<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 0-18034
INDENET, INC.
(Exact name of registrant as specified in charter)
Delaware 68-0158367
- -------------------------------------------------------------------------------
(State or other jurisdiction IRS Employer
of incorporation) Identification No.)
16000 Ventura Boulevard., Suite 700, Encino, California 91436
(Address of principal executive office)
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Registrant's telephone number, including area code: (818) 461-8525
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 16,906,829 Shares of Common
Stock, Par Value $.001 as of February 12, 1997.
<PAGE> 2
INDENET, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
No.
Consolidated Balance Sheet --
December 31, 1996 and March 31, 1996....................... 1
Consolidated Statement of Operations --Three-months and
Nine-months Ended December 31, 1996 and 1995............... 3
Consolidated Statement of Changes in Stockholders'
Equity -- Nine-months Ended December 31, 1996.............. 4
Consolidated Statement of Cash Flows --
Nine-months Ended December 31, 1996 and 1995............... 5
Notes to Consolidated Financial Statements................. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................... 11
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K...................... 16
</TABLE>
<PAGE> 3
INDENET, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,363,166 $ 3,818,133
Restricted cash 1,574,264 453,340
Accounts and other receivables, net of allowance
for doubtful accounts 10,737,018 5,159,651
Inventories 2,245,491 2,143,927
Prepaid expenses 824,922 209,822
------------- -------------
Total current assets 16,744,861 11,784,873
Property and equipment, less accumulated
depreciation and amortization 13,837,929 13,646,419
Capitalized costs, net 10,206,581 485,930
Other long-term assets 356,116 525,387
Deferred financing costs, net -- 235,771
Customer list, net 14,446,010 --
Goodwill, net 15,389,323 16,514,557
------------- -------------
TOTAL ASSETS $ 70,980,820 $ 43,192,937
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
INDENET, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
-------------- --------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 13,620,058 $ 7,667,159
Deferred income 3,120,846 --
Notes payable, current portion 5,289,985 1,047,694
Notes payable to shareholders of acquired companies,
current portion 915,397 1,197,226
-------------- --------------
Total current liabilities 22,946,286 9,912,079
Notes payable to shareholders of acquired companies,
net of current portion 9,170,130 4,676,221
Notes payable, net of current portion 9,839,515 8,152,051
Deferred income taxes 1,265,899 --
Other long-term liabilities 55,616 --
-------------- --------------
TOTAL LIABILITIES 43,277,446 22,740,351
Minority interest 983,785 1,580,456
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A, $.0001 par value
Authorized - 1,200 shares
998 issued and outstanding 1 --
Preferred stock, Series B, $.0001 par value
Authorized - 40,000,000 shares
216,667 issued and outstanding 22 22
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 16,881,573
and 12,451,815 16,880 12,451
Additional paid-in capital 49,141,362 23,169,510
Accumulated deficit (23,297,445) (4,309,853)
Foreign currency translation adjustment 858,769 --
-------------- --------------
Total stockholders' equity 26,719,589 18,872,130
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,980,820 $ 43,192,937
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
INDENET, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, Nine Months Ended December 31,
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 11,991,331 $ 4,930,388 $ 33,821,850 $ 13,558,661
Cost of sales 4,023,781 2,221,925 12,608,036 5,848,202
-------------- -------------- -------------- --------------
Gross profit 7,967,550 2,708,463 21,213,814 7,710,459
Operating expenses:
Selling, general and administrative 7,276,924 2,388,415 19,843,681 6,518,721
Depreciation and amortization 1,795,672 563,126 4,669,602 1,309,661
Research and development 121,815 32,258 635,402 174,960
Corporate 451,489 409,271 1,624,021 779,055
Non-cash write-down of assets 8,545,563 -- 8,545,563 --
Restructuring charges 1,581,500 -- 1,581,500 --
-------------- -------------- -------------- --------------
19,772,963 3,393,070 36,899,769 8,782,397
-------------- -------------- -------------- --------------
Operating loss (11,805,413) (684,607) (15,685,955) (1,071,938)
Other income (expense):
Interest income 39,638 54,345 189,146 101,395
Non-cash interest expense -- -- (847,000) --
Interest expense (524,055) (185,034) (1,385,790) (554,740)
Settlement of lawsuit -- -- -- 145,000
Miscellaneous, net 33,869 16,584 224,596 54,904
-------------- -------------- -------------- --------------
(450,548) (114,105) (1,819,048) (253,441)
-------------- -------------- -------------- --------------
Loss before income tax expense and
allocation to minority interest (12,255,961) (798,712) (17,505,003) (1,325,379)
Income tax expense 68,432 -- 125,872 2,484
-------------- -------------- -------------- --------------
Loss before allocation to minority interest (12,324,393) (798,712) (17,630,875) (1,327,863)
Allocation to minority interest (272,255) (51,870) (596,671) (51,870)
-------------- -------------- -------------- --------------
Net loss (12,052,138) (746,842) (17,034,204) (1,275,993)
Dividends to preferred shareholders (172,650) (19,500) (1,953,388) (39,000)
-------------- -------------- -------------- --------------
Net loss allocable to common shareholders $ (12,224,788) $ (766,342) $ (18,987,592) $ (1,314,993)
============== ============== ============== ==============
Net loss per share $ (0.71) $ (0.08) $ (1.21) $ (0.17)
============== ============== ============== ==============
