UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended March 31, 1996.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______ to ________.
Commission File No.: 0-18034
INDENET, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0158367
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
1640 N. Gower Street, Los Angeles, CA 90028
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(213) 466-6388
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
Title of Class
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
Revenues for the issuer's most recent fiscal year ended March 31,
1996 are $20,868,899.
As of June 25, 1996 there were 12,693,423 shares of Common Stock
issued and outstanding and the aggregate market value of the
issued and outstanding Common Stock held by non-affiliates was
approximately $41,600,000.
Documents incorporated by reference: The Proxy Statement for the
Annual Meeting of Shareholders estimated to be held in September
1996, is incorporated by reference of this Annual Report on Form
10-KSB.
This Form 10-KSB consists of __ pages.
PART I
Item 1. Business
Introduction
Since commencing its current business in February 1995,
IndeNet, Inc., through its consolidated subsidiaries, has emerged
as a leading provider of:
- television advertisement spot delivery services for
national advertisers and television programmers, and
- computer systems and equipment for the management of
advertisement spots and the insertion of ad spots into television
programs.
The Company is also currently deploying The IndeNet Digital
Broadcast NetworkTM ("The IndeNet"), a computer-based, MPEG 2
standard, digital satellite network that, it believes, will
materially change and improve the manner in which most television
spot ads are distributed in the television industry.
The Company's goal is to offer the television industry a
complete, integrated range of support services, including those
related to the sale and purchase of spot advertising time, the
delivery of the ads, the scheduling of air time, the insertion of
the ads into the television programming, the verification of the
airing, and the billing for the airing. In pursuit of this goal,
the Company has targeted acquisition candidates with a history of
operations, an established customer base, strong market share,
and a stable source or revenues. The Company believes that the
successful implementation of its goals will benefit the
television industry by reducing the cost and time required to
transact the everyday business between the key parties. This has
the effect of empowering advertisers with a system for immediate,
competitive response, topical and targeted advertising.
During the past 16 months, IndeNet has consummated five
acquisitions, all of which are in the Company's business segment.
The acquired companies were assembled to establish a horizontally
integrated network of television support services that the
Company is able to offer to advertisers, television programmers,
television stations and cable operators. The Company intends to
pursue the possible acquisition of other companies that will
allow the Company to expand its client base or the range of
products and services it can offer to advertisers, programmers,
television stations and cable operators.
The Company currently distributes national spot broadcast
advertising to virtually all of the top United States television
stations and cable systems. In addition, the Company's
television broadcast traffic, billing and management software is
installed in over 140 U.S. television stations (which serve an
estimated 50% of the total U.S. television advertising market)
and 70 television stations located in the United Kingdom, Western
Europe, New Zealand, Australia, Southeast Asia and South Africa.
Additionally, the Company's cable industry traffic and billing
software is installed in approximately 240 cable systems,
primarily in the U.S. The Company's advertising insertion
hardware is used by approximately 1,200 cable suppliers
in the United States (which serve approximately 40% of the
domestic cable system television advertising market). The
Company's clients include such accounts as McDonald's
Corporation, Coca Cola, King World Syndicated Programming,
Questar Home Video, TCI, Time Warner, NBC Television Stations and
Fox Television Stations.
As a result of its acquisitions, the Company's revenues have
grown to $20,869,000 for the fiscal year ended March 31, 1996
from no revenues recorded for the fiscal year ended December 31,
1994. After giving pro forma effect to the two additional
acquisitions consummated in May 1996, if all of the acquisition
would have been consummated as of April 1, 1995, the Company's
consolidated revenues for the fiscal year ended March 31, 1996
would have been $48,660,000.
IndeNet was originally founded as a Colorado corporation on
April 4, 1988 and was re-organized under the laws of the State of
Delaware on July 17, 1995. Effective October 31, 1993, IndeNet
sold all of its operating assets with the intent to transition
into a new line of business utilizing the proceeds from the sale.
At December 31, 1994, IndeNet's assets consisted primarily of the
cash and promissory notes IndeNet had received from the 1993 sale
of its operating assets. Effective February 3, 1995, IndeNet
acquired Mediatech, Inc. ("Mediatech"), which became the first
operating subsidiary of IndeNet. On November 27, 1995, IndeNet
acquired a 66.67% interest in Channelmatic, Inc. ("Channelmatic")
and on February 7, 1996 it completed the acquisition of Starcom
Television Services, Inc. ("Starcom"). On May 16, 1996, IndeNet
acquired Cable Computerized Systems Management, Inc. ("CCMS") and
on May 24, 1996, IndeNet acquired Enterprise Systems Group
Limited and its subsidiaries ("Enterprise"). All references
herein to the "Company" include IndeNet, Inc. and its
consolidated subsidiaries, Mediatech, Channelmatic, Enterprise,
CCMS, and Starcom, and all references to "IndeNet" refer only to
IndeNet, Inc.
Industry Background
According to industry sources, approximately $34 billion was
spent in the United States in 1994 on television advertising.
This amount includes the production of commercials and purchase
of air time for (i) advertisements to air on national broadcast
and cable networks and syndicated programming, where commercials
are distributed in conjunction with the origination of the
programming, (ii) local broadcast and cable television
advertising, consisting of locally produced and aired
commercials, and (iii) national spot advertising, which is
produced and distributed nationally to air during commercial time
slots controlled by individual television stations and cable
systems.
The market for television advertising has experienced
significant expansion in all segments. The following table shows
the expenditures in the television advertising market by segment
for the years from 1990 to 1994.
TELEVISION ADVERTISING BY SEGMENT
(in millions)
Total
TV National Cable
Adver- National National Local Syndi- Adver-
Year tising Network Spot Market cation tising
1990 $28,405 $9,863 $7,788 $7,856 $1,109 $1,789
1991 27,402 9,533 7,110 7,565 1,253 1,941
1992 29,409 10,249 7,551 8,079 1,370 2,160
1993 30,584 10,209 7,800 8,435 1,576 2,564
1994 34,167 10,942 8,993 9,464 1,734 3,034
___________________
Source: Television Bureau of Advertising
According to industry sources, the United States has
approximately 1,300 licensed television stations. The processes
used to create and deliver television advertising have evolved in
conjunction with technological developments in the television and
air courier industries. Most television advertising spots are
currently delivered to television stations and cable systems in
the United States on video tape via air or ground courier, using
the same services as provided by the Company. See "Item 1.
Business -- Advertising and Programming Services."
Advertisers and their agencies constantly seek to increase
the speed at which advertisements are delivered to television
stations and to improve the quality of the commercial being
broadcast. The Company believes that, with the creation of The
IndeNet digital satellite spot delivery network, television spots
and programming will hereafter be delivered more quickly and
efficiently. See "Item 1. Business -- Network Services: The
IndeNet - A Digital Spot Delivery Network." Advertisers are also
continuously attempting to target ever smaller, more specific
demographic groups by advertising in select geographic markets
and by producing many variations of commercials oriented to
different demographic audiences. As a consequence, routing
instructions specifying which stations are to receive particular
commercials, and the traffic instructions given to those stations
specifying the times and rotation of spot airings, have grown
increasingly complex. Television broadcasters and cable
operators depend on software companies such as the Company to
provide the technology necessary to manage the traffic, billing
and management functions of television advertisements and
commercials. See "Item 1. Business -- Broadcast Station
Services."
Technological advances, marketing techniques, and
legislative changes during the past quarter of a century have
created a growing demand for services and equipment to deliver,
insert and manage television advertising. Historically,
television advertising was restricted to advertising aired on
broadcast television. Since the early 1970's, the advent of
cable television and wireless (microwave) cable systems, and the
invention of MPEG 2 digital video satellite transmission systems
such as DirecTV and Primestar, have drastically increased the
opportunities for television advertising. In addition, with the
passage of the Telecommunications bill in 1996, telephone
companies will now be able to distribute television broadcasts
and, therefore, commercials.
Advertisers and their agencies have been attempting to
target ever smaller, more specific demographic groups for their
ads. As a result, television and cable companies have needed to
develop systems to distribute and manage targeted broadcasts. In
1995, there were an estimated 1,300 licensed television stations,
600 cable headends (a cable television's delivery point from
which the cable operator delivers 32 channels of programming), 30
wireless cable operators, and two direct broadcast providers. In
1995, there were an estimated 2.5 million spot ads delivered in
the United States. It has been estimated that the number of
advertisement insertion points could grow from 9,000 in 1995 to
as high as 65,000 by the year 2000.
Syndicated television programming is either produced by the
syndicator or purchased from an independent producer and licensed
to a television station for broadcast. Syndicated programming
may be distributed to network-owned or affiliated stations,
independent stations and, in some cases, cable system operators.
Most syndicated programming is owned and licensed by major
syndication companies and is delivered using third-party
distribution facilities such as those provided by the Company.
See "Item 1. Business -- Advertising and Programming Services."
Business Strategy
The Company's strategy is as follows:
* Selectively acquire established business that provide
television support services to the broadcast industry;
* Integrate the various television support services
provided by the Company, and make the Company a single vendor for
all such services;
* Link the various television services electronically
through a digital network.
The Company has attempted to implement its strategy, and intends
to continue the implementation of its strategy, in the following
manner:
Pursue acquisitions that provide strategic fit and
contribute to the Company's growth. The Company has grown
significantly through the strategic acquisition of five
businesses with strong market positions and established customer
bases. These acquisitions have enabled the Company to enter into
additional geographic areas and to expand its installed base,
service network and range of products and technologies. The
Company plans to continue to pursue acquisitions that complement
its technologies, products and services, broaden its customer
base and expand its network.
Deploy the Company's digital satellite network. During
1996, the Company anticipates deploying the first digital spot
broadcast satellite network in the United States that, if fully
implemented by the end of the fiscal year ended March 31, 1997 as
planned, is expected to provide the Company with the significant
advantages over its competitors in the time, cost, quality and
reliability of national spot advertising delivery services. The
IndeNet will provide the Company with the ability to distribute
advertisements instantly, 24 hours a day, and will position the
Company to provide additional video delivery and other broadcast
support services. The Company's plan is to install its digital
video file server that will be serviced by The IndeNet in
350 to 400 television stations. To date, the Company has
deployed 100 of its digital video file servers.
Achieve synergies in the Company's operations. Integrate
acquired companies to provide synergies, such as cross-selling
its product line or services to a broader customer base, and
expanding distribution and service capabilities.
Expand market position in national spot broadcast
advertising and syndicated programming delivery services. The
Company's market share in the spot ad and syndicated programming
delivery business is attributable to the acquisition by IndeNet
of two companies in this market. The Company's plan is to
increase its market share by providing a broad range of services,
extended deadline times for processing customer orders, digital
satellite delivery capability, improved delivery times, improved
quality and a reduction in overall operating costs. In addition,
the Company may increase its market share through additional
acquisitions.
Continue tradition of delivering high quality customer
service. IndeNet believes that its subsidiaries have a
reputation for delivering high-quality products and services.
The Company's plan is to continue to enhance its various products
and to continue its commitment to service at every level of its
organization.
Recent Growth of the Company
In pursuit of its strategic objective of becoming the
leading provider of integrated electronic support services and
products to the broadcast marketplace, the Company has, over the
past 16 months, acquired five businesses with strong market
positions and established customer bases. These acquisitions
have enabled the Company to acquire a broad range of critical
relationships in the industry, to acquire the critical support
services required to implement its integration strategy, to enter
into additional geographic areas and industries, and to expand
its customer base, service network and range of products and
technologies.
The principal businesses acquired over the past 16 months
are:
Name and Principal Business
Acquisition Principal Activity at Time
Date Location of Acquisition
2/3/95 Mediatech Distribution and delivery
Chicago, Illinois of national spot ads for
television stations.
11/27/95 Channelmatic Advertising insertion
Alpine, California equipment and software.
2/7/96 Starcom Distribution of syndicated
North Hollywood, programming.
California
5/16/96 CCMS Traffic and billing software
Wyoming, Michigan for the cable industry.
5/24/96 Enterprise Traffic, billing and revenue
Thames Ditton, management software for the
England television broadcasting
industry.
The following is an overview of the terms of the four
acquisitions that IndeNet has completed since April 1, 1995. For
additional information regarding the acquired companies, see the
footnotes to the financial statements included in Item 7 of this
Annual Report.
Channelmatic. Since November 27, 1995, IndeNet has owned
66.67% of the issued and outstanding common stock of
Channelmatic, Inc., a Delaware corporation ("Channelmatic"). On
November 27, 1995, Channelmatic, the Delaware corporation,
acquired the assets, liabilities, facilities and business of
Channelmatic, Inc., the California corporation that had conducted
Channelmatic's business since 1974 and is now known as Killer
Barn, Inc., a California corporation ("Old Channelmatic").
IndeNet acquired its interest in Channelmatic by purchasing
from Old Channelmatic most of the assets, liabilities and
business of Old Channelmatic on November 27, 1995 in
consideration for 1,530,000 shares of IndeNet's $.001 par value
common stock (the "Common Stock") and a secured promissory note
in the amount of $5,602,500 (the "Note"). Immediately after the
foregoing acquisition of the assets and business of Old
Channelmatic, IndeNet contributed all of the assets, liabilities
and business that it had purchased to Channelmatic, IndeNet's
wholly-owned subsidiary, in exchange for 500,000 additional
shares of the subsidiary's shares of common stock (the "Pledged
Shares"). Prior to the foregoing contribution of assets, IndeNet
had owned all 166,667 outstanding shares of Channelmatic capital
stock. Concurrently with the contribution of the assets by
IndeNet to Channelmatic, Old Channelmatic contributed the
remaining assets and business of Old Channelmatic to Channelmatic
in exchange for 333,333 shares of Channelmatic's common stock.
Accordingly, immediately following the foregoing transactions,
IndeNet owned 666,667 shares (66.67%) of the outstanding capital
stock of Channelmatic and Old Channelmatic owned 333,333 shares
(33.33%) of the capital stock of Channelmatic.
The Note bears interest at a rate of 8% per annum. IndeNet
made principal payments of $2,000,000 and $500,000 on the Note in
January 1996 and April 1996, respectively, and will commence
making monthly payments of principal and interest on the Note on
June 30, 1996. The monthly payments of $58,962 are sufficient to
fully amortize the outstanding balance of the Note over the
remaining term of the Note. The entire unpaid balance of the
Note shall be due and payable on November 27, 2001.
IndeNet's obligation under the Note are secured by a pledge
of the Pledged Shares. In addition, Channelmatic has guaranteed
the repayment of the Note, which guarantee is secured by a lien
on substantially all of the assets of Channelmatic.
In connection with acquiring its interest in Channelmatic,
IndeNet also obtained a five-year option (the "Option") to
purchase some or all of the 333,333 shares (or 33.33% of the
outstanding capital stock) of Channelmatic stock owned by Old
Channelmatic. The aggregate option price for all 333,333 shares
of Channelmatic stock is $6,000,000, which option price is
required to be paid in cash. However, if the option is exercised
by IndeNet, Old Channelmatic may elect to have up to 50% of the
option exercise price paid in shares of Common Stock in lieu of
cash. If the Option is exercised during the first three years
following the acquisition of Channelmatic, the number of shares,
if any, to be issued by IndeNet upon the exercise of the Option
shall be based on a value equal to the midpoint between the
then-current trading price of the Common Stock and $2.00 per
share. If the Option is exercised during the fourth or fifth
year of the Option, the shares to be issued, if any, will be
valued at $2.00 per share.
Starcom. On February 7, 1996, the Company completed the
acquisition of Starcom Television Services, Inc., a Delaware
corporation ("Starcom"). The acquisition was effected as a stock
for stock exchange in which IndeNet issued shares of its Common
Stock to the stockholders of Starcom in exchange for all of the
issued and outstanding shares of Starcom's capital stock.
Although Starcom currently is a separate subsidiary, in order to
eliminate duplicate administrative expenses and in order to
improve operating efficiencies, the Company has commenced
integrating the operations of Starcom with the operations of
Mediatech. See "Item 1. Business -- Advertising and Programming
Services."
For the purposes of determining the number of shares of
Common Stock that IndeNet would issue to the former Starcom
stockholders, the Common Stock was valued at $4.00 per share,
which price was approximately 70% of the last sale price of the
Common Stock on February 7, 1996, as reported by Nasdaq. The
total number of shares to be issued to the Starcom shareholders
was determined by dividing the "value" of Starcom by $4.00. The
value of Starcom is based on a formula. In general, the formula
value in an amount equal to the difference between (A) 1.14 times
the annualized adjusted gross profit of Starcom (based on the
operations of Starcom from January 1, 1996 through March 31,
1996) and (B) certain liabilities of Starcom. IndeNet issued
500,000 shares of Common Stock to the stockholders of Starcom on
February 7, 1996 and expects to issue the remaining shares of
Common Stock in July 1996 after the adjusted gross profit of
Starcom for the period between January 1, 1996 and March 31, 1996
has been finally determined. The stockholders have informed the
Company that they disagree with the Company's initial
determination of the formula-based value of Starcom, and the
Company and the stockholders are currently reevaluating the
financial and operating information from which the formula value
is to be derived.
