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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, 1997
( ) 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.
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(Exact name of registrant as specified in its charter)
Delaware 68-0158367 68-0158367
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(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
16000 Ventura Blvd., Suite 700 Encino, CA 91436
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 461-8525
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
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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, 1997 are
$46,742,520.
As of June 23, 1997 there were 17,181,064 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 $26.0 million.
Documents incorporated by reference: The Proxy Statement for the Annual Meeting
of Shareholders estimated to be held in September 1997, is incorporated by
reference of this Annual Report on Form 10-KSB.
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PART I
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Annual
Report contains forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any revision
to these forward-looking statements. Readers should carefully review the risk
factors described in other documents the Company files from time to time with
the Securities and Exchange Commission, including the Annual Report on Form
10-KSB/A for the fiscal year ended March 31, 1996, the Quarterly Reports on Form
10-Q to be filed by the Company in 1997 and 1998, and any future Current Reports
on Form 8-K hereafter filed by the Company.
ITEM 1. BUSINESS
INTRODUCTION
IndeNet, Inc. ("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. Prior to October 31, 1993, IndeNet provided the media
communications with various support services, including audiotext and
conferencing applications and bankcard settlement and clearing services.
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").
On March 24, 1997, IndeNet sold its 66.67% interest in the capital stock of
Channelmatic to Local Insertion Media Technology AB, a Swedish company. All
references herein to the "Company" include IndeNet, Inc. and its consolidated
subsidiaries, Mediatech, Enterprise, CCMS, and Starcom, and all references to
"IndeNet" refer only to IndeNet, Inc.
Since commencing its current business in February 1995, the Company has
emerged as a provider of technology products and services to the television
advertising industry. Over two years ago, IndeNet's management envisioned the
creation of a company that could provide services as a single-source vendor to
disparate groups of companies in the television advertising industry. In order
to fully implement its original plan, IndeNet intended to make a number of
acquisitions and then to consolidate and reorganize all of its acquired
subsidiaries in order to eliminate duplication and in order to provide a
digitally connected, vertically integrated television services company.
Accordingly, in order to effect its plans, during the past 29 months, the
Company acquired five companies and established its satellite digital delivery
division (the "Digital Delivery Division") as a foundation for the single-source
vendor idea.
In January 1997, the Company announced its plan to integrate the
operations of its five subsidiaries and to reorganize the operations of the
subsidiaries. Among other things, the Company planned to reduce its work force
from 610 employees to 445 and to consolidate its 19 offices into 11 facilities.
In connection with the reorganization, the Company merged its Starcom and
Mediatech subsidiaries. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
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Operations" and footnotes to the consolidated financial statements herein for
further discussions regarding the integration plan, results of operations and
financial condition.
Since the goals for IndeNet were established two years ago, many
changes affected the marketplace, which caused management to re-focus its
strategic goals. Those changes in the marketplace include current market
consolidation and competition from companies with greater capital resources than
IndeNet. In addition, substantial additional resources are needed in order to
complete the capital investment needed in the Digital Delivery Division. Due to
these factors and changes, the Company conducted a strategy review of its
current business. The Board of Directors of the Company decided that, due to
market conditions and the Company's financial position, the Company would in the
future focus its operations on core products in the technology, software and
services supplied to the broadcast and cable industries. The Company's
Enterprise and CCMS subsidiaries currently provide these products and services.
On March 24, 1997, the Company sold its interest in Channelmatic, a manufacturer
of ad insertion equipment. In addition, the Company has decided to find a
strategic buyer for its subsidiaries Mediatech and Starcom and the Digital
Delivery Division. The two subsidiaries and division for sale currently provide
content delivery services to advertising agencies, national advertisers and
programmers.
INDUSTRY BACKGROUND
Over the past several years, the broadcast and cable industries have
undergone significant changes primarily as a result of new technologies, an
increase in the number of television channels and changes in industry
regulation, both in the United States and internationally. These changes have
led to a dramatic increase in the sources of television and radio, 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 required
price levels, as a result of the increase in competition for the sale of
advertising time and continued fragmentation of audiences. 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 information technology
requirements of the broadcast and cable industries.
BUSINESS STRATEGY/RECENT DEVELOPMENTS
On June 2, 1997, the Company announced that is pursuing a strategic
buyer for its subsidiaries Mediatech and Starcom and its Digital Delivery
Division. These subsidiaries and division currently provide services to
television agencies, national advertisers and programmers. Specifically, those
services include (i) duplication and distribution of national spot broadcast
advertising to broadcast television stations, (ii) duplication of syndicated
programming, and (iii) duplication and distribution to corporate clients that
use video or audio programs to provide training or business information to their
employees. The Digital Delivery division provides digital delivery services of
national spot broadcast advertising to Mediatech. Currently, there are over 100
digital receivers installed at broadcast television stations nation-wide.
As part of its new business plan, the Company intends to find a buyer
for Mediatech/Starcom and for its Digital Delivery Division. As of the date of
this Annual Report, the Company is engaged in preliminary discussions with
certain parties that have expressed a desire to purchase Mediatech/Starcom and
the Digital Delivery Division. However, the Company has not entered into any
agreement with any party regarding the
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sale of Mediatech/Starcom and the Digital Delivery Division, and no assurance
can be given that the Company will be able to consummate a sale of these
operations with any of the parties. The Company has retained Schroder Wertheim &
Co., an investment-banking firm, to assist the Company in the sale of these
operations. If the Company is unable to sell Mediatech/Starcom and the Digital
Delivery Division on terms and conditions, and at a price acceptable to the
Company, the Company will continue to operate Mediatech/Starcom. The operations
of Mediatech/Starcom currently are profitable and, based on the anticipated
continuing operations of Mediatech/Starcom, is expected to be a profitable
subsidiary in the foreseeable future. However, the Company may, if the Digital
Delivery Division is not sold, reorganize the operation of the division or
explore alternate means of maximizing the Company's investment in the division.
The Company's recently announced strategy is to be a leader in
providing information technology to broadcast and cable television stations. The
Company's television station services are provided by Enterprise and CCMS.
Enterprise and CCMS design, develop and distribute traffic, billing, revenue and
program management software products for television stations and cable
operators. 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. As of the date of this Annual Report,
Enterprise and CCMS jointly have a backlog of over $75 million, most of which
consists of software licensing and out-sourcing agreements having an average
life of five years. To date, most of the Company's broadcast television station
clients have consisted of larger stations in the larger metropolitan markets.
The Company's strategy is to leverage its existing technology, its client base
and its reputation to aggressively pursue additional television broadcast
clients. In addition, the Company also intends to expand its client base into
smaller broadcast stations with its CCMS products.
OPERATIONS
Enterprise was incorporated in 1977 in England and Wales. Enterprise
has offices in the United States, Europe, Australia, New Zealand and South
Africa. Enterprise currently has 213 employees worldwide. CCMS was incorporated
in 1983 in Michigan. CCMS, headquartered in the City of Wyoming, Michigan,
currently has 20 employees.
The Company, through its subsidiaries, Enterprise and CCMS, designs,
develops and integrates traffic and billing, revenue management, and program
management software products for use by broadcast television, radio stations and
cable operators, in the management of advertising time and programming. The
Company's broadcast television and radio station's customers, which typically
enter into five year contracts licensing the Company's software products,
include such major television networks as NBC Television Stations, Tribune
Television Stations, Fox Television Stations, Time-Warner Cable, TCI Cable and
Pacific Telesys Cable in the United Stated; Laser Sales, TSMS and VTM in Europe;
Network 10 in Australia; and TVNZ in New Zealand. The Company also provides a
range of related services to its customers including hardware installation,
customer support, ongoing training, and custom software development services.
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 and programming
management software products in media industry clients.
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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, and customer training
and support.
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 flexibility and support for television
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 a variety of operations
including individual operations, full networks and multichannel environments.
The Company's software 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. Systems place 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, Deal Management, Audience Research, and
Sales Information Base.
Cable Television
The principal product offered by the Company to its cable industry
clients is the Ad Manager 20/20 System, a traffic management, billing and sales
management system designed to manage all activities of the advertising sales
operation. The system is designed to incorporate 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 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 multiple 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
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advertising insertion schedule and (iv) automatic 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 television industry.
Advertising and Programming Services
As disclosed above in this Annual Report, the Company is pursuing a
strategic buyer for Mediatech/Starcom and Mediatech's Digital Delivery Division.
Mediatech/Starcom currently provide advertising and programming services for the
Company.
Mediatech was formed in 1975 and is currently a leading duplicator and
distributor of television and radio commercials in the United States. Starcom
was formed in 1993 and was merged with Mediatech in 1997 to form
Mediatech/Starcom. Mediatech/Starcom collectively have 158 employees.
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, Studio City, California and Louisville, Kentucky. From these various
facilities, Mediatech/Starcom 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.
Mediatech/Starcom's advertising and programming services include broadcast
advertising, program syndication, corporate education and infomercial
distribution.
The broadcast advertising market is served through the duplication and
distribution of commercial messages (spots). These spots are duplicated and
delivered either on video tape or electronically to the television or radio
stations for on-air playback. Mediatech/Starcom is not involved in the creation
or production of the commercials or the post-production activities of editing
and finishing the commercials. Mediatech/Starcom's role is to produce
high-quality duplicates of the spots and to ensure that the correct spots are
delivered to the appropriate television and radio stations in a timely manner
and to verify the receipt of such delivery.
Most of Mediatech/Starcom'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 a group of stations in a last-minute media buy
or the advertisers may be editing a newly produced spot until shortly before the
intended air date. To meet this demanding service level, Mediatech/Starcom
maintains a high level of production capacity and has developed operating and
computer systems that provide immediate processing of incoming orders. The
Company created the Digital Delivery Division in order to distribute the spots
digitally through a satellite network and to thereby enhance Mediatech/Starcom's
ability to provide its delivery services. The principal customers of
Mediatech/Starcom during the fiscal year ended March 31, 1997 included ads
delivered for McDonald's Corporation, Coca-Cola, King World, Warner Bros., Taco
Bell, Best Buy Company and Toyota Motor Sales.
Mediatech/Starcom also provide program syndication services consisting
of transmission services to syndicators of television programming, playback and
record services, integrating advertising spots into programs being distributed,
communicating with stations that receive the programs on behalf of the
syndicator and providing additional editing and encoding services.
Mediatech/Starcom's syndicated programming clients include Columbia, Tri-Star,
Buena Vista TV, King World, Warner Bros., Domestic Television Distribution, and
Tribune Entertainment.
The Company created the Digital Delivery Division in order to be able
to digitally deliver spots throughout the United States for Mediatech/Starcom's
clients through digital satellite transmission. In order to establish the
digital satellite network, Mediatech/Starcom equipped its headquarters in
Chicago, Illinois, as its Network Operations Center and entered into two
agreements with Hughes Network Systems, Inc. to provide
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for satellite delivery. In addition, the Company installed over 100 Spot Server
satellite dishes and insertion units at television stations nationwide.
Mediatech/Starcom currently utilizes this Digital Delivery System to a limited
extent. However, in order for the entire satellite delivery network to be
profitable, the Company believes that it would need to install an additional 300
or more Spot Servers throughout the United States. Due to the cost of such
installation, the numerous other digital delivery transmissions systems that
have recently been fully introduced (including high capacity T1
telecommunications lines and fiber optic lines), and the intense competition
from other companies entering into this market, the Company is pursuing the sale
of this division.
Although the Company is currently discussing the possible sale of
Mediatech/Starcom and Digital Delivery Division with certain potential buyers,
no assurance can be given that these operations can or will be sold. In the
event that these operations are not sold, the Company will continue its business
integration plan that it initiated in January 1997 and further consolidate and
integrate these businesses. The failure of the Company to sell these operations
will negatively impact the Company's new strategic plan of limiting its future
operations to providing software products to the broadcast television, radio and
cable marketplace.
MARKETING AND SALES
The Company coordinates the marketing and sales efforts of its
subsidiaries under the supervision of the corporate office.
COMPETITION
Competition in each of the Company's businesses is highly competitive.