Weighted average number of
common shares outstanding 17,114,389 9,660,288 15,736,345 7,612,723
============== ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
INDENET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------ ------------------------------
Number of Preferred Number of Common
Shares Stock Shares Stock
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at April 1, 1996 216,667 $ 22 12,451,815 $ 12,451
Issuance of Series A Preferred Stock 1,200 1 -- --
Exercise of warrants -- -- 178,876 179
Shares issued for purchase of CCMS -- -- 587,612 588
Shares issued for purchase of Enterprise -- -- 2,276,200 2,276
Adjustment to purchase price
of Starcom acquisition (362,500) (363)
Cashless exercise of employee
stock options -- -- 311,596 311
Stock issued for settlement of
accounts payable 98,595 99
Shares issued from conversion of Series
A Preferred Stock (202) -- 735,523 735
Shares issued for the conversion
of convertible debt to Common Stock -- -- 487,694 488
Shares issued for the conversion
of shareholder notes to Common Stock -- -- 116,162 116
Deferred interest payable in
Common Stock -- -- -- --
Deferred accretion on Series A
Preferred Stock -- -- -- --
Amount to be paid in Common Stock
related to stated accretion on
Series A Preferred Stock -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 1996 217,665 $ 23 16,881,573 $ 16,880
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Foreign
Additional Currency
Paid-in Accumulated Deferred Translation
Capital Deficit Accretion Adjustment Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1996 $ 23,169,510 $ (4,309,853) $ -- $ -- $ 18,872,130
Issuance of Series A Preferred Stock 11,183,605 -- -- -- 11,183,606
Exercise of warrants 414,520 -- -- -- 414,699
Shares issued for purchase of CCMS 2,647,339 -- -- -- 2,647,927
Shares issued for purchase of Enterprise 8,665,494 -- -- -- 8,667,770
Adjustment to purchase price
of Starcom acquisition (1,449,637) -- -- -- (1,450,000)
Cashless exercise of employee
stock options (311) -- -- -- --
Stock issued for settlement of
accounts payable 311,085 -- -- -- 311,184
Shares issued from conversion of Series
A Preferred Stock (735) -- -- -- --
Shares issued for the conversion
of convertible debt to Common Stock 1,226,396 -- -- -- 1,226,884
Shares issued for the conversion
of shareholder notes to Common Stock 232,208 -- -- -- 232,324
Deferred interest payable in
Common Stock 847,000 -- -- -- 847,000
Deferred accretion on Series A
Preferred Stock 1,478,400 -- (1,478,400) -- --
Amount to be paid in Common Stock
related to stated accretion on
Series A Preferred Stock 416,488 -- -- -- 416,488
Preferred stock dividends -- (1,953,388) 1,478,400 -- (474,988)
Net loss -- (17,034,204) -- -- (17,034,204)
Foreign currency translation adjustment -- -- -- 858,769 858,769
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 $ 49,141,362 $ (23,297,445) $ -- $ 858,769 $ 26,719,589
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 7
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Nine Months Ended December 31,
--------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (17,034,204) $ (1,275,993)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 4,669,602 1,309,661
Provision for losses on accounts receivable 13,301 (43,812)
Amortization of deferred interest 847,000 --
Non-cash write-down of assets 8,545,563
Provision for restructuring charges 1,581,500
Allocation of loss to minority interest (596,671) (51,870)
Gain on sale of building (128,811) --
Changes in operating assets and liabilities:
Restricted cash 451,444 688,826
Accounts receivable (1,909,342) 368,256
Inventories (100,457) 24,586
Prepaid expenses (178,025) (79,951)
Other assets 169,271 (4,703)
Accounts payable and accrued expenses 1,961,625 (341,335)
Deferred income (52,052) --
Other long-term liabilities 38,226 --
-------------- --------------
NET CASH (USED IN) PROVIDED BY OPERATIONS (1,722,029) 593,665
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,753,366) (986,991)
Capitalized costs (3,442,902) 13,862
Deferred financing costs (446,721) --
Proceeds from sale of building 1,158,186 --
Cash used to acquire Channelmatic -- (755,000)
Cash used to acquire CCMS (1,036,522) --
Cash used to acquire Enterprise (10,000,000) --
Cash of acquired entity Channelmatic -- 270,000
Cash of acquired entity CCMS 276,779 --
Cash of acquired entity Enterprise 656,771 --
Collection of note receivable -- 526,472
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (14,587,775) (931,657)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (184,968) (886,816)
Proceeds from note payable from private placement 2,500,000 --
Proceeds from exercise of warrants and options 414,699 4,852,191
Proceeds from sale of preferred stock -- 145,400
Purchase and cancellation of treasury stock -- (100,000)
Proceeds from private placement 11,183,606 --
Dividends on preferred stock (58,500) (34,500)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,854,837 3,976,275
-------------- --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,454,967) 3,638,283
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,818,133 479,534
-------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,363,166 $ 4,117,817
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 8
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 778,545 $ 125,000
Income taxes 250,167 --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Effective May 16, 1996, in conjunction with an Agreement and Plan of Merger with
Cable Computerized Management Systems, Inc., ("CCMS") the Company received
assets of approximately $568,000 (including cash of $276,779) and assumed
liabilities of approximately $366,000 in exchange for $1,036,522 in cash and
587,612 shares of the Company's common stock valued, for book purposes, at
$4.48 per share.
