS ----------------- ----------------
Current assets:
Cash and cash equivalents $ 855,302 $ 300,939
Accounts receivable, net of allowance for doubtful accounts
of $100,448 95,785 100,180
Prepaid expenses 355,647 255,397
Notes receivable, current portion 561,321 -
Net production company assets available for sale - 2,520,545
------------ ------------
Total current assets 1,868,055 3,177,061
Property and equipment, net 372,047 438,734
Intangible assets, net 181,500 160,417
Notes receivable net of current portion 706,415 -
Net production company assets available for sale - 764,455
Other assets 326,348 316,049
------------ ------------
Total assets $ 3,454,365 $ 4,856,716
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 702,864 $ 1,341,411
Deferred revenue 25,589 27,602
Other accrued expenses 1,602,800 1,848,631
Other accrued expenses, related party 255,000 255,000
Long-term debt, current portion 90,679 390,679
------------ ------------
Total current liabilities 2,676,932 3,863,323
Other accrued expenses, related party 505,002 568,750
Long-term debt net of current portion 1,421,678 1,283,509
Long-term debt, related parties 704,725 702,835
Deferred litigation award assignment 495,000 -
------------ ------------
Total liabilities 5,803,337 6,418,417
------------ ------------
Commitments and contingencies - -
Minority interest 500,000 500,000
Shareholders' deficit:
Common stock 136,652 136,652
Additional paid-in capital 47,335,498 47,335,498
Accumulated deficit (50,321,122) (49,533,851)
------------ ------------
Total shareholders' deficit (2,848,972) (2,061,701)
------------ ------------
Total liabilities and shareholders' deficit $ 3,454,365 $ 4,856,716
============ ============
See accompanying notes to the consolidated financial statements.
1
iNTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
2002 2001
------------ ------------
Revenues $ - $ -
Costs and expenses:
Cost of revenues 4,970 44,000
Selling, technical, general and administrative
(exclusive of all items shown below) 286,658 550,000
Corporate 503,117 597,885
Corporate expenses paid to affiliated management company - 345,000
Depreciation and amortization 104,832 196,000
------------ ------------
Loss from continuing operations (899,577) (1,732,885)
Other income 242,174 -
Interest expense (115,582) (118,569)
Interest income 2,013 -
------------ ------------
Net loss from continuing operations before income taxes (770,972) (1,851,454)
Income tax provision (benefit) 16,299 (322)
------------ ------------
Net loss from continuing operations (787,271) (1,851,132)
Loss from discontinued operations - (2,149,628)
------------ ------------
Net loss $ (787,271) $ (4,000,760)
============ ============
Basic and diluted net loss per share from continuing operations $ (0.12) $ (0.28)
============ ============
Basic and diluted net loss per share from discontinued operations $ - $ (0.33)
============ ============
Basic and diluted net loss per share $ (0.12) $ (0.61)
============ ============
Weighted average number of shares outstanding 6,833,000 6,584,000
============ ============
See accompanying notes to the consolidated financial statements
2
iNTELEFILM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (787,271) $ (4,000,760)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities net of disposition and
discontinued operations:
Note receivable received in lawsuit settlement (232,736) -
Loss on disposal of discontinued operations, net of taxes - 2,149,628
Depreciation and amortization 104,832 196,000
Amortization and write-off of deferred debt issue costs 21,351 -
Decrease (increase) in (excluding subsidiary acquisitions and
sales):
Accounts receivable 4,395 7,245
Other receivables - 3,019
Prepaid expenses (100,250) (18,257)
Other assets (31,650) -
Increase (decrease) (excluding subsidiary acquisitions
and sales):
Accounts payable (638,547) (70,771)
Deferred revenue (2,013) 4,000
Other accrued expenses (109,579) (367,930)
------------ ------------
Net cash used in continuing operations (1,771,468) (2,097,826)
Net cash provided by discontinued operations - 55,437
------------ ------------
Net cash used in operating activities (1,771,468) (2,042,389)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (15,228) -
Proceeds from sale of television commercial production companies 2,050,000 -
Other capital expenses (44,000) -
------------ ------------
Net cash provided by continuing operations 1,990,772 -
Net cash used in discontinued operations - (352,276)
------------ ------------
Net cash provided by (used in) investing activities 1,990,772 (352,276)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit - 1,381,843
Repayment of debt (159,941) -
Proceeds from lawsuit award assignment 495,000 -
Proceeds from issuance of subsidiary common stock - 590,000
------------ ------------
Net cash provided by continuing operations 335,059 1,971,843
Net cash provided by discontinued operations - -
------------ ------------
Net cash provided by financing activities 335,059 1,971,843
------------ ------------
Increase (decrease) in cash and cash equivalents 554,363 (422,822)
Cash and cash equivalents at beginning of year 300,939 3,099,496
------------ ------------
Cash and cash equivalents at end of period $ 855,302 $ 2,676,674
============ ============
See accompanying notes to the consolidated financial statements.
