UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 0-18034
INDENET, INC.
(Exact name of registrant as specified in charter)
Delaware 68-0158367
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
1640 North Gower Street, Los Angeles, California 90028
(Address of principal executive office)
Registrant's telephone number, including area code:
(213) 466-6388
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes X NO ___
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
17,093,683 Shares of Common Stock, Par Value $.001 as of November
12, 1996.<PAGE>
INDENET, INC.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
No.
Consolidated Balance Sheet -- September 30, 1996 and
March 31, 1996. . . . . . . . . . . . . . . . . . . . . . .1
Consolidated Statement of Operations --Three-months
and Six-months Ended September 30, 1996 and
1995. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in Stockholders'
Equity -- Six-months Ended
September 30, 1996. . . . . . . . . . . . . . . . . . . . .4
Consolidated Statement of Cash Flows -- Six months Ended
September 30, 1996 and 1995. . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 10
PART II. OTHER INFORMATION:
Item 6. Other Information. . . . . . . . . . . . . . . . . . 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INDENET, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
September 30 March 31,
1996 1996
Current assets:
Cash and cash equivalents $ 2,446,050 3,818,133
Restricted cash 1,896,622 453,340
Accounts and other
receivables, net of
allowance for doubtful
accounts 10,626,362 5,159,651
Inventories 2,356,135 2,143,927
Prepaid expenses 749,018 209,822
Total current assets 18,074,187 11,784,873
Property and equipment,
less accumulated
depreciation and amortization 14,967,762 13,646,419
Capitalized software costs, net 13,278,922 485,930
Other long-term assets 338,662 525,387
Deferred financing costs, net 481,525 235,771
Customer list, net 14,696,197 --
Goodwill, net 18,132,170 16,514,557
TOTAL ASSETS $ 79,969,425 $ 43,192,937
See accompanying notes to consolidated financial statements.<PAGE>
INDENET, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
LIABILITIES
September 30 March 31,
1996 1996
Current liabilities:
Accounts payable and
accrued expenses $ 11,784,452 7,667,159
Deferred income 2,661,902 --
Notes payable, current portion 6,511,659 1,047,694
Notes payable to shareholders
of acquired companies,
current portion 2,162,715 1,197,226
Total current liabilities 23,120,728 9,912,079
Notes payable to shareholders
of acquired companies, net
of current portion 8,210,672 4,676,221
Notes payable, net of
current portion 8,170,535 8,152,051
Deferred taxes 1,222,002 --
Other long-term liabilities 64,313 --
Total Liabilities 40,788,250 22,740,351
Minority interest 1,256,040 1,580,456
Commitments and Contingencies
Stockholders' equity:
Preferred stock, Series A, $.0001 par value
Authorized - 1,200 shares
1,021 issued and outstanding 1 --
Preferred stock, Series B, $.0001 par value
Authorized - 250,000 shares
216,667 issued and outstanding 22 22
Common stock, $.001 par value
Authorized - 100,000,000 shares
16,990,865 and 12,451,815
issued and outstanding 16,990 12,451
Additional paid-in capital 46,455,378 23,169,510
Accumulated deficit (8,547,256) (4,309,853)
Total stockholders' equity 37,925,135 18,872,130
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 79,969,425 43,192,937
See accompanying notes to consolidated financial statements.
<PAGE>
INDENET, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Three Months Six Months
Ended September 30 Ended September 30,
1996 1995 1996 1995
Revenue 13,047,803 4,030,324 22,030,519 8,628,272
Cost of sales 5,084,482 1,663,857 8,584,255 3,626,277
Gross profit 7,963,321 2,366,467 13,446,264 5,001,995
Operating
expenses:
Selling,
general and
admini-
strative 7,404,042 2,171,393 12,566,757 4,273,009
Depreciation
and
amortization 1,712,013 476,273 2,873,930 746,535
Research
and
development 263,993 71,351 513,587 71,351
Corporate 623,726 120,539 1,172,531 298,431
10,003,774 2,839,556 17,126,805 5,389,326
Operating
loss (2,040,453) (473,089) (3,680,541) (387,331)
Other income
(expense):
Interest
income 57,121 42,334 149,508 47,051
Interest
expense (528,872) (150,589) (861,735) (369,707)
Miscellaneous
net 34,451 11,646 190,727 183,320
(437,300) (96,609) (521,500) (139,336)
Loss before
income tax
expense and
allocation
to minority
interest (2,477,753) (569,698) (4,202,041) (526,667)
Income tax
expense 54,247 2,400 57,440 2,484
Loss before
allocation
to minority
interest (2,532,000) (572,098) (4,259,481) (529,151)
Allocation
to minority
interest (240,669) - (324,416) -
Net loss $(2,291,301) $(572,098) $(3,935,065) $(529,151)
Net loss
per share $(0.15) $(0.08) $(0.28) $(0.08)
Weighted
average
number
of common
shares
outstanding 16,319,379 7,550,098 15,044,036 6,588,941
See accompanying notes to consolidated financial statements.
