10QSB/A 1 0001.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly period ended March 31, 2000 or [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _________ to _________ Commission File No. 0-21534 ------- 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 May 10, 2000, there were outstanding 6,418,866 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 -- March 31, 2000 and December 31, 1999. Consolidated Statements of Operations -- Three months ended March 31, 2000 and 1999. Consolidated Statements of Cash Flows -- Three months ended March 31, 2000 and 1999. Condensed Notes to Consolidated Financial Statements -- March 31, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT INDEX iNTELEFILM Corporation Consolidated Balance Sheets
March 31, December 31, 2000 1999 (unaudited) (audited) -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 12,934,634 $ 15,986,385 Accounts receivable 5,725,994 8,965,467 Allowance for doubtful accounts (167,010) (339,216) Accounts receivable - affiliates 433,074 373,239 Other accounts receivable 205,786 642,076 Prepaid expenses 621,255 1,563,122 -------------- -------------- Total current assets 19,753,733 27,191,073 Property and equipment, net 3,025,699 2,957,455 Goodwill, net 6,475,112 6,730,446 Other Assets 840,654 738,878 -------------- -------------- Total assets $ 30,095,198 $ 37,617,852 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,280,317 $ 4,010,891 Accrued income taxes 367,777 1,032,520 Deferred revenue 1,654,901 2,392,785 Other accrued expenses 2,822,854 4,650,835 Line of credit -- 3,548,911 Short-term debt 1,500,000 1,500,000 Long-term debt - current portion 322,361 191,933 -------------- -------------- Total current liabilities 10,948,210 17,327,875 Long-term debt, less current maturities 654,283 679,885 -------------- -------------- Total liabilities 11,602,493 18,007,760 -------------- -------------- Minority interest 248,226 139,447 Shareholders' equity Common stock 129,686 125,772 Authorized shares - 50,000,000 Issued & outstanding shares - voting: 6,229,825 March 31, 2000 and 6,099,577 - December 31, 1999 Issued and outstanding shares - nonvoting: 189,041 - March 31, 2000 and December 31, 1999 Additional paid-in capital 45,896,904 45,625,300 Accumulated deficit (27,472,143) (25,952,927) Stock subscriptions receivable (309,968) (327,500) -------------- -------------- Total Shareholders' Equity 18,244,479 19,470,645 -------------- -------------- Total Liabilities & Shareholders' Equity $ 30,095,198 $ 37,617,852 ============== ==============
See accompanying condensed notes to the consolidated financial statements. iNTELEFILM Corporation Consolidated Statements of Operations (Unaudited)
AMENDED THREE MONTHS ENDED MARCH 31, 2000 1999 ------------ ------------ Production contract revenues $ 21,739,591 $ 1,144,300 Costs and expenses: Cost of production 18,497,237 965,464 Selling 813,714 36,943 General and administrative (exclusive of items shown below) 2,238,332 263,081 Stock option compensation 90,352 -- Corporate 1,161,313 540,095 Depreciation and amortization 516,251 4,241 ------------ ------------ Loss from continuing operations (1,577,608) (665,524) Equity loss in Harmony -- (1,930,942) Interest income net of interest (expense) 62,941 (502,806) ------------ ------------ Net loss from continuing operations before income taxes (1,514,667) (3,099,272) Income tax provision/(benefit) 4,549 (400,000) ------------ ------------ Net loss from continuing operations (1,519,216) (2,699,272) Gain on the disposal of discontinued operations, net of income taxes of $3,500,000 three months ended March 31, 1999 -- 12,853,510 ------------ ------------ Net Income (loss) $ (1,519,216) $ 10,154,238 ============ ============ Basic and diluted net loss per share from continuing operation $ (0.24) $ (0.42) ============ ============ Basic and diluted net income (loss) per share $ (0.24) $ 1.56 ============ ============ Weighted average number of shares outstanding 6,336,000 6,492,000 ============ ============
See accompanying condensed notes to the consolidated financial statements iNTELEFILM Corporation Consolidated Statements of Cash Flows (Unaudited)
AMENDED THREE MONTHS ENDED MARCH 31, 2000 1999 ------------ ------------ Operating activities: Net income (loss) $ (1,519,216) $ 10,154,238 Adjustments to reconcile net income (loss) to net cash used in operating activities net of disposition and discontinued operations: Gain on disposal of discontinued operations, net of taxes -- (12,853,510) Provision for doubtful accounts & director advances 548,558 (167) Depreciation & amortization 516,251 4,241 Stock option compensation 90,352 -- Non cash income tax benefit (400,000) Amortization and write-off of deferred debt issue costs -- 742,737 Equity loss in Harmony -- 1,930,942 Non-cash interest payment related to sale of stations -- 92,008 Decrease (increase) in: -- Accounts receivable 3,239,473 (55,977) Other receivables (344,309) (428,549) Prepaid expenses 941,867 (184,165) Increase (decrease) in: -- Accounts payable 269,426 (1,692,831) Deferred income (737,884) -- Other accrued expenses (2,492,724) 2,447,172 ------------ ------------ Net cash provided by (used in) operating activities 511,794 (243,861) ------------ ------------ Investing activities: Sale/purchase of property & equipment (282,286) (74,564) Net investment in & notes receivable from Harmony -- (2,440,137) Other capital expenditures (148,651) -- Proceeds from sale of radio stations -- 14,034,415 ------------ ------------ Net cash provided by (used in) investing activities (430,937) 11,519,714 ------------ ------------ Financing activities: Payment of line of credit (3,548,911) -- Payment of debt (86,627) (33,211) Proceeds from debt financings 191,453 -- Redemption of convertible preferred stock -- (2,450,002) Repurchase of common stock -- (11,505) Proceeds from issuance of common stock 311,477 -- Proceeds from stock subscriptions receivable -- 21,500 ------------ ------------ Net cash used in financing activities (3,132,608) (2,473,218) ------------ ------------ Cash used in discontinued operations (3,347,587) Increase (decrease) in cash and cash equivalents (3,051,751) 5,455,048 Cash and cash equivalents at beginning of period 15,986,385 253,905 ------------ ------------ Cash and cash equivalents at end of period $ 12,934,634 $ 5,708,953 ============ ============
See accompanying condensed notes to the consolidated financial iNTELEFILM Corporation Condensed Notes to Consolidated Financial Statements (unaudited) March 31, 2000 Note 1 Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals with the exception of the adjustments discussed in Note 2) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-KSB for the year ended December 31, 1999. Through the additional purchase of Harmony Holdings, Inc. ("Harmony") common stock in April 1999, iNTELEFILM ("the Company") acquired a majority interest in Harmony which allowed the Company to consolidate Harmony, for financial statement purposes, beginning April 1, 1999, rather than accounting for the investment under the equity method as it had for all previous periods. Note 2 Significant Transactions during 2000 The following significant transactions occurred during 2000 and are considered non-recurring: A. In January 2000, the Company formed webADTV.com, Inc. ("webADTV") under the laws of the state of Minnesota. The Company is the principal shareholder in webADTV. webADTV intends to offer an online digital suite of tools designed to web-enable all aspects of the global advertising process from conception of the media campaign, through production, placement and fulfillment. By providing a series of productivity features and through a wide array of e-commerce solutions within webADTV's tools, specifically designed for transactions by the advertising community, webADTV will enhance and streamline the business processes for advertising agencies and their clients. Initially, iNTELESOURCE will be the core of webADTV. iNTELESOURCE provides agencies and production companies the opportunity to digitize, archive and retrieve all television commercials produced by their firms. B. In February 2000, webADTV adopted the 2000 Incentive Stock Option Plan and the 2000 Non-Qualified Stock Option Plan whereby 5,000,000 shares of the subsidiaries common stock have been reserved under each plan. The options can be either incentive stock options or non-statutory options as indicated by the plan name and are generally valued at the fair market value of the stock on the date of grant. The plans allow various vesting options and the ability for the employee to immediately exercise the options for consideration of cash or a subscription receivable. The subsidiary is able to repurchase stock issued on immediate exercises at the exercise price if certain service periods are not met by the employee. As Of May 10, 2000, approximately 3.3 million options have been granted under the plans of which approximately 2.8 million options have been exercised. Stock subscription receivable related to these exercises aggregates $54,400. If all options were exercised, the Company's ownership in webADTV would be diluted to 86%. C. In March 2000, the Company proposed to commence an exchange tender offer to the shareholders of Harmony to acquire all of the outstanding shares of Harmony's common stock in exchange for shares of the Company's common stock. The Company proposes to offer one share of its common stock for every 13.75 shares of Harmony common stock. If the Company is successful in its tender offer, Harmony will become a wholly owned subsidiary of the Company. D. On March 23, 2000, the Company called its notes payable due from Harmony. As a result of Harmony's inability to repay the notes within the 30-day demand period, on May 1, 2000, the Company granted Harmony a forbearance for an indeterminate amount of time to allow the independent directors of Harmony to further consider and propose some cure alternatives. E. During the quarter ended March 31, 2000, the Company recorded a valuation allowance associated with commercial director advances in excess of earnings totaling $624,000, of which $461,000 relates to advances paid in 1999. Such advances are regularly paid to established commercial