Effective May 24, 1996, in connection with a Share Purchase Agreement with
Enterprise Systems Group Limited, ("Enterprise") the Company received assets
of approximately $16,961,000 (including cash of $656,771) and assumed
liabilities of approximately $8,281,000 in exchange for $10,000,000 in cash,
notes payable of $5,000,000, and 2,276,200 shares of the Company's common
stock valued, for book purposes, at $3.81 per share.
In July 1996, the holder of convertible debt converted debt of $1,215,000 and
accrued interest of $11,884 into 487,694 shares of common stock.
During the nine months ended December 31, 1996, the Company issued 98,595 shares
of common stock as payment for accounts payable totaling $311,184.
During the nine months ended December 31, 1996, 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 (see Note 4).
During the nine months ended December 31, 1996, the Company recorded deferred
dividends of $1,478,400 related to the issuance of convertible Series A
Preferred Stock. The amount was recognized as dividends in full during the
same period (see Note 4).
During the nine months ended December 31, 1996, the Company recorded $416,488 of
accretion, to be paid in Common Stock, related to Series A Preferred Stock.
See accompanying notes to consolidated financial statements
6
<PAGE> 9
INDENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments, consisting solely of adjustments of
a normal recurring nature (except for the restructuring charges and
write-down of assets as discussed in Notes 8 and 9), necessary to
present fairly the financial position, results of operations and cash
flows for the periods presented. These unaudited consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not contain all the information and footnotes
required in a complete set of financial statements. These statements
should be read in conjunction with the Company's consolidated financial
statements and footnotes thereto as of March 31,1996 included in the
Company's Form 10-KSB/A for the fiscal year ended March 31, 1996. Also
included in the Form 10-KSB/A are pro-forma financial statements of the
Company, Mediatech, Inc. ("Mediatech"), Channelmatic, Inc.
("Channelmatic"), Starcom Television Services, Inc. ("Starcom"), Cable
Computerized Management Systems, Inc. ("CCMS") and Enterprise Systems
Group Limited ("Enterprise") for the year ended March 31, 1996. The
results of operations for the three and nine-month periods ended
December 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending March 31, 1997.
Included in this interim report are pro-forma financial results of
operations for the nine-months ended December 31, 1996 for the Company,
Mediatech, Channelmatic, Starcom, CCMS (acquired effective May 1, 1996)
and Enterprise (acquired effective June 1, 1996).
The accompanying consolidated financial statements include the accounts
of IndeNet, Inc., its wholly-owned subsidiaries Mediatech, Starcom
(since its acquisition on February 7, 1996), CCMS (since its
acquisition effective May 1, 1996), Enterprise (since its acquisition
effective June 1, 1996) and its 66.67% owned subsidiary Channelmatic
(since its acquisition on November 27, 1995) (collectively "the
Company").
2 The Company leases office, production and warehousing facilities in its
Chicago, Illinois location from real estate partnerships in which a
former shareholder of Mediatech has a controlling interest. Total rent
expense paid to these partnerships for the three-months ended December
31, 1996 and 1995 was $183,551 and $217,078, and for the nine-months
ended December 31, 1996 and 1995 was $572,218 and $652,337. The Company
also leases office space in Alpine, California from a director who was
the sole shareholder of Channelmatic. Total rent expense paid to the
director for the three and nine-months ended December 31, 1996 was
$19,500 and $58,500.
3 Net loss per share is calculated by taking the sum of the net loss plus
preferred stock dividends divided by the average number of common
shares outstanding. Common stock equivalents, such as stock options,
warrants and convertible preferred stock and debt, have not been
included since their effect would be anti-dilutive.
