-----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, SnkW8m5T0HV6J20P/+iJXrtylzLhE5G5YLnwEWaku/AgOQfi0mgHccF5lgG4GCJD T8gmrjDwVwwkpVk/FDuTog== /in/edgar/work/0000950124-00-006294/0000950124-00-006294.txt : 20001030 0000950124-00-006294.hdr.sgml : 20001030 ACCESSION NUMBER: 0000950124-00-006294 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20001027 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: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-21534 FILM NUMBER: 747803 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 10KSB/A 1 c57792a1e10ksba.txt FORM 10KSB/A 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-KSB/A |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 | | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-21534 iNTELEFILM CORPORATION (Name of Small Business Issuer in Its Charter) Children's Broadcasting Corporation (former name) MINNESOTA 41-1663712 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 5501 EXCELSIOR BOULEVARD, MINNEAPOLIS, MINNESOTA 55416 (Address of Principal Executive Offices, including Zip Code) (612) 925-8840 (Issuer's Telephone Number, including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK ($.02 PAR VALUE) COMMON STOCK PURCHASE RIGHTS (Title of Class) 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 | | Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. | | The issuer's revenues for its most recent fiscal year were $67,242,374. The aggregate market value of the voting stock held by non-affiliates of the issuer as of March 1, 2000 was approximately $20,409,920. The number of shares of the common stock of the issuer outstanding as of March 1, 2000 was 6,388,966. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the document listed below have been incorporated by reference to the indicated part of this Form 10-KSB. DOCUMENT INCORPORATED BY REFERENCE PART OF THE FORM 10-KSB Definitive Proxy Statement for the Company's 2000 Item 10 of Part III Annual Meeting of Shareholders ================================================================================ 2
TABLE OF CONTENTS PAGE ---- PART I .........................................................................................................2 ITEM 1 DESCRIPTION OF BUSINESS.......................................................................2 ITEM 2 DESCRIPTION OF PROPERTY.......................................................................8 ITEM 3 LEGAL PROCEEDINGS.............................................................................8 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................9 PART II ....................................................................................................... 10 ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.....................................10 ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................................10 ITEM 7 FINANCIAL STATEMENTS......................................................................18-51 ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................................52 PART III ........................................................................................................52 ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT............................................52 ITEM 10 EXECUTIVE COMPENSATION.......................................................................54 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................55 ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................56 ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K.......................................................58 SIGNATURES.......................................................................................................61 EXHIBIT INDEX....................................................................................................62
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements under the captions "Description of Business," "Legal Proceedings," "Market for Common Equity and Related Shareholder Matters," "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this Form 10-KSB constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "may," "will," "expect," "anticipate," "estimate," "should," or "continue" or the negative thereof or other variations thereon or comparable terminology. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from those results presently anticipated or projected. Such factors are set forth under the caption "Management's Discussion and Analysis or Plan of Operation - Cautionary Statements." i 3 PART I ITEM 1 DESCRIPTION OF BUSINESS GENERAL OVERVIEW Over the past year, iNTELEFILM(sm) Corporation (the "Company") has transformed itself into a leading source of services for the television commercial production and related media business industry through acquisitions and the establishment of relationships in the industry, and now offers the most extensive production capability for television commercials, music videos and related media available in the United States and the exclusive services of established talent (See General Overview of 1999 Events and Transactions). In January 1999, the Company completed its exit from the children's entertainment and radio business when it sold the last of its radio stations to Radio Unica Corp. The Company believes that the expanded number of television channels, advances in digital technology and the demand for effective advertising concepts and efficient delivery of production services create significant opportunities for the Company in traditional broadcast media and on the Internet. During 1999, the Company increased its ownership interest in Harmony Holdings, Inc. ("Harmony"), a company which produces television commercials, music videos and related media, from 49.1% to 55.2%. For reporting purposes, the Company now consolidates Harmony's financial statements under the purchase method of accounting for the acquisition of a majority interest in a subsidiary. On March 23, 2000, the Company announced its proposal to commence an exchange tender offer to the shareholders of Harmony to acquire all of the outstanding shares of Harmony not currently owned by the Company. The Company proposes to offer one share of its common stock for every 13.75 shares of Harmony's common stock. In January 2000, the Company, through its relationships with AT&T, Excalibur Technologies, The Source Maythenyi and Spot Rocket, announced the formation of webADTV.com, Inc. ("webADTV"). webADTV, a wholly-owned subsidiary of the Company, was organized to provide a complete web based source of communications, commerce, solutions and services to advertising agencies and other companies in the advertising campaign production industry. The Company's services are usually directed towards advertising agencies located in the major markets of New York, Los Angeles, Chicago, Minneapolis, Detroit, Dallas and San Francisco as well as regional markets. The Company provides commercial production services to such major advertisers as Acura, Anheuser Busch, AT&T, Audi, Bank of America, Blue Cross, Coca Cola, Canon, Disney, Kellogg's, Kodak, McDonald's, Motorola, Nike, Nintendo, Reebok, Sears, Sony, State Farm and Visa. The Company also works with such major advertising agencies as Leo Burnett, Bozell Worldwide, Foote, J. Walter Thompson, DDB Needham, Young & Rubicam and Fallon McElligot. The Company was incorporated under the Minnesota Business Corporation Act on February 7, 1990. All references to the Company herein include its subsidiaries, unless otherwise noted. The Company's executive office is located at 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416, and its telephone number is (612) 925-8840. The Company's website is http://www.intelefilm.com. BUSINESS AND ACQUISITION STRATEGY COMMERCIAL PRODUCTION STRATEGY It is the Company's objective to provide an end-to-end commercial production solution for advertising agencies enabling the Company to provide the highest level of service to its clients. To do so, the Company intends to further expand its television commercial production service business and holdings through acquisitions 2 4 and/or opportunities within its present divisions. The Company intends to seek to acquire production service companies, such as rental, editing, designing/marketing, post-production or music companies. The Company believes that it can increase revenues and profits through the acquisition of production companies and related service companies. By creating this infrastructure, the Company believes it can also create a community for creative talent including a highly effective and cost-efficient professional support organization, experienced executive producers and integrated production services. The Company believes key talent will recognize that the Company will provide an environment conducive to creativity by relieving them and production management of the responsibility of business and financing operations while providing a measure of financial stability. Key talent will also recognize the possibility of the Company taking a long-term interest in their career that traditional, independent production houses typically do not provide. The Company believes the primary benefits of its strategy include: - offering more extensive services than its competitors; - attracting key talent; - higher overall profit margins; - economies of scale; - centralization of accounting, legal and marketing functions; and - the ability to receive support services at lower costs. The Company believes it should have adequate capital to continue its acquisition strategy and business plan over the next 12 months. However, should a potential acquisition be greater than the Company's current 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 implementation of its full business plan. 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. INTERNET STRATEGY As the leader in television commercial production, the Company has developed a high level of expertise in the development of short form video and advertising. The Company has assessed its strengths in these areas and has identified several Internet initiatives: - utilization of the Internet for productivity gains; - development of a global presence; - creation of short form content via the Company's directorial talent pool for use on the Internet; - development of new advertising solutions for the Internet through integration of character-based content; and - creation of the leading business to business portal to serve the advertising agency industry. The Company believes the Internet can be used for greater communication within each of its divisions, sales network and as a solution to provide lower costs and improve productivity and information availability. Additionally, the Company currently spends approximately $750,000 per year to dub and send directorial reels to advertising agencies and their clients. The Company is exploring the elimination of this process through Internet video systems including a beta version of the inteleSource.org ("inteleSource") system described below. DEVELOPMENT OF SHORT FORM CONTENT AND ADVERTISING The Company is also exploring the use and development of short form video together with the development of new Internet advertising models. Recent studies have shown that banner ads create only a 0.2% 3 5 click through rate. It is the Company's belief that rich media advertising is a key to developing greater advertising revenue models for the Internet. Although the Company recognizes that current broadband parameters still limit the development of rich media advertising for the mass market, the Company believes that there will be solutions to these barriers. Additionally, the Company believes that rich media advertising to individuals while they are at work is a viable opportunity due to high speed access at most business locations. As such, the Company has begun to establish relationships with broadband providers to maintain an awareness and participate in seeking the solution to the advertising revenue models. In February 2000, the Company announced a relationship with Hitplay, an entertainment video delivery network, pursuant to which the Company will develop, produce and deliver original and archival entertainment video to Hitplay and Hitplay will deliver the video over the Internet. The Company currently retains the exclusive services of approximately 60 commercial directors. The Company believes that this director pool has the video expertise necessary to meet the growing demand for short form video on the Internet. The Company intends to leverage its talent base to explore the convergence of content and technology over the Internet. DEVELOPMENT OF A BUSINESS TO BUSINESS PORTAL In January 2000, the Company formed webADTV. webADTV will provide a complete web based source of communications, commerce, solutions and services to the advertising agencies and other companies in the advertising campaign production industry including news and information from affiliate content providers, an e- commerce business generated from a wide range of affiliated design and production sources and its subscription based archiving and retrieval service, inteleSource. Initially, the portal will focus on the workflow needs critical to advertising agencies in the $60 billion television commercial production arena. webADTV will later expand to meet the service needs of advertising agencies in all areas including print, media, newspaper, magazines and outdoor. The Company believes the portal will differentiate itself from future competitors due to the uniqueness of its service oriented subscriber based inteleSource archiving system. The Company also anticipates that the portal will generate revenues through advertising and pay per view content specifically created for advertising agencies. In connection with the development of the business to business portal, the Company, in development with AT&T and Excalibur Technologies Corporation ("Excalibur"), announced the creation of inteleSource, a digital video archiving and retrieval service designed specifically for global advertising agencies, the Company's core customer. AT&T and Excalibur will provide web-based hosting, connectivity and video content management technologies for the data-based service and the Company will provide its relationships with advertising agencies and its expertise in commercial production. The Company believes that there is a great need for on-demand digital archiving and retrieval of video assets by global advertising agencies and that the Company will be able to couple its agency relationships with the AT&T infrastructure and the new Excalibur architecture in order to manage video content over networks to take additional steps in web-enabling its services. inteleSource is a web based digitized video storage and retrieval service designed exclusively for use by global advertising agencies and their clients. Utilizing Excalibur Screening Room technologies powered by AT&T Labs technology, inteleSource encodes television commercials with specific searchable criteria such as clients, products, directors, producers, and creatives, empowering agencies and their clients to more efficiently manage and retrieve assets from their extensive video libraries. inteleSource provides an Internet solution to advertising agencies who do not have a reliable or efficient manner to search their commercial video library. Currently, advertising agencies collect and store the commercials produced for their clients on 3/4 inch video tape. Because commercials are stored on individual reels, the creative personnel do not have a system to quickly review all the reels in their library by selected categories. Instead, each reel would have to be viewed separately. inteleSource minimizes this process to better serve the creative personnel's need to review past advertising campaigns, specific director work or, for example, all the car commercials produced by the agency. Additionally, inteleSource encodes and digitizes each new commercial produced by the advertising agency and stores the commercial on the agency's archive system. In addition to the 4 6 need to archive commercials, webADTV intends to further develop the archiving capabilities of the service to include agency specific programming. As an example, the portal could utilize the system to archive various seminars, spots of the week or interviews with various industry lumaries. There can be no assurance that webADTV's business plan will be completed or if completed, that the business plan will be successful. BUSINESS DESCRIPTION The Company's primary business is the production of television commercials, music videos and related media. The expertise, reputation and creative vision of the commercial director roster and the ability of the Company to deliver the commercial in an efficient manner defines the production company's role. The Company's customers are typically advertising agencies acting on behalf of a television advertiser. The Company's marketing efforts have focused on national and multi-national advertisers, national network commercials and higher budget commercials. Nationally, the advertising and commercial production industry has experienced an increase in the number of markets for television commercials. Generally, the Company's budgeted price for a commercial ranges from $200,000 to $400,000 and occasionally exceeds $1,000,000. The Company's services are marketed by a staff of sales representatives who seek out available commercial projects suitable for the Company's commercial directors. These efforts are usually directed towards advertising agencies located in New York, Los Angeles, Chicago, Detroit, Dallas, San Francisco, Minneapolis and other regional markets. Sales personnel hired by the Company work exclusively for the Company out of offices located in Los Angeles and New York. The Company also employs independent sales representatives on a select basis. The Company is seeking to coordinate its sales efforts in a more efficient manner to enhance revenues. To sell a commercial director's work, the sales staff uses the commercial director's reel as its primary tool which contains samples of the director's work demonstrating the director's creativity and experience. The reels are continuously updated and provided to the advertising agencies who generally act as the decision maker. The Company also advertises in trade publications and has sponsored agency events on an occasional basis to maintain visibility among advertisers and advertising agencies and to publicize specific information such as additions to the directorial roster, completion of a significant commercial, or the recognition of awards and achievements. The Company attracts and retains commercial directors by offering such directors the opportunity to work in an organization with a highly effective sales force and a high-quality staff of executive producers and support staff. The Company offers directors the ability to work in an environment that fosters creativity by relieving directors of the worry and burden of running a business or financing the projects on which they work. Ad agencies award jobs to commercial production companies with an accompanying bid. The award bid contains all of the costs associated with that particular commercial and is broken down into direct costs of production, director's fees, insurance and the production company's fee. The production company and producer of the commercial carefully monitor costs throughout the filming process. The pre-approved bid is often altered during filming due to agreed upon new creative options or unexpected occurrences such as inclement weather. When this occurs, and the project costs exceed the original budget, the increased cost is paid for by the agency and its client. 5 7 In most circumstances, the Company bills the advertising agency for 33%-70% of the entire budget as stated in the bid, to be paid in advance or on the first day of principal photography. The remainder of the contract price is generally paid in one or more installments by the agency within 30 to 120 days after completion of the principal photography. The accounts receivable write offs have traditionally been less than 2% of all business. A small percentage of the Company's business is derived from the production of music videos. The production cycles for music videos is similar to that of television commercials, but the budgets are generally smaller. The client for the music videos is usually the record company or the performer directly. The television commercial production industry is a highly fragmented multi-billion dollar industry, with most of the Company's competitors being relatively small operations. The Company believes that its large director roster with its range of creative ability, expertise and wide experience coupled with the Company's reputation and advertising agency relationships, provide the Company with a competitive edge in its current markets. GENERAL OVERVIEW OF 1999 EVENTS AND TRANSACTIONS During 1999, the Company utilized its resources to purchase an aggregate of 456,600 additional shares of common stock of Harmony at prices ranging from $0.94 to $1.03 per share. Such purchases increased the Company's ownership interest in Harmony, a company which produces television commercials, music videos and related media, from 49.1% to 55.2%. For reporting purposes, the Company consolidates Harmony's financial statements under the purchase method of accounting for the acquisition of a majority interest in a subsidiary. In January 1999, the Company completed the sale of the radio broadcast licenses and certain other assets of its remaining three radio stations KAHZ(AM), Dallas, KIDR(AM), Phoenix and WJDM(AM), New York to Radio Unica Corp. The Company used a portion of the proceeds of that transaction to redeem all of its 606,061 shares of Series B Convertible Preferred Stock which were issued in June 1998. The preferred stock was redeemed at $4.04 per share, or $2.45 million. Upon the sale to Radio Unica Corp. the Company completed the exit from its former business plan. In February 1999, the Company incorporated a new subsidiary, Buffalo Rome Films, Inc. ("Buffalo Rome") which will seek out independent film opportunities. During 1999, the Company entered into an agreement regarding the production of a picture entitled "True Rights" which was based on a screenplay written by Meg Thayer. In exchange for providing certain financing of the production, the Company acquired a one-third equity interest in the screenplay, production of "True Rights" and any other material relating thereto. In addition, the Company will receive a percentage of the net proceeds from the distribution and exploitation of "True Rights" in all media and all sources worldwide after the Company receives, the sum equal to 125% of its respective contribution to the production of "True Rights." The Company's financing obligation totaled $126,000 and was paid in full during the filming of the project. The Company has no assurance as to the amount of return, if any, that the investment will produce. Investment in independent films involves a high degree of risk. As a result, the Company has limited its involvement in this area. In March 1999, the Company acquired Chelsea Pictures, Inc. ("Chelsea") by merging it with Chelsea Acquisition, Inc., a newly formed subsidiary of the Company with Chelsea as the surviving corporation. Chelsea engages in the production of television commercials, independent films and related media. In 1999, Chelsea had revenues of approximately $16.7 million. In exchange for the stock of Chelsea, the Company issued to Steve Wax, Chelsea's sole shareholder, 125,000 shares of the Company's Common Stock with an additional 75,000 shares to be issued to Mr. Wax contingent upon Chelsea obtaining certain earnings before interest, taxes, depreciation, and amortization ("EBITDA") levels. Subsequent to the merger transaction, the Company repaid approximately $887,000 of Chelsea's liabilities in existence at the time of the merger. Also, in connection with this transaction, Chelsea entered into certain employment and commercial production director agreements. 6 8 In April 1999, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of its common stock. The repurchases have been made in accordance with Exchange Act Rule 10b-18, and are subject to the availability of stock, trading price, market conditions and the Company's financial performance. The repurchased shares are canceled and returned to the Company's authorized capital stock. As of March 1, 2000, the Company had repurchased an aggregate of 488,900 shares at prices ranging from $1.53 to $2.06 per share. In June 1999, as part of its repositioning into the television commercial production industry, the Company began doing business as iNTELEFILM(sm) and changed its Nasdaq symbol from "AAHS" to "FILM." On September 30, 1999, the Company and Children's Radio of Kansas City, Inc., a subsidiary of the Company, merged and in the process of the merger the Company changed its name from Children's Broadcasting Corporation to iNTELEFILM Corporation. Effective as of August 1, 1999, the Company purchased the Option and Share Transfer Agreement ("Option Agreement") entered into by Harmony and the four principal executives (collectively, "Curious Management") of Curious Pictures Corporation ("Curious Pictures") dated December 15, 1996, from Curious Management. Under the Option Agreement, Curious Management could earn the right to purchase 50% of the outstanding stock of Curious Pictures from Harmony upon the achievement of certain specified financial goals. Pursuant to the Company's purchase agreement and based on the results of operations of Curious Pictures, it was agreed by all parties that Curious Management's right to purchase the 50% equity interest had fully vested and was exercisable for consideration totaling $50. Following its purchase of the Option Agreement, the Company acquired 50% of Curious Pictures through the exercise of stock options granted under the Option Agreement. The Company also acquired a 1% equity interest in Curious Pictures owned by Curious Management that was initially conveyed to Curious Management upon signing the Option Agreement. The consideration paid to Curious Management by the Company for the aforementioned acquisitions aggregated $3.0 million consisting of $1.5 million in cash and $1.5 million note payable bearing an interest rate of 8%, due May 31, 2000. The Company believes it has adequate resources to satisfy the note payable. As a result of this transaction, the Company currently owns 51% of the outstanding stock of Curious Pictures and Harmony owns 49% of the outstanding stock of Curious Pictures. In October 1999, the Company received payment in full on its $15.0 million note receivable from Catholic Radio Network ("CRN"). The Company believes that with the sums received on this note, it should have adequate capital to continue its acquisition strategy and business plan over the next 12 months. SALE OF RADIO STATIONS ACQUIRED PURSUANT TO FORMER BUSINESS STRATEGY. In January 1998, the shareholders initially approved a sale agreement for all of the assets related to the Company's radio stations; however, this sale was ultimately not closed by the seller. Management continued to pursue the sale strategy, and in August 1998, the shareholders of the Company approved new sales agreements for substantially all of the assets related to the Company's radio stations. During the fall of 1998 and early 1999, the Company completed the sale of all of its radio stations and exited its former business strategy. TRADEMARKS, SERVICE MARKS AND COPYRIGHTS The Company has pending service mark applications and claims trademark and service mark rights to and ownership in a number of marks including, but not limited to, iNTELEFILM(sm) Corporation, iNTELEFILM.com(sm), Chelsea Pictures(sm), Wraparoni(sm), Populuxe Pictures(sm), inteleSource.org(sm), webADTV.com(sm), Curious Pictures Corporation(sm), Harmony Holdings, Inc.(sm), The End, Inc.(sm), Beginning Entertainment, Inc.(sm), The Moment Films, Inc.(sm), Unscented, Inc.(sm) and Gigantic Entertainment, Inc.(sm). In addition, the Company has trademark and service mark rights to a number of marks in connection with its former business strategy. 7 9 EMPLOYEES The Company had 76 employees, including one part-time employee, at the end of its last fiscal year. No employee is represented by a union. Some of the Company's subsidiaries are signatory to several talent and collective bargaining agreements related to the physical production of commercials. Personnel covered by such agreements are hired on a freelance basis solely for a specific production and do not have an employment relationship with the Company. The Company believes its relations with employees are satisfactory. Also, see "Certain Relationships and Related Transactions." ITEM 2 DESCRIPTION OF PROPERTY The Company's executive offices are located at 5501 Excelsior Boulevard, Minneapolis, Minnesota. The Company pays for its executive office space through its management fee with Media Management, LLC (" MMLLC"), an entity owned by Messrs. Christopher T. Dahl and Richard W. Perkins, each a director of the Company. See "Certain Relationships and Related Transactions." Chelsea leases an office facility in New York City which consists of approximately 5,000 square feet. This lease requires an annual rent of $132,000 and expires on September 30, 2002. Chelsea also leases an office facility in Hollywood, California, at an annual rent of $59,760 and expires on March 31, 2000. Curious Pictures leases two office spaces in New York City and one office space in San Francisco, California. One New York office lease consists of approximately 20,708 square feet which requires an annual rent of $290,731 and expires on January 31, 2008. The other New York office lease requires an annual rent of $151,500 and expires on November 30, 2004. The San Francisco office lease consists of approximately 3,741 square feet, requires an annual rent of $41,040 and expires on August 31, 2003. The End, Inc.'s California facility is located at 433 South Beverly Hills Drive in Beverly Hills, California. The lease is for ten years ending in October 2008 at a monthly rate for $21,909. The End, Inc.'s current New York facility is located at 75 Varick Street, New York, New York and is shared with Populuxe Pictures, Inc. The lease is for ten years ending in August 2009 at a monthly rate of $9,282. Harmony Holdings, Inc. also leases office space located at 420 South Beverly Hills Drive in Beverly Hills, California, on a month to month basis at a monthly rate of $1,950. The Company carries general commercial liability insurance coverage on its leased property. The Company believes that such insurance is adequate to cover any losses that may occur on such property. ITEM 3 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. As of March 28, 8 10 2000, 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. Except as described above, the Company is not a party to any material legal proceedings. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the Company's most recently completed fiscal year. EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides information with respect to the Company's executive officers as of March 1, 2000. Each executive officer has been appointed to serve until his or her successor is duly appointed by the Board of Directors or his or her earlier removal or resignation from office. NAME AGE POSITION ---- --- -------- Christopher T. Dahl 56 Chairman of the Board, President and Chief Executive Officer James G. Gilbertson 38 Chief Operating Officer Steven C. Smith 44 Chief Financial Officer Jill J. Theis 29 Secretary and General Counsel Michael N. Delgado 40 Executive Vice President of Marketing
Christopher T. Dahl has been President, Chief Executive Officer and Chairman of the Company since its inception in February 1990. Mr. Dahl also serves as Chairman of the Board, President and Chief Executive Officer of Harmony, a company which produces television commercials, music videos and related media, of which the Company is the largest shareholder and is the Chairman of the Board of webADTV. Messrs. Dahl and Perkins own MMLLC. Employees of MMLLC provide certain administrative, legal and accounting services to the Company and Harmony. From 1969 to 1979, Mr. Dahl was the founder and President of a group of companies involved in photo finishing, retail photo sales, home sewing notions, toy distribution and retail craft stores. He was employed by Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969. James G. Gilbertson has served as the Company's Chief Operating Officer since April 1996 and its Chief Financial Officer from July 1992 until December 21, 1999. In January 2000, Mr. Gilbertson was appointed the Chief Executive Officer, President and director of webADTV. From June 1988 to July 1992, he was the Chief Financial Officer of Parker Communications, which operated a group of radio stations. From 1985 to June 1988, he was Controller of the radio division of Palmer Communications located in Des Moines, Iowa. Prior to joining Palmer Communications, Mr. Gilbertson was a practicing certified public accountant with the firm of Ernst & Young LLP. Mr. Gilbertson is also the Chief Operating Officer of Harmony. Mr. Gilbertson is also a director of Founders Food & Firkins, Ltd., a company which owns and operates Granite City Brewery, a microbrewery restaurant in St. Cloud, Minnesota. Steven C. Smith became the Chief Financial Officer of the Company on December 21, 1999. Mr. Smith has been with the Company since October 1998. Formerly the Chief Financial Officer of DIC Entertainment Animation Television and the Vice President of Finance of Orion Television, Mr. Smith brings more than 20 years experience with companies such as the Walt Disney Company. Mr. Smith has also performed as a financial consultant to special effects houses, TV and Satellite Broadcasters and technology companies. On December 21, 1999, Mr. Smith also became the Chief Financial Officer of Harmony. Jill J. Theis joined the Company in March 1997 and has served as the General Counsel and Secretary since February 1999. From January 1996 to March 1997, Ms. Theis worked for the law firm of Holper, Welsh, Mitchell 9 11 & Joanis, P.A. in Minneapolis, Minnesota. From 1993 to 1997, Ms. Theis attended law school at William Mitchell School of Law in St. Paul, Minnesota. Ms. Theis is also the General Counsel and Secretary of Harmony. Michael N. Delgado oversees the marketing and sales efforts of the Company and has been with the Company since March 1997. A graduate of the University of Southern California School of Fine Arts, Mr. Delgado has orchestrated national marketing campaigns and has been involved in worldwide branding efforts for a variety of corporations including Patagonia and Lucky Brand Clothing Companies. Mr. Delgado gained significant operations experience in his capacity as President of SenDel Automotive Corporation, a manufacturer of aluminum automotive wheels whose customers included Toyota Motor Company. PART II ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Common Stock of the Company, which currently trades under the symbol "FILM", has been included in the Nasdaq National Market since February 1996, on the Nasdaq SmallCap Market between May 1993 and February 1996, and on the over-the-counter Bulletin Board from the completion of the Company's public offering in 1992 until May 1993. The following table sets forth the approximate high and low closing prices for the Common Stock for the periods indicated as reported by the Nasdaq National Market. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