The Company competes in its business with numerous competitors and potential
competitors, some of which 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.
The Company's principal competitor in the traffic and billing market 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, confidentiality 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.
The Company believes that its 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
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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, 1997, the Company had 395 employees, of whom 213 were
employed at Enterprise, 20 were employed at CCMS, four were employed at IndeNet,
and 158 at Mediatech/Starcom. The Company's employees are not represented by any
collective bargaining organization.
GOVERNMENT REGULATION
Mediatech transmits its domestic, analog satellite traffic through
earth stations operated by third parties. IndeNet relies on Hughes to transmit
traffic for the Digital Delivery Division 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.
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 traffic and billing products. For the fiscal
years ended March 31, 1997 and 1996, research and development expense was
$746,451 and $446,525. These expenses represent costs incurred in the
development of products by Channelmatic, Enterprise and the Digital Delivery
Division. Although Enterprise intends to continue to actively develop new and
enhanced products, the Company expects that its total research and development
costs will decrease in future periods due to the sale of the Company's interests
in Channelmatic.
SIGNIFICANT CUSTOMERS
During the fiscal year ended March 31, 1997, there was no single
customer representing over 10% of its business. Additionally, no single customer
of Enterprise or CCMS represented more than 10% of the aggregate amount of
business jointly generated by Enterprise and CCMS during the past fiscal year.
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ITEM 2. PROPERTIES.
The Company currently 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:
<TABLE>
<CAPTION>
Location Use Lessee
-------- --- ------
<S> <C> <C>
Los Angeles Corporate head office IndeNet***
Colorado Springs, Colorado Executive offices and office facilities Enterprise Systems Group,
Inc.*
Thames Ditton, Surrey, England Executive offices, office facilities and Enterprise Air - Time
computer suite Systems Limited*
Frenchs Forest, NSW, Australia Executive offices and office facilities Enterprise Systems Group
(Australia) Pty Limited*
Auckland, New Zealand Office facility Enterprise Air - Time
Systems Limited, New
Zealand branch*
Johannesburg, South Africa Office facility Enterprise Air - Time
Systems Limited, South
Africa branch*
Wyoming, Michigan Office facility CCMS
Chicago, Illinois Executive offices; Duplication and delivery Mediatech**
offices; satellite earth station
Niles, Illinois Warehouse Mediatech**
New York, New York Duplication and delivery offices; satellite Mediatech**
earth station
Louisville, Kentucky Duplication and delivery offices Mediatech**
North Hollywood, California Duplication and delivery offices Starcom**
Studio City, California Satellite earth station Starcom**
</TABLE>
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* Subsidiaries or branches of Enterprise
** Subsidiaries for sale
*** Pending office closure during 1997 as part of the Company's business
integration plan.
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. The Los Angeles office will be closed in connection the
move of the corporate office into the Colorado Springs location.
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ITEM 3. LEGAL PROCEEDINGS.
The Company 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.
<TABLE>
<CAPTION>
Per Share Per Share
High Low
--------------- -------------
<S> <C> <C>
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
Fiscal 1997
-----------
Quarter Ended 06/30/96 $7.13 $4.82
Quarter Ended 09/30/96 $4.32 $2.50
Quarter Ended 12/31/96 $4.19 $1.88
Quarter Ended 03/31/97 $2.88 $1.63
</TABLE>
There are 538 stockholders of record. The Company believes that there
are approximately 3,000 stockholders who beneficially own the Common Stock of
the Company.
No dividends have been declared or paid by IndeNet on its Common Stock
since inception, and no dividends are contemplated to be paid by IndeNet at any
time in the foreseeable future.
On February 14, 1997, the Company exchanged 771 shares of its Series A
Preferred Stock for 771 shares of its new Series C Preferred Stock. The exchange
was effected pursuant an exemption under Section 3(a)(9) of the Securities Act
of 1933. No commission or other remuneration was paid or given in connection
with such exchange. The Series C Preferred is not convertible into Common Stock
until April 1, 1997. The holders of the Series C Preferred are entitled, during
each two-week period, to convert up to 5% of the aggregate number of shares of
Series C Preferred issued to such holder in the exchange (the conversion of
fractional shares is permitted if necessary to convert the maximum amount
allowed). Shares not converted during any two-week period may be converted
later, provided that no more than 10% of the holder's shares may be converted
during any two-week period. In the event that the closing bid price of the
Common Stock, as published by The Nasdaq Stock Market, exceeds $7.00 per share
for any five consecutive trading days, the rate at which the shares of Series C
Preferred may be converted will thereafter double to 10% per two-week period,
and the aggregate maximum conversion rate per two week period will double to
20%. The number of shares of Common Stock issuable upon the conversion of a
share of Series C Preferred Stock (the "Conversion Rate") is equal to (x) the
sum of the original issue price of the shares ($10,000) and the accretion (at 8%
per annum beginning January 1, 1997) through the conversion date, (y) divided by
$5.00. The $5.00 price is subject to adjustment for stock splits, stock
dividends, reorganizations and other similar events.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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.
In January 1997, the Company announced its plan to reorganize,
integrate and consolidate the operations of its five subsidiaries. Among other
things, the Company planned to reduce its work force from 610 employees to 445
and to consolidate its 19 offices into 11 facilities. In connection with the
integration plan, the Company to date has reduced its workforce by 155
(excluding employees of Channelmatic), and merged the operations of Starcom and
Mediatech into one company.
The Company currently designs and develops traffic billing, revenue and
program management software products for the management of advertising time and
programming through its subsidiaries Enterprise and CCMS. It also currently is a
provider of television advertisement delivery services for national advertisers
and programmers through its subsidiaries Mediatech and Starcom and the Digital
Delivery Division. Until March 24, 1997, through its subsidiary Channelmatic, it
was a hardware manufacturer and a software provider for advertising insertion
into television programming. On March 24, 1997, the Company sold its interest in
Channelmatic. The Company operates in one business segment. The Company operates
in various countries. See Note 11 to the consolidated financial statements.
On June 2, 1997, the Company announced the results of its strategy
review of its current business. The Board of the Directors of the Company
decided to focus its operations in the technology, software product and services
supplied to the media industry, particularly in the television/radio industry
including broadcast and radio. These products and services are currently
provided by the Company's subsidiaries Enterprise and CCMS. Accordingly, because
the operations of certain of its remaining subsidiaries were inconsistent with
the Company's revised business strategy, the Company has decided to find a
strategic buyer for its content delivery subsidiaries Mediatech, Starcom and the
Digital Delivery Division.
The results of the Company's operations for the past two fiscal years
reflect the Company's prior business goal of becoming a vertically integrated
provider of television advertising and programming services. The Company's
activities during the past two years were primarily directed at (i) acquiring
various businesses that would support its vertically integrated operations, (ii)
the development of a new, state-of-the-art digital satellite network that would
connect the Company's various services with the needs of the television
advertising and programming marketplace, and (iii) financing the foregoing
acquisitions and network development. Since the end of the fiscal year ended
March 31, 1997, management has determined that the Company does not have the
financial ability to acquire the remaining businesses necessary to establish the
planned vertically integrated operations and to fully deploy the equipment for
its satellite digital delivery system. In addition, the television marketplace
is rapidly changing and competition in the digital delivery business is becoming
increasingly competitive as numerous large, well-financed businesses have
entered into the market. Due to the foregoing factors, management has
implemented the new business strategy described elsewhere in this Annual Report,
including the sale of two of its four remaining subsidiaries and the sale of its
Digital Delivery Division. Accordingly, the following comparison of the
Company's operations for the past two fiscal years may not be indicative of the
Company's operations in the future. In addition, even if the proposed sale of
the two subsidiaries and the Digital Delivery Division is not effected as
proposed, the operations during the past two fiscal years are not indicative of
the Company's future operations due to the business integration plan underway
since the third fiscal quarter of fiscal 1997.
11
<PAGE> 12
ACTUAL RESULTS FOR FISCAL 1997 COMPARED TO FISCAL 1996
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
--------------------------------------
<S> <C> <C>
Revenue $46,742,520 $20,868,899
Cost of sales 22,929,918 9,791,964
Selling, general and administrative 21,550,279 10,166,713
Depreciation and amortization 5,992,944 2,076,590
Research and development 746,451 446,525
Corporate 1,901,583 1,023,659
Restructuring, impairment and other costs 18,420,258 -
Other income (expense), net (2,968,110) (459,641)
Income tax (benefit) expense (1,434,997) 17,255
Allocation to minority interest (731,910) (156,416)
Net loss (25,600,116) (2,957,032)
</TABLE>
Revenue
Revenue increased $25.8 million or 124% from $20.9 million in fiscal
1996 to $46.7 million in fiscal 1997 due primarily to the revenues contributed
by the subsidiaries acquired by the Company during fiscal 1997 (the "New
Subsidiaries"). At the end of fiscal 1997, the Company sold its 66.67% interest
in Channelmatic. Although revenues of Channelmatic are included for five months
of fiscal 1996 and twelve months of fiscal 1997, no revenues will be derived
from Channelmatic in the current fiscal year or in the future. In addition, the
Company has announced plans to find a strategic buyer of its subsidiaries
Mediatech and Starcom and its Digital Delivery Division. Accordingly, revenue is
expected to decrease in fiscal 1998.
Cost of sales
Cost of sales increased $13.1 million or 134% from $9.8 million in
fiscal 1996 to $22.9 million in fiscal 1997. As a percent of revenue, the gross
margin decreased from 53% in fiscal 1996 to 51% in fiscal 1997. The changes are
due primarily to the operations of the New Subsidiaries acquired by the Company
during fiscal 1997. At the end of fiscal 1997, the Company sold its 66.67%
interest in Channelmatic, which had a gross margin of only 19% during fiscal
1997. Accordingly, cost of sales as a percent of sales is expected to decrease
in fiscal 1998. In addition, the Company has announced plans to sell its
subsidiaries Mediatech and Starcom and its Digital Delivery Division, which
typically has a lower gross margin than Enterprise and CCMS, which will further
decrease cost of sales as a percent of sales if the proposed divestiture is
consummated.
Depreciation and Amortization
Depreciation and amortization increased from fiscal 1996 to fiscal 1997
due to (i) the additional depreciation and amortization attributable to the New
Subsidiaries since the dates of their acquisitions, and (ii) amortization of
goodwill as a result of those acquisitions. Depreciation and amortization is
expected to decrease in future periods due primarily to (i) exclusion of
depreciation and amortization from the assets which were written-off during
fiscal 1997, (ii) the exclusion of depreciation and amortization expense from
the goodwill and basis step-up of assets related to the sale of Channelmatic in
fiscal 1997, and (iii) exclusion of depreciation and amortization from the
assets which are expected to be sold during fiscal 1998.
12
<PAGE> 13
Research and Development
Research and development ("R&D") increased $.3 million or 67%, from
fiscal 1996 to fiscal 1997 primarily due to increased R&D from Channelmatic and
the R&D from Enterprise after Enterprise was acquired during fiscal 1997. As the
Company's interest in Channelmatic was sold during fiscal 1997, there will be no
future R&D from Channelmatic. However, there may be additionally R&D from CCMS
and Enterprise in future periods from new product development and additional
development of existing products.
Restructuring, Impairment and Other Costs
During the last quarter of fiscal 1997, the Company began to implement
its business integration plan. The purpose of the plan is to streamline
operations and eliminate duplicative and excess costs. The cost reduction phase
of the plan includes the consolidation of administrative functions within the
Company, the merging of the five acquired businesses and the Digital Delivery
Division into two operating divisions organized around core customers, and the
centralization of research and development and marketing functions. Overall, the
business integration plan calls for a reduction in the number of facilities from
19 to 11 and the elimination of over 150 positions from the Company's workforce.
The Company completed the major phase of the integration plan by March 31, 1997.