INDENET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended September 30, 1996
(Unaudited)
Preferred Stock Common Stock
Add'l Accumu-
No. of Preferred No. of Common Paid-in lated
Shares Stock Shares Stock Capital Deficit Total
Balance at April 1, 1996
216,667 $ 22 12,451,815 12,451 23,169,510(4,309,853)18,872,130
Issuance of Series A Preferred Stock
1,200 1 -- -- 11,183,605 -- 11,183,606
Exercise of warrants
-- -- 128,876 129 289,570 -- 289,699
Shares issued for purchase of CCMS
-- -- 587,612 588 2,647,339 -- 2,647,927
Shares issued for purchase of Enterprise
-- -- 2,276,200 2,276 8,655,494 -- 8,667,770
Adjustment to purchase price of Starcom acquisition
-- -- (362,500) (363) (1,449,637) (1,450,000)
Cashless exercise of employee stock options
-- -- 308,270 308 (308) -- --
Stock issued for settlement of accounts payable
-- -- 98,595 99 311,085 -- 311,134
Shares issued from conversion of Series A Preferred Stock
(179) -- 664,303 664 (664) -- --
Shares issued for the conversion of convertible debt to equity
-- -- 837,694 838 1,376,046 -- 1,376,884
Accretion on Series A Preferred Stock
-- -- -- -- 263,338 -- 263,338
Preferred stock dividends
-- -- -- -- -- (302,338) (302,338)
Net loss
-- -- -- -- -- (3,935,065)(3,935,065)
Balance at September 30, 1996
217,688 $ 23 16,990,865 16,990 46,455,378(8,547,256)37,925,135
See accompanying notes to consolidated financial statements.
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six Months
Ended September 30,
1996 1995
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (3,935,065) $ (529,151)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating activities:
Depreciation and
amortization 2,873,930 746,535
Provision for losses on
accounts receivable 13,301 (44,000)
Allocation of loss to minority
interest (324,416) --
Debt refinancing charge 150,000 --
Gain on sale of building (128,811) --
Changes in operating
assets and liabilities:
Restricted cash (17,809) 688,826
Accounts receivable (2,127,003) 354,230
Inventories (211,101) 37,524
Prepaid expenses (153,484) (23,420)
Other assets 186,725 2,125
Accounts payable and accrued
expenses 1,697,338 (437,421)
Deferred income (261,594) --
Other long-term liabilities 48,400 --
NET CASH (USED IN) PROVIDED
BY OPERATIONS (2,189,589) 795,248
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (1,987,753) (598,194)
Capitalized software costs (2,129,300) --
Deferred financing costs (330,593) --
Proceeds from sale
of building 1,158,186 --
Cash used to acquire CCMS (1,036,522) --
Cash used to acquire Enterprise (10,000,000) --
Cash of acquired entity CCMS 276,779 --
Cash of acquired entity
Enterprise 656,771 --
Collection of note receivable -- 467,805
NET CASH USED IN
INVESTING ACTIVITIES (13,392,432) (130,389)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of notes payable (47,435) (679,187)
Proceeds from exercise
of warrants 289,699 2,525,931
Proceeds from private
placements 14,006,674 --
Proceeds from sale of
preferred stock -- 145,400
Dividends on preferred stock (39,000) (15,000)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 14,209,938 1,977,144
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,372,083) 2,642,003
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 3,818,133 479,534
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 2,446,050 $ 3,121,537
See accompanying notes to consolidated financial statements
<PAGE>
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 641,177 $ 369,707
Income Taxes 57,440 --
Supplemental Disclosure of Noncash Investing and Financing
Activities
Effective May 16, 1996, in conjunction with an Agreement and Plan
of Merger with Cable Computerized Management Systems, Inc.