4. On April 29, 1996, the Company completed a private placement of Series
A Preferred Stock ("the Preferred Stock") for $12.0 million, the net
proceeds, after costs of approximately $800,000, of which were used
primarily for the acquisition of Enterprise. The placement consisted of
1,200 shares of the Preferred Stock with a 6% annual accretion. The
Preferred Stock was convertible into common stock based on 85% of the
average closing bid price of the Common Stock for the five days
immediately preceding the conversion date, but not to exceed $7.00 per
share. The Common Stock carries registration rights and the Company had
the option to repurchase the Preferred Stock at the time of conversion
at an 18% premium to the principal amount and has the right to call the
Preferred Stock at a 30% premium to the principal amount after 12
months
7
<PAGE> 10
declining to a 15% premium after 30 months. As of December 31, 1996,
$2.0 million of the Preferred Stock had been converted, resulting in
the issuance of approximately 736,000 shares of the Company's Common
Stock.
Effective September 30, 1996, the Company and the holders of 76%, or
$7.71 million of the $10.2 million outstanding Series A Preferred Stock
agreed to exchange their shares for a new Series C Preferred Stock (the
"Series C"). The exchange is contingent upon obtaining the approval of
the Company's stockholders. A special meeting of the stockholders has
been scheduled for February 13, 1997. The Series C has the following
features: Conversion into common stock is fixed at $5.00, no
conversions can occur for six months, it is non-voting and bears an 8%
accretion rate. After a nine-month lock-up period, conversion into
common stock is limited to 10% of Series C shares per month. At the
time of exchange, the holders will also receive common stock purchase
warrants with an exercise price of $5.00; the number of which will
equal 10% of the issue price of their Series C shares divided by $5.00.
Up to 3.9% of the original Preferred Stock issuance may be converted
during the first 90 day period and up to 3.9% during the next 90 day
period at a conversion price of $3.32 per share.
The Company may, prior to April 1, 1997, redeem up to 50% of the Series
C shares for (i) cash equal to the value of the redeemed shares plus
accretion, and (ii) the issuance of common stock purchase warrants with
an exercise price of $7.00. The number of purchase warrants to be
issued upon any such redemption will equal the issue price of the
Series C that is being redeemed (plus accretion) divided by $5.00. From
October 1, 1997 to January 31, 1998, the holders of the Series C shall
be entitled to require the Company to redeem up to 25% of their
remaining shares each month for cash or common stock at the Company's
option.
During the nine-months ended December 31, 1996, the Company recorded a
deferred accretion charge of $1,478,400 and fully amortized that amount
into dividends. The deferred accretion amount related to the issuance
of convertible Series A Preferred Stock. 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 convertible into common stock.
On May 24, 1996, the Company completed a private placement of a $2.5
million Convertible Note ("the Note") to a single accredited
institutional investor, which funds were used primarily for product
development. The investor was the same investor who invested $4.0
million of a private placement in February 1996 for approximately
225,000 shares of common stock and a $3.0 million Convertible Note. The
$2.5 million Note accrued interest at a rate of 7% annually, payable
quarterly in cash or the Company's Common Stock (at the Company's
option) and had a term of two years. The principal amount of the Note,
together with interest was convertible into common stock at a
conversion rate based on 82% of the average closing bid price of the
Common Stock for the five days immediately preceding the conversion
date. The Company had the right to convert all or part of the Note any
time after 210 days from the closing date into the underlying stock. In
addition, the Note was redeemable for cash in whole or in part anytime
after 120 days from closing in an amount equal to 122% of the principal
balance of the Note. In July 1996, the holder of the $3.0 million
Convertible Debt converted approximately $1.2 million of the Note. The
conversion resulted in the Company issuing to the holder 487,694 shares
of Company's Common Stock.
During the nine-months ended December 31, 1996, 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
million and $2.5 million notes, and was amortized over the period from
effective date through the dates in which the notes are convertible
into common stock.
8
<PAGE> 11
In September 1996, the Company and the investor held negotiations to
restructure certain of the terms of the convertible notes, including
the elimination the conversion feature of the original issuance, and
the conversion of 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 payable in cash in quarterly
installments of $350,000 beginning December 31, 1996 with principal and
interest amortized over 3 years at an interest rate of 8% per annum and
a balloon payment due in 2 years. The 350,000 shares of Common Stock
were to be locked-up and escrowed with 50,000 of the shares to be free
trading after 45 days from the date of close and the balance of 300,000
shares to be free trading after 6 months at a rate of 50,000 shares per
month. The Company was to have the right to redeem at any time within 6
months the 300,000 escrowed shares at the value in which the shares
were issued and any remaining note balance at face value. In two
letters received in January and February 1997, the investor has denied
the existence of an agreement to restructure the notes and has demanded
that the notes be repaid or be converted into common stock. The Company
has not reflected the renegotiated terms in this Form 10-QSB due to
foregoing information obtained during January and February 1997. See
LIQUIDITY AND CAPITAL RESOURCES for further information.