directors on a monthly basis and are offset against the actual earnings from commercial directorial services. The Company capitalizes these monthly payments and recognizes them as an expense in the period that they are offset against a commercial director's actual earnings. Capitalized amounts were evaluated for impairment based on anticipated future commercial project awards for individual commercial directors and an allowance was established for capitalized amounts believed to be impaired. The valuation allowance was primarily necessitated by changes in the workflow and contractual relationships of the majority of The End's commercial directors after the resignation of two principal officers of The End. F. On May 1, 2000, members of the Screen Actors Guild began a strike against the advertising agencies that represent the Company's customer base. This strike has limited the Company's ability to produce television commercials domestically. The Company has made an effort to limit the effect that the strike will have on its operations by utilizing non-union talent and continuing to produce its commercials off-shore wherever possible. The Company can give no assurance that it will not experience future adverse affects from the strike, which the industry believes will be settled by October 30, 2000. Note 3 Investment in Harmony The Company holds a majority interest in Harmony through the ownership of 4,139,562 shares of Harmony's common stock. Harmony's most recent fiscal 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 -------- Income from productions (465) Corporate, depreciation & amortization 836 Restructuring cost & impairment of assets (175) -------- Loss from Operations (1,126) Interest expense (79) -------- Net loss $ (1,205) -------- Harmony's results from operations are consolidated for the period beginning April 1, 1999 and all periods thereafter. Previous periods are accounted for under the equity method. No minority interest is currently shown related to Harmony, as the minority shareholders no longer have any equity basis in their investment. As of March 31, 2000, the Company had recognized losses in excess of its prorata share totaling $2.5 million. Note 4 Reclassifications Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. These reclassifications have no effect on the accumulated deficit or net income or loss previously reported. In accordance with Accounting Principles Board Opinion 30, "Reporting the Results of Operations - Discontinued Events and Extraordinary Items" (ABP 30), certain reclassifications have been made to the previously reported 1999 financial statements to reflect the disposition of the radio stations as a discontinued operation. Note 5 Business Segments The Company classifies its operations into two major business segments: television commercial production and webADTV. The television commercial production segment consists of the Company's production companies: Curious Pictures, Chelsea Pictures, Populuxe, The End and its subsidiaries through Harmony, and Buffalo Rome Films. The webADTV segment is comprised of the Company's online digital tools and Internet content initiatives. The Company evaluates performance based on several factors, of which the primary financial measure is production service income, excluding non-cash charges and non-recurring charges, since this measure approximates the cash flow generated by each segment. Production service income is defined as earnings before interest, taxes, stock-based compensation, corporate overhead, and depreciation and amortization. The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. Three months ended March 31, 2000 (in thousands) Television Commercial Total Production webADTV Corporate iNTELEFILM ---------- ------- --------- ---------- Revenues from external sources $21,740 $ -- $ -- $21,740 Inter-segment Revenues -- -- 300 300 Production service income/ (loss) 272 (382) 300 190 Depreciation and amortization 269 -- 247 516 Income (loss) from operations (82) (382) (1,114) (1,578) Additions to long- lived assets $ 247 $ 7 $ 29 $ 283 The Company has not presented segment information for the three months ended March 31, 1999 as the Company only operated the television commercial production segment for that period. Revenues, production service loss and loss from operations for the television commercial production segment was $1,144,300, $(121,186), and $(121,344), respectively. Note 6 Discontinued Operations On January 6, 1998, the Company's shareholders approved the sale of all of the Company's owned and operated radio stations which represents the measurement date for the Company's exit from the children's entertainment and radio broadcasting industries. Accordingly, the operation and disposition of the radio stations has been classified as discontinued operations in the accompanying financial statements. During the three months ended March 31, 1999, the Company recognized a gain on the disposal of discontinued operations of $12,854,000. This overall gain includes a $192,000 loss from discontinued operations on revenues of $87,000 and a tax provision of $3,500,000. The basic and diluted income per share related to the gain from the disposal of discontinued operations was $1.98 for the three months ended March 31, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis contains certain non-historical forward-looking terminology such as "believes," "expects," "anticipates," and "intends," or comparable terminology. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Potential purchasers of the Company's securities are cautioned not to place undue reliance on such forward-looking statements which are qualified in their entirety by the cautions and risks described herein. Results of Operations for the Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31, 1999: General Overview On January 6, 1998, the Company's shareholders approved the sale of all of the Company's owned and operated radio stations which represents the measurement date for the Company's exit from the children's entertainment and radio broadcasting industries. Accordingly, the operation and disposition of the radio stations has been classified as discontinued operations in the accompanying financial statements. The complete transition into the commercial production service industry occurred in 1999 with increases in the Company's ownership in Harmony to 55%, in Curious Pictures to 51%, and in Chelsea to 100%. The Company believes it is now a leading source of services for the television commercial production 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 also operates iNTELESOURCE, an Internet based, video asset management system that provides agencies and production companies with the ability to digitize, encode, archive and stream television commercials which they produce. As a result of acquiring a majority interest in Harmony and Curious Pictures, the Company began consolidating these companies under the purchase method of accounting for the acquisition of majority-owned subsidiaries. Harmony's and Curious Pictures' results from operations are consolidated for the period beginning April 1, 1999. Previous periods are accounted for under the equity method. Chelsea's operations are consolidated for the period beginning March 1, 1999. Because of this transition, a comparison of the changes in the revenue and expense categories from the first quarter of 1999 to the first quarter of 2000 would not be meaningful without including additional information related to Harmony's results of operations for the first quarter of 1999. Accordingly, information related to Harmony's first quarter 1999 performance has been provided. The Company's total commercial production revenues increased $20,596,000 from $1,144,000 in the first quarter of 1999 to $21,740,000 in the first quarter of 2000. Revenues at Chelsea and Populuxe increased $4,664,000 from $1,144,000 in the first quarter of 1999 to $5,808,000 in the first quarter of 2000. The End, the operating division of Harmony, and Curious Pictures produced revenues of $15,931,000 in the first quarter of 2000, an increase of $2,410,000 over the same period last year, although those revenues were not consolidated in the Company's financial statements at that time. These increases were due primarily to the improved ability of the Company's production companies to attract and retain directors. Cost of production is directly related to revenues and includes all direct costs incurred in connection with the production of television commercials including film, crews, location fees and commercial directors' fees. Cost of production as a percentage of production contract revenues was 85% during the first quarter of 2000. Included in the cost of production for the first quarter of 2000 is the $461,000 one-time charge related to the Company's change in method of accounting for the advances paid to its commercial production directors (see Note 2E to the financial statements). The Company believes the cost of production, as a percentage of revenues, will decrease as its production companies retain more directors and are able to charge greater premiums for these directors as the demand for their work increases. Additionally, the Company believes it will continue to realize greater cost benefits on a consolidated basis, such as vendor discounts, which may lower the overall cost of production. Selling expenses at the production companies consist of sales commissions, advertising and promotional expenses, travel and other expenses incurred in the securing of television commercial contracts. Selling costs at Chelsea and Populuxe increased $144,000 from $37,000 in the first quarter of 1999 to $181,000 in the first quarter of 2000. The End and Curious Pictures incurred selling costs of $611,000 in the first quarter of 2000, an increase of $85,000 over the same period in 1999, although those expenses were not consolidated in the Company's financial statements at that time. Additionally, the Company's newest subsidiary, webADTV, incurred $22,000 in selling costs through iNTELESOURCE, its subscription based video asset management system. General and administrative expenses at the divisions consist of overhead costs such as office rent