CCMS. IndeNet completed the acquisition of CCMS on May 16,
1996 for $4,800,000 by the merger of CCMS with and into a newly
organized subsidiary of IndeNet. The consideration paid at the
closing by IndeNet for the acquisition of CCMS consisted of
$1,036,522 plus 587,612 unregistered shares of Common Stock. The
shares issued in connection with the acquisition were valued at
$6.40 per share, which price was based on the trading price of
the shares of Common Stock at the time the acquisition agreement
was signed.
Enterprise. On May 24, 1996, the Company purchased all of
the shares of Enterprise by delivering to the shareholders of
Enterprise (i) $10,000,000, which amount was paid in cash at the
closing, (ii) promissory notes (collectively, the "Notes")
having an aggregate principal balance of $5,000,000, and (iii) by
agreeing to pay the shareholders $12,379,210 in shares of Common
Stock. The number of shares of Common Stock that IndeNet will be
required to issue to the shareholders of Enterprise is equal to
$12,379,210 divided by the average last reported sales price of a
share of the Common Stock as reported by Nasdaq for the 60-day
trading period consisting of the period from February 8, 1996
through March 21, 1996 and the 30-day trading period following
May 24, 1996 (the "Share Price"). The average price of the
Common Stock for the first 30-day period was $5.60 per share.
The foregoing shares will be issued in July 1996.
The larger shareholders of Enterprise, the largest of whom
consist of certain institutional investors based in the United
Kingdom, received Notes as partial consideration for their
Enterprise shares and will receive all of the shares of Common
Stock to be issued in July 1996. The Notes earn interest at a
rate of 8% per annum and mature on May 31, 2000. Commencing on
November 30, 1996, the Company is required to make quarterly
payments of principal and interest on the Note in an amount
necessary to fully amortize the outstanding balances of the Notes
over the remaining three and one-half year term of the Notes.
Commencing on November 24, 1996, the Notes are convertible into
shares of Common Stock at the option of the holders thereof at a
conversion price equal to 150% of the Share Price. The foregoing
conversion price is subject to adjustment for stock splits, stock
dividends and similar adjustments. Notwithstanding the
foregoing, the foregoing conversion privilege will expire if and
when the aggregate of all shares issued as part of the purchase
price and upon the conversion of the Notes exceeds 2,530,000
shares of Common Stock. IndeNet's obligation to repay the Notes
is secured by a pledge of 1,192,779 shares of Enterprise stock.
Organization
For operational purposes, the Company has organized its
current operations into three divisions: "Advertising and
Programming Services" - the delivery of national spot advertising
and syndicated television programming for national advertisers
and programmers; "Broadcast Station Services" - the design,
development, and distribution of traffic, billing, revenue and
program management software products for television stations and
cable operators coupled with the development and manufacture of
advertising insertion equipment and software for cable operators
and television stations; and "Network Services: The IndeNet" -
the Company's computer-based, MPEG-2 standard digital satellite
spot delivery broadcast network for the distribution of
advertisements and programming to television stations.
Advertising and Programming Services
The Company's advertising and programming services are
currently provided by Mediatech and Starcom.
Mediatech was formed in 1975 and over the ensuing 20 years
became a leading duplicator and distributor of television and
radio commercials in the United States. Starcom was formed in
1993 and, after the acquisition by IndeNet, its operations were
merged with that of Mediatech. Mediatech and Starcom
collectively have approximately 200 employees and annual revenues
in excess of $22 million in the fiscal year ended March 31, 1996.
Mediatech is headquartered in Chicago, Illinois, where it
maintains production and distribution facilities as well as sales
and administrative offices. Mediatech also has facilities in New
York, New York, North Hollywood, California, and Louisville,
Kentucky. Starcom maintains facilities in Studio City,
California, where its satellite uplink facilities are located.
From its various facilities, the Company provides video and audio
duplication, media asset warehousing services and distribution of
dubs and collateral materials for national advertisers, program
owners and corporate training departments.
The Company's advertising and programming services include
broadcast advertising, program syndication, corporate education
and infomercial distribution.
Broadcast Advertising. The broadcast advertising market is
served through the duplication and distribution of commercial
messages (spots). These spots are duplicated on
professional-grade video tape or audio tape and are delivered to
television stations or radio stations or are delivered
electronically through The IndeNet. The Company's customers in
this business are the major advertising agencies or the national
advertisers themselves who have purchased air time on the
television or radio station and need to have their commercials
delivered to the stations for on-air playback. The Company is
not involved in the creation or production of the commercial nor
in the post production activities of editing and finishing the
commercial. The Company's role is to produce high-quality
duplicates of the spot and to ensure that the correct spot is
delivered to the correct television or radio station in a timely
manner and to verify its receipt.
The Company also duplicates and delivers long form
infomercials that are customized to specific markets.
Most of the Company's services to the broadcast advertising
market are provided on a next day turnaround basis as advertisers
may acquire air time on a single station or group of stations in
a last-minute media buy or the advertiser may be editing a newly
produced spot until shortly before its intended air date.
Advertisers and their agencies have come to rely on the Company's
ability to produce large quantities of duplicates at the last
minute and get them delivered to the proper station on a timely
basis. This ability is key to the Company's success in this
aspect of its business.
To meet this demanding service level, the Company maintains
a high level of production capacity and has developed operating
and computer systems that provide immediate processing of
incoming orders. The Company ships a significant portion of its
products via overnight air freight carriers who provide early
morning delivery to television and radio stations and who also
provide proof of delivery. The Company believes that the
deployment of The IndeNet will greatly enhance the Company's
ability to provide these services to its clients.
While no independently published industry statistics are
readily available, the Company estimates that the Company has a
15% to 20% market share in the national spot television
advertising distribution market. The principal customers in its
broadcast advertising business during the fiscal year ended March
31, 1996 included ads delivered for McDonald's Corporation,
Coca-Cola, King World, Warner Bros., Taco Bell, Best Buy Company
and Toyota Motor Sales.
Program Syndication. The program syndication market consist
of providing analog satellite transmission services to
syndicators of television programming. Starcom operates an
earthstation in North Hollywood which it uses to transmit
programming via AT&T's SKYNET satellite system. Mediatech
purchases for third parties and resells to its syndicator
customers satellite transponder space, uplink services and
downlink services. It also provides playback and record
services, integrates advertising spots into the program being
distributed, and communicates with the stations that are to
receive the program on behalf of the syndicator. Additional
editing and encoding services are also provided as is tape
duplication and physical distribution of the programs to those
stations which are unable or unwilling to accept a satellite
feed.
This market is dominated by production companies that view
the program distribution services that the Company provides as a
subset or an additional service to the production of the program
itself. These companies tend to include the distribution
services as part of their bid to produce the program. There are,
however, a number of competitors that provide only distribution
services to program syndicators and which compete directly with
the Company.
The Company distributes 25 to 30 hours of programming each
day from its uplink location in Studio City and from third party
uplink facilities in Chicago and New York. The right to
distribute programs is won through a bidding process and the
winning bidder generally distributes that program for its on-air
life. If a program is canceled the distributor loses a revenue
source.
The Company's syndicated programming clients include
Columbia/Tri-Star, Buena Vista TV, King World, Warner Bros.
Domestic Television Distribution, and Tribune Entertainment.
During the fiscal year ended March 31, 1996, some of the
syndicated programs were distributed by the Company include "The
Oprah Winfrey Show," "Inside Edition," "American Journal,"
"Rolanda Watts," "Jeopardy" and "Wheel of Fortune."
Corporate Education. The corporate education market is
served by providing duplication and distribution services to
corporate clients that use video or audio programs to provide
training or business information to their employees, customers or
stockholders. This information is typically provided on VHS
video cassettes, 3/4" video cassettes or audio cassettes and is
frequently accompanied by ancillary support materials. The
Company also provides these services to program owners that serve
the consumer home video market with entertainment or special
interest programming.
This corporate education market is served on a national
level by several high-volume duplicators that specialize in
producing very large quantities of copies at very low prices for
the consumer market and by hundreds of smaller duplicators that
serve special market niches or local customers. The corporate
education market is known to have substantial overcapacity
resulting in highly competitive pricing strategies and narrow
operating margins.
The Company provides a wide range of services to this market
segment including program duplication, distribution services,
warehousing services, component acquisition services, specialized
packaging services, inventory tracking services and customized
information reporting services. These additional services also
provide additional revenue in a very price-competitive industry.
Network Services: The IndeNet - A Digital Spot Delivery Network
Since the 1930s, video images have been transmitted and
stored almost exclusively using analog formats. Digital video,
however, unlike analog video, can be compressed, which allows for
increased storage capability and transmission efficiencies as
well as the ability to transmit and reproduce video images
without image degradation. Digital video also permits superior
editing capabilities because of its greater compatibility with
computers.
Video and audio programs and commercial messages are today
recorded on tape and physically distributed via common carriers
to the nation's television and radio stations. This physical
delivery process imposes several important limitations on the
utility of these messages including the inability to edit the
message after it is delivered to the station without transferring
it to another medium and the time constraints imposed by the
delivery schedules of the common carriers. To minimize this
latter constraint many advertisers use air freight services to
deliver their spots, thus minimizing the time constraint but
incurring expensive delivery costs.
Distributing video programs in an analog format via
satellite or other electronic delivery method has a number of
inherent shortcomings. Among them are the fact that analog video
signals can only be recorded on tape or other physical media.
This requires that each receiving site has a recording device
available and is ready to receive the signal at the time it is
sent. In practice this results in uneven quality of the recorded
signal as each station uses different levels of quality in the
recording devices employed, the tape media used and the personnel
operating the recording equipment.
The electronic delivery system which the Company is
deploying provides specific answers to the problems involved with
electronic delivery today. The key features of The IndeNet are
the conversion of the signal from analog to digital, the
compression of the digital signal and the delivery of the
compressed digital signal to an intelligent receiving device.
Once the signal is converted to a digital format it can be
treated in an equivalent manner as are computer data files and
can be transported, stored and manipulated similar to a computer
file. Digital video can also be copied from one medium to
another without the generational loss of quality which analog
signals experience in transfer. Digital video is also easier to
compress and decompress than is analog video as each pictel can
be more precisely defined as digital data than it can as analog
video. Compression of the data permits faster and thus less
expensive transmission of the data and reduces the costs of
storing the transmitted data. Storing the spot or program as a
digital file will permit the system to manipulate the spot, add
tags to it, edit it or delete it in a seamless fashion. Spots
can be sent at any time of the day or night avoiding the
constraints imposed by air carriers.
Other benefits to be gained by this technology deployment
include the improved timeliness and quality of information on the
delivery and playback of spots or programs, higher quality of
video signals being played on air, easier storage and retrieval
of video spots or programs by station personnel and lower net
delivered costs of programming or spots. Also, the ability to
deliver the message in a higher quality digital format, to
address it to a specific receiver, to include traffic
instructions, and to reduce the net delivered cost of the message
are defined benefits that will increase the value of these
products and services to the Company's customers. The Company
believes that its ability to deliver spots digitally upon the
implementation of The IndeNet will provide it with a competitive
advantage in the advertising and programming services market.
Because a standard for video compression is required in
order for compressed video to be shared among various products, a
number of industry leaders in consumer electronics, computers and
communications joined together through the International
Standards Organization (the "ISO") to define a standard for
compression of audio and video to CD-ROM called MPEG (Motion
Picture Experts Group)-1. MPEG-1 was adopted by the ISO in 1991.
In 1994, the ISO adopted a standard for compression of audio and
video to broadcast systems called MPEG-2. MPEG-2 permits better
picture resolution than MPEG-1, but requires about four times as
much data.
The IndeNet. The Company is currently deploying the first
large-scale, broadcast quality digital spot satellite delivery
network in the United States. The digital spot delivery network,
known as The IndeNet, will be owned by IndeNet and operated from
the facilities of Mediatech in Chicago, Illinois. The purpose of
The IndeNet is to enable the Company to deliver spot television
advertising and programming to most major broadcast television
stations through digital satellite transmission. The IndeNet is
expected to have the following advantages over other delivery
systems currently in effect.
* Transmission will be digital, with all the benefits
described above.
* Satellite delivery is almost instantaneous, thereby
providing the advertiser with faster service.
* Satellite transmissions can be directed simultaneously
to multiple sites.
* Satellite transmission can occur 24 hours a day.
* For most delivery purposes, satellite delivery is more
cost effective.
* Satellite delivery eliminates the cost of video tape
and courier delivery costs.
In September 1995, Mediatech, on behalf of the Company,
entered into two agreements with Hughes Network Systems, Inc.,
doing business as DirectPCTM ("Hughes"), in connection with the
operation of The IndeNet. Both agreements have a three-year term
and both agreements will automatically be renewed for successive
one-year periods unless either party delivers notice of
termination to the other at least 90 days before the end of the
then current term.
Pursuant to one of the agreements, Hughes has agreed to
broadcast via its satellite the audio and video materials
provided to it by the Company. In addition, Hughes has agreed to
provide the Company with confirmation of the satellite
transmission, which confirmation Hughes receives from each
addressed receiver via an automatic dial-up system.
The second agreement with Hughes appoints the Company as a
reseller of the equipment and software produced by Hughes and
used in receiving satellite transmissions (the "Hughes Systems").
Pursuant to the agreement, the Company is authorized to offer and
sell the Hughes Systems to unaffiliated customers of the Company.
The Company has agreed to purchase at least 600 Hughes Systems
during the three-year term of the agreement. The Hughes Systems,
including the small satellite dish, are installed at the
television stations and connected to the Company's SpotServer.
The digital transmission of ads and programming is expected
to be accomplished as follows: First, the video masters are
transmitted to the Company's facilities in Chicago. The Company
has implemented a system referred to as MAP (Master Acquisition
Plan) that permits the ads and programming to be transmitted to
the Company's Network Operations Center in Chicago almost
instantaneously in a digital format via fiber optic cable from
any of 12 metropolitan centers in the U.S. and Canada.
Thereafter, at the Network Operations Center, the MPEG-2 encoded
material is stored on IndeNet's production control server for
transmission to the Hughes uplink facility. The ads and
programming, encoded with the television station's traffic
instructions, are then sent to the Hughes uplink facility via a
high capacity T1 telecommunications line, fiber optic line, or
other similar means. Hughes then broadcasts the material.
The Company's clients receive the satellite transmission of
the spots via a SpotServer, the video file server that is
manufactured by Channelmatic for the Company. The SpotServer
includes an integrated satellite IRD and an MPEG-2 decoder. Spot
files with embedded traffic instructions are received and
immediately confirmed back to the Company's Network Operations
Center in Chicago via an automatic dial-up system. The
SpotServer supports interfaces to the television station's
automation software and can play spots live, off load to a
station library management system or pass media files to other
local servers complying with the MPEG-2 standard, providing
end-to-end commercial delivery.
In order for the television broadcast stations and cable
operators to be able to receive and use advertisements or
programming that is distributed digitally via satellite, the
television stations will need to install the Company's
SpotServers. Each SpotServer is addressable and can be activated
by a remotely generated signal which will eliminate the need for
the station to man the device. Once deployed, the SpotServers
will be able to receive spots or programs delivered via
satellite. Since all stations that agree to use The IndeNet will
have the same equipment, the quality of the signal recorded at
each station will be consistent.
The roll-out of The IndeNet initially involves the
installation of SpotServers and Hughes Systems in up to 400
television broadcast stations by the end of 1996. The Company
estimates the cost to be $10,000 per station. Since the
announcement of its intent to create The IndeNet in April 1996,
the Company has installed 100 SpotServers. The Company is
installing the SpotServers at no cost to the stations. The
Company hopes to install approximately 400 SpotServers by the end
of 1996 and believes that approximately 350-400 SpotServers need
to be installed before The IndeNet can be operated profitably.
The top 400 television stations currently account for 75% of all
of the advertising spot deliveries in the United States. To
date, the Company has not received commitments for the
installation of the remaining SpotServers, and no assurance can
be given that the deployment of 400 SpotServers can be achieved
by the end of 1996, or ever.
After the initial deployment of 350-400 SpotServers and the
commencement of commercial traffic over The IndeNet, the Company
plans to gradually deploy, through sales or other means,
additional SpotServers. The Company's goal is to install a
SpotServer in up to 800 of the nation's 1,200 television
stations.
The Company has tested The IndeNet but has not commenced
commercial use of the network. The Company intends to commence
commercial traffic on The IndeNet once between 350 and 400
SpotServers have been installed, a target the Company hopes to
achieve during 1996.
