-----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, MnvkSfW/+lM2kTZdDHmz+FfNFgqU4w0CKwjttioyUjUHm8QRAumMA2mefehWLrEb yf0KT/QPGTFIYLuN/ijaPQ== 0000950137-01-503058.txt : 20010815 0000950137-01-503058.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950137-01-503058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELEFILM CORP CENTRAL INDEX KEY: 0000882160 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 411663712 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21534 FILM NUMBER: 1710166 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 10-Q 1 c64352e10-q.txt QUARTERLY REPORT 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT COMMISSION FILE NUMBER 0-21534 iNTELEFILM CORPORATION (Exact Name of Registrant as Specified in Its Charter) MINNESOTA 41-1663712 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) CROSSTOWN CORPORATE CENTER 6385 OLD SHADY OAK ROAD - SUITE 290 EDEN PRAIRIE, MINNESOTA 55344 (952) 925-8840 (Address of Principal Executive Offices, including Zip Code, and Registrant's Telephone Number, including Area Code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- -----. As of July 23, 2001, the issuer had outstanding 6,782,646 shares of common stock. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION....................................................... 1 Item 1 Financial Statements.................................................. 1 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 8 Item 3 Quantitative and Qualitative Disclosures About Market Risk............ 14 PART II OTHER INFORMATION........................................................... 14 Item 1 Legal Proceedings..................................................... 14 Item 2 Changes in Securities and Use of Proceeds............................. 15 Item 3 Defaults upon Senior Securities....................................... 15 Item 4 Submission of Matters to a Vote of Security Holders................... 15 Item 5 Other Information..................................................... 15 Item 6 Exhibits and Reports on Form 8-K...................................... 15 SIGNATURES.............................................................................. 16 EXHIBIT INDEX........................................................................... 17
i 3 PART I ITEM 1 Financial Statements iNTELEFILM CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 (Unaudited) (Audited) ----------- ------------ ASSETS Current assets: Cash and cash equivalents $1,401,546 $ 3,099,496 Accounts receivable, net of allowance for doubtful accounts of $39,357 and $27,600, respectively 3,630,085 7,127,026 Unbilled accounts receivable 187,266 1,122,888 Accounts receivable - affiliates net allowance of $324,835 and $324,835, respectively 61,550 82,448 Other accounts receivable 564,210 590,956 Prepaid expenses 1,082,658 1,138,738 Other current assets 194,639 676,294 ----------- ------------ Total current assets 7,121,954 13,837,846 Property and equipment, net 2,747,038 3,373,844 Intangible assets, net 5,953,837 7,014,358 Other assets 733,609 471,862 ----------- ------------ Total assets $16,556,438 $ 24,697,910 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,787,654 $ 4,921,347 Accounts payable - affiliates - 30,000 Accrued income taxes 30,000 30,000 Deferred revenue 1,844,748 2,938,268 Other accrued expenses 4,326,768 4,664,376 Line of credit 222,979 198,847 Short-term debt 400,000 1,087,731 Long-term debt - current maturities 113,411 115,134 ----------- ------------ Total current liabilities 10,725,560 13,985,703 Long-term debt, less current maturities 502,431 610,332 ----------- ------------ Total liabilities 11,227,991 14,596,035 ----------- ------------ Commitments and Contingencies - - Minority interest 1,172,483 1,002,580 Shareholders' equity: Common stock 135,653 130,227 Additional paid-in capital 46,879,658 46,223,361 Accumulated deficit (42,502,472) (36,897,418) Stock subscriptions receivable (356,875) (356,875) ----------- ------------ Total shareholders' equity 4,155,964 9,099,295 ----------- ------------ Total liabilities and shareholders' equity $16,556,438 $ 24,697,910 =========== ============
See accompanying notes to the consolidated financial statements. 1 4 iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ---------- Contract revenues $10,524,702 $15,437,142 $22,979,933 $37,176,733 Costs and expenses: Cost of production 8,459,766 12,368,178 18,975,543 30,865,415 Selling, general and administrative 2,411,836 3,042,033 5,267,703 6,094,079 (exclusive of all items shown below) Corporate 610,051 1,195,622 1,552,937 2,356,935 Stock option compensation 84,951 135,393 169,903 225,745 Depreciation and amortization 738,377 524,048 1,417,961 1,040,299 Restructuring charges - - 1,202,006 - ----------- ----------- ----------- ----------- Loss from operations (1,780,279) (1,828,132) (5,606,120) (3,405,740) Minority interest 160,000 - 160,000 - Interest income (expense) - net 17,272 111,829 (157,970) 174,770 ----------- ----------- ----------- ----------- Net loss from operations before income taxes (1,603,007) (1,716,303) (5,604,090) (3,230,970) Income tax provision (1,287) (7,295) (964) (11,844) ----------- ----------- ----------- ----------- Net loss $(1,604,294) $(1,723,598) $(5,605,054) $(3,242,814) =========== =========== =========== =========== Basic and diluted net loss per share $ (0.24) $ (0.27) $ (0.84) $ (0.51) =========== =========== =========== =========== Weighted average number of shares outstanding 6,760,000 6,423,000 6,673,000 6,379,000 =========== =========== =========== ===========
See accompanying notes to the consolidated financial statements. 2 5 iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ---------------------------------- 2001 2000 ------------ ------------ OPERATING ACTIVITIES: Net loss $(5,605,054) $(3,242,814) Adjustments to reconcile net loss to net cash used in Operating activities: Provision for doubtful accounts and director advances 38,357 571,639 Depreciation and amortization 1,417,961 1,040,299 Stock option compensation expense 169,903 225,745 Minority interest (160,000) - Decrease (increase) in: Accounts receivable 3,458,584 2,921,348 Other receivables 983,266 (781,821) Prepaid expenses 93,480 (224,662) Other assets 219,908 - Increase (decrease): Accounts payable (1,133,693) (1,207,834) Accounts payable - affiliates (30,000) - Deferred income (1,093,520) 556,760 Other accrued expenses 23,481 (2,147,906) ------------ ------------- Net cash used in operation activities (1,617,327) (2,289,246) ------------ ------------- INVESTING ACTIVITIES: Purchase of property and equipment (232,647) (608,639) Other capital expenses (314,753) (329,557) ------------ ------------- Net cash used in investing activities (547,400) (938,196) ------------ ------------- FINANCING ACTIVITIES: Increase (decrease) in line of credit 24,132 (3,548,911) Repayment of debt (147,355) (1,679,173) Proceeds from debt financings - 191,453 Proceeds from issuance of subsidiary common stock 590,000 - Proceeds from issuance of common stock - 273,977 ------------ ------------- Net cash provided by (used in) financing activities 466,777 (4,762,654) ------------ ------------- Decrease in cash and cash equivalents (1,697,950) (7,990,096) Cash and cash equivalents at beginning of year 3,099,496 15,986,385 ------------ ------------- Cash and cash equivalents at end of period $ 1,401,546 $ 7,996,289 ============ =============
See accompanying notes to the consolidated financial statements. 3 6 iNTELEFILM Corporation Condensed Notes to Consolidated Financial Statements (unaudited) June 30, 2001 NOTE 1 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-KSB for the year ended December 31, 2000. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern; however, recurring losses, negative working capital and negative cash flow from operations raise concerns as to the Company's ability to continue as a going concern. As a result, the Company's independent certified public accountants included an explanatory paragraph in their opinion provided with the Company's December 31, 2000 Consolidated Financial Statements wherein they expressed substantial doubt about the Company's ability to continue as a going concern. NOTE 2 BUSINESS SEGMENTS The Company classifies its operations into two major business segments: television commercial production and the operations of WebADTV. The television commercial production operations consist of the Company's production companies: Curious Pictures, Chelsea Pictures, and The End, which was discontinued in the first quarter of 2001. The WebADTV operation is comprised of a web enabled video asset management system that facilitates the digitization, ingestion, archiving and streaming of video. The Company evaluates performance of its segments based on several measurements. The primary financial measure used by the Company is production service income, which is defined as earnings before interest, taxes, stock-based compensation, corporate overhead, depreciation, and amortization. Production service income measures the contribution margin generated by each of its segments. The accounting policies of the segments are the same as those described in Note 1.