and expenses, executive, general and administrative payroll, and related items. General and administrative expenses at Populuxe and Chelsea increased $389,000 from $263,000 in the first quarter of 1999 to $652,000 in the first quarter of 2000, as the Company owned Chelsea only one month of the first quarter of 1999. The End and Curious Pictures incurred general and administrative costs of $1,522,000 during the first quarter of 2000, an increase of $69,000 over the same period of 1999, although those expenses were not consolidated in the Company's financial statements at that time. webADTV's general and administrative costs during the first quarter of 2000 were $60,000. Stock option compensation was $90,000 in the first quarter of 2000 and includes $5,000 of expense related to options granted to members of the Company's Board of Directors, and $85,000 of expense related to current options granted to Curious Management. Corporate charges incurred in the first quarter of 2000 were $1,161,000 and $540,000 in the first quarter of 1999. Corporate charges related to the Harmony divisions were $530,000 in the first quarter of 1999 and were not consolidated in the Company's financial statements for that period. Overall, the increase in corporate charges on a comparable basis was $91,000 from the first quarter of 1999 to the first quarter of 2000. This increase is due primarily to the start-up activities related to webADTV. Depreciation and amortization for the production and corporate operations incurred in the first quarter of 2000 was $516,000 and $4,000 in the first quarter of 1999. Depreciation and amortization related to the Harmony divisions was $197,000 in the first quarter of 1999 and was not consolidated in the Company's financial statements for that period. This increase is related primarily to the excess of the investment cost over the value of the underlying net assets (goodwill) of Harmony. Prior to the Company obtaining a majority interest in Harmony, this expense was reported as a portion of the equity loss in Harmony. Net interest income was $63,000 in the first quarter of 2000 compared to net interest expense of $503,000 in the first quarter of 1999. The interest income in 2000 was due primarily to interest earned on the Company's cash, while the interest expense of the first quarter of 1999 was related to the debt and debt-issue costs remaining prior to the sale of the last three radio stations the Company held until mid-January 1999. Income tax benefits of $400,000 were recognized in the three months ended March 31, 1999. These income tax benefits were derived primarily from the ability to offset the taxable loss from operations against the sale of discontinued operations. A net loss from continuing operations of $1,519,000 was realized in the first quarter of 2000 compared to $2,699,000. During the three months ended March 31, 1999, the Company recognized a gain on the disposal of discontinued operations of $12,854,000. This overall gain includes a $192,000 loss from discontinued operations on revenues of $87,000, and a tax provision of $3,500,000. This represents taxes estimated to be due as a result of the sale of the radio stations at the time. This estimate was subsequently reduced to approximately $1,802,000 in the fourth quarter of 1999 by employing certain income tax strategies not in place in the first three quarters of 1999. A net loss of $1,519,000 was realized in the first quarter of 2000 compared to net income of $10,154,000 in the first quarter of 1999. Liquidity and Capital Resources The Company's liquidity, as measured by its working capital, was $8,806,000 at March 31, 2000, compared to $9,863,000 at December 31, 1999. In January 2000, the Company organized webADTV as a subsidiary. webADTV intends to offer an online digital suite of tools designed to web-enable all aspects of the global advertising process from conception of the media campaign, through production, placement, and fulfillment. Initially, iNTELESOURCE will be the core of webADTV. iNTELESOURCE provides agencies and production companies the opportunity to digitize, archive, and retrieve all television commercials that they produce. webADTV will focus on the workflow needs critical to advertising agencies in the $250 billion advertising arena. webADTV believes the development of its tools for the advertising agency will generate revenues through a tiered subscription model, service income and commissions. webADTV will continue to differentiate itself from competitors by applying the depth of its industry expertise, incorporating its various proprietary tools, and by increasing the range of its strategic relationships. However, there can be no assurance that webADTV's business plan will be completed, or if completed, that the business plan will be successful. To date, approximately 88% of the outstanding shares of common stock of webADTV are held by iNTELEFILM and approximately 12% of the outstanding shares of webADTV common stock has been issued to employees and consultants pursuant to stock option plans. The Company intends to seek separate, private financing for