PERIOD HIGH LOW ------ ---- --- 1998 First Quarter...................................... $ 4.3125 $ 2.8125 Second Quarter..................................... 4.0625 3.0000 Third Quarter...................................... 3.3125 2.8750 Fourth Quarter..................................... 3.6875 2.8125 1999 First Quarter...................................... $ 3.0630 $ 1.7190 Second Quarter..................................... 2.1880 1.5000 Third Quarter...................................... 2.5630 1.5000 Fourth Quarter..................................... 5.2500 1.6250
As of March 1, 2000, the Company had approximately 307 shareholders of record and approximately 2,500 beneficial owners. The Company has never declared or paid any cash dividends on its Common Stock and does not intend to declare or pay cash dividends on its Common Stock in the foreseeable future. The Company currently expects to retain any earnings to finance its business. The declaration or payment by the Company of dividends, if any, on its Common Stock in the future is subject to the discretion of the Board of Directors and will depend on the Company's earnings, financial condition, capital requirements and other relevant factors. ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS This discussion and analysis contains certain forward-looking terminology such as "believes," "anticipates," "expects," 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 10 12 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 YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 On January 6, 1998, the Company's shareholders approved the initial sale agreements 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 transition from the radio broadcasting industry and effectively completed with the closing of the sale of the Company's radio stations in January 1999. The transition into the commercial production service industry occurred with the Company's acquisition of a majority interest in Harmony, and Curious Pictures, and a 100% interest in Chelsea. 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 results from operations are consolidated for the period beginning April 1, 1999 (the "Consolidated Reporting Period"). 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 traditional "Management's Discussion and Analysis" comparison of the changes in the revenue and expense categories from 1998 to 1999 would not be meaningful. Accordingly, information detailing the origin of the production revenues and expenses has been provided. The Company had revenues of $67,242,000 in 1999 compared to no such revenues in 1998. The Harmony production companies produced revenues of $49,393,000 during the Consolidated Reporting Period while the Company's two production companies added in the current year, Chelsea and Populuxe, provided $17,849,000 of the 1999 revenues. Populuxe is a start-up production company. The Company purchased and began operating Chelsea in March 1999. Chelsea currently has a base of talent and directors from which to draw, but intends to continue to build that base. 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 84% during 1999. The Company believes the cost of production as a percentage of revenues will decrease as its production companies retain more directors and these directors become more established. Additionally, the Company believes it will continue to realize greater cost benefits such as vendor discounts which may lower the overall cost of production. Selling expenses consist of sales commissions, advertising and promotional expenses, travel and other expenses incurred in the securing of television commercial contracts. Harmony's selling expenses were $1,987,000 during the Consolidated Reporting Period, while selling expenses at Chelsea and Populuxe were $668,000 in 1999. General and administrative expenses consist of overhead costs such as office rent and expenses, executive, general and administrative payroll, and related items. Harmony's general and administrative expenses were $4,881,000 during the Consolidated Reporting Period, while general and administrative expenses at Chelsea and Populuxe were $2,186,000 in 1999. Stock option compensation was $2,121,000 in 1999 and includes the following: (i) $50,000 of expense related to options granted to members of the Company's Board of Directors, (ii) $1,908,000 of expenses related to previously existing options granted to Curious Management, and (iii) $163,000 of expense related to current options granted to Curious Management. 11 13 Corporate charges decreased $1,941,000 during 1999 from $5,614,000 in 1998 to $3,673,000 in 1999. During 1999 there was a decrease in litigation expenses of $2,737,000 as the trial against ABC/Disney was concluded in the last quarter of 1998. A less costly appeals process continues at this time. Corporate charges, exclusive of the litigation expense, increased as general office operation expense increased as well as the increase in acquisition activity. Depreciation and amortization for the production and corporate operations was $1,542,000 in 1999 compared to $8,000 in 1998. The Company reported $675,000 of amortization expense during the Consolidated Reporting Period 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. In the third quarter of 1999, a gain of $120,000 was realized related to the sale of 90% of the common stock of The End (London), a previously consolidated subsidiary of Harmony. Interest income for 1999 was $1,555,000 compared to $300,000 in 1998. This increase of $1,255,000 was due primarily to interest earned through October 1999 from the $15,000,000 note receivable due from CRN and the interest earned from the advances made to Harmony prior to the Consolidated Reporting Period. Interest expense decreased $4,336,000 from $5,485,000 in 1998 to $1,149,000 in 1999. This decrease in interest expense resulted from the payoff of the majority of the Company's debt in existence at the time of the radio station sales in October 1998 and January 1999. Income tax benefits of $700,000 and $4,000,000 were realized from continuing operations in 1999 and 1998, respectively. These income tax benefits were derived from the ability to offset the taxable loss from operations against the sale of discontinued operations. Net loss from continuing operations of $7,010,000 was realized in 1999 compared to a net loss from continuing operations in 1998 of $10,948,000. During the years ended December 31, 1999 and 1998, the Company recognized gains on the disposal of discontinued operations of $14,349,000 and $18,518,000, respectively. These overall gains include losses from discontinued operations of $113,000 and $3,527,000 on revenues of $100,000 and $2,567,000, respectively, and a tax provision of $1,802,000 and $4,330,000, respectively. This represents taxes estimated to be due as a result of the sale of the radio stations. Net income of $7,340,000 and $6,890,000 was realized in 1999 and 1998, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity, as measured by its working capital, was $9,863,000 at December 31, 1999, compared to a deficit of $5,507,000 at December 31, 1998. This increase in working capital was due to the sale of three radio stations to Radio Unica, the payoff of related debt, and the receipt of $15,000,000 upon payment of the note receivable from CRN. In January 1999, the Company closed on the sale of the radio broadcast licenses and certain other assets of its radio stations KAHZ(AM), Dallas, KIDR(AM), Phoenix, and WJDM(AM), New York to Radio Unica. The Company received gross proceeds of $29,250,000 for the stations' assets which had a net book value of approximately $11,304,000 at the time of the sale. The Company recognized approximately $1,682,000 in transaction costs, including bonuses paid to management, employees and Media Management, LLC, recorded a tax provision of $1,102,000, and paid off all but $981,000 of its debt outstanding at the time of closing. The following is a description of the non-operational use of the proceeds, net of debt repayments, from the Radio Unica transaction: - The Company redeemed 606,061 shares of Series B Convertible Preferred Stock which were issued in June 1998 for an aggregate of $2,450,000. 12 14 - The Company advanced Harmony $3,290,000 in cash payments to unsecured note receivable agreements which are due on demand and bear an interest rate of 14%. As of December 31, 1999, approximately $3,326,000 (including interest) was outstanding. These notes as well as the related interest are eliminated in the Company's consolidation of Harmony for periods after April 1, 1999. - The Company acquired all of the issued and outstanding common stock of Chelsea for $1,135,000, representing 125,000 shares of common stock with a value of $250,000 and the assumption of approximately $885,000 of liabilities net of assets. - The Company's Board of Directors authorized the repurchase of up to 500,000 additional shares of its common stock. As of December 31, 1999, the Company had repurchased an aggregate of 488,900 shares for an aggregate of approximately $918,000 at prices ranging from $1.53 to $2.06. - The Company purchased 51% of Curious Pictures, a commercial production company, from Curious Management for $1,500,000 in cash and $1,500,000 pursuant to a promissory note bearing 8% interest, due May 31, 2000. Curious Pictures was a majority-owned subsidiary of Harmony, which now owns 49% of Curious Pictures. In October 1999, the Company received payment in full on its $15,000,000 note receivable due from CRN. Management believes that with this replenishment of working capital (of which $9,863,000 remained available at December 31, 1999) 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 accrued radio station income tax liability of $1,033,000 and payment of the short-term note payable of $1,500,000 due to Curious Management in March and May 2000, respectively. Additionally, the Company intends to further replenish its acquisition capital by replacing the operating line of credit in existence at December 31, 1999. This line of credit had outstanding borrowings of $3,549,000 at December 31, 1999, which have subsequently been repaid in full pursuant to the lender's call of the debt. Such a line will provide working capital for 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 implementation of its full business plan. The Company began executing its business plan to acquire production companies with the acquisition of Chelsea in March 1999, a majority interest in Harmony in April 1999, and the acquisition of 51% of Curious Pictures in August 1999. 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. In January 2000, the Company continued the implementation of its business plan through the incorporation of webADTV, a subsidiary of the Company which will combine the digital archiving and retrieval service, inteleSource with additional web enabled services, news, and information under development to the global advertising industries and their clientele. webADTV currently seeks to expand and brand its infrastructure to include numerous in-demand vertical services such as research, media planning and buying, competitive monitoring, video and print delivery and the services of agency business partners. In addition, webADTV intends to create useful e-commerce based affiliates and establish carriage relationships with recognized advertising industry news and information content providers. There can be no assurance that webADTV's business plan will 13 15 be completed, or if completed, that the business plan will be successful. In February 2000, webADTV granted the right to purchase approximately 3,330,500 shares of webADTV common stock to various individuals. If all options were exercised, the Company's ownership in webADTV would be diluted to 84%. In November 1999, two of the principal officers of The End, a wholly owned subsidiary of Harmony, 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 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 impact on The End's revenues. During the Consolidated Reporting Period, The End produced revenues of $18,487,000 and an operating loss of $601,000. 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. Consolidated cash was $15,986,000 at December 31, 1999 and $254,000 at December 31, 1998, an increase of $15,732,000. Cash used in operating activities from continuing operations during 1999 was $4,344,000 and the operating cash flows reflected are net of account increases occurring as a result of acquisitions. Accounts receivable at December 31, 1999 increased $2,760,000 from December 31, 1998, other receivables at December 31, 1999, decreased $307,000 and prepaid expenses at December 31, 1999 increased $326,000 during that same time period. Accounts payable at December 31, 1999, decreased $1,785,000 from December 31, 1998, accrued expenses at December 31, 1999 increased $571,000 from December 31, 1998, and deferred income increased $950,000 during the same period. During 1999, net cash obtained through investing activities was $23,289,000 and was provided primarily by the sale of the radio stations to Radio Unica net of proceeds utilized for the direct payment of outstanding debt. Prior to the April 1, 1999, consolidation of Harmony's financial statements, advances to Harmony under note receivable agreements were $2,986,000 net of Harmony's repayments. Proceeds from the sale of radio stations totaled $29,045,000, net of advance payments received prior to December 31, 1998. Cash used in financing activities amounted to $1,884,000 during 1999. This represents the redemption of the convertible preferred stock for $2,448,000, the repurchase of the Company's common stock of $931,000, less the increased borrowings under Harmony's line of credit. Cash used in discontinued operations was $1,329,000. 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. YEAR 2000 READINESS DISCLOSURE Before the rollover of the year from 1999 to 2000, many installed computer systems and software products were coded to accept only two digit date entries and were unable to accept four digit date entries to distinguish 21st century dates from the 20th century dates. As a result, computer systems and software used by many companies prior to the rollover date required upgrading or replacement to comply with such "Year 2000" requirements. The failure of the Company, its vendors, suppliers or other critical third parties with whom the Company conducts business to achieve Year 2000 compliance on a timely basis could materially adversely affect the Company's business, operating results, and financial condition. As of March 1, 2000, the Company has not experienced and does not anticipate any material adverse effects on its production equipment, systems or operations as a result of Year 2000 issues. Business is continuing as usual, and internal equipment and systems will continue to be monitored for any likely disruptions. Further, as 14 16 of March 1, 2000, the Company has not experienced any operational difficulties as a result of Year 2000 issues with its vendors, suppliers or other critical third parties with whom the Company conducts business. However, Year 2000 compliance has many elements and potential consequences, some of which may not be foreseeable or may be realized in future periods. Consequently, there can be no assurance that unforeseen circumstances may not arise, or that the Company will not in the future identify equipment or systems which are not Year 2000 compliant. Although the transition to the Year 2000 did not have any significant impact on the Company or its equipment, systems and operations, the Company will continue to monitor the impact of the Year 2000 on its equipment and systems and those of its vendors, suppliers and other critical third parties. The contingency plans that were developed for use in the event of Year 2000-related failures will be maintained and generalized for ongoing business use. In the aggregate, the Company has spent approximately $8,000 to address Year 2000 issues and does not anticipate spending any additional material amounts relating to Year 2000 issues. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is effective for financial statements with fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to affect its financial statements. CAUTIONARY STATEMENTS OUR VENTURE INTO TELEVISION COMMERCIAL PRODUCTION MAY NOT PROVE ADVANTAGEOUS OR PROFITABLE. We have changed our business focus from the programming of children's radio to the production of television commercials and related media. Although we believe favorable opportunities exist in the television commercial production industry, the industry is highly fragmented and we cannot assure you that we will be successful in completing our revised business plan, or if completed, that the revised business plan will be advantageous or profitable. We cannot assure you that our competitors will not try to consolidate commercial production companies and production service companies. We cannot assure you that consolidation, if it occurs, will be advantageous or profitable. We do not have any understandings, commitments or agreements with respect to any future acquisitions or that any acquisitions, if consummated, will be advantageous or profitable. WE MAY LOSE MONEY ON OUR INVESTMENT IN HARMONY AND HAVE LITTLE ABILITY TO CUT POTENTIAL LOSSES DUE TO THE ILLIQUID NATURE OF HARMONY'S STOCK. As of March 1, 2000, we had invested approximately $9.7 million in purchasing Harmony common stock and had advances receivable from Harmony and Curious Pictures of approximately $3.7 million in cash. The excess of our investment in Harmony's common stock over Harmony's net book value is primarily reflected as goodwill on our consolidated balance sheet. Our advances to Harmony are eliminated through financial statement consolidation for reporting purposes. Over the last year, Harmony shut down Harmony Pictures, Inc. and sold 90% of The End (London). Ltd., each a former subsidiary, due to continued losses. In February 1999, Harmony's common stock was removed from listing on the Nasdaq SmallCap Market and currently trades on the OTC Bulletin Board. Until such time as Harmony receives a new working line of 15 17 credit, we have agreed to act as Harmony's lender and fund Harmony's operations as necessary. At this time, we receive no additional compensation for providing such lending services to Harmony. There can be no assurance that the notes receivable will be repaid or that our investment in Harmony will not lose value or that we will be able to dispose of our Harmony common stock should we decide to do so. WEBADTV.COM, INC. MAY BE UNABLE TO IMPLEMENT ITS BUSINESS PLAN. In January 2000, we announced the formation of webADTV, a subsidiary which will combine the digital archiving and retrieval service, inteleSource with additional web enabled services, news, and information under development to the global advertising industries and their clientele. webADTV seeks private placement financing in order to expand and brand its infrastructure to include numerous in-demand vertical services such as research, media planning and buying, competitive monitoring, video and print delivery and the services of agency business partners. As a result of such financing, our equity ownership in webADTV may decrease. In addition, there can be no assurance that webADTV will be successful in obtaining such financing or if obtained, such financing will be sufficient to implement its business plan. Further, there can be no assurance that webADTV's business plan will be completed or if completed, that the business plan will be successful. WE MAY BE UNABLE TO ACQUIRE ADDITIONAL TELEVISION COMMERCIAL PRODUCTION COMPANIES OR PRODUCTION SERVICE COMPANIES WITHOUT ADDITIONAL FINANCING. The availability of capital may impact our ability to consummate future acquisitions as we try to consolidate commercial production companies and production service companies. There can be no assurance that we will obtain such financing when required, or if available, that the amount or terms of such financing would be acceptable or favorable to us. Additional financing could require the sale of equity securities, which could result in significant dilution to our shareholders. TELEVISION COMMERCIAL DIRECTORS AND OTHER KEY PERSONNEL COULD LEAVE US, IMPAIRING OUR DEVELOPMENT AND PROFITABILITY. The television commercial production business is driven by its personnel and creative talent. We recognize that a major part of our success in this industry will depend upon the hiring and continued engagement or employment of our directors and other key personnel. To this end, we have entered into various director and employment agreements which range from two to five years in length. However, there can be no assurance that we will be able to retain such talent, nor that such directors and employees will fulfill their obligations to us nor that they will seek renewal at the end of their current agreements. In general, with one exception, we do not maintain life insurance on any of our television commercial directors or other key personnel. WE MAY LOSE OUR APPEAL AGAINST ABC/DISNEY. On September 30, 1998, a jury in the Court ruled in our favor in connection with litigation for breach of contract and misappropriation of trade secrets that we had commenced against ABC/Disney and awarded us $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 us and that ABC/Disney both misappropriated our trade secret information, however, the Court disagreed with the jury's conclusion that the evidence showed that those actions caused damages to us 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. We filed a Notice of Appeal in February 1999. On February 16, 2000, we presented our oral argument to the 8th Circuit Court of Appeals. As of March 28 2000, the 8th Circuit Court of Appeals had not ruled on the appeal. We intend to pursue our appeal of the judgment and to this end, certain personnel and financial resources will be used. We cannot assure you that we will be successful on our appeal. OUR STOCK IS THINLY TRADED, CREATING POSSIBLE LIQUIDITY PROBLEMS FOR SHAREHOLDERS WHO SEEK TO SELL. Our common stock is currently listed on the Nasdaq National Market. We cannot assure you our common stock will ever be actively traded on such market or that, if active trading does develop, it will be sustained. 16 18 OUR STOCK PRICE MAY BE VOLATILE. The market price of our Common Stock has been subject to significant fluctuations in response to numerous factors, including variations in the annual or quarterly financial results, changes by financial research analysts in their estimates of our earnings, conditions in the economy in general or in the television commercial production industry in particular, unfavorable publicity or changes in applicable laws and regulations (or judicial or administrative interpretations thereof) affecting us or the television commercial production industry. During 1999, the market price of our Common Stock ranged from a high of $5.25 on December 8, 1999, to a low of $1.50 on May 28, 1999. We cannot assure you that purchasers of our common stock will be able to sell such stock at or above the prices at which it was purchased. THE SALE OF OUR STOCK MAY CAUSE THE MARKET PRICE OF OUR STOCK TO FALL. We had 6,388,966 shares of Common Stock outstanding as of March 1, 2000, and we also had warrants and options outstanding to purchase additional Common Stock totaling 3,450,616 common shares exercisable at prices ranging from $1.63 to $13.00 per share. The sale of such shares and the sale of additional Common Stock which may become eligible for sale in the public market from time to time upon exercise of warrants and stock options could have the effect of depressing the market price for our Common Stock. WE DEPEND ON MANAGEMENT SERVICES RENDERED BY AN ENTITY WHICH MAY FAVOR ITS OWN INTERESTS OVER OURS. We share with Harmony certain management services provided by MMLLC which is owned by Messrs. Dahl and Perkins, each our director and a director of Harmony. The management services consist of administrative, legal and accounting services. Such arrangements may present conflicts of interest in connection with the pricing of services provided. OUR MANAGEMENT HAS THE ABILITY TO SIGNIFICANTLY AFFECT THE OUTCOME OF SHAREHOLDER VOTING, INCLUDING THE POSSIBILITY OF TAKING ACTIONS CONTRARY TO THE PREFERENCES OF SHAREHOLDERS AT LARGE. As of March 1, 2000, approximately 24.8% of our outstanding Common Stock was beneficially owned by our current executive officers and directors. Accordingly, such persons may be able to significantly influence our business and affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. THE EXISTENCE OF OUR SEVERANCE PLAN MAY PREVENT A CHANGE IN CONTROL OR A LIQUIDATION OF OUR ASSETS. We adopted a severance plan which provides significant benefits to two executive officers and one non-employee director following a change in control. Christopher T. Dahl, our Chief Executive Officer, President and Chairman of the Board, James G. Gilbertson, our Chief Operating Officer, and Richard W. Perkins, one of our directors, are eligible to receive lump sum severance payments under the plan. Based upon 1999 annual gross base salaries, the plan participants would receive an aggregate of approximately $2.0 million following a change in control The plan also provides for accelerated vesting of outstanding options and other benefits following a change in control. The existence of our severance plan could deter or delay a takeover or other change in control. OUR ABILITY TO ISSUE PREFERRED STOCK MAY PREVENT A CHANGE OF CONTROL. The Board of Directors, without any action by our shareholders, has the authority to issue the remaining undesignated and unissued authorized shares and to fix the powers, preferences, rights and limitations of such shares or any class or series thereof, without shareholder approval. Persons acquiring such shares could have preferential rights with respect to voting, liquidation, dissolution or dividends over existing shareholders. We are subject to certain provisions of the Minnesota Business Corporation Act which limit the voting rights of shares acquired in "control share acquisitions" and restrict certain "business combinations." Such provisions, as well as the ability to issue undesignated shares, could have the effect of deterring or delaying a takeover or other change in control, deny shareholders the receipt of a premium on their Common Stock and depress the market price of our Common Stock. OUR ABILITY TO DILUTE UNFRIENDLY POTENTIAL ACQUIRORS MAY PREVENT A CHANGE IN CONTROL. On February 14, 1998, the Board of Directors declared a dividend of one common share purchase right (a "Right") for each share of our Common Stock outstanding as of the close of business on February 27, 1998. Each Right will entitle the registered holder to purchase from us, after the Distribution Date (as defined in the Rights Agreement), 17 19 common shares at an initial price of $18.00. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire us without conditioning the offer on a substantial number of Rights being acquired or redeemed. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Board of Directors may, at its option and in its sole and absolute discretion, redeem the Rights as provided in the Rights Agreement. YEAR 2000 ISSUES MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS. As of March 1, 2000, we have not experienced and do not anticipate any material adverse effects on our equipment, systems and operations as a result of Year 2000 issues. However, our failure, or the failure of our vendors, suppliers or other critical third parties with whom we conduct business to achieve Year 2000 compliance on a timely basis could materially adversely affect our business, operating results and financial condition. ITEM 7 FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS PAGE iNTELEFILM CORPORATION Independent Auditors' Report............................................................................19 Consolidated Financial Statements Balance Sheets.................................................................................20 Statements of Operations.......................................................................21 Statement of Shareholders' Equity..............................................................22 Statements of Cash Flows....................................................................23-24 Notes to Consolidated Financial Statements...........................................................25-51
18 20 INDEPENDENT AUDITORS' REPORT Board of Directors iNTELEFILM Corporation We have audited the accompanying consolidated balance sheets of iNTELEFILM Corporation as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of iNTELEFILM Corporation at December 31, 1999 and 1998, and the consolidated results of its operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Milwaukee, Wisconsin February 8, 2000, except Note 8 and 10 dated March 17, 2000 -19- 21 INTELEFILM CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------------- ASSETS 1999 1998 --------------- --------------- Current assets: Cash and cash equivalents $ 15,986,385 $ 253,905 Accounts receivable, net of allowance for doubtful accounts of $339,216 and $39,000, respectively 8,626,251 - Accounts receivable - affiliates (Note 13) 373,239 280,438 Radio station assets available for sale (Note 2) - 11,391,402 Other accounts receivable 642,076 331,527 Prepaid expenses 1,563,122 279,816 --------------- --------------- Total current assets 27,191,073 12,537,088 Note receivable (Note 2) - 15,000,000 Investment in and notes receivable from Harmony (Note 4) - 5,421,322 Property and equipment, net (Note 5) 2,957,455 120,385 Goodwill, net (Note 3 and 6) 6,730,446 - Other assets 738,878 - Deferred debt issue costs (Note 9) - 742,737 --------------- --------------- Total assets $ 37,617,852 $ 33,821,532 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,835,891 $ 2,205,212 Accounts payable - affiliates (Note 13) 175,000 363,727 Accrued income taxes 1,032,520 328,000 Deferred revenue (Note 2) 2,392,785 2,675,556 Other accrued expenses 4,650,835 1,371,142 Line of credit (Note 8) 3,548,911 434,974 Short-term debt (Note 3 and 7) 1,500,000 - Long-term debt - current portion (Note 9) 191,933 10,665,792 --------------- --------------- Total current liabilities 17,327,875 18,044,403 Long-term debt, less current maturities (Note 9) 679,885 848,111 --------------- --------------- Total liabilities 18,007,760 18,892,514 --------------- --------------- Commitments and Contingencies (Note 10) - - Redeemable convertible preferred stock (Note 11) - 2,448,486 Minority interest (Note 3) 139,447 - Shareholders' equity (Note 12): Common stock 125,772 129,015 Additional paid-in capital 45,625,300 45,773,584 Accumulated deficit ( 25,952,927) ( 33,292,504) Stock subscriptions receivable (Note 13) ( 327,500) ( 129,563) --------------- --------------- Total shareholders' equity 19,470,645 12,480,532 --------------- --------------- Total liabilities and shareholders' equity $ 37,617,852 $ 33,821,532 =============== ===============
See accompanying notes to the consolidated financial statements. -20- 22 INTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, ----------------------------------- 1999 1998 --------------- --------------- Production contract revenues $ 67,242,374 $ - Costs and expenses: Cost of production 56,488,737 - Selling, general and administrative (exclusive of all items shown below) 9,722,084 - Corporate 2,123,734 4,714,011 Corporate expenses paid to affiliated management company (Note 13) 1,549,372 900,000 Stock option compensation 2,121,024 - Depreciation and amortization 1,541,727 7,655 --------------- --------------- Loss from continuing operations (6,304,304) (5,621,666) Gain on sale of subsidiary stock (Note 2) 119,508 - Equity loss in Harmony (Note 4) (1,930,942) (4,058,361) Interest expense (1,096,660) (5,364,117) Interest expense - related parties (Note 3 and 13) (51,945) (120,713) Interest income 1,554,687 299,571 Other income (expense) - net - (82,883) --------------- --------------- Loss from continuing operations before taxes (7,709,656) (14,948,169) Income tax benefit 700,000 4,000,000 --------------- --------------- Net loss from continuing operations (7,009,656) (10,948,169) Gain on the disposal of discontinued operations, net of income taxes of $1,801,892 (1999) and $4,330,237 (1998) (Note 2) 14,349,233 18,517,964 ---------------- --------------- Net income 7,339,577 7,569,795 Accretion of preferred stock - (680,236) --------------- --------------- Net income available to common shareholders $ 7,339,577 $ 6,889,559 =============== =============== Basic and diluted net loss per share from continuing operations $ (1.11) $ (1.64) =============== =============== Basic and diluted net income per share $ 1.16 $ 1.03 =============== =============== Weighted average number of shares outstanding 6,343,000 6,676,000 =============== ===============
See accompanying notes to the consolidated financial statements. -21- 23 INTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999 AND 1998
COMMON STOCK ADDITIONAL STOCK ------------------------ PAID-IN SUBSCRIPTIONS SHARES AMOUNT CAPITAL RECEIVABLE ---------- --------- ----------- -------------- Balance at December 31, 1997 6,649,865 132,997 46,387,536 (529,563) Issuance of common stock in connection with note payable 69,277 1,386 225,144 - Issuance of common stock upon exercise of options 2,600 52 5,269 - Repurchase of common stock (271,000) (5,420) (882,754) - Accretion of redeemable convertible preferred stock - - (680,236) - Issuance of warrants in connection with debt financing - - 622,625 - Issuance of warrants in connection with preferred stock - - 96,000 - Write-off of stock subscription receivable - - - 400,000 Net income - - - - --------- --------- ------------ ---------- Balance at December 31, 1998 6,450,742 $ 129,015 $ 45,773,584 $ (129,563) Issuance of common stock regarding purchase of Chelsea 125,000 2,500 247,500 - Repurchase of common stock (488,900) (9,778) (907,836) - Issuance of common stock upon exercise of options 205,316 4,106 474,602 (222,500) Director options compensation - - 50,400 - Receipt of stock subscription - - - 24,563 Other (3,540) (71) (12,950) - Net income - - - - --------- --------- ------------ ---------- Balance at December 31, 1999 6,288,618 $ 125,772 $ 45,625,300 $ (327,500) ========= ========= ============ ========== TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT EQUITY ------------- --------------- Balance at December 31, 1997 (40,862,299) 5,128,671 Issuance of common stock in connection with note payable - 226,530 Issuance of common stock upon exercise of options - 5,321 Repurchase of common stock - (888,174) Accretion of redeemable convertible preferred stock - (680,236) Issuance of warrants in connection with debt financing - 622,625 Issuance of warrants in connection with preferred stock - 96,000 Write-off of stock subscription receivable - 400,000 Net income 7,569,795 7,569,795 -------------- -------------- Balance at December 31, 1998 $ (33,292,504) $ 12,480,532 Issuance of common stock regarding purchase of Chelsea - 250,000 Repurchase of common stock - (917,614) Issuance of common stock upon exercise of options - 256,208 Director options compensation - 50,400 Receipt of stock subscription - 24,563 Other - (13,021) Net income 7,339,577 7,339,577 -------------- -------------- Balance at December 31, 1999 $ (25,952,927) $ 19,470,645 ============== ==============