Six months ended June 30, 2001 (in thousands) ---------------------------------------------------------------- Television Commercial Production WebADTV Corporate iNTELEFILM ---------- --------- ---------- ---------- Revenues from external sources $ 22,976 $ - $ 4 $22,980 Inter-segment Revenues - - - - Production service income/(loss) $ 46 $(1,009) $(1,852) $(2,815) Stock option compensation 170 - - 170 Depreciation and amortization 457 341 620 1,418 Restructuring costs and impaired assets 1,202 - - 1,202 Loss from operations (1,783) (1,350) (2,472) (5,605) Additions to long-lived assets 213 19 - 232 Total Assets $ 8,396 $ 987 $ 7,173 $16,556
4 7 NOTE 3: EXCHANGE OFFER Prior to December 31, 2000, the Company commenced an exchange offer to the shareholders of Harmony Holdings, Inc. ("Harmony") to acquire all of the remaining outstanding shares of Harmony's common stock in exchange for shares of the Company's common stock. This exchange offer was completed as of March 2, 2001. The Company exchanged 193,315 shares of its common stock for 2,658,081 shares of Harmony's common stock, thereby owning 90.4% of Harmony. Based on its stock price of $1.13 per share on March 2, 2001 and $206,271 in transaction costs, the Company recognized $423,750 of goodwill. On May 10, 2001, the Company completed the Harmony acquisition by merging Harmony with a wholly owned subsidiary of iNTELEFILM. In connection with the merger, the Company exchanged 51,565 shares of its common stock for the remaining 709,017 shares of Harmony that remained outstanding. In addition, the Company incurred approximately $15,000 in transactions costs and recognized $73,041 of goodwill. NOTE 4: FUNDING FOR WebADTV In February and March 2001, a Company subsidiary, WebADTV, raised $590,000 through the issuance of 5,900,000 shares of WebADTV common stock and warrants to purchase 5,900,000 shares of WebADTV common stock at $0.10 per share. As of June 30, 2001, approximately 68% of the outstanding shares of common stock of WebADTV were held by the Company and approximately 32% of the outstanding shares of WebADTV common stock had been issued directly to third parties, employees, directors, and consultants pursuant to stock option plans, equity financing, and purchase agreements. WebADTV has reserved an aggregate of 10,000,000 shares of its common stock under its two stock option plans. As of June 30, 2001, 2,881,000 of the 4,550,500 options granted under the plans have been exercised. If all options and warrants outstanding as of June 30, 2001 were exercised, the Company's ownership in WebADTV would be reduced to approximately 55%. Throughout 2000 and during January 2001, the Company funded the operations of WebADTV. Effective January 31, 2001, the Company's board of directors agreed to convert the amount due from the WebADTV to contributed capital concurrent with the February and March 2001 equity financing. Accordingly, in February 2001, WebADTV's debt was converted and the Company's investment in WebADTV increased by $2,605,000. In April 2001, the Company advanced to WebADTV an additional $60,000 in exchange for 600,000 shares of WebADTV's common stock and warrants to purchase an additional 600,000 shares for $0.10 per share. In May, June and July 2001, the Company advanced to WebADTV an aggregate of $310,000. These advances, if unpaid for a period of greater than 30 days, convert to demand notes payable with interest at 12% and secured by WebADTV's assets. As of July 23, 2001, $210,000 of such advances had been converted to notes payable. In connection with these advances, the Company also received a warrant to purchase 310,000 shares of WebADTV's common stock at a price equal to that of WebADTV's next equity financing. These amounts are eliminated in the consolidated financial statements. NOTE 5: DISCONTINUATION OF HARMONY'S SUBSIDIARY, THE END: In February 2001, the operations of Harmony's subsidiary, The End, Inc. ("The End") were discontinued. The End consisted of The Beginning, Inc., The Moment, Inc., Serial Dreamer, Inc., Gigantic Entertainment, Inc., and Unscented, Inc. and had locations in Los Angeles and New York. The Company accrued closing costs totaling $1,202,006. These costs consist of the following: continuing contractual obligations of $735,000 and estimated office, legal, non-refundable prepayments and other administrative costs of the closure of $467,006. As of June 30, 2001, approximately, $200,000 of the continuing contractual obligations and $334,955 of other closing costs had been incurred with no adjustment necessary to the accrual. At June 30, 2001, $671,045 remained accrued. In March 2001, the Company was released from all obligations associated with the lease of the End's New York facility in exchange for the forfeiture of a portion of the security deposit. In addition to the restructure charge recognized in the first quarter of 2001, the Company also recognized a long-lived asset impairment charge of $895,500 related to The End in the last quarter of 2000. This charge includes $150,000 for goodwill, $614,000 for property and equipment and $131,500 for lease deposits. Based upon the present value of future cash flows the fair value of assets was reduced to $0. The End accounted for revenues of $0 and $4,463,607 and operating losses of $0 and $394,313 for the quarters ended June 31, 2001 and 2000, respectively. The End accounted for revenues of $531,291 and $14,171,350 and operating losses of $1,590,532 and $847,668 for the six months ended June 30, 2001 and 2000, respectively. 5 8 NOTE 6: LINE OF CREDIT FORBEARANCE AGREEMENT The Company has failed to comply with certain financial covenants relating to minimum net tangible worth, maximum operating losses, and certain reporting requirements under its loan and security agreement with its senior lender, General Electric Capital Corporation ("GE Capital"). On June 19, 2001, GE Capital agreed to forbear from exercising its rights and remedies under the loan and security agreement related to these defaults until September 30, 2001. In connection with this forbearance agreement, the Company agreed to a 2% prepayment fee through July 2002. This fee had previously been 1% for the period August 2001 to July 2002. NOTE 7: CHELSEA PICTURES OPERATING AGREEMENT AND EMPLOYMENT CONTRACT AMENDMENT On June 20, 2001, the Company entered into an operating agreement and employment contract amendment with members of the management of Chelsea Pictures. Under the agreement and in exchange for concessions on existing employment contract provisions, management of Chelsea Pictures received an option to purchase 20% of the issued and outstanding common stock of Chelsea Pictures. Such stock options vest as follows: 10% upon Chelsea reaching $300,000 of EBITDA for the period from July 1, 2001 to June 30, 2002; 10% upon Chelsea reaching $500,000 of EBITDA for the period from July 1, 2002 to June 30, 2003. In the event that no vesting occurs in the period July 1, 2001 to June 30, 2002, full vesting may still occur if Chelsea reaches $800,000 of EBITDA for the period July, 1, 2002 to June 30, 2003. The stock options have an exercise price of $1 for each 1% purchased. Upon vesting, management of Chelsea Pictures may exchange the options to purchase Chelsea Pictures common stock for warrants to purchase up to 270,000 shares of iNTELEFILM common stock. Such warrants will have an exercise price of $.01 per share and expire in five years from the grant date. Further, once vested, management may require Chelsea Pictures to repurchase such stock options beginning July 2003 at a valuation of Chelsea Pictures of three times the prior two year average EBITDA. NOTE 8: RESCISSION OF COSMIC INVENTIONS ACQUISITION In May 2001, the sellers of Cosmic Inventions ("Cosmic") notified the Company of its default of the payment provisions of the seller note payable entered into in connection with the Company's acquisition of Cosmic. Under the note payable agreement, the seller's only remedy of the default was to affect a rescission of the acquisition transaction, which occurred effective April 30, 2001. Under the terms of the rescission, WebADTV returned 100% of the acquired Cosmic membership interests and the sellers cancelled the $650,000 note payable and returned 560,000 of 660,000 shares of WebADTV common stock issued in the acquisition transaction. Cosmic's results from operations were not material to the Company's ongoing results from operations. NOTE 9: CHANGE IN ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. 