5. On May 16, 1996, the Company completed the acquisition of CCMS for a
purchase price of $4,800,000. The acquisition was effected through the
merger of CCMS into a newly-formed wholly-owned subsidiary of the
Company. The purchase price was paid at the closing by the Company
paying $1,036,522 in cash and by the Company issuing 587,612
unregistered shares of the Company's common stock to the CCMS
shareholders. The number of shares issued to the CCMS shareholders was
based on the trading price of the Company's common stock, approximately
$6.40 per share. For book purposes, the stock was valued at $4.48 per
share, or 70% of $6.40. The amount of the purchase price was based on a
multiple of CCMS's earnings before interest, taxes, depreciation and
amortization. The cash portion of the purchase price was paid from the
Company's existing working capital reserves.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the net assets of $3,566,656 is included in
Goodwill and is being amortized over 20 years. The results of
operations of CCMS are included in the following unaudited pro forma
results of operations.
On May 24, 1996, the Company completed the acquisition of Enterprise, a
private company incorporated in England and Wales for a purchase price
equal to $27,379,210. The purchase price is equal to the U.S. dollar
equivalent of eight times EBITDA (earnings before interest, taxes,
depreciation and amortization) of Enterprise for the 12 months ended
March 31, 1996. The purchase price was paid (i) at the closing by the
Company paying $10,000,000 in cash and $5,000,000 in promissory notes
("the Enterprise Notes") and (ii) by the Company issuing 2,276,200
shares of Common Stock, valued at $5.44 per share. The number of shares
issued was based on the average closing price of the stock (as reported
by The Nasdaq Stock Market) for a 60-day trading period consisting of a
defined 30 trading days in February and March 1996 and 30 trading
following the closing (the "Share Price"). For book purposes, the
shares were valued at $3.81 per share, or 70% of $5.44. The Enterprise
Notes earn interest at a rate of 8% per annum, mature May 31, 2000,
with equal payments due quarterly commencing on November 30, 1996.
Commencing November 24, 1996, the Enterprise Notes are convertible into
the Company's common stock at the holders' option at a conversion price
of 150% of the Share Price. The holders of the common stock issued in
this transaction have certain demand and piggy-back registration
rights. The cash portion of the purchase price was paid from proceeds
of the Preferred Stock private placement discussed above. In connection
with the acquisition of Enterprise, the Company elected two designees
of the former Enterprise shareholders to the Company's Board of
Directors.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the net assets of $15,044,142 is included in
Customer List and is being amortized over 15 years. The result of
operations of Enterprise are included in the following unaudited pro
forma results of operations. Included in Notes Payable is an Enterprise
bank loan of approximately $1.3 million which is secured
9
<PAGE> 12
by a like amount included in Restricted Cash. Also included in
Capitalized Software Costs at purchase date was Enterprise capitalized
software costs of approximately $12.0 million.
6. Condensed unaudited pro-forma results of operations of the IndeNet,
Mediatech, Channelmatic, Starcom, CCMS and Enterprise are presented as
if the respective purchases occurred at the beginning of the period.
The unaudited pro forma results of operations are not necessarily
indicative of what would have occurred had the acquisitions been
completed as of that date or of any results that may occur in the
future.
Pro-forma adjustments include amortization of allocated costs in
connection with the purchases and interest expense on shareholder
notes.
<TABLE>
<CAPTION>
The Company CCMS Enterprise Combined Pro forma
9 months 1 month 2 months 9 months Pro forma 9 months
Ended Ended Ended Ended Adjust- Ended
12/31/96 04/30/96 05/31/96 12/31/96 ments 12/31/96
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 33,821,850 $ 195,742 $ 2,489,505 $ 36,507,097 $ -- $ 36,507,097
Cost of sales 12,608,036 -- 217,269 12,825,305 12,825,305
Net (loss) income (17,034,204) 48,818 (95,067) (17,080,453) (248,690) (17,329,143)
Preferred stock
dividends (1,953,388) -- -- (1,953,388) (60,000) (2,013,388)
Net (loss) income
allocated to common
shareholders
$(18,987,592) $ 48,818 $ (95,067) $(19,033,841) $ (308,690) $(19,342,531)
Net loss per share $ (1.21) $ (1.19)
Number of shares 15,736,345 16,281,600
</TABLE>
7. The Company purchased Starcom in February 1996 in a stock-for-stock
exchange pursuant to which the number of shares that the Company had to
pay the former stockholders of Starcom was based on a formula and was
to be paid after the close of fiscal 1996. A disagreement arose between
the Company and the former stockholders regarding the application of
the formula. In September 1996, the Company and the stockholders
resolved their differences, and the Company has issued to the
stockholders all of the shares of the Company's common stock that was
due under the purchase price. The total number of shares issued to the
stockholders of Starcom was 637,500 shares.
8. During the three months ended December 31, 1996, the Company wrote down
assets totaling $8.5 million. This was caused by changes in business
affecting the realization of these assets. The assets written-down were
goodwill and capitalized costs. The Company wrote-down those assets as
it determined that the carrying value of these 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.
