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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to ________.
Commission File No.: 0-18034
INDENET, INC.
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(Exact name of registrant as specified in its charter)
Delaware 68-0158367
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(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
1640 N. Gower Street, Los Angeles, CA 90028
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 466-6388
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
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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, 1996 are
$20,868,899.
As of June 25, 1996 there were 12,693,423 shares of Common Stock issued and
outstanding and the aggregate market value of the issued and outstanding Common
Stock held by non-affiliates was approximately $41,600,000.
Documents incorporated by reference: The Proxy Statement for the Annual Meeting
of Shareholders estimated to be held in September 1996, is incorporated by
reference of this Annual Report on Form 10-KSB.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Since commencing its current business in February 1995, IndeNet, Inc.,
through its consolidated subsidiaries, has emerged as a provider of:
- television advertisement spot delivery services for national
advertisers and television programmers, and
- computer systems and equipment for the management of
advertisement spots and the insertion of ad spots into
television programs.
The Company is also currently deploying The IndeNet Digital Broadcast
NetworkTM ("The IndeNet"), a computer-based, MPEG 2 standard, digital satellite
network. Substantially all spot ads in the television support industry are
currently delivered in analog format, mostly on video tape by overnight mail.
Once the Company's network is fully deployed, The IndeNet will be able to
deliver spot ads instantaneously and simultaneously to hundreds of stations in a
digital format. Because of the distribution benefits of digital transmissions,
the superior quality of digital video and audio, and because of the computer
editing capabilities of digital deliveries, the Company believes that The
IndeNet has the potential to materially change and improve the manner in which
most television spot ads are distributed in the television industry.
The Company's goal is to offer the television industry a complete,
integrated range of support services, including those related to the sale and
purchase of spot advertising time, the delivery of the ads, the scheduling of
air time, the insertion of the ads into the television programming, the
verification of the airing, and the billing for the airing. In pursuit of this
goal, the Company has targeted acquisition candidates with a history of
operations, an established customer base, strong market share, and a stable
source of revenues. The Company believes that the successful implementation of
its goals will benefit the television industry by reducing the cost and time
required to transact the everyday business between the key parties. This has the
effect of empowering advertisers with a system for immediate competitive
response, topical and targeted advertising.
During the past 16 months, IndeNet has consummated five acquisitions,
all of which are in the Company's business segment. The acquired companies were
assembled to establish a horizontally integrated network of television support
services that the Company is able to offer to advertisers, television
programmers, television stations and cable operators. The Company intends to
pursue the possible acquisition of other companies that will allow the Company
to expand its client base or the range of products and services it can offer to
advertisers, programmers, television stations and cable operators.
The Company currently distributes national spot broadcast advertising
to virtually all of the top United States television stations and cable systems.
In addition, the Company's television broadcast traffic, billing and management
software is installed in over 140 U.S. television stations (which serve an
estimated 50% of the total U.S. television advertising market) and 70 television
stations located in the United Kingdom, Western Europe, New Zealand, Australia,
Southeast Asia and South Africa. Additionally, the Company's cable industry
traffic and billing software is installed in approximately 240 cable systems,
primarily in the U.S. The Company's advertising insertion hardware is used by
approximately 1,200 cable suppliers in the United States. The Company's clients
include such accounts as McDonald's Corporation (4.9%), Coca Cola (3.8%), King
World Syndicated Programming (4.4%), Questar Home Video (0.5%), TCI (2.8%), Time
Warner (0.8%), NBC Television Stations (1.4%) and Fox Television Stations
(0.6%). The percentages in parentheses represent the approximate percentile
contribution by each of the foregoing clients to the Company's revenues for the
fiscal year ended March 31, 1996.
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As a result of its acquisitions, the Company's revenues have grown to
$20,869,000 for the fiscal year ended March 31, 1996 from no revenues recorded
for the fiscal year ended December 31, 1994. After giving pro forma effect to
the two additional acquisitions consummated in May 1996, if all of the
acquisition would have been consummated as of April 1, 1995, the Company's
consolidated revenues for the fiscal year ended March 31, 1996 would have been
$48,660,000.
IndeNet was originally founded as a Colorado corporation on April 4,
1988 and was re-organized under the laws of the State of Delaware on July 17,
1995. Prior to October 31, 1993, IndeNet provided the media communications with
various support services, including audiotext and conferencing applications and
bank card 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"). All references herein to the "Company"
include IndeNet, Inc. and its consolidated subsidiaries, Mediatech,
Channelmatic, Enterprise, CCMS, and Starcom, and all references to "IndeNet"
refer only to IndeNet, Inc.