("CCMS") the Company received assets of approximately $568,000
(including cash of $276,779) and assumed liabilities of
approximately $366,000 in exchange for $1,036,522 in cash and
587,612 shares of the Company's common stock valued, for book
purposes, at $4.48 per share.
Effective May 24, 1996, in connection with a Share Purchase
Agreement with Enterprise Systems Group Limited ("Enterprise")
the Company received assets of approximately $16,961,000
(including cash of $656,771) and assumed liabilities of
approximately $8,281,000 in exchange for $10,000,000 in cash,
notes payable of $5,000,000 and 2,276,200 shares of the
Company's common stock valued, for book purposes, at $3.81
per share.
In July 1996, the holder of convertible debt converted debt of
$1,215,000 and accrued interest of $11,884 into 487,694
shares of common stock.
During the six months ended September 30, 1996, the Company
issued 98,595 shares of common stock as payment for accounts
payable totalling $311,184.
During the six months ended September 30, 1996, the Company
recorded $263,338 of accretion related to Series A Preferred
Stock.
See accompanying notes to consolidated financial statements
<PAGE>
INDENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the Company, the unaudited consolidated
financial statements contain all adjustments, consisting
solely of adjustments of a normal recurring nature,
necessary to present fairly the financial position, results
of operations and cash flows for the periods presented.
These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not contain all the information and
footnotes required in a complete set of financial
statements. These statements should be read in conjunction
with the Company's consolidated financial statements and
footnotes thereto as of March 31,1996 included in the
Company's Form 10-KSB for the fiscal year ended March 31,
1996. Also included in the Form 10-KSB are pro-forma
financial statements of the Company, Mediatech, Inc.
("Mediatech"), Channelmatic, Inc. ("Channelmatic"), Starcom
Television Services, Inc. ("Starcom"), Cable Computerized
Management Systems, Inc. ("CCMS") and Enterprise Systems
Group Limited ("Enterprise") for the year ended March 31,
1996. The results of operations for the three and six-month
periods ended September 30, 1996 are not necessarily
indicative of the results for the year ending March 31,
1997.
Included in this interim report are pro-forma financial
results of operations for the six-months ended September 30,
1996 for the Company, Mediatech, Channelmatic, Starcom, CCMS
(acquired effective May 1, 1996) and Enterprise (acquired
effective June 1, 1996).
The accompanying consolidated financial statements include
the accounts of IndeNet, Inc., its wholly-owned subsidiaries
Mediatech, Starcom (since its acquisition on February 7,
1996), CCMS (since its acquisition effective May 1, 1996),
Enterprise (since its acquisition effective June 1,
1996) and its 66.67% owned subsidiary Channelmatic (since
its acquisition on November 27, 1995) (collectively the
"Company").
2. The Company leases office, production and warehousing
facilities in its Chicago, Illinois location from real
estate partnerships in which a former shareholder of
Mediatech has a controlling interest. Total rent expense
paid to these partnerships for the three and six-months
ended September 30, 1996 and 1995 was $162,002 and $367,120
for 1996, and $217,519 and $435,259 for 1995. The Company
also leases office space in Alpine, California from a
director who was the sole shareholder of Channelmatic.
Total rent expense paid to the director for the three and
six-months ended September 30, 1996 was $19,500 and $39,000.
3. Net loss per share is calculated by taking the sum of the
net loss plus preferred 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.
4. On April 29, 1996, the Company completed a private placement
of Series A Preferred Stock ("the Preferred Stock") for
$12.0 million, the net proceeds, after costs of
approximately $800,000, of which were used primarily for the
acquisition of Enterprise. The placement consisted of 1,200
shares of the Preferred Stock with a 6% annual accretion.
The Preferred Stock was convertible into common stock based
on 85% of the average closing bid price of the Common Stock
for the five days immediately preceding the conversion date,
but not to exceed $7.00 per share. The Common Stock carries
registration rights and the Company had the option to
repurchase the Preferred Stock at the time of conversion at
an 18% premium to the principal amount and has the right to
call the Preferred Stock at a 30% premium to the principal
amount after 12 months declining to a 15% premium after 30
months. As of September 30, 1996, approximately $1.8
million of the Preferred Stock had been converted, resulting
in the issuance of approximately 664,000 shares of the
Company's Common Stock.