In conjunction with the implementation of the business integration
plan, the Company recorded a pre-tax special charge to earnings of $18.4 million
in the third and fourth quarters of fiscal 1997. The charge is included in
Restructuring, Impairment and Other Costs under Operating Expenses in the
Consolidated Statement of Operations. Included in the amount are cash items such
as severance and other employee costs of $1.0 million, lease obligations and
other exit costs associated with facility closures of $.6 million, and $.1
million in various other costs related to the implementation of the business
integration plan. Expenditures for the cash restructuring items will be
substantially completed in fiscal 1998.
The non-cash items included in the $18.4 million Restructuring,
Impairment and Other Costs include $16.7 million related to asset write-downs to
net realizable value for disposals of excess facilities and equipment, and
write-offs of goodwill and product development costs. The Company wrote-down
those assets due to (i) a change in its product strategy and (ii), its
determination that the carrying value of the assets may not be recoverable. In
determining the amount of the impairment loss, the fair value of the assets were
calculated as the sum of the discounted future cash flows estimated to be
generated from the utilization of the respective assets
Corporate Expense
Corporate expense is attributable to the expenses of IndeNet, the
parent company. These expenses include salaries, legal and professional fees and
other miscellaneous costs. Corporate expenses increased in fiscal 1997 from
fiscal 1996 by $877,924 or 86% due primarily to an increase in professional fees
and salaries and related costs. The increase in professional fees is related to
the preparation and filing of the registration statements with the SEC and fees
related to the proxy statement for the conversion of Series A Preferred Stock to
Series C Preferred Stock. Salaries and related costs increased from the prior
year as the result of the hiring of a Chief Operating Officer and a full year's
expense in fiscal 1997 from the employees hired during fiscal 1996. The Company
expects that corporate expenses may decrease in future periods due to a
reduction of personnel and a planned corporate office relocation during the fall
of 1997.
Other Income (Expense)
Interest income increased from fiscal 1996 to fiscal 1997 by $82,846 or
60% due primarily to the inclusion of interest income earned by the subsidiaries
acquired during fiscal 1997. Interest income is expected to decrease in future
periods due to estimated lower cash balances.
13
<PAGE> 14
Non-cash interest expense relates to an implied discount on the
conversion features of two convertible notes. No non-cash expense interest is
expected in future periods.
Interest expense increased from fiscal 1996 to fiscal 1997 by $1.0
million due to (i) the inclusion of interest expense of the acquired companies
in fiscal 1997 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 decrease in future periods due to lower expected debt balances and the
pay-off of a shareholder note payable as the result of the sale of Channelmatic.
The Company recorded settlement of lawsuit expense related to the
settlement of a lawsuit. As the Company is currently not in any material
litigation, no significant charge for lawsuit settlements is expected in future
periods.
Miscellaneous income, net of expenses increased $191,063 or 281% due
primarily due to a gain realized on a sale of an office building in May 1997.
Income Taxes
At March 31, 1997 and 1996, the Company (excluding Channelmatic) has
net operating loss carryforwards of $19.8 million and $7.7 million for federal
income tax purposes, of which $2.7 million is subject to a separate return
limitation. The carryforwards expire in varying amounts and years through 2012.
This loss carryforwards also gives rise to a deferred tax asset of $6.7 million
and $2.6 million at March 31, 1997 and 1996. This tax asset has a 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
carryforwards. Income tax benefit for fiscal 1997 primarily represents the
reversal of a deferred tax liability. A deferred tax liability was written-off
the balance sheet in connection with the write-off of capitalized software
development costs which gave rise to the deferred tax liability. Income tax
expense for fiscal 1996 represents state taxes for the various states in which
the Company does business and corporate tax.
Allocation to Minority Interest
The allocation to minority interest represents 33.33% of the net loss
of the majority-owned subsidiary Channelmatic. The Company sold its interest in
Channelmatic during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had $2.9 million in unrestricted cash
and cash equivalents and a working capital deficit of $12.5 million. During the
year ended March 31, 1997, cash and cash equivalents decreased by $.9 million
and the Company used $.8 million in operations, primarily due to the operating
loss of the Company and a decrease in working capital. The Company used $10.9
million in investing activities, primarily for the purchases of CCMS and
Enterprise, capital expenditures for the Company's 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 (ii) cash from acquired companies CCMS and Enterprise and (iii)
proceeds from the sale of Channelmatic. The Company generated $10.7 million in
financing activities, primarily from net proceeds of two private placements
totaling $14.0 million, offset by repayment of a $750,000 mortgage note from the
sale of the underlying collateral on an office building and payments on related
party notes payable of $3.7 million.
The Company anticipates funding its working capital needs for the next
twelve months through (i) sale of assets, (ii) cash generated from operations,
(iii) continued cost savings through the business integration plan, (iv)
extending payments due on acquisition indebtedness owed by the Company to
certain of its stockholders and third parties, and (v) lower costs associated
with servicing contracts related to the
14
<PAGE> 15
deferred income of $2.4 million. During fiscal 1997, the Company generated
negative cash flow primarily due to (i) the operations of Channelmatic and the
other cash needs of that subsidiary, (ii) the operations of the Digital Delivery
Division which, as expected, will not generate positive cash flow until
approximately 400 digital satellite receivers are installed at television
stations nationwide (only approximately 100 are currently installed), and (iii)
the corporate expenses of IndeNet. The remaining subsidiaries of the Company
collectively generated positive cash flow from operations, which cash flow is
expected to be further positively impacted by the business integration plan
referred to above. In order to address the foregoing cash flow problems, the
Company sold Channelmatic (which sale both reduced the cash flow due to the
operations of that company and eliminated the obligations of the Company under
the $3.45 million note owed by the Company to the minority-owner of
Channelmatic) and has announced its intention to sell the Digital Delivery
Division. In addition, the Company has reduced the number of employees at its
corporate office and is planning to move the corporate office into the offices
of Enterprise in Colorado, thereby reducing its corporate overhead. Although the
foregoing actions are expected to significantly improve the Company's overall
cash flow, no assurance can be given that the Company will be able to sell the
Digital Delivery Division or that the other cost reduction actions will be
sufficient to remedy the Company's cash flow deficit.
In January 1997, the Company announced its plan to integrate the
operations of its five subsidiaries and to reorganize the operations of the
subsidiaries. Among other things, the Company planned to reduce its work force
from 610 employees to 445 and to consolidate its 19 offices into 11 facilities.
The business integration plan is currently being implemented among the remaining
businesses, and no assurance can be given that the anticipated amount of cost
reductions will, in fact, be realized or that the cost savings will be
sufficient to offset the Company's working capital deficit.
In September 1996, the Company believed that it had renegotiated
certain of the terms of its convertible notes with the holder of the notes to,
among other things, eliminate the conversion feature of the original issuance,
and convert the obligation into subordinate notes due in two years. The
renegotiated terms called for the total obligation to be repaid by the issuance
of approximately 350,000 shares of the Company's Common Stock, and $4.285
million to be paid in cash in quarterly installments over 2 years. Based on its
belief that the holder of the notes had agreed to the foregoing restructuring,
the Company reflected the terms of the transactions in its Form 10-QSB for the
quarterly period ended September 30, 1996. Since the time of the renegotiations,
the Company has been waiting and expecting formal documentation from the
holder's counsel and, in the interim, has relied on a term sheet initialed by
the holder and oral representations made by the holder. In January and February
1997, the Company received two letters from the holder's counsel stating the
holder does not believe that it is bound by the terms of the renegotiations and
that the Company is in default under the original terms of the notes.
Accordingly, the Company has doubt regarding the renegotiated terms of the notes
and has reflected in this Form 10-KSB the original terms of the convertible
notes. The Company is continuing its discussions with the holder to restructure
the notes. However, no assurance can be given that the outcome of the
negotiations will be favorable and such outcome may negatively impact the
liquidity of the Company. The Company has classified the $4.285 million
obligation as a current liability at March 31, 1997.
The Company's debt obligations consist of debt owed by both IndeNet and
by certain of its subsidiaries. The debt obligations of IndeNet consist of
indebtedness owed to affiliates of the Company and convertible notes held by one
investment fund, whereas the debt obligations of the subsidiaries are loans owed
to third party institutional lenders. IndeNet currently is, however, a holding
company that generates no revenues and is dependent on cash from its
subsidiaries for operating proceeds. Certain of the subsidiaries are subject to
loan agreements that prohibit dividends or limit cash advances to IndeNet.
Accordingly, the ability of IndeNet to fund its debt service obligations and its
working capital expenses is dependent upon proceeds from sale of subsidiaries,
income from its subsidiaries and upon its ability to raise additional financing.
During fiscal 1997, the Company did not make certain scheduled payments on the
related party notes payable. The Company currently believes that cash generated
by the subsidiaries from operations is sufficient to repay the debt obligations
of its subsidiaries as such obligations become due. Since the obligations of
IndeNet to certain of its affiliates under its existing debt is secured by a
lien
15
<PAGE> 16
on some of the stock of one its subsidiaries, failure to repay such indebtedness
could result in the loss of a portion of IndeNet's interest in such subsidiary.
Any foreclosure by the institutional lenders that have extended credit to the
subsidiaries could result in the foreclosure of certain of the assets of the
subsidiaries.
Inflation
The Company does not believe that inflation will have a material impact
on the Company's future operations.
NEW ACCOUNTING STANDARDS
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). This pronouncement provides
a different method of calculating earnings per share than is currently used in
accordance with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted earnings
per share. This pronouncement is effective for fiscal years and interim periods
ending after December 15, 1997. Early adoption is not permitted. The Company has
not determined the effect, if any, of adoption on its EPS computations.
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
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated by reference to the Company's Proxy Statement for the 1997
Annual Meeting.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's Proxy Statement for the 1997
Annual Meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's Proxy Statement for the 1997
Annual Meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's Proxy Statement for the 1997
Annual Meeting.
16
<PAGE> 17
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Item 13(a)(1) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
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)
17
</TABLE>
<PAGE> 18
<TABLE>
<S> <C>
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)
10.9 Certificate of Designation of Series C
Preferred Stock (Incorporated by reference to Appendix A of Proxy
Statement (File No. 333-1205)
10.10 Channelmatic Stock Purchase Agreement and First
Amendment (Incorporated by reference to
Exhibit 99 to Report on Form 8-K for event
dated March 24, 1997)
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
</TABLE>
Item 13(b) Reports on Form 8-K
None
18
<PAGE> 19
INDENET, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
registrant caused this Report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
INDENET, INC.
Signed By: /s/ Graeme R. Jenner
---------------------
Graeme R. Jenner,
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.
