-----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, HPhKzR5gknr49c+rBvSZuAElpF85Ow8N6I/9NtC10kVAZ9ZRC5UvzoJw6MHnaw6W pwyYGxmT8YwWzwm/TEQaXw== 0000950137-02-003089.txt : 20020515 0000950137-02-003089.hdr.sgml : 20020515 20020515143058 ACCESSION NUMBER: 0000950137-02-003089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02650976 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 c69622e10-q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT COMMISSION FILE NUMBER 0-21534 iNTELEFILM CORPORATION (Exact Name of Registrant as Specified in Its Charter) MINNESOTA 41-1663712 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 6385 OLD SHADY OAK ROAD - SUITE 290 EDEN PRAIRIE, MINNESOTA 55344 (952) 925-8840 (Address of Principal Executive Offices, including Zip Code, and Registrant's Telephone Number, including Area Code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ---- ----- As of May 1, 2002, the issuer had outstanding 6,832,646 shares of common stock. ================================================================================
PART I FINANCIAL INFORMATION.............................................................1 Item 1 Financial Statements.........................................................1 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................7 Item 3 Quantitative and Qualitative Disclosures About Market Risk..................11 PART II OTHER INFORMATION................................................................11 Item 1 Legal Proceedings...........................................................11 Item 2 Changes in Securities and Use of Proceeds...................................12 Item 3 Defaults upon Senior Securities.............................................12 Item 4 Submission of Matters to a Vote of Security Holders.........................12 Item 5 Other Information...........................................................12 Item 6 Exhibits and Reports on Form 8-K............................................12 SIGNATURES.................................................................................13 EXHIBIT INDEX..............................................................................14
i PART I FINANCIAL INFORMATION ITEM 1 Financial Statements iNTELEFILM CORPORATION CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2002 2001 (UNAUDITED) (AUDITED) ASSETS ----------------- ---------------- Current assets: Cash and cash equivalents $ 855,302 $ 300,939 Accounts receivable, net of allowance for doubtful accounts of $100,448 95,785 100,180 Prepaid expenses 355,647 255,397 Notes receivable, current portion 561,321 - Net production company assets available for sale - 2,520,545 ------------ ------------ Total current assets 1,868,055 3,177,061 Property and equipment, net 372,047 438,734 Intangible assets, net 181,500 160,417 Notes receivable net of current portion 706,415 - Net production company assets available for sale - 764,455 Other assets 326,348 316,049 ------------ ------------ Total assets $ 3,454,365 $ 4,856,716 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 702,864 $ 1,341,411 Deferred revenue 25,589 27,602 Other accrued expenses 1,602,800 1,848,631 Other accrued expenses, related party 255,000 255,000 Long-term debt, current portion 90,679 390,679 ------------ ------------ Total current liabilities 2,676,932 3,863,323 Other accrued expenses, related party 505,002 568,750 Long-term debt net of current portion 1,421,678 1,283,509 Long-term debt, related parties 704,725 702,835 Deferred litigation award assignment 495,000 - ------------ ------------ Total liabilities 5,803,337 6,418,417 ------------ ------------ Commitments and contingencies - - Minority interest 500,000 500,000 Shareholders' deficit: Common stock 136,652 136,652 Additional paid-in capital 47,335,498 47,335,498 Accumulated deficit (50,321,122) (49,533,851) ------------ ------------ Total shareholders' deficit (2,848,972) (2,061,701) ------------ ------------ Total liabilities and shareholders' deficit $ 3,454,365 $ 4,856,716 ============ ============
See accompanying notes to the consolidated financial statements. 1 iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
2002 2001 ------------ ------------ Revenues $ - $ - Costs and expenses: Cost of revenues 4,970 44,000 Selling, technical, general and administrative (exclusive of all items shown below) 286,658 550,000 Corporate 503,117 597,885 Corporate expenses paid to affiliated management company - 345,000 Depreciation and amortization 104,832 196,000 ------------ ------------ Loss from continuing operations (899,577) (1,732,885) Other income 242,174 - Interest expense (115,582) (118,569) Interest income 2,013 - ------------ ------------ Net loss from continuing operations before income taxes (770,972) (1,851,454) Income tax provision (benefit) 16,299 (322) ------------ ------------ Net loss from continuing operations (787,271) (1,851,132) Loss from discontinued operations - (2,149,628) ------------ ------------ Net loss $ (787,271) $ (4,000,760) ============ ============ Basic and diluted net loss per share from continuing operations $ (0.12) $ (0.28) ============ ============ Basic and diluted net loss per share from discontinued operations $ - $ (0.33) ============ ============ Basic and diluted net loss per share $ (0.12) $ (0.61) ============ ============ Weighted average number of shares outstanding 6,833,000 6,584,000 ============ ============
See accompanying notes to the consolidated financial statements 2 iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (787,271) $ (4,000,760) Adjustments to reconcile net loss to net cash provided by (used in) operating activities net of disposition and discontinued operations: Note receivable received in lawsuit settlement (232,736) - Loss on disposal of discontinued operations, net of taxes - 2,149,628 Depreciation and amortization 104,832 196,000 Amortization and write-off of deferred debt issue costs 21,351 - Decrease (increase) in (excluding subsidiary acquisitions and sales): Accounts receivable 4,395 7,245 Other receivables - 3,019 Prepaid expenses (100,250) (18,257) Other assets (31,650) - Increase (decrease) (excluding subsidiary acquisitions and sales): Accounts payable (638,547) (70,771) Deferred revenue (2,013) 4,000 Other accrued expenses (109,579) (367,930) ------------ ------------ Net cash used in continuing operations (1,771,468) (2,097,826) Net cash provided by discontinued operations - 55,437 ------------ ------------ Net cash used in operating activities (1,771,468) (2,042,389) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (15,228) - Proceeds from sale of television commercial production companies 2,050,000 - Other capital expenses (44,000) - ------------ ------------ Net cash provided by continuing operations 1,990,772 - Net cash used in discontinued operations - (352,276) ------------ ------------ Net cash provided by (used in) investing activities 1,990,772 (352,276) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase in line of credit - 1,381,843 Repayment of debt (159,941) - Proceeds from lawsuit award assignment 495,000 - Proceeds from issuance of subsidiary common stock - 590,000 ------------ ------------ Net cash provided by continuing operations 335,059 1,971,843 Net cash provided by discontinued operations - - ------------ ------------ Net cash provided by financing activities 335,059 1,971,843 ------------ ------------ Increase (decrease) in cash and cash equivalents 554,363 (422,822) Cash and cash equivalents at beginning of year 300,939 3,099,496 ------------ ------------ Cash and cash equivalents at end of period $ 855,302 $ 2,676,674 ============ ============