On September 30, 1996, the Company and the holders of 76%,
or $7.71 million of the $10.2 million outstanding Series A
Preferred Stock agreed to exchange their shares for a new
Series C Preferred Stock (the "Series C"). The exchange is
contingent upon obtaining the approval of the Company's
stockholders. A special meeting of the stockholders has
been scheduled for December 1996. The Series C has the
following features: Conversion into common stock is fixed
at $5.00, no conversions can occur for six months, it is
non-voting and bears an 8% accretion rate. After a
six-month lock-up period, conversion into common stock is
limited to 10% of Series C shares per month. At the time of
exchange, the holders will also receive common stock
purchase warrants with an exercise price of $5.00; the
number of which will equal 10% of the issue price of their
Series C shares divided by $5.00. Up to 3.9% of the
original Preferred Stock issuance may be converted during
the first 90 day period and up to 3.9% during the next 90
day period at a conversion price of $3.32 per share.
The Company may, prior to April 1, 1997, redeem up to 50% of
the Series C shares for (i) cash equal to the value of the
redeemed shares plus accretion, and (ii) the issuance of
common stock purchase warrants with an exercise price of
$7.00. The number of purchase warrants to be issued upon
any such redemption will equal the issue price of the Series
C that is being redeemed (plus accretion) divided by $5.00.
From October 1, 1997 to January 31, 1998, the holders of the
Series C shall be entitled to require the Company to redeem
up to 25% of their remaining shares each month for cash or
common stock at the Company's option.
On May 24, 1996, the Company completed a private placement
of a $2.5 million Convertible Note ("the Note") to a single
accredited institutional investor, which funds were used
primarily for product development. The investor was the
same investor who invested $4.0 million of a private
placement in February 1996 for approximately 225,000 shares
of common stock and a $3.0 million Convertible Note. The
$2.5 million Note accrued interest at a rate of 7% annually,
payable quarterly in cash or the Company's Common Stock (at
the Company's option) and had a term of two years. The
principal amount of the Note, together with interest was
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 Common Stock for the five days
immediately preceding the conversion date. The Company had
the right to convert all or part of the Note any time after
210 days from the closing date into the underlying stock.
In addition, the Note was 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. In July 1996,
the holder of the $3.0 million Convertible Debt converted
approximately $1.2 million of the Note. The conversion
resulted in the Company issuing to the holder 487,694 shares
of the Company's Common Stock.
In September 1996, the Company renegotiated certain of the
terms of the convertible notes, eliminating the conversion
feature of the original issuance, and converting the
obligation into subordinate notes due in two years. Terms
of the new agreement call for the total obligation of $5.225
million to be repaid by the immediate issuance of
approximately 350,000 shares of the Company's Common Stock,
with the remaining $4.285 million payable in cash in
quarterly installments of $350,000 beginning December 31,
1996 with principal and interest amortized over 3 years at
an interest rate of 8% per annum and a balloon payment due
in 2 years. The 350,000 shares of Common Stock are
locked-up and escrowed with 50,000 of the shares free
trading after 45 days from the date of close and the balance
of 300,000 shares free trading after 6 months at a rate of
50,000 shares per month. The Company may redeem at any time
within 6 months the 300,000 escrowed shares at the value in
which the shares were issued and any remaining note balance
at face value.
5. On May 16, 1996, the Company completed the acquisition of
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. For book purposes, the stock
was valued at $4.48 per share, or 70% of $6.40. 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.
The acquisition was accounted for as a purchase. The excess
of the purchase price over the net assets of $3,566,656 is
included in Goodwill and is being amortized over 20 years.
The results of operations of CCMS are included in the
following unaudited pro forma results of operations.
On May 24, 1996, the Company completed the acquisition of
Enterprise, a private company incorporated in England and
Wales for a purchase price equal to $27,379,210. The
purchase price is 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 Enterprise Notes")
and (ii) by the Company issuing 2,276,200 shares of Common
Stock, valued at $5.44 per share. The number of shares
issued was 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"). For book purposes, the shares were
valued at $3.81 per share, or 70% of $5.44. The Enterprise
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
Enterprise 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 the Preferred Stock private
placement discussed above. In connection with the
acquisition of Enterprise, the Company elected two designees
of the former Enterprise shareholders to the Company's Board
of Directors.