Date: June 30, 1997 By: /s/ Andre A. Blay
-----------------
Andre A. Blay, Chairman of the Board
and Director
Date: June 30, 1997 By: /s/ Graeme R. Jenner
--------------------
Graeme R. Jenner,
Chief Executive Officer and Director
Date: June 30, 1997 By: /s/ Thomas A. Baur
------------------
Thomas A. Baur, Director
Date: June 30, 1997 By: /s/ Cary S. Fitchey
-------------------
Cary S. Fitchey, Director
Date: June 30, 1997 By: /s/ Richard L. Schleufer
------------------------
Richard L. Schleufer, Director
Date: June 30, 1997 By: /a/ William A. Kunkel
---------------------
William A. Kunkel, Director
Date: June 30, 1997 By: /s/ H. Bradley Eden
-------------------
H. Bradley Eden, Director
19
<PAGE> 20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of BDO Seidman, LLP, Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996.................................... F-3
Consolidated Statements of Operations for the years ended March 31, 1997 and 1996............ F-5
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997
and 1996................................................................................ F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1997
and 1996............................................................................... F-7
Notes to Consolidated Financial Statements................................................... F-9
</TABLE>
F-1
<PAGE> 21
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, 1997 and 1996, 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, 1997 and 1996, 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, 1997
F-2
<PAGE> 22
INDENET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS (Note 6)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 2,885,406 $ 3,818,133
Restricted cash (Notes 3 and 6) 1,514,902 453,340
Accounts and other receivables, net of allowance for doubtful
accounts of $230,063 and $245,932 (Note 11) 8,425,017 5,159,651
Inventories (Notes 1 and 4) 311,434 2,143,927
Note receivable, current portion (Note 2) 434,080 -
Equity securities held for sale (Note 2) 2,341,262 -
Prepaid expenses 922,344 209,822
------------ ------------
Total current assets 16,834,445 11,784,873
Property and equipment, less accumulated depreciation and
amortization (Notes 1, 5 and 6) 11,872,587 13,646,419
Note receivable, net of current portion (Note 2) 2,407,314 -
Capitalized software development costs, net of accumulated
amortization of $55,366 and $57,105 (Note 1) 838,837 485,930
Customer list, net of accumulated amortization of
$835,030 (Notes 1 and 2) 14,195,501 -
Goodwill, net of accumulated amortization of $1,313,414
and $511,321 (Notes 1 and 2) 6,320,092 16,514,557
Other long-term assets 324,531 761,158
------------ ------------
TOTAL ASSETS $ 52,793,307 $ 43,192,937
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 23
INDENET, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
------------ -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 10,323,132 $ 7,667,159
Deferred income (Note 1) 2,406,977 -
Notes payable, current portion (Notes 6 and 9) 9,089,520 1,047,694
Notes payable to shareholders of acquired companies,
current portion (Notes 2 and 6) 6,844,117 1,197,226
Capital lease obligations, current portion (Note 7) 645,755 -
------------ -------------
Total current liabilities 29,309,501 9,912,079
Notes payable to shareholders of acquired companies,
net of current portion (Notes 2 and 6) 172,123 4,676,221
Notes payable, net of current portion (Notes 6 and 9) 4,896,228 8,152,051
Capital lease obligations, net of current portion (Note 7) 702,321 -
Other long-term liabilities 65,486 -
------------ -------------
TOTAL LIABILITIES 35,145,659 22,740,351
Minority interest (Note 2) - 1,580,456
Commitments and contingencies (Note 13)
Stockholders' equity (Notes 1 and 9):
Preferred stock, Series A, $.0001 par value
Authorized - 1,200 shares, 190 issued and outstanding 1 -
Preferred stock, Series B, $.0001 par value
Authorized - 40,000,000 shares, 216,667 issued and outstanding 22 22
Preferred stock, Series C, $.0001 par value
Authorized - 1,200 shares, 789 issued and outstanding 1
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 17,181,064 and 12,451,815 17,181 12,451
Additional paid-in capital 49,209,922 23,169,510
Accumulated deficit (32,036,455) (4,309,853)
Foreign currency translation adjustment 456,976 -
------------ -------------
Total stockholders' equity 17,647,648 18,872,130
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,793,307 $ 43,192,937
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 24
INDENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenue (Notes 1 and 11) $ 46,742,520 $ 20,868,899
Cost of sales 22,929,918 9,791,964
------------ ------------
Gross profit 23,812,602 11,076,935
Operating expenses:
Selling, general and administrative 21,550,279 10,166,713
Depreciation and amortization (Notes 1 and 5) 5,992,944 2,076,590
Research and development (Note 1) 746,451 446,525
Corporate 1,901,583 1,023,659
Restructuring, impairment and other costs (Note 10) 18,420,258 --
------------ ------------
48,611,515 13,713,487
------------ ------------
Operating loss (24,798,913) (2,636,552)
Other income (expense):
Interest income 221,611 138,765
Non-cash interest expense (Note 9) (847,000) --
Interest expense (Note 6) (1,829,895) (811,306)
Settlement of lawsuits (Note 13) (802,256) 145,000
Gain on sale of Channelmatic, Inc. (Note 2) 30,466 --
Miscellaneous, net 258,964 67,900
------------ ------------
(2,968,110) (459,641)
------------ ------------
Loss before income tax expense and
allocation to minority interest (27,767,023) (3,096,193)
Income tax (benefit) expense (Notes 1 and 8) (1,434,997) 17,255
------------ ------------
Loss before allocation to minority interest (26,332,026) (3,113,448)
Allocation to minority interest (Note 2) (731,910) (156,416)
------------ ------------
Net loss (25,600,116) (2,957,032)
Dividends to preferred shareholders (Note 9) (2,126,486) (54,000)
------------ ------------
Net loss allocable to common shareholders $(27,726,602) $ (3,011,032)
============ ============
Net loss per share (Note 1) $ (1.73) $ (0.35)
============ ============
Weighted average number of
common shares outstanding 16,022,847 8,615,055
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 25
INDENET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Two Years Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
------------------- ------------------- --------------------
Number of Preferred Number of Preferred Number of Preferred
Shares Stock Shares Stock Shares Stock
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 -- $ -- -- $ -- -- $ --
Exercise of warrants (Note 9) -- -- -- -- -- --
Cashless exercise of stock
options and warrants (Note 9) -- -- -- -- -- --
Conversion of debt to preferred
stock (Note 2) -- -- 166,667 17 -- --
Conversion of debt to common
stock (Note 2) -- -- -- -- -- --
Sale of preferred stock (Note 9) -- -- 50,000 5 -- --
Shares issued for purchase
of Channelmatic (Note 2) -- -- -- -- -- --
Shares issued and to be issued
for purchase of Starcom
Television Services, Inc.
(Note 2) -- -- -- -- -- --
Buy-back of common stock from
officers, at fair market
value (Note 9) -- -- -- -- -- --
Shares issued in connection with
private placement (Note 9) -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ------- ------- ----- ----- -----
Balance at March 31, 1996 -- -- 216,667 22 -- --
Issuance of Series A Preferred
Stock (Note 9) 1,200 1 -- -- -- --
Exercise of warrants (Note 9) -- -- -- -- -- --
Shares issued for purchase of
CCMS (Note 2) -- -- -- -- -- --
Shares issued for purchase of
Enterprise (Note 2) -- -- -- -- -- --
Adjustment to purchase price
of Starcom
acquisition (Note 2) -- -- -- -- -- --
Cashless exercise of employee
stock options (Note 9) -- -- -- -- -- --
Stock issued for settlement of
accounts payable (Note 9) -- -- -- -- -- --
Shares issued from conversion
of Series A Preferred
Stock (Note 9) (288) -- -- -- -- --
Shares issued for the conversion
of convertible
debt to Common Stock
(Note 9) -- -- -- -- -- --
Shares issued for the conversion
of shareholder
notes to Common Stock
(Note 2) -- -- -- -- -- --
Deferred interest payable in
Common Stock (Note 9) -- -- -- -- -- --
Conversion of Series A to Series
C Preferred
Stock (Note 9) (722) -- -- -- 789 1
Redemption of Series A conversion
fractional shares
(Note 9) -- -- -- -- -- --
Deferred accretion on Series A
and Series C Preferred
Stock (Note 9) -- -- -- -- -- --
Amount to be paid in Common
Stock related to
stated accretion and put
option on Series A and
Series C Preferred Stock
(Note 9) -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
Foreign currency translation
adjustment (Note 1) -- -- -- -- -- --
-------- ------- ------- ----- --- -----
Balance at March 31, 1997 $ 190 $ 1 216,667 $ 22 789 $ 1
======== ======= ======= ===== === =====
</TABLE>
<TABLE>
<CAPTION>
Stock Common Stock Foreign
------------------- Additional Currency
Number of Common Paid-in Accumulated Deferred Translation
Shares Stock Capital Deficit Accretion Adjustment Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 5,404,823 $5,405 $ 6,064,463 $ (1,298,821) $ -- $ -- $4,771,047
Exercise of warrants (Note 9) 3,079,744 3,079 4,935,241 -- -- -- 4,938,320
Cashless exercise of stock
options and warrants (Note 9) 441,280 441 (441) -- -- -- --
Conversion of debt to preferred
stock (Note 2) -- -- 499,983 -- -- -- 500,000
Conversion of debt to common
stock (Note 2) 848,951 849 2,644,954 -- -- -- 2,645,803
Sale of preferred stock (Note 9) -- -- 145,395 -- -- -- 145,400
Shares issued for purchase
of Channelmatic (Note 2) 1,530,000 1,530 4,313,070 -- -- -- 4,314,600
Shares issued and to be issued
for purchase of Starcom
Television Services, Inc.
(Note 2) 1,000,000 1,000 3,999,000 -- -- -- 4,000,000
Buy-back of common stock from
officers, at fair market
value (Note 9) (77,778) (78) (349,922) -- -- -- (350,000)
Shares issued in connection with
private placement (Note 9) 224,795 225 917,767 -- -- -- 917,992
Preferred stock dividends -- -- -- (54,000) -- -- (54,000)
Net loss -- -- -- (2,957,032) -- -- (2,957,032)
----------- -------- ----------- ------------ --------- ---------- -----------
Balance at March 31, 1996 12,451,815 12,451 23,169,510 (4,309,853) -- -- 18,872,130
Issuance of Series A Preferred
Stock (Note 9) 1,200 -- -- 11,183,605 -- -- -- 11,183,606
Exercise of warrants (Note 9) 178,876 179 414,520 -- -- -- 414,699
Shares issued for purchase of
CCMS (Note 2) 587,612 588 2,647,339 -- -- -- 2,647,927
Shares issued for purchase of
Enterprise (Note 2) 2,276,200 2,277 8,665,493 -- -- -- 8,667,770
Adjustment to purchase price
of Starcom
acquisition (Note 2) (362,500) (363) (1,449,637) -- -- -- (1,450,000)
Cashless exercise of employee
stock options (Note 9)- 314,125 314 (314) -- -- -- --
Stock issued for settlement of
accounts payable (Note 9) 98,595 99 278,349 -- -- -- 278,448
Shares issued from conversion
of Series A Preferred
Stock (Note 9) 1,032,485 1,032 (1,032) -- -- -- --
Shares issued for the conversion
of convertible
debt to Common Stock
(Note 9) 487,694 488 1,226,396 -- -- -- 1,226,884
Shares issued for the conversion
of shareholder
notes to Common Stock
(Note 2) 116,162 116 232,208 -- -- -- 232,324
Deferred interest payable in
Common Stock (Note 9) -- -- 847,000 -- -- -- 847,000
Conversion of Series A to Series
C Preferred
Stock (Note 9) -- -- (1) -- -- -- --
Redemption of Series A conversion
fractional shares
(Note 9) -- -- (52,000) -- -- -- (52,000)
Deferred accretion on Series A
and Series C Preferred
Stock (Note 9) -- -- 1,312,469 -- (1,312,469) -- --
Amount to be paid in Common
Stock related to
stated accretion and put
option on Series A and
Series C Preferred Stock
(Note 9) -- -- 736,017 -- -- -- 736,017
Preferred stock dividends -- -- -- (2,126,486) 1,312,469 -- (814,017)
Net loss -- -- -- (25,600,116) -- -- (25,600,116)
Foreign currency translation
adjustment (Note 1) -- -- -- -- -- 456,976 456,976
----------- -------- ----------- ------------ --------- ---------- ------------
Balance at March 31, 1997 $17,181,064 $ 17,181 $49,209,922 $(32,036,455) $ -- $ 456,976 $17,647,648
=========== ========= =========== ============ ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 26
INDENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Year Ended March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,600,116) $ (2,957,032)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,992,944 2,076,590
Amortization of deferred interest 847,000 -
Restructuring, impairment and other costs 17,781,415 -
Gain on sale of Channelmatic (30,466) -
Allocation of loss to minority interest (731,910) (156,416)
Gain on sale of building and other PP&E (143,216) -
Changes in operating assets and liabilities:
Restricted cash 185,190 235,486
Accounts receivable (1,491,085) (129,885)
Inventories 332,334 (158,463)
Prepaid expenses (466,870) 8,622
Other assets 189,209 (135,619)
Accounts payable and accrued expenses 2,537,615 311,566
Deferred income (293,250) -
Other long-term liabilities 87,983 -
------------ ------------
NET CASH USED IN OPERATIONS (803,223) (905,151)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,855,507) (2,042,710)
Capitalized software development costs (4,565,053) (510,707)
Deferred financing costs (456,950) -
Net proceeds from sale of building and other PP&E 1,326,890 -
Proceeds from sale of Channelmatic 5,250,000 -
Purchase of businesses (11,036,522) -
Cash of acquired businesses 933,550 68,571
Cash of divested business (451,872)
Collection of note receivable - 583,604
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (10,855,464) (1,901,242)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (6,931,447) (5,534,728)
Repayment of notes payable to shareholders (3,670,038) -
Proceeds from notes payable 9,859,140 3,000,000
Proceeds from exercise of warrants and options 414,699 4,938,320
Proceeds from sale of preferred stock - 145,400
Net proceeds from private placement 11,183,606 4,000,000
Purchase and cancellation of treasury stock - (350,000)
Redemption of fractional shares of preferred stock (52,000) -
Dividends on preferred stock (78,000) (54,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,725,960 6,144,992
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (932,727) 3,338,599
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,818,133 479,534
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,885,406 $ 3,818,133
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 27
INDENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 1997 1996
----------------- ----------------
<S> <C> <C>
Cash paid during the period for:
Interest 1,463,411 95,747
Income taxes 264,297 17,255
</TABLE>
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 637,500 shares of the Company's common stock valued at $4.00
per share, its then fair market value.