See accompanying notes to the consolidated financial statements. 3 iNTELEFILM Corporation Condensed Notes to Consolidated Financial Statements (unaudited) March 31 2002 NOTE 1 BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended December 31, 2001. The accompanying financial statements have been prepared assuming that we will continue as a going concern; however, recurring losses, negative working capital and negative cash flow from operations raise concerns as to our ability to continue as a going concern. As a result, our independent certified public accountants included an explanatory paragraph in their opinion provided with our December 31, 2001 consolidated financial statements wherein they expressed substantial doubt about our ability to continue as a going concern. NOTE 2 PRODUCTION COMPANY SALE TRANSACTIONS Chelsea: On January 15, 2002, we completed the sale of the stock of our commercial production subsidiary, Chelsea Pictures, Inc. to the Chelsea Pictures management group (the "Chelsea Management Group"). The Chelsea Management Group paid $785,000 in proceeds to us, consisting of cash at closing of $250,000 and a promissory note for $535,000. The note bears interest at a variable rate (7% at March 31 2002) and is payable in varying installments of principal and interest through December 31, 2004. Principal maturities for the years ended December 31, 2002, 2003 and 2004 total $271,000, $119,000 and $145,000, respectively. The note is secured by the acquired Chelsea Pictures, Inc. stock, and 200,000 shares of iNTELEFILM common stock held by the Chelsea Management Group. The note limits personal recourse against the Chelsea Management Group to $150,000. The sale transaction is effective for operating purposes as of January 1, 2002. Warrants to purchase 270,000 shares of our common stock at $0.88 per share were terminated in connection with this transaction. Curious Pictures and DCODE: On February 28, 2002, we completed the sale of the stock of our commercial production subsidiaries, Curious Pictures Corporation ("Curious Pictures") and DCODE, Inc. to a group led by the management team at Curious Pictures (the "Curious Management Group"). The Curious Management Group paid approximately $5,100,000 in proceeds to us, consisting of cash at closing of $2,000,000 ($200,000 was prepaid and included in accrued liabilities at December 31, 2001), a promissory note for $500,000, extinguishment of the Curious Management put right with a value of approximately $1,200,000 at the time of closing and extinguishment of approximately $1,400,000 of intercompany indebtedness. The note bears interest at a rate of 5% payable quarterly and calls for minimum principal payments of $250,000 on each of February 28, 2003 and 2004. The note is secured by the assets of Curious Pictures subject to an intercreditor agreement with the finance source that backed the Curious Management Group. Warrants to purchase 300,000 shares of our common stock at $1.92 per share were terminated in connection with this transaction. NOTE 3: ABC RADIO AND DISNEY LAWSUIT AWARD ASSIGNMENT On January 7, 2002, we executed a transaction whereby we assigned $1,000,000 of any potential award received in connection with our ongoing litigation against ABC Radio and Disney (see Legal Proceedings) for net proceeds totaling $495,000. Pursuant to the terms of this agreement, the Company's repayment obligation is limited to the lesser of the proceeds received from such litigation net of amounts due to the litigation attorneys, or $1,000,000. 4 NOTE 4: NOTE PAYABLE During the quarter ended March 31, 2002, our promissory note payable to the landlord of our former subsidiary, The End, became fully due and payable. At that time, the landlord demanded, and we paid an amount of $125,000. We then modified the terms for the remaining obligation of $175,000. Under the revised terms, the remaining principal balance of $175,000 is now due on the earlier of i) April 3, 2003, ii) the receipt of gross cash proceeds of $4,000,000 in connection with the sale of our securities, or iii) a final award or settlement of the ABC Radio and Disney lawsuit (see Legal Proceedings) in excess of $4,000,000. The restated note payable carries an annual interest rate of 12% and is secured by all the assets of iNTELEFILM, Harmony and The End. Furthermore, the note payable carries an additional lending fee payable when the note becomes due equal to 8% per annum although this incremental fee is waived if the loan becomes due pursuant to our receipt of gross cash proceeds of $4,000,000 in connection with the sale of our securities. As part of the restatement, we repriced warrants to purchase 150,000 shares of our common stock from $2.00 per share to $0.46 per share and the landlord acknowledged our full performance of our obligations under our previous settlement agreement related to the lease for the facilities of our former production company subsidiary, The End. NOTE 5: LITIGATION SETTLEMENT In June 1999, we filed suit against Oklahoma Sports Properties, Inc. and Fred Weinberg (the "Defendants") seeking to collect on several promissory notes and guarantees totaling $495,000, plus interest and attorney costs for a total of approximately $670,000. The United States District Court for the District of Minnesota granted us summary judgment. On appeal by the Defendants, in February 2001, the United States Court of Appeals for the Eighth Circuit affirmed the lower courts decision holding the Defendants liable for the notes. This judgement aggregating $670,000 had been fully reserved as uncollectable due to the financial condition of the Defendant. As of March 31, 2002, we revised this estimated reserve for uncollectability to account for the settlement of this claim on April 10, 2002 in exchange for an assignment to us of a promissory note due owing to the Defendant from Reunion Broadcasting, L.L.C. with an outstanding principal amount of $232,736. As a result, we recognized other income of $232,736 in connection with this settlement. NOTE 6: LEGAL PROCEEDINGS We filed suit against ABC Radio and Disney in the United States District Court for the District of Minnesota on September 26, 1996. On September 30, 1998, a jury in the United States District Court for the District of Minnesota ruled in our favor for breach of contract and misappropriation of trade secrets and awarded us $20 million for breach of contract against ABC Radio, $10 million for misappropriation of trade secrets by ABC Radio and $10 million for misappropriation of trade secrets against Disney. On January 15, 1999, the trial court upheld the jury's findings that ABC Radio had breached its contract with us and that ABC Radio and Disney misappropriated its trade secret information; however, the court set aside the jury's verdict because it disagreed with the jury's conclusions that the evidence showed that those actions caused us damage and because the trial court found that the amount of damages awarded by the jury was not supported by the evidence. The court further ruled, in the event that the decision is reversed or remanded on appeal, that the defendants should be granted a new trial on the issues of causation and damages. We appealed the court's findings in February 1999. On February 16, 2000, oral arguments were held before the Eighth Circuit Court of Appeals. On April 10, 2001, the Court of Appeals reversed the grant of judgment as a matter of law for ABC Radio and Disney and affirmed the grant of a new trial limited to the issue of quantifying damages. The trial on damages was completed on May 10, 2002. The jury award totaled $9.5 million, $1.5 million for breach of contract and $8.0 million for misappropriation of a trade secret. We currently anticipate that final resolution of the case will likely take several more years. We intend to vigorously pursue the defense and collection of this award. We have committed certain proceeds from this litigation to various parties. The total current commitment of proceeds includes the following at March 31, 2002: Contingent legal fees - Primary Counsel shall receive the amount of its suspended fees plus interest at 5%. In addition, primary counsel will receive a premium of 13.5% of an amount which is equal to the recovery by judgment minus the amount of contingent fees. Total suspended fees and interest aggregated approximately $1,757,000 at March 31, 2002. In no event will the payment due the attorney be greater than the amount of an award or settlement. ABC Radio and Disney Lawsuit Award Assignment - We have assigned and will be obligated to pay the lesser of the proceeds received from such litigation, net of legal costs, or $1,000,000. 5 Repayment of Bridge Notes Payable - We are obligated to repay the $1,530,000 of bridge loans if proceeds, net of legal costs, exceed $2,550,000. Repayment of Note Payable - We are obligated to repay $175,000 note payable if proceeds exceed $4,000,000. Employment Contracts - We are obligated to pay two former officers an aggregate of 4.25% of any proceeds less any litigation and tax expenses incurred since the onset of the lawsuit. On March 21, 2002, the broker associated with the sale of our television commercial production subsidiaries, Curious Pictures, Chelsea Pictures and DCODE, initiated arbitration proceedings. The broker claims that fees totaling $455,000 are owed pursuant to our April 24, 2001 agreement. We intend to vigorously defend our position that such amount is not owed in the matter. 