The acquisition was accounted for as a purchase. The excess
of the purchase price over the net assets of $15,044,142 is
included in Customer List and is being amortized over 15
years. The result of operations of Enterprise are included
in the following unaudited pro forma results of operations.
Included in Notes Payable is an Enterprise bank loan of
approximately $1.3 million which is secured by a like amount
included in Restricted Cash. Also included in Capitalized
Software Costs is Enterprise capitalized software costs of
approximately $12.0 million.
6. Condensed unaudited pro-forma results of operations of the
IndeNet, Mediatech, Channelmatic, Starcom, CCMS and
Enterprise are presented as if the respective purchases
occurred at the beginning of the period. The unaudited pro
forma results of operations 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. The column labeled "Acquisitions" consist of
operations of CCMS for the one-month ended April 30, 1996
and of Enterprise for the two-months ended May 31, 1996.
Pro-forma adjustments include amortization of allocated
costs in connection with the purchases and interest expense
on shareholder notes.
The
Company Combined Pro Pro forma
6 Mos. 6 Mos. Forma 6 Mos.
Ended Acqui- Ended Adjust- Ended
9/30/96 sitions 9/30/96 ments 9/30/96
Revenue $22,030,519 $2,682,447 $24,712,966 $ - $24,712,966
Cost of
Sales 8,584,255 217,269 8,801,524 - 8,801,524
Net Loss $(3,935,065)$(46,249) $(3,981,314)$(248,690)$(4,230,004)
Net Loss
per share (0.28) (0.27)
Number of
shares 15,044,036 15,863,407
7. On September 17, 1996, the Company entered into a
non-binding letter of intent for a proposed business
combination with Petry Media Corporation ("PMC"). Under the
preliminary terms of the transaction, the Company will issue
shares of its Common Stock in exchange for 100% of the
capital stock of PMC, such that the resulting ownership of
the Company will be 59% to existing PMC shareholders and 41%
to the Company's existing shareholders. The Common Shares
issued to PMC shareholders will be subject to a lock-up
provision to be mutually agreed upon. The closing of the
transaction is contingent upon, among other things,
applicable due diligence, execution of a definitive
agreement, receipt of necessary regulatory approvals, the
Company's shareholders' approval and approval by both
companies' Board of Directors.
INDENET, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three and six-month periods ended September 30, 1995, the
operations of the Company were conducted solely through its
subsidiary Mediatech. The results of operations for the three
and six-month periods ended September 30, 1996 include the
operations of the Company's subsidiaries Mediatech, Channelmatic,
Starcom, CCMS (since its acquisition which is accounted for
commencing May 1, 1996) and Enterprise (since its acquisition
which is accounted for commencing June 1, 1996).
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.
Revenue
The increase in revenue in the current three and six-month
periods over the prior periods was primarily a result of the
consolidation of revenue from the four subsidiaries acquired
subsequent to the comparative prior periods. Revenue for
Mediatech in the current periods were consistent with revenues of
the comparable prior periods. In addition, because Enterprise
and CCMS were acquired during the current six-month period, only
a portion of their six-month financial results are included
herein. Accordingly, it is anticipated that revenue in future
periods for the Company on a consolidated basis will increase in
comparison to revenue in the current six-month period due to
consolidation of revenue from the subsidiaries acquired during
the current periods for a full reporting period.
Cost of Sales
The increase in cost of sales in the current three and six-month
periods over the prior periods was primarily a result of the
consolidation of the cost of sales of the four subsidiaries
acquired subsequent to the comparative prior periods. Cost of
sales as a percent of sales for Mediatech in the current periods
were consistent with that of the comparable prior periods. In
addition, because Enterprise and CCMS were acquired during the
current six-month period, only a portion of their six-month
financial results are included herein. Accordingly, it is
anticipated that cost of sales in future periods for the Company
on a consolidated basis will increase in comparison to cost of
sales in the current six-month period due to consolidation of
cost of sales from the subsidiaries acquired during the current
periods for a full reporting period.