Broadcast Station Services
The Company's television station services are provided by
Enterprise and CCMS and by Channelmatic. Enterprise and CCMS
design, develop and distribute traffic, billing, revenue and
program management products for television stations and cable
operators, while Channelmatic develops, manufactures, assembles
and distributes the equipment and software for advertising
insertion into cable television programming.
Enterprise was incorporated in 1977 in England and Wales.
Enterprise, headquartered in Thames Ditton, Surrey, England (near
London), also has offices in the United States, Australia, New
Zealand and South Africa. Enterprise currently employs over 200
employees worldwide. CCMS was incorporated in 1983 in Michigan.
CCMS, headquartered in the City of Wyoming, Michigan, currently
has 15 employees. Enterprise and CCMS were acquired by IndeNet
after the end of fiscal 1996. Accordingly, the actual
consolidated financial statements included in Item 7 of the
Annual Report do not include financial information regarding
these subsidiaries.
Channelmatic, in business since 1976, has three offices and
facilities located in Southern California. Channelmatic
currently has approximately 70 employees.
Traffic and Billing
The Company, through its recently acquired subsidiaries,
Enterprise and CCMS, designs, develops and integrates traffic and
billing, revenue management, and program management software
products for use by broadcast television and radio stations, as
well as the cable industry, in the management of advertising time
and programming. The Company currently provides its software
products to over 140 domestic broadcast television and radio
stations, and to a total of over 70 broadcast television stations
located in the United Kingdom, Western Europe, New Zealand,
Australia, Southeast Asia and South Africa. The Company has also
installed approximately 240 traffic and billing software systems
for cable advertisers, primarily in the U.S., representing
approximately 55% of the worldwide installed base of cable
industry traffic and billing software systems. The Company's
broadcast television and radio station's customers, which
typically enter into five year contracts licensing the Company's
products, include such major television networks as NBC
Television Stations and Fox Television Stations in the United
States, Laser Sales and VTM in Europe, Network 10 in Australia
and TVNZ in New Zealand. The Company's cable advertising
industry clients, which typically enter into perpetual software
license agreements for a one-time up-front fee, and annual
support agreements, include major multi-system cable operators
such as Time-Warner Cable, TCI Cable and Pacific Telesys. The
Company also provides a range of related services to its
customers including hardware installation, customer support,
ongoing training, and custom development of software programs.
The Company believes that, based on the concentration of its
customer base in the top television markets in the United States
and other parts of the world, and the nature and extent of its
contractual relationships with its customers, it is one of the
leading providers of advertising time and programming management
software products to broadcast television stations. In addition,
the Company estimates that approximately 40% of cable system
advertising sales are managed using the Company's software.
The Traffic and Billing Industry. Over the past several
years, the broadcast and cable industries have undergone
significant changes primarily as a result of new technologies and
an increase in the number of television channels and changes in
industry regulation, both in the United States and abroad. These
changes have led to a dramatic increase in the number of
television and radio stations, and a corresponding increase in
the amount of available advertising time. Television and radio
stations derive revenue primarily from the sale of advertising
time, the level of which is directly dependant upon the amount of
available time that is sold and the price at which such time is
sold. Television and radio stations are finding it increasingly
difficult to sell advertising time at the price levels that they
had been sold for in the past, as a result of the increase in
competition for the sale of advertising time. This increased
supply of advertising time, together with an increased ability of
advertisers to identify their target audiences, has also led to
advertisers and agencies demanding a higher quality of service,
with improved targeting of advertisements. As a result,
television and radio stations require more sophisticated methods
of determining how to price, package and deliver their inventory
of advertising time. The Company believes that the products and
services it has developed address the changing informational
requirements of the broadcast and cable industries.
Products and Services. The Company has developed a number
of integrated and interactive computer systems for use in
specific geographic markets, both domestic and abroad, which can
also be customized to satisfy individual client requirements.
The products are typically made available to broadcast television
and radio clients through five-year licensing arrangements and to
cable advertisers through perpetual licenses. The Company also
provides a full line of related services to its customers,
including project management, customer support and ongoing
training.
Broadcast Television and Radio Station
Traffic and Billing Management Software Systems. The
Company's traffic and billing management software systems for
broadcast television and radio stations are designed to provide
maximum flexibility and support for broadcast management. The
systems incorporate a comprehensive set of programs which provide
the user with information on a range of areas, including sales
orders, program scheduling, financial, transmission logs,
invoicing, and credit and collections. The systems can be
configured to handle individual operations, full networks and
multichannel environments.
The Company's systems enable television and radio stations'
sales teams to identify the inventory of available advertising
spots and support their sales initiatives using sales history,
external market research (for example, ratings data obtained from
A.C. Nielsen Company) and pricing data. The sales inventory is
updated immediately as orders are input. The systems
automatically identify and highlight any gaps in the inventory
and recommend how the inventory can be optimized to maximize
revenue. As soon as final orders and available slots within the
inventory have been matched, the systems automatically update the
station's transmission log, which contains the schedule of
programs and advertisements, downloads the log details to the
transmission equipment and updates historic sales data files and
financial and accounting records.
Program Management Software Systems. The Company's program
management software systems for broadcast television and radio
stations give customers complete control with respect to their
inventory of feature films, syndicated series, cartoons, specials
and other programs. The systems provide customers with extensive
search capabilities, leading to better management of programming
decisions. Examples of these capabilities include searches for a
particular actor or theme, and searches based on past ratings or
last play date. The systems also provide information which can
assist customers in purchasing programming. Other features of
the systems include monthly amortization forecasting, comparison
of program revenue with the amortized cost of the program and
cash requirements reporting.
Revenue Management Systems - "Landmark". In an effort to
develop systems which best match the needs of its customers, the
Company recently designed and implemented a "revenue management
system" known as "Landmark." Unlike the systems that are offered
by the Company's competitors, Landmark places the inventory of
airtime in a station's sales system, rather than in the traffic
system. This enables customers to manipulate their inventory
from a sales prospective. In addition to traffic and billing
functions, the Landmark system also incorporates the following
features:
- Yield Management - the system can evaluate airtime
sales with projected audience delivery statistics, against
current inventory availability.
- Deal Management - the system can monitor a particular
advertising campaign and track deviations from projected results
such that corrective measures can be taken before the campaign is
completed.
- Audience Research - audience research information
included in the system enables the assessment of the relationship
between demographics and revenue potential.
- Sales Information Base - the system includes a
comprehensive sales information data bank which includes all
relevant sales, historical business, inventory availability and
audience ratings information.
Cable Industry
The principal product offered by the Company to its cable
industry clients is the Ad Manager 20/20 System, a complete
traffic management, billing and sales management system designed
to manage all activities of the advertising sales operation. The
system is designed to incorporate all of the information
contained within a client's advertising contracts, as well as the
advertising spots associated with each contract and the network
programs within which spots are to be scheduled. The Ad Manager
20/20 can manage up to 3,000 contracts at any one time, while the
Ad Manager 20/20 EX (an enhanced version of the Ad Manager 20/20)
can handle up to 5,000 contracts at any one time. The Company
offers a single-user version of the system, as well as a
multi-user version to allow for access by several users
simultaneously. Certain of the features of the Company's systems
include (i) automatic or manual scheduling of advertising spot
data, according to specific client requirements; (ii) maintenance
of client advertising insertion tape libraries and assistance
with tape editing procedures; (iii) generation of an advertising
insertion schedule and (iv) automatic verification and
reconciliation of advertising spots that have aired, and the
automatic scheduling of "make-goods" for spots that were missed.
In order to keep pace with the rapidly evolving needs of the
cable advertising industry, the Company recently introduced
Novar, the next generation traffic and billing system for the
cable industry.
The Company typically enters into a customer service and
support agreement with its cable industry clients, pursuant to
which the Company provides customers with all software updates
and enhancements generally offered by the Company to its
customers, and grants unlimited telephone access to the Company's
Grand Rapids, Michigan customer service department. The
agreements are typically entered into for one year terms, with
automatic renewals, unless cancelled by either party.
Insertion Products
Channelmatic is a leading supplier of products used to
insert commercials and automate program play-back primarily for
cable television systems and small to medium size broadcast
television stations, domestically and internationally.
Advertising Insertion. The cable TV industry currently
represents the largest market for the Company's Channelmatic
subsidiary. Channelmatic's products enable a cable operator to
insert local commercials into national cable network satellite
feeds. Local ad insertion allows a cable operator to increase
revenues without increasing subscriber fees. Currently, cable
operators generate approximately $1.3 billion annually in
local/spot advertising. Presently the industry is inserting
commercials on roughly 22,500 channels nationwide. The Company's
installed base is approximately 9,000 channels. The price per
channel for Channelmatic equipment varies from $1,000 to $12,000
depending on the configurations selected by the customer.
Revenues from ad insertion equipment sales represented
approximately 75% of Channelmatic's total revenues for the
12-months ended March 31, 1996. The balance of Channelmatic's
revenues constituted customer service and maintenance revenues.
Interconnects and Ad Distribution Systems. A related market
to local ad insertion, the cable advertising interconnect,
requires additional equipment for the distribution and insertion
of regional advertisements. An interconnect is an association of
independent cable systems in one metropolitan media center,
formed to collectively sell metropolitan-wide advertising.
The Company was recently awarded a contract by National
Cable Communications ("NCC") to install a 80 channel, 5 zone,
MPEG 2 MVP digital ad insertion system for the Chicago
Interconnect (the "NCC Agreement"), the third largest
interconnect in the U.S. The value of the initial contract from
the consortium of system owners is estimated to be approximately
$1,500,000, and the system will be the second cable interconnect
in the country to be outfitted with a SpotServer, allowing
television commercials to be delivered in an MPEG 2 digital
format via satellite rather than analog video tape. The NCC
Agreement also provides for the grant to NCC of a
non-transferable, non-exclusive and perpetual right and license
to use the software in connection with NCC's operation of the
insertion system. Pursuant to the NCC Agreement, the Company has
deposited in escrow $450,000 to secure the timely performance of
the Company's obligations under the contract.
NCC, which is a partnership owned by Katz Media Group, Inc.,
Time-Warner, Inc., Continental Cable, Inc., Comcast, Inc. and Cox
Communications, Inc., is the largest domestic cable advertising
firm selling available spot inventories directly to advertisers
and their agencies for 11 major interconnects out of the top 25
media markets. Installation of the NCC system is scheduled to be
completed in August 1996.
Sony and Channelmatic have created the MVP/VideoStoreTM
solution specifically for large multiple channel and zone
systems. The Chicago Interconnect system will have: a capacity
of 2,500 thirty second spots; dynamic real time traffic
interface; and regional and local zoning. The system will serve
49 individual headends of which 25 have Channelmatic's remote
control switches. The NCC Agreement represents the first major
sale of the MVP/VideoServicerTM cooperative product.
Channelmatic's signal switching hardware and software coupled
with Sony's high resolution MPEG 2 video output at 10 megabits
per second, the highest quality available today, offer
advertisers superior picture and sound, real time traffic
interface, and advanced spot management capabilities previously
unavailable to advertisers. Both of Channelmatic's and Sony's
domestic sales forces are marketing the MVP/VideoStoreTM product.
Broadcast and Direct Broadcast Satellite. Historically, the
use of automation systems has not been wide spread in the
broadcast industry. Due to economic pressures from cable,
telephone companies and others, many broadcast stations are
looking to reduce cost through automation. These markets
currently represent a small part of Channelmatic's business, but
the Company intends to focus its marketing efforts in this area.
Direct broadcast satellite ("DBS") is a new source of
television programming for consumers. DBS will compete directly
with cable operators and satellite dish programmers, by enabling
viewers to buy a small inexpensive satellite dish to receive
cable style service. Signals are distributed from a central
national site. In 1993, Channelmatic delivered an ad insertion,
automated playback system for United States Satellite
Broadcasting, the first digitally delivered DBS provider.
Products. Channelmatic provides turnkey systems that
incorporate proprietary as well as third party products. The
large variety of switching and control equipment manufactured by
Channelmatic provide customized configurations not offered by the
competition. Two of Channelmatic's primary products currently
consist of the Managed Video Playback ("MVP") and Digital LITE.
In December 1995, Channelmatic introduced MVP, a
comprehensive content and network management system for media
distribution, playback and insertion. The MVP consists of
digital ad insertion hardware and software developed and
manufactured by Channelmatic. Developed for cable and broadcast
television applications, MVP integrates the latest video file
server technology from SONYr Electronics, Inc. ("Sony"), the
VideoStoreTM, with that of the traffic and billing function and
network management.
The VideoStoreTM works in tandem with Channelmatic's MVP ad
insertion equipment, creating a MPEG 2 digital video server
capable of storing and replaying as many as 7,600 television
commercials, or 60 hours of on-line storage. Expansion is
possible from one television channel to several hundred and the
VideoStoreTM is engineered with swappable disk drives, circuitry,
and power supplies. In addition to the VideoStore'sTM large
digital storage capabilities, the RAID (Redundant Array of
Independent Drives) architecture provides high fault tolerance,
unlike other LAN and WAN intensive competitive designs. The
MVP/VideoStoreTM product has full traffic and billing interface
as well as simultaneous outputs to all channels, and is intended
to replace existing tape based systems.
The MVP, combined with the Sony VideoStoreTM provides
playback control and management of ad insertion and playback
operations, which allows for flexibility. Some of the benefits
to the combination of the Sony VideoStore and the Channelmatic
MVP are as follows: (i) MVP/VideoStoreTM has the ability to
handle multiple zones of insertion and share commercial inventory
across these multiple zones in a wide area network
implementation, which allows customers to select the wide area
network model which is most cost effective; (ii) by providing a
dynamic real-time interface to the traffic and billing system,
MVP can respond quickly to late arriving commercials, last minute
changes in schedule and a global commercial delete and replace;
(iii) MVP provides real-time network status and control; (iv)
MVP/VideoStoreTM allows users to make last second changes to the
playlist, so that users can continue to sell spots until the time
that the spots need to be inserted; (v) a Sony predictive
maintenance system provides the ability to alert a user of
potential component failures prior to the failure actually
occurring, which allows the user to take action and replace the
component before failure; (vi) an embedded clip ID allows
verification that the clip actually played back and that it was
the correct clip; and (vii) spots can be played in any order, on
any channel, and even simultaneously.
Digital LITE, first introduced in December 1995, is a
digital insertion system that functions similarly to the MVP but
is designed for smaller cable stations with 1 to 12 channels
which do not need the capacity of an MVP. Because the Digital
LITE is a single channel, component-based product, a small cable
system customer can expand his cable system at a lower cost per
channel simply by adding one Digital LITE per additional channel.
License Agreements. Channelmatic recently entered into an
agreement with SONYr Electronics, Inc. (the "Sony License
Agreement") wherein Channelmatic is granting license to Sony to
sublicense, and a right to resell in the U.S., the MVP
manufactured by Channelmatic. The Sony License Agreement
authorizes Sonyr's VideoStoreTM salespeople to sublicense
Channelmatic's MVP products and support services. Channelmatic
may also directly sell or license the hardware and software. The
Sony License Agreement will expire in April 1997 and may be
renewed at Sony's option.
Marketing and Sales
As part of the Company's goal to horizontally integrate the
services that the Company provides to advertisers, television
programmers, television stations and cable systems, the Company
has commenced coordinating the marketing and sales efforts of its
various subsidiaries under the supervision of IndeNet's marketing
director. Although each subsidiary of IndeNet engages its own
sales agents and representatives, the sales personnel of the
various subsidiaries coordinate their sales efforts and actively
engage in cross-selling the Company's other products and
services.
Competition
Competition in each of the Company's businesses is highly
competitive. Each of the Company's subsidiaries competes in its
business with numerous competitors and potential competitors,
many of whom are substantially larger in size and have greater
financial, technical, marketing, customer service and other
resources available than the Company. Certain of the Company's
competitors and potential competitors have technological
capabilities or other resources that would allow them to develop
alternative products or provide alternative services which could
compete directly with the Company's products and services.
Although no competitors of the Company currently provide digital
delivery of video advertising content via satellite, a number of
other companies have announced their intentions to establish
competing digital satellite delivery systems.
The Company currently competes in the market for the
distribution of video and audio advertising spots to television
stations. The principal competitive factors affecting this
market are production quality, customer service, price,
timeliness and accuracy of delivery. The Company competes with a
variety of duplication and delivery companies that have
traditionally distributed commercials on video tape via air and
ground courier. Some duplication and delivery companies
currently offer satellite or electronic delivery, and have
long-standing customer relationships, resulting in significant
customer loyalty. Moreover, other companies have announced
systems for delivering video advertising content electronically
or via satellite. Competitors include Cycle-Sat, Inc., VDI
Media, MGS Services, and a number of smaller regional firms.