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words "anticipates," "believes," "expects," "intends," "plans," "estimates" and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ materially from those anticipated, certain of which are beyond its control, are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, under the caption "Management's Discussion and Analysis or Plan of Operation -- Cautionary Statement." Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the risks described in our Cautionary Statement and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. OVERVIEW General Overview We have undergone a restructuring whereby our sole continuing operating subsidiary is Video(3), formerly known as WebADTV. We own approximately 75% of the outstanding capital stock of Video(3) and it is accounted for as a consolidated majority-owned subsidiary. Video(3) is engaged in the sale and distribution of digital asset management software, hardware and services which are designed to enable clients to encode, share and leverage media assets online. The restructuring encompassed the discontinuance of our television commercial production business that was completed in the first quarter of 2002 with the sales of our former subsidiaries Chelsea Pictures, Inc., Curious Pictures Corporation and DCODE, Inc. The television commercial production business has been accounted for as discontinued operations in the accompanying consolidated financial statements. Our results from operations encompass Video(3), which was formed in January 2000, and ongoing corporate general and administrative activities. Our continuing Video(3) business is still at an early stage of development. We expect to generate revenue from the sale of our software and hardware products, the provisioning of professional services in the implementation of our products, the recurring charges to clients using us as their applications service provider ("ASP") and annual software maintenance fees. We currently market our products utilizing our direct sales force and anticipate that strategic channel partnerships will also provide sales activity in the near future. Our sales efforts primarily target businesses that utilize video in multiple functional areas. These functional areas include corporate and marketing communications, training and e-learning, advertising and public relations. Other factors that drive a client's need for Video(3) products include the existence of a large geographically disbursed workforce, in-house video production capability, web-portal and e-commerce capability, brand intensive culture, or a culture that otherwise strongly embraces technology. Management anticipates that initial sales will be leveraged to generate additional revenue from sales to other areas within the client's organization. Clients may require video supply chain participants to adopt the technology. The product can be installed at the client's site or delivered through an ASP host. Our product's features and functionality allow for installation and implementation within approximately two weeks once a client purchases our system. Critical Accounting Policies We derive our revenues from the sale of licenses of software products and related services. Product license revenue is recognized when a purchase order has been received or license agreement has been signed, the product has been shipped and accepted by the customer, and collection is probable. Services revenue consists of fees from consulting and maintenance. Consulting services include needs assessment, software integration, security analysis, application development and training. We bill consulting fees either on a time and materials or on a fixed-bid basis. We price maintenance agreements based on a percentage of the product license fee. Customers purchasing maintenance agreements receive product upgrades and technical support. We recognize revenue from maintenance agreements ratably over the term of the agreement, typically one year. Customer advances and billed amounts due 7 from customers in excess of revenue recognized are recorded as deferred revenue. We account for our purchased and internally developed computer software under Statement of Financial Accounting Standards (SFAS) 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. To date, we have capitalized the cost of the purchased software license and expensed other development costs as incurred as they represented the cost to develop a working model for beta testing and costs for product demonstrations for specific customers. The capitalized costs are amortized over the greater of the ratio of current revenues to a total of current and future anticipated revenues or on a straight line basis over their useful lives. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2002 AND MARCH 31, 2001 Our revenues are derived from the installations of our software and hardware products and ASP and technology services. We had no revenue from continuing operations in the first quarter of 2002 or 2001. Cost of revenues includes all direct costs incurred in connection with the sale of our products and services. These costs included license fee royalties, hardware, Internet connection fees, and labor. We incurred license fees and Internet connection fees of $5,000 during the first quarter of 2002 compared to $44,000 during the first quarter of 2001. Selling, technical, general and administrative expenses are directly attributable to the operation of Video(3). These expenses included services, salaries, commissions, advertising and promotional expenses, travel, supply and other expenses incurred in the sale of our products and technological development, as well as overhead costs such as general and administrative payroll, and related items. Selling, technical, general and administrative expenses decreased $263,000 to $287,000 in first quarter of 2002 from $550,000 in the first quarter of 2001. This reduction was due to a restructuring effort that significantly reduced the Video(3) executive salary and related employment expenses, reduced travel due to utilization of on-line sales presentation technology and the completion of our initial product development activities which were ongoing. Corporate charges consist of general and administrative charges that are not related to a specific line of business and include overhead costs such as office rent and expenses, general and administrative payroll, accounting, legal, and litigation expense, and other related items. Corporate charges decreased $440,000 to $503,000 in the first quarter of 2002 from $943,000 in the first quarter of 2001. The decrease related to restructuring plans implemented in January 2001 that significantly reduced corporate salaries and related benefits through the elimination of several positions. These reductions were somewhat offset by approximately $101,000 related to our ongoing ABC Radio and Disney litigation that was included in corporate charges for the first quarter of 2002. We believe that our corporate overhead will continue to decline as we significantly simplify our corporate structure after the discontinuance of the television commercial production business which was completed in the first quarter of 2002. Depreciation and amortization decreased to $105,000 in the first quarter of 2002 from $196,000 in the first quarter of 2001. Depreciation and amortization primarily related to the capitalized costs of our software license agreement with Convera and computer equipment and the decrease relates primarily to the restructuring of our software license agreement with Convera in October 2001. Other income of $242,000 primarily related to the note receivable assignment received in the litigation settlement with Oklahoma Sports Properties. Interest expense was $116,000 in the first quarter of 2002 compared to interest expense of $119,000 in 2001, representing a decline in interest expense of $3,000. The interest expense in 2001 relates primarily to borrowings under our line of credit which was repaid in full in October 2001 while our interest expense in 2002 relates primarily to bridge loans and other notes payable entered into in the fourth quarter of 2001. 