INDUSTRY BACKGROUND
According to the Television Bureau of Advertising, approximately $34
billion was spent in the United States in 1994 on television advertising. This
amount includes the production of commercials and purchase of air time for (i)
advertisements to air on national broadcast and cable networks and syndicated
programming, where commercials are distributed in conjunction with the
origination of the programming, (ii) local broadcast and cable television
advertising, consisting of locally produced and aired commercials, and (iii)
national spot advertising, which is produced and distributed nationally to air
during commercial time slots controlled by individual television stations and
cable systems.
The market for television advertising has experienced significant
expansion in all segments. The following table shows the expenditures in the
television advertising market by segment for the years from 1990 to 1994.
TELEVISION ADVERTISING BY SEGMENT
(in millions)
<TABLE>
<CAPTION>
Total TV National National Local National Cable
Year Advertising Network Spot Market Syndication Advertising
---- ----------- ------- -------- ------ ----------- -----------
<C> <C> <C> <C> <C> <C> <C>
1990......... $28,405 $9,863 $7,788 $7,856 $1,109 $1,789
1991......... 27,402 9,533 7,110 7,565 1,253 1,941
1992......... 29,409 10,249 7,551 8,079 1,370 2,160
1993......... 30,584 10,209 7,800 8,435 1,576 2,564
1994......... 34,167 10,942 8,993 9,464 1,734 3,034
</TABLE>
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Source: Television Bureau of Advertising
According to Veronis Suhler & Associates Communications Industry
Forecast/Television Broadcasting, the United States had approximately 1,500
licensed television stations in
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1995. The processes used to create and deliver television advertising have
evolved in conjunction with technological developments in the television and air
courier industries. Most television advertising spots are currently delivered to
television stations and cable systems in the United States on video tape via air
or ground courier, using the same services as provided by the Company. See "Item
1. Business -- Advertising and Programming Services."
Advertisers and their agencies constantly seek to increase the speed at
which advertisements are delivered to television stations and to improve the
quality of the commercial being broadcast. The Company believes that, with the
creation of The IndeNet digital satellite spot delivery network, television
spots and programming will hereafter be delivered more quickly and efficiently.
See "Item 1. Business -- Network Services: The IndeNet - A Digital Spot Delivery
Network." Advertisers are also continuously attempting to target ever smaller,
more specific demographic groups by advertising in select geographic markets and
by producing many variations of commercials oriented to different demographic
audiences. As a consequence, routing instructions specifying which stations are
to receive particular commercials, and the traffic instructions given to those
stations specifying the times and rotation of spot airings, have grown
increasingly complex. Television broadcasters and cable operators depend on
software companies such as the Company to provide the technology necessary to
manage the traffic, billing and management functions of television
advertisements and commercials. See "Item 1. Business -- Broadcast Station
Services."
Technological advances, marketing techniques, and legislative changes
during the past quarter of a century have created a growing demand for services
and equipment to deliver, insert and manage television advertising.
Historically, television advertising was restricted to advertising aired on
broadcast television. Since the early 1970's, the advent of cable television and
wireless (microwave) cable systems, and the invention of MPEG 2 digital video
satellite transmission systems such as DirecTV and Primestar, have drastically
increased the opportunities for television advertising. In addition, with the
passage of the Telecommunications bill in 1996, telephone companies will now be
able to distribute television broadcasts and, therefore, commercials.
Advertisers and their agencies have been attempting to target ever
smaller, more specific demographic groups for their ads. As a result, television
and cable companies have needed to develop systems to distribute and manage
targeted broadcasts. In 1995, there were an estimated 1,500 licensed television
stations, 9,500 cable headends (a cable television's delivery point from which
the cable operator delivers 32 channels of programming), 73 wireless cable
operators, and three direct broadcast providers.
Syndicated television programming is either produced by the syndicator
or purchased from an independent producer and licensed to a television station
for broadcast. Syndicated programming may be distributed to network-owned or
affiliated stations, independent stations and, in some cases, cable system
operators. Most syndicated programming is owned and licensed by major
syndication companies and is delivered using third-party distribution facilities
such as those provided by the Company. See "Item 1. Business -- Advertising and
Programming Services."
BUSINESS STRATEGY
The Company's strategy is as follows:
- Selectively acquire established business that provide
television support services to the broadcast industry;
- Integrate the various television support services provided by
the Company, and make the Company a single vendor for all such
services;
- Link the various television services electronically through a
digital network.