webADTV. However, no assurance can be given that webADTV will be able to obtain financing or that the terms of such financing will be favorable to webADTV. In that event, webADTV may have to seek alternative methods of financing including the continued use of iNTELEFILM funds. Additionally, outside financing may result in the issuance of additional shares, thereby diluting the Company's investment. In February 2000, all advances made through the credit facility established between Finova Capital Corporation ("Finova") and Harmony were paid in full as Finova terminated its relationship with Harmony. As a result, all of the Company's obligations as a guarantor of this facility have been fulfilled. In March 2000, the Company proposed to commence an exchange tender offer to the shareholders of Harmony to acquire all of the remaining outstanding shares of Harmony's common stock in exchange for shares of the Company's common stock. The Company proposes to offer one share of its common stock for every 13.75 shares of Harmony common stock. If the tender offer were fully completed according to these terms, the Company would exchange approximately 244,880 shares of its common stock for 3,367,098 shares of Harmony's common stock, thereby owning 100% of Harmony. As part of such transaction, the Company would recognize approximately $719,000 of goodwill. No assurance can be given that the Harmony shareholders will accept the offer once it is made. On March 23, 2000, the Company demanded payment on the notes payable from Harmony, aggregating approximately $3.2 million at March 31, 2000. On May 1, 2000, the Company granted Harmony a forbearance for an indeterminate amount of time to allow the independent directors of Harmony to consider and propose some cure alternatives. On May 1, 2000, members of the Screen Actors Guild began a strike against the advertising agencies that represent the Company's customer base. This strike may limit the Company's ability to produce television commercials domestically and in Canada until resolved. The Company will take efforts to limit the effect that the strike will have on its operations by utilizing non-union talent and continuing to produce its commercials off-shore wherever possible. To date, the Company has not experienced a significant loss of business as a result of the strike, however, the Company can give no assurance that an extended strike will not have an adverse affect on its operations. In November 1999, two of the principal officers of The End resigned from the Company. Under their agreements with The End, certain of the commercial directors of The End now have the right to terminate their agreement with The End. To date, one of The End's commercial directors has exercised his right to terminate his agreement and ended his exclusive representation by The End. The departure of the two principal executives and of the one commercial director, have not, to date, had any material adverse impact on The End's revenues. Subsequent to the departure of the aforementioned officers, the Company appointed a long-time executive with the Company as president of The End, and appointed a new chief operating officer who is a known talent as an executive in the financial, administrative, production and marketing arena of the entertainment industry. During the quarter ended March 31, 2000, The End produced revenues of $9.7 million and an operating loss of $453,000 compared to revenues of $7.9 million and an operating loss of $814,000 for the quarter ended December 31, 1999. No assurance can be given that these departures will not cause further negative impact on operations or financial performance of The End. The impact of the departure of the foregoing individuals of The End on the Company's liquidity and profits/losses is not currently ascertainable; however, it has reduced The End's overhead and necessitated the valuation allowance for director advances in excess of earnings discussed fully in Note 2E to the financial statements. The Company intends to further expand its television commercial production business and holdings through acquisitions and opportunities within its present divisions. The Company seeks to explore the consolidation of commercial production companies in an effort to increase its commercial production director pool. In addition, the Company intends to acquire production service companies, such as rental, editing, design/marketing, post-production and music companies. The Company believes that gross revenues and profits can be increased through the acquisition of private production companies and related service companies. There can be no assurance that the Company will consummate any additional acquisition or that any acquisition, if consummated, will ultimately be advantageous or profitable for the Company. Management believes that with $8,806,000 of working capital as the foundation of its acquisition capital, the Company should have adequate capital to meet its ongoing working capital needs and continue its new business plan and acquisition strategy in the near term. Anticipated uses of cash in the near term include