8 Interest income of $2,000 was recorded in the first quarter of 2002. Income tax provision was $16,000 in the first quarter of 2002 relating primarily to state income taxes payable and minimum fees compared to a benefit of $322 in the first quarter of 2001. The net loss from continuing operations decreased to $787,000 for the first quarter of 2002 compared to a net loss from continuing operations of $1,851,000 for the first quarter of 2001, primarily as a result of the cost reduction measures implemented during 2001. Losses from discontinued television commercial production business was $2,150,000 in the first quarter of 2001, which related primarily to the closing of The End. No loss was incurred during the first quarter of 2002 as the sales of our remaining production companies were completed in the first quarter of 2002 and the results of 2002 operations were estimated and accounted for in the estimated loss on disposal in 2001. A net loss of $787,000 was incurred for the first quarter of 2002 compared to $4,001,000 for the first quarter of 2001. LIQUIDITY AND CAPITAL RESOURCES Overview During the three months ended March 31, 2002, we incurred a net loss of $787,000 and used $1,771,000 in cash for operations resulting in a working capital deficit of $809,000 compared to a deficit of $686,000 at December 31, 2001. As a result of our recurring losses, negative working capital and negative cash flow from operations, our independent certified public accountants included an explanatory paragraph in their opinion on our December 31, 2001 consolidated financial statements expressing a substantial doubt about our ability to continue as a going concern. Reference is made to our Annual Report on Form 10-K for the year ended December 31, 2001 for information regarding this going concern qualification. Short-Term Liquidity Needs and Plans We will require additional financing to continue to support our Video(3) operations, fund our corporate expenses and pursue our lawsuit against ABC Radio and Disney in the upcoming 12 months. We anticipate our cash needs for the 12 months after December 31, 2001 will range from $4,000,000 to $5,000,000. We are currently exploring options to raise this additional capital. There can be no assurance that we will obtain financing when required. Additional financing, if available, will likely require us to sell additional equity securities, which is likely to result in substantial dilution to our current shareholders. If such financing is not available, we will be forced to further reduce or terminate our operations and we will likely default on obligations to creditors, all of which will be materially adverse to our operations and prospects. Based on the cash proceeds from the sale of the remaining television commercial production subsidiaries in January and February 2002 and the sale of a participation in the ABC Radio and Disney lawsuit discussed below, we anticipate that we will have sufficient funds to continue our operations at the current level through June 2002 without additional funding. 9 In January and February 2002, we completed the sale of the remaining television commercial production subsidiaries. The operations and business valuation of these subsidiaries had been adversely affected by the after-math of the September 11, 2001 terrorist attack. The sales were consummated for gross cash proceeds of $2,250,000, $200,000 of which was received prior to December 31, 2001, and notes receivable of $1,035,000 with installments and maturity over three years. Certain inter-company payables due to the television commercial production companies were released and put rights of management of a subsidiary were extinguished. In addition, in January 2002, we raised net proceeds totaling $495,000 from an assignment of $1,000,000 of the potential award to be received in connection with our ongoing litigation against ABC Radio and Disney. In the event that such litigation is not successful or we do not receive proceeds, net of amounts due to the litigation attorneys, to fully satisfy the assignment, no additional amount will be paid to the purchasing party. In April 2002, we reached an agreement to extend $175,000 in a note payable until April 2003. Harmony, our subsidiary that served as a holding company for some of our television commercial production businesses, has outstanding judgments against it totaling $637,000, but has nominal assets. To date, the judgment creditors have not initiated claims against us, the parent company, but there can be no assurance that such claims will not be asserted. If we were required to pay these judgments, such action will have an adverse affect on our cash position. Consolidated cash was $855,000 at March 31, 2002 and $301,000 at December 31, 2001, an increase of $554,000. We are pursuing claims against ABC Radio and Disney relating to our children's radio and entertainment business that we discontinued in 1999. Although we have received a determination that ABC Radio breached its contract with us and both ABC Radio and Disney misappropriated our trade secrets, the amount of damages that we can recover had not been determined as of March 31, 2002. The trial on damages was completed on May 10, 2002. The jury award totaled $9.5 million, $1.5 million for breach of contract and $8.0 million for misappropriation of a trade secret. We currently anticipate that final resolution of the case will likely take several more years. Furthermore, we have entered into several financing and other arrangements which will offset the ultimate amount of this award accruing to us if and when it is paid by ABC Radio and Disney. Cash used in continuing operating activities during the three months ended March 31, 2002 was $1,771,000. Accounts receivable at March 31, 2002 decreased $4,000 from December 31, 2001 and prepaid expenses at March 31, 2002 increased $100,000 during the same period. Accounts payable at March 31, 2002 decreased $639,000 from December 31, 2001, accrued expenses at March 31, 2002 decreased $110,000 from December 31, 2001, and deferred income decreased $2,000 during the same period. The changes in the balance sheet that affect cash-flow occurred primarily to the prepayment of insurance premiums and the declining accounts payable and accrued payable balances related to due to declining corporate and litigation activity and the repayment of aged payables on the sale of the television production companies. During the three months ended March 31, 2002, net cash provided by investing activities was $1,991,000 representing $2,050,000 of cash received with the sale of the television commercial production companies and $59,000 used for capital expenditures. Cash provided by financing activities in 2001 amounted to $335,000. We raised $495,000 in January 2002 through an assignment of potential lawsuit proceeds and used cash totaling $160,000 to repay other debt. Seasonality and Inflation The Company does not believe that seasonality or inflation have affected the results of its operations, and does not anticipate that inflation will have an impact on its future operations. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that we 10 recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that we reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that we identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires that we complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. As a result of the adoption of SFAS 141 and 142, all future business combinations will be accounted for under the purchase method, which may result in the recognition of goodwill and other intangible assets, some of which will be recognized through operations, either by amortization or impairment charges, in the future. For purchase business combinations completed prior to December 31, 2001, the net carrying amount of goodwill was written down to net realizable value pursuant to the anticipated sale of the commercial production subsidiaries. The adoption of SFAS 141 and SFAS 142 did not have an impact on our financial position and results of operations. In August 2001, the Financial Accounting Standards Board finalized the Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment on Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment of disposal of long-lived assets including the broadening of the presentation of discontinued operations. The pronouncement is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this new pronouncement did not have a material effect on our financial statements. ITEM 3 Quantitative and Qualitative Disclosures About Market Risk The Company does not enter