-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EOHN8QK6NVS7ttSF2bb19E/h5QXloQlFV3DsXUC+KhwHifvfsS+BqLeAiTY+LciC Vh2KINSZT4T2p9vAHbzTCg== /in/edgar/work/20000814/0000897101-00-000829/0000897101-00-000829.txt : 20000921 0000897101-00-000829.hdr.sgml : 20000921 ACCESSION NUMBER: 0000897101-00-000829 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELEFILM CORP CENTRAL INDEX KEY: 0000882160 STANDARD INDUSTRIAL CLASSIFICATION: [7812 ] IRS NUMBER: 411663712 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-21534 FILM NUMBER: 700909 BUSINESS ADDRESS: STREET 1: 5501 EXCELSIOR BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6129258840 MAIL ADDRESS: STREET 1: 5501 EXCELSIOR BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 FORMER COMPANY: FORMER CONFORMED NAME: CHILDRENS BROADCASTING CORP DATE OF NAME CHANGE: 19951102 10QSB 1 0001.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly period ended June 30, 2000 or [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _________ to _________ Commission File No. 0-21534 ------- iNTELEFILM Corporation ---------------------- (Exact name of small business issuer as specified in its charter) Minnesota 41-1663712 -------------------------- ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 5501 Excelsior Blvd., Minneapolis, MN 55416 ------------------------------------------- (Address of principal executive office, including zip code) (612) 925-8840 -------------- (Issuer's telephone number, including area code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No _______ As of August 4, 2000, there were outstanding 6,511,366 shares of common stock, $.02 par value, of the registrant. INDEX iNTELEFILM CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999. Consolidated Statements of Operations -- Three and six months ended June 30, 2000 and 1999. Consolidated Statements of Cash Flows -- Six months ended June 30, 2000 and 1999. Condensed Notes to Consolidated Financial Statements -- June 30, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT INDEX iNTELEFILM CORPORATION CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2000 1999 (UNAUDITED) (AUDITED) -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 7,996,289 $ 15,986,385 Accounts receivable 6,044,119 8,965,467 Allowance for doubtful accounts (129,664) (199,164) Unbilled accounts receivable -- -- Accounts receivable - affiliates 373,301 373,239 Other accounts receivable 642,644 502,024 Prepaid expenses 1,787,784 1,563,122 -------------- -------------- Total current assets 16,714,473 27,191,073 Property and equipment, net 3,123,962 2,957,455 Goodwill, net 6,195,408 6,730,446 Other Assets 1,005,306 738,878 -------------- -------------- Total assets $ 27,039,149 $ 37,617,852 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,803,057 $ 4,010,891 Accrued income taxes 366,946 1,032,520 Deferred revenue 2,949,545 2,392,785 Other accrued expenses 3,168,503 4,650,835 Line of credit -- 3,548,911 Short-term debt -- 1,500,000 Long-term debt - current portion 255,865 191,933 -------------- -------------- Total current liabilities 9,543,916 17,327,875 Long-term debt, less current maturities 628,233 679,885 -------------- -------------- Total liabilities 10,172,149 18,007,760 -------------- -------------- Commitments and Contingencies -- -- Minority interest 333,477 139,447 Shareholders' equity Common stock 128,127 125,772 Authorized shares - 50,000,000 Issued & outstanding shares - voting: 6,217,325 June 30, 2000 and 6,099,577 - December 31, 1999 Issued and outstanding shares - nonvoting: 189,041 - March 31, 2000 and December 31, 1999 Additional paid-in capital 45,916,683 45,625,300 Accumulated deficit (29,195,741) (25,952,927) Stock subscriptions receivable (315,546) (327,500) -------------- -------------- Total Shareholders' Equity 16,533,523 19,470,645 -------------- -------------- Total Liabilities & Shareholders' Equity $ 27,039,149 $ 37,617,852 ============== ==============
See accompanying condensed notes to the consolidated financial statements iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 -------------------------------- -------------------------------- Revenues: Production contract revenues $ 15,437,142 $ 23,457,601 $ 37,176,733 $ 24,619,824 Broadcast related revenues -- 10,418 -- 97,320 -------------------------------- -------------------------------- Total revenues 15,437,142 23,468,019 37,176,733 24,717,144 Costs and expenses: Cost of production 12,368,178 19,557,110 30,865,415 20,836,738 Selling 780,278 908,017 1,593,992 1,081,787 General and administrative (exclusive of items shown below) 2,261,755 2,115,366 4,500,087 2,611,130 Broadcast related expenses -- 13,004 -- 193,319 Stock option compensation 135,393 1,958,250 225,745 1,958,250 Corporate 1,195,622 880,560 2,356,935 1,520,655 Depreciation and amortization 524,048 408,197 1,040,299 557,428 -------------------------------- -------------------------------- Loss from operations (1,828,132) (2,372,485) (3,405,740) (4,042,163) Gain/(loss) on sale of radio stations -- (7,551) -- 16,537,956 Equity loss in Harmony -- -- -- (1,118,785) Interest income net of interest (expense) 111,829 388,715 174,770 (114,091) -------------------------------- -------------------------------- Net income (loss) before income taxes (1,716,303) (1,991,321) (3,230,970) 11,262,917 Income tax provision (7,295) -- (11,844) (3,100,000) -------------------------------- -------------------------------- Net income (loss) $ (1,723,598) $ (1,991,321) $ (3,242,814) $ 8,162,917 ================================ ================================ Basic and diluted net income (loss) per share $ (0.27) $ (0.31) $ (0.51) $ 1.26 ================================ ================================ Weighted average number of shares outstanding 6,423,000 6,490,000 6,379,000 6,491,000 ================================ ================================
See accompanying condensed notes to the consolidated financial statements iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 1999 ------------------------------ Operating activities: Net income (loss) $ (3,242,814) $ 8,162,917 Adjustments to reconcile net income (loss) to net cash used in operating activities: Provision for doubtful accounts & director advances 571,639 109,039 Depreciation & amortization 1,040,299 557,428 Gain on sale of radio stations -- (16,537,956) Stock option compensation 225,745 1,958,250 Amortization and write-off of deferred debt issue costs -- 742,737 Equity loss in Harmony -- 1,118,785 Non-cash interest payment related to sale of stations -- 92,008 Decrease (increase) in: Accounts receivable 2,921,348 (1,242,197) Other receivables (781,821) (311,612) Prepaid expenses (224,662) (246,169) Increase (decrease) in: Accounts payable (1,207,834) (3,319,958) Deferred income 556,760 3,370,393 Other accrued expenses (2,147,906) 2,809,825 ------------ ------------ Net cash (used in) operating activities (2,289,246) (2,736,510) ------------ ------------ Investing activities: Sale/purchase of property & equipment (608,639) (860,795) Net investment in & notes receivable from Harmony -- (215,657) Other capital expendiures (329,557) (1,471,861) Proceeds from sale of radio stations -- 14,034,415 ------------ ------------ Net cash provided by (used in) investing activities (938,196) 11,486,102 ------------ ------------ Financing activities: Payment of line of credit (3,548,911) -- Payment of debt (1,679,173) (538,291) Proceeds from debt financings 191,453 645,303 Redemption of convertible preferred stock -- (2,450,002) Repurchase of common stock -- (260,145) Proceeds from issuance of common stock 273,977 -- Proceeds from stock subscriptions receivable -- 21,500 ------------ ------------ Net cash used in financing activities (4,762,654) (2,581,635) ------------ ------------ Increase (decrease) in cash and cash equivalents (7,990,096) 6,167,957 Cash and cash equivalents at beginning of period 15,986,385 253,905 ------------ ------------ Cash and cash equivalents at end of period $ 7,996,289 $ 6,421,862 ============ ============
See accompanying condensed notes to the consolidated financial statements iNTELEFILM Corporation Condensed Notes to Consolidated Financial Statements (unaudited) June 30, 2000 Note 1 Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals with the exception of the adjustments discussed in Note 2) considered necessary for a fair presentation have been included. Operating results for the three and six-month period ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-KSB for the year ended December 31, 1999. Through the additional purchase of Harmony Holdings, Inc. ("Harmony") common stock in April 1999, iNTELEFILM ("the Company") acquired a majority interest in Harmony, thereby allowing the Company to consolidate Harmony, for financial statement purposes, beginning April 1, 1999, rather than accounting for the investment under the equity method as it had for all previous periods. Note 2 Significant Transactions and Subsequent Events The following significant transactions occurred during 2000 and are considered non-recurring: A. In January 2000, the Company formed webADTV.com, Inc. ("webADTV") under the laws of the state of Minnesota. The Company is the principal shareholder in webADTV. webADTV intends to offer an online digital suite of tools designed to web-enable all aspects of the global advertising process from conception of the media campaign, through production, placement and fulfillment. By providing a series of productivity features and through a wide array of e-commerce solutions within webADTV's tools, specifically designed for transactions by the advertising community, webADTV will enhance and streamline the business processes for advertising agencies and their clients. Initially, iNTELESOURCE will be the core of webADTV. iNTELESOURCE provides agencies and production companies the opportunity to digitize, archive and retrieve all television commercials produced by their firms. B. In February 2000, webADTV adopted the 2000 Incentive Stock Option Plan and the 2000 Non-Qualified Stock Option Plan whereby 5,000,000 shares of the subsidiary's common stock have been reserved under each plan. The options can be either incentive stock options or non-statutory options as indicated by the plan name and are generally valued at the fair market value of the stock on the date of grant. The plans allow various vesting options and the ability for the employee to immediately exercise the options for consideration of cash or a subscription receivable. The subsidiary is able to repurchase stock issued on immediate exercises at the exercise price if the employee does not meet certain service periods. As of August 4, 2000, approximately 3.9 million options had been granted under