Selling, General and Administrative
The increase in selling, general and administrative expense from
the prior period was primarily a result of the consolidation of
the selling, general and administrative expense of the four
subsidiaries acquired subsequent to the comparative prior
periods. Selling, general and administrative expense for
Mediatech is $155,010 or 7% greater for the three-months ended
September 30, 1996 and $380,368 or 9% greater for the six-months
ended September 30, 1996 than the comparable prior periods due
primarily to additional personnel costs incurred from an
additional office opened in Louisville, Kentucky. It is
anticipated that selling, general and administrative expense in
future periods for the Company on a consolidated basis will
increase in comparison to selling, general and administrative
expense in the current six-month period due to consolidation of
the subsidiaries acquired during the current periods for a full
reporting period.
Depreciation and Amortization
The increase in depreciation and amortization from the prior
periods was primarily a result of the consolidation of the
depreciation and amortization of the subsidiaries acquired
subsequent to the comparable prior periods. Prior periods'
depreciation and amortization consisted of depreciation and
amortization of Mediatech and IndeNet. Depreciation and
amortization for Mediatech remained consistent with prior
periods; however depreciation and amortization for the corporate
division increased by $630,653 and $1,265,748 for the three and
six-months ended September 30, 1996 as compared to the prior
periods due to depreciation and amortization of goodwill and
purchase price allocation of equipment and customer list of the
subsidiaries acquired subsequent to the comparable prior periods.
It is anticipated that depreciation and amortization in future
periods will increase in comparison to depreciation and
amortization in the current six-month period due to (i) the
consolidation of the subsidiaries acquired during the current
periods for a full reporting period and (ii) a full period of
amortization of excess purchase price for those acquisitions.
Research and Development
Research and development expense for the three and six-months
ended September 30, 1996 represent expenses primarily related to
the research and development of Channelmatic products. There was
no material research and development expense in the comparative
prior periods. It is anticipated that research and development
will increase in future periods related to continued research and
development incurred by Channelmatic and potential research and
development expense to be incurred by CCMS and Enterprise.
Corporate
Corporate overhead represents general and administrative expenses
related to the administration of IndeNet, Inc., exclusive of
expenses of the subsidiaries. These expenses for three and
six-months ended September 30, 1996 increased by $503,187 and
$874,100 compared to the comparative prior period. The increase
is due to (i) additional personnel needed at the corporate level
in overseeing the subsidiaries, continued corporate financings
and evaluation and execution of mergers and acquisitions, (ii)
Company advertising and promotion, and (iii) additional legal and
other professional costs. It is anticipated that corporate
expenses will increase in the future due to additional
administrative costs and professional fees that may be incurred
in any future mergers and acquisitions.
Interest Income
Interest income increased $14,787 and $102,457 for the three and
six-months ended September 30, 1996 compared to the comparable
prior periods due primarily to the change in the average cash
balance during the period. It is expected that interest income
will decrease as a result of a lower cash balance through use of
cash in funding of the Company's digital delivery system and
capitalized software costs.
<PAGE>
Interest Expense
Interest expense increased $378,283 and $492,028 for the three
and six-months ended September 30, 1996 compared to the prior
periods due to (i) also the inclusion of interest expense of the
subsidiaries acquired subsequent to the comparable prior periods,
(ii) interest expense incurred on the promissory notes delivered
by IndeNet as partial payment of the purchase price of each of
those subsidiaries and (iii) interest expense on the convertible
note financing obtained by the Company since the end of the
comparable 1995 periods. Interest expense is expected to
increase in future periods due to the interest expense for a full
reporting period incurred on the promissory notes delivered by
IndeNet as partial payment of the purchase price of Enterprise.
Income Tax Expense
At September 30, 1996, the Company (excluding Channelmatic) has a
net operating loss carryforward of approximately $9.5 million for
federal income tax purposes of which $3.4 million 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 $3.8 million.
This tax asset has a 100% valuation allowance as the Company
cannot determine if it more likely than not that the deferred tax
asset will be realized. Due to changes in the Company's
ownership, there is an annual limitation on the usage of the net
operation loss carryforward. Income tax expense for the three
and six-months ended September 30, 1996 represents U.K. and U.S.
tax on Enterprise income and minimum state taxes paid for the
various states in which the Company does business.