into derivative contracts either to hedge existing risks or for speculative purposes. PART II OTHER INFORMATION ITEM 1 Legal Proceedings We filed suit against ABC Radio and Disney in the United States District Court for the District of Minnesota on September 26, 1996. On September 30, 1998, a jury in the United States District Court for the District of Minnesota ruled in our favor for breach of contract and misappropriation of trade secrets and awarded us $20 million for breach of contract against ABC Radio, $10 million for misappropriation of trade secrets by ABC Radio and $10 million for misappropriation of trade secrets against Disney. On January 15, 1999, the trial court upheld the jury's findings that ABC Radio had breached its contract with us and that ABC Radio and Disney misappropriated its trade secret information; however, the court set aside the jury's verdict because it disagreed with the jury's conclusions that the evidence showed that those actions caused us damage and because the trial court found that the amount of damages awarded by the jury was not supported by the evidence. The court further ruled, in the event that the decision is reversed or remanded on appeal, that the defendants should be granted a new trial on the issues of causation and damages. We appealed the court's findings in February 1999. On February 16, 2000, oral arguments were held before the Eighth Circuit Court of Appeals. On April 10, 2001, the Court of Appeals reversed the grant of judgment as a matter of law for ABC Radio and Disney and affirmed the grant of a new trial limited to the issue of quantifying damages. The trial on damages was completed on May 10, 2002. The jury 11 award totaled $9.5 million, $1.5 million for breach of contract and $8.0 million for misappropriation of a trade secret. We currently anticipate that final resolution of the case will likely take several more years. Furthermore, we have entered into several financing and other arrangements which will offset the ultimate amount of this award accruing to us if and when it is paid by ABC Radio and Disney. We intend to vigorously pursue the defense and collection of this award. We have settled our previously disclosed litigation against Oklahoma Sports Properties, Inc. and Fred Weinberg. We had been awarded a judgment in the amount of $495,000 plus interest and collection costs, but had not been able to find any assets of the defendants except for a promissory note owed to the corporate defendant. On April 10, 2002, we settled this claim for an assignment to us of this promissory note due from Reunion Broadcasting, L.L.C. with an outstanding principal amount of $232,736. On March 21, 2002, the broker associated with the sale of our television commercial production subsidiaries, Curious Pictures, Chelsea Pictures and DCODE, initiated arbitration proceedings. The broker claims that fees totaling $455,000 are owed pursuant to our April 24, 2001 agreement. We intend to vigorously defend our position that such amount is not owed in the matter. Except as described above, there have been no material developments in the legal proceedings disclosed under Item 3 of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 2 Changes in Securities and Use of Proceeds Not Applicable ITEM 3 Defaults upon Senior Securities Not Applicable ITEM 4 Submission of Matters to a Vote of Security Holders Not Applicable. ITEM 5 Other Information Not Applicable. ITEM 6 Exhibits and Reports on Form 8-K See "Index to Exhibits." (b) Reports on Form 8-K On January 29, 2002, we filed a Current Report on Form 8-K relating to the sale of the stock of our commercial production subsidiary, Chelsea Pictures, Inc. On March 5 and 14, 2002, we filed Current Reports on Form 8-K relating to the sale of the stock of our commercial production subsidiaries, Curious Pictures Corporation and DCODE, Inc. The Company filed no other Current Reports on Form 8-K during the quarter ended March 31, 2002. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. iNTELEFILM Corporation Date: May 15, 2002 By /s/ Richard A. Wiethorn ---------------------------- Richard A. Wiethorn Authorized Officer and Chief Financial Officer
13 INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 10.48 Letter of Agreement Modifying Promissory Note and Warrant for 150,000 Shares between the Registrant and Westminster Properties, Inc. dated April 1, 2002 and Restated Promissory Note dated April 1, 2002 10.49 Settlement Agreement between the Registrant and Oklahoma Sports Properties and Fred Weinberg dated April 10, 2002 and promissory note dated September 4, 1998 executed by Reunion Broadcasting L.L.C. 14 EX-10.48 3 c69622ex10-48.txt LETTER OF AGREEMENT EXHIBIT 10.48 LETTER OF AGREEMENT MODIFYING PROMISSORY NOTE AND WARRANT FOR 150,000 SHARES ("MODIFICATION AGREEMENT") April 1, 2002 Mr. Carlo Tabibi Westminster Properties, Inc. 1015 Gayley Ave., #200 Los Angeles, CA 90024 Dear Carlo: This letter confirms our agreement concerning the modification of the terms of (a) the promissory note dated October 9, 2001 (the "Original Note") in the original principal amount of $300,000 from The End, Inc. ("The End"), iNTELEFILM Corporation ("iNTELEFILM") and Harmony Holdings, Inc. ("Harmony") to Westminster Properties, Inc. ("Westminster") and (b) the Warrant expiring October 9, 2006 that entitles Westminster to purchase 150,000 shares of common stock of iNTELEFILM at $2.00 per share (the "Warrant). We have agreed as follows: 1. Original Note. The outstanding principal amount of the Original Note will be reduced to $175,000 on or prior to April 1, 2002 and will be restated and replaced effective April 1, 2002 with the promissory note in the form of Exhibit A attached to this Modification Agreement (the "Replacement Note"). You acknowledge that you have received principal payments on the Original Note in the aggregate of $125,000 and payment of the accrued and unpaid interest to and through March 31, 2002 so that the outstanding principal amount of the Original Note is $175,000 on April 1, 2002. 2. Warrant. The exercise price of the Warrant will be reduced to $.46 per share effective April 1, 2002 which is the same as the exercise price of the warrant expiring October 9, 2006 to purchase 100,000 shares of common stock of iNTELEFILM that was issued to Westminster pursuant to the Mutual Release and Settlement Agreement dated October 9, 2001 (the "Settlement Agreement") among The End, iNTELEFILM, Harmony and Westminster. 3. Full Performance. The End, iNTELEFILM and Harmony have fully performed their obligations under the Settlement Agreement. 4. Right to Invest. iNTELEFILM will provide Westminster an opportunity to invest in the current private placement of iNTELEFILM's securities described in the summary attached as Exhibit B to this Modification Agreement, provided that Westminster represents that it is an accredited investor and signs the standard non-disclosure agreement that prospective investors sign in connection with the private placement. iNTELEFILM reserves the right to modify the terms of the private placement and the securities offered as well as to withdraw the private placement if sufficient cash purchasers do not subscribe. Westminster may elect to tender the Replacement Note at par in payment of the subscription price for the securities offered by iNTELEFILM in the private placement. 