3
iNTELEFILM Corporation
Condensed Notes to Consolidated Financial Statements (unaudited)
March 31 2002
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 our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2002, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Form 10-K for the
year ended December 31, 2001.
The accompanying financial statements have been prepared assuming that we
will continue as a going concern; however, recurring losses, negative working
capital and negative cash flow from operations raise concerns as to our ability
to continue as a going concern. As a result, our independent certified public
accountants included an explanatory paragraph in their opinion provided with our
December 31, 2001 consolidated financial statements wherein they expressed
substantial doubt about our ability to continue as a going concern.
NOTE 2 PRODUCTION COMPANY SALE TRANSACTIONS
Chelsea:
On January 15, 2002, we completed the sale of the stock of our commercial
production subsidiary, Chelsea Pictures, Inc. to the Chelsea Pictures management
group (the "Chelsea Management Group"). The Chelsea Management Group paid
$785,000 in proceeds to us, consisting of cash at closing of $250,000 and a
promissory note for $535,000. The note bears interest at a variable rate (7% at
March 31 2002) and is payable in varying installments of principal and interest
through December 31, 2004. Principal maturities for the years ended December 31,
2002, 2003 and 2004 total $271,000, $119,000 and $145,000, respectively. The
note is secured by the acquired Chelsea Pictures, Inc. stock, and 200,000 shares
of iNTELEFILM common stock held by the Chelsea Management Group. The note limits
personal recourse against the Chelsea Management Group to $150,000. The sale
transaction is effective for operating purposes as of January 1, 2002. Warrants
to purchase 270,000 shares of our common stock at $0.88 per share were
terminated in connection with this transaction.
Curious Pictures and DCODE:
On February 28, 2002, we completed the sale of the stock of our
commercial production subsidiaries, Curious Pictures Corporation ("Curious
Pictures") and DCODE, Inc. to a group led by the management team at Curious
Pictures (the "Curious Management Group"). The Curious Management Group paid
approximately $5,100,000 in proceeds to us, consisting of cash at closing of
$2,000,000 ($200,000 was prepaid and included in accrued liabilities at December
31, 2001), a promissory note for $500,000, extinguishment of the Curious
Management put right with a value of approximately $1,200,000 at the time of
closing and extinguishment of approximately $1,400,000 of intercompany
indebtedness. The note bears interest at a rate of 5% payable quarterly and
calls for minimum principal payments of $250,000 on each of February 28, 2003
and 2004. The note is secured by the assets of Curious Pictures subject to an
intercreditor agreement with the finance source that backed the Curious
Management Group. Warrants to purchase 300,000 shares of our common stock at
$1.92 per share were terminated in connection with this transaction.
NOTE 3: ABC RADIO AND DISNEY LAWSUIT AWARD ASSIGNMENT
On January 7, 2002, we executed a transaction whereby we assigned
$1,000,000 of any potential award received in connection with our ongoing
litigation against ABC Radio and Disney (see Legal Proceedings) for net proceeds
totaling $495,000. Pursuant to the terms of this agreement, the Company's
repayment obligation is limited to the lesser of the proceeds received from such
litigation net of amounts due to the litigation attorneys, or $1,000,000.