Effective May 16, 1996, in conjunction with an Agreement and Plan of Merger with
Cable Computerized Management Systems, Inc., 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, 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 valued at
$2.51 per share, its then fair market value.
During the year ended March 31, 1997, the Company issued 98,595 shares of common
stock as payment for accounts payable totaling $278,448.
During the year ended March 31, 1997, the Company recorded deferred interest of
$847,000 related to the placement of convertible notes totaling $5.5
million. The amount was fully amortized and charged to interest expense
during the same period.
During the year ended March 31, 1997, the Company recorded deferred dividends of
$1,312,469 related to the issuance of convertible Series A Preferred Stock.
The amount was recognized as dividends in full during the same period.
During the year ended March 31, 1997, the Company recorded $736,017 of
accretion, to be paid in Common Stock, related to Series A Preferred Stock.
During the year ended March 31, 1997, the Company issued 116,162 shares of
common stock valued at $2.00 per share, its then fair value, from
conversions of $232,324 of shareholder notes.
Effective March 24, 1997, in connection with the sale of the Company's 66.67%
interest in Channelmatic, Inc., the Company divested assets of approximately
$6,026,000 (including cash of $451,872) and liabilities of approximately
$4,030,000 in exchange for $5,250,000 in cash, $2,841,394 in notes
receivable from and $2,841,262 of a short-term equity investment in LIMT AB.
See accompanying notes to consolidated financial statements
F-8
<PAGE> 28
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), its 66.67%-owned
subsidiary Channelmatic, Inc. ("Channelmatic") (since its acquisition on
November 27, 1995), Cable Computerized Management Systems, Inc. ("CCMS") (since
its acquisition on May 16, 1996), and Enterprise Systems Group, Ltd.
("Enterprise") (since its acquisition on May 24, 1996). The Company's interest
in Channelmatic was sold on March 24, 1997, effective for accounting purposes on
March 31, 1997. 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. Effective July 15, 1995, the Company re-incorporated as a
Delaware corporation. The Company designs and develops traffic billing, revenue
and program management software products for the management of advertising time
and programming. It also is a provider of television advertisement delivery
services for national advertisers and programmers. Until the sale of the
Company's interest in Channelmatic on March 24, 1997, it developed, assembled,
and distributed 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 world and are serviced by operating
facilities located in Colorado Springs, Colorado; Thames Ditton, England;
Sydney, Australia; Grand Rapids, Michigan; Chicago, Illinois; Louisville,
Kentucky; New York, New York; and Los Angeles, California.
LIQUIDITY
At March 31, 1997, the Company had a working capital deficit of $12.5
million. Included in this amount are principal payments of $7.0 million due to
the former shareholders of the acquired subsidiaries. The Company is also
currently attempting to restructure the terms of these notes so that payments
made will not have negative impact on operations. The Company is currently in
negotiations with the holder of two notes totaling $4.3 million to restructure
the notes. Over the next twelve months, the Company believes cash flow from
operations will be positive. This is expected to be accomplished primarily
through the Company's business restructuring and integration plan designed to
improve operating efficiencies. The Company anticipates selling its Mediatech
and Starcom subsidiaries for a combination of cash and other consideration. The
Company expects that the cash proceeds from the sale of those subsidiaries will
result in a significant increase to working capital. The Company would, if
necessary, liquidate certain long-term assets for cash and liquidate certain
liabilities with the Company's common stock. The Company also believes it could
raise additional funds through a private placement of equity securities. The
Company believes it will be successful in its plans to meet cash requirements
over the next twelve months.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Company's foreign subsidiaries is the
local currency. The assets and liabilities of the subsidiaries whose functional
currencies are other than the U.S. dollar are translated into U.S. dollars at
the current exchange rate in effect at the balance sheet date. Income and
expense items are translated using the average exchange rate during the period.
Cumulative translation adjustments are reflected as a separate component of
stockholders' equity, until there is a realized reduction of the investment in
the foreign operations. Foreign currency transaction gains and losses are
included in results of operations.
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).
F-9
<PAGE> 29
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
Vehicles 4 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 software products
are capitalized upon the establishment of technological feasibility until ready
for sale. At each balance sheet date, using an un-discounted 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 software development costs has continuing value.
All other research and development costs are charged to research and
development expense in the period incurred.
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. During fiscal 1997, the
Company wrote-off capitalized development costs of $13.1 million. The Company
wrote-down those assets as it determined that the carrying value of these assets
may not be recoverable due to management's change in product strategy.
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, the
February 7, 1996 acquisition of Starcom and the May 16, 1996 acquisition of
CCMS. Goodwill is amortized on a straight-line basis over 20 years. During
fiscal 1997, the Company wrote-off goodwill of $2.5 million from the
acquisitions of Mediatech and Starcom. The Company wrote-down the goodwill as it
determined that the carrying value of this asset may not be recoverable due to
changes in business affecting its realization. In determining the amount of the
impairment loss, the fair value of the asset was calculated as the sum of the
discounted cash flows estimated to be generated from the utilization of the
respective assets.
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.
CUSTOMER LIST
Customer list represents an identifiable intangible asset acquired in
connection with the May 24, 1996 acquisition of Enterprise. The customer list is
supported by long-term contracts held by Enterprise. Customer list is being
amortized on a straight-line basis over 15 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 customer list has continuing value.
F-10
<PAGE> 30
REVENUE RECOGNITION
Revenue is recognized at the time products are shipped or installed to
the customer or at the completion of services rendered.
Deferred Income
Deferred income represents amounts received for products and services
not yet supplied at the balance sheet date.
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 weighted 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 FINANCIAL INSTRUMENTS
The fair value of the Company's notes receivable and long-term debt is
estimated based on the quoted market price for the same or similar financial
instruments issued, or on the current rates offered to the Company for financial
instruments of the same remaining maturities.
STOCK-BASED COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), which establishes a fair value method of accounting for stock-based
compensation plans. In accordance with SFAS 123, the Company has chosen to
continue to account for stock-based compensation utilizing the intrinsic value
method prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
compensation is measured at the grant date based on the value of the award and
recognizes this cost over the service period. The value of the stock-based award
is determined using a pricing model whereby compensation cost is the excess of
the fair market value of the stock as determined by the model at grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
F-11
<PAGE> 31
NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). This pronouncement provides
a different method of calculating earnings per share than is currently used in
accordance with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted earnings
per share. This pronouncement is effective for fiscal years and interim periods
ending after December 15, 1997. Early adoption is not permitted. The Company has
not determined the effect, if any, of adoption on its EPS computations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 1997 presentation.
2. ACQUISITIONS AND SALE OF ASSETS
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 $9.1 million. Under
the terms of the Agreement with the shareholders of Mediatech, the Company
issued 900,000 shares of restricted common stock valued at $1.5 million (its
fair value), paid $3.0 million in cash and issued notes of $4.6 million.
Principal and interest payments on the notes were to be payable quarterly and
begin 90 days from the date of close and will equal $18,750 per quarter for the
first four quarters; increase to $141,033 for the fifth through the twelfth
quarters; and remain at $122,283 for the remaining term of the notes. Effective
June 30, 1995, a former shareholder of Mediatech converted $2.25 million of a
note payable into 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 into 26,840
shares of the Company's common stock at $4.00 per share. The Company has not
made the schedule May 1997 note payment to one of the note holders. The Company
is currently in discussions with the note holder towards renegotiating the terms
and conditions of the notes. The Company has classified the entire obligation
of $2.1 million in principal plus accrued interest as a current liability as of
March 31, 1997.
The acquisition was accounted for as a purchase. The results of
operations of Mediatech are included in the statement of operations as of the
date of acquisition. The excess purchase price over the fair value of the
identifiable net assets acquired is $9.0 million, of which $4.9 million is
allocated to purchased equipment, $200,000 to long-term assets, and $4.0 million
to goodwill. The purchased equipment is being amortized on a straight-line basis
over five years and goodwill is being amortized on a straight-line basis over 20
years. See Notes 1 and 10 regarding write-down of goodwill.
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 $5.6 million 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 approximately 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
F-12
<PAGE> 32
$3.0 million to the capital of Channelmatic, which amount was payable over an
18-month period with interest at an 8% annual rate. The $3.0 million was
contributed to Channelmatic. The Company also 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 $6.0 million on a pro rata basis.
The $5.6 million promissory note bears interest at a rate of 8% per
annum. A $2.0 million 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
was to make monthly payments of principal and interest equal to $58,962. The
Company made various payments towards the note during fiscal 1997. The Company's
obligations under the promissory note were 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 guarantee of Channelmatic.
The acquisition was accounted for as a purchase. The results of
operations of Channelmatic are included in the statements of operations as of
the date of acquisition through the sale of Channelmatic effective March 31,
1997. The excess purchase price over the fair value of the identifiable net
assets acquired was $10.1million, of which $600,000 was allocated to purchased
equipment and $9.5 million to goodwill. The purchased equipment was being
amortized on a straight-line basis over five years and goodwill was being
amortized on a straight-line basis over 20 years.
On March 24, 1997, the Company sold its 66.67% interest in Channelmatic
to Limt Local Insertion Media Technology AB, a Swedish corporation ("LIMT") for
$10.91 million. The total consideration consisted of (i) $5.25 million in cash;
(ii) 237,000 shares of LIMT's shares of capital stock; (iii) LIMT's Convertible
Subordinated Debenture, dated May 1, 1997, in the amount of SEK (Swedish Krona)
10,697,500 ("Note 1"); and (iv) LIMT's Subordinated Debenture, dated May 1,
1997, in the principal amount of SEK 10,696,494 ("Note 2"). Based on the
conversion rate in effect between the United States dollar and SEK, Note 1 and
Note 2 had an aggregate principal balance of U.S. $2.8 million at the time of
sale. The 237,700 shares of LIMT stock was valued at $2.84 million, which
management believes is its fair value. The two notes bear interest at a rate of
5.5% per annum, with interest payable quarterly. The entire principal balance of
Note 1 is due and payable on April 30, 2000. Note 1 provides that its
outstanding principal balance, together with any accrued interest thereon, may
be prepaid, in full or in part, at any time prior to December 31, 1998. After
December 31, 1998, Note 1 will be convertible at the option of the Company into
shares of common stock of LIMT at the rate of one share for each SEK 90 of
principal amount to be converted. Commencing June 30, 1997 Note 2 is payable in
12 equal principal installments of SEK 891,372 plus interest. Note 2 may be
prepaid at any time. If the entire principal balance of Note 2 is prepaid in
full prior to December 31, 1998, such prepayment may be made in the amount of
80% of the then unpaid principal balance, plus accrued but unpaid interest. In
the event of a default in payment under Note 2, in addition to any other
available remedies, the holder of Note 2 may convert the unpaid portion of the
Note into LIMT's common stock at a conversion rate equal to 80% of the
conversion rate applicable under Note 1.