See accompanying notes to the consolidated financial statements. -22- 24 INTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, ------------------------------- 1999 1998 ------------- ------------ OPERATING ACTIVITIES: Net income $ 7,339,577 $ 7,569,795 Adjustments to reconcile net income to net cash used in operating activities net of disposition and discontinued operations: Gain on disposal of discontinued operations, net of taxes (14,349,233) (18,517,964) Provision for doubtful accounts 191,010 (433,000) Depreciation and amortization 1,541,727 7,655 Gain on sale of subsidiary stock (119,508) - Net barter activity - 2,767 Amortization and write-off of deferred debt issue costs 742,737 1,859,389 Write-off of stock subscription receivable - 400,000 Equity loss in Harmony 1,930,942 4,058,361 Stock option compensation expense 2,121,024 - Non cash income tax benefit (700,000) (4,000,000) Issuance of common stock and use of sale proceeds for payment of interest - 392,093 Decrease (increase) in (excluding subsidiary acquisitions and sales): Accounts receivable (2,759,791) 309,688 Other receivables 306,817 (674,518) Prepaid expenses (325,545) (183,954) Increase (decrease) in (excluding subsidiary acquisitions and sales): Accounts payable (1,785,306) 643,109 Deferred income 950,000 - Other accrued expenses 571,468 430,187 ---------- ------------ Net cash used in operating activities (4,344,081) (8,136,392) ---------- ------------ INVESTING ACTIVITIES: Purchase of property and equipment (1,236,515) (246,097) Investment in Curious Pictures and Chelsea (1,750,382) - Investment in and notes receivable from Harmony (2,986,152) (3,201,250) Cash acquired net of cash relinquished in acquisitions and sales 411,983 - Proceeds from sale of radio stations 14,045,180 8,656,990 Proceeds from note receivable 15,000,000 - Other capital expenses (195,309) - ----------- ------------- Net cash provided by investing activities 23,288,805 5,209,643 ----------- ------------- FINANCING ACTIVITIES: Increase (decrease) in line of credit 1,356,776 (18,864) Repayment of debt (142,085) (1,454,390) Proceeds from issuance of debt - 3,627,345 Proceeds from issuance of common stock 280,771 5,321 Payment of deferred debt issue costs - (32,792) Issuance (redemption) of redeemable convertible preferred stock (2,448,486) 1,768,250 Repurchase of common stock (930,635) (524,447) ----------- ------------- Net cash provided (used in) by financing activities (1,883,659) 3,370,423 ----------- ------------- Cash used in discontinued operations (1,328,585) (735,027) Increase (decrease) in cash and cash equivalents 15,732,480 (291,353) Cash and cash equivalents at beginning of year 253,905 545,258 ----------- ------------- Cash and cash equivalents at end of year $15,986,385 $ 253,905 =========== =============
See accompanying notes to the consolidated financial statements. -23- 25 INTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
DECEMBER 31, ----------------------------------- 1999 1998 --------------- ---------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 421,104 $ - =============== ================ Cash paid during the year for interest $ 386,274 $ 3,414,837 =============== ================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 1999: The Company utilized radio station sale proceeds totaling $10,934,974 to pay debt collateralized by the related assets. The Company acquired all the issued and outstanding common stock of Chelsea (Note 3) through the assumption of $885,441 in non-cash liabilities net of non-cash assets. Additional consideration included the issuance of 125,000 shares of the Company's common stock valued at $250,000. Consideration the Company paid to Curious Management for the acquisition of 51% of the stock of Curious Pictures (Note 3), included a $1,500,000 note receivable due May 31, 2000. The Company issued 125,000 shares of common stock and received a stock subscription note receivable for $222,500. During the year ended December 31, 1998: The Company recognized revenues of $115,983 and expenses of $118,750 through barter activity. The Company utilized radio station sale proceeds totaling $18,116,023 to pay principal and interest due to lenders aggregating $17,916,023 and to pay debt issue costs of $200,000. Additionally, a note receivable of $15,000,000 was received in connection with the sale transactions. The Company paid debt issuance costs totaling $400,000 by issuing additional long-term debt. The Company issued 69,277 shares of common stock valued at $226,530 for the payment of installments due for the note payable outstanding to the seller of WAUR-AM. The Company issued warrants to purchase 662,500 shares of common stock and cancelled warrants to purchase 150,000 shares of common stock with a net value totaling $718,625 in connection with obtaining short and long-term debt, and preferred stock. At December 31, 1998, an account payable-affiliate of $363,727 remained due related to the Company's purchase of 271,000 shares of its common stock for consideration totaling $888,174. See accompanying notes to the consolidated financial statements. -24- 26 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: iNTELEFILM Corporation (f/k/a Children's Broadcasting Corporation) (the "Company") was incorporated under the Minnesota Business Corporation Act on February 7, 1990. Through a series of transactions, the Company believes it has become the largest producer of television commercials in the world. During the period from July 1997 through December 1999, the Company has utilized its resources to purchase a 55.2% ownership interest in Harmony Holdings, Inc. ("Harmony"), a corporation which produces television commercials, music videos and related media. Further, in April 1999, the Company became Harmony's majority shareholder and began consolidating Harmony rather than accounting for Harmony under the equity method. Additionally, in August 1999, the Company acquired a majority ownership interest in Curious Pictures Corporation ("Curious Pictures") by buying an existing option and share transfer agreement from four principle executives ("Curious Management") of Curious Pictures. As a result, Curious Pictures, a former majority-owned subsidiary of Harmony, became a direct subsidiary of the Company. The Company typically directs its services towards large advertisers and advertising agencies located in the major markets of New York, Los Angeles, Chicago, Detroit, Dallas, San Francisco and Minneapolis. In March 1999 the Company acquired Chelsea Pictures, Inc. ("Chelsea"), which has offices in New York and Hollywood. Chelsea produces television commercials, independent films and related media. 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. In 1999 and 1998, the Company also incorporated the following new subsidiaries: Buffalo Rome Films, Inc. and Populuxe Pictures, Inc. ("Populuxe"). Buffalo Rome Films, Inc. seeks out independent film opportunities and Populuxe produces television commercials with two directors and an executive staff in New York. In December 1999, the Company, in development with AT&T and Excalibur Technologies Corporation ("Excalibur"), announced the creation of inteleSource, a digital video archiving and retrieval service designed specifically for global advertising agencies, the Company's core customer. AT&T and Excalibur will provide dynamic hosting, connectivity and video content management technologies for the data-based service and the Company will provide its relationships with advertising agencies and its expertise in commercial production. inteleSource is an Internet based digitized video storage and retrieval service designed exclusively for use by global advertising agencies and their clients. -25- 27 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Description of Business (Continued): In January 2000, the Company incorporated webADTV.com, Inc. ("webADTV"). webADTV will provide a complete web based source of communications, commerce, solutions and services to the advertising agencies and other companies in the advertising campaign production industry. Initially, the Company's inteleSource will be the core of webADTV. With inteleSource, webADTV will build a full business to business portal for the advertising agency industry which will include news and information from affiliate content providers, e-commerce business generated from a wide range of affiliated design and production sources and the subscription based inteleSource archiving and retrieval service. The Company also anticipates that the portal will generate revenues through advertising and pay per view content, specifically created for advertising agencies. In addition, webADTV intends to create useful, e-commerce based affiliates and establish carriage relationships with recognized advertising industry news and information content providers. As Children's Broadcasting Corporation, the Company broadcast 24-hour children's radio programming, known as Aahs World RadioSM*, via satellite to markets representing approximately 40% of the U.S. population. Pursuant to its former growth strategy, the Company acquired AM radio broadcast licenses ("Radio Stations") in 14 U.S. markets. On November 3, 1997, the Company announced that it would terminate its network affiliation agreements and cease distributing its full-time Aahs World Radio programming format effective January 30, 1998. In 1998, the Company focused on the process of selling its previously acquired radio stations. The last of its radio stations were sold on January 14, 1999. Consolidated Financial Statements: The financial statements include the accounts of the Company and all majority-owned subsidiaries. All references to the Company in these financial statements relate to the consolidated entity. All significant intercompany accounts and transactions are eliminated in consolidation. Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Property, Equipment and Intangible Assets: Property, equipment and intangible assets are stated at cost. Depreciation and amortization are computed using the straight-line method and are charged to expense based upon the estimated useful lives of the assets. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. -26- 28 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long Lived Assets: The Company accounts for long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of". The standard establishes guidelines regarding when impairment losses on long-lived assets, which include property and equipment, certain identifiable intangible assets and goodwill, should be recognized and how impairment losses should be measured. The Company evaluates the existence of long-lived asset impairment on the basis of whether the asset net book value is fully recoverable from projected, undiscounted net cash flows of the related business unit. This standard did not have an impact on the Company's financial position or results of operations. Investment in Harmony: Prior to the Company becoming the majority shareholder of Harmony, the investment in Harmony (Note 4) was accounted for under the equity method of accounting. The equity method of accounting is used to account for investments made when the Company has the ability to exercise significant influence over the operating and financial policies of an investee, generally involving a 20% to 50% interest in those investees. Under the equity method, original investments are recorded at cost, increased for subsequent investments in and advances to the investee, and adjusted for the Company's share of undistributed earnings and losses of the investee. Additionally, the excess of the Company's prorata share of the investee's net assets is amortized over the estimated useful life of the underlying assets. Goodwill: Goodwill primarily represents the excess of the Company's purchase price, including additional payments over the fair market value of Harmony, Chelsea and Curious Pictures net assets at the date of acquisition. Goodwill has been amortized on a straight-line basis over seven years for all periods. Revenues: The Company produces television commercials and music videos under firm bid, cost plus or cost plus fixed fee contracts, which are typically less than one month in duration. At December 31, 1999 and 1998, the Company had no long-term contracts. Contract revenues are recognized using the percentage of completion method. The percentage of contract revenues recognized is computed at that percentage of estimated total revenues that incurred costs to date bears to total estimated costs, after giving effect to the most recent estimate of costs to complete. Revisions in costs and revenue estimates are reflected in the period in which the facts which require the revision become known. Deferred income represents amounts billed in excess of revenues earned. -27- 29 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Income (Loss) Per Share: In February 1997, The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, Earnings Per Share ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and warrants. Outstanding options and warrants to purchase 3,577,718 and 3,197,317 shares of the Company's common stock at December 31, 1999 and 1998, respectively, were not included in the diluted EPS calculation as they were antidilutive. For 1999 and 1998 the Company's basic and diluted EPS were the same as the effect of all outstanding options and warrants were antidilutive. Additionally, the Company's preferred stock outstanding at December 31, 1998 was not included in the computation of diluted EPS as its effect would be antidilutive. Income Taxes: The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax basis. Stock Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), establishes a fair value method of accounting for stock-based compensation plans and for transactions in which a company acquires goods or services from non-employees in exchange for equity instruments. SFAS 123 also gives the option to account for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock issued to Employees," or SFAS 123. The Company has chosen to account for stock-based compensation utilizing the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the measurement date over the amount an employee must pay to acquire stock. If SFAS 123 is not adopted related to stock-based employee compensation, SFAS 123 for footnote purposes requires that companies measure the cost of stock-based employee compensation at the grant date based on the value of the award and recognize this cost over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. -28- 30 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk: Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash, cash equivalents and trade receivables. The Company invests available cash in money market securities of high credit quality financial institutions. The Company's accounts receivable were from customers primarily in the advertising industry. To reduce credit risk, the Company performs periodic credit evaluations of its customers, but does not generally require advance payments or collateral. Credit losses to customers operating in the advertising industry have not been material. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Comprehensive Income: The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" as of January 1, 1998. The Company does not have any components of comprehensive income. Segment Information: The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" as of January 1, 1998. Following the provisions of this Statement, the Company is reporting segment assets, liabilities, sales and operating income in the same format reviewed by the Company's management. In 1999 and 1998, the Company transitioned into the commercial production and related media business. New Accounting Pronouncements: Statement of Financial Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) issued by the FASB is effective for financial statements with fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. -29- 31 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements: Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to affect its financial statements. Reclassifications: Certain amounts in the 1998 financial statements have been reclassified to conform with the 1999 presentation. These reclassifications have no effect on the accumulated deficit or net 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 operations. NOTE 2: ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS Radio Station Sale Transaction: 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 operations and disposition of the radio stations has been classified as discontinued operations in the accompanying financial statements. During the years ended December 31, 1999 and 1998, the Company recognized gains on the disposal of discontinued operations of $14,349,233 and $18,517,964, respectively. These overall gains include losses from discontinued operations of $113,183 and $3,526,703 on revenues of $100,279 and $2,566,647, respectively, and a tax provision of $1,802,000 and $4,330,000, respectively. The basic and diluted income per share related to the gain from the disposal of discontinued operations was $2.26 and $2.77 in 1999 and 1998, respectively: The following table summarized the balance sheets of such radio stations to be sold as of December 31:
1999 1998 ------------ ------------ Current assets $ - $ 386,211 Assets held for sale - 11,391,402 Accounts payable - 462,800 Accrued income taxes - 328,000 Other accrued liabilities - 40,971 Deferred revenue - 2,675,556 Notes payable - 979,613
As of January 14, 1999, all of the stations have been sold pursuant to the following transactions: 1090 Radio Station Sale Transaction: On September 8, 1998, the Company closed on the sale of the radio broadcast license and certain other assets of its radio station WCAR(AM), Livonia, MI to 1090 Investments, LLC. ("1090"). The Company received gross proceeds of $2,000,000 in cash and incurred transaction expenses totaling $138,051. The station assets had a net book value totaling $1,431,609 and the Company realized a gain on sale of $430,340. Salem Radio Station Sale Transaction: On October 30, 1998, the Company closed on the sale of the radio broadcast licenses and certain other assets of its radio stations KTEK(AM), Alvin,TX and KYCR(AM), Golden Valley, MN to Salem Communications Corporation ("Salem"). The Company received gross proceeds of $2,700,000 in cash and incurred transaction expenses totaling $229,135. The station assets had a net book value totaling $863,006 and the Company realized a gain on sale of $1,607,859. CRN Radio Station Sale Transaction: On October 30, 1998, the Company closed on the sale of the radio broadcast licenses and certain other assets of its radio stations KCNW(AM), Fairway, KS, KKYD(AM), Denver, CO, KPLS(AM) Orange, CA, WAUR(AM), Sandwich, IL, WPWA(AM), Chester, PA, WWTC(AM) Minneapolis, MN, and WZER(AM), Jackson, WI, to Catholic Radio Network LLC ("CRN"). The Company received gross proceeds of $37,000,000 ($22,000,000 in cash and $15,000,000 pursuant to a note receivable agreement) and incurred transaction expenses totaling $2,235,357. The station assets had a net book value totaling $10,427,936 and the Company realized a gain on sale of $24,336,707. -30- 32 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS (CONTINUED) Radio Station Sale Transaction (Continued): CRN Radio Station Sale Transaction: The note receivable bore interest at 10% payable monthly, was secured by the sold station assets and virtually all of CRN's other property, whether owned prior to or subsequent to the sale transaction. The note was due in full on April 30, 2000. In October 1999, the Company received payment in full on this note. Unica Radio Station Sale Transaction: On October 26, 1998, the Company entered into an agreement to sell the radio broadcast licenses and certain other assets of its radio stations KAHZ(AM), Fort Worth, TX, KIDR(AM), Phoenix, AZ, and WJDM(AM), Elizabeth, NJ, to Radio Unica Corp. ("Unica"). The stations assets had a net book value totaling $11,391,402 at December 31, 1998 and are included on the accompanying 1998 balance sheet as radio station assets held for sale. Under the agreement, the Company received gross proceeds of $29,250,000 in cash and incurred transaction expenses totaling $1,682,180. At the time of the sale, the asset net book value totaled $11,303,512 and the Company realized a gain on the sale of $16,264,308. The agreement provided for the stations to be operated by Unica to the closing date under a Local Programming and Marketing Agreement ("LMA"). Unica prepaid a total of $2,500,000 of the LMA fees which were earned by the Company based on a monthly LMA fee of $200,000. Unica also prepaid $500,000 of the purchase price. The prepaid purchase price and any unused portion of the prepaid LMA fee was credited to the sales price at closing. At December 31, 1998, deferred revenue aggregating $2,675,556 was included on the accompanying balance sheet related to these prepayments. On January 14, 1999, the transaction closed. The gain on the sale of the Company's radio stations aggregated $14,462,416 and $22,044,667 net of income taxes in 1999 and 1998, respectively. Included in the transaction costs for the transactions closed in 1998 are bonuses paid to Company management, employees and the Management Company (Note 13) totaling $1,930,000. An additional bonus of approximately $825,000 was paid in 1999 on the close of the Unica radio station sale transaction. This additional bonus was reflected as a transaction expense for the Unica radio station sale in 1999. The bonuses were approved by the Company's board of directors and were contingent upon completion of the sale transactions. The End (London) Sale Transaction: Effective July 1, 1999, Harmony sold 90% of the issued and outstanding shares of capital stock of one of its consolidated subsidiaries, The End (London), LTD ("The End (London)"), to a principal executive (the "Purchaser") of The End (London) for nominal consideration. The End (London) is a commercial production company based in London, England, and, prior to this sale, was a wholly owned subsidiary of Harmony. In connection with the sale, the Company and the Purchaser entered -31- 33 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: ASSET AND SUBSIDIARY STOCK SALE TRANSACTIONS (CONTINUED) The End (London) Sale Transaction: into an agreement granting the Purchaser the right, under certain circumstances, to purchase the remaining 10% equity interest in The End (London) from Harmony for approximately $803,000. As a result of the sale, Harmony was relieved of liabilities in excess of assets forfeited, resulting in a non-cash gain to the Company of $119,508. NOTE 3: ACQUISITIONS Chelsea Pictures: On March 4, 1999, the Company acquired all of the issued and outstanding common stock of Chelsea Pictures, Inc. ("Chelsea") for 125,000 shares of common stock with a value of $250,000 and the assumption of approximately $885,441 of liabilities net of assets. Chelsea is a television commercial production company with principal operations in New York, New York. The acquisition has been accounted for as a purchase, whereby, the purchase price and related acquisition expenses incurred of $250,382 were allocated based upon the fair market value of the assets purchased and liabilities assumed, consisting of goodwill of $1,385,823, current accrued liabilities of $1,163,584 and current assets of $278,143. Additionally, consideration for the transaction may consist of up to an aggregate of 200,000 shares of the Company's common stock, 125,000 of these shares were issued on the acquisition date. Issuance of the remaining shares is contingent upon the level of Chelsea's earnings before interest, taxes, depreciation and amortization (EBITDA) in the first year following the acquisition. If Chelsea achieves EBITDA within a range of $0 - $410,000, the previous owner will receive a proportionate number of shares up to a maximum of 50,000 shares. If Chelsea achieves EBITDA in excess of $500,000, an additional 25,000 shares will be issued. The value of the remaining shares will be treated as an adjustment to the purchase price upon issuance. Curious Pictures: Effective as of August 1, 1999, the Company purchased the Option and Share Transfer Agreement ("Option Agreement") entered into by Harmony and the four principal executives (collectively, "Curious Management") of Curious Pictures Corporation ("Curious Pictures") dated December 15, 1996. Under the Option Agreement, Curious Management could earn the right to purchase 50% of the outstanding stock of Curious Pictures from Harmony upon the achievement of certain specified financial goals. Pursuant to the Company's purchase agreement and based on the results of operations of Curious Pictures, it was agreed by all parties that Curious Management's rights to purchase the 50% equity interest in Curious Pictures had fully vested and were exercisable for consideration totaling $50. As a result of the intrinsic value established by interim valuations of Curious Pictures and the Company's purchase of the Option Agreement, compensation expense totaling $1,907,850 has been recognized in the accompanying statement of operations resulting from the consolidation with Harmony. -32- 34 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: ACQUISITIONS (CONTINUED) Curious Pictures (Continued): Following its purchase of the Option Agreement, the Company acquired 50% of Curious Pictures through the exercise of stock options granted under the Option Agreement. The Company also acquired a 1% equity interest in Curious Pictures owned by Curious Management that was initially conveyed to Curious Management upon signing the Option Agreement. The consideration paid to Curious Management by the Company for the aforementioned acquisitions aggregated $3,000,000 consisting of $1,500,000 in cash and a $1,500,000 note payable bearing an interest rate of 8%, due May 31, 2000. As a result of the aforementioned transaction, the Company owns 51% of the outstanding stock of Curious Pictures and Harmony owns 49% of the outstanding stock of Curious Pictures. In addition, as of January 1, 1999, Curious Pictures entered into new five-year employment agreements with each of the four members of Curious Management. As part of the compensation to be paid to Curious Management, at the end of each employment year, each member of Curious Management was granted the right to purchase from Harmony, one share of Curious Pictures at a price of $1.00 per share, representing 1% of the capital stock of Curious Pictures. As a result, if all of the members of Curious Management exercise all of their new options over the five-year term of their employment agreements, the Company will own 51% of the Curious Pictures stock, Curious Management will collectively own 20%, and Harmony will own the remaining 29%. Additionally, the Company granted Curious Management warrants to purchase an aggregate 300,000 shares of the Company's common stock for approximately $1.92 per share. The Company, Harmony, and Curious Management also entered into a Stock Agreement effective as of August 1, 1999. Under this agreement, the members of Curious Management were granted the right to sell to the Company the shares of Curious Pictures that they earn from Harmony (the put right), and the Company obtained the right to purchase such shares from Curious Management (the call right). The price to be paid by the Company to Curious Management under the put or call is $96,774 per share. These options have been valued at their intrinsic value as of August 1, 1999 ($54,000 per option). The related compensation expense will be recognized ratably over the employment agreement service period and reflected as a minority interest on the Company's balance sheet. Further, the minority interest will be ratably accreted to the value of management's put right ($96,774 per share) over the time period from the option vesting date to the date that the put right may be exercised. During the six month period ended December 31, 1999, the Company recognized compensation expense of $162,774. The minority interest valuation aggregated $139,447 at December 31, 1999. NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY The Company's investment represents 55.2% and 49.1% of the outstanding common stock of Harmony at December 31, 1999 and 1998, respectively. The aggregate purchase price paid of $9,730,872 and transaction costs totaling $93,201 were allocated based on the estimated fair market value of the assets acquired consisting of common stock of $9,140,872 and stock options valued at $590,000. With this increase of ownership, the Company began to consolidate Harmony results from -33- 35 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED) operations on April 1, 1999. All periods prior to this date were accounted for under the equity method. Accordingly, the excess of the purchase price over the Company's pro-rata share of Harmony's net tangible assets discussed below was recast from the investment in Harmony to Goodwill based on the estimated fair market value of Harmony's assets. The excess of the purchase price over the Company's prorata share of Harmony's net tangible assets totaled $6,810,877 and $6,245,996 at December 31, 1999 and 1998, respectively. This excess purchase price relates to Harmony's intangible asset value, principally technical know-how, industry reputation and customer lists, and is being amortized on a straight line basis over a seven-year estimated useful life. At December 31, 1999 and 1998, accumulated amortization of the excess purchase price totaled $1,752,998 and $871,552, respectively. The following schedule represents the Company's equity investments in Harmony since January 1, 1998:
Common Stock Stock Options ------------------------------------------------------------------ Number of Number of Date Shares Consideration Shares Consideration -------------------------------------- ----------- --------------- ----------- ---------------- Balance at December 31, 1997 2,188,731 6,149,150 750,000 590,000 June 30, 1998 (exercise of stock options) 750,000 1,715,000 (750,000) (590,000) July 2, 1998 250,000 432,500 - - November 4, 1998 494,231 968,750 - - ----------- --------------- ----------- ---------- Balance at December 31, 1998 3,682,962 $ 9,265,400 - $ - April 15, 1999 225,000 229,754 - - May 21, 1999 40,000 39,304 - - May 25, 1999 180,000 184,575 - - June 25, 1999 1,600 1,622 - - June 28, 1999 10,000 10,217 - - ---------- -------------- ------------ ---------- Balance at December 31, 1999 4,139,562 $ 9,730,872 - $ - ========== ============== ============ ==========
The June 1998 stock option exercise at $1.50 per share and the July 1998 purchase of outstanding common stock required consideration totaling $1,557,500 in cash obtained through the Company's issuance of redeemable convertible preferred stock (Note 11). Consideration for the November 1998 stock acquisitions of 269,231 newly issued shares and of 225,000 outstanding shares of common stock totaled $968,750 in cash obtained in through the Company's sale of its radio stations (Note 2). The November 1998 purchases of 225,000 outstanding shares occurred pursuant to an outstanding put option exercised by the seller in February 1998. The put option required that the Company purchase the shares for $2.50 per share by March 31, 1998. As the Company did not have the current financial resources to meet this obligation by March 31, 1998, the Company assigned the put option to two entities controlled by a director, and another director individually (the "assigned parties"). The assigned parties consummated the purchase of shares required by the initial put and were granted a similar option to put the shares to the Company at a price of $2.75 per share. The new put option was exercisable upon the completion of the CRN sale transaction which occurred in October 1998 (Note 2). -34- 36 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED) Consideration for the April through June 1999 purchases of 456,600 outstanding shares totaled $465,472 in cash obtained through the Company's sale of its radio stations (Note 2). These purchases increase the Company's ownership in Harmony to approximately 55.2%, and this additional ownership allows the Company to consolidate Harmony, for financial statement purposes, as of April 1, 1999, rather than accounting for the investment under the equity method as it has for all previous periods presented. No minority interest is currently shown related to Harmony, as the minority shareholders no longer have any equity basis in their investment. As of December 31, 1999, the Company has recognized losses in excess of its prorata share totaling $2,214,013. Unsecured demand notes payable due from Harmony totaling $3,326,369 and $680,041 (including interest) are outstanding at December 31, 1999 and 1998, respectively. At December 31, 1999, these notes as well as the related interest are eliminated in Harmony's consolidation with the Company. The following amounts represent Harmony's results from operations for the periods presented that Harmony was accounted for under the equity method. Such amounts have been derived from Harmony's financial statements for the fiscal years ended June 30, 1999 and 1998:
Quarter Ended Year Ended March 31, 1999 December 31, 1998 ----------------- ------------------ Contract revenues $ 16,274,699 $ 62,019,148 Cost of production 14,300,552 51,779,753 ----------------- ------------------ Gross profit 1,974,147 10,239,395 Operating expenses 3,620,554 18,089,550 ----------------- ------------------ Loss from operations (1,646,407) (7,850,155) Interest income (expense), net (79,089) (179,221) ----------------- ------------------ Loss before income taxes (1,725,496) (8,029,376) Income taxes - (8,122) ----------------- ------------------ Net loss $ (1,725,496) $ (8,037,498) ================= ================== Company's share of Harmony's net loss $ (1,725,496) $ (3,398,841) Amortization expense for the excess of the investment cost over the underlying net assets of Harmony (205,446) (659,520) ----------------- ------------------ Company's equity loss in Harmony $ (1,930,942) $ (4,058,361) ================= ==================