Digital Generation Systems, Inc., a leading provider of
electronic distribution of audio spot advertising to radio
stations, has also announced its intent to deliver television
spot ads electronically. In addition, telecommunications
providers or cable television operators could enter the market as
competitors with lower delivery costs.
The Company's major competitors in the ad insertion product
marketplace include SeaChange Technology, Texscan MSI, a
subsidiary of Texscan Corp., StarNet Development, Inc. a division
of the Lenfest Group, and Digital Equipment Corporation.
The Company's principal competitor in the traffic and
billing market in the United States is Columbine/JDS, Inc., a
provider of traffic and billing management systems. Enterprise
also competes to a limited extent with the internal data
processing departments of television and radio stations, to the
extent such departments generate traffic and billing systems
in-house.
Intellectual Property and Proprietary Rights
The Company primarily relies upon a combination of
trademark, tradename, and trade secret laws and license
agreements to establish and protect proprietary rights in its
technologies. Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use the Company's
hardware, software or technology without authorization or to
develop similar technology independently. In addition, effective
copyright and trade secret protection may be unavailable or
limited in certain foreign countries.
Because the Company's business is characterized by rapid
technological change, the Company believes that factors such as
the technological and creative skills of its personnel, new
computer hardware, software and telecommunications developments,
frequent hardware and software enhancements, name recognition,
and reliable customer service and support are more important to
establishing and maintaining a leadership position than the
various legal protections of its technology.
The Company believes that its patent, software, trademarks
and other proprietary rights do not infringe the proprietary
rights of third parties. There can be no assurance, however,
that third parties will not assert such infringement by the
Company with respect to current or future software, hardware or
services. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause software
release delays or might require the Company to enter into royalty
or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to the
Company.
Employees
As of June 1, 1996, the Company had approximately 500
employees. Other than at the subsidiary levels, the Company had
13 employees as of June 1, 1996, five of whom perform management
and administrative functions and seven of whom are engaged in
deploying and operating The IndeNet. The Company's employees are
not represented by any collective bargaining organization.
Government Regulation
Transmissions from the Company's earth stations to
satellites must be made pursuant to a license or other
authorization granted by the Federal Communications Commission
(the "FCC"). FCC licensing decisions or changes in U.S.
government policies increasing or decreasing access to satellites
could adversely affect the Company. No FCC authorization is
required for reception of transmission from domestic satellites
from points within the United States.
Mediatech transmits its domestic, analog satellite traffic
through earth stations operated by third parties. IndeNet relies
on Hughes to transmit traffic for The IndeNet to the Hughes
satellite for broadcast by Hughes' satellite to the various
subscribing television stations. Neither IndeNet nor Mediatech
holds an FCC license and both companies rely on the licenses or
authorizations of their respective earth station operators.
Starcom has to date relied on a license to transmit domestic
satellite traffic that is held by Jupiter Radio, Inc. In
connection with the acquisition of Starcom, all of the
outstanding capital stock of Jupiter Radio, Inc. was assigned and
transferred to Starcom, subject only to obtaining the FCC's
approval to the assignment. The approval of the FCC to the
transfer of Jupiter Radio's stock has not yet been obtained.
The FCC establishes technical standards for satellite
transmission equipment which change from time to time and also
requires coordination of earth stations with land-based microwave
systems at certain frequencies to assume noninterference.
Transmission equipment must also be installed and operated in a
manner that avoids exposing humans to harmful levels of
radio-frequency radiation. The placement of earth stations or
other antennae is typically subject to regulation under local
zoning ordinances.
Research and Development
The Company intends to devote a significant amount of its
resources to the development of new or enhanced products. For
the fiscal year ended March 31, 1996, research and development
expenses were approximately $447,000, which amount represents
expenses incurred in the development of new products by
Channelmatic and the costs incurred in developing The IndeNet.
Since the Company had no operations in the prior fiscal year, the
Company did not incur any research and development expenses. The
Company expects that its research and development expenses will
increase in future periods.
Significant Customers
During the fiscal year ended March 31, 1996, revenues
derived from McDonald's Corporation and King World represented
11.1% and 10.4% of the Company's total revenues, respectively.
Due to the increase in the Company's revenues as a result of the
acquisitions of Enterprise and CCMS after March 31, 1996, the
Company does not expect the revenues derived from any single
customer to exceed 10% of the Company's total revenues for the
year ended March 31, 1997.
Item 2. Properties.
The Company maintains eleven offices and other facilities in
the U.S. and offices abroad. All of the Company's offices and
facilities are leased. Certain of the Company's offices are
leased from affiliates of the Company. See "Item 12. Certain
Relationships and Related Transactions." The following is a
summary of the Company's offices and other facilities:
Location Use Lessee
Chicago, Illinois Executive offices; Mediatech
Duplication and delivery
offices; satellite earth
station
Niles, Illinois Warehouse Mediatech
New York, New York Duplication and delivery
offices; satellite earth
station
Louisville, Duplication and delivery Mediatech
Kentucky offices
North Hollywood, Duplication and delivery Starcom
California offices
Studio City, Satellite earth station Starcom
California
Alpine, California Executive offices; assembly Channelmatic
facility
El Cajon, Warehouse Channelmatic
California
El Cajon, Technology Center Channelmatic
California
Colorado Springs, Executive offices and office Enterprise
Colorado facilities Systems Group,
Inc.*
Thames Ditton, Executive offices, office Enterprise
Surrey, England facilities and computer Air-Time
suite Systems
Limited*
French Forest Executive offices and Enterprise
NSW, Australia office facilities Systems Group
(Australia)
Pty Limited*
Auckland, Office facility Enterprise
New Zealand Air-Time
Systems
Limited, New
Zealand branch*
Johannesburg, Office facility Enterprise
South Africa Air-Time
Systems
Limited, South
Africa branch*
Wyoming, Michigan Office facility CCMS
_______________________
* Subsidiaries or branches of Enterprise
The Company believes that these facilities and offices and
additional or alternative space available to it are adequate to
meet its requirements for the foreseeable future.
Item 3. Legal Proceedings.
Sutro & Co. Incorporated v. IndeNet, Inc.
On May 3, 1996, Sutro & Co. Incorporated ("Sutro"), a Nevada
corporation engaged primarily in the business of assisting
publicly and privately held companies in securing equity and debt
financing, filed an action in the Superior Court of the State of
California for the County of Los Angeles against IndeNet for
damages for breach of contract and quantum meruit, and injunctive
relief. On May 30, 1996, Sutro amended its complaint. Sutro
seeks approximately $2,000,000 in damages for breach of the
contract or approximately $1,000,000 in quantum meruit for the
value of services rendered. The injunction being sought would
also require IndeNet to deliver 100,000 warrants to purchase
shares of Common Stock, including unlimited "piggy-back"
registration rights and all costs and expenses in connection with
such registration.
Sutro bases its allegations of contractual breach on a
letter agreement, dated on or about June 21, 1995, whereby
IndeNet retained Sutro as its exclusive financial advisor
regarding the private placement of equity-related securities in a
transaction. The letter agreement also stated that IndeNet would
provide Sutro with a right of first refusal until June 21, 1997
to serve as underwriter in any public or private financing or as
IndeNet's exclusive financial advisor on any merger, business
combination, recapitalization or sale of IndeNet's assets.
Sutro alleges that it is entitled to receive fees based on
(i) IndeNet's sale of $4,000,000 of its securities on February
29, 1996, (ii) IndeNet's sale of $12,000,000 of its Series A
Preferred Stock in May 1996, and (iii) IndeNet's failure to
provide Sutro with a right of first refusal in connection with
IndeNet's acquisition of CCMS and Enterprise.
The Company effected the foregoing securities issuance
because Sutro had not obtained any financing for the Company
during the eight-month period following the execution of the June
21, 1995 letter agreement. The net proceeds from the February
1996 and May 1996 securities issuances were used to fund the
Company's working capital needs and the acquisition of
Enterprise. Sutro was fully informed of the Company's need for
the offering proceeds and of the Company's acquisition of
Enterprise. The Company did not use any financial advisor in
connection with the acquisitions of either Enterprise or CCMS.
IndeNet intends to vigorously contest the action. However,
there can be no assurance that the foregoing litigation will be
decided in favor of IndeNet or that any settlement of this
litigation will not have a material adverse effect on IndeNet.
The Company also is subject from time to time to litigation
arising in the ordinary course of its business. The Company
believes that no such litigation is pending that would have a
material adverse effect on the Company's business.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock trades on the Nasdaq National
Market under the symbol INDE. The following table sets forth the
high and low closing sales prices for the Common Stock for each
quarter during the past two fiscal years and for the interim
quarter between the two fiscal years.
Per Share Per Share
High Low
Fiscal 1994
Quarter Ended 03/31/94 $2.31 $0.97
Quarter Ended 06/30/94 $3.13 $1.63
Quarter Ended 09/30/94 $2.25 $1.19
Quarter Ended 12/31/94 $2.13 $1.38
Quarter Ended 03/31/95 $2.05 $1.25
Fiscal 1996
Quarter Ended 06/30/95 $3.38 $1.56
Quarter Ended 09/30/95 $3.78 $2.25
Quarter Ended 12/31/95 $4.34 $3.22
Quarter Ended 03/31/96 $6.19 $3.44
There are approximately 3,000 stockholders who beneficially
own the common stock of the Company.
No dividends have been declared or paid by IndeNet since
inception. No dividends are contemplated by IndeNet at any time
in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company is a leading provider of television
advertisement delivery services for national advertisers and
programmers. It also develops, assembles, and distributes
software and hardware for advertising insertion into television
programming and through its two acquisitions subsequent to March
31, 1996 designs and develops traffic billing, revenue and
program management software products for the management of
advertising time and programming. The Company operates in one
business segment. In 1995, the Company changed its fiscal
year-end from December 31 to March 31. As a result of this
change, comparisons are for fiscal 1996 and 1994. For
information regarding results of the three months ended March 31,
1995 see Notes to the Consolidated Financial Statements.
References to "fiscal
1996" represent the year ended March 31, 1996 and references to
"fiscal 1994" represent the fiscal year ended December 31, 1994.
Overview
The Company did not have any operations during fiscal 1994.
Operations of the Company commenced through its first acquisition
in February 1995. The acquisitions completed by the Company to
date are as follows: (i) Mediatech, Inc. ("Mediatech") in
February 1995, (ii) Channelmatic, Inc. ("Channelmatic") in
November 1995, (iii) Starcom Television Services, Inc.
("Starcom") in February 1996, (iv) Cable Computerized Management
Systems, Inc. ("CCMS") in May 1996 and (v) Enterprise Systems
Group Ltd. ("Enterprise") in May 1996. The results of operations
discussed herein reflect (i) the actual operating results of the
Company during fiscal 1994 and fiscal 1996 on a consolidated
basis with such subsidiaries as IndeNet actually owned during
such periods of ownership and (ii) the pro forma consolidated
operating results as if IndeNet had owned Channelmatic, Mediatech
and Starcom since the beginning of fiscal 1994.
As a result of the acquisitions, the Company will have
recorded approximately $35.4 million of goodwill on its pro forma
balance sheet which will be amortized over 20 years and will
result in annual charges to income of approximately $1.8 million.
Future acquisitions will likely result in additional amortization
charges. See the Unaudited Pro Forma Results of Operations and
the Consolidated Financial Statements included elsewhere herein.
Except for historical information contained herein,
statements in this report are forward-looking statements that are
made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to
differ materially from forecast results.
Actual Results For Fiscal 1996 Compared to Fiscal 1994
Fiscal 1996 Fiscal 1994
Revenue $20,868,899 $ -
Cost of sales 9,791,964 -
Selling, general and 10,166,713 -
administrative
Depreciation and 2,076,590 25,000
amortization
Research and development 446,525 -
Corporate 1,023,659 1,221,082
Other income (expense), ( 459,641) 496,299
net
Income tax expense 17,255 -
Allocation to minority ( 156,416) -
interest
Net loss $(2,957,032) $ (749,783)
As discussed above, the Company did not have any operations
during fiscal 1994 as it was transitioning between different
segments of the entertainment industry. The Company did not
commence operations until the acquisition of Mediatech in
February 1995. Accordingly, since IndeNet did not have any
Revenues, Cost of Sales, or Selling, General and Administrative
Expenses in fiscal 1994, all increases in Revenue, Cost of Sales,
and Selling, General and Administrative Expenses are attributable
to the three operating companies acquired prior to and during
fiscal 1996.
Depreciation and amortization increased from fiscal 1994 due
to (i) the inclusion of depreciation and amortization of the
acquired companies which is not included in fiscal 1994 results
and (ii) amortization of goodwill as a result of those
acquisitions. Depreciation and amortization is expected to
increased in future periods due to (i) the inclusion of the
depreciation and amortization of the acquired companies for a
full reporting period, (ii) amortization of goodwill as a result
of the companies acquired prior to March 31, 1996 for a full
reporting period, and (iii) depreciation and amortization of CCMS
and Enterprise and of any other companies that may be acquired
subsequent to March 31, 1996, and, in each case, the amortization
of goodwill attributable to those subsequent acquisitions.
Corporate expense is attributable to the expenses of
IndeNet, the parent company. Such expenses include salaries,
legal, professional and other miscellaneous costs. Corporate
expenses decreased in fiscal 1996 from fiscal 1994 by $197,423 or
16% due primarily to a reduction of legal fees. During fiscal
1994, the Company was involved in lawsuits that have been
settled. The Company expects that corporate expenses may
increase in future periods due to the hiring of additional
personnel in assisting in the Company's acquisitions or managing
the acquired businesses.
Interest income decreased from fiscal 1994 by $138,438 or
50% due to a reduction in cash balances maintained by the Company
during fiscal 1996 and the repayment in fiscal 1996 of a $900,000
note receivable. The Company expects interest income to decrease
in future periods due to the use of cash in funding and
deployment of the Company's digital delivery system.
Interest expense increased from fiscal 1994 by $746,306 due
to (i) the inclusion of interest expense of the acquired
companies in fiscal 1996 for the period that the subsidiaries
were owned and (ii) interest expense incurred on the promissory
notes delivered by IndeNet as partial payment of the purchase
price of each of the acquisitions. Interest expense is expected
to increase in future periods due to (i) the inclusion of
interest expense incurred by each of the acquired companies for a
full reporting period, (ii) interest expense related to the
purchase price promissory notes for a full reporting period, and
(iii) the inclusion of interest expense of the companies acquired
subsequent to March 31, 1996 and interest expense from the
purchase price promissory notes attributable to those subsequent
acquisitions.
At March 31, 1996, the Company (excluding Channelmatic) has
a net operating loss carryforward of approximately $7,700,000 for
federal income tax purposes of which $2,700,000 is subject to a
separate return limitation. The carryforward expires in varying
amounts and years through 2011. This loss carryforward also
gives rise to a deferred tax asset of approximately $2,600,000.
This tax asset has a 100% valuation allowance as the Company
cannot determine if it is more likely than not that the deferred
tax asset will be realized. Because of changes in the Company's
ownership, there is an annual limitation on the usage of the net
operating loss carryforward. Income tax expense for fiscal 1996
represents state taxes for the various states in which the
Company does business and corporate tax.
The allocation to minority interest represents 33.33% of the
net loss of the majority-acquired entity Channelmatic. The
amount allocated to minority interest will differ in future
periods based on the operations of Channelmatic.
Pro Forma For Fiscal 1996 Compared to Pro Forma Fiscal 1994
Pro forma Pro forma
Fiscal 1996 Fiscal 1994
Revenue $ 28,503,409 $ 31,448,205
Cost of sales 13,878,456 14,965,315
Selling, general and 12,466,771 12,651,550
administrative
Depreciation and 3,446,777 3,704,512
amortization
Research and development 536,727 669,672
Corporate 1,023,659 1,221,082
Other income (expense), net (802,869) (249,536)
Income tax expense 5,902 31,532
Allocation to minority interest (162,641) 294,993
Net loss $(3,495,111) $(2,339,987)
The following discusses the results of operations for the
Company, Mediatech, Channelmatic and Starcom as if the three
subsidiaries had been acquired at the beginning of each of the
fiscal years. See the Unaudited Pro Forma Results of Operations
and the Consolidated Financial Statements included elsewhere
herein.
Revenue decreased by $2,944,796 or 9% from $31,448,205 to
$28,503,409 due primarily to a decrease in the revenue of
Channelmatic. Channelmatic's decrease in revenue is due to
Channelmatic migrating from analog to digital product lines.
During fiscal 1994, Channelmatic's primary business was in the
development, assembly and sale of analog advertisement insertion
equipment; in fiscal 1996, the Company developed, assembled and
sold the current line of digital advertisement insertion
equipment. The Company believes that, because of the various
benefits digital ad insertion equipment appears to have over
existing analog systems, the cable industry will gradually
convert existing systems to the digital format. Based on this
assumption, the Company expects revenue to increase in future
periods as existing analog systems are replaced by Channelmatic's
digital advertisement insertion equipment.