the plans of which approximately 2.8 million options had been exercised. Stock subscription receivable related to these exercises aggregated $54,900. If all options were exercised, the Company's ownership in webADTV would be diluted to 84%. C. In March 2000, the Company proposed to commence an exchange tender offer to the shareholders of Harmony to acquire all of the outstanding shares of Harmony's common stock in exchange for shares of the Company's common stock. The Company proposes to offer one share of its common stock for every 13.75 shares of Harmony common stock. If the Company is successful in its tender offer, Harmony will become a wholly owned subsidiary of the Company. D. On March 23, 2000, the Company called its notes payable due from Harmony. As a result of Harmony's inability to repay the notes within the 30-day demand period, on May 1, 2000, the Company granted Harmony a forbearance for an indeterminate amount of time to allow the independent directors of Harmony to further consider and propose cure alternatives. E. During the six months ended June 30, 2000, the Company recorded a valuation allowance associated with commercial director advances in excess of earnings totaling $641,000, of which $461,000 relates to advances paid in 1999. Such advances are regularly paid to established commercial directors on a monthly basis and are offset against the actual earnings from commercial directorial services. The Company capitalizes these monthly payments and recognizes them as an expense in the period that they are offset against a commercial director's actual earnings. Capitalized amounts were evaluated for impairment based on anticipated future commercial project awards for individual commercial directors and an allowance was established for capitalized amounts believed to be impaired. The valuation allowance was primarily necessitated by changes in the workflow and contractual relationships of the majority of commercial directors at The End, Inc. ("The End"), a wholly-owned subsidiary of Harmony, after the resignation of two principal officers of The End. F. On May 1, 2000, members of the Screen Actors Guild ("SAG") began a strike against the advertising agencies that represent the Company's customer base. This on-going strike has limited the Company's ability to produce television commercials domestically. The Company has made an effort to limit the effect that the strike may have on its operations by utilizing non-union talent and continuing to produce its commercials outside of the United States wherever possible. To date, the Company has experienced some loss of business as a result of the strike. The Company can give no assurance that an extended strike will not have a significant adverse affect on its operations. G. In June 2000, webADTV signed a letter of intent to acquire Cosmic Inventions, LLC ("Cosmic Inventions"). Cosmic Inventions' leading product, Spot Rocket, facilitates the transmittal of approval-quality video, CD-quality audio tracks, animatics, photographs, storyboards, animations and various multimedia components. Additionally, Cosmic Inventions has developed a product that enables simplified delivery and receiving of large files via standard e-mail addressing. These products provide high quality transmittal, eliminating costly production errors, travel expenses and last minute revisions. H. In July 2000, the Company discontinued the operations of Populuxe Pictures, Inc. ("Populuxe"). There are no significant continuing obligations related to this subsidiary. I. In July 2000, webADTV entered into a software license agreement with Excalibur Technologies Corporation ("Excalibur"). Under the agreement, Excalibur will receive 200,000 shares of webADTV's common stock, valued at $2.50 per share, and $500,000 in cash. In return, webADTV will receive a three-year, pre-paid license for, and the right to exclusively market to advertising agencies through iNTELESOURCE, the Excalibur Screening Room(R) and RetrievalWare(R) product lines. These products will provide webADTV tools needed to provide its web-based advertising services. J. In August 2000, the Company signed an accounts receivable-based loan and security agreement with General Electric Capital Corporation ("GE Capital"). This loan and security agreement provides for borrowings for working capital under a revolving line of credit with maximum availability of $7 million based on acceptable accounts receivable. The line of credit bears interest at a variable rate (10.29% at July 26, 2000). The agreement requires the Company to comply with certain restrictive covenants and will provide financing for Curious Pictures Corporation ("Curious Pictures"), Chelsea Pictures, Inc. ("Chelsea") and The End. K. Currently, $750,000 of the Company's cash balance secures a line to be used to issue import letters of credit. At the date of this filing, the Company is not exposed to a significant credit risk as a result of these letters of credit. Note 3 Investment in Harmony The Company holds a majority interest in Harmony through the ownership of 4,139,562 shares of Harmony's common stock. Harmony's most recent reported fiscal year-end was June 30, 1999. Harmony's operations prior to the Company consolidating Harmony's financial statements, are summarized as follows for the quarter ended March 31, 1999: Three Months Ended 3/31/99 (in thousands) -------------- Contract revenues $ 16,275 Cost of production 13,889 ---------- Gross profit 2,386 Production expenses 2,851 ---------- Loss from productions (465) Corporate, depreciation & amortization 836 Restructuring cost & impairment of assets (175) ---------- Loss from Operations (1,126) Interest expense (79) ---------- Net loss $ (1,205) ---------- Harmony's results from operations are consolidated for the period beginning April 1, 1999 and all periods thereafter. Previous periods are accounted for under the equity method. No minority interest is currently shown related to Harmony, as the minority shareholders no longer have any equity basis in their investment. As of June 30, 2000, the Company had recognized losses in excess of its prorata share totaling $2.8 million. Note 4 Reclassifications Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. These reclassifications have no effect on the accumulated deficit or net income or loss previously reported. Note 5 Business Segments The Company classifies its operations into two major business segments: television commercial production and webADTV. The television and commercial production segment consists of the Company's production companies: Curious Pictures, Chelsea, and The End and its subsidiaries through Harmony. The webADTV segment is comprised of the INTELESOURCE and other online digital tools designed to web-enable all aspects of the advertising campaign process. The Company evaluates performance based on several factors, of which the primary financial measure is production service income, excluding non-cash charges and non-recurring charges, since this measure approximates the cash flow generated by each segment. Production service income is defined as earnings before interest, taxes, stock-based compensation, corporate overhead, and depreciation and amortization. The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. Six months ended June 30, 2000 (in thousands) Television Commercial Total Production webADTV Corporate iNTELEFILM ---------- ------- --------- ---------- Revenues from external sources $ 37,161 $ 16 $ -- $ 37,177 Inter-segment Revenues -- -- 600 600 Production service income/ (loss) $ 441 $ (823) $ 600 $ 218 Stock option compensation 170 -- 56 226 Depreciation and amortization 527 2 511 1,040 -------- -------- -------- -------- Income (loss) from operations $ (349) $ (826) (2,231) (3,406) -------- -------- -------- -------- Additions to long- lived assets $ 501 $ 75 $ 33 $ 609 -------- -------- -------- -------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis contains certain non-historical forward-looking terminology such as "believes," "expects," "anticipates," and "intends," or comparable terminology. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Potential purchasers of the Company's securities are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety, by the cautions and risks described herein. Results of Operations for the Three and Six Months Ended June 30, 2000 Compared to the Three and Six Months Ended June 30, 1999: General Overview The Company has changed its focus within the media and entertainment industry from children's entertainment to commercial production services. The transition was finalized with the completion of the sale of the Company's radio stations in January 1999. As such, broadcasting revenues and expenses in 1999, exclusive of the gain on the sale of the radio stations, were insignificant. The complete transition to commercial production service within the media and entertainment industry occurred in 1999 with increases in the Company's ownership in Harmony to 55%, in Curious Pictures to 51%, and in Chelsea to 100%. The Company believes it is one of the leading sources of services for the television commercial production within the entertainment industry, offering extensive production capability and the exclusive services of established industry talent. The Company intends to seek additional acquisitions to further broaden its offering of services with the objective of enhancing overall profit margins and leveraging its pool of talent and technical expertise to capitalize on the convergence of short-form video content and technologies of broadband Internet delivery systems. The Company is also expanding services offered through its subsidiary, webADTV. webADTV intends to offer an online digital suite of tools that will web-enable all aspects of the global advertising process. webADTV will enhance and streamline the business process for advertising agencies and their clients by providing a series of tools and a wide array of e-commerce solutions designed for transactions within the advertising community. webADTV's first tool, iNTELESOURCE, is an Internet based, video asset management system that provides agencies and production companies with the ability to digitize, encode, archive and stream television commercials that they produce. As a result of acquiring a majority interest in Harmony and Curious Pictures, the Company began consolidating these companies under the purchase method of accounting for the acquisition of majority-owned subsidiaries. Harmony and Curious Pictures' results from operations are consolidated for the period beginning April 1, 1999. Previous periods are accounted for under the equity method. Chelsea's operations are consolidated for the period