6 9 As a result of the adoption of SFAS 141 and 142, all future business combinations will be accounted for under the purchase method, which may result in the recognition of goodwill and other intangible assets, some of which will be recognized through operations, either by amortization or impairment charges, in the future. For purchase business combinations completed prior to June 30, 2001, the net carrying amount of goodwill is $5,287,170. Amortization expense during the six-month period ended June 30, 2001 was $716,676. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. NOTE 10 LEGAL PROCEEDINGS On August 26, 1997, a former employee of Harmony Pictures commenced legal action in California against Harmony and Harmony Pictures alleging breach of employment contract. Summary judgment in favor of Harmony and Harmony Pictures was granted by the trial court and subsequently reversed by the Court of Appeals. A judgment was rendered against Harmony and Harmony Pictures for $309,000 at trial on July 24, 2001. Harmony and Harmony Pictures intend to appeal the judgment. A bank that was a former lender to Harmony filed suit against Harmony alleging default on a $250,000 guaranteed line of credit on October 20, 1999. On February 27, 2001, the Los Angeles Superior Court entered final judgment against Harmony in the amount of $328,208. To date, the Company has accrued $575,000 for the aforementioned judgments. In 1999, the Company filed suit against Oklahoma Sports Properties, Inc. and Fred Weinberg ("the Defendants") seeking recovery of five promissory notes, aggregating $495,000, plus interest and attorney costs for a total of approximately $670,000. The United States District Court for the District of Minnesota granted summary judgment for the Company. Upon appeal by the Defendants, in February 2001, the United States Court of Appeals for the Eighth Circuit affirmed the lower courts decision holding the Defendants liable for the notes. These promissory notes had previously been written off as un-collectable, however, the Company is aggressively pursuing collection of this judgment. 7 10 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. Although the Company believes that, in making any such statement, its expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words "anticipates," "believes," "expects," "intends," "plans," "estimates" and similar expressions, as they relate to the Company or its management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ materially from those anticipated, certain of which are beyond its control, are set forth in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000, under the caption "Management's Discussion and Analysis or Plan of Operation - Cautionary Statement." Accordingly, the Company cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on it. The Company cautions you to keep in mind the risks described in its Cautionary Statement and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. OVERVIEW The Company believes it is one of the leading independent sources of services for television commercial production within the entertainment industry, offering extensive production capability and the exclusive directorial services of certain established industry talent. Its commercial production strategy is to offer an end-to-end commercial production solution for advertising agencies, enabling them to provide the highest level of service to their clients. To do so, the Company plans to continue to seek expansion opportunities for its television commercial production service business and holdings through strategic partnerships, financed acquisitions of rental, editing, designing/marketing, post-production or music companies, and/or opportunities within its present divisions. Subject to the availability of necessary financing, the Company intends to combine a diversified group of production companies with related service companies. In April 2001, consistent with its efforts to explore all possible strategic alternatives and in response to an unsolicited offer for the sale of the divisions, the Company engaged an investment banker to assist in investigating and negotiating the potential sale of its production subsidiaries, Curious Pictures and Chelsea Pictures. The investigation led to the determination that Curious Pictures has greater market value than Chelsea Pictures and accordingly the Company is currently devoting its divestiture efforts on the sale of Curious Pictures. If the Company is unable to sell Curious Pictures on acceptable terms, it intends to continue to advance business in the industry. The Company is concentrating on the growth of its partially-owned subsidiary, WebADTV, a vertical market software company the applications of which are designed to reduce costs and increase productivity between advertising agencies and their clients. WebADTV has developed its first product, InteleSource, a web-enabled, video asset management system that provides agencies and production companies with the ability to digitize, encode, archive and stream television commercials. Before the introduction of digital management of creative libraries using InteleSource, most advertising agencies and their clients managed their entire creative libraries using bulky and costly reels of film. WebADTV also plans to develop a related set of tools aimed at specific aspects of the advertising campaign workflow. Via the development of hosted applications for the advertising agency industry, WebADTV anticipates generating revenues through software licensing and hardware sales, on-line digital storage and service income and commissions. 8 11 SIX-MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 The Company's operating results, expressed as a percentage of total revenue, were as follows:
Six-Months Ended June 30, -------------------------- 2001 2000 -------- -------- Net sales: Commercial income 99.7% 99.7% Insurance income 0.1% 0.1% New system sales - - Other sales 0.2% 0.2% ------ ------ Television commercial production 99.9 99.9 WebADTV 0.1 0.1 Corporate - - ------ ------ Total net sales 100.0 100.0 Cost of sales 82.6 83.0 ------ ------ Gross Profit 17.4 17.0 Selling, general and administrative 22.9 16.4 Corporate 6.8 6.3 Stock option compensation 0.7 0.6 Depreciation and amortization 6.2 2.8 Restructuring charges 5.2 - ------ ------ Loss from operations (24.4) (9.1) Interest income (expense) - net (0.6) 0.5 Income tax provision (0.0) (0.0) ------ ------ Net loss (25.0)% (8.6)% ====== ======