-35- 37 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: INVESTMENT IN AND NOTES RECEIVABLE FROM HARMONY (CONTINUED) The consolidated balance sheet of Harmony is summarized as follows:
March 31, 1999 December 31, 1998 ----------------- ------------------ Current assets $ 8,416,156 $ 7,117,732 Non-current assets 3,159,354 3,001,164 ----------------- ------------------ Total assets $ 11,575,510 $ 10,118,896 ================= ================== Current liabilities 13,223,368 10,150,060 Minority interest 792,150 - Stockholders' deficit (2,440,008) (31,164) ------------------ ------------------ Total liabilities and stockholders' deficit $ 11,575,510 $ 10,118,896 ================= ==================
Harmony is a public company traded over-the-counter under the symbol "HAHO". At December 31, 1999, the aggregate value of the Harmony common stock held by the Company totaled $558,841. NOTE 5: PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
Estimated Useful Life 1999 1998 In Years --------------- --------------- ----------- Office equipment 840,476 198,352 5 Vehicles 39,014 50,514 5 Leasehold improvements 1,584,670 - 5 Computer & production equipment 2,828,543 - 3 --------------- --------------- 5,292,703 248,866 Less accumulated depreciation 2,335,248 128,481 --------------- --------------- Property and equipment, net $ 2,957,455 $ 120,385 =============== ===============
Depreciation expense was $687,514 and $670,748 for the years ended December 31, 1999 and 1998, respectively. NOTE 6: GOODWILL Goodwill consisted of the following at December 31:
Estimated Useful Life 1999 1998 In Years --------------- --------------- ------------ Goodwill $ 8,746,640 $ - 7 Less accumulated amortization 2,016,194 - --------------- --------------- Goodwill, net $ 6,730,446 $ - =============== ===============
Amortization expense related to goodwill and other intangible assets totaled $976,899 and $1,278,592 for the years ended December 31, 1999 and 1998, respectively. The 1998 amortization expense relates primarily to the amortization of radio broadcast licenses. -36- 38 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: SHORT-TERM DEBT - AFFILIATES Directors and Shareholders: In July 1998, the notes payable aggregating $1,250,000 which were issued in July 1997, were extended four months to October 22, 1998. As consideration for the extension, the holders, a partnership controlled by a Company director, a Company director individually and a less than five-percent shareholder, were offered additional warrants to purchase the Company's common stock or an increase in the note payable interest rate from 10% to 20%. Two of the holders representing $750,000 of the outstanding debt opted to receive additional warrants to purchase an aggregate of 37,500 shares of the Company's common stock. The remaining holder of outstanding debt totaling $500,000 opted for the increased interest rate of 20%. The warrants vested immediately and are exercisable at $3.06 per share for a term of 5 years. The value of the warrants was determined to be $62,625. The debt was repaid in full in October 1998 upon closing of the CRN radio station sales transaction (Note 2). Curious Picture's Management: Effective August 1, 1999, the Company purchased the Option and Share Transfer Agreement for the sum of $3,000,000 including cash consideration of $1,500,000 and this issuance of a promissory note for a aggregate of $1,500,000 to the four members of Curious Management ($375,000 to each member) payable on May 31, 2000 at an interest rate equal to eight percent (8%) per annum (Note 3). The promissory note requires the Company to pay interest quarterly through May 31, 2000, at which time the principal balance will be payable in full. In the event any member of Curious Management's employment with Curious is terminated or any member of Curious Management terminates his/her employment agreement prior to the payment of the promissory note, the principal amount of this promissory note will be reduced by $375,000 for such member. NOTE 8: LINE OF CREDIT At December 31, 1998, the Company had outstanding short-term borrowings totaling $434,974 under a discretionary line of credit pursuant to the finance company credit agreement (Note 9). The line of credit was terminated upon its full repayment in January 1999 (Note 9). In July 1998, Harmony entered into an asset based loan and security agreement due to a finance company, which is secured by virtually all its assets, is guaranteed by iNTELEFILM, and provides for the following borrowings: a revolving line of credit with maximum availability of $4,500,000 or a specified percentage of acceptable accounts receivable with interest at a variable rate (10.0% at December 31, 1999). At December 31, 1999, $3,548,911 was outstanding on the line of credit. Subsequent to December 31, 1999, the line of credit was repaid in full pursuant to the lender's call. -37- 39 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: LONG-TERM DEBT Long-term debt consisted of the following at December 31:
1999 1998 --------------- --------------- Term note payable bearing interest at a variable rate (13.5% at December 31, 1998). Due to the recurring requirement to meet certain restrictive financial covenants, which had not been met, this entire indebtedness was classified as current at December 31, 1998. This note was paid in full in January 1999. $ - $ 10,500,000 Covenant not-to-compete, non-interest bearing, payable in quarterly installments of $37,500 through June 2006, less unamortized discount at 9.25% ($197,035 and $255,531, at December 31, 1999 and 1998, respectively). 777,965 869,469 Note payable bearing interest at 9%, subsequently paid in full in February 2000. 57,069 80,433 Various other installment notes payable. 36,784 64,001 --------------- --------------- 871,818 11,513,903 Less current portion 191,933 10,665,792 --------------- --------------- Long-term debt, less current portion $ 679,885 $ 848,111 =============== ===============
In November 1996, the Company entered into an agreement with a finance company (the "Credit Agreement") under which three credit facilities (the "Facilities") were established. The Facilities included a $11,500,000 term note payable, a $1,000,000 line of credit (Note 8), and a $4,000,000 acquisition facility which was not utilized. From July 1997 through October 1998, the Credit Agreement was amended and restated pursuant to additional term note payable advances received by the Company aggregating $15,000,000 in 1998. The provisions of the Credit Agreement remained substantially unchanged as a result of these amendments and restatements except that the $4,000,000 acquisition facility was cancelled and the available line of credit (Note 8) was reduced from $1,000,000 to $500,000 in favor of the increased term note payable. In September and October 1998, the Company repaid $1,300,000 and $14,700,000 in connection with the 1090 and CRN radio station sales transactions (Note 2), respectively. Finally, the Credit Agreement was amended again in October 1998, primarily to reschedule installment payments due and to provide the lender a security interest in the note receivable received by the Company in the CRN radio station sale transaction (Note 2). In January 1999, the Facilities were repaid in full upon completion of the Unica radio station sale transaction (Note 2). In connection with the original Credit Agreement and the amendments, the Company incurred debt issuance costs aggregating $1,310,000 in 1998. These costs included finance company fees which reduced the proceeds of the term note payable advances of $400,000 in 1998, the value of warrants granted to the finance company net of the value of cancelled previously granted warrants of $560,000 in 1998, and other transaction costs of $350,000 in 1998. The debt issuance costs have been deferred on -38- 40 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: LONG-TERM DEBT (CONTINUED) the accompanying balance sheet and, prior to the complete facility repayment in January 1999, were being amortized utilizing the interest method over the remaining life of the Credit Agreement. Additionally, with each of the aforementioned facility repayments, the Company wrote-off deferred debt issue costs based on the proportionate share of principal repaid. At December 31, 1998 the unamortized value of these costs totaled $742,737, and was written off in January 1999. The facilities were subject to certain restrictive covenants. As of December 31, 1998, the Company had not met certain of the covenant requirements; however, the violation was cured with the Company's repayment of the Facilities in full in January 1999. Future maturities of long-term debt are as follows:
Year ending December 31: 2000 $ 191,933 2001 105,128 2002 112,682 2003 120,799 2004 129,458 Thereafter 211,818 --------------- $ 871,818 ===============
The Company believes that the carrying value of the debt approximates its fair market value at December 31, 1999 and 1998. NOTE 10: COMMITMENTS AND CONTINGENCIES Operating Leases and Other Commitments: The Company leases various office and production studio space. Future minimum lease and other commitment payments are as follows for the years ending December 31: 2000 $ 1,054,672 2001 1,053,317 2002 1,028,896 2003 938,092 2004 925,840 Thereafter 2,693,664 --------------- $ 7,694,481 ===============
Total rent expense was $916,077 and $771,728 for the years ended December 31, 1999 and 1998, respectively, and rent expense to related parties totaled $0 and $234,984, respectively. -39- 41 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED) Employment Contracts: The Company has entered into various employment agreements with its officers and commercial directors, which obligate it to make minimum payments of approximately $9,914,047. The payments due are $3,443,901, $2,219,696, $1,747,878, $1,722,487, $499,046 and $281,039, for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and thereafter, respectively. Of these amounts $6,344,220 are for administrative personnel and $3,569,827 are for commercial television directors and salespeople. Certain of these agreements provide for additional compensation based on subsidiary revenues, defined subsidiary operating profits or other incentives. This additional compensation is payable whether or not the Company achieves an operating profit as a whole. Some of the television directors who are associated with the Company receive monthly draws against the directors' compensation for production of commercials. The monthly draws equal the minimum guaranteed compensation payable to such directors. Although the draws are recoupable by the Company out of compensation otherwise payable to such directors, such directors are not obligated to repay such draws, if their fees for commercials produced do not exceed the monthly draws that have been paid. Consequently, the Company is obligated to provide compensation to these directors whether or not they are directing commercials. Most of the Company's sales personnel receive monthly draws offset by their earned commissions. Officers and Director Severance Plan: In April 1999, a severance plan which covers two of the Company's executive officers and one of the Company's non-employee directors was adopted. As to the officers, the plan provides for severance benefits in the event of termination of employment under certain circumstances following a change in control of the Company (as defined). The applicable circumstances are (a) termination by the Company without cause (as defined) other than because of death, retirement or disability, (b) termination for good reason (as defined), or (c) termination without good reason if the date of termination is within 180 days after a change in control. Following any such termination, in addition to compensation and benefits already earned, such individual will be entitled to receive a lump sum severance payment equal to a multiple of such individual's annual gross base salary as then in effect, including amounts accrued but not paid. Based upon 1999 annual gross base salaries, lump sum severance payments aggregating $2,055,000 would be payable under the plan. The plan also provides for the accelerated vesting of outstanding stock options and certain other benefits following a change in control. The plan is in effect from April 1, 1999 through March 31, 2002. Thereafter, the plan automatically renews annually unless the Company gives notice that it does not wish to extend it. In addition, the plan will continue in effect for three years after a change in control. -40- 42 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: COMMITMENTS AND CONTINGENCIES (CONTINUED) Pending Litigation: 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 $20,000,000 for breach of contract against ABC Radio, $10,000,000 for misappropriations of trade secret by ABC Radio and $10,000,000 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. The Company intends to pursue its appeal of the judgement and, to this end, certain personnel and financial resources will be used. Additionally, the Company has entered an agreement with its primary counsel for this litigation. Under the agreement the counsel has agreed to make twenty-five percent of their fees contingent upon the successful outcome of this lawsuit in exchange for seven and one half percent of any settlement or judgement in favor of the Company. At December 31, 1999 and 1998, the fees contingent under this agreement totaled approximately $800,000 and $727,000, respectively. Except as described above, the Company is not a party to any material proceedings. From time to time the Company is a party to litigation which is incidental to its business, including administrative proceedings. 401(k) Savings/Profit-Sharing Plan: The Company has a 401(k) plan available to all employees meeting certain service requirements. Eligible employees may contribute a portion of their annual salary to the plan, subject to certain limitations. The Company may make matching contributions and also may provide profit-sharing contributions at the discretion of its board of directors. Employees become fully vested in the Company contributions after five years of service. There were no Company contributions in 1999 or 1998. -41- 43 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company has authorized 606,061 shares of $0.02 par value Series B redeemable convertible preferred stock ("the Series"). In June 1998, the Company issued 606,061 shares of the Series with a $3.30 per share stated value and warrants to purchase 100,000 shares of the Company's common stock. The Series was initially recorded on the Company's financial statements at $1,768,250 which represents the net proceeds received totaling $1,864,250 ($2,000,000 aggregate stated value less transaction costs totaling $135,750) discounted by $96,000 for the value of the warrants granted. The preferred stock carried the right of redemption or conversion into a variable number of shares of the Company's common stock upon expiration of the Company's right to redeem the series. Prior to an amendment to the related securities agreement, the Company had the right to redeem the Series for $4.04 per share until October 22, 1998. Subject to the amendment, the Company issued additional warrants to purchase 125,000 shares of the Company's common stock. The warrant issuance allowed the Company to extend its redemption right until January 1999. At that time, the preferred stock was redeemed at $4.04 per share, or $2,450,000, utilizing proceeds of the Unica radio station sale transaction (Note 2). During 1998, the Company recorded accretion of the preferred stock totaling $680,236. NOTE 12: SHAREHOLDERS' EQUITY Common Stock: The Company has authorized 50,000,000 shares of common stock at $.02 par value. The Company has voting shares of 6,099,577 and 6,261,701 issued and outstanding at December 31, 1999 and 1998, respectively, and nonvoting shares of 189,041 which are issued and outstanding at December 31, 1999 and 1998. Repurchase of Common Stock: In April 1999, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of its common stock, representing approximately 7.6% of the outstanding common stock at that time, over a period of 12 months. Repurchases have been and will be made in accordance with Exchange Act Rule 10b-18, and will be subject to the availability of stock, trading price, market conditions and the Company's financial performance. The repurchased shares are canceled and returned to the Company's authorized capital stock. As of December 31, 1999, the Company had repurchased an aggregate of 488,900 shares for an aggregate of $917,614 at prices ranging from $1.53 to $2.06 per share. Incentive and Non-Qualified Stock Options Plans: In August 1998, the Company amended the 1994 Stock Option Plan to allow the board of directors to amend the terms of options issued under the plan at its discretion subject to certain restrictions. Additionally, options issued under the 1991 and 1994 Stock Option Plans were revised to provide that the options would not automatically terminate as a result of a sale of substantially all the Company's assets. In October 1998 upon the closing of the CRN radio station transaction (Note 2), all options outstanding under the plans became fully vested to the holders. -42- 44 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Incentive and Non-Qualified Stock Options Plans (Continued): In 1991, the Company established the 1991 Stock Option Plan to provide incentives to employees whereby 200,000 shares of the Company's common stock have been granted. The options are exercisable on the date of grant and are generally valued at the fair market value of the stock on the date of grant. The options expire on various dates through January 2005. In March 1994, the board adopted the 1994 Stock Option Plan whereby 1,000,000 shares of the Company's common stock have been reserved. The options can be either incentive stock options or nonstatutory options and are generally valued at the fair market value of the stock on the date of grant. The options generally vest over a five-year period and expire through January 2005. In May 1994, the board adopted the 1994 Director Stock Option Plan whereby 125,000 shares of the Company's common stock have been reserved. The plan provided for automatic grants of non-qualified options to purchase 3,750 shares to outside directors upon first becoming a director and an additional 3,750 shares upon each anniversary of the original grant. In April 1999, the Plan was amended to reserve 500,000 shares of the Company's common stock. At that time 45,000 options, vesting equally over three years, were granted to each of the three outside directors. All options under this plan were valued under the Black-Scholes option-pricing model resulting in $50,400 of compensation expenses recorded in 1999. The options are generally valued at the fair market value of the stock on the date of grant and expire five years thereafter. In December 1999, the board adopted the 1999 Broad-Based Stock Incentive Plan whereby 400,000 shares of the Company's common stock have been reserved. The options may be granted to only non-officer employees and may be priced at not less than 100% of the fair market value on the date of grant. The options have varying vesting schedules and generally expire within five years of the date of grant. A summary of the status of the Company's stock option plans as of December 31, 1999 and 1998 and changes during the years ending on those dates is presented below:
1999 1998 ------------------------------ ------------------------------- Weighted- Weighted- Average Average Fixed Options Shares Exercise Price Shares Exercise Price --------------------------------- ------------ --------------- ------------ --------------- Outstanding at beginning of year 984,276 3.19 1,372,401 5.76 Granted 1,003,749 2.08 1,063,552 3.20 Exercised ( 205,316) 2.33 ( 2,600) 2.05 Forfeited ( 181,032) 3.17 (1,449,077) 5.62 ------------- ------------ Outstanding at end of year 1,601,677 2.61 984,276 3.19 ============ ============ Options exercisable at year end 930,555 2.95 984,276 3.19 Weighted-average fair value of options granted during the year $ 1.42 $ 1.16
-43- 45 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Incentive and Non-Qualified Stock Options Plans (Continued): On April 3, 1998, option holders were offered the opportunity to receive a reduced number of options at an exercise price of $3.19, the fair market value of the Company's stock on that date. The number of new options received by the option holders was determined ratably based on the ratio of the existing option exercise price and the new exercise price of $3.19. The forfeited and granted option amounts in the table above include options aggregating 1,289,972 and 817,302, respectively, that were canceled and issued under this offer. The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------------ --------------------------------- Number Weighted-Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Prices At 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price ------------------------------------------------------------------------------------------------------ $1.50 to 2.99 744,249 4.3 years $ 1.87 156,667 $ 1.79 $3.00 to 4.00 857,428 2.7 years $ 3.25 773,888 $ 3.19 --------- ------- 1,601,677 3.4 years $ 2.61 930,555 $ 2.95 ========= =======
Included in the table above are certain options outstanding which are performance based which become exercisable on the achievement of certain goals reached, but no later than 2005. A summary of these performance-based options is presented below:
1999 1998 ---------------------------- --------------------------- Weighted- Weighted- Average Average Performance Options Shares Exercise Price Shares Exercise Price --------------------------------- ----------- ------------- ------------ ------------ Outstanding at beginning of year 66,835 $ 3.19 158,750 $ 7.59 Granted 61,500 2.20 66,835 3.19 Forfeited ( 31,714) 3.19 (158,750) 7.59 ----------- ------------ ------------ ------------ Outstanding at end of year 96,621 2.56 66,835 3.19 =========== ============ ============ ============ Options exercisable at year end 35,121 3.19 66,835 3.19 Weighted-average fair value of options granted during the year $ 1.59 $ 1.16
As of December 31, 1999 the performance options outstanding under the Plans have exercise prices ranging from $1.88 to $3.19 and a weighted-average remaining contractual life of 3.6 years. -44- 46 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Incentive and Non-Qualified Stock Options Plans (Continued): FASB Statement 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans and employment contract warrants had been determined in accordance with the fair value based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999 and 1998, respectively: no dividend yield for each year; weighted average estimated option life 5.0; expected volatility of 82.6 and 41.3 percent; and risk-free interest rates of 5.3 and 5.4 percent. Under the accounting provisions of FASB Statement 123, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below:
1999 1998 --------------- ---------------- Net income: As reported $ 7,339,577 $ 7,569,795 Pro forma 6,400,308 5,513,782 Basic and diluted net income per share: As reported 1.16 1.03 Pro forma 1.01 0.72
Employee Stock Purchase Plan: In May 1996, the Board adopted the 1996 employee stock purchase plan whereby 400,000 shares of the Company's common stock have been reserved. The reserved shares may be purchased at their fair market value during specified offering periods. No shares were issued under the plan during 1999 and 1998. In 1999, they amended this plan to update for various regulation compliance. The underlying plan terms have not changed. Shareholder Rights Plan: In February 1998, the Company adopted a Shareholder Rights Plan designed to enable the Company and its board to develop and preserve long-term values for shareholders and to protect shareholders in the event an attempt is made to acquire control of Company through certain coercive or unfair tactics or without an offer of fair value to all shareholders. The Plan provides for distribution of a common share purchase right to each shareholder of record of the Company's Common Stock on February 27, 1998. Under the Plan, these rights to purchase common shares will generally be exercisable a certain number of days after a person or group acquires or announces an intention to acquire 20% or more of the Company's Common Stock. Each right entitles the holder, after the rights become exercisable, to receive shares of Company common stock having a market value of two times the exercise price of the right or securities of the acquiring entity at one-half their market value at that time. -45- 47 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Finance Company Credit Agreement: In connection with the original completion and subsequent amendments of the Credit Agreement (Note 9), the Company granted the finance company warrants to purchase an aggregate of 600,000 shares of the Company's common stock at exercise prices ranging from $3.68 to $3.76. The warrants became immediately exercisable and expire through May 2003. The warrants also are convertible into a variable number of shares of common stock which, upon conversion, allows the finance company to receive a benefit of an amount equal to the amount obtainable if the options were exercised without payment of the related exercise price. Redeemable Convertible Preferred Stock: In connection with the issuance and subsequent amendment of the Redeemable Convertible Preferred Stock (Note 11), the Company granted the investors warrants to purchase 225,000 shares of the Company's common stock at exercise prices ranging from $2.68 to $3.77. The warrants became immediately exercisable and expire through January 2004. The following table summarizes the warrants to purchase shares of the Company's common stock:
Exercise Warrants Price Outstanding Exercisable Per Share ------------ ----------- ----------------- Balance at December 31, 1997 1,700,541 1,686,540 $ 2.40 - 13.80 Granted: Credit agreement 200,000 200,000 3.68 Credit agreement 200,000 200,000 3.76 Short-term debt 37,500 37,500 3.06 Preferred stock 100,000 100,000 3.77 Preferred stock 125,000 125,000 2.68 Canceled: Credit agreement ( 50,000) ( 50,000) 4.40 Credit agreement ( 100,000) ( 100,000) 5.29 -------------- -------------- ----------------- Balance at December 31, 1998 2,213,041 2,199,040 $ 2.40 - 13.80 Granted: Employment agreement 300,000 - $ 1.92 Canceled: Bridge loans and others ( 537,000) ( 522,999) $ 4.00 - $13.80 --------------- -------------- ----------------- Balance at December 31, 1999 1,976,041 1,676,041 $ 1.92 - $13.00 ============== ============= =================
-46- 48 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: SHAREHOLDERS' EQUITY (CONTINUED) Redeemable Convertible Preferred Stock (Continued): Included in the table above are warrants issued in connection with the finance company Credit Agreement, bridge loans and other short-term notes payable. The value of these warrants is charged to interest expense over the term of the related debt agreement and during the years ended December 31, 1999 and 1998, the Company incurred interest expense aggregating approximately $302,747 and $725,378, respectively. The value of the warrants related to the issuance of new debt was determined based on the difference between the stated interest rate and the Company's estimated effective borrowing rate. Harmony Stock Options: As of December 31, 1999, 1,120,500 Harmony stock options at a weighted average exercise price of $1.47 per share were outstanding. If all these options were exercised, the Company's ownership in Harmony would be diluted to 48%. NOTE 13: RELATED PARTY TRANSACTIONS Management Agreement: The Company has management services contracts with a privately held affiliate (the "Management Company") related to the Company through common control. The contracts, which expire in December 2000 and are renewable annually thereafter, require that the Company pay the Management Company a fee aggregating of $180,000 per month for services received. The management fees totaled $1,549,372 and $900,000 in 1999 and 1998, respectively. At December 31, 1999, $175,000 of these fees remained due and payable to the Management Company. The Management Company also provides services to another privately held affiliate related to the Company through common control. The management fee is based on estimated usage of the Management Company's services by each company. Management reviews the allocation periodically and believes that the allocation method is reasonable. Accounts Receivable/Payable - Affiliates: At December 31, 1999 and 1998, accounts receivable aggregating $373,239 and $280,438, respectively, were outstanding from several affiliates related to Company through common control or equity investment. These accounts result primarily from the allocation of shared expenses. At December 31, 1998, an account payable totaling $363,727 remained due to an officer and director of the Company associated with their assistance in financing the Company's repurchases of 271,000 shares of its common stock. -47- 49 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13: RELATED PARTY TRANSACTIONS (CONTINUED) Stock Subscriptions Receivable - Officers: The Company's board of directors has, from time to time, approved the non-cash exercise of options for employees, officers and directors. At December 31, 1999 and 1998 stock subscriptions receivable of $327,500 and $129,563, respectively, remained outstanding from officers of the Company as a result of such exercises. Interest Expense - Related Parties: At December 31, 1999, interest expense paid to Curious Management related to the note payable resulting from the purchase of 51% of Curious Pictures (Note 3) was $51,945. Note Receivable - Director: In April 1999, the Company advanced a director $12,000 as evidenced by a promissory note signed by said director. The note bears an interest rate of 8% per annum and is due in full on or before April 13, 2001. As of December 31, 1999, $12,000 of principal remained due to the Company, as well as approximately $690 of related interest. Payment to Officer In connection with the sale of radio station KYCR(AM) (Note 2), Salem became the lessee for the KYCR tower site which is leased from the president and chief executive officer of the Company. The transaction was structured so that the monthly tower lease payments decreased from $4,000 per month to $2,000 per month. The Company reimburses its president for the money he would have received had the Company continued to be the lessee of the KYCR tower site. NOTE 14: INCOME TAXES At December 31, 1999, the Company has net operating loss carryforwards for income tax purposes of $3,000,000 which expire in 2012. Additionally, the federal net operating loss carryforwards for subsidiaries not consolidated for tax purposes are as follows:
Carryforward Curious Expires Pictures Harmony ------------ ------------------ ---------------- 2005 $ - $ 251,730 2006 - 1,721,893 2007 - 6,430 2008 - 2,709,559 2009 - 348,090 2011 - 1,366,208 2013 - 3,108,872 2019 - 2,428,813 2020 (approximate) 2,150,000 1,300,000 ----------------- ---------------- $ 2,150,000 $ 13,241,595 ================= ================
-48- 50 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: INCOME TAXES (CONTINUED) The Company's ability to utilize the net operating loss carryforwards is dependent upon the ability to generate taxable income in future periods. Additionally, federal net operating losses of Harmony of approximately $7,400,000 are limited to usage of $792,000 per year, due to ownership changes as defined under Section 382 of the Standard Revenue Code of 1986. The income tax provisions (benefits) for the years ended December 31 are as follows:
1999 1998 --------------- --------------- Current: Federal $ (615,000) $ (3,500,000) State (85,000) (500,000) --------------- ---------------- (700,000) (4,000,000) =============== ================
During 1999 and 1998, the Company allocated a benefit of $700,000 and $4,000,000, respectively, to continuing operations for the current tax benefit realized from the ability to offset the taxable loss from operations against the sale of discontinued operations. The benefit from net operating losses from periods prior to 1999 that were realized as a result of the radio station sale transactions was allocated to discontinued operations A reconciliation of the statutory federal income tax rate (benefit) and the effective tax rate as a percentage of income (loss) before taxes on income is as follows:
1999 1998 ---------- ----------- Statutory rate (benefit) (34.0%) (34.0%) Current state tax benefit (0.4%) (1.1%) Loss carry forwards with no current benefit 25.4% 8.3% ------- ------- Effective tax rate (benefit) (9.0%) (26.8%) ======= =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows: Deferred tax assets: Net operating loss carryforwards $ 1,111,000 $ 11,877,000 Net operating loss carryforward of subsidiaries not consolidated for tax purposes 6,288,000 - Excess of subsidiary and equity-basis investee stock tax basis over the amount for financial reporting - 5,515,000 Other items not yet deductible for tax purposes 220,000 20,000 --------------- ---------------- Total long-term deferred tax asset 7,619,000 17,412,000 Deferred tax liability: Deferred installment gain - 3,650,000 Amortization and the excess of broadcasting license financial reporting basis over the amounts for taxes - 3,237,000 Depreciation 190,000 - --------------- ---------------- Total net long-term deferred tax asset 7,429,000 10,525,000 Valuation allowance for net deferred tax assets ( 7,429,000) ( 10,525,000) --------------- ---------------- Net deferred tax assets $ - $ - =============== ================
-49- 51 INTELEFILM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: INCOME TAXES (CONTINUED) As the Company has posted consistent operating losses since inception exclusive of the radio station sale transactions, realization of the tax benefit related to the net deferred tax asset is uncertain. Accordingly, a valuation allowance has been recorded for the full value of the net deferred tax asset. The net change in the deferred tax valuation allowance was a decrease of $3,096,000 and $3,342,000 in 1999 and 1998, respectively. -50- 52 ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Set forth below is certain information concerning the management of the Company as of March 1, 2000. There are no family relationships among any directors and any executive officers.