5. Advice of Counsel. The parties to this Modification Agreement have consulted with and been advised by their own legal counsel concerning this Modification Agreement and the transactions contemplated hereby. If the foregoing correctly states our agreement, please execute this Modification Agreement in the space provided below. Sincerely, iNTELEFILM, Corporation By: /s/ Richard A. Wiethorn ----------------------------------------------- Richard A. Wiethorn, Chief Financial Officer HARMONY HOLDINGS, INC. By: /s/ Richard A. Wiethorn ------------------------------------------------ Richard A. Wiethorn, Chief Financial Officer The undersigned hereby acknowledges its receipt and acceptance of and agreement to the terms and conditions of Modification Agreement: Westminster Properties, Inc. By: /s/ -------------------------------- Its: President Exhibit A Form of Replacement Note RESTATED PROMISSORY NOTE $175,000.00 Los Angeles, California April 1, 2002 FOR VALUE RECEIVED the undersigned, Harmony Holdings, Inc., a Delaware Corporation, and iNTELEFILM Corporation, a Minnesota corporation, jointly and severally (hereinafter collectively the "Company" or "Borrower"), do hereby promise to pay to Westminster Properties, Inc., a Nevada Corporation ("Holder"), or order, the principal sum of One Hundred Seventy-five Thousand and No/100 Dollars ($175,000.00), together with interest on the unpaid principal balance at the rate of twelve percent (12%) per annum commencing as of April 1, 2002 through April 3, 2003 (the "Term"). The Company shall have the right to prepay this Note, in whole or in part, without the prior written consent of Holder. Principal, interest and the Additional Fee (as defined below) shall be payable in lawful money of the United States. During the Term interest only shall be payable quarterly on the unpaid principal balance of this Promissory Note ("Note") and shall be calculated based on a 360 day year and shall be payable on each three month anniversary of the date hereof. If not sooner converted and further subject to the mandatory prepayment as provided below, the entire unpaid principal amount, all accrued and unpaid interest, and the Additional Fee shall be due and payable on April 3, 2003 (the "Maturity Date") or upon the earlier to occur (the mandatory prepayment date) of (i) the receipt by iNTELEFILM Corporation of gross cash proceeds from the sale of its equity securities (common stock and/or preferred stock) in the aggregate of at least $4,000,000 (the "Equity Financing"), or (ii) a final judgment (not subject to any further appeal) in an amount in excess of $4,000,000 in favor of iNTELEFILM Corporation in its lawsuit against ABC Radio/Disney pending in the United States District Court for the District of Minnesota, whichever first occurs. Except for the repayment of this Note in connection with an Equity Financing or the voluntary conversion by the Holder of this Note into securities of the Company for which no Additional Fee is payable, the Company will pay Holder an additional fee (the "Additional Fee") calculated at the rate of eight percent (8%) per annum that the amount of principal so repaid has been outstanding from April 1, 2002 to the date on which such principal amount and any accrued and unpaid interest related to such principal amount is repaid. The Additional Fee shall be due and payable when such principal amount is repaid whether prior to, at, or after the stated maturity date. Payment of principal, interest and Additional Fee hereunder shall be made by cashiers check delivered to Holder at the address furnished to the Company for that purpose. Any and all payments not received by Holder on their due date, shall accrue, a late fee equal to Six (6%) percent of such amount due. This Note shall be superior to any loans or advances made by iNTELEFILM Corporation to the other borrower under this Note. Repayment of this Note is secured by a pledge of a security interest in any and all of the Company's assets and the Company has executed and delivered to Holder or Holder's counsel, proper UCC-1 forms in recordable form in the County Recorder's Office of any and all counties in which the Company and each of them conducts business. The UCC-1 forms are accompanied by a list of such counties. The Company shall execute and deliver a security agreement evidencing such security interest and any financing statement reasonably requested by Holder upon execution hereof. The secured pledge and UCC-1 shall be filed upon execution of this document. Furthermore, Holder may at its option accelerate maturity of the loan indebtedness in the event the assets of the Company or each of them, are (i) sold or transferred by the Company, or (ii) made subject to any other lien or security interest without the prior written consent of Holder, except for the junior lien granted by iNTELEFILM Corporation in its assets to the holders of its bridge notes dated October 4, 2001 in the aggregate original principal amount of $1,553,000. The Company hereby represents and warrants that the lien in favor of Holder constitutes a first priority security interest in the assets of the Company. Holder is not required to subordinate its first lien on the assets to any indebtedness of the Company. Nothing contained herein shall act to affect, modify or alter the Holder priority of the security interest previously recorded. This Note shall be subject to a liquidation preference such that in the event of liquidation or dissolution of the Company prior to the earlier of (i) payment in full of the principal of and interest accrued on the Note or (ii) the date on which the Note is converted, Holder shall be entitled to a priority in payment over all other debts and obligations of the Company. Each Borrower hereby represents and warrants that all board approval and corporate resolutions have been obtained for the execution of this Note, the attached Warrants and Mutual Release. The Company agrees to pay Holder's costs of collection and enforcing this Note, including reasonable attorneys' fees. This Note shall be construed in accordance with the laws of the State of Minnestoa as applied to contracts entered into by Minnesota residents within the State of Minnesota, which contracts are to be performed entirely within the State of Minnesota. The Company submits for itself and its property in any legal action or proceeding relating to this Note and any other documents executed and delivered in connection herewith to which the Company is a party; or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of California and the Courts of the Untied States of America for the Central District of California and appellate courts thereof; consents that any such action or proceeding may be brought in such courts and waives any objection to the venue of any action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees that service of process in any such action or proceeding may be effected by registered or certified mail, postage prepaid to the Company at the address set forth below or such other address as the Company shall have furnished to the Holder. Notwithstanding the foregoing, all agreements between the Company and Holder are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration of maturity of the unpaid principal balance hereof, payment of the Additional Fee or otherwise shall the amount paid or agreed to be paid to Holder for the use, forebearance or detention of the money to be advanced hereunder exceed the highest lawful rate permissible under the applicable usury law. This Note replaces the promissory note dated October 9, 2001 (the "Prior Note") from The End, Inc., Harmony Holdings, Inc. and iNTELEFILM Corporation to Westminster Properties, Inc. in the original principal amount of $300,000, as modified by the letter of promissory note extension dated February 27, 2002, and the Holder is entitled to the securities interests granted to Holder pursuant to the Prior Note. IN WITNESS WHEREOF, the undersigned has executed this Convertible Promissory Note as of the date set forth herein. Harmony Holdings, Inc., iNTELEFILM Corporation A Delaware Corporation A Minnesota Corporation By: /s/ Richard A. Wiethorn By: /s/ Richard A.Wiethorn ------------------------------ ---------------------- Name: Richard A. Wiethorn Name: Richard A. Wiethorn Title: CFO Title: CFO EX-10.49 4 c69622ex10-49.txt SETTLEMENT AGREEMENT EXHIBIT 10.49 SETTLEMENT AGREEMENT THIS AGREEMENT is made and entered into as of the 10th day of April, 2002 by and among the following parties: iNTELEFILM Corporation, a Minnesota corporation ("iNTELEFILM"); and OLKAHOMA SPORTS PROPERTIES, INC., an Oklahoma corporation ("OSPI"), and FRED M. WEINBERG, a Nevada resident ("Weinberg" and collectively with OSPI called the "Weinberg Parties"). WHEREAS, OSPI and Weinberg are indebted to iNTELEFILM under that certain promissory note dated September 4, 1998 in the original principal amount of $275,000 (the "Note"); WHEREAS, OSPI and iNTELEFILM entered into an asset purchase agreement dated May 21, 1998 providing for the sale of the assets of the KMUS-AM radio station (the "Radio Station Purchase Agreement"), which iNTELEFILM has cancelled; WHEREAS, the Weinberg Parties own 51 shares of iNTELEFILM common stock (the "Stock"); WHEREAS, iNTELEFILM has made certain other claims against the Weinberg parties and the Weinberg parties have made certain claims against iNTELEFILM; and WHEREAS, the parties desire to resolve and settle their claims in accordance with the terms and provisions of this Agreement, NOW, THEREFORE, in consideration of these premises and One Dollar and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties here to agree as follows: 1. Transfer of KMUS Note and Stock. Upon execution and delivery of this Agreement by iNTELEFILM, (a) OSPI shall assign and transfer to iNTELEFILM all of the rights title and interest of OSPI in that certain promissory note in the original principal amount of $275,000 from Reunion Broadcasting L.L.C. to OSPI (the "KMUS Note"), free and clean of any liens, encumbrances or other restrictions, and deliver to iNTELEFILM the original of the KMUS Note together with the originally executed allonge by OSPI and acknowledgement by the maker of the KMUS Note in the form of Exhibit A attached hereto, including the confirmation therein of the balance owed by the maker of the KMUS Note and the acknowledgment of such maker that future payments under the KMUS Note will be made to iNTELEFILM or its successors or assigns, and (b) the Weinberg Parties shall deliver the certificate(s) for the Stock together with a stock power with medallion signature guaranty transferring the Stock to iNTELEFILM, free and clear of any liens, encumbrances or other restrictions. 