4
NOTE 4: NOTE PAYABLE
During the quarter ended March 31, 2002, our promissory note payable to
the landlord of our former subsidiary, The End, became fully due and payable. At
that time, the landlord demanded, and we paid an amount of $125,000. We then
modified the terms for the remaining obligation of $175,000. Under the revised
terms, the remaining principal balance of $175,000 is now due on the earlier of
i) April 3, 2003, ii) the receipt of gross cash proceeds of $4,000,000 in
connection with the sale of our securities, or iii) a final award or settlement
of the ABC Radio and Disney lawsuit (see Legal Proceedings) in excess of
$4,000,000. The restated note payable carries an annual interest rate of 12% and
is secured by all the assets of iNTELEFILM, Harmony and The End. Furthermore,
the note payable carries an additional lending fee payable when the note becomes
due equal to 8% per annum although this incremental fee is waived if the loan
becomes due pursuant to our receipt of gross cash proceeds of $4,000,000 in
connection with the sale of our securities. As part of the restatement, we
repriced warrants to purchase 150,000 shares of our common stock from $2.00 per
share to $0.46 per share and the landlord acknowledged our full performance of
our obligations under our previous settlement agreement related to the lease for
the facilities of our former production company subsidiary, The End.
NOTE 5: LITIGATION SETTLEMENT
In June 1999, we filed suit against Oklahoma Sports Properties, Inc. and
Fred Weinberg (the "Defendants") seeking to collect on several promissory notes
and guarantees totaling $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 us summary judgment. On 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. This
judgement aggregating $670,000 had been fully reserved as uncollectable due to
the financial condition of the Defendant. As of March 31, 2002, we revised this
estimated reserve for uncollectability to account for the settlement of this
claim on April 10, 2002 in exchange for an assignment to us of a promissory note
due owing to the Defendant from Reunion Broadcasting, L.L.C. with an outstanding
principal amount of $232,736. As a result, we recognized other income of
$232,736 in connection with this settlement.
NOTE 6: LEGAL PROCEEDINGS
We filed suit against ABC Radio and 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
our favor for breach of contract and misappropriation of trade secrets and
awarded us $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 trial
court upheld the jury's findings that ABC Radio had breached its contract with
us and that ABC Radio and Disney misappropriated its trade secret information;
however, the court set aside the jury's verdict because it disagreed with the
jury's conclusions that the evidence showed that those actions caused us damage
and because the trial court found that the amount of damages awarded by the jury
was not supported by the evidence. The court further ruled, in the event that
the decision is reversed or remanded on appeal, that the defendants should be
granted a new trial on the issues of causation and damages. We appealed the
court's findings in February 1999. On February 16, 2000, oral arguments were
held before the Eighth Circuit Court of Appeals. On April 10, 2001, the 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 trial on damages was completed on May 10, 2002. The jury award
totaled $9.5 million, $1.5 million for breach of contract and $8.0 million for
misappropriation of a trade secret. We currently anticipate that final
resolution of the case will likely take several more years. We intend to
vigorously pursue the defense and collection of this award. We have committed
certain proceeds from this litigation to various parties. The total current
commitment of proceeds includes the following at March 31, 2002:
Contingent legal fees - Primary Counsel shall receive the amount of its
suspended fees plus interest at 5%. In addition, primary counsel will
receive a premium of 13.5% of an amount which is equal to the recovery
by judgment minus the amount of contingent fees. Total suspended fees
and interest aggregated approximately $1,757,000 at March 31, 2002. In
no event will the payment due the attorney be greater than the amount of
an award or settlement.
ABC Radio and Disney Lawsuit Award Assignment - We have assigned and
will be obligated to pay the lesser of the proceeds received from such
litigation, net of legal costs, or $1,000,000.
5
Repayment of Bridge Notes Payable - We are obligated to repay the
$1,530,000 of bridge loans if proceeds, net of legal costs, exceed
$2,550,000.