9. During the three months ended December 31, 1996, the Company recorded a
restructuring charge of $1.6 million. The charge and corresponding
reserve are related primarily to the estimated employee termination
benefits and exit costs that the Company expects to incur in its
business integration plan. The restructuring reserve is included in
accounts payable and accrued expenses.
10
<PAGE> 13
INDENET, INC.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Quarterly
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-QSB and Form 10-QSB/A filed by the Company in fiscal 1997 and any Current
Reports on Form 8-K by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three and nine-month periods ended December 31, 1995, the
operations of the Company were conducted solely through its subsidiaries
Mediatech (beginning February 1995) and Channelmatic (beginning December 1995).
The results of operations for the three and nine-month periods ended December
31, 1996 include the operations of the IndeNet. Inc.'s subsidiaries Mediatech,
Channelmatic, Starcom, CCMS (since its acquisition which is accounted for
commencing May 1, 1996) and Enterprise (since its acquisition which is accounted
for commencing June 1, 1996).
Revenue
The increase in revenue in the current three and nine-month periods
over the prior periods was primarily a result of the consolidation of revenue
from the three subsidiaries acquired subsequent to the comparative prior
periods. Revenue for Mediatech and Channelmatic in the current periods were
consistent with revenues of the comparable prior periods. In addition, because
Enterprise and CCMS were acquired during the current nine-month period, only a
portion of their nine-month financial results are included herein. Accordingly,
it is anticipated that revenue in future periods for the Company on a
consolidated basis will increase in comparison to revenue in the current
nine-month period due to consolidation of revenue from the subsidiaries acquired
during the current periods for a full reporting period.
Cost of Sales
The increase in cost of sales in the current three and nine-month
periods over the prior periods was primarily a result of the consolidation of
the cost of sales of the three subsidiaries acquired subsequent to the
comparative prior periods. Cost of sales as a percent of sales for Mediatech and
Channelmatic in the current periods were consistent with that of the comparable
prior periods. In addition, because Enterprise and CCMS were acquired during the
current nine-month period, only a portion of their nine-month financial results
are included herein. Accordingly, it is anticipated that cost of sales in future
periods for the Company on a consolidated basis will increase in comparison to
cost of sales in the current nine-month period due to consolidation of cost of
sales from the subsidiaries acquired during the current periods for a full
reporting period.
11
<PAGE> 14
Selling, General and Administrative
The increase in selling, general and administrative expense from the
prior period was primarily a result of the consolidation of the selling, general
and administrative expense of the three subsidiaries acquired subsequent to the
comparative prior periods. It is anticipated that selling, general and
administrative expense in future periods for the Company on a consolidated basis
will increase in comparison to selling, general and administrative expense in
the current nine-month period due to consolidation of the subsidiaries acquired
during the current periods for a full reporting period.
Depreciation and Amortization
The increase in depreciation and amortization from the prior periods
was primarily a result of the consolidation of the depreciation and amortization
of the subsidiaries acquired subsequent to the comparable prior periods and
amortization of acquisition assets from the purchase of the subsidiaries. Prior
periods' depreciation and amortization consisted of depreciation and
amortization of Mediatech and IndeNet, Inc. It is anticipated that depreciation
and amortization in future periods will increase in comparison to depreciation
and amortization in the current nine-month period due to (i) the consolidation
of the subsidiaries acquired during the current periods for a full reporting
period and (ii) a full period of amortization of acquisition assets from the
purchase of the subsidiaries.
Research and Development
Research and development expense for the three and nine-months ended
December 31, 1996 represent expenses primarily related to the research and
development of Channelmatic products. There was no material research and
development expense in the comparative prior periods. It is anticipated that
research and development will increase in future periods related to continued
research and development incurred by Channelmatic and potential research and
development expense to be incurred by CCMS and Enterprise.
Corporate
Corporate overhead represents general and administrative expenses
related to the administration of IndeNet, Inc., exclusive of expenses of the
subsidiaries. These expenses for three and nine-months ended December 31, 1996
increased by $42,218 and $844,966 compared to the comparative prior period. The
increase is due to (i) additional personnel needed at the corporate level in
overseeing the subsidiaries, continued corporate financings and evaluation and
execution of mergers and acquisitions, (ii) Company advertising and promotion,
and (iii) additional legal and other professional costs. It is anticipated that
corporate expenses will remain constant (relative to the three-months ended
December 31, 1996) in future periods.
Interest Income
Interest income decreased $14,707 for the three-months ended December
31, 1996 and increased $87,751 for the nine-months ended December 31, 1996
compared to the comparable prior periods due primarily to the change in the
average cash balance during the periods. It is expected that interest income
will decrease in the future as a result of a lower cash balance through use of
cash in funding of the Company's digital delivery system and capitalized
software costs.