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The Company has attempted to implement its strategy, and intends to continue the
implementation of its strategy, in the following manner:
Pursue acquisitions that provide strategic fit and contribute to the
Company's growth. The Company has grown significantly through the strategic
acquisition of five businesses with strong market positions and established
customer bases. These acquisitions have enabled the Company to enter into
additional geographic areas and to expand its installed base, service network
and range of products and technologies. The Company plans to continue to pursue
acquisitions that complement its technologies, products and services, broaden
its customer base and expand its network.
Deploy the Company's digital satellite network. During 1996, the
Company anticipates deploying the first digital spot broadcast satellite network
in the United States that, if fully implemented by the end of the fiscal year
ended March 31, 1997 as planned, is expected to provide the Company with the
significant advantages over its competitors in the time, cost, quality and
reliability of national spot advertising delivery services. The IndeNet will
provide the Company with the ability to distribute advertisements instantly, 24
hours a day, and will position the Company to provide additional video delivery
and other broadcast support services. The Company's plan is to install its
digital video file server that will be serviced by The IndeNet in 350 to 400
television stations. To date, the Company has deployed 100 of its digital video
file servers.
Achieve synergies in the Company's operations. Integrate acquired
companies to provide synergies, such as cross-selling its product line or
services to a broader customer base, and expanding distribution and service
capabilities.
Expand market position in national spot broadcast advertising and
syndicated programming delivery services. The Company's market share in the spot
ad and syndicated programming delivery business is attributable to the
acquisition by IndeNet of two companies in this market. The Company's plan is to
increase its market share by providing a broad range of services, extended
deadline times for processing customer orders, digital satellite delivery
capability, improved delivery times, improved quality and a reduction in overall
operating costs. In addition, the Company may increase its market share through
additional acquisitions.
Continue tradition of delivering high quality customer service. IndeNet
believes that its subsidiaries have a reputation for delivering high-quality
products and services. The Company's plan is to continue to enhance its various
products and to continue its commitment to service at every level of its
organization.
RECENT GROWTH OF THE COMPANY
In pursuit of its strategic objective of becoming the leading provider
of integrated electronic support services and products to the broadcast
marketplace, the Company has, over the past 16 months, acquired five businesses
with strong market positions and established customer bases. These acquisitions
have enabled the Company to acquire a broad range of critical relationships in
the industry, to acquire the critical support services required to implement its
integration strategy, to enter into additional geographic areas and industries,
and to expand its customer base, service network and range of products and
technologies.
The principal businesses acquired over the past 16 months are:
<TABLE>
<CAPTION>
Name and Principal Business Activity
Acquisition Date Principal Location at Time of Acquisition
---------------- ------------------ ---------------------------
<S> <C> <C>
February 3, 1995 Mediatech Distribution and delivery of national spot ads for
Chicago, Illinois television stations.
November 27, 1995 Channelmatic Advertising insertion equipment and software.
</TABLE>
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<TABLE>
<S> <C> <C>
Alpine, California
February 7, 1996 Starcom Distribution of syndicated programming.
North Hollywood, California
May 16, 1996 CCMS Traffic and billing software for the cable industry.
Wyoming, Michigan
May 24, 1996 Enterprise Traffic, billing and revenue management software for
Thames Ditton, England the television broadcasting industry.
</TABLE>
The following is an overview of the terms of the four acquisitions that
IndeNet has completed since April 1, 1995. For additional information regarding
the acquired companies, see the footnotes to the financial statements included
in Item 7 of this Annual Report.
Channelmatic. Since November 27, 1995, IndeNet has owned 66.67% of the
issued and outstanding common stock of Channelmatic, Inc., a Delaware
corporation ("Channelmatic"). On November 27, 1995, Channelmatic, the Delaware
corporation, acquired the assets, liabilities, facilities and business of
Channelmatic, Inc., the California corporation that had conducted Channelmatic's
business since 1974 and is now known as Killer Barn, Inc., a California
corporation ("Old Channelmatic").
IndeNet acquired its interest in Channelmatic by purchasing from Old
Channelmatic most of the assets, liabilities and business of Old Channelmatic on
November 27, 1995 in consideration for 1,530,000 shares of IndeNet's $.001 par
value common stock (the "Common Stock") and a secured promissory note in the
amount of $5,602,500 (the "Note"). Immediately after the foregoing acquisition
of the assets and business of Old Channelmatic, IndeNet contributed all of the
assets, liabilities and business that it had purchased to Channelmatic,
IndeNet's wholly-owned subsidiary, in exchange for 500,000 additional shares of
the subsidiary's shares of common stock (the "Pledged Shares"). Prior to the
foregoing contribution of assets, IndeNet had owned all 166,667 outstanding
shares of Channelmatic capital stock. Concurrently with the contribution of the
assets by IndeNet to Channelmatic, Old Channelmatic contributed the remaining
assets and business of Old Channelmatic to Channelmatic in exchange for 333,333
shares of Channelmatic's common stock. Accordingly, immediately following the
foregoing transactions, IndeNet owned 666,667 shares (66.67%) of the outstanding
capital stock of Channelmatic and Old Channelmatic owned 333,333 shares (33.33%)
of the capital stock of Channelmatic.