beginning March 1, 1999. Because of this transition, a comparison of the changes in the revenue and expense categories from the first half of 1999 to the first half of 2000 would not be meaningful without including additional information related to Harmony's results of operations for the first quarter of 1999. Accordingly, information related to Harmony's first quarter 1999 performance has been provided. The Company's total revenues decreased $8,031,000 from $23,468,000 in the second quarter of 1999 to $15,437,000 in the second quarter of 2000, while in the first half of 2000 revenues increased $12,460,000 or 50% from $24,717,000 in 1999 to $37,177,000 in 2000. During the second quarter of 2000, revenues at Curious Pictures and Chelsea increased $2.9 million while revenues at The End and Populuxe decreased $8.8 million. A decrease in revenues of $2.0 million during the second quarter is attributable to The End (London), which Harmony sold July 1, 1999. The End and Curious Pictures produced revenues of $13.5 million in the first quarter of 1999, although those revenues were not consolidated in the Company's financial statements at that time. The Company believes that the decrease in revenues at The End resulted from the effects of the SAG strike, which began in May 2000. In reaction to the initial strike announcement, many agencies withheld production as they assessed the situation in an attempt to determine when a settlement might be reached. Although the agencies are gradually sending more jobs into production, there continued to be fewer jobs on which to bid through August 4, 2000. The strike has had a lesser effect on Curious Pictures as Curious Pictures' productions primarily use animation and digigraphics. Chelsea has been able to avoid some of the strike's impact by producing commercials outside of the United States. Additionally, a portion of the decrease in revenues at The End may be attributed to the commercial director contracts that were not renewed. Revenues of $97,000 were produced by the broadcasting entities in the first half of 1999. These entities were sold in mid-January 1999. Cost of production is directly related to revenues and includes all direct costs incurred in connection with the production of television commercials including film, crews, location fees, production insurance and commercial directors' fees. Cost of production as a percentage of production contract revenues decreased to 80% and 83% during the second quarter and first half of 2000, respectively, from 84% and 85% during the second quarter and first half of 1999, respectively. Included in the cost of production for the first half of 2000 is $641,000 in charges related to the Company's change in estimated valuation for the advances paid to its commercial production directors (see Note 2E to the financial statements). Of this amount, $461,000 is related to advances paid in 1999. The Company believes the cost of production, as a percentage of revenues, will decrease as its production companies retain more directors and are able to charge greater premiums for these directors as the demand for their work increases. Additionally, the Company believes it will continue to realize greater cost benefits on a consolidated basis, such as vendor discounts, which may lower the overall cost of production. Selling expenses at the production companies consist of sales commissions, advertising and promotional expenses, travel and other expenses incurred in the securing of television commercial contracts. Selling costs decreased $128,000 from $908,000 during the second quarter of 1999 to $780,000 during the second quarter of 2000, and increased $512,000 during the first half of 2000 compared to the same period in 1999. Expenses recorded related to The End (London) during the second quarter of 1999 amounted to $275,000, while The End and Curious Pictures incurred selling costs of $526,000 in the first quarter of 1999, which were not consolidated in the Company's financial statements at that time. Additionally, during the first half of 2000, the Company's newest subsidiary, webADTV, incurred $65,000 in selling costs associated with iNTELESOURCE, its subscription based video asset management system. General and administrative expenses at the divisions consist of overhead costs such as office rent and expenses, executive, general and administrative payroll, and related items. During the second quarter of 2000, general and administrative expenses increased $147,000 from $2,115,000 during the second quarter of 1999 to $2,262,000 during the second quarter of 2000, and increased $1,889,000 during the first half of 2000 compared to the same period in 1999. Expenses recorded related to The End (London) during the second quarter of 1999 amounted to $205,000, while The End and Curious Pictures incurred general and administrative costs of $1,453,000 during the first quarter of 1999, although those expenses were not consolidated in the Company's financial statements at that time. webADTV's general and administrative costs during the first half of 2000 were $728,000. These costs include a management fee of $600,000. This fee is eliminated in the consolidated financial statements. Expenses related to the Company's broadcasting entities held until mid-January 1999 were $193,000 during the first half of 1999. Stock option compensation decreased $1,823,000 during the second quarter of 2000 and $1,733,000 during the first half of 2000 compared to the respective periods of 1999. Stock option compensation expense in the first half of 2000 and 1999 includes expense related to options granted to members of the Company's Board of Directors in the amount of $56,000 and $50,000, respectively, and expense related to options granted to Curious Management of $170,000 and $1,908,000, respectively. Corporate charges incurred in the second quarter of 2000 were $1,196,000 and $881,000 in the second quarter of 1999. During the first half of 2000, corporate charges increased from $1,521,000 in 1999 to $2,357,000 in 2000. Corporate charges related to the Harmony divisions were $530,000 in the first quarter of 1999 and were not consolidated in the Company's financial statements for that period. Overall, the increase in corporate charges on a comparable basis was $306,000 from the first half of 1999 to the first half of 2000. This increase was due primarily to the start-up activities related to webADTV. Depreciation and amortization increased to $524,000 in the second quarter of 2000 from $408,000 in the second quarter of 1999, and increased $483,000 during the first half of 2000 compared to the same period in 1999. Depreciation and amortization related to the Harmony divisions was $197,000 in the first quarter of 1999 and was not consolidated in the Company's financial statements for that period. Overall, the increase in depreciation and amortization on a comparable basis was $286,000. This increase was related to the excess of the investment cost over the value of the underlying net assets (goodwill) of Harmony. Prior to the Company obtaining a majority interest in Harmony, this expense was reported as a portion of the equity loss in Harmony. Net interest income was $112,000 in the second quarter of 2000 compared to $389,000 in the second quarter of 1999. Interest income of $175,000 was reported in the first half of 2000 compared to interest expense of $114,000 in the same period of 1999. The interest income in 2000 was due primarily to interest earned on the Company's cash, while the interest expense in the first half of 1999 was related to the debt and debt-issue costs remaining prior to the sale of the last three radio stations the Company held until mid-January 1999. A tax provision of $3,100,000 consisting of alternative minimum tax and state income taxes was recorded in the first quarter of 1999. This represented taxes estimated to be due as a result of the sale of the radio stations at the time. This estimate was subsequently reduced to approximately $1,102,000 in the fourth quarter of 1999 by employing certain income tax strategies not in place in the first three quarters of 1999. A net loss of $1,724,000 was recognized in the second quarter of 2000 compared to a net loss of $1,991,000 in the second quarter of 1999. A net loss of $3,243,000 was recognized in the first half of 2000, while net income of $8,163,000 was recognized in the first half of 1999. The net income realized in 1999 was due to the sale of the radio stations. Liquidity and Capital Resources The Company's liquidity, as measured by its working capital, was $7,171,000 at June 30, 2000, compared to $9,863,000 at December 31, 1999. In January 2000, the Company organized webADTV as a subsidiary. webADTV intends to offer an online digital suite of tools designed to web-enable all aspects of the global advertising process from conception of the media campaign, through production, placement, and fulfillment. Initially, iNTELESOURCE will be the core of webADTV. iNTELESOURCE provides agencies and production companies the opportunity to digitize, archive, and retrieve all television commercials that they produce. webADTV will focus on the workflow needs critical to advertising agencies in the $250 billion advertising arena. webADTV believes the development of its tools for the advertising agency will generate revenues through a tiered subscription model, service income and commissions. webADTV will continue to differentiate itself from competitors by applying the depth of its industry expertise, incorporating its various proprietary tools, and by increasing the range of its strategic relationships. In June 2000, webADTV signed a letter of intent to acquire Cosmic Inventions. Cosmic Inventions' leading product, Spot Rocket, facilitates the transmittal of approval-quality video, CD-quality audio tracks, animatics, photographs, storyboards, animations and various multimedia components. Additionally, Cosmic Inventions has developed a product that enables simplified delivery and receiving of large files via standard e-mail addressing. These products provide high quality transmittal, eliminating costly production errors, travel expenses and last minute revisions. Currently, approximately 88% of the outstanding shares of common stock of webADTV are held by iNTELEFILM and approximately 12% of the outstanding shares of webADTV common stock have been issued to employees and consultants pursuant to stock option plans. The Company is seeking separate financing for webADTV. However, no assurance can be given that webADTV will be able to obtain financing or that the terms of such financing will be favorable to webADTV. In that event, webADTV may have to seek alternative methods of financing, including