Minority Interest
The allocation of net loss to minority interest for the periods
presented represents the 33.33% minority interest in
Channelmatic. The amount allocated to minority interest is
expected to decrease in future periods based on improved
operations of Channelmatic through cost reduction and sales
contracts awarded subsequent to September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had approximately $2.4
million in cash and cash equivalents and a working capital
deficit of approximately $5.0 million. During the six-months
ended September 30, 1996, cash and cash equivalents decreased
$1.4 million, and the Company used approximately $2.2 million in
operations, primarily due to the operating loss of the Company
and decrease in working capital. The Company used approximately
$13.4 million in investing activities, primarily for the
purchases of CCMS and Enterprise, ongoing capital expenditures
for the digital delivery system, capitalized software costs, and
deferred financing costs. Investing activities also include the
non-recurring activities of (i) proceeds from the sale of an
office building and (ii) cash from acquired companies CCMS and
Enterprise. The Company generated approximately $14.2 million in
financing activities, primarily from net proceeds of two private
placements totaling approximately $14.0 million, offset by
repayment of a $750,000 mortgage note from the sale of the
underling collateral and payments on related party notes payable.
The Company anticipates funding its working capital needs for the
next twelve months through (i) cash generated from operations,
(ii) realization of cost savings through headcount reduction,
(iii) extending payments due on acquisition indebtedness owed by
the Company to certain of its stockholders, (iv) increasing
borrowings under existing Enterprise bank line-of-credit, (v)
obtaining a bank line of credit for Channelmatic, and (vi)
realization of a high gross profit on deferred income. Such
projections are based on financial information that the Company
has obtained from its acquired subsidiaries and is based on
projected benefits to be derived from the on-going integration of
the operations of the subsidiaries. No assurance can be given
that the projected operations or projected integration benefits
will be realized.
In the next twelve months, the Company estimates that it will
have to spend approximately an additional $3.5 million to
complete and deliver its digital delivery system. In addition,
it estimates that it will need approximately $755,000 for
research and development on certain of Channelmatic's products
and approximately $2.0 million in development of Enterprise's
products. Channelmatic does not currently have the financial
ability to fund such research and development expenses.
Accordingly, in order to complete its proposed business plan, the
Company will need to raise debt or equity capital to fund its
capital expenses. In order to fund Channelmatic's anticipated
research and development and other working capital needs, the
Company is also attempting to obtain a line-of-credit facility
from institutional lenders. To date, the Company has not entered
into any agreements to obtain any of the foregoing financing, and
no assurance can be given that the Company will be able to raise
the required amount of additional capital or that it will be able
to obtain a credit facility for Channelmatic. The Company
anticipates funding development of the Enterprise products
through Enterprise's cash flow and borrowings under its existing
line of credit. If the Company is unable to obtain the required
additional capital, the Company will need to further restructure
or consolidate its operations, reduce its projected research and
development expenses, or otherwise revise its proposed business
plan. Any such restructuring or reduction may detrimentally
affect the future growth and operations of the Company.
As part of its business plan, the Company may also attempt to
acquire other companies or businesses. Any such future
acquisitions requiring cash will be funded from equity and/or
debt financing. In addition, payments on promissory notes and
notes payable as a result of the private placements of
convertible notes that were completed earlier in 1996 are
expected to be paid from either (i) future fund raising or (ii)
funds from IndeNet's subsidiaries. The ability of the Company to
obtain future debt financing will be dependent upon, among other
factors, the Company's financial statements, its projected future
operations and its ability to generate sufficient cash from its
operations to fund the debt service obligations of such debt.
Due to the cost of the rollout of its digital delivery system,
the operating losses and expenses expected to be borne during
the period in which the industry adopts the new system, and the
significant annual amortization resulting from the acquisitions
of its various subsidiaries, the Company does not expect to
generate profits in the near future. As a result, the Company's
ability to obtain debt financing may be limited. The Company's
ability to obtain equity funding will be dependent on various
factors, including the market conditions for equity financing and
the industry's perception of the Company's business and
prospects. 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.
<PAGE>
INDENET, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a). 27. Financial Data Schedule
(b). No reports on Form 8-K were filed during the quarter
for which this report is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused the report to be signed on
its behalf by the undersigned hereunto duly authorized.
INDENET, INC.
Date: November 14, 1996 By: /s/ Richard J. Parent
Richard J. Parent,
Chief Financial Officer and
Corporate Secretary
(Principal Financial and
Chief Accounting Officer)
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