9 12 RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 2001 AND JUNE 30, 2000 The Company's total revenues decreased $4,912,000 from $15,437,000 in the second quarter of 2000 to $10,525,000 in the second quarter of 2001. The Company's revenues for the six-months ended June 30, 2001 decreased from $37,177,000 in 2000 to $22,980,000 in 2001, a $14,197,000 reduction. The End, which discontinued operations in February 2001, accounted for revenues totaling $4,464,000 and $14,171,000 during the three and six-months ended June 30, 2000, respectively. During the second quarter of 2001, revenues at Curious Pictures and Chelsea Pictures decreased $1,585,000 from $11,529,000 in the second quarter of 2000 to $9,413,000 in 2001. DCode had total revenue in the second quarter of 2001 of $573,000 compared to $126,000 in the same quarter of 2000. For the six-months ended June 30, 2001, Curious Pictures sales decreased by $844,000 from revenues of $22,316,000 in 2000 to 21,472,000 in 2001. Chelsea Pictures revenues increased by $282,000 and DCode increased by $784,000 from the six months ended June 30, 2000 compared to the same period in 2001. Cost of production is directly related to revenues and includes all direct costs incurred in connection with the production of television commercials including film, crews, location fees and commercial directors' fees. Cost of production as a percentage of production contract revenues was 80.4% in the second quarter 2001 compared to 80.1% in the second quarter of 2000. Year to date, cost of production was 82.6% in 2001 representing a 0.4% decrease in the overall cost over the first half results of 2000 of 83.0%. Selling expenses at the production companies consist of sales commissions, advertising and promotional expenses, travel and other expenses incurred in securing television commercial contracts. Selling costs for the Company as a whole decreased $171,000 and $620,000 during the three and six-months ended June 30, 2001, respectively. The End, which discontinued operations in February 2001, incurred selling expense of $48,000 and $620,000 in the six months ended June 30, 2001 and 2000, respectively. The End incurred no selling costs in the second quarter of 2001. The Company's subsidiary, WebADTV, incurred $62,000 in selling expenses in the second quarter 2001, a decrease from $117,000 for the first quarter of 2001 resulting primarily from a reduction of salary expense. Chelsea Pictures selling expenses decreased $39,000 from $262,000 in the first quarter of 2001 to $223,000 in the second quarter of 2001, resulting from a decrease in sales commissions. General and administrative expenses at the operating company level consist of overhead costs such as office rent and expenses, executive, general and administrative payroll, and related items. General and administrative costs for the Company as a whole decreased $459,000 and $206,000 for the three and six-months ended June 30, 2001, respectively. General and administrative expenses for The End, discontinued in the first quarter of 2001, were $254,000 and $1,392,000 in the six-months ending June 30, 2001 and 2000, respectively. The End incurred no general and administrative expenses in the second quarter of 2001. General and administrative expenses at Chelsea Pictures decreased to $600,000 in the second quarter of 2001 from $705,000 in the first quarter of 2001, for a total expense of $1,305,000 in the first half of 2001. WebADTV realized a decrease of $14,000 in the first half of 2001 in general and administrative expenses compared to the same period of 2000. WebADTV's total expense decreased from $448,000 in the first quarter of 2000 to $270,000 in the second quarter of 2001. The majority of this decrease was due to a decrease in payroll expense and a decrease in consulting fees. Stock option compensation was $85,000 in the first quarter of 2001 and was the same in the second quarter of 2001 for a total of $170,000 in the first half of 2001. The total expense for all periods shown was related to stock options granted to Curious Pictures management. Corporate charges incurred in the second quarter of 2001 were $610,000 and $1,196,000 in the second quarter of 2000. During the first half of 2001, corporate charges decreased from $2,357,000 in 2000 to $1,553,000. The decrease was related to restructuring plans implemented in January 2001. Corporate salaries and related benefits were significantly reduced through the elimination of several positions as part of a restructuring plan that management began implementing in January 2001. Depreciation and amortization expenses incurred in the second quarter of 2001 were $738,000 and $524,000 in the second quarter of 2000. The $214,000 increase was primarily a result of amortizing WebADTV software licenses capitalized subsequent to second quarter 2000. Net interest income was $17,000 in the second quarter of 2001 compared to $112,000 in the second quarter of 2000. The interest expense in the second quarter of 2001 was due to the Company utilizing its line of credit. The interest income in 2000 was earned on the Company's excess working cash balance. 10 13 A tax provision of $1,000 and $12,000 for state tax minimum fees was recorded in the first half of 2001 and 2000, respectively. A restructuring charge was incurred in the first quarter of 2001 in the amount of $1,202,000. This is a one-time charge relating to the discontinuation of operations of Harmony's operating division, The End. A net loss of $1,604,000 was recognized in the second quarter of 2001 compared to a net loss of $1,724,000 in the second quarter of 2000. Year to date, the Company has incurred a $5,605,000 net loss. The magnitude of the 2001 net loss was impacted significantly by the following factors: a net loss of $1,590,000 associated with Harmony's subsidiary, The End, operations of which ceased in February 2001; a net loss of $1,333,000 associated with WebADTV which was, in part self-funded by a private placement of the subsidiary's common stock; and a net loss of $586,000 at Chelsea Pictures related to decreased advertising demand as a result of the first quarter economic slow-down. 11 14 LIQUIDITY AND CAPITAL RESOURCES Overview During the six months ended June 30, 2001, the Company incurred a net loss of $5,605,054 and used $1,617,000 in cash for operations resulting in a working capital deficit of $3,604,000 compared to a deficit of $148,000 at December 31, 2001. Additionally, the Company has failed to comply with certain financial covenants relating to minimum net tangible worth, maximum operating losses, and certain reporting requirements under its loan and security agreement with its senior lender, General Electric Capital Corporation. On June 19, 2001, GE Capital agreed to forbear from exercising its rights and remedies under the loan and security agreement related to these defaults until September 30, 2001. As a result of the Company's recurring losses, negative working capital and negative cash flow from operations, the Company's independent certified public accountants included an explanation paragraph in their opinion on the Company's December 31, 2000 Consolidated Financial Statements wherein they expressed a substantial doubt about its ability to continue as a going concern. Components of Working Capital Deficit On June 30, 2001, $2,289,000 of the Company's working capital deficit related to the discontinuance of operations of The End. Additionally, $400,000 of the Company's short-term debt relates to an alleged payment due on the Company's software license agreement. The Company disputes the software license vendor's May 10, 2001 assertion that the amount has come due in connection with the completion of the WebADTV private placement in February 2001. The software license vendor has not taken any action to collect the amount alleged to be due except to assert the termination of the exclusivity provision of the agreement. The Company anticipates continuing negotiations with the software vender to redefine both the exclusivity and payment terms of the software agreement. Short-Term Liquidity Plans In response to these adversities, management is implementing the following plans. During the first quarter of 2001, the Company began executing restructuring plans to eliminate all non-profitable commercial production subsidiaries and to significantly reduce corporate and WebADTV operating expenses. During the first quarter of 2001, the Company began the process of discontinuing the operations of The End. The End had been adversely affected by the SAG strike as the well as by the non-renewal of several key commercial director contracts. The Company has also reduced corporate and WebADTV operating expenses during the first quarter of 2001 by eliminating several positions, thereby reducing payroll and benefits costs. The Company moved to smaller, less expensive corporate