MANAGEMENT - -------------------------------- ----------------------------------------------------- Name Position Age Christopher T. Dahl 56 Chairman of the Board, President and Chief Executive Officer James G. Gilbertson 38 Chief Operating Officer Steven C. Smith 44 Chief Financial Officer Jill J. Theis 29 General Counsel and Secretary Michael N. Delgado 40 Vice President of Marketing Richard W. Perkins 69 Director Michael R. Wigley 46 Director William E. Cameron 55 Director
Christopher T. Dahl has been President, Chief Executive Officer and Chairman of the Company since its inception in February 1990. Mr. Dahl also serves as Chairman of the Board, President and Chief Executive Officer of Harmony, a company which produces television commercials, music videos and related media, of which the Company is the largest shareholder and is the Chairman of the Board of webADTV. Messrs. Dahl and Perkins own MMLLC. Employees of MMLLC provide certain administrative, legal and accounting services to the Company and Harmony. From 1969 to 1979, Mr. Dahl was the founder and President of a group of companies involved in photo finishing, retail photo sales, home sewing notions, toy distribution and retail craft stores. He was employed by Campbell-Mithun and Knox Reeves Advertising from 1965 through 1969. James G. Gilbertson has served as the Company's Chief Operating Officer since April 1996 and its Chief Financial Officer from July 1992 to December 21, 1999. In January 2000, Mr. Gilbertson was appointed the Chief Executive Officer, President and director of webADTV. From June 1988 to July 1992, he was the Chief Financial Officer of Parker Communications, which operated a group of radio stations. From 1985 to June 1988, he was Controller of the radio division of Palmer Communications located in Des Moines, Iowa. Prior to joining Palmer Communications, Mr. Gilbertson was a practicing certified public accountant with the firm of Ernst & Young LLP. Mr. Gilbertson is also the Chief Operating Officer of Harmony. Mr. Gilbertson is also a director of Founders Food & Firkins, Ltd., a company which owns and operates Granite City Brewery, a microbrewery restaurant in St. Cloud, Minnesota. Steven C. Smith became the Chief Financial Officer of the Company on December 21, 1999. Mr. Smith has been with the Company since October 1998. Formerly the Chief Financial Officer of DIC Entertainment Animation Television and the Vice President of Finance of Orion Television, Mr. Smith brings more than 20 years experience with companies such as the Walt Disney Company. Mr. Smith has also performed as a financial consultant to special effects houses, TV and Satellite Broadcasters and technology companies. On December 21, 1999, Mr. Smith also became the Chief Financial Officer of Harmony. 51 53 Jill J. Theis joined the Company in March 1997 and has served as the General Counsel and Secretary since February 1999. From January 1996 to March 1997, Ms. Theis worked for the law firm of Holper, Welsh, Mitchell & Joanis, P.A. in Minneapolis, Minnesota. From 1993 to 1997, Ms. Theis attended law school at William Mitchell School of Law in St. Paul, Minnesota. Ms. Theis is also the General Counsel and Secretary of Harmony. Michael N. Delgado oversees the marketing and sales efforts of the Company and has been with the Company since March 1997. A graduate of the University of Southern California School of Fine Arts, Mr. Delgado has orchestrated national marketing campaigns and has been involved in worldwide branding efforts for a variety of corporations including Patagonia and Lucky Brand Clothing Companies. Mr. Delgado gained significant operations experience in his capacity as President of SenDel Automotive Corporation, a manufacturer of aluminum automotive wheels whose customers included Toyota Motor Company. Richard W. Perkins has been a director of the Company since its inception. For more than five years, Mr. Perkins has been President and Chief Executive Officer of Perkins Capital Management ("PCM"), a registered investment advisor. Mr. Perkins is also a director of the following publicly held companies: Bio-Vascular, Inc., a medical products manufacturer; CNS, Inc., a consumer products manufacturer; Eagle Pacific Industries, Inc., a manufacturer of plastic pipe; Harmony; LifeCore Biomedical, Inc., a medical device manufacturer; Nortech Systems, Inc., an electronic sub-systems manufacturer; Quantech LTD., a developer of immunological tests; and Vital Images, Inc., a medical visualization software company. Michael R. Wigley was elected to the Company's Board of Directors in February 1998. Mr. Wigley is President and Chief Executive Officer of Great Plains Companies, Inc. ("Great Plains"), a building material and supply company based in Roseville, Minnesota. He has served as its President since 1989. Mr. Wigley is Chairman and Chief Executive Officer of four subsidiaries of Great Plains, as well as Chairman and Chief Executive Officer of Great Plains Properties, Inc. and TerraDek Lighting, Inc., two independent privately-held companies. Mr. Wigley is also a director of Choicetel Communications, Inc., an internet kiosk provider. He co- founded the Minnesota branch of McKinsey & Company, where he managed various teams of consultants from 1986 to 1989. Mr. Wigley holds a M.B.A. from Harvard University and a M.S. in Civil Engineering from Stanford University. William E. Cameron was elected to the Company's Board of Directors in April 1998. Since 1993, Mr. Cameron has been the head of International Business Development for Universal Health Communications, London, England, the largest medical-health-wellness video library in the world. Mr. Cameron also runs International Telemedicine Marketing for KZT Corporation. Mr. Cameron also serves as a director of Harmony and RME Entertainment. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers, directors and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the SEC. Such officers, directors and shareholders are required by the SEC to furnish the Company with copies of all such reports. To the Company's knowledge, based solely on a review of copies of reports filed with the SEC during 1999, all applicable Section 16(a) filing requirements were satisfied except that one report on Form 5 setting forth the November 5, 1999 exercise by Christopher T. Dahl, President, Chief Executive Officer and Chairman of a stock option to purchase 125,000 shares was not filed on a timely basis. 52 54 ITEM 10 EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference from the information set forth under the caption "Executive Compensation" in the Definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders. ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table contains certain information as of March 1, 2000, regarding the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director, (iii) each executive officer, and (iv) the executive officers and directors as a group, and as to the percentage of the outstanding shares held by them on such date. Any shares which are subject to an option or a warrant exercisable within 60 days are reflected in the following table and are deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by the option or warrant holder but are not deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by any other person. Unless otherwise noted, each person identified below possesses sole voting and investment power with respect to such shares. The business address of Messrs. Dahl, Wigley, Cameron, Gilbertson, Delgado, Smith and Ms. Theis is 5501 Excelsior Boulevard, Minneapolis, Minnesota 55416.
SHARES PERCENT BENEFICIALLY OF OWNED (1) CLASS ------------------------- ----------------- Christopher T. Dahl....................... 1,127,668(2) 15.0% William Bednarczyk........................ 628,500(3) 9.0% 6908 Gleason Road Edina, Minnesota 58439 Foothill Capital Corporation.............. 600,000(4) 8.6% 11111 Santa Monica Boulevard Los Angeles, California 90025 Richard W. Perkins..................... 518,717(5) 7.3% 730 East Lake Street Wayzata, Minnesota 55391 Perkins Capital Management, Inc........... 680,186(6) 9.6% 730 East Lake Street Wayzata, Minnesota 55391 James G. Gilbertson................... 235, 976(7) 3.6% Michael N. Delgado........................ 73,006(8) 1.1% Jill J. Theis............................. 18,432(8) * Steven C. Smith........................... 50,000(8) * Michael R. Wigley......................... 68,750(9) 1.1% William E. Cameron........................ 33,750(8) * All Directors and Executive Officers as a Group (8 persons).................... 2,111,299(10) 24.8%
--------------- * Less than 1% (1) Securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the SEC and, accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the option or right to acquire Common Stock within 60 days. (2) Mr. Dahl has the sole right to sell and has sole voting power over such shares. Includes 434,682 shares purchasable upon the exercise of options and warrants. (3) Based upon statements filed on a Schedule 13D with the SEC as of July 23, 1999, Mr. Bednarczyk has the sole right to sell such shares and has sole voting power over such shares. (4) Represents shares purchasable upon the exercise of warrants. 53 55 (5) Represents shares held by Mr. Perkins as trustee for various trusts of which he is sole trustee. Mr. Perkins has the sole right to sell such shares and has sole voting power over 336,460 of such shares. Includes 167,257 shares purchasable upon the exercise of options and warrants. (6) Based upon statements filed with the SEC as of February 2, 2000, PCM is a registered investment adviser of which Richard W. Perkins, a director of the Company, is President. As set forth in Schedule 13 D filed with the SEC on February 2, 2000, PCM has the sole right to sell such shares and has sole voting power over 149,051 of such shares. Mr. Perkins and PCM disclaim any beneficial interest in such shares. This excludes shares beneficially owned by Mr. Perkins. (7) Includes 231,476 shares purchasable upon the exercise of options. (8) Represents shares purchasable upon the exercise of options. (9) Includes 33,750 shares purchasable upon exercise of options. (10) Includes 1,042,353 shares purchasable upon exercise of options and warrants. ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LEASES Until October 30, 1998, the studios and tower site of WWTC(AM) and KYCR(AM) were located in St. Louis Park, Minnesota. The studio facility consisted of approximately 12,000 square feet. The tower site included four 200-foot towers, a transmitter building and a storage garage on approximately 16 acres. The tower site was leased from Mr. Dahl at a total annual rent of approximately $114,000, and the studio site was leased from 5501 Building Partnership, a partnership consisting of Messrs. Dahl and Perkins at an annual rent of approximately $132,000. In connection with the sale of radio station KYCR(AM), Salem became the lessee for the KYCR(AM) tower site lease. The transaction was structured so that the monthly tower lease payments decreased from $4,000 a month to $2,000 a month. The Related Party Transaction Committee has approved the Company's reimbursement to Mr. Dahl for the money he would have received had the Company continued to be the lessee of the KYCR(AM) tower site through October 31, 2008. Until February 28, 1999, the Company leased certain office space at 724 First Street North, Minneapolis, Minnesota, the Company's former executive offices, from 724 Associates, a partnership consisting of Messrs. Dahl, Perkins and Stephen L. Wallack, a shareholder of the Company. These facilities were leased at annual rental of $54,000. The arrangements were approved by the Related Party Transaction Committee of the Company's Board of Directors, which is comprised of disinterested directors, and the Company believes such arrangements were on terms at least as favorable as could have been obtained from unaffiliated third parties. On March 1, 1999, the Company assigned all of its rights and obligations under the lease to 5501 Building Partnership, an entity owned by Dahl and Perkins. MANAGEMENT SERVICES FROM AN AFFILIATE From July 1993 through July 1998 the Company received administrative, legal and accounting services from RMC, an entity owned by Messrs. Dahl, Perkins, and Russell Cowles II. Mr. Cowles, a former director-elect of the Company, is a beneficiary and trustee of John Cowles Family Trust, a shareholder of the Company. Since August 1998, the Company has received such services from MMLLC, an entity owned by Messrs. Dahl and Perkins. MMLLC provides corporate, legal, accounting and financial services to the Company, CAC and Harmony. The Company also subleases its executive offices from MMLLC. The Company pays a set monthly fee of $125,000 for the services listed above. All outside services directly attributable to the Company are billed directly to the Company. The Company paid MMLLC an aggregate of $1,095,000 for such services during the fiscal year ended December 31, 1999 and an aggregate of $ 375,000 for such services during the fiscal year ended December 31, 1998. Harmony pays a set monthly fee of $55,000 for services provided to it. Harmony paid MMLLC an aggregate of $463,720 for such services during its fiscal year ending June 30, 1999 and $0 for its fiscal year ending June 30, 1998. The Company paid RMC an aggregate of $525,000 for such services during 54 56 fiscal year ended December 31, 1998. The salaries of three of the Company's officers, Messrs. Gilbertson, Smith and Ms. Theis are paid by MMLLC. The services of the Chief Operating Officer, Chief Financial Officer and the General Counsel are also rendered by Messrs. Gilbertson, Smith and Ms. Theis, respectively, on a shared basis with Harmony. Additionally, MMLLC received additional payments of $550,000 in connection with the closing of the sale of the radio stations to 1090, Salem, CRN and Radio Unica Corp. HARMONY-RELATED TRANSACTIONS In connection with the July 1997 acquisition by the Company of shares of common stock of Harmony, the Company borrowed an aggregate of $1.25 million from three parties: Rodney P. Burwell, a former director of the Company, Pyramid Partners, L.P., an entity of which PCM is the managing partner, and William M. Toles, a shareholder of the Company. Mr. Perkins, a director of the Company, is President and Chief Executive Officer of PCM. Messrs. Perkins and Toles are members of the Board of Directors of Harmony. Their loans were evidenced by notes bearing interest at 10% per year, payable on July 25, 1998. Additionally, warrants to purchase an aggregate of 125,000 shares of Common Stock at $4.00 per share were issued to those lenders. In June 1998, the Company received extensions from Messrs. Toles and Burwell and Pyramid Partners in exchange for an option for either additional warrants or for an increase in the interest rate on the outstanding balance of the loan. Mr. Toles and Pyramid Partners elected to receive additional warrants to purchase 12,500 and 25,000 shares of the Company's common stock at a price of $3.06 per share for a term of five years, respectively, and Mr. Burwell elected to receive an increase in the interest rate to 20%. On November 3, 1998, the Company repaid Messrs. Toles and Burwell and Pyramid Partners in full. Messrs. Dahl and Perkins are directors of Harmony, an entity of which the Company is the largest shareholder. In January 1998, the Company received proceeds of $611,000 and paid debt issuance costs of $39,000 through the issuance of a note payable to Harmony on face amount of $650,000. The Company repaid the entire note along with accrued interest in June 1998. In April 1998, the Company assigned to Pyramid Partners, L.P.; Perkins & Partners, Inc., Profit Sharing Plan & Trust and Christopher T. Dahl & State Bank of New Prague Joint Account all of its right to purchase 225,000 shares of common stock of Harmony at $2.50 per share from Glenn B. Laken, a shareholder of Harmony. In October 1998, the Company repurchased the 225,000 shares of common stock of Harmony at $2.75 per share from Pyramid Partners, L.P., Perkins & Partners, Inc. Profit Sharing Plan & Trust and Christopher T. Dahl & State Bank of New Prague Joint Account. From November 1998 to March 2000, the Company has advanced Harmony operating funds under notes receivable of which approximately $3.7 million remain outstanding as of March 1, 2000. The notes receivable bear an interest rate of 14%. Also, until such time as Harmony receives a new working line of credit, the Company has agreed to fund Harmony's operations as necessary. At this time, the Company receives no additional compensation for providing such services to Harmony. OTHER In connection with the sale of the assets to CRN, Christopher T. Dahl, Chairman of the Board of Directors, President and Chief Executive Officer of the Company entered into a three (3) year Consulting and Non- Circumvention Agreement with CRN, pursuant to which Mr. Dahl received payment of $750,000. Also, in connection with the sale of the assets to Radio Unica, Mr. Dahl entered into a two (2) year Non-Competition Agreement with Radio Unica, pursuant to which Mr. Dahl received payment of $750,000. The fees provided for under these agreements are payable whether or not CRN or Radio Unica requests Mr. Dahl to perform any services thereunder. In April 1999, after consulting with an outside consulting firm, the Board of Directors adopted a severance plan which covers two of the Company's executive officers, Christopher T. Dahl and James G. Gilbertson, and 55 57 one of the Company's non-employee directors, Richard W. Perkins. As to the officers, the plan provides for severance benefits in the event of termination of employment under certain circumstances following a change in control of the Company (as defined in the plan). The applicable circumstances are (a) termination by the Company without cause (as defined in the plan) other than because of death, retirement or disability (only as it pertains to Messrs. Dahl and Perkins), (b) termination for good reason (as defined in the plan), or (c) termination without good reason if the date of termination is within 180 days after a change in control. Following any such termination, in addition to compensation and benefits already earned, such individual will be entitled to receive a lump sum severance payment equal to a multiple of such individual's annual gross base salary from MMLLC, Harmony and the Company as then in effect, including amounts accrued but not paid. The applicable multiples for Messrs. Dahl and Perkins are five and for Mr. Gilbertson two. Based upon 1999 annual gross base salaries, Messrs. Dahl and Gilbertson would be eligible to receive lump sum severance payments of $1,455,000 and $350,000, respectively. As to Mr. Perkins, he would be entitled to receive a lump sum severance payment of $250,000. Mr. Perkins is participating in the plan in consideration of his status as a founding director of the Company and his ongoing consulting with management, for which he has not received separate compensation. The plan also provides for the accelerated vesting of outstanding stock options and certain other benefits following a change in control. The plan is in effect from April 1, 1999 through March 31, 2002. Thereafter, the plan automatically renews annually unless the Company gives notice that it does not wish to extend it. In addition, the plan will continue in effect for three years after a change in control. In November 1999, Mr. Dahl exercised his right to purchase 125,000 shares of the Company's common stock at a price equal to $1.625 per share by executing a note receivable to the Company for the principal amount of $203,125 at an interest rate equal to 6% per annum. The Company's Board of Directors approved the loan and exercise of the options. In August 1998, the Board of Directors of the Company authorized the repurchase of up to 400,000 shares of common stock pursuant to Exchange Act Rule 10b-18 whereby such repurchase was to be made through a broker through purchases of common stock in the open market in the Company's name and on its behalf. The Company subsequently determined that the broker did not follow the Company's instructions with respect to the purchase of such shares and canceled its authorization for the repurchase of shares. The broker then advised the Company that it has accumulated 385,000 shares of common stock for its own account and presented Company with the opportunity to purchase such shares, but the Company was unable to effect such purchase because of delays in connection with the closing of the sale of assets to CRN and restrictions placed upon the Company by its lender. Two of the Company's directors, Christopher T. Dahl and Richard W. Perkins, with the consent of the Board, initiated negotiations with the broker to acquire the broker's shares and financed the acquisition of 171,000 shares of the Company's common stock from the broker for their own account and assumed all market and other risks associated therewith. Upon the closing of the sale of the assets to CRN, the Company purchased 171,000 shares of the Company's common stock from Messrs. Dahl and Perkins at their actual cost, including financing expenses associated therewith in the amount of approximately $563,000 and assumed the financing obligations of Messrs. Dahl and Perkins at Key Community Bank. In January 1999, the Company repaid in full along with interest its indebtedness with Key Community Bank. The Company canceled the repurchase of shares pursuant to its 1998 repurchase plan. Lance W. Riley, former Secretary and General Counsel of the Company, had an of counsel relationship with Hessian & McKasy, P.A. ("HMPA"), one of the law firms which represented the Company in connection with the ABC/Disney litigation. During 1997, the Company paid HMPA legal fees of $883,749 and disbursements of $106,480. During 1998, the Company paid HMPA legal fees of $419,299 and disbursements of 50,735 in connection with the ABC/Disney litigation. 56 58
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Articles of Incorporation, as amended and restated (incorporated by reference to the Company's Form 8-K filed October 1, 1999). 3.2 Amended and Restated Bylaws (incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 33-44412) filed on December 5, 1991). 4.1 Rights Agreement between the Company and Norwest Bank Minnesota, National Association, as Rights Agent, dated as of February 19, 1998 (incorporated by reference to the Company's Registration Statement on Form 8-A (File No. 0-21534) filed on February 20, 1998). 10.1 1991 Incentive Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 33-44412) filed on December 5, 1991). 10.2 1994 Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 (File No. 0-21534) filed on March 31, 1997, as amended by Definitive Schedule 14A (Proxy Statement) filed on July 9, 1998). 10.3 1994 Director Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994 (File No. 0-21534) filed on March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995 and as amended by Definitive Proxy Schedule 14A filed on April 29, 1999). 10.4 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated November 7, 1996 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 (File No. 0-21534) filed on March 31, 1997). 10.5 Management Services Agreement between the Company and Media Management, L.L.C. (f/k/a Radio Management, L.L.C.) dated July 31, 1998 and effective August 1, 1998. 10.7 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated September 25, 1997 (incorporated by reference to the Company's Current Report on Form 8-K/A (File No. 0-21534) filed on October 1, 1997, relating to the Company acquiring a 40.7% beneficial interest in Harmony Holdings, Inc.). 10.8 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated as of March 13, 1998 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (File No. 0-21534 filed on March 31, 1998). 10.9 Amended and Restated Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated March 13, 1998 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (File No. 0-21534 filed on March 31, 1998). 10.10 Purchase Agreement with Catholic Radio Network, LLC dated April 17, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.11 First Amendment to the Purchase Agreement with Catholic Radio Network, LLC, dated September 29, 1998 (incorporated by reference to the Registrant's Current Report on Form 8-K filed on October 2, 1998).
57 59 10.12 Second Amendment to Purchase Agreement with Catholic Radio Network, LLC, dated October 26, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.13 Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.14 First Amendment to the Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.15 Amendment No. 1 to Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund Ltd., Dominion Capital Limited and Sovereign Partners, L.P dated October 22, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.16 Form of Common Stock Purchase Warrant issued by the Company to Talisman Capital Opportunity Fund Ltd. (incorporated by reference to the Registrant's Current Report on Form 8-k filed on July 6, 1998). 10.17 Form of Common Stock Purchase Warrant issued by the Company to Dominion Capital Limited (incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 6, 1998). 10.18 Form of Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP (incorporated by reference to the Registrant's Current Report on Form 8-k filed on July 6, 1998). 10.19 Promissory Note issued by Catholic Radio Network, LLC to the Company, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.20 Loan Agreement by and between the Company and CRN Broadcasting, LLC, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.21 Amendment No. 4 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of October 1, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.22 Asset Purchase Agreement by and between the Company and 1090 Investments, L.L.C. dated May 1, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.23 Amendment No. 3 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of May 21, 1998, and effective as of April 17, 1998 (incorporated by reference to the Registrant's Form 8-K filed on June 5, 1998). 10.24 Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.25 Registration Rights Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP
58 60 dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.26 Common Stock Purchase Warrant issued by the Company to Talisman Capital dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.27 Common Stock Purchase Warrant issued by the Company to Dominion Capital Limited dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.28 Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP, dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.29 Guaranty by and between the Company and Heller Financial, Inc., dated July 30, 1998 (incorporated by reference to Registrant's Form 10QSB for quarter ended June 30, 1998 and filed August 13, 1998). 10.30 Asset Purchase Agreement by and between the Company and Salem Communications Corporation for the sale of two of the Company's radio stations (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.31 Guaranty by and between the Company and The Rector, Church-Wardens and Vestrymen of Trinity Church dated July 8, 1998 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.32 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 13, 1998 (incorporated by reference to the Registrant's Form 10- KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.33 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 18, 1998 (incorporated by reference to the Registrant's Form 10- KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.34 Promissory Note issued by Harmony Holdings, Inc. to the Company dated December 17, 1998 (incorporated by reference to the Registrant's Form 10- KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.35 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 7, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.36 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 15, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.37 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.38 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.39 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 8, 1999 (incorporated by reference to the Registrant's Form 10- KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.40 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 18, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.41 Form of Promissory Note issued by Harmony Holdings, Inc. to the Company. 10.42 1999 Broad-Based Stock Incentive Plan. 10.43 1996 Employee Stock Purchase Plan as amended and restated.