Repayment of Note Payable - We are obligated to repay $175,000 note
payable if proceeds exceed $4,000,000.
Employment Contracts - We are obligated to pay two former officers an
aggregate of 4.25% of any proceeds less any litigation and tax expenses
incurred since the onset of the lawsuit.
On March 21, 2002, the broker associated with the sale of our television
commercial production subsidiaries, Curious Pictures, Chelsea Pictures and
DCODE, initiated arbitration proceedings. The broker claims that fees totaling
$455,000 are owed pursuant to our April 24, 2001 agreement. We intend to
vigorously defend our position that such amount is not owed in the matter.
6
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 we believe that,
in making any such statement, our 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 us or our 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 our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001, under
the caption "Management's Discussion and Analysis or Plan of Operation --
Cautionary Statement." Accordingly, we 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 us. We caution you to keep in mind the
risks described in our 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
General Overview
We have undergone a restructuring whereby our sole continuing operating
subsidiary is Video(3), formerly known as WebADTV. We own approximately 75% of
the outstanding capital stock of Video(3) and it is accounted for as a
consolidated majority-owned subsidiary. Video(3) is engaged in the sale and
distribution of digital asset management software, hardware and services which
are designed to enable clients to encode, share and leverage media assets
online. The restructuring encompassed the discontinuance of our television
commercial production business that was completed in the first quarter of 2002
with the sales of our former subsidiaries Chelsea Pictures, Inc., Curious
Pictures Corporation and DCODE, Inc. The television commercial production
business has been accounted for as discontinued operations in the accompanying
consolidated financial statements. Our results from operations encompass
Video(3), which was formed in January 2000, and ongoing corporate general and
administrative activities.
Our continuing Video(3) business is still at an early stage of development.
We expect to generate revenue from the sale of our software and hardware
products, the provisioning of professional services in the implementation of our
products, the recurring charges to clients using us as their applications
service provider ("ASP") and annual software maintenance fees. We currently
market our products utilizing our direct sales force and anticipate that
strategic channel partnerships will also provide sales activity in the near
future. Our sales efforts primarily target businesses that utilize video in
multiple functional areas. These functional areas include corporate and
marketing communications, training and e-learning, advertising and public
relations. Other factors that drive a client's need for Video(3) products
include the existence of a large geographically disbursed workforce, in-house
video production capability, web-portal and e-commerce capability, brand
intensive culture, or a culture that otherwise strongly embraces technology.
Management anticipates that initial sales will be leveraged to generate
additional revenue from sales to other areas within the client's organization.
Clients may require video supply chain participants to adopt the technology. The
product can be installed at the client's site or delivered through an ASP host.
Our product's features and functionality allow for installation and
implementation within approximately two weeks once a client purchases our
system.
Critical Accounting Policies
We derive our revenues from the sale of licenses of software products and
related services. Product license revenue is recognized when a purchase order
has been received or license agreement has been signed, the product has been
shipped and accepted by the customer, and collection is probable. Services
revenue consists of fees from consulting and maintenance. Consulting services
include needs assessment, software integration, security analysis, application
development and training. We bill consulting fees either on a time and materials
or on a fixed-bid basis. We price maintenance agreements based on a percentage
of the product license fee. Customers purchasing maintenance agreements receive
product upgrades and technical support. We recognize revenue from maintenance
agreements ratably over the term of the agreement, typically one year. Customer
advances and billed amounts due
7
from customers in excess of revenue recognized are recorded as deferred revenue.
We account for our purchased and internally developed computer software under
Statement of Financial Accounting Standards (SFAS) 86, Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed. To date, we have
capitalized the cost of the purchased software license and expensed other
development costs as incurred as they represented the cost to develop a working
model for beta testing and costs for product demonstrations for specific
customers. The capitalized costs are amortized over the greater of the ratio of
current revenues to a total of current and future anticipated revenues or on a
straight line basis over their useful lives.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2002 AND MARCH 31, 2001
Our revenues are derived from the installations of our software and hardware
products and ASP and technology services. We had no revenue from continuing
operations in the first quarter of 2002 or 2001.