and WebADTV facilities to accommodate its smaller staff in August 2001. Additionally, WebADTV funded its own operations for the period from February 1 to April 15 as a result of a private placement of its common stock that generated net proceeds of approximately $590,000. However, WebADTV will require additional financing in 2001 to continue its operations and iNTELEFILM has provided $310,000 of such funding to date in April, May, June and July 2001 (See Note 4). The Company may also seek to advance its business strategy by diversifying or selling its existing business holdings, or by seeking to raise capital directly or through its subsidiary WebADTV. The Company has engaged an investment banker to assist in negotiating the potential sale of its production subsidiaries and its divestiture efforts are now concentrated primarily on the sale of Curious Pictures. The investment banking firm has initiated a general market solicitation from the sale of Curious Pictures and is in the process of responding to inquiries. If the Company is unable to sell Curious Pictures on acceptable terms, it plans to maintain and grow the business of Curious Pictures in the industry. The Company will require additional financing to continue its operations to support its commercial production operations and the advancement of the lawsuit against ABC/Disney. There can be no assurance that the Company will obtain such financing when required, or that such financing, if available, will be on terms acceptable or favorable to us. Additional financing could require the Company to sell additional equity securities, which would result in dilution to its current shareholders. If such financing is not available, the Company may be forced to 12 15 further reduce or terminate its operations or potentially default on obligations to creditors, all of which may be materially adverse to its operations and prospects. Further, the Company estimates that the advancement of WebADTV will require minimum additional financing during 2001 ranging from $1.0 to $2.0 million. Such financing may be provided by iNTELEFILM or through the direct sale of WebADTV equity securities that would further dilute the Company's ownership interest. If WebADTV is not able to obtain such financing, or financing on acceptable terms, it could cause a delay in the implementation of WebADTV's strategy. If WebADTV is not able to obtain additional working capital, it may be forced to cease operations. As more fully described in Part II, Item 1 "Legal Proceedings", the Company has outstanding judgment awards that total $637,000. The payment of these judgments will have an adverse affect on the Company's cash position. To date, the Company has accrued $575,000 for the aforementioned judgments. Consolidated cash was $1,402,000 at June 30, 2001 and $3,099,000 at December 31, 2000 a decrease of $1,697,000. Cash used in operating activities during the second quarter of 2001 was $1,617,000. Accounts receivable at June 30, 2001 decreased $3,497,000 from December 31, 2000. Other receivables at June 30, 2001 decreased $983,000 from December 31, 2000, and prepaid expenses at June 30, 2001 decreased $94,000 during the same period. Accounts payable at June 30, 2001 decreased $1,133,000 from December 31, 2001, accrued expenses at June 30, 2001 increased $23,000 from December 31, 2001, and deferred income decreased $1,094,000 during the same period. The changes in the balance sheet that affect cash-flow occured primarily because the Company's operations are derived from large contracts that typically range from $100,000 to $1,000,000 and these contracts are at various stages of completion at any given point in time. Additionally, the discontinuation of operations of The End accounted for a significant portion of the difference between the net loss from operations of $5,604,000 and the cash used in operations of $1,617,000 as collections of existing receivables at the End were utilized primarily to fund current discontinuation expenses with limited payments to existing vendors. During the second quarter 2001, net cash used in investing activities was $547,000 and was used for capital expenditures. Cash provided by financing activities amounted to $467,000 during the second quarter of 2001. This amount related to the use of a bank line of credit and the issuance of subsidiary common stock. Seasonality and Inflation The Company does not believe that seasonality or inflation have affected the results of its operations, and does not anticipate that inflation will have an impact on its future operations. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. 13 16 An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. As a result of the adoption of SFAS 141 and 142, all future business combinations will be accounted for under the purchase method, which may result in the recognition of goodwill and other intangible assets, some of which will be recognized through operations, either by amortization or impairment charges, in the future. For purchase business combinations completed prior to June 30, 2001, the net carrying amount of goodwill is $5,287,170. Amortization expense during the six-month period ended June 30, 2001 was $716,676. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. ITEM 3 Quantitative and Qualitative Disclosures About Market Risk Not applicable. PART II OTHER INFORMATION ITEM 1 Legal Proceedings On August 26, 1997, Ron Hoffman, a former Harmony Pictures employee, commenced legal action in Superior Court of the State of California against Harmony Holdings and Harmony Pictures alleging breach of employment contract. Summary judgment in favor of Harmony Holdings and Harmony Pictures was granted by the trial court and subsequently reversed by the Court of Appeals. Judgment for $309,000 was rendered against Harmony Holdings and Harmony Pictures at trial on July 24, 2001. Appeal of the judgment has commenced. The Company filed suit against ABC/Disney in the United States District Court for the District of Minnesota on September 26, 1996. On September 30, 1998, a jury in the United States District Court for the District of Minnesota ruled in favor of the Company in connection with litigation for breach of contract and misappropriation of trade secrets that the Company had commenced against ABC Radio and Disney and awarded the Company $20 million for breach of contract against ABC Radio, $10 million for misappropriation of trade secrets by ABC Radio and $10 million for misappropriation of trade secrets against Disney. On January 15, 1999, the court upheld the jury's findings that ABC Radio had breached its contract with the Company and that ABC Radio and Disney misappropriated its trade secret information; however, the court disagreed with the jury's conclusions that the evidence showed that those actions caused the Company damages and that the amount of damages awarded by the jury was supported by the evidence, and set aside the jury's verdict. The court further ruled, in the event that the decision is reversed or remanded on appeal, that the defendants be granted a new trial on the issues of causation and damages. The Company filed a Notice of Appeal in February 1999. Following its February 16, 2000 oral argument to the Eighth Circuit Court of Appeals in St. Paul, Minnesota, on April 10, 2001, the Eighth Circuit Court of Appeals reversed the grant of judgment as a matter of law for ABC Radio and Disney and affirmed the grant of a new trial limited to the issue of quantifying damages. The Company intends to vigorously pursue its claim in a trial for damages and, to this end, certain personnel and financial resources will be used. A scheduling conference has been set for August 21, 2001. The Company filed suit against Oklahoma Sports Properties, Inc. and Fred Weinberg to collect on several unpaid promissory notes and guarantees totaling $495,999 on June 2, 1999. On March 31, 2000, United States District Court entered summary judgment