The Note bears interest at a rate of 8% per annum. IndeNet made
principal payments of $2,000,000 and $500,000 on the Note in January 1996 and
April 1996, respectively, and will commence making monthly payments of principal
and interest on the Note on June 30, 1996. The monthly payments of $58,962 are
sufficient to fully amortize the outstanding balance of the Note over the
remaining term of the Note. The entire unpaid balance of the Note shall be due
and payable on November 27, 2001.
IndeNet's obligation under the Note are secured by a pledge of the
Pledged Shares. In addition, Channelmatic has guaranteed the repayment of the
Note, which guarantee is secured by a lien on substantially all of the assets of
Channelmatic.
In connection with acquiring its interest in Channelmatic, IndeNet also
obtained a five-year option (the "Option") to purchase some or all of the
333,333 shares (or 33.33% of the outstanding capital stock) of Channelmatic
stock owned by Old Channelmatic. The aggregate option price for all 333,333
shares of Channelmatic stock is $6,000,000, which option price is required to be
paid in cash. However, if the option is exercised by IndeNet, Old Channelmatic
may elect to have up to 50% of the option exercise price paid in shares of
Common Stock in lieu of cash. If the Option is exercised during the first three
years following the acquisition of Channelmatic, the number of shares, if any,
to be issued by IndeNet upon the exercise of the Option shall be based on a
value equal to the midpoint between the then-current trading price of the Common
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Stock and $2.00 per share. If the Option is exercised during the fourth or fifth
year of the Option, the shares to be issued, if any, will be valued at $2.00 per
share.
Starcom. On February 7, 1996, the Company completed the acquisition of
Starcom Television Services, Inc., a Delaware corporation ("Starcom"). The
acquisition was effected as a stock for stock exchange in which IndeNet issued
shares of its Common Stock to the stockholders of Starcom in exchange for all of
the issued and outstanding shares of Starcom's capital stock. Although Starcom
currently is a separate subsidiary, in order to eliminate duplicate
administrative expenses and in order to improve operating efficiencies, the
Company has commenced integrating the operations of Starcom with the operations
of Mediatech. See "Item 1. Business -- Advertising and Programming Services."
For the purposes of determining the number of shares of Common Stock
that IndeNet would issue to the former Starcom stockholders, the Common Stock
was valued at $4.00 per share, which price was approximately 70% of the last
sale price of the Common Stock on February 7, 1996, as reported by Nasdaq. The
total number of shares to be issued to the Starcom shareholders was determined
by dividing the "value" of Starcom by $4.00. The value of Starcom is based on a
formula. In general, the formula value in an amount equal to the difference
between (A) 1.14 times the annualized adjusted gross profit of Starcom (based on
the operations of Starcom from January 1, 1996 through March 31, 1996) and (B)
certain liabilities of Starcom. IndeNet issued 500,000 shares of Common Stock to
the stockholders of Starcom on February 7, 1996 and expects to issue the
remaining shares of Common Stock in July 1996 after the adjusted gross profit of
Starcom for the period between January 1, 1996 and March 31, 1996 has been
finally determined. The stockholders have informed the Company that they
disagree with the Company's initial determination of the formula-based value of
Starcom, and the Company and the stockholders are currently reevaluating the
financial and operating information from which the formula value is to be
derived.
CCMS. IndeNet completed the acquisition of CCMS on May 16, 1996 for
$4,800,000 by the merger of CCMS with and into a newly organized subsidiary of
IndeNet. The consideration paid at the closing by IndeNet for the acquisition of
CCMS consisted of $1,036,522 plus 587,612 unregistered shares of Common Stock.
The shares issued in connection with the acquisition were valued at $6.40 per
share, which price was based on the trading price of the shares of Common Stock
at the time the acquisition agreement was signed.