the continued use of iNTELEFILM funds. Additionally, outside financing may result in the issuance of additional shares, thereby diluting the Company's investment. There can be no assurance that webADTV's business plan will be completed, or if completed, that the business plan will be successful. In April 2000, all advances made through the credit facility established between Finova Capital Corporation ("Finova") and Harmony were paid in full as Finova terminated its relationship with Harmony. As a result, all of the Company's obligations as a guarantor of this facility have been fulfilled. In March 2000, the Company proposed to commence an exchange tender offer to the shareholders of Harmony to acquire all of the remaining outstanding shares of Harmony's common stock in exchange for shares of the Company's common stock. The Company proposes to offer one share of its common stock for every 13.75 shares of Harmony common stock. If the tender offer were fully completed according to these terms, the Company would exchange approximately 244,880 shares of its common stock for 3,367,098 shares of Harmony's common stock, thereby owning 100% of Harmony. Based on the stock prices of Harmony and the Company at August 4, 2000, and assuming approximately $200,000 of transaction costs, the Company would recognize approximately $690,000 of goodwill. No assurance can be given that the Harmony shareholders will accept the offer once it is made. On March 23, 2000, the Company demanded payment on the notes payable from Harmony, aggregating approximately $3.2 million at March 31, 2000. On May 1, 2000, the Company granted Harmony a forbearance for an indeterminate amount of time to allow the independent directors of Harmony to consider and propose cure alternatives. On May 1, 2000, members of SAG began a strike against the advertising agencies that represent the Company's customer base. This on-going strike has limited the Company's ability to produce television commercials domestically. The Company has made an effort to limit the effect that the strike may have on its operations by utilizing non-union talent and continuing to produce its commercials outsie of the United States wherever possible. To date, the Company has experienced some loss of business as a result of the strike. The Company can give no assurance that an extended strike will not have a significant adverse affect on its operations. In November 1999, two of the principal officers of The End resigned. Under their agreements with The End, certain of the commercial directors of The End now have the right to terminate their agreement with The End. To date, one of the End's commercial directors has exercised his right to terminate his agreement and has ended his exclusive representation by The End. Subsequent to the departures of the aforementioned officers, the Company appointed a long-time executive with The End as executive producer of The End, and appointed a new chief operating officer who is a known talent as an executive in the financial, administrative, production and marketing arena of the entertainment industry. During the quarters ended June 30, 2000 and March 31, 2000, The End produced revenues of $4.5 million and $9.7 million, respectively, and operating losses of $394,000 and $453,000, respectively, compared to revenues of $7.9 million and an operating loss of $814,000 for the quarter ended December 31, 1999. No assurance can be given that these departures will not cause material adverse impact on operations or financial performance of The End. The impact of the departures of the foregoing individuals of The End on the Company's liquidity and profits/losses is not currently ascertainable; however, it has reduced The End's overhead and necessitated the valuation allowance for director advances in excess of earnings discussed fully in Note 2E to the financial statements. The Company intends to further expand its television commercial production business and holdings through acquisitions and opportunities within its present divisions. The Company seeks to explore the consolidation of commercial production companies in an effort to increase its commercial production director pool. In addition, the Company intends to acquire production service companies, such as rental, editing, design/marketing, post-production and music companies. The Company believes that gross revenues and profits can be increased through the acquisition of private production companies and related service companies. There can be no assurance that the Company will consummate any additional acquisition or that any acquisition, if consummated, will ultimately be advantageous or profitable for the Company. Management believes that with $7,171,000 of working capital as the foundation of its acquisition capital, the Company should have adequate capital to meet its ongoing working capital needs and continue its business plan and acquisition strategy in the near term. Anticipated uses of cash in the near term include funding operating losses and funding costs incurred by webADTV, which is currently in its initial start-up phase. Additionally, the Company further replenished its acquisition capital in August 2000 by entering into an accounts receivable-based loan and security agreement with GE Capital. This loan and security agreement provides for borrowings for working capital under a revolving line of credit (see note 2J to the financial statements), thereby enabling the divisions to operate their business through a line of credit instead of depending on the Company to fund their operations. The line will provide working capital for all of the Company's existing divisions, excluding webADTV, which the Company currently finances internally. However, should a potential acquisition require greater capital than the Company's cash sources, the Company may need to obtain additional financing. If the Company is not able to obtain adequate financing, or financing on acceptable terms, it could possibly cause a delay in the full implementation of its business plan. Consolidated cash was $7,996,000 at June 30, 1999 and $15,986,000 at December 31, 1999, a decrease of $7,990,000. Cash provided by operating activities during the first half of 2000 was $2,289,000. Accounts receivable at June 30, 2000 decreased $2,921,000 from December 31, 1999, other receivables at June 30, 2000 increased $782,000 from December 31, 1999 and prepaid expenses at June 30, 2000 increased $225,000 during the same period. Accounts payable at June 30, 2000 decreased $1,208,000 from December 31, 1999, accrued expenses at June 30, 2000 decreased $2,148,000 from December 31, 1999, and deferred income increased $557,000 during the same period. During the first half of 2000, net cash used in investing activities was $938,000 and was used for capital expenditures. Cash used in financing activities amounted to $4,763,000 during the first half of 2000. This represents primarily the payoff of the line of credit and the short-term note payable to the four principals of Curious Pictures, net of the proceeds from the exercise of options to purchase common stock. Seasonality and Inflation The Company does not believe that seasonality or inflation has affected the results of its operations, and does not anticipate that inflation will have an impact on its future operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings On September 30, 1998, a jury in the United States District Court for the District of Minnesota (the "Court") ruled in favor of the Company in connection with litigation for breach of contract and misappropriation of trade secrets that the Company had commenced against ABC/Disney and awarded the Company $20 million for breach of contract against ABC Radio, $10 million for misappropriation of trade secret by ABC Radio and $10 million for misappropriation of trade secret against Disney. On January 15, 1999, the Court upheld the jury's findings that ABC Radio had breached its contract with the Company and that ABC/Disney both misappropriated the Company's trade secret information, the Court disagreed with the jury's conclusion that the evidence showed that those actions caused the Company's damages or that the amount of damages awarded by the jury was supported by the evidence, and set aside the jury's verdict. The Court further ruled that in the event that the decision is reversed or remanded on appeal, that the defendants be granted a new trial on the issues of causation and damages. The Company filed a Notice of Appeal in February 1999. On February 16, 2000, the Company presented its oral argument to the 8th Circuit Court of Appeals in St. Paul, Minnesota. To date, the 8th Circuit Court of Appeals had not yet ruled on the appeal. The Company intends to pursue its appeal of the judgment and, to this end, certain personnel and financial resources will be used. Item 2. Changes in Securities. Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Securities Holders (a) The Company held its Annual Meeting of Shareholders on June 22, 2000. (b) The following directors were elected and continued their terms of office at the Annual Meeting: Christopher T. Dahl Richard W. Perkins Michael R. Wigley William E. Cameron (c) The following matters were voted upon at the Annual Meeting of Shareholders: (1) To elect four directors for the ensuing year and until their successors shall be elected and duly qualified: FOR AGAINST Christopher T. Dahl 4,882,563 941,009 Richard W. Perkins 4,919,133 904,439 Michael R. Wigley 4,924,988 898,584 William E. Cameron 4,921,988 901,584 (2) To consider and vote upon adoption of the Company's 2000 Stock Option Plan; and FOR 2,606,035 AGAINST 604,693 ABSTAIN 20,375 BROKER NON-VOTE 2,592,469 (3) To ratify the appointment of BDO Seidman, LLP as the Company's independent public accountants for the fiscal year ending December 31, 2000. FOR 5,696,959 AGAINST 120,378 ABSTAIN 5,875 (d) Not applicable Item 5. Other Information. a. On August 9, 2000, webADTV.com, Inc. ("webADTV"), a subsidiary of the Registrant, issued a press release announcing that it signed an exclusive licensing agreement with CDCX Corporation, a leading digital asset management company, to provide print and audio digital archiving as part of webADTV's inteleSource product. Under the agreement, webADTV has the exclusive right to market the CDXC Solution to the top 100 U.S. advertising agencies. b. On August 10, 2000, webADTV issued a press release announcing the appointment of James Bergeson to its Board of Advisors. Mr. Bergeson is currently the Chief Executive Officer of Colle and McVoy, one of the top 100 advertising agencies in the world. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits 27.1 Financial Data Schedule 99.1 Online System Software License Agreement Between Excalibur Technologies Corporation and webADTV.com, Inc. dated July 31, 2000 b. Current Reports on Form 8-K The Company filed the following Current Reports on Form 8-K (File No. 0-21534) with the Commission during the quarter for which this report is filed: 1. The Company's Current Report on Form 8-K filed on April 26, 2000 regarding the online availability of inteleSOURCE.ORG through webADTV.com, Inc. 2. The Company's Current Report on Form 8-K filed on April 27, 2000 regarding the execution of a joint operating agreement by webADTV.com, Inc. and Post Production Services, Inc. to provide encoding service expertise to webADTV.com, Inc. 3. The Company's Current Report on Form 8-K filed on June 22, 2000 regarding a letter of intent executed by webADTV.com, Inc. to acquire Cosmic Inventions, LLC, a subsidiary of Post Production Services, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on August 14, 2000. iNTELEFILM CORPORATION BY: /s/ Steven C. Smith ----------------------------------- Steven C. Smith ITS: Chief Financial Officer EXHIBIT INDEX 27.1 Financial Data Schedule 99.1 Online System Software License Agreement Between Excalibur Technologies Corporation and webADTV.com, Inc. dated July 31, 2000 EX-99.1 2 0002.txt ONLINE SYSTEM SOFTWARE LICENSE AGREEMENT EXHIBIT 99.1 ONLINE SYSTEM SOFTWARE LICENSE AGREEMENT BETWEEN EXCALIBUR TECHNOLOGIES CORPORATION AND WEBADTV.COM, INC. This Online System Software License Agreement (this "Agreement") is made by and between Excalibur Technologies Corporation, a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 1921 Gallows Road, Suite 200 Vienna, VA 22182 ("Excalibur"), and webADTV.com, a corporation organized and existing under the laws of the State of Minnesota, with its principal place of business at 5501 Excelsior Boulevard, Minneapolis, MN 55416 ("webADTV"). This Agreement shall be effective on July 31, 2000 ("Effective Date"). WHEREAS, Excalibur has developed proprietary software referred to and defined herein as "Licensed Product"; and WHEREAS, webADTV desires to integrate the Licensed Product into its commercially available Online System and to allow its customers to access the Licensed Product through said Online System; and WHEREAS, Excalibur is willing to grant webADTV the right to incorporate the Licensed Product into the Online System in exchange for license payments and other valuable consideration; and WHEREAS, webADTV desires and, subject to the payment of certain fees, Excalibur is willing to perform certain maintenance and support services; and NOW THEREFORE, in consideration of the mutual covenants, terms and conditions, and other valuable consideration contained herein, Excalibur and webADTV agree: 1. DEFINITIONS. In this Agreement, the following terms shall have the meaning specified. Page 1 of 22 1.1 AFFILIATE. The term, "Affiliate" means any majority owned subsidiary which is controlled by or under common control with a party to this Agreement. 1.2 DOCUMENTATION. The term, "Documentation" shall include textual material, revised as appropriate to reflect updates, enhancements and custom work, consisting of End-User manuals relating to the installation and use of the Licensed Product which enables webADTV to operate the Licensed Product in accordance with the specifications contained therein. 1.3 END-USER. The term "End-User" means a person who accesses the Licensed Product by accessing the Online System. 1.4 ONLINE SYSTEM. The term "Online System" means webADTV's commercially available webADTV-branded online system which is a suite of products and services to be marketed and sold solely to the advertising agency industry. 1.5 LICENSED PRODUCT. The term "Licensed Product" means the object code form of the Licensed Product identified on Schedule 1 attached hereto and all patches, updates, enhancements, revisions and new versions thereto that Excalibur may make generally available to its other customers. 1.6 webADTV SUPPORT. The term "webADTV Support" shall mean the level of technical support provided to webADTV in support of End-Users of the Online System for which support fees shall be paid by webADTV to Excalibur described in Schedule 2 to this Agreement ("webADTV Support Description"). 1.7 TERM. The term "Term" shall have the meaning set out in Section 14. 1.8 TERRITORY. The term "Territory" means Worldwide. 2. LICENSE. 2.1 In accordance with the terms of this Agreement, Excalibur grants to webADTV, and webADTV accepts from Excalibur, the following licenses: 2.1.2 A license to sublicense the Licensed Product, in binary code form, to end-users of the Online System but only for the purpose of accessing the Online System. Page 2 of 22 2.2 Excalibur hereby grants to webADTV a non-transferable license in the Territory during the Term to: 2.2.1 Install the object code form of the Licensed Product on an unlimited number of server machines that are part of the operational use, maintenance, backup or further development of the Online System. 2.2.2 Perform demonstrations of the Licensed Product for webADTV's current or prospective customers for the Online System. 2.3 Restrictions. The Licensed Product is licensed for an unlimited number of concurrent users. Use of the Licensed Product for internal or external uses other than those specified in subsections 2.1 and 2.2 , or use of the Licensed Product in online services other than the Online System or stand-alone applications is prohibited. Except for temporary copies of the Licensed Product created for program error verification, the Licensed Product may not be copied, distributed or modified by webADTV other than as set forth in this Agreement. A reasonable number of copies of the Licensed Product may be made for backup purposes. The Licensed Product and its related Documentation represent confidential information and trade secrets belonging to Excalibur and its licensors. Except as provided in the license grant in this Section 2, webADTV shall not make the Licensed Product available on a time-sharing or online service basis. webADTV shall not remove or alter any designation or mark on the Licensed Product. 2.4 Use of Excalibur's Logo. Excalibur's trademarked graphical logo shall be displayed on webADTV's search pages that use the Licensed Product as well as the associated page where the search results are displayed for the purpose of specifically identifying that webADTV's search engine is RetrievalWare. The graphical logo shall be prominently displayed and shall be no less than one (1) square inch in size on a 1074 x 768 pixels computer monitor display. Excalibur's trademarked graphical logo is displayed as Schedule 3. 2.5 Exclusivity. Upon execution of this Agreement, Excalibur agrees to refrain from marketing the Screening Room or related video indexing products to advertising agencies or companies that, to Excalibur's knowledge, plan to market Screening Room or the related video indexing products to advertising agencies for a period of eighteen Page 3 of 22 (18) months from the effective date of this Agreement. The exclusivity provision will remain in effect during the eighteen (18) month period provided that webADTV is current on all payment obligations due to Excalibur under this Agreement. Following the eighteen (18) month exclusivity period, webADTV may extend the exclusivity provision for one (1) additional eighteen (18) month period provided that at that time there are a minimum of four thousand five hundred (4,500) users of the Online System who are registered and paying for use of the Online System. 3. OWNERSHIP. 3.1 Subject to the licenses granted herein, Excalibur owns all right, title and interest in and to the Licensed Product. 3.2 The Licensed Product and updates of the Licensed Product are proprietary to Excalibur, and title to them shall remain with Excalibur. All applicable common law and statutory rights in the Licensed Product and updates thereto, including, but not limited to, rights to confidential and trade secret material, source code, object code, trademarks, service marks, patents, and copyrights, shall be and will remain the property of Excalibur. webADTV shall have no right, title, or interest in such proprietary rights. Ownership of derivative works completed as a direct result of webADTV's input and not contemplated at that time as an enhancement to the Licensed Product by Excalibur will be discussed by the parties and mutually agreed upon on a case by case basis. 4. DELIVERY OF LICENSED PRODUCT; DOCUMENTATION. 4.1 Delivery of Code. Excalibur shall deliver the object code form of the Licensed Product to webADTV within ten (10) business days of the Effective Date. 4.2 Documentation Provided. Excalibur has or will provide to webADTV two (2) hard copies and any available electronic copy of Documentation for the Licensed Product at no charge to webADTV. 4.3 Reproduction of Documentation; Marking. webADTV shall be granted the right to make copies of all or any part of the Documentation for training of and use by its customers, subject to restrictions elsewhere set forth herein. webADTV will retain on all such copies of the Documentation all of Excalibur's trademarks, copyright, and other proprietary marking and legends. Page 4 of 22 4.4 Documentation Updates. If the Documentation is updated, revised, enhanced, or otherwise modified, Excalibur will provide to webADTV at no charge, two (2) copies hard copies and an electronic copy of such revised Documentation indicating the changes being made. webADTV may also distribute such revised Documentation to its customers in connection with their access to and use of the Online System. 5. GENERAL DUTIES OF webADTV. 5.1 During the Term and any extension of this Agreement, webADTV agrees to use its commercially reasonable best efforts to actively promote and market in the Territory the Online System incorporating the Licensed Product. webADTV shall prominently feature the Excalibur and RetrievalWare logos on the Online System, and Excalibur shall not unreasonably withhold or delay its approval in advance of all such uses. 5.2 Excalibur shall have no obligation to support End-Users. 5.3 Upon execution of this Agreement by Excalibur and webADTV, webADTV and Excalibur shall jointly issue a general press announcement to mutually agreed upon publications. In addition, Excalibur shall have the right to use webADTV as a reference account in selected publications as agreed to by webADTV, which consent will not be unreasonably withheld or delayed. It shall not be deemed a breach of this Agreement for either party to unilaterally make public statements or to submit publicly-available reports regarding its transactions with the other party, including without limitation the terms of this Agreement but only if and to the minimum extent that any governmental agency legitimately and legally requires such statements or reports to be made. 6. GENERAL DUTIES OF EXCALIBUR. 