59 61 10.44 1999 Company's Severance Policy. 10.45 Memorandum of Understanding by and among the Company, AT&T, and Excalibur Technologies. 21.1 Subsidiaries of the Company. 23.1 Consent of BDO Seidman, LLP. 27.1 Financial Data Schedule. (b) Reports on Form 8-K (1) The Company's Current Report on Form 8-K filed on October 1, 1999, relating to the Company's name change from Children's Broadcasting Corporation to iNTELEFILM Corporation. (2) The Company's Current Report on Form 8-K filed on December 10, 1999, relating to the Company's announcement of inteleSource.
SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota on October 27, 2000. iNTELEFILM CORPORATION By /s/ Christopher T. Dahl ------------------------------------------ Christopher T. Dahl President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Christopher T. Dahl President, Chief Executive Officer October 27, 2000 ------------------------- and Director Christopher T. Dahl (principal executive officer) /s/ Steven C. Smith Chief Financial Officer and October 27, 2000 ------------------------- Principal Accounting Officer Steven C. Smith /s/ Richard W. Perkins Director October 27, 2000 ------------------------- Richard W. Perkins /s/ Michael R. Wigley Director October 27, 2000 ------------------------- Michael R. Wigley /s/ William E. Cameron Director October 27, 2000 ------------------------- William E. Cameron
60 62
EXHIBIT INDEX EXHIBITS 3.1 Articles of Incorporation, as amended and restated (incorporated by reference to the Company's Form 8-K filed October 1, 1999). 3.2 Amended and Restated Bylaws (incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 33-44412) filed on December 5, 1991). 4.1 Rights Agreement between the Company and Norwest Bank Minnesota, National Association, as Rights Agent, dated as of February 19, 1998 (incorporated by reference to the Company's Registration Statement on Form 8-A (File No. 0-21534) filed on February 20, 1998). 10.1 1991 Incentive Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 33-44412) filed on December 5, 1991). 10.2 1994 Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 (File No. 0-21534) filed on March 31, 1997, as amended by Definitive Schedule 14A (Proxy Statement) filed on July 9, 1998). 10.3 1994 Director Stock Option Plan (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994 (File No. 0-21534) filed on March 31, 1995, as amended by Form 10-KSB/A filed on October 4, 1995 and as amended by Definitive Proxy Schedule 14A filed on April 29, 1999). 10.4 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated November 7, 1996 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 (File No. 0-21534) filed on March 31, 1997). 10.5 Management Services Agreement between the Company and Media Management, L.L.C. (f/k/a Radio Management, L.L.C.) dated July 31, 1998 and effective August 1, 1998. 10.7 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated September 25, 1997 (incorporated by reference to the Company's Current Report on Form 8-K/A (File No. 0-21534) filed on October 1, 1997, relating to the Company acquiring a 40.7% beneficial interest in Harmony Holdings, Inc.). 10.8 Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated as of March 13, 1998 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (File No. 0-21534 filed on March 31, 1998). 10.9 Amended and Restated Common Stock Purchase Warrant issued by the Company to Foothill Capital Corporation, dated March 13, 1998 (incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 (File No. 0-21534 filed on March 31, 1998). 10.10 Purchase Agreement with Catholic Radio Network, LLC dated April 17, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.11 First Amendment to the Purchase Agreement with Catholic Radio Network, LLC, dated September 29, 1998 (incorporated by reference to the Registrant's Current Report on Form 8-K filed on October 2, 1998).
61 63 10.12 Second Amendment to Purchase Agreement with Catholic Radio Network, LLC, dated October 26, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.13 Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.14 First Amendment to the Asset Purchase Agreement by and between the Company and Radio Unica Corp., dated October 27, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.15 Amendment No. 1 to Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund Ltd., Dominion Capital Limited and Sovereign Partners, L.P dated October 22, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.16 Form of Common Stock Purchase Warrant issued by the Company to Talisman Capital Opportunity Fund Ltd. (incorporated by reference to the Registrant's Current Report on Form 8-k filed on July 6, 1998). 10.17 Form of Common Stock Purchase Warrant issued by the Company to Dominion Capital Limited (incorporated by reference to the Registrant's Current Report on Form 8-K filed on July 6, 1998). 10.18 Form of Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP (incorporated by reference to the Registrant's Current Report on Form 8-k filed on July 6, 1998). 10.19 Promissory Note issued by Catholic Radio Network, LLC to the Company, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.20 Loan Agreement by and between the Company and CRN Broadcasting, LLC, dated October 30, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.21 Amendment No. 4 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of October 1, 1998 (incorporated by reference to the Registrant's Form 10QSB for quarter ended September 30, 1998 and filed on November 16, 1998). 10.22 Asset Purchase Agreement by and between the Company and 1090 Investments, L.L.C. dated May 1, 1998 (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.23 Amendment No. 3 to the Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation, dated as of May 21, 1998, and effective as of April 17, 1998 (incorporated by reference to the Registrant's Form 8-K filed on June 5, 1998). 10.24 Securities Purchase Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.25 Registration Rights Agreement by and between the Company, Talisman Capital Opportunity Fund, Ltd., Dominion Capital Limited and Sovereign Partners, LP
62 64 dated June 25, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.26 Common Stock Purchase Warrant issued by the Company to Talisman Capital dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.27 Common Stock Purchase Warrant issued by the Company to Dominion Capital Limited dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.28 Common Stock Purchase Warrant issued by the Company to Sovereign Partners LP, dated June 26, 1998 (incorporated by reference to the Registrant's Form 8-K filed on July 6, 1998). 10.29 Guaranty by and between the Company and Heller Financial, Inc., dated July 30, 1998 (incorporated by reference to Registrant's Form 10QSB for quarter ended June 30, 1998 and filed August 13, 1998). 10.30 Asset Purchase Agreement by and between the Company and Salem Communications Corporation for the sale of two of the Company's radio stations (incorporated by reference to the Registrant's Definitive Schedule 14A (Proxy Statement) filed on July 8, 1998). 10.31 Guaranty by and between the Company and The Rector, Church-Wardens and Vestrymen of Trinity Church dated July 8, 1998 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.32 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 13, 1998 (incorporated by reference to the Registrant's Form 10- KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.33 Promissory Note issued by Harmony Holdings, Inc. to the Company dated November 18, 1998 (incorporated by reference to the Registrant's Form 10- KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.34 Promissory Note issued by Harmony Holdings, Inc. to the Company dated December 17, 1998 (incorporated by reference to the Registrant's Form 10- KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.35 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 7, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.36 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January 15, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.37 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.38 Promissory Note issued by Harmony Holdings, Inc. to the Company dated January, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.39 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 8, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.40 Promissory Note issued by Harmony Holdings, Inc. to the Company dated February 18, 1999 (incorporated by reference to the Registrant's Form 10-KSB for fiscal year ending December 31, 1998 and filed on March 31, 1999). 10.41 Form of Promissory Note issued by Harmony Holdings, Inc. to the Company. 10.42 1999 Broad-Based Stock Incentive Plan. 10.43 1996 Employee Stock Purchase Plan as amended and restated.
63 65 10.44 1999 Company's Severance Policy. 10.45 Memorandum of Understanding by and among the Company, AT&T, and Excalibur Technologies. 21.1 Subsidiaries of the Company. 23.1 Consent of BDO Seidman, LLP. 27.1 Financial Data Schedule.
64 EX-10.5 2 c57792a1ex10-5.txt MANAGEMENT SERVICES AGREEMENT 1 EXHIBIT 10.5 SERVICE AGREEMENT THIS AGREEMENT made this 31st day of July, 1998, and effective August 1, 1998, by and between RADIO MANAGEMENT, L.L.C., a Minnesota limited liability company (hereinafter "RMLLC"), and CHILDREN'S BROADCASTING CORPORATION, a Minnesota Corporation (hereinafter "CBC"). WHEREAS, RMLLC engages in business of providing administrative, general and legal services for companies and CBC engages primarily in television commercial production; and WHEREAS, CBC intends to retain RMLLC to provide administrative, general and legal services for its television commercial production operations and in connection with the wrapping up of its radio station interests according to the terms and provisions set forth herein. NOW, THEREFORE, based upon the mutual premises contained herein, and other good and valuable consideration, the parties hereby agree as follows: 1. SERVICES. During the term hereof, RMLLC shall perform general and administrative services for CBC, including, but not limited to, payroll services, general accounting services, general legal services and such other services as the parties may mutually agree to from time to time. 2. COMPENSATION. In consideration for the services performed by RMLLC hereunder, CBC shall pay RMLLC Seventy-five Thousand and no/100 Dollars ($75,000.00) per month payable within thirty (30) days from the end of each calendar month. The compensation paid to RMLLC hereunder shall not include any fees or expenses for accounting, legal or other services performed for CBC by third parties. 2 3. QUARTERLY REVIEW. The parties agree that they will review the services provided by RMLLC hereunder and the compensation set forth herein at the end of each calendar quarter during the term hereof, and at such time the services and compensation may be adjusted upon the mutual agreement of the parties. 4. EXPENSES. In addition to the compensation set forth in Section 2 above, CBC shall pay all reasonable and necessary expenses incurred by RMLLC in connection with the services performed hereunder, including, but not limited to, travel and lodging expenses and ay other expenses directly attributable to the services performed by RMLLC hereunder. RMLLC shall bill CBC on a monthly basis for such expenses and CBC shall pay the same within thirty (30) days from the date CBC receives any such invoice. 5. INDEPENDENT CONTRACTOR. The parties hereby acknowledge that (i) RMLLC, while performing services hereunder, at all times acting as an independent contractor and not as an employee of CBC; (ii) RMLLC shall be solely responsible for all federal, state and local income taxes, employment taxes, self-employment taxes, workers' compensation insurance premiums and any and all other similar payments RMLLC is required to make as a result of the services RMLLC performs hereunder. CBC shall approve the engagement of any officer of RMLLC who shall pursuant to such engagement also serve as an officer of CBC, and CBC shall affirm and agree to the terms of such engagement. 6. LIMITATIONS ON LIABILITY. CBC hereby agrees that in no event shall RMLLC be liable to CBC for any indirect, special or consequential damages or lost profits arising out of or in any way related to the Agreement or the performance of services hereunder or any breach thereof and that RMLLC's liability to CBC hereunder, if any, shall in no even exceed the total compensation paid to RMLLC hereunder. 7. TERM. This Agreement shall remain in effect for a period of one (1) year from the date hereof; provided, however, the term of the Agreement shall automatically renew for successive one (1) year periods unless terminated by either party, by written notice delivered to the other party, within sixty (60) days from the end of the then current term. 8. TERMINATION. Notwithstanding Section 7 above, the Agreement shall terminate upon the occurrence of any of the following events: a. by RMLLC if CBC is more than sixty (60) days delinquent in its payment of compensation or expenses pursuant to the Sections 2 or 3 above; b. by either party if the other party is in default under any provision hereunder and such default is not cured within sixty (60) days after notice thereof is given to the defaulting party; 3 c. by either party if the other party becomes insolvent or seeks protection, voluntarily or involuntarily, under any bankruptcy law; or d. upon the mutual agreement of both parties. A termination of this Agreement pursuant to this Section 8 or Section 7 above shall not relieve CBC of its obligation to pay RMLLC compensation or expenses for any services rendered or expenses incurred prior to the date of termination. 9. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the day and year first above written. RADIO MANAGEMENT, L.L.C. BY: /s/ James G. Gilbertson ITS: /s/ Chief Operating Officer CHILDREN'S BROADCASTING CORPORATION BY: /s/ Patrick Grinde ITS: /s/ Chief Financial Officer EX-10.41 3 c57792a1ex10-41.txt FORM OF PROMISSORY NOTE 1 EXHIBIT 10.41 A FORM OF PROMISSORY NOTE $ MINNEAPOLIS, MINNESOTA ----------------- FOR GOOD AND VALUABLE CONSIDERATION, RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, within thirty (30) days after demand, the undersigned promises to pay to the order of INTELEFILM CORPORATION the sum of ($ ) with interest on the unpaid balance of this Note which shall accrue at the rate of 14% per annum from the date hereof through the due date, and shall accrue on the basis of actual days based on a 365-day year. The undersigned reserves the right to prepay all or any part of the principal of the Note at any time without penalty. Notwithstanding any provision to the contrary contained in this Note, the undersigned shall not be required to pay, and the holder of this Note (the "Holder") shall not be permitted to collect any amount of interest in excess of the maximum amount of interest permitted by law ("Excess interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Note, then in such event: 1) the provisions of this paragraph shall govern and control; 2) the undersigned shall not be obligated to pay any Excess Interest; 3) and Excess Interest that the Holder may have received hereunder shall be, at the Holder's option, (a) applied as a credit against the outstanding principal balance of the Note or the accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; 4) the interest rate provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Note shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and 5) the undersigned shall not have any action against the Holder for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on this Note is calculated at the Maximum Rate rather than the applicable rate under this Note, and thereafter the Maximum Rate exceeds the applicable rate, the rate of interest payable on this Note shall become the Maximum Rate until the Holder shall have received the amount of interest which the Holder would have received during such period on this Note had the rate of interest not been limited to the Maximum Rate during such period. The undersigned hereby acknowledges that this Note is entered into in the State of Minnesota and is governed by Minnesota law. The undersigned further consents to the jurisdiction and venue of 2 the courts of the County of Hennepin, State of Minnesota, for any and all disputes which may arise under this Note. The makers, endorsers and guarantors hereof waive presentment for payment, notice of non-payment, protest and notice of protest, and consent that the time of payment may be extended without notice. If any part of the principal or interest of this note is not paid when due, then the whole principal sum shall immediately become due and payable at the option of the holder without notice. And the maker and all other parties liable hereon agree to pay the cost of collection of this note, including a reasonable attorney fee. HARMONY HOLDINGS, INC. BY: ---------------------------- ITS: EX-10.42 4 c57792a1ex10-42.txt 1999 BROAD-BASED STOCK INCENTIVE PLAN 1 EXHIBIT 10.42 INTELEFILM CORPORATION 1999 BROAD-BASED STOCK INCENTIVE PLAN SECTION 1. PURPOSE. The purpose of the iNTELEFILM CORPORATION 1999 Broad-Based Stock Incentive Plan (the "Plan") is to (a) aid in attracting and retaining non-officer personnel of iNTELEFILM CORPORATION (the "Company") capable of assuring the future success of the Company, (b) to offer certain non-officer employees a personal financial incentive for their work in increasing the Company's business, and (c) to afford such personnel an opportunity to acquire a proprietary interest in the Company. The plan is intended to be a broad-based stock plan established to reward key non-officer employees. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award or other Stock-Based Award granted under the Plan. (c) "Award Agreement" shall mean any written agreement evidencing any Award granted under the Plan. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. (e) "Committee" shall mean a committee of the Board of Directors of the Company designated by such Board to administer the Plan and composed of not less than three directors, each of whom is a "disinterested person" within the meaning of Rule 16b-3. Each member of the Committee shall be an "outside director" within the meaning of Section 162(m) of the Code. (f) "Eligible Person" shall mean any non-officer employee or independent contractor providing services to either the Company or an Affiliate. (g) "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding 2 the foregoing, for purposes of the Plan, the Fair Market Value of Shares on a given date shall be the closing price of the Shares as reported on the Nasdaq Stock Market on such date, if the Shares are then quoted on the Nasdaq Stock Market or, if the market is closed on that date, the closing price of the Shares on the previous trading date. (h) "Option" shall mean a non-qualified stock option, defined as any compensatory stock option that does not satisfy the requirements under Code Section 422 for incentive stock options, and such Option is granted under Section 6(a) of the Plan. (i) "Other Stock-Based Award" shall mean any right granted under Section 6(e) of the Plan. (j) "Participant" shall mean an Eligible Person designated by the Committee to be granted an Award under the Plan. (k) "Performance Award" shall mean any right granted under Section 6(d) of the Plan. (l) "Person" shall mean any individual, corporation, partnership, association or trust. (m) "Restricted Stock" shall mean any Share granted under Section 6(c) of the Plan. (n) "Restricted Stock Unit" shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date. (o) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934. (p) "Shares" shall mean shares of common stock, $.02 par value, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 7(c) of the Plan. (q) "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of Options; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what 3 circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final and binding upon any Participant, any holder or beneficiary of any Award and any employee of the Company or any Affiliate. No member of the Committee shall be personally liable for any action or determination made with respect to the Plan. SECTION 4. SHARES AVAILABLE FOR AWARDS. (a) Shares Available. Subject to adjustment as provided in Section 8(c), the number of Shares available for granting Awards under the Plan shall be four hundred thousand (400,000). If any Shares covered by an Award are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. In addition, any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award, or in connection with satisfaction of tax obligations relating to an Award in accordance with the provisions of Section 6 of the Plan, shall again be available for granting Awards under the Plan. (b) Accounting for Awards. For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan. (c) Award Limitations Under the Plan. No Eligible Person may be granted any Award or Awards, the value of which Awards are based solely on an increase in the value of the Shares after the date of grant of such Awards, for more than 100,000 Shares, in the aggregate, in any calendar year beginning with the effective date of this Plan. The foregoing limitation specifically includes the grant of any "performance-based" Awards within the meaning of ss.162(m) of the Code. 4 SECTION 5. ELIGIBILITY. The Committee may designate any Eligible Person to be a Participant by granting an Award to such Eligible Person. SECTION 6. AWARDS. (a) Options. The Committee is hereby authorized from time to time to grant Options to purchase Shares to Participants pursuant to the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) Exercise Price. The purchase price per Share under an Option shall be determined by the Committee; provided, however, that such purchase price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option. The exercise price shall be payable in cash or by tendering by either actual delivery of Shares or attestation, Shares acceptable to the Committee, and valued at Fair Market Value as of the day of exercise, or in any combination thereof, as determined by the Committee. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement, substantially in the form set forth in Exhibit A, between the Company and the Participant setting forth the terms and conditions, not inconsistent with the Plan, under which the Option so granted may be exercised pursuant to the Plan and contain such other terms with respect to the Options as the Committee in its sole discretion may determine. (ii) Option Term. The term of each Option shall be fixed by the Committee. (iii) Time and Method of Exercise. The Committee shall determine the time at which an Option may be exercised in whole or in part and the method by which payment of the exercise price may be made or deemed to have been made. The Committee shall also determine the acceptable forms of payment, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price with respect thereto. (iv) Reload Options. The Committee may grant "reload" options, separately or together with another Option, pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 or any other applicable law, the Participant would be granted a new Option when the payment of the exercise price of a previously granted Option is made by the delivery of shares of the Company's Common Stock owned by the Participant pursuant to Section 6(a)(ii) hereof or the relevant provisions of another plan of the Company, and/or when shares of the Company's Common 5 Stock are tendered or forfeited as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of an Option, which new Option would be an Option to purchase the number of Shares not exceeding the sum of (A) the number of shares of the Company's Common Stock provided as consideration upon the exercise of the previously granted Option to which such "reload" option relates and (B) the number of shares of the Company's Common Stock tendered or forfeited as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of the Option to which such "reload" option relates. "Reload" options may be granted with respect to Options granted under this Plan or any other stock option plan of the Company. Such "reload" options shall have a per share exercise price equal to the Fair Market Value as of the date of grant of the new Option. (v) Vesting. Participants shall vest in all Options granted by the Company according to terms and conditions of an option agreement entered into by and between the Participant and the Company. (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate. (c) Restricted Stock and Restricted Stock Units. The Committee is hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units to Participants pursuant to the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) Restrictions. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation 6 on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. (ii) Stock Certificates. Any Restricted Stock granted under the Plan shall be evidenced by issuance of a stock certificate(s), which certificate(s) shall be held by the Company. Such certificate(s) shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions applicable to such Restricted Stock. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted. (iii) Forfeiture; Delivery of Shares. Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. Shares representing Restricted Stock that is no longer subject to restrictions shall be delivered to the holder thereof promptly after the applicable restrictions lapse or are waived. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holders of the Restricted Stock Units. (d) Performance Awards. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined by the Committee. (e) Other Stock-Based Awards. The Committee is hereby authorized to grant to Participants such other Awards that are denominated or payable in, valued in whole or in part by reference to, or 7 otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan; provided, however, that such grants must comply with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of such Awards. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(e) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value of such Shares or other securities as of the date such purchase right is granted. (f) General. Except as otherwise specified by the Plan: (i) No Cash Consideration for Awards. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (ii) Forms of Payment under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. (iii) Limits on Transfer of Awards. An Award is not transferable unless the Participant receives written approved by the Committee in accordance with any rules and regulations the Committee may establish with respect to Award transfers. (iv) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee. (v) Restrictions; Securities Exchange Listing. All certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission and any applicable federal or state securities laws, and the Committee may cause a legend or 8 legends to be placed on any such certificates to make appropriate reference to such restrictions. If the Shares or other securities are traded on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been admitted for trading on such securities exchange. SECTION 7. CHANGE IN CONTROL (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control (as defined in Section 7(b)), any Options outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested in the full extent of the original grant unless in the case of a merger with the Company, the surviving corporation assumes the obligations of the Company under the Plan. (b) Definition of Change in Control. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of either (1) the then outstanding Shares of common stock of the Company or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, however, that the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company; (2) any acquisition by the Company; (3) any acquisition by a Person including the Participant or with whom or with which the Participant is affiliated; (4) any acquisition by a Person or Persons one or more of which is a member of the Board or an officer of the Company or an affiliate of any of the foregoing on the date the Plan is adopted by the Company, (5) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (6) any acquisition by any corporation pursuant to a transaction described in clauses (A), (B) and (C) of paragraph (iii) of this Section 7; or (ii) During any period of twenty-four (24) consecutive months, individuals who, as of the beginning of such period, constituted the entire Board cease for any reason to constitute at least a majority of the Board, unless the election, or nomination for election, by the Company's stockholders, of each new director was approved by a vote of at least two-thirds (2/3) of the Continuing Directors, as hereinafter defined, in office on the date of such election 9 or nomination for election for the new director. For purposes hereof, "Continuing Director" shall mean: A. any member of the Board at the close of business on the date the Plan is adopted by the Company; or B. any member of the Board who succeeded any Continuing Director described in clause (A) above if such successor's election, or nomination for election, by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the Continuing Directors then still in office. The term "Continuing Director" shall not, however, include any individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such term is used in Rule 14a-11 of Regulation 14A of the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or (iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (A) more than 60% of the then outstanding securities having the right to vote in the election of directors of the corporation resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such reorganization, merger or consolidation, (B) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of the corporation resulting from such reorganization, merger or consolidation, and (C) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger are Continuing Directors at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the stockholders of the Company of (A) a complete liquidation or dissolution of the Company or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale 10 or other disposition, (1) more than 60% of the then outstanding securities having the right to vote in the election of directors of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such sale or other disposition of such outstanding securities, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 30% or more of the outstanding securities having the right to vote in the election of directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of directors of such corporation and (3) at least a majority of the members of the board of directors of such corporation are Continuing Directors at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. (c) Change in Control Price. For purposes of the Plan, "Change in Control Price" means the highest price per share (i) paid in any transaction reported on NASDAQ, or (ii) paid or offered in any bona fide transaction related to a potential or actual Change in Control of the Company at any time during the preceding sixty (60) day period as determined by the Committee. SECTION 8. AMENDMENT AND TERMINATION; ADJUSTMENTS. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval: (i) would cause Rule 16b-3 to become unavailable with respect to the Plan; or (ii) would violate the rules or regulations of any securities exchange or the Nasdaq Stock Market that are applicable to the Company. (b) Amendments to Awards. The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, 11 without the consent of the Participant or holder or beneficiary thereof, except as otherwise herein provided. (c) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company or other similar corporate transaction or event affecting the Shares would be reasonably likely to result in the diminution or enlargement of any of the benefits or potential benefits intended to be made available under the Plan or under an Award (including, without limitation, the benefits or potential benefits of provisions relating to the term, vesting or exercisability of any Option, the availability of any tandem stock appreciation rights or "reload" option rights, if any, contained in any Option Award) the Committee shall, in such manner as it shall deem equitable or appropriate in order to prevent such diminution or enlargement of any such benefits or potential benefits, adjust any or all of (i) the number and type of Shares (or other securities or other property) which thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards and (iii) the purchase or exercise price with respect to any Award; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. (d) Correction of Defects, Omissions and Inconsistencies. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect. SECTION 9. INCOME TAX WITHHOLDING. The Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist a Participant in paying all federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the 12 amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined. SECTION 10. GENERAL PROVISIONS. (a) Award Agreements. No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company. (b) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (c) Right to Employment. This Plan shall not be construed to create any right in the Participant to continued employment with the Company or to grant to the Participant any other rights or to impose any obligations on the Company other than those set forth in this Plan. (d) Construction. In the event an ambiguity or question of intent or interpretation arises, this Plan shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Plan. (e) Headings. The headings of the sections and subsections of this Plan are intended for the convenience of the parties only and shall in no way be held to explain, modify, construe, limit, amplify or aid in the interpretation of the provisions hereof. (f) Binding Plan. The provisions of this Plan once approved by the Board of Directors and executed by a corporate officer, are binding on and inure to the benefit of the Company and its successors, unless otherwise provided by amendment to this Plan. Similarly, the provisions of the Plan are binding on and inure to the benefit of the Participant, his or her estate, personal representative, heirs, beneficiaries, and if any, permitted assigns. (g) Beneficiaries. A Participant may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid or transferred in case of death. Each designation will revoke all prior designations, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his or her lifetime. In the absence of any such designation, benefits outstanding at the Participant's death shall be paid or transferred to his or her estate. There shall be no third party beneficiaries of or to this Plan. Any beneficiary of the Participant shall have only a claim to such 13 benefits as may be determined to be payable hereunder, if any, and shall not, under any circumstances other than the right to claim such benefits, be deemed a third party beneficiary of or to this Plan. (h) Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Minnesota, without regard to the principles of comity or the conflicts of law provisions of any jurisdiction. (i) Severability. If any portion or provision of this Plan shall be deemed invalid or unenforceable, in whole or in part, than such provision or portion shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Plan shall be construed and enforced to the intent permitted by federal and Minnesota law, as if so modified or restricted, or as if such provision or portion had not been originally incorporated herein, as the case may be. (j) Entire Agreement. This Plan and the Stock Option Agreement (the "Agreement") shall constitute the entire agreement between the Company and the Participant as to the subject matter hereof. No rights are granted to the Participant by virtue of the Plan and the Agreement other than those specifically set forth herein. DATE: DECEMBER 21, 1999 INTELEFILM CORPORATION BY /S/ JILL J. THEIS ------------------------------- ITS GENERAL COUNSEL EX-10.43 5 c57792a1ex10-43.txt 1996 EMPLOYEE STOCK PURCHASE PLAN AS AMENDED 1 EXHIBIT 10.43 INTELEFILM CORPORATION AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the Amended and Restated Employee Stock Purchase Plan of INTELEFILM CORPORATION (the "Company"), a Minnesota corporation. This Plan is intended to amend and restate the Company's original Employee Stock Purchase Plan that was approved by the Board and the shareholders in 1996. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2 Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Committee" shall mean a committee of the Board, as described in Section 14. (d) "Common Stock" shall mean the Common Stock, $.01 par value, of the Company. (e) "Company" shall mean iNTELEFILM CORPORATION, a Minnesota corporation. (f) "Compensation" shall mean total cash compensation received by an Employee from the Company or a Designated Subsidiary. By way of illustration, but not limitation, Compensation includes regular compensation such as salary, wages, overtime, shift differentials, bonuses, commissions and incentive compensation, but excludes relocation, expense reimbursements, tuition or other reimbursements and income realized as a result of participation in any stock option, stock purchase, or similar plan of the Company or any Designated Subsidiary. (g) "Continuous Status as an Employee" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise 2 pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company and its Designated Subsidiaries. (h) "Contributions" shall mean all amounts credited to the account of a participant pursuant to the Plan. (i) "Corporate Transaction" shall mean a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (j) "Designated Subsidiaries" shall mean the Subsidiaries that have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (k) "Employee" shall mean any person, including an Officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (m) "Exercise Date" shall mean the last day of each offering period of the Plan. (n) "Offering Date" shall mean the first business day of each offering period of the Plan. (o) "Plan" shall mean this Employee Stock Purchase Plan. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. (a) Any person who is an Employee as of the Offering Date of a given offering period shall be eligible to participate in such offering period under the Plan, subject to the requirements of paragraph 5(a) and the limitations imposed by Section 423(b) of the Code. Anyone who meets the eligibility criteria and becomes an Employee during the offering period but after the Offering Date may begin participation at the beginning of the next payroll period. All eligible Employees who elect to participate in this Plan shall have the same rights and privileges except as provided in Subparagraph (b) below. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 425(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or 3 more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) which permits his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by one offering during each 12 month period of the Plan, commencing on or about January 1 and continuing thereafter to a date no later than December 31 of the same twelve consecutive month period or until terminated in accordance with Section 20 hereof. The Board shall have the power to change the duration and/or the frequency of offering periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first offering period to be affected. The first offering period shall commence on a date determined by the Board which follows the date on which the Company's Common Stock has been registered under the Exchange Act. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deduction, on the form provided by the Company, and any other required documents ("Enrollment Documents") and submitting such documents to the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given offering period. The Enrollment Documents and their submission may be electronic, as directed by the Company. (b) Payroll deductions for a participant shall commence on the first full payroll following the Offering Date and shall end on the Exercise Date of the offering to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 11. Payroll deductions must be whole dollar amounts only and may not be less than $10.00 per pay period. 6. Method of Payment of Contributions. (a) A participant shall elect to have payroll deductions made on each payday during the offering period in an amount not less than ten dollars ($10.00) per payday and not more than ten percent (10%) of such participant's Compensation on each payday during the offering period. All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. 4 (b) A participant may discontinue his or her participation in the Plan as provided in Section 11, or, on one occasion only during an offering period may increase or decrease the rate of his or her Contributions with respect to the offering period by completing and filing with the Company new Enrollment Documents authorizing a change in the payroll deduction rate. The change in rate shall be effective as of the beginning of the next payroll period following the date of filing of the new Enrollment Documents, if the documents are completed at least five (5) business days prior to such date and, if not, as of the beginning of the next succeeding payroll period. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased during any offering period scheduled to end during the current calendar year to 0%. Payroll deductions shall re-commence at the rate provided in such participant's Enrollment Documents at the beginning of the first offering period that is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 11. 7. Grant of Option. (a) On the Offering Date of each offering period, each eligible Employee participating in the Plan shall be granted an option to purchase (at the per share option price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's Contributions to be accumulated during such offering period (not to exceed an amount equal to ten percent (10%) of his or her anticipated Compensation for the offering period, or the remainder of the offering period if the election is made upon employment after the Offering Date, to be determined as of the date of the commencement of the applicable offering period) by eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date, subject to the limitations set forth in Sections 3(b) and 13 hereof. Fair market value of a share of the Company's Common Stock shall be determined as provided in Section 7(b) herein. (b) The fair market value of the Company's Common Stock on a given date (the "Fair Market Value") shall be determined by the Board in its discretion based on the closing sales price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market, or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq, or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such 5 date, on the immediately preceding trading date), as reported in The Wall Street Journal. (c) Options to purchase Common Stock granted on the Offering Date expire as of the Exercise Date. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in paragraph 11, his or her option for the purchase of shares will be exercised automatically on the Exercise Date of the offering period, and the maximum number of full shares subject to option will be purchased for the participant at the applicable option price with the accumulated Contributions in the participant's account. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Exercise Date. During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after the Exercise Date of eac offering period, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the number of whole shares purchased upon exercise of his or her option. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him or her of full shares at the termination of each offering period, or which is insufficient to purchase a full share of Common Stock of the Company, shall be returned to the participant. 10. Expenses. All costs of maintaining records and executing transfers will be borne by the Company. Brokerage expenses incurred in connection with the purchase of shares shall be included as part of the costs of the shares to the participating employees. 11. Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all of the Contributions credited to his or her account under the Plan at any time prior to the Exercise Date of the offering period by giving 5 days prior written notice to the Company. All of the participant's Contribution credited to his or her account will be paid to the participant promptly after receipt of his or her notice of withdrawal, and the participant's option for the current period will be automatically terminated. Upon a participant's submission of his or her notice of withdrawal, the Company shall make no further payroll deductions for the purchase of shares during the offering period. (b) Upon the termination of the participant's Continuous Status as an Employee prior to each Exercise Date of the offering period for any reason, whether voluntary or involuntary, including retirement or death, the Contributions credited to his or her account will be returned to the participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15, and his or her option will be automatically terminated. 6 (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the offering period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option will be terminated. (d) A Participant who withdraws from an offering may not revoke that withdrawal and recommence payroll deductions during the same offering period. (e) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 400,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 19. If the total number of shares which would otherwise be subject to options granted pursuant to Section 7(a) hereof on the Offering Date of an offering period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Offering Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable. In such event, the Company shall give written notice of such reduction in the number of shares subject to the option to each Employee affected thereby and shall similarly reduce the rate of payroll deductions, if necessary. (b) The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board of the Company or a committee of members of the Board appointed by the Board. The administration, interpretation or application of the Plan by the Board or its Committee shall be final, conclusive and binding upon all participants. The Board or its Committee shall have full power to adopt, amend, and rescind any rules deemed desirable and appropriate for the administration of the Plan. Members of the Board who are 7 eligible Employees are permitted to participate in the Plan, provided that: (a) Members of the Board who are eligible to participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. (b) If a Committee is established to administer the Plan, no member of the Board who is eligible to participate in the Plan may be a member of the Committee. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of the offering period but prior to delivery to him or her of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the Exercise Date of the offering period. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 11. 17. Use of Funds. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 18. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees promptly following the Exercise Date, which statements will set forth the amounts of Contributions, the per share purchase price, the number 8 of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan that has not yet been exercised, the number of shares of Common Stock that have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), the maximum member of shares of Common Stock that may be purchased by a participant in an offering period, the number of shares of Common Stock set forth in Section 13 above, as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. In the event of a dissolution or liquidation of the Company, any offering period then in progress will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for outstanding options, each offering period then in progress shall be shortened and a new Exercise Date shall be set (the "New Exercise Date"), as of which date any offering period then in progress will terminate. The New Exercise Date shall be on or before the date of consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Exercise Date, that the Exercise Date for his or her option has been changed to the New Exercise Date and that his or her option will be exercised automatically on the New Exercise Date, unless prior to such date he or she has withdrawn from the offering period as provided in Section 11. For purposes of this Section 19, an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of 9 of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to the transaction, the holder of the number of shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of shares covered by the option as provided for in this Section 19); provided, however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock in the transaction. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 20. Amendment or Termination. The Board may at any time terminate or amend the Plan. Except as provided in Section 19, no such termination of the Plan may affect options previously granted, provided that the Plan or an offering period may be terminated by the Board on an Exercise Date or by the Board's setting of a New Exercise Date with respect to an offering period then in progress if the Board determines that termination of the Plan and/or the offering period is in the best interests of the Company and the stockholders or if the continuation of the Plan and/or the offering period would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan and after applying the generally accepted accounting rules applicable to the Plan. No amendment to the Plan shall make any change in any option previously granted that adversely affects the rights of any participant, nor may an amendment be made without prior approval of the shareholders of the Company (obtained in the manner described in Section 22) if such amendment would: (a) Increase the number of shares that may be issued under the Plan; (b) Permit payroll deductions at a rate in excess of ten percent (10%) of the participant's Compensation; (c) Change the designation of the employees (or class of employees) eligible for 10 participation in the Plan; or (d) If the Company has a class of equity securities registered under Section 12 of the Exchange Act at the time of such amendment, materially increase the benefits which may accrue to participants under the Plan. If any amendment requiring shareholder approval under this Section 20 of the Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 22 of the Plan. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Shareholder Approval. (a) Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, it must be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company, or if such shareholder approval is obtained by written consent, it must be obtained by the unanimous written consent of all shareholders of the Company; provided, however, that approval at a meeting or by written consent may be obtained by a lesser degree of shareholder approval if the Board determines, in its discretion after consultation with the Company's legal counsel, that such a lesser degree of shareholder approval will comply with all applicable laws and will not adversely affect the qualification of the Plan under Section 423 of the Code. (b) If and in the event that the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the shareholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. (c) If any required approval by the shareholders of the Plan itself or of any amendment thereto is solicited at any time otherwise than in the manner described in Section 22(b) hereof, then the Company shall, at or prior to the first annual meeting of shareholders held subsequent to the later of (1) the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (2) the granting of an option hereunder to an officer or director after such registration, do the following: 11 (i) furnish in writing to the holders entitled to vote for the Plan substantially the same information which would be required (if proxies to be voted with respect to approval or disapproval of the Plan or amendment were then being solicited) by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and (ii) file with, or mail for filing to, the Securities and Exchange Commission four copies of the written information referred to in subsection (ii) hereof not later than the date on which such information is first sent or given to shareholders. 23. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the afore mentioned applicable provisions of law. 24. Term of Plan. The Plan shall become effective upon approval by the Board and shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20. The Company shall acquire shareholder approval of the Plan within twelve (12) months from the date of the Board's approval of the Plan. 25. Additional Restrictions of Rule 16b-3. The terms and conditions of options granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. EX-10.44 6 c57792a1ex10-44.txt 1999 SEVERANCE POLICY 1 EXHIBIT 10.44 INTELEFILM CORPORATION SEVERANCE POLICY January 2000 And effective as of April 1, 1999 2
TABLE OF CONTENTS ----------------- ARTICLE I - ESTABLISHMENT 1.1 Purpose...........................................................................1 ARTICLE II - DEFINITIONS 2.1 Affiliate.........................................................................1 2.2 Base Salary.......................................................................1 2.3 Benefit Period....................................................................1 2.4 Board of Directors................................................................1 2.5 Cause.............................................................................1 2.6 Change in Control.................................................................2 2.7 Company...........................................................................4 2.8 Date of Termination...............................................................5 2.9 Disability........................................................................5 2.10 Good Reason.......................................................................5 2.11 Notice of Termination.............................................................6 2.12 Participant.......................................................................6 2.13 Policy............................................................................6 2.14 Retirement........................................................................6 2.15 Welfare Benefits..................................................................7 ARTICLE III - DURATION 3.1 Duration of the Policy............................................................7 ARTICLE IV - PARTICIPATION 4.1 Eligibility.......................................................................7 4.2 Termination of Participation......................................................7 ARTICLE V - SEVERANCE COMPENSATION 5.1 Termination by the Company without Cause, Termination by the Participant for Good Reason, and Special Termination...................................................8 5.2 Other Termination.................................................................9 5.3 Security.........................................................................10 ARTICLE VI - U.S. EXCISE TAX INDEMNIFICATION 6.1 Indemnification..................................................................10 6.2 Determination of Amount..........................................................10 6.3 Procedural Aspects...............................................................11 6.4 Refunds..........................................................................12 ARTICLE VII - AMENDMENT 7.1 Amendments.......................................................................12
3
ARTICLE VIII - INDEMNIFICATION 8.1 Indemnification..................................................................13 8.2 Limitations......................................................................13 ARTICLE IX - CLAIMS PROCEDURE 9.1 Claim for Payment................................................................13 ARTICLE X - MISCELLANEOUS 10.1 Assumption of Policy.............................................................14 10.2 Successors and Assigns...........................................................14 10.3 Arbitration......................................................................14 10.4 Governing Law....................................................................15 10.5 Offsets, Withholding.............................................................15 10.6 Non-alienation of Payment........................................................15 10.7 Facility of Payment..............................................................15 10.8 Effect of Return of Benefit Checks...............................................15 10.9 Non-exclusivity of Rights........................................................16 10.10 Severability.....................................................................16 10.11 Notices..........................................................................16 10.12 Reimbursement of Expenses in Enforcing Rights....................................16 10.13 Interest on Unpaid Amounts.......................................................16 10.14 No Contract of Employment........................................................16 10.15 Beneficiaries....................................................................17 10.16 No General Waivers...............................................................17 10.17 No Obligation to Mitigate........................................................17 10.18 Authority........................................................................17 10.19 Counterparts.....................................................................17 10.20 Headings and Gender..............................................................17
4 INTELEFILM CORPORATION SEVERANCE POLICY ARTICLE I ESTABLISHMENT 1.1 Purpose. iNTELEFILM Corporation (the "Company") Severance Policy is hereby established by the Company. The purpose of the Policy is to provide severance benefits to persons covered by the Policy who incur a termination of employment or provision of services as a member of the Board. The Policy is adopted effective as of April 1, 1999. ARTICLE II DEFINITIONS For purposes of this Policy, the following terms shall have the following meanings (unless expressly indicated to the contrary) and the term shall be capitalized when the meaning is intended: 2.1 "Affiliate" means any individual, corporation, partnership, association, limited liability company, joint-stock company, trust, unincorporated association or other entity (other than the Company) that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, the Company. 2.2 "Base Salary" means the annual (gross) base salary of the Participant from Media Management, LLC, Harmony Holdings, Inc., and/or the Company as in effect at the commencement of the Term or as the same may be increased from time to time during the Term, including amounts accrued but not paid. The annual (gross) base salary for Richard W. Perkins shall be deemed to be $50,000.00. 2.3 "Benefit Period" means the period commencing on the Date of Termination and continuing for 36 consecutive months. 2.4 "Board of Directors" or "Board" means the Board of Directors of the Company. 2.5 "Cause" shall mean as to the Participant any of the following: (a) the Participant's committing a felony or entering a plea of no contest to a felonious crime in a court of law which results in material damage to the Company or any of its Affiliates or materially impairs the value of the Participant's services to the Company or its Affiliates; or (b) the Participant's willfully engaging in one or more acts, or willfully omitting to act (except for sickness, a disability, vacation or authorized leave of absence), 5 which is demonstrably willful and materially damaging to the Company or any of its Affiliates committed in bad faith or with reasonable belief that such act or omission to act was damaging to the Company or an Affiliate, including acts and omissions that constitute gross negligence in the performance of the Participant's duties as in effect immediately prior to the commencement of the Term. Notwithstanding the foregoing, the Participant may not be terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by a majority affirmative vote of the membership of the Board of Directors of the Company (excluding the Participant, if the Participant is then a member) at a meeting of the Board called and held for such purpose (after giving the Participant reasonable notice specifying the nature of the grounds for such termination and not less than thirty (30) days to correct the acts or omissions complained of, if correctable, and affording the Participant the opportunity, together with the Participant's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Participant was guilty of conduct which constitutes Cause. An act or omission shall not be Cause if such act or omission was directed by the Board or approved by the Company's legal counsel. 2.6 "Change in Control" shall mean the occurrence of any of the following events: (a) Individuals who on the Effective Date constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person who becomes a member of the Board subsequent to the Effective Date, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for membership on the Board, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a member of the Board as a result of an actual or threatened election contest with respect to the Board of Directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (b) Any "person" (as such term is defined in Section 3(a)(9) of the Securities and Exchange Act of 1934, as amended, hereinafter the "Exchange Act", and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this definition shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company; (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliate; (C) by any underwriter temporarily holding securities pursuant to an offering of such securities; (D) pursuant to a Non-Qualifying Transaction (as defined in (c) below); or (E) a transaction (other than one described in (c) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this 6 clause (E) does not constitute a Change in Control under this definition. For purposes of this definition a "beneficial owner" of a security of the Company includes any person, company, government (or political subdivision, agency, or instrumentality of a government), either alone or acting together in a partnership, limited partnership, syndicate, or other group that, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, that has or shares the power to (A) vote or to direct the voting of securities of the Company and/or the power to invest or to dispose or to direct the disposition of securities of the Company, whether directly or through a trust, proxy, power of attorney, pooling arrangement or other contract or arrangement or (B) has the right to acquire the beneficial ownership of a security of the Company within sixty (60) days, including but not limited to the right to acquire such through the exercise of any option. (c) The Company consummates a merger, amalgamation, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Affiliates that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (i) More than 80% of the total voting power of (A) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (B) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination; (ii) No person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation or any person which beneficially owned, immediately prior to such Business Combination, directly or indirectly, 20% or more of the Company Voting Securities (a "Company 20% Shareholder")) would become the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and no Company 20% Shareholder would increase its percentage of such total voting power; and (iii) At least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial plan providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (i), (ii), and (iii) above shall be deemed to be a "Non-Qualifying Transaction"); 7 (d) The Company consummates a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets other than where with respect to which, immediately after such sale or other disposition: (i) More than 80% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Voting Securities immediately prior to such sale or other disposition; (ii) No Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Voting Securities) beneficially owns, directly or indirectly, 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors; and (iii) At least a majority of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial Policy or action of the Board providing for such sale or other disposition; or (e) The Company makes a distribution or a series of distributions within a consecutive 24-month period (whether as a liquidation, a substantial dividend, or otherwise) whereby the Company distributes to shareholders cash or other property equal to at least 50% of the value of the Company as of the date of the initial distribution. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such an acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. Section 2.6(e) shall not apply with respect to James G. Gilbertson. 2.7 "Company" means iNTELEFILM Corporation, a company which engages in the television commercial production and related commercial services, and any successor or assignee of all or substantially all of its business, or of all or substantially all of its assets, whether such succession or assignment is direct or indirect, by purchase, merger, consolidation, assignment, or otherwise and does not effectuate a Change in Control. 2.8 "Date of Termination" shall mean (i) if the Participant's employment is terminated by the Company for Cause, the date on which Notice of Termination is given; or (ii) if the 8 Participant's employment is terminated by the Company without Cause or by the Participant for Good Reason, or in the case of Christopher T. Dahl for any other reason during the period specified in Section 5.1, the date thirty (30) days after the date on which a written Notice of Termination is given or, if no such Notice of Termination is given, the date thirty (30) days after the date the Participant ceases to render services. If the Participant is not an officer or an employee of the Company and only a member of the Board of Directors, the "Date of Termination" shall mean (i) if the Participant is removed from the Board due to Cause, the date on which Notice of Termination is given; or (ii) if the Participant ceases to be a member of the Board at the request of the Company (but other than due to Cause) (including, without limitation, failure of the Company to nominate such person for continued membership on the Board) or the person resigns from the Board for Good Reason or for any other reason during the period specified in Section 5.1, the date thirty (30) days after the date on which a written Notice of Termination is given, or if no such Notice of Termination is given, the date 30 days after the date the Participant ceases to be a member of the Board. 2.9 "Disability" means a disability which results in benefits to the Participant under any long-term disability arrangement of the Company or an Affiliate, or if there is no such arrangement or the Participant is not a participant therein, then it means the failure of the Participant to render and perform the substantial services required of the Participant for a total of 180 days or more during any consecutive 12-month period, because of any physical or mental incapacity or disability as determined by a physician or physicians selected by the Company and reasonably acceptable to the Participant; provided that, if within thirty (30) days after the Participant has received written notice from the Company of a proposed Date of Termination due to a disability, the Participant shall have returned to the full performance of the Participant's duties and shall have presented to the Company a written certificate of the Participant's good health prepared by a physician selected by the Company and reasonably acceptable to the Participant, the disability shall be disregarded. 2.10 "Good Reason" shall mean the occurrence of any of the following events during the Term, unless the event occurs with the Participant's express prior written consent; unless the event is an isolated, insubstantial and inadvertent action or failure to act which was not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Participant; unless the event occurs in connection with the termination of the Participant's employment or provision of services as a member of the Board for Cause, Disability, Retirement or death; or unless the event occurs as a result of the voluntary termination of employment or voluntary termination of service as a member of the Board of the Participant and not in connection with the occurrence of any of the following: (a) the assignment to the Participant of any duties inconsistent in any respect with the Participant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities in effect immediately prior to the Term or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities (including, without limitation, the requirement of the Participant to report to any person or entity other than the Board of Directors of the Company); or (b) the Company's requiring the Participant to be based at any office or location more than 25 miles from the location of such office at the commencement of the Term, or the Company's requiring the Participant to travel on Company business to a 9 substantially greater extent than required immediately prior to the commencement of the Term; or (c) a reduction by the Company in the Participant's rate of annual Base Salary as in effect immediately prior to the commencement of the Term or the failure by the Company to provide adjustments in the Participant's Base Salary which are comparable both as to frequency and percentage adjustment to the adjustments of other Participants; or (d) the failure of the Company to continue in effect the Company's Welfare Benefits Plans, schemes, practices, policies and programs in respect of benefits, perquisites and expense reimbursements as in effect at the commencement of the Term, and if applicable, failing to continue in effect the Participant's and the Participant's family participation and coverage in the Company's benefits, perquisites and expense reimbursements at a level substantially equivalent in value to and on a basis consistent with the relative levels of participation of other Participants or as in effect at the commencement of the Term (whichever is greater); or (e) the failure of the Company to obtain from a successor (including a successor to a material portion of the business or assets of the Company or an Affiliate) a satisfactory assumption in writing of the Company's obligations under this Policy; or (f) any failure to maintain reasonable and adequate indemnification in respect of the Participant's services as an officer or member of the Board. For purposes of this Section, any good faith determination of "Good Reason" made by the Participant shall be conclusive. 2.11 "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Policy relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment or membership on the Board under the provision so indicated. 2.12 "Participant" shall mean a person designated to participate by the Company in accordance with the terms of the Policy. 2.13 "Policy" means the Company's Severance Policy, as herein set forth and as may be amended from time to time. 2.14 "Retirement" means the date the Participant attains an age of superannuation upon which the Company may, under all applicable laws, force the Participant's termination of employment or services as a member of the Board due to age. 2.15 "Welfare Benefits" means as to any Participant such benefits as medical, hospitalization, prescription drug, dental, vision, life insurance, accidental death, travel accident, disability and retiree health benefits as are provided to the Participant by the Company or an Affiliate, or by any plan, contract, or other arrangement to which the Company contributes on 10 behalf of the Participant, including such material features of the plan, contract, or other arrangement as the rate of Participant contributions, co-payments, deductibles and the level of coverage, in effect on the date on which the person most recently became a Participant in the plan. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. ARTICLE III DURATION 3.1 Duration of the Policy. The Policy shall be and become effective as of April 1, 1999 (the "Effective Date") and shall cease to be effective on March 31, 2002 (such period to be known as the "Term"). On each anniversary of the Effective Date, the Term shall be automatically extended, upon the same terms and conditions, for an additional period of one (1) year unless at least ninety (90) days prior to the anniversary of the Effective Date as of which the Term would be extended, the Company shall give written notice to the Participants of its intention not to extend the Term. If a Change in Control occurs during the original or extended Term of the Policy, the Term shall not end prior to the end of the second anniversary of the Change in Control, notwithstanding any written notice given by the Company to the contrary. Anything herein to the contrary notwithstanding, the payment obligation of the Company or an Affiliate occurring during the Term shall be continued to the extent that any obligation of the Company or an Affiliate remains unpaid (or otherwise not fully discharged) as of the end of the Term. ARTICLE IV PARTICIPATION 4.1 Eligibility. Subject to the limitations herein, the Company has selected and designated Christopher T. Dahl, James G. Gilbertson, and Richard W. Perkins as eligible Participants. The selection of the previously named persons as Participants for any Term shall not require the selection of any other person as a Participant. In the event a person ceases to be a Participant for any reason, the Company shall determine, in its sole discretion, whether such person shall again, at any time, become a Participant. 