Cost of sales decreased by $1,086,859 or 7% from $14,965,315
in fiscal 1994 to $13,878,456 in fiscal 1996. As a percentage of
sales, cost of sales increased from 48% to 49% because the
decrease in costs was less than the decrease in revenue. Overall
cost of sales as a percentage of revenue is expected to increase
based on the profit margins of the additional companies acquired
subsequent to March 31, 1996; however cost of sales as a percent
of revenue is expected to remain constant for the aforementioned
companies.
Selling, general and administrative expenses decreased
$184,779 or 1% from $12,651,550 to $12,466,771. As a percent of
sales, selling general and administrative expenses increased from
40% to 44%. The increase in selling, general and administrative
expenses as a percent of sales is due primarily to fact that
selling, general and administrative expense of Channelmatic
remained constant while, as discussed above, sales decreased from
prior periods. Although sales decreased, Channelmatic maintained
the same level of trade show activity and administrative and
selling personnel. As discussed above, based on the Company's
assumptions, revenue attributable to Channelmatic is expected to
increase, however, selling, general and administrative expense is
not expected to increase in proportion to that increase due to
the fact that Channelmatic is appropriately staffed for increased
production.
Depreciation and amortization decreased by $257,735 or 7%
from $3,704,512 to $3,446,777. The decrease was due primarily to
certain fixed assets being fully depreciated during fiscal 1996.
Depreciation and amortization is expected to remain constant in
future periods for Channelmatic.
Research and development decreased $132,945 or 20% from
$669,672 to $536,727. The decrease was due to the combination of
a decrease in research and development expense by Channelmatic
and to the fact that during fiscal 1994, Channelmatic expensed
100% of the incurred research and development costs and
commencing January 1, 1995, Channelmatic capitalized certain
research and development expenses as defined under generally
accepted accounting principles. Research and development
expenses are expected to increase in future periods due to (i)
increased development of the Company's digital delivery system,
and (ii) increased research and development related to new
product lines developed by Channelmatic.
Corporate expense is attributable to the expenses of
IndeNet, alone. Because IndeNet actually incurred these expenses
during all of fiscal 1996 and fiscal 1994, the pro forma
corporate expenses are also the actual corporate expenses
discussed above in "Actual Results For Fiscal 1996 Compared to
Fiscal 1994."
Interest income decreased $155,323 or 45% from $345,485 to
$190,162 as a result of lower cash balances held by the Company
on a consolidated basis during fiscal 1996. Interest income is
expected to decrease in future periods based on the utilization
of cash for the deployment of the digital delivery system and
resultant lower cash balances.
Interest expense increased $159,776 or 16% from $996,944 to
$1,156,720 as the result of higher interest rates on notes which
have variable interest rates tied to the Prime or LIBOR rates.
Interest expense may increase in future periods due to any
increase in the Prime or LIBOR rates.
Income tax expense for fiscal 1994 represents income taxes
incurred by Channelmatic and for fiscal 1996 represents minimum
state and corporate taxes.
Allocation of minority interest represents allocation of
33.33% of Channelmatic's net operations to the minority
shareholder.
Liquidity and Capital Resources
The Company's primary cash requirements are for operating
expenses, capital expenditures, development of the digital
delivery system, and acquisitions. The Company's primary sources
of cash have been from bank borrowings, private placements, and
exercise of warrants and options.
IndeNet's subsidiaries are generally cash flow positive from
the date of acquisitions, and as such the Company's capital needs
primarily relate to (i) the development and deployment of the
digital spot delivery system; (ii) funding corporate expenses;
(iii) acquisitions; (iv) payment on promissory notes delivered by
IndeNet as partial payment of the purchase price of certain of
the acquisitions; and (v) notes payable as a result of the
private placements.
In February 1996, IndeNet raised $4.0 million from a private
placement of the issuance of 224,795 shares of its common stock
and the issuance of a $3.0 million convertible note. The funds
from the sale of the stock and the note are being used primarily
for the development and deployment of the Company's digital
delivery spot network.
In April 1996, IndeNet raised $12.0 million in cash from the
issuance of 1,200 shares of IndeNet's Series A preferred stock.
The net proceeds of this offering was used primarily for the
acquisition of Enterprise.
In May 1996, IndeNet raised an additional $2.5 million in
cash from the issuance of a convertible note. The funds are
being used for general product development.
In May 1996, the Company sold its office building in Los
Angeles, California for $1.25 million and used part of the
proceeds to pay-off a mortgage loan of approximately $.75
million.
As of March 31, 1996, the Company had approximately $3.8
million in cash and cash equivalents and working capital of
approximately $1.9 million. For the fiscal year ended March 31,
1996, the Company's unrestricted cash balances increased by
$3,338,599. During fiscal 1996, the Company used $905,151 in
operations, primarily due to the operating loss of the Company.
The Company used $1,901,242 in investing activities, primarily
for normal ongoing capital expenditures and capital expenditures
for the digital spot delivery system, and $510,707 on capitalized
costs. These amounts are net of $583,604 payments on a note
receivable, which will not be recurring. The Company generated
$6,144,992 in financing activities, primarily from the $4,000,000
proceeds from a private placement of the issuance of the
Company's Common Stock and a note, and the exercise of warrants
and options which netted the Company $4,938,320; the latter
amounts were offset by payments on notes payable of $2,534,728.
It is not expected that the Company will receive this
level of proceeds from the exercise of warrants and options in
the future. In addition, during the three month period ended
March 31, 1995, the Company paid $3,000,000 in cash to the former
shareholders of Mediatech as part of the consideration of the
acquisition of Mediatech.
The Company expects to spend approximately an additional
$4.0 million to complete and deliver its digital spot delivery
system. The Company believes that, with the new financings
described above, it has adequate working capital to fund the
deployment of the digital spot delivery system. The Company also
expects to enter into a line-of-credit arrangement for its
subsidiary Channelmatic in order to fund Channelmatic's working
capital needs.
Any future acquisitions will be funded from equity and/or
debt financing. Payments on promissory notes and notes payable
as the result of the private placements are expected to be paid
from either (i) future fund raising or (ii) funds from IndeNet's
subsidiaries. The notes payable as a result of the private
placements may also be converted to common stock at the option of
either the holder or IndeNet. There is no assurance given that
anticipated future capital financings will be successful or that
funds will be available from IndeNet's subsidiaries to meet
capital requirements.
Inflation
The Company does not believe that inflation will have a
material impact on the Company's future operations.
New Accounting Standards
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed of" (SFAS No. 121) issued by the
Financial Accounting Standards Board (FASB) is effective for
financial statements for fiscal years beginning after December
15, 1995. The new standard establishes new guidelines regarding
when impairment losses on long-lived assets, which included plant
and equipment, and certain identifiable intangible assets, should
be recognized and how important losses should be measured. The
Company does not expect adoption to have a material effect on its
financial position or results of operations.
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) issued
by the Financial Accounting Standards Board (FASB) is effective
for specific transactions entered into after December 15, 1995.
The new standard establishes a fair value method of accounting
for stock-based compensation plans and for transactions in which
an entity acquires goods or services from nonemployees in
exchange for equity instruments. At the present time, the
Company has not determined if it will change its accounting
policy for stock based compensation or only provide the required
financial statement disclosures. As such, the impact on the
Company's financial position and results of operations is
currently unknown. The Company does not expect adoption to have
a material effect on its financial position or results of
operations.
Item 7. Financial Statements
The financial statements begin on page F-1.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There were no disagreements with the Company's auditors on
any matter of accounting principles, practice, financial
statement disclosure or auditing scope or procedure.
PART III
Item 9. Directors and Executive Officers of the Company
Incorporated by reference to the Company's Proxy Statement
for the Annual Meeting.
Item 10. Executive Compensation
Incorporated by reference to the Company's Proxy Statement
for the 1996 Annual Meeting.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Incorporated by reference to the Company's Proxy Statement
for the 1996 Annual Meeting.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement
for the 1996 Annual Meeting.
Item 13. Exhibits and Reports on Form 8-K
Item 13(a)(1) Exhibits
Exhibit Number Description
3.1 IndeNet, Inc. Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 of
the Registration Statement on Form S-3 (File
No. 333-1205)
3.2 IndeNet, Inc. Bylaws (Incorporated by
reference to Exhibit No. 3.2 of registration
statement on Form S-3 (File No. 333-1205)
4.1 Certificate of Designation of Series A
Preferred Stock (Incorporated by reference to
Exhibit 4.1 of Registration Statement on Form
S-3 (File No. 333-1205)
10.1 Mediatech Stock Purchase Agreement
(Incorporated by reference to Exhibit 10.1 of
Registration Statement on Form S-3 (File No.
333-1205)
10.2 Channelmatic Stock Purchase Agreement
(Incorporated by reference to Exhibit 10.1
and 10.2 to Form 8-K dated December 12, 1995)
10.3 Starcom Stock Exchange Agreement
(Incorporated by reference to Exhibit II to
the Form 10-QSB dated December 31, 1995)
10.4 Robert Lautz Employment Agreement
(Incorporated by reference to Exhibit 10.4 of
Registration Statement on Form S-3 (File No.
333-1205)
10.5 Registration Rights Agreement (Incorporated
by reference to Exhibit I to the Form 8-K for
event which occurred on February 29, 1996)
10.6 Note Purchase Agreement (Incorporated by
reference to Exhibit II to the Form 8-K for
event which occurred on February 29, 1996)
10.7 Cable Computerized Management Systems
Agreement and Plan of Merger (Incorporated by
reference to Exhibit 99 to Report on Form 8-K
for event dated May 16, 1996)
10.8 Enterprise Systems Group Ltd. Share Purchase
Agreement (Incorporated by reference to
Exhibit 99 to Report on Form 8-K for event
dated May 24, 1996)
27 Financial Data Schedule
Item 13(b) Reports on Form 8-K
During the fourth quarter of fiscal 1996 the Company filed
the following Reports on Form 8-K:
1) 8-K for Starcom Acquisition, event dated February 7,
1996.
2) 8-K/A for Starcom Acquisition dated April 22, 1996
including Starcom financial statements.
3) 8-K as amended on Form 8-K/A both filed on March 15,
1996 for event (GFL Performance Fund investment) dated
February 29, 1996.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified
Public Accountants F-2
Consolidated Balance Sheet as of March 31,
1996 and December 31, 1994 F-3
Consolidated Statement of Operations for F-5
the years ended March 31, 1996 and
December 31, 1994
Consolidated Statement of Stockholders' F-6
Equity for the years ended March 31, 1996
and December 31, 1994
Consolidated Statement of Cash Flows for F-7
the years ended March 31, 1996
and December 31, 1994
Notes to Consolidated Financial F-9
Statements
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
IndeNet, Inc.
We have audited the accompanying consolidated balance sheets of
IndeNet, Inc. and subsidiaries as of March 31, 1996 and December
31, 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years
then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating
the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of IndeNet, Inc. and subsidiaries as of March
31, 1996 and December 31, 1994, and the results of their
operations and their cash flows for each of the two years then
ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Los Angeles, California
June 18, 1996
INDENET, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, December 31,
1996 1994
Current assets:
Cash and cash equivalents (Note 1) $3,818,133 $3,250,554
Restricted cash (Note 4) 453,340 706,280
Receivables
Accounts and other
receivables, net of
allowance for doubtful
accounts of $245,932
and $O 5,159,651 16,559
Note receivable, current portion - 909,605
Total receivables 5,159,651 926,164
Inventories (Notes 1 and 5) 2,143,927 -
Prepaid expenses 209,822 41,500
Total current assets 11,784,873 4,924,498
Property and equipment, less
accumulated depreciation and
amortization (Notes 1, 6 and
7) 13,646,419 -
Capitalized costs, net (Note 1) 721,701 -
Other long-term assets 525,387 -
Goodwill, net of accumulated
amortization of $511,321
(Notes 1 and 3) 16,514,557 -
TOTAL ASSETS $43,192,937 $4,924,498
See accompanying notes to consolidated financial statements
F-3
INDENET, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1996 1994
Current liabilities:
Accounts payable and
accrued expenses $ 7,667,159 $ 424,457
Notes payable, current portion
(Note 7) 1,047,694 500,000
Notes payable to shareholders
of acquired companies,
current portion
(Notes 3 and 7 ) 1,197,226 -
Total current liabilities 9,912,079 924,457
Notes payable to shareholders
of acquired companies,
net of current portion
(Notes 3 and 7) 4,676,221 -
Notes payable, net of current
portion (Note 7) 8,152,051 -
Total liabilities 22,740,351 924,457
Minority interest (Note 3) 1,580,456 -
Commitments and contingencies
(Note 11)
Stockholders' equity (Note 9):
Preferred stock, Series B,
$.0001 par value
Authorized - 40,000,000 shares
216,667 issued and outstanding
(Note 7) 22 -
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding -
12,451,815 and 4,050,143 12,451 4,050
Additional paid-in capital 23,169,510 4,532,818
Accumulated deficit (4,309,853) (536,827)
Total stockholders' equity 18,872,130 4,000,041
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 43,192,937 $ 4,924,498
See accompanying notes to consolidated financial
statements
F-4
INDENET, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
March 31, December 31,
1996 1994
Revenue $ 20,868,899 $ -
Cost of sales 9,791,964 -
Gross profit 11,076,935 -
Operating expenses:
Selling, general and
administrative 10,166,713 -
Depreciation and
amortization
(Notes 1, 6 and 7) 2,076,590 25,000
Research and development
(Note 1) 446,525 -
Corporate 1,023,659 1,221,082
13,713,487 1,246,082
Operating loss (2,636,552) (1,246,082)
Other income (expense):
Interest income 138,765 277,203
Interest expense (Note 7) (811,306) (65,000)
Gain from reduction of
accounts payable - 211,727
Gain from settlement of
lawsuits 145,000 102,280
Miscellaneous, net 67,900 (29,911)
Loss before income tax expense
an allocation to minority
interest (3,096,193) (749,783)
Income tax expense (Notes 1
and 8) 17,255 -
Loss before allocation
to minority interest (3,113,448) (749,783)
Allocation to minority
interest (Note 3) (156,416) -
Net loss $(2,957,032) $ (749,783)
Net loss per share (Note 1) $ (0.35) $ (0.19)
Weighted average number of
common shares outstanding 8,615,055 3,936,668
See accompanying notes to consolidated financial
statements
F-5
INDENET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 1996 and December 31, 1994
Preferred Stock Common Stock
Addi-
No. Pre- No. tional Retained
of ferred of Common Paid-in Earnings
Shares Stock Shares Stock Capital (Deficit) Total
Bal-
ance
at
Janu-
ary 1,
1994 - $ - 3764472 $3764 $4127933 $212956 $4344653
Stock
issued
in lieu
of
officers'
compen-
sation
(Note 9) - - 146000 146 260613 - 260759
Stock
issued
in settle-
ment of
lawsuit - - 40000 40 97680 - 97720
Stock
warrants
exercised - - 100000 100 124900 - 125000
Purchase of
Class A
warrants
(Note 9) - - - - (77920) - (77920)
Purchase
of
common
stock - - (329) - (388) - (388)
Net loss - - - - - (749783) (749783)
Balance at
December 31,
1994 - - 4050143 4050 4532818 (536827) 4000041
Cashless
exercise
of
stock
options - - 430680 431 (431) -
Stock
issued in
lieu of
officers'
compen-
sation - - 24000 24 29976 30000
Issuance
of
common
stock
for
purchase
of
Mediatech
(Note 3 - - 900000 900 1502100 1503000
Net loss - - - - - (761994) (761994)
Balance at
March 31,
1995 - - 5404823 5405 6064463 (1298821) 4771047
Exercise
of
warrants
(Note 9) - - 3079744 3079 4935241 - 4938320
Cashless
exercise
of stock
options
(Note 9) - - 441280 441 (441) - -
Conversion
of debt
to
preferred
stock
(Note 7) 166667 17 - - 499983 - 500000
Conversion
of debt
to common
stock
(Note 3) - - 848951 849 2644954 - 2645803
Sale of
preferred
stock
(Note 7) 50000 5 - - 145395 - 145400
Shares
issued
for
purchase
of
Channel-
matic, Inc.
(Note 3) - - 1530000 1530 4313070 - 4314600
Shares
issued
and to
be issued
for
purchase
of
Starcom
Television
Services,
Inc.