6.1 Excalibur shall support webADTV's marketing activities in relation to the Licensed Product by providing, at no additional charge to webADTV, such advice and assistance, in relation to the Licensed Product as webADTV may reasonably request from time to time. Such assistance may include but shall not be limited to technical support in the preparation of proposals and operation and use of the Licensed Product, competitive product research and information, oral presentations to prospective End-Users, and joint marketing, sales, and promotional programs in which the parties agree to collaborate. The Page 5 of 22 foregoing notwithstanding, webADTV shall reimburse Excalibur for all reasonable and approved out of pocket expenses incurred by Excalibur in supporting and assisting webADTV as contemplated in this section; and Excalibur may decline to support and assist webADTV in the event that webADTV's requests therefore become burdensome or a drain on Excalibur's existing resources. 6.2 Excalibur will assist webADTV in developing a business and marketing plan with specific goals for developing the markets for the Online System as well as meeting the sales objectives identified by the parties. 6.3 During the Term, Excalibur will make updates, new releases and versions to the Licensed Product available to webADTV, without additional charge, contemporaneously with their availability to other Excalibur customers. 6.4 Support. A more complete description of the services to be provided by Excalibur in support of the Licensed Product is described in Schedule 2. webADTV will be responsible for providing technical support to end-users of the webADTV system. Excalibur will provide two levels of support services to webADTV. 6.4.1 For a period of one year from the Effective Date of this Agreement, Excalibur will provide one full-time dedicated engineer to support webADTV in assistance of ongoing and future development activities related to webADTV's use of the Licensed Product. The projects undertaken by the full-time dedicated engineer will be prioritized by webADTV's Chief Technical Officer. The cost for dedicated engineer support will be $150,000 per annum and will be invoiced on a quarterly basis in advance. Following the period of one year from the Effective Date of this Agreement, webADTV may elect to purchase the support services of one full-time dedicated engineer at a cost of $150,000 per annum for one (1) additional year. 6.4.2 For a period of two years from the Effective Date of this Agreement, Excalibur will provide standard support consisting of telephone support, bug fixes and enhancements at no additional charge. Following the period of two years at no cost, webADTV may purchase standard support services set forth in Schedule 2 for the Licensed Product at a price determined by applying a factor of 10% to the total cumulative price of the Licensed Product set forth in Subsection 7.1.1 and 7.1.3. Page 6 of 22 6.4.3 webADTV will be provided administrative access to servers. 7. LICENSE AND SUPPORT FEES. 7.1 In consideration of the license granted by Excalibur to webADTV under this Agreement, webADTV agrees: 7.1.1 For the right to integrate the Licensed Product into its Online System and make no additional license payments during the Term: (i) Upon the Effective Date, issue two hundred thousand (200,000) shares of its common stock valued at $2.50 per share. In the event that webADTV common stock shares are not publicly traded within thirty (30) months of the Effective Date and provided that Excalibur still holds the webADTV common stock, webADTV agrees to pay an amount of $ 500,000 to Excalibur in cash on the thirty (30) month anniversary of the Effective Date. In the event of a change in control of webADTV, whether by merger, acquisition, or otherwise, prior to webADTV's common stock being publicly traded, Excalibur may elect to receive the greater of: (a) $500,000 in cash less the price per share paid by the acquirer multiplied by the number of webADTV common shares held by Excalibur at the time of the acquisition; or (b) the price per share paid by the acquirer multiplied by the number of webADTV common shares held by Excalibur at the time of the acquisition. (ii) within 30 days from the Effective Date, pay Excalibur $ 100,000. (iii) within 10 days from the closing of webADTV's private placement, expected to close by October 31, 2000, pay Excalibur $ 400,000. 7.1.2 For the right to receive dedicated engineering support more completely described in Schedule 2 to this Agreement: (i) pay Excalibur a total of $150,000 in four (4) quarterly installments of $37,500 each. Each quarterly installment will be billed in advance and payment shall be due within thirty (30) days of receipt of the invoice. Page 7 of 22 7.1.3 Following the Term of this Agreement, webADTV may continue to deploy the Licensed Product in the Online System and remit license payments to Excalibur in accordance with the pricing schedule set forth in Schedule 4 to this Agreement. 7.2 Annual Audit 7.2.1 At Excalibur's own expense and upon reasonable notice to webADTV, Excalibur shall be entitled to an annual audit of the records by an independent firm of certified public accountants, certifying that the account summary statements provided to Excalibur under this Agreement are a true and fair representation of the royalties and due. The independent auditor must be reasonably acceptable to both parties. Such auditor will execute a confidentiality agreement with webADTV and the auditor's report to Excalibur will not include any webADTV confidential materials. 7.2.2 In the event that the reports provided and royalties paid to Excalibur are deficient, webADTV agrees to pay Excalibur the deficiency. In the event that the reports provided and royalties paid to Excalibur were deficient by ten percent (10%) or more of the royalty otherwise payable, webADTV agrees to pay Excalibur the deficiency as well as the reasonable costs of the independent auditor conducting the audit 8. LIMITED WARRANTY AND DISCLAIMER OF LIABILITY. 8.1 Excalibur warrants that it has, and on the Effective Date and during the Term will have, the full right and authority to enter into and perform under this Agreement. 8.2 Excalibur warrants that the Licensed Product will substantially perform in accordance with the product specifications for a period of 90 days following its delivery to webADTV. In the event the Licensed Product fails to perform substantially in accordance with the product specifications, and Excalibur is unable to correct any material non-conformance within a reasonable period of written notification thereof by webADTV, webADTV's sole remedy shall be that upon demand Excalibur shall return to webADTV any and all cash and stock delivered to Excalibur pursuant to this Agreement. Page 8 of 22 8.3 Excalibur does not warrant that the functions contained in the Licensed Product or in any update will meet the requirements of webADTV or that the operation of the Licensed Product or update, alone or as part of the Online System, will be uninterrupted or error free. 8.4 Excalibur represents and warrants that the Licensed Product is Year 2000 Qualified. "Year 2000 Qualified" means that the Licensed Product stores, processes (including sorting and performing mathematical operations), inputs, and outputs data containing date information correctly regardless of whether the data contains dates before, on, or after January 1, 2000 or during any leap year. Excalibur products which do not perform date manipulation, and which do not alter any date information that flows through them, are also considered Year 2000 Qualified. 8.5 Excalibur warrants that the Licensed Product and Documentation delivered to webADTV under this Agreement shall not infringe on any United States patent or copyright, or trade secret or trademark right of any third party. To the extent this material contains matter proprietary to a third party, Excalibur shall obtain a license from the owner permitting the use of such matter and granting Excalibur the right to sub-license its use. 8.6 Excalibur expressly warrants that no portion of the Licensed Product contains or will contain any protection feature designed to prevent its use. This includes, without limitation, any computer virus, worm, Licensed Product lock, drop dead device, Trojan-horse routine, trap door, time bomb or any other codes or instructions that may be used to assess modify, delete, damage or disable the Online System or the related computer system. Excalibur further warrants that it will not impair the operation of the Licensed Product in any way other than by order of a court of law. 8.7 THE WARRANTIES CONTAINED IN SECTIONS 8.1 THROUGH 8.4 ARE MADE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED; AND EXCALIBUR HEREBY DISCLAIMS ALL OTHER WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Only an authorized officer of Excalibur may make modifications to this warranty or additional warranties binding on Excalibur, and such modifications or additional warranties must be in writing. Accordingly, additional statements such as those made in advertising or presentations, whether oral or written, do not Page 9 of 22 constitute warranties by Excalibur to webADTV and should not be relied upon as such. 9. INDEMNIFICATION. 9.1 Excalibur shall indemnify webADTV and any of its employees or agents against all liabilities, claims and legal costs (including reasonable attorneys' fees) arising from any claim or suit alleging infringement by the Licensed Product, in a use within the scope of this Agreement, of any United States patent or copyright, or the trade secret or trademark rights of any third party. Excalibur's obligations hereunder will survive any expiration or termination of this Agreement. webADTV shall promptly notify Excalibur of any third party claim or suit and Excalibur shall have sole control of the defense of any such action and all negotiations for its settlement or compromise. webADTV may participate at its own expense in the defense of any such action of such claim is against webADTV. The foregoing represents Excalibur's entire liability to webADTV in connection with claims alleging intellectual property infringement by the Licensed Product. The Excalibur shall have no liability for any claim under this section if a claim for patent, copyright, license, or trade secret infringement is based on the modification or use of the Licensed Product or any update or derivative work thereto by webADTV. 