Cost of revenues includes all direct costs incurred in connection with the
sale of our products and services. These costs included license fee royalties,
hardware, Internet connection fees, and labor. We incurred license fees and
Internet connection fees of $5,000 during the first quarter of 2002 compared to
$44,000 during the first quarter of 2001.
Selling, technical, general and administrative expenses are directly
attributable to the operation of Video(3). These expenses included services,
salaries, commissions, advertising and promotional expenses, travel, supply and
other expenses incurred in the sale of our products and technological
development, as well as overhead costs such as general and administrative
payroll, and related items. Selling, technical, general and administrative
expenses decreased $263,000 to $287,000 in first quarter of 2002 from $550,000
in the first quarter of 2001. This reduction was due to a restructuring effort
that significantly reduced the Video(3) executive salary and related employment
expenses, reduced travel due to utilization of on-line sales presentation
technology and the completion of our initial product development activities
which were ongoing.
Corporate charges consist of general and administrative charges that are not
related to a specific line of business and include overhead costs such as office
rent and expenses, general and administrative payroll, accounting, legal, and
litigation expense, and other related items. Corporate charges decreased
$440,000 to $503,000 in the first quarter of 2002 from $943,000 in the first
quarter of 2001. The decrease related to restructuring plans implemented in
January 2001 that significantly reduced corporate salaries and related benefits
through the elimination of several positions. These reductions were somewhat
offset by approximately $101,000 related to our ongoing ABC Radio and Disney
litigation that was included in corporate charges for the first quarter of 2002.
We believe that our corporate overhead will continue to decline as we
significantly simplify our corporate structure after the discontinuance of the
television commercial production business which was completed in the first
quarter of 2002.
Depreciation and amortization decreased to $105,000 in the first quarter of
2002 from $196,000 in the first quarter of 2001. Depreciation and amortization
primarily related to the capitalized costs of our software license agreement
with Convera and computer equipment and the decrease relates primarily to the
restructuring of our software license agreement with Convera in October 2001.
Other income of $242,000 primarily related to the note receivable assignment
received in the litigation settlement with Oklahoma Sports Properties.
Interest expense was $116,000 in the first quarter of 2002 compared to
interest expense of $119,000 in 2001, representing a decline in interest expense
of $3,000. The interest expense in 2001 relates primarily to borrowings under
our line of credit which was repaid in full in October 2001 while our interest
expense in 2002 relates primarily to bridge loans and other notes payable
entered into in the fourth quarter of 2001.
8
Interest income of $2,000 was recorded in the first quarter of 2002.
Income tax provision was $16,000 in the first quarter of 2002 relating
primarily to state income taxes payable and minimum fees compared to a benefit
of $322 in the first quarter of 2001.
The net loss from continuing operations decreased to $787,000 for the first
quarter of 2002 compared to a net loss from continuing operations of $1,851,000
for the first quarter of 2001, primarily as a result of the cost reduction
measures implemented during 2001.
Losses from discontinued television commercial production business was
$2,150,000 in the first quarter of 2001, which related primarily to the closing
of The End. No loss was incurred during the first quarter of 2002 as the sales
of our remaining production companies were completed in the first quarter of
2002 and the results of 2002 operations were estimated and accounted for in the
estimated loss on disposal in 2001.
A net loss of $787,000 was incurred for the first quarter of 2002 compared to
$4,001,000 for the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During the three months ended March 31, 2002, we incurred a net loss of
$787,000 and used $1,771,000 in cash for operations resulting in a working
capital deficit of $809,000 compared to a deficit of $686,000 at December 31,
2001. As a result of our recurring losses, negative working capital and negative
cash flow from operations, our independent certified public accountants included
an explanatory paragraph in their opinion on our December 31, 2001 consolidated
financial statements expressing a substantial doubt about our ability to
continue as a going concern. Reference is made to our Annual Report on Form 10-K
for the year ended December 31, 2001 for information regarding this going
concern qualification.