The Company used part of the cash consideration received of $5.25
million to pay-off a shareholder note payable, which was secured by the
Company's stock ownership in Channelmatic. The amount used to the pay-off the
debt plus accrued interest was $3.45 million. In a separate agreement, the
Company and the holder of the shareholder note agreed to transfer 42,000 shares
of LIMT common stock received by IndeNet from LIMT in the sale of Channelmatic
to the holder for $500,000, the Company's costs basis in the stock. The $500,000
receivable is included in accounts and other receivables on the balance sheet as
of March 31, 1997.
As a result of the $10.91 million recorded as consideration for the
sale of the Company's interest in Channelmatic, the Company realized a gain of
$30,466. At the time of sale (March 31, 1997), Channelmatic had total assets of
$6.0 million and total liabilities of $4.0 million.
Management intends to sell its investment in the common stock of LIMT
of $2.3 million in the next twelve months. Accordingly, the investment in LIMT
stock is classified as a current asset and stated at the lower of cost or
market.
F-13
<PAGE> 33
STARCOM
On February 7, 1996, the Company acquired 100% of the common stock of
Starcom for 637,500 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 approximately 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 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. The excess purchase price over the fair value of the
identifiable net assets acquired is $4.9 million, of which $2.9 is allocated to
purchased equipment and $2.0 million is allocated to goodwill. The purchased
equipment is being amortized on a straight-line basis over five years and
goodwill is being amortized on a straight-line basis over 20 years. See Notes 1
and 10 regarding write-off of goodwill.
CCMS
On May 16, 1996 the Company completed the acquisition of CCMS for a
purchase price of $4.8 million. 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 $1.0 million in cash and by
the Company issuing 587,612 unregistered shares of the Company's common stock to
the CCMS shareholders. The shares are subject to certain "dribble-out"
provisions through May 1998. 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, which management believes was its fair value. 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 is being accounted for as a purchase. The excess of the
purchase price over the net assets of $3.6 million is included in Goodwill and
is being amortized over 20 years. The results of operations of CCMS are included
in the statement of operations as of the date of acquisition. See Note 11 for
unaudited pro forma results of operations which include CCMS.
ENTERPRISE
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
$27.3 million. 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 $10.0 million in cash
and $5.0 million 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,
which management believes was its fair value. 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 a Preferred Stock private placement. In
connection with the acquisition of Enterprise, the Company elected two designees
of the former Enterprise shareholders to the Company's Board of Directors.
During fiscal 1997, note holders converted $232,324 of principal into 116,162
shares of the Company's common stock. The stock was valued at its fair value at
the time of conversion. The Company has not made the scheduled note payments
beginning November 1996
F-14
<PAGE> 34
through May 1997. The Company is currently in discussions with the note holders
towards renegotiating the terms and conditions of the notes. The Company has
classified the entire obligation of $4.3 million in principal plus accrued
interest as a current liability as of March 31, 1997.
The acquisition was accounted for as a purchase. A part of the
allocation of the purchase price, $15.0 million, is included in Customer List
and is being amortized over 15 years. The customer list is supported by
long-term contracts held by Enterprise. The results of operations of Enterprise
are included in the statement of operations as of the date of acquisition. See
Note 11 for unaudited pro forma results of operations which include Enterprise.
3. RESTRICTED CASH
At March 31, 1997, the Company had $1.5 million in a restricted bank
account as an offset for a corresponding current liability of $1.3 million. The
liability represents a hedging facility to mitigate the Company's exposure to
currency fluctuations between the United States dollar and British pound.
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. During fiscal 1997, the Company
paid approximately $438,000 for payroll taxes from this escrow account.
4. INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
--------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 311,434 $ 1,283,372
Work in process - 401,467
Finished goods - 644,289
--------------------------------------------------------------------------
311,434 2,329,128
Less reserve for obsolescence - 185,201
--------------------------------------------------------------------------
Total inventories $ 311,434 $ 2,143,927
==========================================================================
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
-------------------------------------------------------------------------
<S> <C> <C>
Land $ - $ 500,000
Building and improvements - 628,753
Equipment 14,597,567 13,731,279
Leasehold improvements 391,862 359,233
Furniture and fixtures 154,179 70,801
Vehicles 482,068 59,596
-------------------------------------------------------------------------
15,625,676 15,349,662
Less accumulated depreciation and
amortization 3,753,089 1,703,243
-------------------------------------------------------------------------
Property and equipment, net $11,872,587 $13,646,419
=========================================================================
</TABLE>
Depreciation and amortization related to Property and Equipment for the
years ended March 31, 1997 and 1996 was $3.5 million and $1.6 million.
F-15
<PAGE> 35
6. NOTES PAYABLE, LONG-TERM DEBT AND LINES-OF-CREDIT
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable - minority shareholder of Channelmatic; 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. Note was paid in full on March 24, 1997.
See Note 2. $ - $3,618,947
Notes payable - former shareholders of Mediatech; bearing interest
at 8.0%; one note due in monthly installments of $40,658
through November 2002; other notes due in aggregate quarterly
installments of $4,587 through November 2004; due from November
2002 through February 2005; unsecured. The Company and holder
of one of the notes are currently in discussions to modify the
terms of the note. 2,248,564 2,254,500
Notes payable - former shareholders of Enterprise; bearing
interest at 8.0%; due in quarterly installments of $447,214
through May 2000, secured by 5/27th of the capital stock of
Enterprise. The Company and the holders of the notes are
currently in discussions to modify the terms of the notes. 4,767,676 -
$1,850,000 bank line-of-credit expiring December 31, 1997.
$350,000 of this line bears interest at 8.5%. The remainder
bears interest at the LIBOR rate. The line was secured by
substantially all the assets of Mediatech. The line was
refinanced during 1997 through another banking facility. - 1,850,000
Line of credit, interest at the bank's prime rate plus 3%.
Borrowings may not exceed $2,000,000 with availability
limited based on various factors. The agreement was to
expire on January 31, 1998 and was subject to renewal. The
line was refinanced during 1997 through another banking - 1,188,605
facility.
Line of credit, interest at the bank's prime rate plus 2.25% (10.75%
at March 31, 1997). Interest is due monthly. The maximum amount
available under the agreement is the lesser of $2,925,000 or 80%
of the eligible unbilled accounts receivables plus the lesser of
$600,000 or 80% of the eligible unbilled accounts receivable, as
specified in the agreement. The line is secured by substantially
all the assets of Mediatech. 2,191,213 -
Note payable - bank; 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 was secured by
substantially all the assets of Mediatech and was refinanced
during 1997 through another banking facility. - 1,253,868
Mortgage payable - bank; 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. - 759,545
Note payable - bank, bearing interest at prime plus 2.25% (10.75%
at March 31, 1997); due in monthly installments of $41,667
through March 1, 2002. The line is secured by substantially
all the assets of Mediatech. 2,458,333 -
</TABLE>
F-16
<PAGE> 36
6. NOTES PAYABLE, LONG-TERM DEBT AND LINES-OF-CREDIT (CONTINUED)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Various notes payable to vendors, interest ranging from 0% to
21.07%, monthly payments ranging from $400 to $7,000, due
through September 1999. 309,447 1,147,727
Note payable - bank, bearing interest at prime plus 2.25%
(10.75% at March 31, 1997). The amount available is
$600,000. No advances were outstanding at March 31, 1997. - -
$3,000,000 convertible note 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. 1,785,000 3,000,000
$2,500,000 convertible note payable - bearing interest at 7.0%,
due May 30, 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. 2,500,000 -
Line of credit, interest at the bank's base rate plus 2% (8.0%
at March 31, 1997). Borrowings may not exceed
$1,237,500. The agreement expires on June 30, 1998 and is
subject to renewal. The line is secured by the assets of 1,237,500 -
Enterprise.
Line of credit, interest at the bank's base rate plus 2% (8.0% at
March 31, 1997). Borrowings may not exceed $1,650,000. The
agreement expires on June 30, 1998 and is subject to renewal.
At March 31, 1997, $248,504 in borrowing capacity remained
available. The line is secured by the assets of Enterprise. 1,401,496 -
Hedging loan, bearing interest LIBOR plus 1% (7.1% at March 31,
1997); due June 30, 1997, secured by a like amount
included in Restricted Cash (See Note 3). 1,300,026 -
Note payable - bank, bearing interest at bank's base rate plus
2% (8.0% at March 31, 1997); due in quarterly installments
of $61,875 through May 1998; secured by the assets of
Enterprise. 307,733 -
Note payable - bank, bearing interest at bank's base rate plus
2% (8.0% at March 31, 1997); due in quarterly installments
of $165,000 through May 1998; secured by the assets of
Enterprise. 495,000 -
------------------------------------------------------------------------------------------------
21,001,988 15,073,192
Less current portion 15,933,637 2,244,920
------------------------------------------------------------------------------------------------
Net long-term portion $ 5,068,351 $12,828,272
================================================================================================
</TABLE>
The carrying amount of the above debt instruments to third parties
approximates the fair value of the instruments.
F-17
<PAGE> 37
As of March 31, 1997, the aggregate amounts of long-term debt maturing
in succeeding years are as follows:
<TABLE>
<CAPTION>
Years ended
March 31, Related Party Third Party Total
--------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $6,844,117 $9,089,520 $15,933,637
1999 4,691 3,437,895 3,442,586
2000 5,114 500,000 505,114
2001 5,510 500,000 505,510
2002 6,016 458,333 464,349
Thereafter 150,792 - 150,792
--------------------------------------------------------------------------
$7,016,240 $13,985,748 $21,001,988
==========================================================================
</TABLE>
7. CAPITAL LEASE OBLIGATIONS
The following is a schedule of future minimum lease payments of
capitalized leases, underlying property and equipment having a cost of $2.2
million, together with the present value of the net minimum lease payments as of
March 31, 1997:
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------------------------
<S> <C>
1998 $746,976
1999 565,106
2000 158,553
2001 53,908
2002 24,597
Thereafter 11,556
--------------------------------------------------------------
Total minimum lease payments 1,560,696
Less amount representing interest (effective
interest ranging from 4% to 18.7%) 212,620
---------
Present value of minimum lease payments 1,348,076
Less - current portion 645,755
--------------------------------------------------------------
Long-term portion $702,321
==============================================================
</TABLE>
8. INCOME TAXES
At March 31, 1997 and 1996, the Company (excluding Channelmatic) has
net operating loss carryforwards of $19.8 million and $7.7 million for federal
income tax purposes, of which $2.7 million is subject to a separate return
limitation. The carryforwards expires in varying amounts and years through 2012.
This loss carryforwards also gives rise to a deferred tax asset of $8.2 million
and $2.6 million at March 31, 1997 and 1996. This deferred tax asset has a
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 carryforwards. Income tax benefit for fiscal 1997 primarily
represents the reversal of a deferred tax liability. A deferred tax liability
was written-off the balance sheet in connection with the write-off of
capitalized software development costs which previously gave rise to the
deferred tax liability. Income tax expense for fiscal 1996 represents state
taxes for the various states in which the Company does business and corporate
tax.
F-18
<PAGE> 38
The Company's total deferred tax assets and valuation allowance
consisted of the following at March 31, 1997 and March 31, 1996:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
----------------------------------------------------------------------------------
<S> <C> <C>
Loss carryforwards $8,178,000 $2,600,000
Tax effects of temporary differences:
Deferred revenue 836,000 -
Accrued litigation 221,000 -
Accrued restructuring expenses 162,000 -
Depreciation and amortization 49,000 167,000
Other 20,000 12,000
----------------------------------------------------------------------------------
Total deferred tax assets 9,466,000 2,779,000
Valuation allowance (9,300,000) (2,779,000)
-----------------------------------------------------------------------------------
Net deferred tax assets $ 166,000 $ -
===================================================================================
</TABLE>
A valuation allowance has been provided since the Company cannot
determine it is more likely than not that a portion of the deferred tax assets
will be realized.