(Note 3) - - 1000000 1000 3999000 - 4000000
Buy-back
of common
stock
from
officers - - (77778) (78) (349922) - (350000)
Shares
issued in
connec-
tion with
private
placement
(Note 9) - - 224795 225 917767 - 917992
Preferred
dividends - - - - - (54000) (54000)
Net loss - - - - - (2957032)(2957032)
Balance
at
March 31,
1996 216667 $22 12451815 $12451 $23169510 $18872130
$(4309853)
See accompanying notes to consolidated financial statements
F-6
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Year Ended
March 31, December 31,
1996 1994
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (2,957,032) $ (749,783)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 2,076,590 25,000
Stock issued in lieu of
officers' compensation - 260,759
Provision for losses on
accounts receivable (3,520) 77,200
Allocation of loss to
minority interest (156,416) -
Settlement of lawsuits - (102,280)
Gain from reduction of
accounts payable - (211,727)
Changes in operating
assets and liabilities:
Restricted cash 235,486 125,436
Accounts receivable (126,365) 242,189
Inventories (158,463) -
Prepaid expenses 8,622 (41,500)
Other assets (135,619) -
Accounts payable and
accrued expenses 311,566 (98,688)
NET CASH USED IN OPERATIONS (905,151) (473,394)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,042,710) -
Capitalized costs (510,707) -
Cash of acquired entity Channelmatic 68,571 -
Collection of note receivable 583,604 1,005,204
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,901,242) 1,005,204
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of notes payable (2,534,728) (90,000)
Proceeds from exercise of warrants 4,938,320 125,000
Purchase of Class A warrants - (77,920)
Proceeds from sale of preferred stock 145,400 -
Proceeds from private placement 4,000,000 -
Purchase and cancellation of
treasury stock (350,000) (388)
Dividends on preferred stock (54,000) -
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 6,144,992 (43,308)
INCREASE IN CASH AND CASH EQUIVALENTS 3,338,599 488,502
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 479,534 2,762,052
CASH AND CASH EQUIVALENTS -
END OF YEAR $ 3,818,133 $ 3,250,554
See accompanying notes to consolidated financial
statements
F-7
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 95,747 $ 65,000
Income taxes 17,255 -
Supplemental Disclosure of Noncash Investing and Financing
Activities
Effective June 30, 1995, a shareholder converted $2,250,000 of a
note payable to 750,000 shares of common stock at $3.00 per
share.
Effective January 1, 1996, another former shareholder of
Mediatech converted $100,000 of a note payable plus accrued
interest of $7,359 to 26,840 shares of common stock at $4.00
per share.
Effective February 7, 1996, the Company paid a vendor $288,444
with 72,111 shares of the Company's common stock.
The stock was valued at $4.00 per share.
Effective June 30, 1995, the holder of a $500,000 note payable
converted the debt to 166,667 shares of Series B Convertible
Preferred Stock. The preferred stock was valued at $3.00 per
share.
Effective November 27, 1995, in conjunction with an Asset
Purchase and Contribution Agreement with Channelmatic, the
Company received assets of approximately $3,379,000 and assumed
liabilities of approximately $1,717,000 in exchange for
1,530,000 shares of the Company's common stock valued at $2.82
per share and a note payable of $5,602,500.
Effective February 7, 1996, in connection with an Exchange
Agreement with Starcom Television Services, Inc., the Company
received assets of approximately $2,684,000 and assumed
liabilities of approximately $4,999,000 in exchange for up to
1,000,000 shares of the Company's common stock valued at $4.00
per share.
During 1994, the Company canceled indebtedness relating to the
settlement of a lawsuit in the amount of $97,720 through the
issuance of stock.
See accompanying notes to consolidated financial
statements
F-8
INDENET, INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of IndeNet, Inc. and Subsidiaries (formerly
Independent TeleMedia Group, Inc.), (the "Company") and its
wholly-owned subsidiaries Mediatech, Inc. ("Mediatech") (since
its acquisition on February 3, 1995), Starcom Television
Services, Inc. ("Starcom") (since its acquisition on February 7,
1996) and its 66.67%-owned subsidiary Channelmatic, Inc.
("Channelmatic") (since its acquisition on November 27, 1995).
All material intercompany transactions and balances have been
eliminated.
Organization and Business
The Company was organized under the laws of the State of
Colorado on April 4, 1988. The Company is a leading provider of
television advertisement delivery services for national
advertisers and programmers. It also develops, assembles, and
distributes software and hardware for advertising insertion into
television programming. The Company considers itself in one
business segment. The Company's customers are located throughout
the United States and are serviced by operating facilities
located in Chicago, Illinois; New York, New York; Los Angeles,
California; and Alpine, California. Effective June 30, 1995, the
Company re-incorporated as a Delaware corporation.
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with an initial maturity of three months or less to be
cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value).
Property, Plant and Equipment
Depreciation of property and equipment is provided using the
straight-line method. The estimated useful lives are as follows:
Building and improvements 10-20 years
Equipment 5-7 years
Furniture and fixtures 5-7 years
Automobiles 5 years
Leasehold improvements are written off over the estimated
useful lives or the life of the related lease, whichever is
shorter.
Software Development Costs
Software development costs related to the Company's digital
advertisement insertion equipment are capitalized upon the
establishment of technological feasibility until ready for sale.
Costs are also capitalized for product enhancements.
Amortization of capitalized software development costs is
provided on a product-by product- basis computed on the
straight-line method over the estimated useful life of the
products not to exceed five years. Capitalized software
development costs was $449,048 at March 31, 1996, net of
accumulated amortization of $57,105. Capitalized software
development costs at December 31, 1994 was $0. The Company
assesses the net realizable value of its capitalized software
development costs on an ongoing basis.
All other research and development costs are charged to
research and development expense in the period incurred.
Goodwill
Goodwill represents the excess of cost over the fair value
of the identifiable net assets acquired in connection with the
February 3, 1995 acquisition of Mediatech, the November 27, 1995
acquisition of Channelmatic, and the February 7, 1996 acquisition
of Starcom. Goodwill is amortized over 20 years.
At each balance sheet date, using an undiscounted cash flow
method, the Company evaluates the realization and period of
amortization to determine whether events and circumstances
warrant revised estimates of amortization and whether the
goodwill has continuing value.
Revenue Recognition
Revenue is recognized at the time products are shipped to
the customer or at the completion of services rendered. The
Company provides a warranty reserve for possible product defects.
Income Taxes
The Company accounts for income taxes using Financial
Accounting Standards Board's (FASB) Statement of Financial
Accounting, Standard No. 109 (SFAS 109) "Accounting for Income
Taxes." SFAS 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences
of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the
years which the differences are expected to reverse.
Loss Per Share
Net loss per share is calculated by taking the net loss plus
preferred stock dividends divided by the average number of common
shares outstanding. Common stock equivalents, such as stock
options, warrants and convertible preferred stock, have not been
included since their effect would be anti-dilutive.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Long-Term Debt
The fair value of the Company's long-term debt is estimated
based on the quoted market price for the same or similar issued
or on the current rates offered to the Company for debt of the
same remaining maturities.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed of" (SFAS No. 121) issued by the
FASB is effective for financial statements for fiscal years
beginning after December 15, 1995. The new standard establishes
new guidelines regarding when impairment losses on long-lived
assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how
important losses should be measured. The Company does not expect
adoption to have a material effect on its financial position or
results of operations.
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) issued
by the FASB is effective for specific transactions entered into
after December 15, 1995. The new standard establishes a fair
value method of accounting for stock-based compensation plans and
for transactions in which an entity acquires goods or services
from nonemployees in exchange for equity instruments. At the
present time, the Company has not determined if it will change
its accounting policy for stock based compensation or only
provide the required financial statement disclosures. As such,
the impact on the Company's financial position and results of
operations is currently unknown. The Company does not expect
adoption to have a material effect on its financial position or
results of operations.
Reclassifications
Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the 1996
presentation.
2. Transition Report
During fiscal year 1996, the Company amended its By-laws to
change its fiscal year-end from December 31 to March 31
commencing with the period ended March 31, 1995.
Results of operations for the three months ended March 31,
1995 are as follows:
Revenue $3,004,259
Gross profit 1,761,048
Net loss (761,994)
Net loss per common share $(0.16)
3. Acquisitions
Mediatech
Effective February 3, 1995 and amended as of March 14, 1995,
the Company acquired 100% of the outstanding common shares of
Mediatech under a Stock Purchase Agreement with Mediatech's
shareholders for $9,107,500. Under the terms of the Agreement
with the shareholders of Mediatech, the Company issued 900,000
shares of restricted common stock valued at $1,503,000, paid
$3,000,000 in cash and issued notes of $4,604,500. Principal and
interest payments on the notes are payable quarterly and begin 90
days from the date of close and will equal $18,750 per quarter
for the first four quarters; will increase to $141,033 for the
fifth
through the twelfth quarters; and will remain at $122,283 for the
remaining term of the notes. Effective June 30, 1995, a former
shareholder of Mediatech converted $2,250,000 of a note payable
to 750,000 shares of the Company's common stock at $3.00 per
share. Effective January 1, 1996, another former shareholder of
Mediatech converted $100,000 of a note payable plus accrued
interest of $7,359 to 26,840 shares of the Company's common stock
at $4.00 per share. The shareholder has agreed to "lockup" the
shares until July 1, 1996; at which time the shareholder may
demand registration rights.
The acquisition is being accounted for as a purchase. The
results of operations of Mediatech are included in the statement
of operations as of the date of acquisition. See Notes 10 and 14
for unaudited pro forma results of operations which include
Mediatech.
Channelmatic
Effective November 27, 1995, the Company entered into an
Asset Purchase and Contribution Agreement with Channelmatic
pursuant to which the Company agreed to purchase 66.67% of the
assets, business and operations of Channelmatic. The purchase
price paid by the Company for its 66.67% interest consisted of
the following: (i) a $5,602,500 promissory note; and (ii)
1,530,000 restricted shares of the Company's Common Stock. The
restricted common stock was valued at $2.82 per share (which
price represents 70% of the average quoted price of the Company's
common stock at the time of acquisition), which management
believes was its fair value. In addition, the Company agreed to
contribute $3,000,000 to the capital of Channelmatic, which
amount is payable over an 18-month period with interest at an 8%
annual rate. On November 27, 1995, the Company made a $755,000
payment on this note. The Company also has obtained a five-year
option to purchase some or all of the remaining 33.33% interest
in Channelmatic for a purchase price of up to $6,000,000 on a pro
rata basis.
The $5,602,500 promissory note bears interest at a rate of
8% per annum. A $2,000,000 principal payment was made on January
5, 1996 and a $500,000 payment was made on April 1, 1996.
Commencing in July 1996, the Company will make monthly payments
of principal and interest equal to $58,962. Based on the
foregoing payment schedule, the entire promissory note will be
paid in full within 72 months after the closing date of the
acquisition. The Company's obligations under the promissory note
are secured by a lien on the Company's 66.67% common stock
interest in Channelmatic, a blanket lien on substantially all of
Channelmatic's assets, and by a guaranty of Channelmatic.
The acquisition is being accounted for as a purchase. The
results of operations of Channelmatic are included in the
statement of operations as of the date of acquisition. See Notes
10 and 14 for unaudited pro forma results of operations which
include Channelmatic.
Starcom
On February 7, 1996, the Company acquired 100% of the common
stock of Starcom for up to 1,000,000 shares of the Company's
restricted common stock. The restricted common stock was valued
for book purposes at $4.00 per share (which price represents 70%
of the average quoted price of the Company's common stock at the
time of acquisition), which management believes was its fair
value.
The number of shares issued to the Starcom shareholders can
be adjusted according to the "Formula Value." The Formula Value
is based primarily on the gross profit of Starcom business from
January 1, 1996 through March 31, 1996. The Company issued
500,000 shares of Common Stock to the shareholders of Starcom on
February 7, 1996 and will issue the remaining shares of Common
Stock in July 1996 after the adjusted gross profit of Starcom for
the period January 1, 1996 through March 31, 1996 and level of
acquired liabilities has been agreed to.
The acquisition is being accounted for as a purchase. The
results of operations of Starcom are included in the statement of
operations as of the date of acquisition. See Notes 10 and 14
for unaudited pro forma results of operations which include
Starcom.
4. Restricted Cash
At March 31, 1996, the Company had approximately $453,000 in
an escrow account for payment of past due payroll taxes. These
payroll tax liabilities were acquired through the purchase of
Starcom. Subsequent to March 31, 1996, the Company paid
approximately $438,000 for payroll taxes from this escrow
account.
At December 31, 1994, the Company had approximately $163,000
in an escrow account related to a lawsuit which was settled
during fiscal 1996. The settlement resulted in the Company
releasing the funds to the opposing party. In addition, at
December 31, 1994, the Company had approximately $543,000 in an
escrow account as collateral against the Company's $500,000 note
payable. See Note 7.
5. Inventory
Inventories are summarized as follows:
March 31, December 31
1996 1994
Raw materials $1,283,372 $ -
Work in process 401,467 -
Finished goods 644,289 -
2,329,128 -
Less reserve for 185,201 -
obsolescence
Total inventories $ 2,143,927 $ -
6. Property and Equipment
Property and equipment are stated at cost and consist of the
following:
March 31, December 31
1996 1994
Land $ 500,000 $ -
Building and improvements 628,753 -
Equipment 14,400,290 50,000
Leasehold improvements 376,945 40,882
Furniture and fixtures 148,079 -
Vehicles 59,596 -
16,113,663 90,882
Less accumulated 2,467,244 90,882
depreciation and
amortization
Property and equipment, $13,646,419 $ -
net
Depreciation and amortization related to Property and
Equipment for the year ended March 31, 1996 and December 31, 1994
was $1,615,708 and $25,000.
7. Long-Term Debt and Line-of-Credit
March 31, December 31
1996 1994
Note payable - former $ 3,618,947 $ -
shareholder of Channel-
matic; bearing interest
at 8.0%; due in monthly
installments of $58,962,
beginning in June 1996;
due November 2001;
secured by the assets of
Channelmatic.
Notes payable - former 2,254,500 -
shareholders of Mediatech;
bearing interest at 8.0%;
due in quarterly install-
ments of $141,033 through
February 1998 with quarterly
installments of $122,283
thereafter; due from May 2001
through February 2005;
unsecured
$1,850,000 bank line-of- 1,850,000 -
credit expiring December 31,
1997. $350,000 of this line
bears interest at 8.5%. The
remainder bears interest at
the LIBOR rate (8.1% at March
31, 1996). The line is secured
by substantially all the assets
of Mediatech.
Note payable - bank; 1,253,868 -
bearing interest at
8.04%; due in monthly
installments of $31,550
with a balloon payment
due in December 1997
for the remaining
balance. The note is
secured by substantially
all the assets of Mediatech.
Mortgage payable - bank; 759,545 -
bearing interest at 8.04%;
due in monthly installments
of $9,272, with a balloon
payment due in December
1997 for the remaining
balance. This mortgage
was paid-off in May 1996
as a result of the sale
of the office building
which secured the mortgage.
Line of credit, interest 1,188,605 -
at the bank's prime rate
plus 3% (11.25% at March
31, 1996). Borrowings may
not exceed $2,000,000
with availability limited
based on various factors.
The agreement expires on
January 31, 1998 and is
subject to renewal. As
of March 31, 1996, $811,395
in borrowing capacity
remained available.
Various notes payable to 1,046,757 -
vendors, interest ranging
from 0% to 21.07%, monthly
payments ranging from $400
to $7,000, due from May 1,
1996 to May 1, 1997.
Note payable to a financial 46,067 -
institution, interest at
10%, monthly payments of
$4,559, due on December 1,
1996
Note payable to a financial 54,903 -
institution, interest at 8%,
monthly payments of $3,134,
due on December 1, 1997.
$3,000,000 convertible note 3,000,000 -
payable - bearing interest
at 7.0%, due February 28,
1998, interest payable
quarterly in cash or the
Company's common stock;
convertible into the
Company's common stock
based on a formula. See
Note 9.
Note payable of $500,000. - 500,000
Effective June 30, 1995,
the holder of the note
converted the debt to
166,667 shares of Series
B Convertible Preferred
Stock. The preferred stock
was valued at $3.00 per share
and provides for a 12% annual
dividend, payable monthly for
a period of up to five years.
Commencing July 1, 1997, the
preferred stock is convertible
into the Company's common
stock for $3.00 per common
share (i.e., one preferred
share for one common share)
or market, whichever is less.
In addition, the holder pur-
chased an additional 50,000
shares of Series B Convertible
Preferred Stock, valued at $3.00
per share. This issuance of
preferred stock has the same
terms as the previously issued
preferred stock. Net proceeds
to the Company of the issuance
of the 50,000 shares of
preferred stock, after
legal and professional
expenses, was $145,400.
$ 15,073,192 $500,000
Less current potion 2,244,920 500,000
Net long-term $ 12,828,272 $ -
The carrying cost of the above debt instruments to third
parties approximates the fair value of the instruments.