Short-Term Liquidity Needs and Plans
We will require additional financing to continue to support our Video(3)
operations, fund our corporate expenses and pursue our lawsuit against ABC Radio
and Disney in the upcoming 12 months. We anticipate our cash needs for the 12
months after December 31, 2001 will range from $4,000,000 to $5,000,000. We are
currently exploring options to raise this additional capital. There can be no
assurance that we will obtain financing when required. Additional financing, if
available, will likely require us to sell additional equity securities, which is
likely to result in substantial dilution to our current shareholders. If such
financing is not available, we will be forced to further reduce or terminate our
operations and we will likely default on obligations to creditors, all of which
will be materially adverse to our operations and prospects. Based on the cash
proceeds from the sale of the remaining television commercial production
subsidiaries in January and February 2002 and the sale of a participation in the
ABC Radio and Disney lawsuit discussed below, we anticipate that we will have
sufficient funds to continue our operations at the current level through June
2002 without additional funding.
9
In January and February 2002, we completed the sale of the remaining
television commercial production subsidiaries. The operations and business
valuation of these subsidiaries had been adversely affected by the after-math of
the September 11, 2001 terrorist attack. The sales were consummated for gross
cash proceeds of $2,250,000, $200,000 of which was received prior to December
31, 2001, and notes receivable of $1,035,000 with installments and maturity over
three years. Certain inter-company payables due to the television commercial
production companies were released and put rights of management of a subsidiary
were extinguished. In addition, in January 2002, we raised net proceeds totaling
$495,000 from an assignment of $1,000,000 of the potential award to be received
in connection with our ongoing litigation against ABC Radio and Disney. In the
event that such litigation is not successful or we do not receive proceeds, net
of amounts due to the litigation attorneys, to fully satisfy the assignment, no
additional amount will be paid to the purchasing party. In April 2002, we
reached an agreement to extend $175,000 in a note payable until April 2003.
Harmony, our subsidiary that served as a holding company for some of our
television commercial production businesses, has outstanding judgments against
it totaling $637,000, but has nominal assets. To date, the judgment creditors
have not initiated claims against us, the parent company, but there can be no
assurance that such claims will not be asserted. If we were required to pay
these judgments, such action will have an adverse affect on our cash position.
Consolidated cash was $855,000 at March 31, 2002 and $301,000 at December 31,
2001, an increase of $554,000.
We are pursuing claims against ABC Radio and Disney relating to our
children's radio and entertainment business that we discontinued in 1999.
Although we have received a determination that ABC Radio breached its contract
with us and both ABC Radio and Disney misappropriated our trade secrets, the
amount of damages that we can recover had not been determined as of March 31,
2002. The trial on damages was completed on May 10, 2002. The jury award totaled
$9.5 million, $1.5 million for breach of contract and $8.0 million for
misappropriation of a trade secret. We currently anticipate that final
resolution of the case will likely take several more years. Furthermore, we have
entered into several financing and other arrangements which will offset the
ultimate amount of this award accruing to us if and when it is paid by ABC Radio
and Disney.
Cash used in continuing operating activities during the three months ended
March 31, 2002 was $1,771,000. Accounts receivable at March 31, 2002 decreased
$4,000 from December 31, 2001 and prepaid expenses at March 31, 2002 increased
$100,000 during the same period. Accounts payable at March 31, 2002 decreased
$639,000 from December 31, 2001, accrued expenses at March 31, 2002 decreased
$110,000 from December 31, 2001, and deferred income decreased $2,000 during the
same period. The changes in the balance sheet that affect cash-flow occurred
primarily to the prepayment of insurance premiums and the declining accounts
payable and accrued payable balances related to due to declining corporate and
litigation activity and the repayment of aged payables on the sale of the
television production companies.
During the three months ended March 31, 2002, net cash provided by investing
activities was $1,991,000 representing $2,050,000 of cash received with the sale
of the television commercial production companies and $59,000 used for capital
expenditures.
Cash provided by financing activities in 2001 amounted to $335,000. We raised
$495,000 in January 2002 through an assignment of potential lawsuit proceeds and
used cash totaling $160,000 to repay other debt.