The consolidated effective tax rate differs from the statutory U.S.
federal tax rate for the following reasons and by the indicated percentages:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
----------------------------------------------------------------------------------
<S> <C> <C>
Statutory U.S. federal benefit (34%) (34%)
Goodwill amortization and write-offs not
deductible for tax purposes 8% 5%
Non-cash interest expense from
convertible notes not deductible for
tax purposes 1% -
Taxable loss on sale of assets not
recognized for book purposes (4%) -
Other 2%
Change in valuation allowance 22% 29%
----------------------------------------------------------------------------------
Effective tax rate (5%) 0%
==================================================================================
</TABLE>
9. EQUITY
Private Placements
1)
On April 29, 1996, the Company completed a Regulation-S private
placement of Series A Preferred Stock ("the Series A") for $12.0 million. The
net proceeds, after costs of approximately $800,000, were used primarily for the
acquisitions of CCMS and Enterprise. The placement consisted of 1,200 shares of
the Series A with a 6% annual accretion. For accounting purposes, the accretion
is being treated as a dividend. The Series A 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 carried registration rights and the Company had the
option to repurchase the Series A at the time of conversion at an 18% premium to
the principal amount and has the right to call the Series A at a 30% premium to
the principal amount after 12 months declining to a 15% premium after 30 months.
As of March 31, 1997, $2.9 million of the Series A plus accrued accretion had
been converted, resulting in the issuance of 1,032,485 shares of the Company's
Common Stock.
Effective September 30, 1996, the Company and the holders of 76%, or
$7.71 million of the then $10.2 million outstanding Series A agreed to exchange
their shares for a new Series C Preferred Stock (the "Series C"). The Series C
has the following features: conversion into common stock is fixed at $5.00, no
F-19
<PAGE> 39
conversions can occur for six months, it is non-voting and bears an 8% accretion
rate. For accounting purposes, the accretion is being treated as a dividend.
After a six-month lock-up period, conversion into common stock is limited to 10%
of Series C shares per month. Any Series C shares outstanding at September 30,
1999 shall be automatically converted into common stock at $5.00 per share. At
the time of exchange, the holders received common stock purchase warrants with
an exercise price of $5.00; the number of which will equaled 10% of the issue
price of their Series C shares divided by $5.00. Up to 3.9% of the original
Preferred Stock issuance was convertible 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.
From October 1, 1997 to January 31, 1998, the holders of the Series C
shares shall be entitled to require the Company to redeem up to 25% of their
remaining shares at a rate of 105% of each share plus accrued accretion each
month for cash or common stock - at the Company's option - valued at market at
the time of the redemption.
The Company is currently in negotiations with the holders of the
remaining Series A of $1.9 million to modify the terms and conditions of the
agreements.
During the year ended March 31, 1997, the Company recorded a deferred
accretion charge of $1.3 million and fully amortized that amount into dividends.
The deferred accretion amount related to the issuance of convertible Series A.
The amount represents an implied additional dividend rate of 12.3% based on the
fair market value of the 85% conversion feature. The amount was amortized over
the period from the issuance date through the date in which the preferred stock
was first convertible into common stock.
The dividends to the preferred shareholders of $2.1 million consists of
$1.3 million discussed in the preceding paragraph, $187,608 related to the
Series A shares, $78,000 related to Series B shares and $548,409 related to the
Series C shares.
2) In May 1996, the Company completed a Regulation-D private placement
of a $2.5 million Convertible Note ("the Note") to a single accredited
institutional investor, used primarily for product development. The investor is
the same investor with whom the Company completed a $4.0 million private
placement on February 28, 1996. (See following paragraph.) 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 common stock for the five trading days immediately
preceding the conversion date. The Company has 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.
On February 28, 1996, the Company completed a Regulation-D private
placement of 224,795 shares of its common stock for $1.0 million and a
Convertible Note ("Note 2") for $3.0 million to a single accredited
institutional investor. Note 2 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 Note 2, 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 trading days immediately preceding the conversion date. The
Company shall have the right to convert all or part of Note 2 any time after 90
days from closing date into the underlying stock. In addition, Note 2 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.
During the year ended March 31, 1997, the Company recorded a deferred
interest charge of $847,000 and fully amortized that amount as a charge to
interest expense. The deferred interest charge related to the placement of
convertible notes totaling $5.5 million. The amount of interest expense
represents an implied discount rate of 15.4% based on the fair market value of
the 82% conversion features of both the $3.0
F-20
<PAGE> 40
million and $2.5 million notes, and was amortized over the period from effective
date through the dates in which the notes were first convertible into common
stock.
In July 1996, $1.2 million in principal of the $3.0 million convertible
note plus accrued interest of $11,884 was converted into 487,694 shares of the
Company's common stock.
In September 1996, the Company believed that it had renegotiated
certain of the terms of its convertible notes with the holder of the notes to,
among other things, eliminate the conversion feature of the original issuance,
and convert the obligation into subordinate notes due in two years. The
renegotiated terms called for the total obligation to be repaid by the issuance
of approximately 350,000 shares of the Company's Common Stock, and $4.285
million in principal to be paid in cash in quarterly installments of $350,000
beginning December 31, 1996 with principal and interest to be amortized over 3
years at an interest rate of 8% per annum and a balloon payment due in 2 years.
Since the time of the renegotiations, the Company has been waiting and expecting
formal documentation from the holder's counsel and, in the interim, has relied
on a term sheet initialed by the holder and oral representations made by the
holder. In January and February 1997, the Company received two letters from the
holder's counsel stating the holder does not believe that it is bound by the
terms of the renegotiations and that the Company is in default under the
original terms of the two notes. The Company is continuing its discussions with
the holder to restructure the notes. The Company has classified the entire
obligation of $4.285 million in principal plus accrued interest as a current
liability as of March 31, 1997.
3)
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
fiscal 1996, the Company called both A and B warrants associated with the
private placement, which resulted in the Company receiving net proceeds of $3.7
million and issuing 2,382,579 shares of common stock.
Buy-Back of Stock From Officers
During fiscal 1996, the Company purchased 77,778 shares of the
Company's common stock from the Company's former Chief Executive Officer and
Chief Financial Officer for $350,000. The common stock was valued at $4.50 per
share, which was its fair value at the time of purchase.
Other Stock Issuances
During fiscal 1997, the Company paid two vendors a total of 98,598
shares of its common stock in settlement of $278,448 in outstanding payables.
Both vendors were related parties. The common stock was issued at the fair value
at the time of issuance.
On February 7, 1996, the Company paid a vendor $288,444 with 72,111
shares of its common stock. The common stock was valued at $4.00 per share,
which was its fair value at the time of issuance.
F-21
<PAGE> 41
Stock Options and Warrants
The Company has a stock option plan for directors, officers, and
employees, which provide for nonqualified stock options. The Board of Directors
determines the option price (not to be less than fair market value) at the date
of grant. Options granted generally vest over three months and expire five years
from the date of grant.
The following table summarizes the transactions related to the
Company's stock option plan:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price Aggregate Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1995 930,000 $1.35 $1,260,080
Options granted 1,036,585 2.66 2,759,901
Options exercised 575,126 1.38 791,091
-------------- ------------------
Balance at March 31, 1996 1,391,459 2.32 3,228,890
Options granted 1,725,050 3.50 6,039,325
Options exercised 590,678 2.79 1,649,155
Options expired 173,098 2.64 456,127
-------------- ------------------
Balance at March 31, 1997 2,352,733 $3.05 $7,162,933
============= ==================
Options exercisable (vested) at
March 31, 1997 2,052,733 $3.25 $6,673,933
============= ==================
</TABLE>
All options issued during the fiscal years ended March 31, 1997 and
1996 had exercise prices that were at fair market value at grant date.
During fiscal 1997, various employees of the Company effected the
cashless exercises of a total of 590,678 options at exercise prices ranging from
$1.25 to $3.25 per share, resulting in the issuance of 314,125 shares of common
stock.
During fiscal 1996, various employees of the Company effected the
cashless exercises of a total of 575,126 options at exercise prices ranging from
$1.25 to $2.25 per share, resulting in the issuance of 441,280 shares of common
stock.
F-22
<PAGE> 42
The following table summarizes the transactions related to the
Company's warrants to purchase common stock:
<TABLE>
<CAPTION>
Weighted-Average
Number of Exercise Price Aggregate Value
Shares
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1995 1,891,241 $2.17 $4,112,683
Warrants granted 2,224,692 2.35 5,228,735
Warrants exercised 3,234,344 1.77 5,714,816
Warrants canceled or expired 265,127 6.96 1,846,020
-------------- -----------------
Balance at March 31, 1996 616,462 2.89 1,780,582
Warrants granted 455,829 4.28 1,952,003
Warrants exercised 178,876 2.32 414,699
Warrants canceled or expired 250,000 3.10 775,000
============= =================
Balance at March 31, 1997 643,415 $3.95 $2,542,886
============= =================
Warrants exercisable (vested) at
March 31, 1997 643,415 $3.95 $2,542,886
============= =================
</TABLE>
The weighted-average fair value, which is defined as the excess of the
weighted-average fair value over the exercise price, of options and warrants
granted during the fiscal year ended March 31, 1997, was $0.80.
During fiscal 1997, warrant holders exercised 178,876 warrants at
exercise prices ranging from $1.33 to $3.00 per share for cash totaling
$414,699.
During fiscal 1996, warrant holders exercised 697,165 warrants at
exercise prices ranging from $1.25 to $2.50 per share for cash totaling
$1,235,188.
During fiscal 1996, warrant holders effected the cashless exercises of
a total of 181,000 warrants at exercise prices ranging between $2.50 and $3.00
per share, resulting in the net issuance of 53,331 shares of common stock.
Effective June 30, 1995, the holder of a $500,000 note converted the
note to 166,667 shares of Series B Convertible Preferred Stock ("Series B"). 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 Series B 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, in August 1995, the holder purchased an
additional 50,000 shares of Series B, valued at $3.00 per share, the fair value
at the time. This issuance of the 50,000 shares 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. In connection with the issuances of the
Series B, the holder received 212,586 warrants at an exercise price or $3.00 per
share. The exercise price was valued at the fair value of the underlying common
stock at the grant dates. During fiscal 1997, the holder exercised its rights
for 50,000 of the warrants, resulting in $150,000 to the Company. The remaining
162,586 warrants outstanding at March 31, 1997 expire in August 1997.
All warrants issued during the fiscal years ended March 31, 1996 and
March 31, 1997 had exercise prices that were at the fair market value at grant
date.
F-23
<PAGE> 43
FASB Statement 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumption used for grants in fiscal 1997 and fiscal 1996:
dividend yield of zero percent; expected volatility of 21 percent; risk-free
interest rate of 6.73 percent; and expected lives ranging between three and five
years. Under the accounting provisions of FASB Statement 123, the Company's net
loss and loss per share for 1997 and 1996 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Net loss 1997 1996
-------------------------------------------------------------------
<S> <C> <C>
As reported $25,600,116 $2,957,032
Pro forma $27,348,204 $4,047,494
Loss per share
-------------------------------------------------------------------
As reported $1.73 $0.35
Pro forma $1.84 $0.48
</TABLE>
Due to the fact that the Company's stock option programs vest over many
years and additionally awards may be made each year; the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of FASB
123 been applicable to all years of previous grants. The numbers above do not
include the effect of options granted prior to 1996 that vested in 1996 and
1997.
The following table summarizes information about stock options and
warrants outstanding at March 31, 1997:
<TABLE>
<CAPTION>
Options and Warrants Exercisable
-----------------------------------
Options and Warrants
Outstanding
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices at 3/31/97 Contractual Life Exercise Price 3/31/97 Exercise Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.38-$2.50 1,917,733 4.13 $1.97 1,617,733 $2.04
$3.00-$4.13 237,586 2.44 $3.17 237,586 $2.44
$5.00-$7.00 840,829 4.08 $6.15 840,829 $4.08
- ------------------------------------------------------------------------------------------------------------
$1.38-$7.00 2,996,148 4.07 $3.24 2,696,148 $3.42
============================================================================================================
</TABLE>
10. Restructuring, Impairment and Other Costs
On January 28, 1997, the Company announced the details of its business
integration plan. The cost reduction phase of the plan includes the
consolidation of administrative functions within the Company, the merging of the
five acquired businesses and start-up division into two operating divisions
organized around core customers, and the centralization of research and
development and marketing functions.