2. Representations of the Weinberg Parties. As a material inducement for iNTELEFILM to enter into this Agreement, the Weinberg parties hereby represent and warrant to iNTELEFILM as follows: (a) OSPI is the legal and beneficial owner of the KMUS Note free and clear of any liens, encumbrances or other restrictions. The maker of the KMUS Note has not asserted any right of offset against the KMUS Note. The unpaid principal amount of the KMUS Note is $232,735.98 after giving effect to the scheduled payment made on April 1, 2002 and interest thereon has been paid through April 1, 2002 and no prepayments have been made on the KMUS Note. To the knowledge of the Weinberg Parties, the maker of the KMUS Note is financially solvent and responsible, and able to pay the KMUS Note in accordance with its terms. The maker of the KMUS Note has not asserted any default by OSPI or any claim against OSPI under the asset purchase agreement dated May 21, 1998 between such maker and OSPI, pursuant to which the maker issued the KMUS Note to OSPI. (b) The Weinberg Parties are the legal and beneficial owners of the Stock, free and clear of any liens, encumbrances or other restrictions. (c) OSPI has the corporate power and authority to execute and deliver this Agreement and perform its obligations hereunder. All requisite corporate and other approvals of this Agreement have been obtained by OSPI. Each of the Weinberg Parties has duly executed and delivered this Agreement. This Agreement is the binding and valid obligation of the Weinberg Parties enforceable against the Weinberg Parties in accordance with its terms. The execution, delivery and performance of this Agreement by the Weinberg Parties, including but not limited to the assignment of the KMUS Note and Stock to iNTELEFILM, will not violate, result in a breach of or default under (i) the articles of incorporation or by-laws of OSPI, (ii) any contract, agreement or other instrument binding upon either of the Weinberg Parties or to which any of their respective properties or assets are subject, or (iii) any law or regulation to which any of the Weinberg Parties or their properties is subject. (d) OSPI is not insolvent and is able to pay its debts and liabilities in the ordinary course without any funds provided from the payments on the KMUS Note. 3. Representations and Warranties of iNTELEFILM. As a material inducement for the Weinberg Parties to enter into this Agreement, iNTELEFILM hereby represents and warrants to the Weinberg Parties as follows: (a) iNTELEFIM has the corporate power and authority to execute and deliver this Agreement and perform its obligations hereunder. All requisite corporate and other approvals of this Agreement have been obtained by iNTELEFILM. (b) iNTELEFILM has duly executed and delivered this Agreement. This Agreement is the binding and valid obligation of iNTELEFILM enforceable against iNTELEFILM in accordance with its terms. The execution, delivery and performance of 2 this Agreement by iNTELEFILM will not violate, result in a breach of or default under (i) the articles of incorporation or by-laws of iNTELEFILM, (ii) any contract, agreement or other instrument binding upon iNTELEFILM or to which any of its properties or assets are subject, or (iii) any law or regulation to which any of the Weinberg Parties or their properties is subject. 4. General Release by Weinberg Parties. In consideration of the agreements set forth herein, the Weinberg Parties for himself/itself and his/its heirs, personal representatives and assigns hereby release, acquit and forever discharge iNTELEFILM, all direct or indirect majority-owned subsidiaries of iNTELEFILM and the officers, directors, employees and agents of iNTELEFILM and its subsidiaries (the "iNTELEFILM Parties") from any and all claims, demands, debts, actions, causes of action, suits, contracts, agreements, obligations, accounts, defenses, offsets, and liabilities of any kind or character, whatsoever, whether known or unknown, arising prior to the date hereof. This release includes, without limitation, any and all claims, demands, debts, actions, causes of action, suits, contracts, agreements, obligations, accounts, defenses, offsets, and liabilities of any kind or character whatsoever arising out of or in connection with the Radio Station Purchase Agreement. Further, the Weinberg Parties acknowledge and agree that the iNTELEFILM Parties recommend that the Weinberg Parties seek legal counsel regarding this Agreement, including the general release contained in this paragraph 4, and that the Weinberg Parties have signed this Agreement understanding the legal effect and significance of the provisions contained in this Agreement. The Weinberg Parties acknowledge and agree that they have executed this Agreement freely, voluntarily and because they wanted to so, after consulting with competent legal counsel with whom they are satisfied. 5. Conditional General Release by iNTELEFILM. Subject to the conditions to effectiveness set forth below in subparagraphs 5(a) - (c) below and the conditions subsequent in subparagraph 5(d) below, iNTELEFILM agrees to provide the general release in favor of the Weinberg Parties in the form of Exhibit B attached hereto (the "iNTELEFILM Release"). Upon execution and delivery of this Agreement, iNTELEFILM shall execute and deliver iNTELEFILM Release in escrow with its counsel, Kaplan, Strangis and Kaplan, P.A. ("Escrow Agent") in Minneapolis, Minnesota with instructions to send via Federal Express on July 15, 2002 the iNTELEFILM Release to the Weinberg Parties at the address set forth in this Agreement unless iNTELEFILM delivers to the Escrow Agent and the Weinberg Parties a statement by a corporate officer of iNTELEFILM under oath that one or more of the conditions set forth in subparagraphs 5(a) - (c) to the effectiveness of the iNTELEFILM Release to the Weinberg Parties is not satisfied on or before that date. The effectiveness of the iNTELEFILM Release is subject to the following conditions, the failure of any of which shall void the iNTELEFILM Release ab initio whether or not the iNTELEFILM Release has been delivered to the Weinberg Parties: (a) Performance of Weinberg Parties. The Weinberg Parties shall have performed all of their obligations under this Agreement and the representations and warranties of the Weinberg Parties shall be true, correct and complete. (b) No Adverse Claims and Performance of Maker under the KMUS Note. No person shall have asserted an interest in the KMUS Note, including by not limited to 3 any claims of fraudulent conveyance, and the maker of the KMUS Note shall not have made any claim of offset or otherwise failed to pay any amount when due under the KMUS Note. (c) No Bankruptcy, Etc. of Weinberg Parties. None of the Weinberg Parties shall have: (i) admitted in writing his/its inability to pay his/its debts generally as they become due; (ii) filed a petition in bankruptcy or petition to take advantage of any insolvency act; (iii) made an assignment for the benefit of creditors; (iv) consented to, or acquiesced in, the appointment of a receiver, liquidator or trustee of him/itself or of the whole or any substantial part of his/its properties or assets; or (v) filed a petition or answer seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the federal bankruptcy laws or any other applicable laws. A court