4.2 Termination of Participation. A person shall cease to be a Participant on the earliest of (a) the first date following the Date of Termination the Participant receives all compensation and benefits provided to the Participant hereunder; (b) any date mutually agreed to by the Participant and the Company; or (c) the date on which the Policy terminates as provided herein. 11 ARTICLE V SEVERANCE COMPENSATION 5.1 Termination by the Company without Cause, Termination by the Participant for Good Reason, and Special Termination. Subject to Sections 3.1 and 7.1, if the Participant incurs a Date of Termination during the Term that is initiated by the Company without Cause (and is not due to death, Retirement, or Disability) but only with respect to Christopher T. Dahl or Richard W. Perkins (and not James G. Gilbertson), or is initiated by the Participant for Good Reason during the Term, or is initiated by the Participant without Good Reason (and is not due to death, Retirement or Disability) but only if such Date of Termination is within the 180-day period after a Change in Control as defined in 2.6(e), the Company shall pay the Participant, and the Participant shall be entitled to receive, the following: (a) Compensation. The Company shall pay to Participants Christopher T. Dahl and Richard W. Perkins, as applicable, an amount equal to five (5) times the Participant's Base Salary; and shall pay to James G. Gilbertson an amount equal to two (2) times the Participant's Base Salary, plus the aggregate of the following amounts: (i) subject to any terms of any long-term incentive plan, scheme, practice, policy or program which would provide for greater compensation upon the Date of Termination, any and all outstanding awards of compensation (including stock options) shall be fully vested, nonforfeitable and exercisable as of the Date of Termination, and any obligation (whether cash, stock or otherwise) shall be paid or distributed immediately; (ii) to the extent not previously described, all vested, nonforfeitable amounts owing or accrued at the Date of Termination under any and all other compensation, benefit, perquisite, or expense reimbursement plans, schemes, practices, policies and programs in which the Participant theretofore participated, under the terms and conditions of the plans, schemes, practices, policies and programs pursuant to which such compensation, benefits, perquisite, or expense reimbursement were accrued. Subject to Article IX, the aggregate amount of all payments to be made under (a) shall be paid in a single sum on the Date of Termination or as soon as administratively possible thereafter. (b) Other Benefits. For the Benefit Period, or such longer period as may be provided by the terms of the appropriate plan, scheme, program, practice or policy, the Company shall continue Welfare Benefits to the Participant and/or the Participant's family at least equal to those which would have been provided to them in accordance with the plans, schemes, programs, practices and policies as in effect on the commencement of the Term if the Participant's employment had not been terminated or, if more favorable to the Participant, as in effect generally at any time thereafter with respect to other Participant employees of the Company and its Affiliates and their families, provided, however, that if the Participant is employed with another company and is eligible to receive Welfare Benefits under another company-provided plan, the 12 Welfare Benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility and benefit accrual (but not the time of commencement of benefits) of the Participant for retiree medical benefits pursuant to such plans, schemes, practices, programs and policies, the Participant shall be considered to have remained employed until the end of the Benefit Period and to have retired on the last day of such period. The Participant's coverage and/or the Participant's family's coverage for the Benefit Period shall not be included in the calculation of the period of coverage to be provided pursuant to any statutory continuation of benefits obligation and the Participant's right to statutory continuation coverage shall commence on the first day following the end of the Benefit Period. The benefits provided hereunder shall either be provided on a non-taxable basis or the Participant shall be entitled to an additional payment to indemnify the Participant for any tax obligation with respect to such benefits and the indemnification thereof. If such Welfare Benefit Plans, schemes, practices, policies and programs do not allow the Participant's continued participation, a cash payment equivalent on an after-tax basis to the value of the additional benefits the Participant and the Participant's family would have received under such benefit plans, schemes, practices, policies and programs in which the Participant was participating immediately prior to the Date of Termination, with such benefits payable by the Company at the same times and in the same manner as such benefits would have been received by the Participant under such plans (it being understood that the value of any insurance-provided benefits will be based on the premium cost to the Participant, which shall not exceed the highest risk premium charged by a carrier having an investment grade or better credit rating); (c) Notice of Termination. Any purported termination of the Participant's employment or membership on the Board (other than by reason of death, Retirement, Disability or Cause) shall be communicated by a written "Notice of Termination" from one party hereto to the other party hereto. (d) Limitation. A Date of Termination for Good Reason shall be permitted hereunder only if the Participant provides the Notice of Termination not later than six (6) months after the date the Participant first knew or should have known of the act or omission to act giving rise to the Date of Termination for Good Reason. The six-month period shall be tolled during any permitted period of correction or administrative procedure. 5.2 Other Termination. Upon the Participant's Date of Termination during the Term which is initiated for any reason other than a reason specified in Section 5.1, and subject to any other plan, scheme, practice, policy or program, the Company shall pay the Participant, and the Participant shall be entitled to receive, the following: (a) Any accrued, unpaid portion of Base Salary through the Date of Termination; and (b) All vested, nonforfeitable amounts owing and accrued at the Date of Termination under any and all compensation, benefit, perquisite and expense plans, 13 schemes, practices, policies and programs in which the Participant theretofore participated under the terms and conditions of the plans, schemes, practices, policies and programs pursuant to which such compensation, benefits, perquisites and expenses were accrued. Amounts which are immediately payable above will be paid as promptly as practicable after the Participant's Date of Termination. 5.3 Security. At any time but not later than thirty (30) days prior to a Change in Control, the Board of Directors may require that the Company establish an irrevocable, grantor trust in a form reasonably acceptable to the Company, and provide to such trust an irrevocable letter of credit or transfer to the trust marketable securities with a fair market value equal to 110% of the present value of all amounts that would be paid to all Participants or payable on behalf of all Participants and/or their family members assuming all Participants incurred a Date of Termination under Section 5.1 upon commencement of the Term. Each January 1 thereafter, until all potential obligations of the Policy are fully satisfied, discharged and paid, the Company shall increase the amount of the letter of credit or contribute cash or marketable securities equal to the net increase in value of the obligation under Section 5.1. The Company or an Affiliate shall remain expressly, absolutely and unconditionally liable for all compensation, benefits or other things of value under this Policy, and failure of the trust for any reason to fully discharge the obligations shall not relieve the Company or any Affiliate of its obligations. ARTICLE VI U.S. EXCISE TAX INDEMNIFICATION 6.1 Indemnification. Anything in this Policy to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company or an Affiliate to or for the benefit of the Participant (whether paid or payable or distributed or distributable pursuant to the terms of this Policy or otherwise, but determined without regard to any additional payments required under this Article VI) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Participant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Participant shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 6.2 Determination of Amount. Subject to the provisions of Section 6.3, all determinations required to be made under this Article VI, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and 14 the Participant within fifteen (15) business days of the receipt of notice from the Participant that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the change in control transaction resulting in the tax recognition, the Participant shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the "Accounting Firm" hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. The Company, as determined pursuant to this Article VI, shall pay any Gross-Up Payment, to the Participant within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the Participant with a written opinion that failure to report the Excise Tax on the Participant's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Participant. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6.3 and the Participant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant. 6.3 Procedural Aspects. The Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Participant is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Participant shall not pay such claim prior to the expiration of the 30-day period following the date on which the Participant gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Participant in writing prior to the expiration of such period that it desires to contest such claim, the Participant shall: (a) give the Company any information reasonably requested by the Company relating to such claim; (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (c) cooperate with the Company in good faith in order effectively to contest such claim; and (d) permit the Company to participate in any proceedings relating to such claim. Provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall 15 indemnify and hold the Participant harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6.3(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Participant to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Participant to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Participant on an interest-free basis and shall indemnify and hold the Participant harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Participant with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6.4 Refunds. If, after the receipt by the Participant of an amount advanced by the Company pursuant to Section 6.3, the Participant becomes entitled to receive, and receives, any refund with respect to such claim, the Participant shall (subject to the Company's complying with the requirements of Section 6.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Participant of an amount advanced by the Company pursuant to Section 6.3, a determination is made that the Participant shall not be entitled to any refund with respect to such claim and the Company does not notify the Participant in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. ARTICLE VII AMENDMENT 7.1 Amendments. The Board of Directors may modify, waive or discharge the Policy, but only if such modification, waiver or discharge is agreed to in writing by the Participants. The Board of Directors may terminate the Policy by terminating the Term in accordance with Section 3.1. 16 ARTICLE VIII INDEMNIFICATION 8.1 Indemnification. The Company shall indemnify and hold harmless each officer and each employee (the "Indemnified Person") to whom is delegated duties, responsibilities and authority with respect to the Policy against all claims, liabilities, fines and penalties, and against all expenses reasonably incurred by or imposed upon such Indemnified Person, that arise in connection with the operation and administration of the Policy to the extent lawfully allowable and to the extent that such claims, liabilities, fines, penalties or expenses are not otherwise paid for by liability insurance, including but not limited to reasonable attorneys' fees. 8.2 Limitations. No obligation under this Article VIII shall arise if the action or failure to act for which indemnification is sought resulted from gross negligence or bad faith on the part of the Indemnified Person. Promptly after an Indemnified Person receives notice of the commencement of any action, proceeding or investigation, such Indemnified Person will notify the Company in writing of the commencement of such action, proceeding or investigation. The Company shall have the right to participate in and, to the extent the Company so elects, to assume the defense of such claim with counsel selected by the Company and reasonably satisfactory to the Indemnified Person. The assumption of the defense of any such claim by the Company shall not limit the right of an Indemnified Person to participate, at his or her own expense, in the defense of such claim with counsel selected by such Indemnified Person. The failure to notify the Company promptly of the commencement of any such action, proceeding or investigation if prejudicial to its ability to defend such action, proceeding or investigation shall relieve the Company of any liability to the Indemnified Person under this Section with respect to the settlement or compromise of any action, proceeding, or investigation entered into without its prior written consent. ARTICLE IX CLAIMS PROCEDURE 9.1 Claim for Payment. Unless otherwise agreed between the Company and the Participant, a written Notice of Termination shall constitute a claim for payment. If there is no Notice of Termination or the Participant and the Company agree such notice is not a claim, then the Participant shall submit a written claim for payment to the Company on a form approved by the Company. The claim shall state the basis for payment and all other facts deemed necessary to determine the right to payment. When any claim for benefits is submitted, the Company shall approve or reject the claim within five business days after its receipt of the claim. Upon approval or rejection of the claim, the Company shall notify the Participant of its determination and, if the claim is approved, the Company will pay or commence payment pursuant to the Policy within five business days after the claim is approved and arrange for the provision of other benefits and outplacement services. The Company shall establish and maintain a procedure by which a Participant may appeal any denial of a claim for benefits. Such procedure shall be set forth in the rules of the Company and shall be provided to any Participant whose initial claim is denied and shall be available to all Participants upon request. 17 ARTICLE X MISCELLANEOUS 10.1 Assumption of Policy. The Company will require any successor (by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to the Participant, to expressly assume and agree to perform this Policy in the same manner and to the same extent that Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Policy and shall entitle the Participant to compensation from the Company in the same amount and on the same terms as the Participant would be entitled hereunder if the Participant incurred a Date of Termination for Good Reason as contemplated by Article V, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Policy, the term "Company" shall mean the Company as herein previously defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Policy by operation of law, written agreement, or otherwise. 10.2 Successors and Assigns. This Policy shall inure to the benefit of and be enforceable by the Participant and the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees, and the Policy shall be binding upon and inure to the benefit of the Company and its permitted successors and assigns as provided in Section 10.1. This Policy is not a personal contract and the rights and interests of the Participant hereunder may not be sold, transferred, assigned, pledged, encumbered, margined, gifted, conveyed, alienated, or hypothecated by the Participant, except as otherwise expressly permitted by the provisions of this Policy. 10.3 Arbitration. Any dispute or controversy arising under or in connection with this Policy (except in connection with any request for injunctive relief) shall be resolved by binding arbitration. The arbitration shall be held in the City of Minneapolis and except to the extent inconsistent with this Policy, shall be conducted in accordance with the principal rules of arbitration applied in the previously mentioned location for the arbitration of commercial disputes then in effect at the time of the arbitration, and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator(s) shall apply Minnesota law. The arbitrator shall be acceptable to both Company and the Participant. If the parties cannot agree on the acceptable arbitration rules or arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. Any expense of arbitration shall be borne by the party who incurs such expense and joint expenses shall be shared equally. The Company and the Participant hereby waive, to the fullest extent permitted by applicable law, any objection, which either may now, or hereafter have to such jurisdiction and any defense of inconvenient forum. The Company and the Participant hereby agree that a judgment upon an award rendered by the arbitrators may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Notwithstanding any provision in this Section 10.3, the Participant shall be entitled to seek specific performance of the Participant's right to be paid during the pendency of any dispute or controversy arising under or in connection with this Policy. 18 10.4 Governing Law. This Policy is governed by and is to be construed, administered, and enforced in accordance with the laws of the State of Minnesota, without regard to Minnesota's conflicts of law principles, except in so far as federal laws and regulations may be applicable. If under the governing law, any portion of this Policy is at any time deemed to be in conflict with any applicable statute, rule, regulation, ordinance, or other principle of law, such portion shall be deemed to be modified or altered to the extent necessary to conform thereto or, if that is not possible, to be omitted from this Policy. The invalidity of any such portion shall not affect the enforceability, or the validity of the remaining portion hereof. 10.5 Offsets, Withholding. Subject to Article V, the amounts required to be paid or benefits to be provided by the Company to the Participant pursuant to this Policy shall not be subject to offset. The foregoing and other provisions of this Policy notwithstanding, all payments to be made to the Participant under this Policy, will be subject to required withholding taxes and other required deductions, and the Participant shall provide the Company such information as the Company reasonably requests so that the Company may implement and verify the operation of this Section 10.5. 10.6 Non-alienation of Payment. Severance benefits payable under the Policy shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, or encumbrance, whether voluntary or involuntary, including any such liability for alimony or other payments for the support of a spouse, former spouse, or children of the Participant, or for any other relative of a Participant prior to actually being received by the person entitled to the benefit under the terms of the Policy, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge, garnish, execute or levy upon, or otherwise dispose of any right to benefits payable hereunder, shall be void. The Company shall not in any manner be liable for, or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to severance benefits under the Policy. 10.7 Facility of Payment. If a Participant is declared as incompetent or is a minor and if a conservator, guardian or other person legally charged with the Participant's care has been appointed, any benefits to which such Participant is entitled shall be payable to such conservator, guardian or other person legally charged with the Participant's care. The decision of the Company in such matters shall be final, binding and conclusive upon the Company, each Participant, and any other interested or concerned person or party. Neither the Company nor an Affiliate shall be under any duty to see to the proper application of such payments. All benefits under the Policy shall be paid to the person entitled thereto either by a check which shall be endorsed personally by the person or, if the person makes a written request on a form approved by the Company, by a deposit in the personal savings account or checking account of the person; provided that if any such deposit shall be made in error or in excess of the amount due, the person shall be liable to return any such payment or excessive portion of any payment. 10.8 Effect of Return of Benefit Checks. Each person entitled to benefits under this Policy shall furnish the Company with the address to which his or her benefit checks shall be mailed. If any benefit check mailed by regular U.S. mail to the last address appearing on the Company's records is returned because the addressee is not found at that address, the mailing of benefit checks will stop. Thereafter, if the Company receives written notice of the proper address of the person entitled to receive such benefit checks and is furnished with evidence satisfactory to the Company that such person is living, all amounts then due shall be forwarded to such person. 19 10.9 Non-exclusivity of Rights. Nothing in this Policy shall prevent or limit the Participant's continuing or future participation in any Policy, scheme, practice, policy or program or compensation, benefits, perquisites or expense reimbursements Policy, scheme, policy, practice or program provided by the Company or any of its Affiliates and for which the Participant and/or the Participant's family may have under any other Plans with the Company or any of its Affiliates. Amounts which are vested benefits or which the Participant and/or the Participant's family is otherwise entitled to receive under any Policy, scheme, policy, practice, program of the Company or any of its Affiliates at or subsequent to the Date of Termination shall be payable in accordance with such Policy, scheme, policy, practice or program. 10.10 Severability. In the event that any one or more of the provisions of this Policy shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 10.11 Notices. Any notice or other communication required or permitted to be delivered under this Policy shall be in writing, delivered personally, by courier service or by certified or registered mail, first-class postage prepaid and return receipt requested, deemed to have been received on the date of delivery or on the third business day after the mailing thereof, and addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof ): (a) if to the Company, to the attention of the Chairman of its Board of Directors at its corporate headquarters; and (b) if to the Participant, to the Participant at the Participant's address. 10.12 Reimbursement of Expenses in Enforcing Rights. All reasonable costs and expenses (including, without limitation, fees and disbursements of actuaries, accountants and counsels) incurred by the Participant in seeking to enforce rights pursuant to this Policy shall be paid on behalf of or reimbursed to the Participant promptly by the Company, whether or not the Participant is successful in asserting such rights. If there shall be any dispute between the Company and the Participant, then unless and until the dispute is decided, the Company shall pay or provide, as applicable, all reasonably undisputed amounts or benefits as are then payable to the Participant or the Participant's beneficiary pursuant to this Policy. 10.13 Interest on Unpaid Amounts. Any amounts that have become payable pursuant to the terms of this Policy or any decision by arbitrators or any judgment by a court of law, but which are not timely paid shall bear interest, payable by the Company, at the lower of (a) the highest lawful rate or (b) the prime rate in effect at the time such payment first becomes payable, as quoted by The Wall Street Journal. 10.14 No Contract of Employment. The Policy is entirely voluntary on the part of the Company and is not intended to create, nor shall it be construed as creating, a contract of employment between the Company or its successors and any employee or as an obligation to nominate a person as a member of the Board, nor shall it be construed as a term of employment with respect to binding effect after a Change in Control. 20 10.15 Beneficiaries. The Participant shall be entitled to designate (and change, to the extent permitted under applicable law) a beneficiary or beneficiaries to receive any compensation or benefits payable hereunder following the Participant's death. If the Participant should die while any amount would still be payable to the Participant under the Policy had the Participant continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Policy to the Participant's devises, legates or other designee or, if there is no such designee, to the Participant's estate. 10.16 No General Waivers. The failure of any party at any time to require performance by any other party of any provision hereof or to resort to any remedy provided herein or at law or in equity shall in no way affect the right of such party to require such performance or to resort to such remedy at any time thereafter, nor shall the waiver by any party of a breach of any of the provisions hereof be deemed to be a waiver of any subsequent breach of such provisions. No such waiver shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. 10.17 No Obligation to Mitigate. The Participant shall not be required to seek other employment or otherwise to mitigate the Participant's damages on or after the Participant's Date of Termination, but the provisions regarding offset and the reduction of certain benefits as expressly provided herein shall apply. 10.18 Authority. The Company represents and warrants that this Policy has been authorized by all necessary corporate action of the Company and is a valid and binding Policy of the Company enforceable against the Company in accordance with its terms. The Participant represents and warrants that the Participant is not a party to any Policy or instrument, which would prevent the Participant from entering into or performing the Participant's duties in any way under this Policy. 10.19 Counterparts. This Policy may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 10.20 Headings and Gender. The section and other headings contained in this Policy are for the convenience of the parties only and are not intended to be a part hereof or to affect the meaning or interpretation hereof. Except where the context indicates to the contrary, when used herein, masculine terms shall be deemed to include the feminine, singular the plural, and plural the singular. IN WITNESS WHEREOF, Company has duly executed this Policy by its authorized representatives effective as of the date first above written. iNTELEFILM CORPORATION By:/s/ Jill J. Theis Name: Jill J. Theis Title: General Counsel/Secretary EX-10.45 7 c57792a1ex10-45.txt MEMORANDUM OF UNDERSTANDING 1 EXHIBIT 10.45 MEMORANDUM OF UNDERSTANDING This Agreement dated this 22nd day of November, 1999 by and between AT&T, a Corporation ("AT&T"), iNTELEFILM Corporation ("iNTELEFILM"), and Excalibur Technologies Corporation ("Excalibur"). RECITALS WHEREAS, iNTELEFILM has developed a unique opportunity to enhance the video production service process of global advertising agencies and through capitalizing on its expertise in video commercial production and its relationship with advertising agencies, iNTELEFILM intends to act as the Application Service Provider (ASP) of the InteleSource video master retrieval service designed for advertising agencies. WHEREAS, AT&T is desirous of providing the web hosting infrastructure of the InteleSource service under the terms of a Dedicated Hosting Services co-location agreement, to enable the development of this internet based service. WHEREAS, Excalibur has designed and developed a proprietary software product ("Screening Room") that provides end users with the ability to index and archive video and has licensed Screening Room to iNTELEFILM via the attached Software License Agreement (attachment B). Excalibur is desirous of introducing the Screening Room to the advertising agency community via its co-marketing agreement with AT&T and via the proprietary product called InteleSource. WHEREAS, all parties are desirous of entering into this memorandum of understanding to define each parties role in developing and implementing such services; NOW, THEREFORE, in consideration of $1.00 and other good and valuable consideration, the receipt and sufficiency of which is hereby expressly acknowledged, the parties hereby agree as follows: 1. AT&T shall provide the web hosting infrastructure which shall include the following: (a) conditioned rack space and power; (b) bandwidth: AT&T will provide this service as outlined in attachment A. 2. Excalibur will provide services and technical support as described in paragraph 9 of their terms and conditions (attachment "B"). Excalibur will refrain from marketing "Screening Room" or related products to advertising agencies for six months from the date of the delivery of the InteleSource product. In this same period, iNTELEFILM will use best efforts to secure no less than 5 clients from top 100 advertising agencies as ranked in the 1999 edition of Adweek's "Redbook". 2 3. iNTELEFILM shall provide its expertise in video commercial production and its relationship with advertising agencies in order to sell the InteleSource service. iNTELEFILM will collect all revenue related to the iNTELEFILM service and remit to AT&T and Excalibur the costs as outlined in attachment A & B depending upon the service required in those contracts. 4. Collectively, the parties agree that iNTELEFILM will operate as a value added service provider, marketing an end to end digital video encoding, archiving, retrieval solution as well as the physical storage of video masters. The product will be based on Excalibur/DVL technologies and will be housed in the AT&T infrastructure as outlined in attachment "B". 5. Confidential Information. The parties agree to keep all information received from the other party confidential and will not disclose any confidential information now or hereafter received or obtained from each other or its representatives to any third party, except as required by applicable law or legal process, without prior written consent of the party whose confidential information may be disclosed to such third parties who need to know information for the purpose of the Memorandum of Understanding and who agree to keep such information confidential. Neither party will make any commercial use, in whole or in part, of any confidential information. 6. Parties shall not issue or approve any public statement concerning this Memorandum of Understanding without the prior written approval of the other party as to its contents and its release unless such disclosure is required by law. 7. In the event a conflict arises between the terms of this Agreement and the Software License Agreement between iNTELEFILM and Excalibur dated , the terms and conditions of the latter shall prevail. IN WITNESS WHEREOF, the parties have executed this Memorandum of Understanding as of the date and year first written above. AT&T iNTELEFILM By: /s/ Andrew Cravero By: /s/ James G. Gilbertson Its: General Manager Its: Chief Operating Officer Excalibur By: /s/ Dan C. Stroman Its: Director of Contract EX-21.1 8 c57792a1ex21-1.txt SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 AS OF DECEMBER 31, 1999, THE SUBSIDIARIES OF THE COMPANY WERE AS FOLLOWS:
Name State of Incorporation - ------------------------------------------------------- ------------------------------------------------------- Children's Radio of Los Angeles, Inc. Minnesota Children's Satellite Network, Inc. Minnesota Children's Radio of New York, Inc. New Jersey Children's Radio of Minneapolis, Inc. Minnesota Children's Radio of Golden Valley, Inc. Minnesota Children's Radio of Dallas, Inc. Minnesota Children's Radio of Houston, Inc. Minnesota Children's Radio of Milwaukee, Inc. Minnesota Children's Radio of Denver, Inc. Minnesota Children's Radio of Detroit, Inc. Minnesota Children's Radio of Philadelphia, Inc. Minnesota Children's Radio of Chicago, Inc. Minnesota Children's Radio of Phoenix, Inc. Minnesota Children's Radio of Tulsa, Inc. Minnesota KAHZ-AM, Inc. Minnesota KCNW-AM, Inc. Minnesota KIDR-AM, Inc. Minnesota KKYD-AM, Inc. Minnesota KMUS-AM, Inc. Minnesota KPLS-AM, Inc. Minnesota KTEK-AM, Inc. Minnesota KYCR-AM, Inc. Minnesota WAUR-AM, Inc. Minnesota WCAR-AM, Inc. Minnesota WJDM-AM, Inc. Minnesota WPWA-AM, Inc. Minnesota WWTC-AM, Inc. Minnesota WZER-AM, Inc. Minnesota Populuxe Pictures, Inc. Minnesota Buffalo Rome Films, Inc. Minnesota Chelsea Acquisition, Inc. Minnesota Chelsea Pictures, Inc. Massachusetts Curious Pictures Corporation New York Furious Pictures Corporation New York Delirious Pictures Corporation New York Harmony Holdings, Inc. Delaware
EX-23.1 9 c57792a1ex23-1.txt CONSENT OF BDO SEIDMAN 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-62402) pertaining to the 1991 Incentive Stock Option Plan, Stock Grants and Non-Qualified Stock Option Agreements, the Registration Statement on Form S-8 (No. 33-93546) pertaining to the 1994 Stock Option Plan, 1994 Director Stock Option Plan and the Written Compensation Agreement with R. David Ridgeway, the Registration Statement on Form S-8 (No. 333-21699) pertaining to the 1994 Stock Option Plan, the Registration Statement on Form S-8 (No. 333-21701) pertaining to the 1996 Employee Stock Purchase Plan and Non-Qualified Stock Option Agreements, the Registration Statement on Form S-3 (No. 333-06865) pertaining to the registration of 1,614,802 shares of common stock, the Registration Statement on Form S-3 (No. 333-14483) pertaining to the registration of 1,125,580 shares of common stock, the Registration Statement on Form S-3 (No. 333-21117) pertaining to the registration of 493,895 shares of common stock, the Registration Statement on Form S-3 (No. 333-28315) pertaining to the registration of 318,607 shares of common stock, the Registration Statement on Form S-4 (No. 333-18575) pertaining to the registration of 5,000,000 shares of common stock and $5,000,000 of debt securities, the Registration Statement on Form S-3 (No. 333-53327) pertaining to the registration of 421,528 shares of common stock, the Registration Statement on Form S-3 (No. 333-60637) pertaining to the registration of 1,580,500 shares of common stock, the Registration Statement on Form S-3 (No. 333-67381) pertaining to the registration of 150,000 shares of common stock, the Registration Statement on Form S-3 (No. 333-86867) pertaining to the registration of 425,000 shares of common stock, the Registration Statement on Form S-4 (No. 333-38474) of INTELEFILM Corporation of our report dated February 8, 2000, except for notes 8 and 10 dated March 17, 2000 with respect to the consolidated financial statements included in the Annual Report (Form 10-KSB/A) for the year ended December 31, 1999. /s/ BDO Seidman, LLP BDO Seidman, LLP Milwaukee, Wisconsin October 27, 2000 EX-27.1 10 c57792a1ex27-1.txt FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-2000 JAN-01-1999 DEC-31-1999 15,986,385 0 8,965,467 (339,216) 0 27,191,073 5,292,703 (2,335,248) 37,617,852 17,327,875 871,818 0 0 125,772 19,344,873 37,617,852 67,242,374 67,242,374 56,488,737 66,210,821 7,335,857 (339,216) 1,148,605 (7,009,656) 0 (7,009,656) 14,349,233 0 0 7,339,577 1.16 1.16
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