in favor of the Company in the amount of $495,000 plus interest and collection costs. On May 10, 2000, an additional $163,818 in accrued interest and $14,017 in attorneys' fees was awarded. On appeal, the Eighth Circuit affirmed the award. Collection of this judgment has commenced. Imperial Bank filed suit against Harmony Holdings alleging default on a $250,000 guaranteed line of credit on October 20, 1999. On February 27, 2001, the Los Angeles Superior court entered final judgment against 14 17 Harmony Holdings in the amount of $328,208. On July 2, 2001 Harmony Holdings received notice of entry of foreign judgment in Minnesota. Except as described above, the Company was not a party to any material legal proceedings as of July 20, 2001. ITEM 2 Changes in Securities and Use of Proceeds Not Applicable ITEM 3 Defaults upon Senior Securities The Company has failed to comply with certain financial covenants relating to minimum net tangible worth, losses, and certain reporting requirements under its loan and security agreement with its senior lender, General Electric Capital Corporation ("GE Capital"). On June 19, 2001, GE Capital agreed to forbear from exercising its rights and remedies under the loan and security agreement related to these defaults until September 30, 2001. In connection with this forbearance agreement, the Company agreed to a 2% prepayment fee through July 2002. This fee had previously been 1% for the period August 2001 to July 2002. ITEM 4 Submission of Matters to a Vote of Security Holders Not applicable. ITEM 5 Other Information Not applicable. ITEM 6 Exhibits and Reports on Form 8-K See "Index to Exhibits." (b) Reports on Form 8-K On February 26, 2001, the Company filed a Current Report on Form 8-K relating to the discontinuation of operations of The End, a subsidiary of Harmony Holdings, Inc. On May 15, 2001 the Company filed Current Reports on Form 8-K relating to the Nasdaq delisting notice and the Company's completion of the acquisition of Harmony Holdings, Inc. The Company filed no other Current Reports on Form 8-K during the quarter ended June 30, 2001. 15 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. iNTELEFILM Corporation Date: August 14, 2001 By /s/ Richard A. Wiethorn -------------------------------------- Richard A. Wiethorn Chief Financial Officer 16 19 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 10.33 June 19, 2001 General Electric Capital Corporation Forbearance Agreement
17 EX-10.33 3 c64352ex10-33.txt GENERAL ELECTRIC CAPITAL CORP. FORBEARANCE AGMT 1 EXHIBIT 10.33 FORBEARANCE AGREEMENT THIS FORBEARANCE AGREEMENT, dated as of June 19, 2001, by and among CURIOUS PICTURES CORPORATION, a New York corporation, CHELSEA PICTURES, INC., a Massachusetts corporation, and THE END, INC., a California corporation (collectively, the "Borrowers" and each a "Borrower") and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"). W I T N E S S E T H: -------------------- WHEREAS, Lender and Borrowers have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated as of July 31, 2000 by and among Lender and Borrowers (and as amended hereby, and as the same may have heretofore been or may hereafter be further amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement", and together with all agreements, documents and instruments at any time executed or delivered in connection therewith or related thereto, collectively, the "Financing Agreements"); and WHEREAS, as of the date hereof, Borrowers are in default under the Financing Agreements as more particularly described below; and WHEREAS, the circumstances described herein constitute multiple Events of Default under the Loan Agreement and the other Financing Agreements; and WHEREAS, Borrowers have requested that Lender forbear from exercising its rights as a result of such Events of Default, which are continuing, and that Lender provide further Revolving Credit Advances and other financial accommodations to Borrower notwithstanding such Events of Default; and WHEREAS, Lender is willing to agree to forbear from exercising certain of its rights and remedies and provide certain further Revolving Credit Advances or other financial accommodations to Borrowers for the period and on the terms and conditions specified herein in order to enable Borrowers to be sold and the Revolving Credit Loans paid in full and the financial accommodations provided under the Loan Agreement to be terminated; NOW, THEREFORE, in consideration of the foregoing, and the respective agreements, warranties and covenants contained herein, the parties hereto agree, covenant and warrant as follows: 2 SECTION 1. DEFINITIONS 1.1 Interpretation. All capitalized terms used herein (including the recitals hereto) shall have the respective meanings assigned thereto in the Loan Agreement unless otherwise defined herein. 1.2 Additional Definitions. As used herein, the following terms shall have the respective meanings given to them below and the Loan Agreement is hereby amended to include, in addition and not in limitation, each of the following definitions: (a) "Existing Defaults" shall mean the Events of Default that have occurred through the date hereof as more particularly identified on Exhibit A hereto. (b) "Forbearance Period" shall have the meaning set forth in Section 3.2(a) hereof. SECTION 2. ACKNOWLEDGMENT 2.1 Acknowledgment of Obligations. Each Borrower hereby acknowledges, confirms and agrees that as of the close of business on June 19, 2001, Borrowers are indebted to Lender in respect of the Revolving Credit Loan in the principal amount of $357,588.64. All of the Loans, together with interest accrued and accruing thereon, and fees, costs, expenses and other charges now or hereafter payable by Borrowers to Lender, are unconditionally owing by Borrowers to Lender, without offset, defense or counterclaim of any kind, nature or description whatsoever. 2.2 Acknowledgment of Security Interests. Each Borrower hereby acknowledges, confirms and agrees that Lender has and shall continue to have valid, enforceable and perfected first-priority liens upon and security interests in the Collateral heretofore granted to Lender pursuant to the Financing Agreements or otherwise granted to or held by Lender. 2.3 Binding Effect of Documents. Each Borrower here by acknowledges, confirms and agrees that: (a) each of the Financing Agreements to which it is a party has been duly executed and delivered to Lender by such Borrower, and each such Financing Agreement is in full force and effect as of the date hereof, (b) the agreements and obligations of such Borrower contained in such documents and in this Agreement constitute the legal, valid and binding Obligations of such Borrower, enforceable against it in accordance with their respective terms, and such Borrower has no valid defense to the enforcement of such Obligations, and (c) Lender is and shall be entitled to the rights, remedies and benefits provided for in the Financing Agreements and applicable law. SECTION 3. FORBEARANCE IN RESPECT OF CERTAIN EVENTS OF DEFAULT 3.1 Acknowledgment of Default. Each Borrower hereby acknowledges and agrees that the Existing Defaults have occurred and are continuing, each of which constitutes an Event of Default and entitles Lender to exercise its rights and remedies under the Financing Agreements, applicable law or otherwise. Each Borrower further represents and warrants that as of the date 2 3 hereof no other Events of Default under the Financing Agreements exist. Lender has not waived, presently does not intend to waive and may never waive such Existing Defaults and nothing contained herein or the transactions contemplated hereby shall be deemed to constitute any such waiver. Each Borrower hereby acknowledges and agrees that Lender has the presently exercisable right to declare the Obligations to be immediately due and payable under the terms of the Financing Agreements. 