payment of the short-term note payable of $1,500,000 due to Curious Management in May 2000, funding operating losses and funding costs incurred by webADTV which is currently in its initial start-up phase. Additionally, the Company intends to further replenish its acquisition capital by replacing the Finova operating line of credit, thereby enabling Harmony to operate its business through a line of credit instead of depending on the Company to fund its operations. Such a line would provide working capital for the all of the Company's existing divisions, which it currently finances internally. However, should a potential acquisition require greater capital than the Company's cash sources, the Company may need to obtain additional financing. If the Company is not able to obtain adequate financing, or financing on acceptable terms, it could possibly cause a delay in the full implementation of its business plan. Consolidated cash was $12,935,000 at March 31, 1999 and $15,986,000 at December 31, 1999, a decrease of $3,051,000. Cash provided by operating activities during the first quarter of 2000 was $512,000. Accounts receivable at March 31, 2000 decreased $3,239,000 from December 31, 1999, other receivables at March 31, 2000 increased $344,000 from December 31, 1999 and prepaid expenses at March 31, 2000 decreased $942,000 during the same period. Accounts payable at March 31, 2000 increased $269,000 from December 31, 1999, accrued expenses at March 31, 2000 decreased $2,493,000 from December 31, 1999, and deferred income decreased $738,000 during the same period. During the first quarter of 2000, net cash used in investing activities was $431,000 and was used for capital expenditures. Cash used in financing activities amounted to $3,133,000 during the first quarter of 2000. This represents primarily the payoff of the Finova line of credit, net of the proceeds from the exercise of options to purchase common stock. Seasonality and Inflation The Company does not believe that seasonality or inflation has affected the results of its operations, and does not anticipate that inflation will have an impact on its future operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On September 30, 1998, a jury in the United States District Court for the District of Minnesota (the "Court") ruled in favor of the Company in connection with litigation for breach of contract and misappropriation of trade secrets that the Company had commenced against ABC/Disney and awarded the Company $20 million for breach of contract against ABC Radio, $10 million for misappropriations of trade secret by ABC Radio and $10 million for misappropriation of trade secret against Disney. On January 15, 1999, the Court upheld the jury's findings that ABC Radio had breached its contract with the Company and that ABC/Disney both misappropriated the Company's trade secret information, the Court disagreed with the jury's conclusion that the evidence showed that those actions caused the Company's damages or that the amount of damages awarded by the jury was supported by the evidence, and set aside the jury's verdict. The Court further ruled that in the event that the decision was reversed or remanded on appeal, that the defendants be granted a new trial on the issues of causation and damages. The Company filed a Notice of Appeal in February 1999. On February 16, 2000, the Company presented its oral argument to the 8th Circuit Court of Appeals in St. Paul, Minnesota. To date, the 8th Circuit Court of Appeals has not ruled on the appeal. The Company intends to pursue its appeal of the judgment and, to this end, certain personnel and financial resources will be used. Item 2. Changes in Securities. a. Not applicable. b. Not applicable. c. Not applicable. d. Not applicable. Item 3. Defaults upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits 27 Financial Data Schedule b. Current Reports on Form 8-K The Company filed the following Current Reports on Form 8-K (File No. 0-21534) with the Securities and Exchange Commission during the quarter for which this report is filed: 1. The Company's Current Report on Form 8-K filed on January 19, 2000, relating to the Company's announcement of the formation of webADTV.com, Inc. 2. The Company's Current Report on Form 8-K filed on February 29, 2000, relating to the engagement of Brian Kenner as a member of the Advisory Committee of webADTV.com, Inc. 3. The Company's Current Report on Form 8-K filed on March 3, 2000, relating to the engagement of Spot Rocket for the digital encoding for iNTELESOURCE.org. 4. The Company's Current Report on Form 8-K filed on March 23, 2000, relating to the proposal to commence an exchange tender offer to shareholders of Harmony to acquire all of the outstanding shares of Harmony common stock not currently owned by the Company in exchange for the Company's common stock. 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 October 27, 2000. iNTELEFILM CORPORATION BY: /s/ Steven C. Smith ----------------------------------- Steven C. Smith ITS: Chief Financial Officer and Principal Accounting Officer EXHIBIT INDEX 27 Financial Data Schedule