9.2 If a third party infringement claim is sustained in a final judgment from which no further appeal is taken or possible, and such final judgment includes an injunction prohibiting webADTV from continued use of the Licensed Product or portions thereof, Excalibur shall, at its sole election and expense: 9.2.1 procure for webADTV the right to continue to use the Licensed Product pursuant to this Agreement; 9.2.2 replace or modify the Licensed Product to make it non-infringing, provided that the modifications or substitutions will not materially and adversely affect the Licensed Product's performance or lessen its utility to webADTV; or 9.2.3 if none of the above options is reasonably available, refund to webADTV all amounts paid to Excalibur by webADTV which represent fees paid for future use of Licensed Product or for future services from Excalibur. Page 10 of 22 9.3 webADTV, at its own expense, will indemnify, hold harmless, and defend Excalibur from any suit, action, loss, damage or other expense arising out of or in connection with any claim that a derivative work or other changes made to the Licensed Product other than by Excalibur infringes any United States patent, copyright, trademark, trade secret or other proprietary right of a third party; provided that webADTV is promptly notified in writing of such a claim and is granted the right to control the defense of all such claims and to settle them. In no event shall Excalibur settle any such claim, lawsuit, or proceeding without webADTV's prior approval. webADTV shall have no liability for any claim under this section to the extent that such claim is based on (i) the Licensed Product, (ii) the modifications of the Licensed Product made by or on behalf of Excalibur, or (iii) modifications of a Derivative Work of the Licensed Product made by or on behalf of Excalibur. 10. CONFIDENTIALITY. 10.1 Each party shall use the same degree of care to prevent disclosure of Confidential Information to any other person as its uses to protect other information of a similar nature which it owns or possesses, but in no event less than reasonable care, unless disclosure is required by law. Each party shall not use such information, nor disclose such information to any third party, except to the extent that will enable webADTV to exercise its rights and to fulfill its obligations under this Agreement, including the right to disclose such information as may be necessary in promoting the Licensed Product to prospective End-Users in the Territory. "Confidential Information" shall mean information in tangible form that is clearly marked as confidential or information in oral or other intangible form that is be identified as confidential at the time of disclosure, or is summarized in tangible form clearly marked as confidential and delivered to the recipient within ten (10) calendar days thereafter. Confidential Information also includes source code whether or not marked and information which the recipient knows or should have known to be confidential, but does not include information which is or becomes available without restriction to the recipient or any other person through no wrongful act. 10.2 The obligations in Section 10.1 will apply for a period of three (3) years from the date of disclosure. The obligations above shall not apply to any such information that has been disclosed in publicly available sources; is, through no fault of the party receiving the Confidential Information, hereafter disclosed in a publicly available source; is independently developed; is in rightful possession of the Page 11 of 22 party receiving the Confidential Information without an obligation of confidentiality; or is required to be disclosed by operation of law. The recipient may disclose Confidential Information to its affiliates or contractors with a legitimate need to know who agree in writing to confidentiality obligations consistent with this Agreement. All materials to the extent containing Confidential Information are and remain the disclosing party's property, and upon no longer having a right to such Confidential Information, the receiving party will promptly destroy, or at the receiving party's option return them, and all copies of them, less a single archival copy. 10.3 Excalibur represents and webADTV hereby acknowledges that the Licensed Product and updates of the Licensed Product which are embodied on magnetic or other storage media contains confidential and trade secret material. webADTV, its employees, and agents agree that they will not attempt to de-compile or disassemble the object code portions of the Licensed Product or updates. webADTV further agrees to use all reasonable efforts to ensure that its employees and agents observe this Subsection 10.3. 10.4 Except as otherwise specified in Section 3.2, this Agreement does not restrict either party from developing, improving, or marketing competitive products or services, so long as a party does not infringe the intellectual property rights of the other party. This Agreement does not restrict the assignment of employees within either party to any other department, division, subsidiary or Affiliate of a party hereto. Nothing contained in this Agreement shall be construed as to prohibit employees of the recipient who have been exposed to the Confidential Information from using residual knowledge, provided that, a) no direct reference is made to Confidential Information in tangible form, and b) the recipient, in good faith, does not recall that the residual knowledge was acquired as a result of exposure to the Confidential Information. "Residual knowledge" shall mean information in intangible form that is retained as part of a person's general skill, knowledge talent or experience from exposure to the Confidential Information. 11. PROPRIETARY NOTICES. 11.1 webADTV will place appropriate copyright notices in the Online System stating that portions are the copyrighted work of Excalibur. Furthermore, webADTV agrees not to remove the copyright and other Page 12 of 22 proprietary notices contained in the Licensed Software and updates as delivered by Excalibur hereunder. 12. LIMITATION OF REMEDIES. 12.1 IN NO EVENT SHALL EITHER PARTY OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, AGENTS, EMPLOYEES OR ADVISORS BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, INCLUDING WITHOUT LIMITATION, FOR ANY LOSS OF USE, PROFIT OR REVENUE, INCURRED OR SUFFERED, IN CONNECTION WITH SUCH PARTY'S PERFORMANCE HEREUNDER. THE LIABILITY OF EITHER PARTY FOR ANY CLAIM, LIABILITY, DAMAGE, PENALTY, LOSS OR EXPENSE UNDER THIS AGREEMENT SHALL IN NO EVENT EXCEED THE AMOUNT PAID BY WEBADTV TO EXCALIBUR HEREUNDER. THE PROVISIONS OF THIS SECTION 12.1 SHALL BE SUBJECT TO, AND SHALL NOT LIMIT, THE PROVISIONS OF SECTIONS 8 AND 9 OF THIS AGREEMENT. 13. TAXES. 13.1 webADTV shall, in addition to other amounts payable under this Agreement, pay all taxes, levied or imposed by reason of the transactions contemplated in this Agreement. webADTV shall promptly pay to Excalibur an amount equal to any such tax(es) actually paid or required to be collected or paid by Excalibur unless webADTV provides proof of an exemption. However, Excalibur shall be liable for payment of all taxes levied on its net income or taxes arising out of or related to this Agreement for which it receives a credit or other reimbursement. 14. AGREEMENT TERM. 14.1 This Agreement, and all licenses granted herein, shall commence on the Effective Date and shall, unless terminated pursuant to Section 15, be in effect for a period of three (3) years from the Effective Date. webADTV may elect to renew or extend this Agreement, and the licenses, on an annual basis by paying to Excalibur the license fees described in Schedule 4. 15. DEFAULT AND TERMINATION. Page 13 of 22 15.1 Excalibur may terminate this Agreement if webADTV fails to make timely payments to Excalibur of the amounts set forth in this Agreement (including its attachments) and has not cured such default within thirty (30) days following written notice thereof by Excalibur. 15.2 Either party may terminate this Agreement thirty (30) days after giving the other party written notice of the occurrence of one of the following and a sixty day opportunity to cure: (i) the other party materially defaults on any of its obligations under this Agreement; or (ii) the other party becomes insolvent, declares bankruptcy or is petitioned into bankruptcy; or (iii) the other party ceases or threatens to cease the operations of its business in the normal course. 15.3 Without limiting any of the provisions contained in Sections 15.1 or 15.2, in the event of termination as a result of webADTV's failure to comply with any of its obligations under this Agreement, webADTV shall continue to be obligated for any payments due as of the date of termination. Termination of the license shall be in addition to, and not in lieu of, any equitable remedies available to the parties. 15.4 Sections 8, 9, 10, 11, 12, 13, 15.3, and the ownership provision of Section 3 shall survive termination of this Agreement. 16. GENERAL. 16.1 Independent Contractor. It is understood that each party is an independent contractor and not partner, joint venturer or agent of the other. Neither party may act on behalf of nor bind the other party in any manner whatsoever. 16.2 Notices. Notices to the parties to this Agreement shall be sent by certified mail, return receipt requested, or other method providing for proof of delivery, to their respective addresses as first set forth at the beginning of this Agreement, but either party may from time to time change such address by written notice to the other party. As for all notices sent to webADTV under this Agreement, Excalibur will send an additional copy to: General Counsel WebADTV.com, Inc. 5501 Excelsior Boulevard Minneapolis, MN 55416 Page 14 of 22 16.3 Governing Law and Jurisdiction. This Agreement shall be construed and interpreted in accordance with the laws of the Commonwealth of Virginia. Any dispute hereunder shall be brought in the state or federal courts in Northern Virginia as though between residents of that Commonwealth. 16.4 Assignment. No assignment of this Agreement will be valid without the prior written consent of the other party which will not be unreasonably withheld, provided however, that the assignment of a party's rights and obligations hereunder to an Affiliate shall not be deemed an assignment hereunder. The assignment of a party's rights and obligations hereunder pursuant to a change of control, merger or acquisition of a majority of the equity of that party shall not be deemed an assignment and shall not need approval of the other party unless such transaction is with a direct competitor of the non-assigning party. This Agreement shall be binding upon and inure to the benefit of any permitted successor or assigns. 