of competent jurisdiction shall not have entered an order, judgment or decree appointing a receiver, liquidator, or trustee of any of the Weinberg Parties, or of the whole or any substantial part of the property or assets of any of the Weinberg Parties and such order, judgment or decree shall remain unvacated, or not set aside, or unstayed for 30 days. No petition shall have been filed against any of the Weinberg Parties seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the federal bankruptcy laws or any other applicable law and such petition shall remain undismissed for 60 days, or under the provisions of any other law for the relief or aid of debtors. No court of competent jurisdiction shall have assumed custody or control of any of the Weinberg Parties or of the whole or any substantial part of his/its property or assets and such custody or control shall remain unterminated or unstayed for 30 days. No attachment or execution shall have been levied against the KMUS Note due to the ownership of the KMUS by OSPI at one time. (d) Condition Subsequent. Since the KMUS Note is subject to certain rights of offset, the Weinberg Parties agree to pay to iNTELEFILM the amounts otherwise payable under the KMUS Note that would paid had the maker not exercised its right of offset. 6. Notices. Any notice or communication required or permitted to be given by the provisions of this Agreement shall be deemed to have been effectively given and received on the date personally delivered to the respective party to whom it is directed, or three (3) days after the date when deposited by registered or certified mail, with postage and charges prepaid and addressed to such party at the address set forth below. If to iNTELEFILM: Crosstown Corporate Center 6385 Old Shady Oak Road Suite 290 Eden Prairie, MN 55344 Attention: Chief Executive Officer 4 If to the Weinberg Parties: c/o Fred M Weinberg 5010 Spencer Las Vegas, NV 89119 Any party may change its address by delivering a written change of address to all of the other parties in the manner set forth in this paragraph 6. 7. Miscellaneous. This Agreement shall be governed by the law of the State of Minnesota, regardless of the domicile of the parties. Time is of the essence of the Agreement. This Agreement constitutes the complete agreement between the parties with respect to its subject matter. This Agreement cannot be amended, altered or modified except by an instrument in writing, signed by the party against whom enforcement of the amendment, alteration or modification is sought. In the event of any breach of this Agreement or dispute regarding the enforcement or terms of this Agreement, the prevailing party shall be entitled to recover, in addition to any other damages or remedies, the costs and expenses incurred by such party in enforcing this Agreement or prevailing in such dispute, including but not limited to reasonable attorneys fees and other litigation expenses. The parties consent to the non-exclusive jurisdiction of the Federal and state courts located in the State of Minnesota in connection with any dispute relating to this Agreement or transactions contemplated hereby. IN WITNESS WERHEOF, the parties have duly executed and delivered this Agreement as of the date and year first above written. INTELEFILM Corporation By: /s/ Mark A. Cohn ------------------------------------- Mark A. Cohn, Chief Executive Officer OKLAHOMA SPORTS PROPERTIES, INC. By: /s/ Fred M. Weinberg ------------------------------------- Fred M. Weinberg, President /s/ Fred M. Weinberg - ------------------------------------- Fred M. Weinberg 5 EVIDENCE OF PROMISSORY NOTE COMES NOW D. Stanley Tacker, on behalf of Reunion Broadcasting L.L.C and John Street, on behalf of Oklahoma Sports Properties, Inc., who hereby certify and verify that certain promissory note (a copy of which is attached hereto as Exhibit "A") was executed on September 4, 1998, by Reunion Broadcasting, L.L.C. and given to Oklahoma Sports Properties, Inc. on that date in the original amount of Two Hunderd Seventy Five Thousand Dollars ($275,000.00). That the original note has been lost and the undersigned verify and agree that Exhibit "A" is a true and correct copy of the original. It is agreed and understood by all parties that this document and the attachments do not create new obligations or debt, but merely verifies the existence and terms of the noted dated September 4, 1998. Dated this 29 day of March, 2002 REUNION BROADCASTING L.L.C. By: /s/ D. Stanley Tacker ------------------------------------ D. Stanley Tacker, Manager OKLAHOMA SPORTS PROPERTIES, INC. By: /s/ John Street ------------------------------------ John Street, Vice President 6 EXHIBIT A (A) PROMISSORY NOTE $275,000.00 Tulsa, Oklahoma September 4, 1998 FOR VALUE RECEIVED, the undersigned, Reunion Broadcasting L.L.C., an Oklahoma limited liability company, ("Maker"), promises to pay to the order of Oklahoma Sports Properties, Inc., an Oklahoma corporation, ("Payee"), the principal sum of Two Hundred Seventy-five Thousand Dollars ($275,000.00), together with interest on all unpaid amounts of principal at the rate of Seven percent (7%) per annum. Principal and interest shall be payable as follows: Installment payments inclusive of principal and interest shall be $2,471.78 on the fourth day of October, 1998, and $2,471.78 on the first day of each month thereafter for one hundred eighty (179) months at which time all unpaid amounts, if any, shall be due in full. This Promissory Note may be prepaid at any time without penalty or premium. The holder hereof, from time to time, may waive or surrender, either in whole or in part, any rights, guarantees, security interest, or liens given for the benefit of the holder in connection with the payment of this Note, and such waiver or surrender shall not, in any manner, affect, limit, modify, or otherwise impair any rights, guarantees, or security of the holder not specifically waived, released, or surrendered in writing, nor shall any maker, guarantor, endorser, or any person who is or might be liable hereof, either primarily or contingently, be released from such liability by reason of the occurrence of any such event. The holder hereof, from time to time, shall have the unlimited right to release any person who might be liable hereon; and such release shall not affect or discharge the liability of any other person who is or might be liable hereon. The obligations of Maker hereunder are subject to any claims, offsets or remedies of Maker, arising under the terms of that certain Asset Purchase Agreement between Maker and Payee dated May 21, 1998 which may be asserted as a defense to payment obligations hereunder. If payment required by this Note to be made is not made when due, and provided that Payee is not in default under the provisions of the Asset Purchase Agreement dated May 21, 1998, the Payee may, at its option, without notice or demand, declare this Note in default and all indebtedness due and owing hereunder immediately due and payable. In the event of a default, the entire unpaid balance shall be immediately due and payable, together with interest from the date of default on such unpaid balance at the rate of fifteen percent (15%). The makers, endorsers, guarantors, and sureties of the Note hereby severally waive protest, presentment, demand, and notice of protest and nonpayment in case this Note or any payment due hereunder is not paid when due; and, they agree to any renewal of this Note or to any extension, acceleration, or postponement of the time of payment, or any other indulgence, to any substitution, exchange 7 or release of collateral, and to the release of any party or person primarily or contingently liable without prejudice to the holder and without notice to any maker, endorser, guarantor, or surety. The maker hereof, and any guarantor, endorser, surety, or any other person who is or may become liable hereon will, on demand, pay all costs of collection, including reasonable attorney fees of the holder hereof in attempting to enforce payment of this Note, and reasonable attorney fees for defending the validity of any document securing this Note as a valid first and prior lien. This Note is executed and delivered in the State of Oklahoma and shall be governed and construed in accordance with the laws of the State of Oklahoma. "MAKER" REUNION BROADCASTING L.L.C. By /s/ ---------------------------------- D. Stanley Tacker, Its manager 8 -----END PRIVACY-ENHANCED MESSAGE-----