12
<PAGE> 15
Interest Expense
Interest expense increased $339,021 and $831,050 for the three and nine-months
ended December 31, 1996 compared to the prior periods due to (i) also the
inclusion of interest expense of the subsidiaries acquired subsequent to the
comparable prior periods, (ii) interest expense incurred on the promissory notes
delivered by IndeNet, Inc. as partial payment of the purchase price of each of
those subsidiaries and (iii) interest expense on the convertible note financing
obtained by the IndeNet, Inc. since the end of the comparable 1995 periods.
Interest expense is expected to increase in future periods due to the interest
expense for a full reporting period incurred on the promissory notes delivered
by IndeNet, Inc. as partial payment of the purchase price of Enterprise.
Income Tax Expense
At December 31, 1996, the Company (excluding Channelmatic) has a net
operating loss carryforward of approximately $9.5 million for federal income tax
purposes of which $3.4 million is subject to a separate return limitation. The
carryforward expires in varying amounts and years through 2011. This loss
carryforward also gives rise to a deferred tax asset of approximately $3.8
million. This tax asset has a 100% valuation allowance as the Company cannot
determine if it more likely than not that the deferred tax asset will be
realized. Due to changes in the Company's ownership, there is an annual
limitation on the usage of the net operation loss carryforward. Income tax
expense for the three and nine-months ended December 31, 1996 represents U.K.
and U.S. tax on Enterprise income and minimum state taxes paid for the various
states in which the Company does business.
Minority Interest
The allocation of net loss to minority interest for the periods
presented represents the 33.33% minority interest in Channelmatic. The amount
allocated to minority interest is expected to decrease in future periods based
on improved operations of Channelmatic through cost reduction and sales
contracts awarded subsequent to December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had approximately $1.4 million in
cash and cash equivalents and a working capital deficit of approximately $6.2
million. During the nine-months ended December 31, 1996, cash and cash
equivalents decreased by $2.5 million, and the Company used approximately $1.7
million in operations, primarily due to the operating loss of the Company and a
decrease in working capital. The Company used approximately $14.6 million in
investing activities, primarily for the purchases of CCMS and Enterprise,
capital expenditures for the Company's proprietary digital delivery system,
capitalized software costs, and deferred financing costs. Investing activities
also include the non-recurring activities of (i) proceeds from the sale of an
office building and (ii) cash from acquired companies CCMS and Enterprise. The
Company generated approximately $13.8 million in financing activities, primarily
from net proceeds of two private placements totaling approximately $14.0
million, offset by repayment of a $750,000 mortgage note from the sale of the
underlying collateral and payments on related party notes payable.
The Company anticipates funding its working capital needs for the next
twelve months through (i) cash generated from operations, (ii) realization of
cost savings through a company-wide integration plan, (iii) extending payments
due on acquisition indebtedness owed by the Company to certain of its
stockholders, (iv) increasing borrowings under existing Enterprise bank
line-of-credit of up to $2.8 million, (v) obtaining a bank line-of-credit for
Channelmatic, (vi) realization of a high gross profit on deferred income of $3.1
million, (vii) defer payments related to a restructuring reserve of $1.6
million, and (viii) renewal of existing line-of-credit for Enterprise.
Enterprise's outstanding balance on its line-of-credit at December 31, 1996 is
$2.4 million and is included in current liabilities
13
<PAGE> 16
because of its May 1997 expiration date. However, the terms of the
line-of-credit provide for an annual renewal, which renewal has been granted for
the past 8 years. Based on the operations of Enterprise and the relationship
with its bank, the Company believes that it will be granted an annual renewal
during fiscal 1998. Such projections are based on financial information that the
Company has obtained from its acquired subsidiaries and is based on projected
benefits to be derived from the on-going integration of the operations of the
subsidiaries.
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 plans to reduce its work force
from 610 employees to 445 and to consolidate its 19 offices into 11 facilities.
When fully implemented, the integration plan could reduce the Company's
expenditures by as much as $8.0 million annually. The integration plan is
currently being implemented, 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 the next twelve months, the Company estimates that it will have to
spend approximately an additional $3.5 million to complete and deliver its
digital delivery system. In addition, it estimates that it will need
approximately $2.0 million in development of Enterprise's products. Channelmatic
does not currently have the financial ability to fund such research and
development expenses. Accordingly, in order to complete its proposed business
plan, the Company will need to raise debt or equity capital to fund its capital
expenses. The Company does not currently have any agreement in effect to raise
the proceeds needed to complete its digital delivery system's planned
expenditures. In order to fund Channelmatic's anticipated research and
development and other working capital needs, the Company is also attempting to
obtain a line-of-credit facility from institutional lenders. To date, the
Company has not entered into any agreements to obtain any of the foregoing
financing, and no assurance can be given that the Company will be able to raise
the required amount of additional capital or that it will be able to obtain a
credit facility for Channelmatic. The Company anticipates funding development of
the Enterprise products through Enterprise's cash flow and borrowings under its
existing line-of-credit. If the Company is unable to obtain the required
additional capital, the Company will need to further restructure or consolidate
its operations, reduce its projected research and development expenses, or
otherwise revise its proposed business plan. Any such restructuring or reduction
may detrimentally affect the future growth and operations of the Company. Due to
the cost of the rollout of its digital delivery system, the operating losses and
expenses expected to be borne during the period in which the industry adopts the
new system, and the significant annual amortization resulting from the
acquisitions of its various subsidiaries, the Company does not expect to
generate profits in the near future. As a result, the Company's ability to
obtain debt financing may be limited. The Company's ability to obtain equity
funding will be dependent on various factors, including the market conditions
for equity financing and the industry's perception of the Company's business and
prospects. There is no assurance given that anticipated future capital
financings will be successful or that funds will be available from IndeNet,
Inc.'s subsidiaries to meet its anticipated capital expenditure requirements.