Overall, the business integration plan calls for a reduction in the
number of facilities from 19 to 11 and the elimination of over 150 positions
from the Company's workforce. The Company completed the major phase of the
integration plan by March 31, 1997.
In conjunction with the implementation of the business integration
plan, the Company recorded a pre-tax special charge to earnings of $18.4 million
in the third and fourth quarters of fiscal 1997. The charge is included in
Restructuring, Impairment and Other Costs under Operating Expenses in the
Consolidates Statement of Operations. Included in the amount are cash items such
as severance and other employee costs of $1.0 million, lease obligations and
other exit costs associated with facility closures of $.6 million and $.1
million of other costs related to the implementation of the business integration
plan. Expenditures for the cash restructuring items will be substantially
completed in fiscal 1998.
F-24
<PAGE> 44
The non-cash items in the $18.4 million Restructuring, Impairment and
Other Costs include $16.7 million related to asset write-downs to net realizable
value for disposals of excess facilities and equipment, write-offs of goodwill
and software development costs. The Company wrote-down those assets due to (i)
change in product strategy and (ii) as it determined that the carrying value of
the assets may not be recoverable. In determining the amount of the impairment
loss, the fair value of the assets were calculated as the sum of the discounted
cash flows estimated to be generated from the utilization of the respective
assets.
11. Customers and Geographic Data
Sales to two customers represented 11.1% and 10.4% 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.
There were no customers representing over 10% of the Company's business for
1997.
The Company's operations are conducted in the United States and
international markets, principally in Europe, Australia, New Zealand, and South
Africa. Information about the Company's domestic and international operations
for each fiscal year is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Domestic $ 37,911,693 $ 20,868,899
International (including U.S. 8,830,827 -
exports)
-------------------------------------------------------------------------------
$ 46,742,520 $ 20,868,899
===============================================================================
Operating loss:
Domestic $ (2,620,958) $ (205,335)
International (including U.S. (12,892,250) -
exports)
-------------------------------------------------------------------------------
(15,513,208) (205,335)
Unallocated expenses and eliminations (9,285,705) (2,431,217)
-------------------------------------------------------------------------------
$(24,798,913) $(2,636,552)
===============================================================================
Identifiable assets:
Domestic $ 17,843,847 $16,989,827
International 4,051,224 -
-------------------------------------------------------------------------------
21,895,071 16,989,827
Corporate assets 30,898,236 26,203,110
-------------------------------------------------------------------------------
$ 52,793,307 $43,192,937
===============================================================================
</TABLE>
Unallocated expenses and eliminations include corporate administrative
expenses and eliminations of intercompany income and expenses. Identifiable
assets are those used directly in the operations, and exclude non-operating,
corporate and deferred tax assets. Sales between geographic areas are not
material and are made primarily at cost plus a markup.
F-25
<PAGE> 45
12. UNAUDITED PRO FORMA RESULTS OF OPERATIONS
Condensed unaudited pro forma results of operations of the Company,
Starcom, Channelmatic, CCMS and Enterprise, as if the respective purchases
occurred at the beginning of the fiscal years ended March 31, 1997 and 1996, 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.
<TABLE>
<CAPTION>
UNAUDITED
Fiscal 1997 Fiscal 1996
------------------------------------------------------------------------------
<S> <C> <C>
Revenue $49,427,767 $48,660,569
Net loss (25,895,056) (3,025,665)
Net loss allocable to common shareholders (28,081,542) (3,799,665)
Net loss per share $(1.71) $(0.29)
</TABLE>
Pro forma adjustments include adjustments to (i) reflect amortization
of goodwill for CCMS, Channelmatic and Starcom and customer list for Enterprise,
(ii) reflect interest expense related to the $5.0 million notes payable to the
former Enterprise shareholders and $5.6 million note to the minority shareholder
of Channelmatic, (iv) reflect elimination of certain product lines, (v) reflect
application of existing volume discounts realized by Mediatech and Starcom, (vi)
reflect payroll reductions of principal officers with employment contracts and
reduction of general payroll of Starcom due to a redundancy of staff with
Mediatech, (vii) reflect non-recurring rent expense due to the closure of the
Starcom offices, (viii) reflect non-recurring expenses such as property
insurance, building costs, and data processing due to the closure of the Starcom
offices.
Condensed unaudited pro forma results of operations of the Company,
CCMS and Enterprise, as if the respective purchases occurred at the beginning of
the fiscal year ended March 31, 1997 and as if the sale of Channelmatic occurred
at the beginning of the fiscal year ended March 31, 1997, 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.
<TABLE>
<CAPTION>
UNAUDITED
Pro Forma
IndeNet Channelmatic Combined Pro Forma
Year Year Year Year
Ended Ended Ended Pro forma Ended
3/31/97 3/31/97 3/31/97 Adjustments 3/31/97
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 49,427,767 $ 6,189,230 $ 43,238,537 $ 43,238,537
Cost of sales 22,929,918 5,047,582 17,882,336 17,882,336
Net loss (25,895,542) (1,741,967) (24,153,089) $840,475 (23,312,614)
Net loss allocable to
common shareholders 28,081,542) $(1,741,967) $(26,339,575) $840,475 $(25,499,100)
Net loss per share $ (1.71) $ (1.55)
Number of shares 16,433,655 16,433,655
</TABLE>
Pro forma adjustments include (a) adjustments to reflect the
elimination of amortization and depreciation of goodwill and basis step-up of
equipment for Channelmatic and (b) an adjustment to reflect the elimination of
interest expense related to the $5.6 million note payable to the minority
shareholder of Channelmatic.
F-26
<PAGE> 46
13. Commitments, Contingencies and Litigation
Employment Agreements
On April 1, 1995, employment agreements with two officers - the
Chairman of the Board, Chief Executive Officer, and President, and the Chief
Financial Officer - 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) provided 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, the Chief Financial Officer resigned as an employee and member
of the Board of Directors. On March 31, 1997, the Chairman of the Board, Chief
Executive Officer, and President resigned as an employee and member of the Board
of Directors.
As of March 31, 1997, the Company had two employment agreements with
the Company's corporate officers. Terms of the agreements are as follows: (i)
annual salaries of $234,555 and $120,000 each, (ii) car allowances of $750 per
month each, (iii) discretionary bonuses and (iv) participation in the Company's
stock option plan. Each agreement is subject to annual increase between 5% and
20%. Effective April 1, 1997, salaries under each agreement were increased by
5%. The agreements terminate in May and August of 1999.
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 CCMS, 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 officers 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). One of officers was terminated effective
February 1997 and was paid a severance of $45,000. Another one of the officers
was terminated effective June 1997 and was also paid a severance of $45,000.
In connection with the acquisition of Enterprise, the Company entered
into employment agreements with three of Enterprise's officers. The agreements
provide for aggregate annual salaries of
F-27
<PAGE> 47
$495,000. All three agreements are for a term of three years terminating May 23,
1999, provide for a yearly percent increase between 5% and 20% as approved by
the Executive Compensation Committee of the Company's Board of Directors, and
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. In October 1996,
one of the officers became the Chief Operating Officer of IndeNet and relocated
from London to Los Angeles. On March 31,1997, that same officer became IndeNet's
Chief Executive Officer.
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 non-cancelable operating leases as
of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Related Party Third Party Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $417,755 $ 830,588 $1,248,343
1999 - 536,791 536,791
2000 - 433,455 433,455
2001 - 411,673 411,673
2002 - 253,597 253,597
Thereafter - 405,960 405,960
-----------------------------------------------------------------------------------------
$417,755 $2,872,064 $3,289,819
=========================================================================================
</TABLE>
Rental expense on operating leases amounted to $2.0 million and $1.1
million for the fiscal years 1997 and 1996, including $851,000 and $894,000 in
fiscal 1997 and 1996 for the related party leases described above.
Litigation
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 sought $2.0 million in damages for breach of the contract and $1.0
million in quantum meruit. The injunction being sought would have forced 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 based 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 alleged that it was entitled to receive fees based on (i) the
Company's sale of $4.0 million of the Company's debt and securities in February
1996, (ii) the Company's sale of $12.0 million of Series A
F-28
<PAGE> 48
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 issuances 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 acquisitions of CCMS and Enterprise. The
Company did not use any financial advisor in connection with the acquisitions of
either Enterprise or CCMS.
On May 11, 1997, the Company settled its lawsuit with Sutro. Terms of
the settlement called for the Company to make an initial $300,000 cash payment
plus $87,500 payable per quarter for four quarters beginning no later than July
15, 1997. The quarterly payments are due in cash or the Company's common stock,
at the Company's option. The entire amount of the settlement and unpaid related
legal fees are accrued as of March 31, 1997.
Lake Management
On September 13, 1996, Lake Management LDC, a Cayman Islands exempted
limited duration company ("LAKE") filed a lawsuit against the Company seeking to
force the Company to convert certain outstanding shares of the Company's Series
A Preferred Stock into shares of the Company's common stock. The complaint did
not seek damages. On March 31, 1997, the Company and LAKE settled the lawsuit
whereby the Company converted $600,000 of Series A Preferred Stock into 214,445
shares of common stock and issued 200,000 warrants. The warrants are convertible
into the Company's common stock at $2.25 per share, which was the fair value at
the time of issuance. The warrant agreement provides for a price adjustment if
warrants granted in the future have a lower exercise price than $2.25. The
warrants expire on April 1, 2000. LAKE has certain registration rights with
respect to the underlying shares of the warrants.
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.
14. 401(k) Plan, Profit Participation Program and Pension Plan
Mediatech has a 401(k) defined contribution plan covering substantially
all of its full-time employees. Mediatech contributes a percentage of
participants' contributed earnings to the plan. Contributions amounted to
approximately $34,000 and $30,000 for the years ended March 31, 1997 and 1996.
Mediatech also has a profit participation program whereby Mediatech
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, 1997 and 1996.
Enterprise has a defined contribution pension plan. The assets of the
plan are held separately from those of Enterprise in an independently
administered fund. Contributions amounted to $272,572 for the year ended March
31, 1997. Enterprise also has a discretionary profit sharing whereby generally
10% of pre-tax earnings are paid to the certain Enterprise employees. The profit
sharing amount paid to the employees for fiscal 1997 was $114,112.
F-29
<PAGE> 49
CCMS has a profit sharing plan whereby generally 5% of the pre-tax
profits excluding the profit sharing expense are paid to the employees of CCMS.
The profit sharing amount for fiscal 1997 was $19,996.
15. Subsequent Event
During June 1997, the Company announced that it had retained Schroder
Wertheim & Co., an investment-banking firm, to facilitate the sale of the
IndeNet's subsidiaries Mediatech and Starcom. The Company is currently in
discussions with prospective purchasers.
F-30
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
IndeNet, Inc.
As independent certified public accountants, we hereby consent to the
incorporation of our report dated June 18, 1997 included in this annual report
on Form 10-KSB into the Company's previously filed Form S-3 Registration
Statements.
/s/ BDO Seidman, LLP
Los Angeles, California
June 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1996
<CASH> 2,885,406
<SECURITIES> 0
<RECEIVABLES> 8,655,080
<ALLOWANCES> 230,063
<INVENTORY> 311,434
<CURRENT-ASSETS> 16,834,445
<PP&E> 15,625,676
<DEPRECIATION> 3,753,089
<TOTAL-ASSETS> 52,793,307
<CURRENT-LIABILITIES> 29,309,501
<BONDS> 0
0
24
<COMMON> 17,181
<OTHER-SE> 17,630,443
<TOTAL-LIABILITY-AND-EQUITY> 52,793,307
<SALES> 46,742,520
<TOTAL-REVENUES> 46,742,520
<CGS> 22,929,918
<TOTAL-COSTS> 48,611,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,676,895
<INCOME-PRETAX> (27,767,023)
<INCOME-TAX> (1,434,997)
<INCOME-CONTINUING> (25,600,116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,600,116)
<EPS-PRIMARY> (1.73)
<EPS-DILUTED> (1.73)
</TABLE>