As of March 31, 1996, the aggregate amounts of long-term
debt maturing in succeeding years are as follows:
Years Ended Related Third
March 31, Party Party Total
1997 $1,197,226 $1,047,694 $ 2,244,920
1998 932,569 6,819,258 7,751,827
1999 934,994 1,299,536 2,234,530
2000 1,010,761 28,506 1,039,267
2001 1,092,167 4,751 1,096,918
Thereafter 705,730 - 705,730
$5,873,447 $9,199,745 $15,073,192
8. Income Taxes
At March 31, 1996, the Company (excluding Channelmatic) has
a net operating loss carryforward of approximately $7,700,000 for
federal income tax purposes of which $2,700,000 is subject to a
separate return limitation. The carryforward expires in varying
amounts and years through 2011. This loss carryforward also
gives rise to a deferred tax asset of approximately $2,600,000.
This tax asset has a 100% valuation allowance as the Company
cannot determine if it is more likely than not that the deferred
tax asset will be realized. Because of changes in the Company's
ownership, there is an annual limitation on the usage of the net
operating loss carryforward. Income tax expense for fiscal 1996
represents state taxes for the various states in which the
Company does business and corporate tax.
9. Equity
Private Placements
On February 28, 1996, the Company completed a Regulation D
private placement of 224,795 of its common stock for $1,000,000
and a Convertible Note ("the Note") for $3,000,000 to a single
accredited institutional investor. The Note accrues interest at
a rate of 7% annually, payable quarterly in cash or the Company's
common stock at the Company's option and has a term of two years.
The principal amount of the Note, together with interest is
convertible in ninety days subsequent to the offering at a
conversion rate based on 82% of the average closing bid price of
the common stock for the five days immediately preceding the
conversion date. The Company shall have the right to convert all
or part of the Note any time after 90 days from closing date
into the underlying stock. In addition, the Note is redeemable
for cash in whole or in part anytime after 90 days from closing
in an amount equal to 122% of the principal balance of the Note.
See Note 14 for discussion of private placement subsequent to
March 31, 1996.
In August 1994, the Company distributed a private Tender
Offer to the warrant holders from a private placement in 1993
offering either to purchase each existing warrant for $.40 per
warrant or to exchange for three existing warrants one share of
available common stock. Warrant holders sold back to the Company
194,800 warrants for a total price of $77,920. In addition,
during 1996, the Company called both A and B warrants
associated with the private placement, which resulted in the
Company receiving net proceeds of $3,703,132 and issuing
2,382,579 shares of common stock.
Stock Compensation Plan
On December 14, 1993, the Company implemented a qualified
stock option plan ("the Plan"). The purposes of the Plan was to
further the success of the Company be making common stock of the
Company available for purchase by employees and to provide an
incentive to such individuals. A total of 1,000,000 shares of
common stock of the Company have been approved by the
shareholders for issuance under the Plan.
The following table summarizes the transactions related to
the Company's stock option plan:
Number of Exercise Aggregate
Shares Price Value
Balance at January 1, 1,304,306 $1.25 to $6.60 $4,123,520
1994
Options granted 345,000 $1.25 to $1.43 452,850
Options exercised 100,000 $1.25 125,000
Options expired 466,506 $6.60 3,078,940
Balance at December 31, 1,082,800 $1.25 to $1.43 1,372,430
1994
Options granted 605,000 $1.38 834,900
Options exercised 757,800 $1.25 947,250
Balance at March 31, 930,000 $1.25 to $1.43 1,260,080
1995
Options granted 1,036,585 $1.38 to $3.25 2,759,901
Options exercised 575,126 $1.25 to $2.25 791,091
Balance at March 31, 1,391,459 $1.25 to $3.25 $3,228,890
1996
Options exercisable 938,126 $1.25 to $3.25 $1,763,890
(vested) at March 31,
1996
Stock Grants
During fiscal 1994, officers received 146,000 shares of
common stock in lieu of cash compensation. The shares were
valued at $1.25 per share. Compensation expense of $120,000 was
recorded in connection with this transaction. There were no
shares issued in lieu of cash compensation in fiscal 1996.
Warrants
The following table summarizes the transactions related to
the Company's warrants to purchase common stock:
Number of Exercise Aggregate
Shares Price Value
Balance at January 1, 2,186,041 $1.25 to $3.25 $4,606,183
1994
Warrants granted - - -
Warrants exercised - - -
Warrants canceled 294,800 $1.25 to $2.50 493,500
or expired
Balance at December 31, 1,891,241 $1.25 to $3.25 4,112,683
1994
Warrants granted - - -
Warrants exercised - - -
Warrants canceled - - -
or expired
Balance at March 31, 1,891,241 $1.25 to $3.25 4,112,683
1995
Warrants granted 2,224,692 $2.00 to $5.00 5,228,735
Warrants exercised 3,234,344 $1.25 to $3.50 5,714,816
Warrants canceled 117,800 $1.25 to $2.50 288,000
or expired
Balance at March 31, 763,789 $2.00 to $5.00 $3,338,602
1996
Warrants exercisable 763,789 $2.00 to $5.00 $3,338,602
(vested) at March 31,
1996
10. Unaudited Pro Forma Results of Operations
Condensed unaudited pro forma results of operations of the
Company, Mediatech, Channelmatic, and Starcom, as if the
respective purchases occurred at the beginning of the following
two fiscal years, are presented below. The unaudited pro forma
financial statements have been prepared for comparative purposes
only and are not necessarily indicative of what would have
occurred had the acquisitions been completed as of those dates or
of any results that may occur in the future.
UNAUDITED
Pro
Historical Forma
IndeNet Acquisitions Combined Proforma Year
Year Ended Year Ended Year Ended Adjust- Ended
3/31/96 3/31/96 3/31/96 ments 3/31/96
Revenue
$ 20,868,899 $ 8,941,510 $29,810,409 $(1,307,000) $28,503,409
Cost of sales
$ 9,791,964 5,876,492 15,668,456 (1,790,000) 13,878,456
Net (loss)
income
(2,957,032) (1,420,843) (4,377,875) 882,763 (3,495,111)
Net (loss)
per share
$ (0.35) $ (0.34)
Number of shares
8,615,055 10,468,388
Pro
Historical Forma
IndeNet Acquisitions Combined Proforma Year
Year Ended Year Ended Year Ended Adjust- Ended
12/31/94 12/31/94 12/31/94 ments 12/31/94
Revenue
$ - $34,626,205 $34,626,205 $(3,178,000) $31,448,205
Cost of sales
$ - 17,293,315 17,293,315 (2,328,000) 14,965,315
Net (loss)
income
(749,783) 85,119 (664,664) (1,675,323) (2,339,987)
Net (loss)
per share
$(0.19) $ (0.32)
Number of shares
3,936,668 7,366,668
Pro forma adjustments include (a) adjustments to reflect
elimination of certain Starcom product lines; (b) adjustments to
reflect application of existing lower Mediatech inventory
purchasing to Starcom inventory; (c) adjustments to reflect
reduction in payroll of principal officers with employment
contracts and reduction of general payroll of Starcom due to a
redundancy of staff with Mediatech. The Company has combined the
Starcom operations with the existing Mediatech operations; (d)
adjustments to reflect non-recurring rent expense due to the
closure of the Starcom offices and Company's corporate office;
(e) adjustments to reflect non-recurring expenses such as
property insurance, building costs, and data processing due to
the closure of the Starcom offices; (f) adjustments to reflect
amortization of goodwill for both Channelmatic and Starcom over
20 years and amortization of step-up of equipment over five
years; (g) adjustments to reflect interest expense related to the
$5,602,500 note payable to the former Channelmatic shareholder;
and (h) adjustments to reflect a 33.33% allocation of operations
from Channelmatic to its 33.33% minority shareholder.
11. Commitments, Contingencies and Litigation
Employment Agreements
On April 1, 1995, employment agreements with two of the
Company's officers were amended and (i) provided annual salaries
of $120,000 each; (ii) were subject to annual raises between 5%
and 20%; (iii) provided discretionary bonuses of up to $37,500
each; (iv) terminate on March 31, 1998; and (v) provide for stock
options of 135,000 shares at an exercise price of $1.375 (market
price at April 1, 1995). On December 29, 1995, through Board
resolution, both agreements were amended to provide annual
salaries aggregating $340,000, and discretionary bonuses of 60%
and 35% of base salaries and stock options aggregating 330,000 at
$3.25 (market price at December 20, 1995). On March 15, 1996,
one of the officers resigned as an employee and member of the
Board of Directors.
In connection with the acquisition of Mediatech, the Company
entered into employment agreements with two of Mediatech's
officers. The agreements expire on January 31, 1998 and provided
for annual salaries of $125,000 each. The agreements also
provide for each officer to participate in the Company's profit
sharing bonus as determined by the Board of Directors. On April
1, 1996, both of the employment agreements were amended. The new
agreements provide for the same benefits as the previous
agreements and expire on March 31, 1999 and the annual salary was
also reduced to $50,000 for one of the officers. On March 13,
1995, Mediatech entered into an employment agreement with an
individual to serve as an officer. The agreement terminates
March 13, 1998; provides for an annual base salary of $100,000; a
bonus based upon the employee's annual performance as assessed
and determined by the Board of Directors; and is cancelable by
Mediatech with thirty days' notice with a severance payment equal
to one year's salary if terminated without just cause.
In connection with the acquisition of Channelmatic,
Channelmatic entered into employment agreements with three of its
officers. The agreement for one of the officers provides for an
annual salary of $90,000 through November 30, 2000, and $200,000
for each subsequent year, a $750 monthly car allowance and
employee benefits. The agreement for the other two officers
provide for an initial base salary of $190,000 per annum
(adjusted in subsequent years based on Channelmatic sales
levels); total bonuses equal to 3.5% of the adjusted net income
when the annual adjusted net income of Channelmatic reaches or
exceeds 5% of gross sales; and employee benefits. The agreement
is in effect until November 27, 1998.
In connection with the acquisition of Starcom, Starcom
entered into a consulting agreement with one of Starcom's
officers. The agreement expires on February 6, 1997 and provides
for an annual salary of $215,000.
In connection with the acquisition of CCMS (see Note 14),
the Company entered into three employment agreements with the
officers of CCMS. The agreement for two of its officers is for a
term of two years, terminating May 15, 1998, with an option to
the employee to extend the agreement for a consecutive third
year; provides for an annual salary of $90,000 for the first
year; $90,000 plus a percent raise between 5% and 20% as approved
by the Executive Compensation Committee of the Board of Directors
for the second year; a similar increase in the third year if the
option is exercised, and a bonus up to 5% of the Company's net
income before interest, depreciation, taxes and amortization as
approved by the Company's Board of Directors. These two
agreements provide for 60,000 stock options at $6.44 (market
price at the closing date of acquisition). The agreement for the
third officer is for a term of five years, terminating May 16,
2001, and provides for an annual salary of $75,000 for the first
year; $90,000 for the second year; and increases of between 5%
and 20% as approved by the Executive Compensation Committee of
the Board of Directors for years three through five, and a bonus
up to 5% of the Company's net income before interest,
depreciation, taxes and amortization as approved by the Company's
Board of Directors. The agreement also provides the employee a
monthly automobile allowance of $500, and 40,000 stock options at
$6.44 (market price at the closing date of the acquisition).
In connection with the acquisition of Enterprise (see Note
14), the Company entered into employment agreement with three of
Enterprise's officers. The agreements provide for aggregate
annual salaries of $495,000. All three agreement are for a term
of three years terminating May 23, 1999, and provide for a yearly
percent increase between 5% and 20% as approved by the Executive
Compensation Committee of the Company's Board of Directors,
provide for participation in the Company's Executive Profit
Sharing Plan up to the following amounts: Chief Executive of
Enterprise Systems Group, Ltd. - $56,250; Group Chief Financial
Officer of Enterprise Systems Group, Ltd. - up to 1% of
Enterprise Systems Group's profit after tax; Chief Executive
Officer of Enterprise Systems Group, Inc. - up to $80,000, plus
5% of "over target" profits as defined in the agreement of
Enterprise Systems Group, Inc.
Leases
The Company leases office and warehouse facilities under
various operating lease agreements. Certain of these facilities
are owned by companies, all of which are owned or majority owned
by an officer of Mediatech. Another facility is owned by an
officer of Channelmatic. In addition to monthly rentals, the
Company is responsible for insurance, property taxes, utilities
and normal maintenance of the facilities.
Future minimum lease payments under noncancelable operating
leases as of March 31, 1996 are as follows:
Years Ended Related Third
March 31, Party Party Total
1997 $ 946,308 $ 361,150 $ 1,307,458
1998 769,094 332,000 1,101,094
1999 237,444 196,909 434,353
2000 230,944 135,372 366,316
2001 159,444 120,372 279,816
Thereafter 93,009 540,963 633,972
$2,436,243 $1,686,766 $ 4,123,009
Rental expense on operating leases amounted to $1,122,970
and $11,423 for the fiscal years 1996 and 1994, including
$163,101 in fiscal 1996 for the related party leases described
above.
Litigation
Allstate
On July 16, 1993, Allstate Communications, Inc. ("Allstate")
filed a lawsuit in Los Angeles Superior Court for the County of
Los Angeles against the Company. The Complaint alleges the
following courses of action: breach of contract, breach of
implied covenant of good faith and fair dealings, fraud,
negligent misrepresentation, constructive fraud, common count,
declaratory relief, statutory misrepresentation of trade secrets,
intentional interference with prospective economic advantage,
negligent interference with prospective economic advantage,
temporary restraining order, preliminary injunction and permanent
injunction, and for an accounting.
On June 29, 1994, the Court provided Allstate an attachment
of approximately $161,000 of the Company's funds. The plaintiffs
have reduced the scope of their complaint to eliminate all direct
and indirect securities claims. At March 31, 1995, the Company
had accrued $251,000 with respect to this matter. During fiscal
1996, the Company settled with Allstate which resulted in the
Company paying to Allstate the $161,000 in the escrow account
plus an additional $90,000 for accrued interest and related
expenses.
Sutro & Co. Incorporated
In May 1996, Sutro & Co. Incorporated ("Sutro"), a Nevada
corporation, engaged primarily in the business of assisting
publicly and privately held companies in securing equity and debt
financing, filed an action in the Superior Court of the State of
California for the County of Los Angeles against the Company for
damages for breach of contract and quantum meruit, and injunctive
relief. Sutro seeks approximately $2,000,000 in damages for
breach of the contract and approximately $1,000,000 in quantum
meruit. The injunction being sough would force the Company to
deliver 100,000 warrants to purchase shares of the Company's
common stock, including unlimited "piggy-back" registration
rights and all costs and expenses in connection with such
registration.
Sutro bases its allegations of contractual breach on a
letter agreement, dated on or about June 21, 1995, whereby the
Company retained Sutro as its exclusive financial advisor
regarding the private placement of equity-related securities in a
transaction. The letter agreement also stated that the Company
would provide Sutro with a right of first refusal until June 1997
to serve as exclusive financial advisor on any merger, business
combination, recapitalization or sale of the Company's assets.
Sutro alleges that it is entitled to receive fees based on
(i) the Company's sale of $4,000,000 of the Company's debt and
securities in February 1996, (ii) the Company's sale of
$12,000,000 of Series A Preferred Stock in May 1996, and (iii)
the Company's failure to provide Sutro with a right of first
refusal in connection with the Company's acquisition of CCMS and
Enterprise.
The Company effected the foregoing securities issuance
because Sutro had not obtained any financing for the Company
during the eight-month period following the execution of the June
21, 1995 letter agreement. The net proceeds from the February
1996 and May 1996 securities issuances were used to fund the
Company's working capital needs and the acquisition of
Enterprise. Sutro was fully informed of the Company's need for
the offering proceeds and of the Company's acquisition of
Enterprise. The Company did not use any financial advisor in
connection with the acquisitions of either Enterprise or CCMS.
The Company intends to vigorously contest the action.
However, there can be no assurance that the foregoing litigation
will be decided in favor of the Company or that any settlement of
this litigation will not have a material adverse effect on the
Company.
Other
During fiscal 1996, the Company settled a lawsuit with one
of its former tenants. The result of the settlement was a net
gain to the Company of $145,000.
The Company is subject to various lawsuits and claims
arising out of the normal course of its business. In the opinion
of management, the ultimate liability to the Company as a result
of any legal proceedings will not have a material effect on the
financial position of the Company.
12. 401(k) Plan and Profit Participation Program
The Company's subsidiary Mediatech has a 401(k) defined
contribution plan covering substantially all of its full-time
employees. The Company contributes a percentage of participants'
contributed earnings to the plan. Contributions amounted to
approximately $30,000 and $36,000 for the years ended March 31,
1996 and December 31, 1994.
Mediatech also has a profit participation program whereby
the Company will allocate a percentage of its pretax profits to
eligible supervisors and managers of the Company. No amounts
were allocated under this program for the years ended March 31,
1996 and December 31, 1994.