3.2 Forbearance. (a) In reliance upon the representations, warranties and covenants of Borrowers contained in this Agreement, and subject to the terms and conditions of this Agreement and any documents or instruments executed in connection herewith, Lender agrees to forbear from exercising its rights and remedies under the Financing Agreements or applicable law in respect of or arising out of the Existing Defaults, subject to the conditions, amendments and modifications contained herein for the period (the "Forbearance Period") commencing on the date hereof and ending on the earlier of (i) September 30, 2001, or (ii) the occurrence or existence of any Event of Default, other than the Existing Defaults. (b) Upon the termination of the Forbearance Period, the agreement of Lender to forbear shall automatically and without further action terminate and be of no force and effect, it being expressly agreed that the effect of such termination will be to permit Lender to exercise such rights and remedies immediately, including, but not limited to, (i) ceasing to make any further Loans and (ii) the acceleration of all of the Obligations, in either case without any further notice, passage of time or forbearance of any kind. 3.3 No Other Waivers; Reservation of Rights. (a) Lender has not waived, is not by this Agreement waiving, and has no intention of waiving, any Event of Default which may be continuing on the date hereof or any Event of Default which may occur after the date hereof (whether the same or similar to the Existing Defaults or otherwise), and Lender has not agreed to forbear with respect to any of its rights or remedies concerning any Event of Default (other than, during the Forbearance Period, the Existing Defaults to the extent expressly set forth herein), which may have occurred or are continuing as of the date hereof or which may occur after the date hereof. (b) Subject to Section 3.2 above (solely with respect to the existing Events of Default), Lender reserves the right, in its discretion, to exercise any or all of its rights and remedies under the Loan Agreement and the other Financing Agreements as a result of any Event of Default which may be continuing on the date hereof or any Event of Default which may occur after the date hereof, and Lender has not waived any of such rights or remedies, and nothing in this Agreement, and no delay on its part in exercising any such rights or remedies, should be construed as a waiver of any such rights or remedies. 3 4 SECTION 4. AMENDMENTS AND SUPPLEMENTARY PROVISIONS 4.1 Prepayment Fee. Paragraph 4 of Schedule E of the Loan Agreement is hereby amended to provide that the Prepayment Fee payable thereunder on the Commitment Termination Date shall be equal to (i) 2% of each Borrower's Maximum Amount for a termination, as provided therein, on or before the second anniversary of the Closing Date, and (ii) 1% of each Borrower's Maximum Amount for such a termination after the second anniversary of the Closing Date and on or before the Stated Expiry Date. Except as specifically provided above, all of the provisions of Schedule E of the Loan Agreement shall remain in full force and effect. 4.2 Advances to WebADTV. Lender hereby (i) waives the breach of Section 5(c) of the Loan Agreement, and the resulting Event of Default under Section 7.1(b) of the Loan Agreement, arising out of advances by Parent to its Subsidiary, webADTV.com, Inc., during May and June 2001, in the aggregate, approximate principal amount of $270,000, and (ii) consents to additional advances by Parent to such Subsidiary of up to $60,000. Except as specifically provided above, all of the prohibitions and limitations on the making of investments and loans, and the incurrence of indebtedness set forth in the Loan Agreement shall remain in full force and effect. 4.3 Interest Rate. Without in any way limiting the rights and remedies of Lender set forth in this Agreement or under the other Financing Agreements, from and after May 1, 2001, and so long as any of the Existing Defaults is continuing, or if any other Event of Default occurs and is continuing, Lender shall charge interest at the Default Rate with respect to the Revolving Credit Loan, as provided in the Loan Agreement. SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS Each Borrower hereby represents, warrants and covenants with and to Lender as follows: 5.1 Representations in Financing Agreements. Each of the representations and warranties made by or on behalf of Borrowers to Lender in any of the Financing Agreements was true and correct when made and in all material respects is, except for the representation and warranty set forth in the Loan Agreement relating to the non-existence of an Event of Default, true and correct on and as of the date of this Agreement with the same full force and effect as if each of such representations and warranties had been made by Borrowers on the date hereof and in this Agreement. 5.2 Binding Effect of Documents. This Agreement and the other Financing Agreements have been duly executed and delivered to the Lender by each Borrower and are in full force and effect, as modified hereby. 5.3 No Conflict, Etc. The execution and delivery and performance of this Agreement by Borrowers will not violate any Requirement of Law or Contractual Obligation of any Borrower and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues. 4 5 5.4 Additional Events of Default. The parties hereto acknowledge, confirm and agree that any misrepresentation by any Borrower, or any failure of any Borrower to comply with the covenants, conditions and agreements contained in any Financing Agreement, herein or in any other agreement, document or instrument at any time executed or delivered by any Borrower with, to or in favor of Lender shall constitute an Event of Default hereunder, under the Loan Agreement and the other Financing Agreements. In the event any Person, other than Lender, shall at any time exercise for any reason (including by reason of any Existing Default, any other present or future Event of Default, or otherwise) any of its rights or remedies against any Borrower or any obligor providing credit support for such Borrower's obligations to such other Person, or against such Borrower's or such obligor's properties or assets, such event shall constitute an Event of Default hereunder. SECTION 6. CONDITIONS TO EFFECTIVENESS OF CERTAIN PROVISIONS OF THIS AGREEMENT The effectiveness of the terms and provisions of Section 3.2 of this Agreement shall be subject to the receipt by Lender of an original of this Agreement, duly authorized, executed and delivered by Borrower. SECTION 7. PROVISIONS OF GENERAL APPLICATION 7.1 Effect of this Agreement. Except as modified pursuant hereto, no other changes or modifications to the Financing Agreements are intended or implied and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Agreement and the other Financing Agreements, the terms of this Agreement shall control. The Loan Agreement and this Agreement shall be read and construed as one agreement. 7.2 Costs and Expenses. Each Borrower absolutely and unconditionally agrees to pay to Lender, on demand by Lender at any time and as often as Lender may require, whether or not all or any of the transactions contemplated by this Agreement are consummated: all fees and disbursements of any counsel to Lender in connection with the preparation, negotiation, execution, or delivery of this Agreement and any agreements delivered in connection with the transactions contemplated hereby and expenses which shall at any time be incurred or sustained by Lender or any participant of Lender or any of their respective directors, officers, employees or agents as a consequence of or in any way in connection with the preparation, negotiation, execution, or delivery of this Agreement and any agreements prepared, negotiated, executed or delivered in connection with the transactions contemplated hereby. 7.3 Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional action as may be necessary or desirable to effectuate the provisions and purposes of this Agreement. 