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 we
10
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 we 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 we 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 that we complete a transitional goodwill
impairment test six months from the date of adoption. We are 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 December
31, 2001, the net carrying amount of goodwill was written down to net realizable
value pursuant to the anticipated sale of the commercial production
subsidiaries. The adoption of SFAS 141 and SFAS 142 did not have an impact on
our financial position and results of operations.
In August 2001, the Financial Accounting Standards Board finalized the
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment on Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 addresses
financial accounting and reporting for the impairment of disposal of long-lived
assets including the broadening of the presentation of discontinued operations.
The pronouncement is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The adoption of this new pronouncement did not have a material effect on our
financial statements.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
The Company does not enter into derivative contracts either to hedge
existing risks or for speculative purposes.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
We filed suit against ABC Radio and 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 our favor for breach of contract and misappropriation of trade secrets
and awarded us $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 trial
court upheld the jury's findings that ABC Radio had breached its contract with
us and that ABC Radio and Disney misappropriated its trade secret information;
however, the court set aside the jury's verdict because it disagreed with the
jury's conclusions that the evidence showed that those actions caused us damage
and because the trial court found that the amount of damages awarded by the jury
was not supported by the evidence. The court further ruled, in the event that
the decision is reversed or remanded on appeal, that the defendants should be
granted a new trial on the issues of causation and damages. We appealed the
court's findings in February 1999. On February 16, 2000, oral arguments were
held before the Eighth Circuit Court of Appeals. On April 10, 2001, the 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 trial on damages was completed on May 10, 2002. The jury
11
award totaled $9.5 million, $1.5 million for breach of contract and $8.0
million for misappropriation of a trade secret. We currently anticipate that
final resolution of the case will likely take several more years. Furthermore,
we have entered into several financing and other arrangements which will offset
the ultimate amount of this award accruing to us if and when it is paid by ABC
Radio and Disney. We intend to vigorously pursue the defense and collection of
this award.
We have settled our previously disclosed litigation against Oklahoma
Sports Properties, Inc. and Fred Weinberg. We had been awarded a judgment in the
amount of $495,000 plus interest and collection costs, but had not been able to
find any assets of the defendants except for a promissory note owed to the
corporate defendant. On April 10, 2002, we settled this claim for an assignment
to us of this promissory note due from Reunion Broadcasting, L.L.C. with an
outstanding principal amount of $232,736.
On March 21, 2002, the broker associated with the sale of our television
commercial production subsidiaries, Curious Pictures, Chelsea Pictures and
DCODE, initiated arbitration proceedings. The broker claims that fees totaling
$455,000 are owed pursuant to our April 24, 2001 agreement. We intend to
vigorously defend our position that such amount is not owed in the matter.
Except as described above, there have been no material developments in
the legal proceedings disclosed under Item 3 of Part I of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
ITEM 2 Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3 Defaults upon Senior Securities
Not Applicable
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 January 29, 2002, we filed a Current Report on Form 8-K relating to
the sale of the stock of our commercial production subsidiary, Chelsea Pictures,
Inc. On March 5 and 14, 2002, we filed Current Reports on Form 8-K relating to
the sale of the stock of our commercial production subsidiaries, Curious
Pictures Corporation and DCODE, Inc.
The Company filed no other Current Reports on Form 8-K during the quarter ended
March 31, 2002.
12
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: May 15, 2002 By /s/ Richard A. Wiethorn
----------------------------
Richard A. Wiethorn
Authorized Officer and Chief Financial Officer
13
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
10.48 Letter of Agreement Modifying Promissory Note and Warrant for 150,000
Shares between the Registrant and Westminster Properties, Inc. dated
April 1, 2002 and Restated Promissory Note dated April 1, 2002
10.49 Settlement Agreement between the Registrant and Oklahoma Sports
Properties and Fred Weinberg dated April 10, 2002 and promissory note
dated September 4, 1998 executed by Reunion Broadcasting L.L.C.
14