16.5 Force Majeure. Neither party shall be liable for failure to fulfill its obligations under this Agreement or any purchase order issued hereunder or for delays in delivery due to causes beyond its reasonable control, including, but not limited to acts of God, acts or omissions of the other party, man-made or natural disasters, material shortages, strikes, delays in transportation or inability to obtain labor or materials through its regular sources. The time for performance of any such obligation shall be extended for the time period lost by reason of the delay. 16.6 Severability. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective without invalidating the remaining provisions hereof, provided the intent of the parties has not been materially frustrated. 16.7 Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, between the parties including without limitation, the Prior License Agreement for Online Services previously executed between Excalibur and Intelefilm Corporation having an effective date of November 30, 1999. Amendments to this Agreement must be in writing, signed by both parties. Page 15 of 22 16.8 Authority. Excalibur and webADTV represent and warrant that the execution, delivery and performance of this Agreement have been duly authorized and that no further action, including without limitation, the vote or consent of their respective Boards of Directors or other controlling bodies, is necessary to make this Agreement valid and binding upon them and legally enforceable against them. 16.9 Affiliates. Any webADTV subsidiary or Affiliate may place orders or otherwise operate under this Agreement and thereafter will become a party to this Agreement. webADTV hereby guarantees the performance of its subsidiaries and Affiliates under this Agreement. 16.10 Counterparts. This Agreement may be executed in counterparts each of which may be designated an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have signed this Agreement. AGREED: AGREED: Page 16 of 22 EXCALIBUR TECHNOLOGIES WEBADTV, INC.: CORPORATION: /s/ Patrick Condo /s/ James Gilbertson - ---------------------------------- ------------------------------------ Signature Signature Patrick Condo James Gilbertson - ---------------------------------- ------------------------------------ Name Name President and CEO President and CEO - ---------------------------------- ------------------------------------ Title Title July 31, 2000 July 31, 2000 - ---------------------------------- ------------------------------------ Date Date Schedules to this Agreement - --------------------------- Schedule 1: Licensed Product. Schedule 2: webADTV Support Description. Schedule 3: Excalibur's Trademarked Graphical Logo. Schedule 4: Licensed Product Unit Pricing Page 17 of 22 SCHEDULE 1 LICENSED PRODUCT Excalibur Screening Room (including SDK) Excalibur RetrievalWare Excalibur RetrievalWare SDK Page 18 of 22 SCHEDULE 2 webADTV SUPPORT DESCRIPTION DEDICATED SUPPORT: For a period of one (1) year from the Effective Date of this Agreement, Excalibur will provide one (1) full-time dedicated engineer to support webADTV in assistance of ongoing and future development activities related to webADTV's use of the Licensed Product. This support will be directed by webADTV and will include, but is not limited to the following: o The dedicated resources will have access to internal Excalibur reporting systems and provide status updates to webADTV on problem reports, system enhancement request, etc. o The dedicated resources will provide webADTV with monthly updates as to any new features and/or functionality incorporated in the product line o The dedicated resource will have access to both the Licensed Product code lines and applicable webADTV code lines and work directly with the Excalibur development engineers and the webADTV development team to resolve any product issues Support shall be limited to programs that make use or plan to make use of the Licensed Product. These services shall be in addition to the services normally provided through the maintenance provisions of the Agreement. webADTV agrees that Excalibur Technologies will own all rights to any unique/critical engineering and integration capabilities made to the Licensed Product. STANDARD SUPPORT: webADTV is required to designate no more than two points of contact ("POCs") to the Excalibur Product Support organization. The names of the POCs will be entered into the Excalibur product support database. The POCs will be responsible for the communication of problems with the Licensed Product to Excalibur and the dissemination within webADTV's organization of resolutions thereof. Likewise, Excalibur shall designate one POC within its US support organization to receive calls on webADTV's behalf. The Excalibur POC shall be responsible for logging each support incident reported by webADTV's POC, assigning the Severity Levels described below, and enacting the Escalation Procedure also described below. Support and Maintenance Services consist of the following: Hot-Line Support - ---------------- Excalibur will consult with webADTV for a reasonable amount of time by telephone during normal business hours to assist with the use of the Licensed Product by answering questions and discussing problems. Normal business hours are defined as Monday through Friday, 9:00 AM to 5:00 PM, PST, excluding major holidays observed by Excalibur. Such telephone consulting shall be enacted by a single POC designated by Excalibur from time to time. This POC will assign one of the following Severity Levels to each new incident logged: Severity 1 - Minor implementation questions, fix delivery and instructions, performance review questions, documentation questions, GUI questions, known bug fixes. Severity 2 - Query processing errors, new bugs identified, system performance issues. Page 19 of 22 Severity 3 - Errors/bugs rendering system unusable. Additionally, the Excalibur POC shall enact the following Escalation Procedure as necessary: Level 1 Telephone Consultant (usually POC) Level 2 Senior Engineer - If incident is not resolved in 5 days. Level 3 Technical Management - If incident is not resolved in 10 days. Enhancements - ------------ Excalibur will supply program code to correct or bypass any reproducible errors in the Licensed Product which causes it to deviate materially from the specifications for the Licensed Product contained in the related user manuals. Notification of all enhancements to the Licensed Product will be made to the appropriate holders of licenses for the use of the Licensed Product. If a user of the Licensed Product desires the enhancement, it will generally be made available at no additional charge. Future Releases (Updates) - ------------------------- Excalibur will supply webADTV with future releases of the Licensed Product. As long as a user of the Licensed Product is an active participant in the support and maintenance program, future releases will be made available at no additional charge. New products are not included. On-Site Support - --------------- Excalibur will investigate and correct suspected errors at its offices to the extent possible. If Excalibur cannot duplicate the error condition at its office, Excalibur, at webADTV's request, may travel to webADTV's place of business to attempt to resolve the matter. In such an event, the Excalibur will be paid for the reasonable travel and living expenses of the Excalibur's employee dispatched to resolve the problem. If Excalibur determines that a suspected software error is attributed to webADTV's negligence, Excalibur will be paid for the work on a time and materials basis in accordance with the Excalibur's standard rates. SERVICE PLAN - ------------------------------------------------ ------------------------------- SERVICE SERVICE PLAN - ------------------------------------------------ ------------------------------- Hot line telephone support 8:00 AM to 5:00 PM customer's local time, Mon. - Fri. - ------------------------------------------------ ------------------------------- Designated number of support contacts 2 - ------------------------------------------------ ------------------------------- Direct access to Product Support Specialists Yes - ------------------------------------------------ ------------------------------- Toll-Free Telephone Number Yes - ------------------------------------------------ ------------------------------- Real-Time Problem Reporting Via E-Mail Yes - ------------------------------------------------ ------------------------------- Periodic Maintenance Releases Yes - ------------------------------------------------ ------------------------------- Access to FTP Server Yes - ------------------------------------------------ ------------------------------- Support Fee Per Year 10% - ------------------------------------------------ ------------------------------- Page 20 of 22 SCHEDULE 3 EXCALIBUR'S TRADEMARKED GRAPHICAL LOGOS [LOGO] EXCALIBUR [LOGO] POWERED BY EXCALIBUR(R) [LOGO] RETRIEVAL WARE(TM) Page 21 of 22 SCHEDULE 4 LICENSED PRODUCT UNIT PRICING Following the initial three year Term of this Agreement, webADTV may continue to deploy the Licensed Product in the Online System and make license payments to Excalibur according to the following schedule: ----------------------- ------------------------- ----------------------------- Product Description Cost per Unit Unit of Measurement ----------------------- ------------------------- ----------------------------- Video Asset Server $19,560 Server ----------------------- ------------------------- ----------------------------- Capture Client 1,980 Client ----------------------- ------------------------- ----------------------------- Edit Client 2,160 Client ----------------------- ------------------------- ----------------------------- Browser Client 21 User ----------------------- ------------------------- ----------------------------- All such license payments will be paid in arrears to Excalibur by webADTV on a quarterly basis with payment occurring within thirty (30) days after the end of webADTV's business quarter. For purposes of this Agreement a webADTV business quarter shall be defined as the end of webADTV's accounting month in March, June, September, and December of each calendar year. Page 22 of 22 EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 7,996,289 0 6,044,119 (129,664) 0 16,714,473 5,890,053 (2,766,091) 27,039,149 9,543,916 884,098 0 0 128,127 16,405,396 27,039,149 37,176,733 37,176,733 30,865,415 36,959,494 3,622,979 (129,664) 0 (3,230,970) 11,844 (3,242,814) 0 0 0 (3,242,814) (0.51) (0.51)
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