13. Significant Customers
Sales to two customer represented approximately 22% of the
Company's net sales for the year ended March 31, 1996. The
related accounts receivable from these customers represented 12%
of the accounts receivable at March 31, 1996.
14. Subsequent Events
Private Placement
On April 29, 1996, the Company completed a private placement
of Class A Preferred Stock for $12,000,000, used primarily for
the acquisition of Enterprise Systems Group, Ltd. The placement
consisted of 1,200 shares of Convertible Class A Preferred Stock
which pays a dividend of 6% annually, payable in cash or common
stock at the Company's option, and has a term of three years.
The Class A Preferred Stock is convertible into common stock at a
rate determined by the average trading price of the Company's
common stock at the time of conversion not to exceed $7.00 per
share. The common stock carries registration rights and the
Company has the option to repurchase the Class A Preferred Stock
at the time of conversion at a 15% premium to the principal
amount and has the right to call the Class A Preferred Stock at a
30% premium to the principal amount after 12 months, declining to
a 15% premium after 30 months.
In May 1996, the Company completed a Regulation D private
placement of a $2,500,000 Convertible Note ("the Note") to a
single accredited institutional investor, used primarily for
product development. The Note accrues interest at a rate of 7%
annually, payable quarterly in cash or the Company's common stock
at the Company's option and has a term of two years. The
principal amount of the Note, together with interest is
convertible no later than 120 days subsequent to the offering at
a conversion rate based on 82% of the average closing bid price
of the commons stock for the five days immediately preceding the
conversion date. The Company shall have the right to convert all
or part of the Note any time after 210 days from closing date
into the underlying stock. In addition, the Note is redeemable
for cash in whole or in part anytime after 120 days from closing
in an amount equal to 122% of the principal balance of the Note.
Acquisitions
CCMS
On May 16, 1996 the Company completed the acquisition of
Cable Computerized Management Systems ("CCMS") for a purchase
price of $4,800,000. The acquisition was effected through the
merger of CCMS into a newly-formed wholly-owned subsidiary of the
Company. The purchase price was paid at the closing by the
Company paying $1,036,522 in cash and by the Company issuing
587,612 unregistered shares of the Company's common stock to the
CCMS shareholders. The number of shares issued to the CCMS
shareholders was based on the trading price of the Company's
common stock, approximately $6.40 per share. The amount of the
purchase price was based on a multiple of CCMS's earnings before
interest, taxes, depreciation and amortization. The cash portion
of the purchase price was paid from the Company's existing
working capital reserves.
CCMS is a designer and distributor of "traffic and billing"
software that is used by the cable television industry to manage
the airing and invoicing of TV commercials. The principal assets
acquired by the Company consisted of CCMS's software, cash and
accounts receivable. Although the Company intends to continue
CCMS's operations, the Company may integrate CCMS with the
Company's other complimentary businesses in the future.
The acquisition is being accounted for as a purchase. The
results of operations of CCMS are included in the following
unaudited pro forma results of operations and balance sheet.
Enterprise
On May 24, 1996 the Company completed the acquisition of
Enterprise Systems Group Limited , a private company incorporated
in England and Wales ("Enterprise") for a purchase price equal to
the U.S. dollar equivalent of eight times EBITDA (earnings before
interest, taxes, depreciation and amortization) of Enterprise for
the 12 months ended March 31, 1996. The purchase price was paid
(i) at the closing by the Company paying $10,000,000 in cash and
$5,000,000 in promissory notes ("the Notes") and (ii) by the
Company agreeing to pay $12,379,210 in unregistered shares of the
Company's common stock to the Enterprise shareholders. The
number of shares to be issued is based on the average closing
price of the stock (as reported by The Nasdaq Stock Market) for a
60-day trading period consisting of a defined 30 trading days in
February and March 1996 and 30 trading following the closing (the
"Share Price"). The shares are expected to be issued in mid-July
1996. The Notes earn interest at a rate of 8% per annum, mature
May 31, 2000, with equal payments due quarterly commencing on
November 30, 1996. Commencing November 24, 1996, the Notes are
convertible into the Company's common stock at the holders'
option at a conversion price of 150% of the Share Price. The
holders of the common stock issued in this transaction have
certain demand and piggy-back registration rights. The cash
portion of the purchase price was paid from proceeds of a private
placement. In connection with the acquisition of Enterprise, the
Company agreed to elect two designees of the former Enterprise
shareholders to the Company's Board of Directors.
Enterprise is a London, U.K. based company which designs,
develops and integrates traffic and billing, revenue management,
and program management software products for use by broadcast
television stations. The principal assets acquired by the
Company consisted of Enterprise's software, cash and accounts
receivable. Enterprise currently provides its software products
to over 140 domestic television and radio stations, and to a
total of over 70 television stations located in the United
Kingdom, Western Europe, New Zealand, Australia, Southeast Asia
and South Africa. Enterprise's customers include such major
television networks as NBC Television Stations and Fox Television
Stations in the United States, Laser Sales and VTM in Europe,
Network 10 in Australia and TVNZ in New Zealand. Although the
Company intends to continue Enterprise's operations, the Company
may integrate Enterprise with the Company's other complimentary
businesses in the future.
The acquisition is being accounted for as a purchase. The
results of operations of Enterprise are included in the following
unaudited pro forma results of operations and balance sheet.
Unaudited Pro Forma Results of Operations
Condensed unaudited pro forma results of operations of the
Company, Mediatech, Channelmatic Starcom, CCMS and Enterprise as
if the respective purchases occurred at the beginning of the
fiscal year (April 1, 1995) is presented below. The following
unaudited pro forma results of operations also include the above
mentioned private placement of $12,000,000 as the private
placement funds were used primarily for the acquisition of
Enterprise. The unaudited pro forma financial statements have
been prepared for comparative purposes only and are not
necessarily indicative of what would have occurred had the
acquisitions been completed as of that date or of any results
that may occur in the future.
INDENET, INC.
PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1996
(Unaudited)
Histor-
ical Acquisi- Pro forma
INDE tions Combined Adjustments Pro forma
ASSETS
Cash $3818133 $3218762 $7036895 $10870000(a) $6870383
(1036512)(b)
(10000000)(c)
Restrict-
ed cash 453340 - 453340 453340
Accounts
receiv-
able 5159651 2742548 7902199 7902199
Inventory 2143927 1085 2145012 2145012
Other
current
assets 209822 333168 542990 542990
Total
current
assets 11784873 6295563 18080436 (166512) 17913924
PP&E at
cost 24817161 5934323 30751484 30751484
Accumu-
lated
depr./
amort. (11170742) (3919620)(15090362) (15090362)
PP&E,
net 13646419 2014703 15661122 - 15661122
Good-
will 16514557 - 16514557 23665446(c) 35045124
3669014(b)
(148574)(b)
(8655319)(c)
Other
long
term
assets 1247088 10267558 11514646 11514646
Total
Assets $43192937 $18577824 $61770761 $18364055 $80134816
LIABILITIES
Accounts
payable $5158750 $2372130 $7530880 $7530880
Accrued
expenses 2508409 229795 2738204 2738204
Lines of
credit 667903 1299999 1967902 1967902
Customer
deposits 96567 96567 96567
Deferred
income - 2179282 2179282 2179282
Notes
payable
to S/H-
current 1197226 - 1197226 1197226
Note
payable-
current
portion 379791 893815 1273606 1273606
Total
current
liabil-
ities 9912079 7071588 16983667 - 16983667
Notes
payable 8152051 1341839 9493890 9493890
Notes
payable
to share-
holders 4676221 - 4676221 5000000(c) 9676221
Other
long-term
liabili-
ties - 88687 88687 88687
Deferred
taxes - 1271817 1217817 1271817
Total
long
term
liabi-
lities 12828272 2702343 15530615 5000000 20530615
Total
Liabil-
ities 22740351 9773931 32514282 5000000 37514282
Minority
Interest 1580456 - 1580456 1580456
STOCKHOLDERS' EQUITY
Preferred
stock 22 - 22 1200(a) 1222
Common
stock 12451 109703 122154 588(b) 15102
2063(c)
(10000)(b)
(99703)(c)
Addi-
tional
paid-in
capital 23169510 4638855 27808365 10868800(a) 45333607
2631914(b)
8663383(c)
(4638855)(c)
Retain-
ed
earn
ings (4309853) 4055335 (254518) (3916761)(c) (4309853)
(138574) (b)
Total
Stock-
holders'
Equity 18872130 8803893 27676023 13364055 41040078
Total
Liabil-
ities
and
Equity $43192937 $18577824 $61770761 $18364055 $80134816
INDENET, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1996
(Unaudited)
Histor-
ical Acquisi- Pro forma
INDE tions Combined Adjustments Pro forma
Revenue $20868899 $29098670 $49967569 $(1307000)(d) $48660569
Cost of
sales 9791964 15351640 25143604 (1790000)(d), 23353604
(e)
Gross
profit 11076935 13747030 24823965 483000 25306965
Operating
expenses:
Salaries 6489944 2759029 9248973 (920468)(f) 8328505
Legal and
profes-
sional 441915 169366 611281 - 611281
Rent 1122970 242209 1365179 (84000)(g) 1281179
Deprecia-
tion
and
amortiza-
tion 2076590 1620614 3697204 1836480(i) 5533684
Research
and
develop-
ment 446525 469357 915882 - 915882
Other
general
and
adminis-
tration 3135543 7163769 10299312 (670000)(h) 9629312
Total
operating
expenses 13713487 12424344 26137831 162012 26299843
Operating
(loss)
income (2636552) 1322686 (1313866) 320988 (992878)
Other
income
(expense)
Interest
expense (811306) (661202) (1472508) (103031)(j) (1415539)
160,000(l)
(400,000)(j) (400000)
Interest
income 138765 199302 338067 160000(l) 338067
(160000)(l)
Other 212900 (78726) 134174 - 134174
(Loss)
income
before
income
tax
expense
and allo-
cation
to minor-
ity
interest (3096193) 782060 (2314133) (22043) (2336176)
Income tax
expense 17255 834874 852129 - 852129
Loss before
allocation
to
minority
interest (3113448) (52814) (3166262) (22043) (3188305)
Allocation
to
minority
interest (156416) - (156416) (6224)(k) (162640)
Net loss $(2957032) $(52814) $(3009846) $(15819) $(3025665)
Net loss
per
share $ (0.35) $ (0.29)
Weighted
average
number
of
common
shares
out-
standing 8615055 13119202
(a) On April 29, 1996, the Company completed a private placement
of Class A Preferred Stock for $12,000,000, primarily for the
acquisition of Enterprise Systems Group, Ltd. The placement
consisted of 1,200 shares of Convertible Class A Preferred Stock
which pays a dividend of 6% annually, payable in cash or common
stock at the Company's option, and has a term of three years.
The Class A Preferred Stock is convertible into common stock at a
rate determined by the average trading price of the Company's
common stock at the time of conversion not to exceed $7.00 per
share. The common stock carries registration rights and the
Company has the option to repurchase the Class A Preferred Stock
at the time of conversion at a 15% premium to the principal
amount and has the right to call the Class A Preferred Stock at a
30% premium to the principal amount after 12 months, declining to
a 15% premium after 30 months. Net proceeds to the Company after
agent's commission was $10,870,000.
(b) On May 16, the Company completed the acquisition of CCMS for
a purchase price of $4,800,000. The purchase price was paid at
the closing by the Company paying $1,036,522 in cash and by the
Company issuing 587,612 unregistered shares of the Company's
common stock to the CCMS shareholders. The number of shares
issued to the CCMS shareholders was based on the trading price of
the Company's common stock, approximately $6.40 per share. The
restricted common stock was valued for book purposes at $4.48 per
share (which price represents 70% of the average quoted price of
the Company's common stock at the time of acquisition) which
management believes was its fair value. The Company will acquire
net assets of $148,574 and allocate the remaining purchase price
to goodwill. The Company believes 20 years to be an appropriate
life for the goodwill resulting from the acquisition of CCMS.
(c) On May 24, 1996 the Company completed the acquisition of
Enterprise for a purchase price equal to the U.S. dollar
equivalent of eight times EBITDA (earnings before interest,
taxes, depreciation and amortization) of Enterprise for the 12
months ended March 31, 1996. The purchase price was paid (i) at
the closing by the Company paying $10,000,000 in cash and
$5,000,000 in promissory notes ("the Notes") and (ii) by the
Company agreeing to pay $12,379,210 in unregistered shares of the
Company's common stock to the Enterprise shareholders. The
number of shares to be issued is based on the average closing
price of the stock (as reported by The Nasdaq Stock Market) for a
60-day trading period consisting of a defined 30 trading days in
February and March 1996 and 30 trading following the closing (the
"Share Price"). The Notes earn interest at a rate of 8% per
annum, mature May 31, 2000, with equal payments due quarterly
commencing on November 30, 1996. The restricted common stock is
estimated to valued for book purposes at $4.20 per share (which
price is estimated to represent 70% of the average quoted price
of the Company's common stock at the time of acquisition) which
management believes was its fair value. The Company will acquire
net assets of $8,655,319 and allocate the remaining purchase
price to goodwill. The Company believes 20 years to be an
appropriate life for the goodwill resulting from the acquisition
of Enterprise.
(d) Adjustments to reflect elimination of Starcom product lines.
(e) Adjustments to reflect application of existing lower
Mediatech inventory purchasing to Starcom inventory.
(f) Adjustments to reflect reduction in payroll of principal
officers with employment contracts and reduction of general
payroll of Starcom due to a redundancy of staff with Mediatech.
The Company will combine the Starcom operations with the existing
Mediatech operations.
(g) Adjustments to reflect non-recurring rent expense due to the
closure of the Starcom offices and Company's corporate office.
(h) Adjustments to reflect non-recurring expenses such as
property insurance, building costs, and data processing due to
the closure of the Starcom offices.
(i) Adjustments to reflect amortization of goodwill both
Channelmatic, Starcom, CCMS and Enterprise over 20 years and
amortization of step-up of equipment of Starcom and Channelmatic
over five years.
(j) Adjustments to reflect interest expense related to the
$5,602,500 note payable to the former Channelmatic shareholder
and interest expense related to $5,000,000 notes payable to the
former shareholders of Enterprise.
(k) Adjustments to reflect a 33.33% allocation of operations
from Channelmatic to minority shareholder.
(l) Adjustments to record and eliminate intercompany interest
income and expense and eliminate other miscellaneous expenses.
INDENET, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized persons this 1st day of July, 1996.
INDENET, INC.
By: /s/ Robert W. Lautz, Jr.
Robert W. Lautz, Jr., President,
Chief Executive Officer and Director
By: /s/ Richard J. Parent
Richard J. Parent, Chief Financial and
Accounting Officer, and Secretary
In accordance with the Securities Exchange Act, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
July 1, 1996 By: /s/ Robert W. Lautz, Jr.
Robert W. Lautz, Jr., President
Chief Executive Officer and
Director
July 1, 1996 By: /s/ Thomas H. Baur
Thomas H. Baur, Director
July 1, 1996 By: /s/ Cary S. Fitchey
Cary S. Fitchey, Director
July 1, 1996 By: /s/ William A. Kunkel
William A. Kunkel, Director
July 1, 1996 By: /s/ William D. Killion
William D. Killion, Director
July 1, 1996 By: /s/ Andre A. Blay
Andre A. Blay, Director
July 1, 1996 By: /s/ Graeme R. Jenner
Graeme R. Jenner, Director
July 1, 1996 By: /s/ Richard L. Schleufer
Richard L. Schleufer, Director
<TABLE> <S> <C>
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<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1996 DEC-31-1994
<PERIOD-END> MAR-31-1996 DEC-31-1994
<CASH> 3,818,133 3,250,554
<SECURITIES> 0 0
<RECEIVABLES> 5,405,583 16,559
<ALLOWANCES> 245,932 0
<INVENTORY> 2,143,927 0
<CURRENT-ASSETS> 11,784,873 4,924,498
<PP&E> 16,113,663 90,882
<DEPRECIATION> 2,467,244 90,882
<TOTAL-ASSETS> 43,192,937 4,924,498
<CURRENT-LIABILITIES> 9,912,079 924,457
<BONDS> 0 0
0 0
22 0
<COMMON> 12,451 4,050
<OTHER-SE> 18,872,130 3,995,991
<TOTAL-LIABILITY-AND-EQUITY> 43,192,937 4,924,498
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<TOTAL-REVENUES> 20,868,899 0
<CGS> 9,791,964 0
<TOTAL-COSTS> 13,713,487 1,246,082
<OTHER-EXPENSES> 459,641 (496,299)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 811,306 65,000
<INCOME-PRETAX> (3,096,193) (749,783)
<INCOME-TAX> 17,255 0
<INCOME-CONTINUING> (2,957,032) (749,783)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,957,032) (749,783)
<EPS-PRIMARY> (0.35) (0.19)
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