During the nine-months ended December 31, 1996, the Company has been
named as a defendant in two lawsuits. In the first lawsuit, the plaintiff is
seeking $2,000,000 in damages for the Company's alleged breach of contract
related to a prior financing arrangement. The Company does not believe that it
breached the contract and is vigorously defending the lawsuit. Should the
Company, however, be found to have breached its agreement with the plaintiff in
that matter, the Company could be required to pay an amount of damages that
could materially impact the Company's liquidity. In any event, because the
Company is actively defending the lawsuit and because the Company has also filed
a cross-complaint against the plaintiff, the Company expects that the lawsuit
will be a protracted proceeding and, as a result, that the Company will be
required to expend a significant amount of fees on the defense/prosecution of
the case.
The second lawsuit filed against the Company seeks to force the Company
to convert certain outstanding shares of the Company's preferred stock into
shares of the Company's common stock. The complaint in the second lawsuit does
not seek damages. Accordingly, the outcome of that lawsuit is not
14
<PAGE> 17
expected to affect the Company's liquidity. However, because the Company is also
actively defending the second lawsuit, the Company does expect that it will
incur legal and other fees in connection with the lawsuit, which fees could be
substantial and could affect the Company's financial condition.
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 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. 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.
Accordingly, the Company has doubt regarding the renegotiated terms of the notes
and has reflected in this Form 10-QSB 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 long-term liability as of December 31, 1996.
The Company's debt obligations consist of debt owed by IndeNet, Inc.
and by certain of its subsidiaries. The debt obligations of IndeNet, Inc.
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. Because of the Company's
current liquidity position, the Company and certain of its affiliates have
agreed that certain of the payments due to affiliates during the fiscal year
ended March 31, 1997 will be deferred. IndeNet, Inc. 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, Inc.
Accordingly, the ability of IndeNet, Inc. to fund its debt service obligations
and its working capital expenses is dependent upon its ability to upstream cash
from certain of its subsidiaries and upon its ability to raise additional
financing. 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. Nevertheless, the Company is
currently considering certain proposals to refinance the third party
indebtedness of one or more of its subsidiaries. The Company believes that any
such refinancing will extend the due dates of the indebtedness. However, no
assurance can be given that the Company will, in fact, be able to refinance the
subsidiaries' debts and if it does not do so, that it will be able to continue
to repay the debts as they become due. Since the obligations of IndeNet to
certain of its affiliates under its existing debt is secured by a lien on some
of the stock of its subsidiaries, failure to repay such indebtedness could
result in the loss of a portion of IndeNet, Inc.'s interest in such
subsidiaries. Any foreclosure by the institutional lenders that have extended
credit to the subsidiaries could result in the foreclosure of all of the assets
of the subsidiaries.
15
<PAGE> 18
INDENET, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a). 27. Financial Data Schedule
(b). No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned hereunto duly authorized.
INDENET, INC.
Date: February 12, 1997 By: /s/ Richard J. Parent
------------------------
Richard J. Parent
Chief Financial Officer and Corporate
Secretary (Principal Financial and Chief
Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 1,363,166
<SECURITIES> 0
<RECEIVABLES> 11,004,906
<ALLOWANCES> 267,888
<INVENTORY> 10,737,018
<CURRENT-ASSETS> 16,744,861
<PP&E> 29,949,141
<DEPRECIATION> 16,111,212
<TOTAL-ASSETS> 70,980,820
<CURRENT-LIABILITIES> 22,946,286
<BONDS> 0
0
23
<COMMON> 16,880
<OTHER-SE> 26,702,686
<TOTAL-LIABILITY-AND-EQUITY> 70,980,820
<SALES> 11,991,331
<TOTAL-REVENUES> 11,991,331
<CGS> 4,023,781
<TOTAL-COSTS> 19,772,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 524,055
<INCOME-PRETAX> (12,255,961)
<INCOME-TAX> 68,432
<INCOME-CONTINUING> (12,224,788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,224,788)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