7.4 Binding Effect. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 5 6 7.5 Survival of Representations and Warranties. All representations and warranties made in this Agreement or any other document furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. 7.6 Release. (a) In consideration of the agreements of Lender contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges the Lender, and its successors and assigns, and its present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (the Lender and all such other Persons being hereinafter referred to collectively as the "Releasees" and individually as a "Releasee"), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever (individually, a "Claim" and collectively, "Claims") of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which such Borrower or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which arises at any time on or prior to the day and date of this Agreement, including, without limitation, for or on account of, or in relation to, or in any way in connection with any of the Loan Agreement, or any of the other Financing Agreements or transactions thereunder or related thereto. (b) Each Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. (c) Each Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above. (d) Each Borrower acknowledges that it is familiar with, and has been advised by its counsel concerning, the provisions of Section 1542 of the California Civil Code, which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 6 7 Each Borrower expressly waives any and all rights under Section 1542 of the California Civil Code, and under any federal or state statute or law of similar effect. 7.7 Covenant Not to Sue. Each Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably, covenants and agrees with and in favor of each Releasee that it will not sue (at law, in equity, in any regulatory proceeding or otherwise) any Releasee on the basis of any Claim released, remised and discharged by such Borrower pursuant to Section 7.6 above. If any Borrower or any of its successors, assigns or other legal representations violates the foregoing covenant, such Borrower, for itself and its successors, assigns and legal representatives, agrees to pay, in addition to such other damages as any Releasee may sustain as a result of such violation, all attorneys' fees and costs incurred by any Releasee as a result of such violation. 7.8 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement. 7.9 Reviewed by Attorneys. Each Borrower represents and warrants to Lender that such Borrower (a) understands fully the terms of this Agreement and the consequences of the execution and delivery of this Agreement, (b) has been afforded an opportunity to have this Agreement reviewed by, and to discuss this Agreement and document executed in connection herewith with, such attorneys and other persons as such Borrower may wish, and (c) has entered into this Agreement and executed and delivered all documents in connection herewith of its own free will and accord and without threat, duress or other coercion of any kind by any Person. The parties hereto acknowledge and agree that neither this Agreement nor the other documents executed pursuant hereto shall be construed more favorably in favor of one than the other based upon which party drafted the same, it being acknowledged that all parties hereto contributed substantially to the negotiation and preparation of this Agreement and the other documents executed pursuant hereto or in connection herewith. 7.10 Governing Law: Consent to Jurisdiction and Venue. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE FINANCING AGREEMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS AND THE OBLIGATIONS ARISING UNDER THE FINANCING AGREEMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN CALIFORNIA SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS; 7 8 PROVIDED, THAT LENDER AND EACH BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF CALIFORNIA; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH BORROWER HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE B OF THE LOAN AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID 7.11 Mutual Waiver of Jury Trial. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN OR AMONG LENDER AND ANY BORROWER OR BORROWERS ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN OR AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED THERETO. 7.12 Counterparts. This Agreement may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. 8 9 IN WITNESS WHEREOF, this Agreement is executed and delivered as of the day and year first above written. BORROWERS: CURIOUS PICTURES CORPORATION CHELSEA PICTURES, INC. THE END, INC. By: Name: Title: ------------------------------------- LENDER: GENERAL ELECTRIC CAPITAL CORPORATION By: ---------------------------------------- Name: -------------------------------------- Title: Duly Authorized Signatory ACKNOWLEDGMENT OF CREDIT PARTIES AND GUARANTORS Each of the undersigned Credit Parties and guarantors hereby acknowledges the execution, delivery and performance of the foregoing Forbearance Agreement and confirms each and every one of its continuing obligations under its guarantee of the Obligations after giving effect to the foregoing Forbearance Agreement. iNTELEFILM CORPORATION DCODE, INC. HARMONY HOLDINGS, INC. FURIOUS PICTURES CORPORATION DELIRIOUS PICTURES CORPORATION THE BEGINNING ENTERTAINMENT, INC. UNSCENTED, INC. GIGANTIC ENTERTAINMENT, INC. THE MOMENT FILMS, INC. By: ---------------------------------------- Name: Christopher T. Dahl Title: Chief Operating Officer iNTELEFILM CORPORATION Chief Operating Officer DCODE, INC. Chief Operating Officer HARMONY HOLDINGS, INC. Chief Operating Officer FURIOUS PICTURES CORPORATION 9 10 Chief Operating Officer DELIRIOUS PICTURES CORPORATION Chief Operating Officer THE BEGINNING ENTERTAINMENT, INC. Chief Operating Officer UNSCENTED, INC. Chief Operating Officer GIGANTIC ENTERTAINMENT, INC. Chief Operating Officer THE MOMENT FILMS, INC. WEBADTV.COM, INC. By: ---------------------------------------- Name: Christopher T. Dahl Title: Chief Executive Officer WEBADTV.COM, INC. 10 11 EXHIBIT A to FORBEARANCE AGREEMENT Existing Defaults 1. Parent and its Subsidiaries have failed to achieve the minimum EBITDA for the period ending on December 31, 2000, as required under paragraph 1 of Schedule G of the Loan Agreement, which failure constitutes an Event of Default under Section 7.1(b) of the Loan Agreement. 2. Parent has failed to maintain the minimum Tangible Net Worth of Parent and its Subsidiaries as of the end of the Fiscal Quarters ending December 31, 2000 and March 31, 2001, respectively, as required under paragraph 2 of Schedule G of the Loan Agreement, each of which failures constitutes an Event of Default under Section 7.1(b) of the Loan Agreement. 3. Parent and its Subsidiaries have failed to finance at least 70% of their aggregate capital expenditures in any Fiscal Year through the incurrence of Indebtedness (other than the Revolving Credit Loan), as required under paragraph 3 of Schedule G of the Loan Agreement, which failure constitutes an Event of Default under Section 7.1(b) of the Loan Agreement. 4. Parent has converted to equity a loan in the approximate principal amount of $2,600,000 to its Subsidiary, WebADTV, in breach of Section 5(c) of the Loan Agreement, which breach constitutes an Event of Default under Section 7.1(b) of the Loan Agreement. 5. A judgment has been entered in California against Parent and in favor of Imperial Bank in the amount of $275,000 plus attorneys fees (which attorneys fees are estimated at $75,000), which judgment constitutes breaches of Sections 3.10 and 3.12 of the Loan Agreement, and each of which breaches constitutes an Event of Default under Section 7.1(b) of the Loan Agreement. 11 -----END PRIVACY-ENHANCED MESSAGE-----