Enterprise. On May 24, 1996, the Company purchased all of the shares of
Enterprise by delivering to the shareholders of Enterprise (i) $10,000,000,
which amount was paid in cash at the closing, (ii) promissory notes
(collectively, the "Notes") having an aggregate principal balance of $5,000,000,
and (iii) by agreeing to pay the shareholders $12,379,210 in shares of Common
Stock. The number of shares of Common Stock that IndeNet will be required to
issue to the shareholders of Enterprise is equal to $12,379,210 divided by the
average last reported sales price of a share of the Common Stock as reported by
Nasdaq for the 60-day trading period consisting of the period from February 8,
1996 through March 21, 1996 and the 30-day trading period following May 24, 1996
(the "Share Price"). The average price of the Common Stock for the first 30-day
period was $5.60 per share. The foregoing shares will be issued in July 1996.
The larger shareholders of Enterprise, the largest of whom consist of
certain institutional investors based in the United Kingdom, received Notes as
partial consideration for their Enterprise shares and will receive all of the
shares of Common Stock to be issued in July 1996. The Notes earn interest at a
rate of 8% per annum and mature on May 31, 2000. Commencing on November 30,
1996, the Company is required to make quarterly payments of principal and
interest on the Note in an amount necessary to fully amortize the outstanding
balances of the Notes over the remaining three and one-half year term of the
Notes. Commencing on November 24, 1996, the Notes are convertible into shares of
Common Stock at the option of the holders thereof at a conversion price equal to
150% of the Share Price. The foregoing conversion price is subject to adjustment
for stock splits, stock dividends and similar adjustments. Notwithstanding the
foregoing, the foregoing conversion privilege will expire if and when the
aggregate of all shares issued as part of the purchase price and upon the
conversion of the Notes exceeds 2,530,000 shares of Common Stock. IndeNet's
obligation to repay the Notes is secured by a pledge of 1,192,779 shares of
Enterprise stock.
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ORGANIZATION
For operational purposes, the Company has organized its current
operations into three divisions: "Advertising and Programming Services" - the
delivery of national spot advertising and syndicated television programming for
national advertisers and programmers; "Broadcast Station Services" - the design,
development, and distribution of traffic, billing, revenue and program
management software products for television stations and cable operators coupled
with the development and manufacture of advertising insertion equipment and
software for cable operators and television stations; and "Network Services: The
IndeNet" - the Company's computer-based, MPEG-2 standard digital satellite spot
delivery broadcast network for the distribution of advertisements and
programming to television stations.
ADVERTISING AND PROGRAMMING SERVICES
The Company's advertising and programming services are currently
provided by Mediatech and Starcom.
Mediatech was formed in 1975 and over the ensuing 20 years became a
leading duplicator and distributor of television and radio commercials in the
United States. Starcom was formed in 1993 and, after the acquisition by IndeNet,
its operations were merged with that of Mediatech. Mediatech and Starcom
collectively have approximately 200 employees and annual revenues in excess of
$22 million in the fiscal year ended March 31, 1996.
Mediatech is headquartered in Chicago, Illinois, where it maintains
production and distribution facilities as well as sales and administrative
offices. Mediatech also has facilities in New York, New York, North Hollywood,
California, and Louisville, Kentucky. Starcom maintains facilities in Studio
City, California, where its satellite uplink facilities are located. From its
various facilities, the Company provides video and audio duplication, media
asset warehousing services and distribution of dubs and collateral materials for
national advertisers, program owners and corporate training departments.
The Company's advertising and programming services include broadcast
advertising, program syndication, corporate education and infomercial
distribution.
Broadcast Advertising. The broadcast advertising market is served
through the duplication and distribution of commercial messages (spots). These
spots are duplicated on professional-grade video tape or audio tape and are
delivered to television stations or radio stations or are delivered
electronically through The IndeNet. The Company's customers in this business are
the major advertising agencies or the national advertisers themselves who have
purchased air time on the television or radio station and need to have their
commercials delivered to the stations for on-air playback. The Company is not
involved in the creation or production of the commercial nor in the post
production activities of editing and finishing the commercial. The Company's
role is to produce high-quality duplicates of the spot and to ensure that the
correct spot is delivered to the correct television or radio station in a timely
manner and to verify its receipt.
The Company also duplicates and delivers long form infomercials that
are customized to specific markets.
Most of the Company's services to the broadcast advertising market are
provided on a next-day turnaround basis as advertisers may acquire air time on a
single station or group of stations in a last-minute media buy or the advertiser
may be editing a newly produced spot until shortly before its intended air date.
Advertisers and their agencies have come to rely on the Company's ability to
produce large quantities of duplicates at the last minute and get them delivered
to the proper station on a timely basis. This ability is key to the Company's
success in this aspect of its business.
To meet this demanding service level, the Company maintains a high
level of production capacity and has developed operating and computer systems
that provide immediate processing of incoming orders.
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The Company ships a significant portion of its products via overnight air
freight carriers who provide early morning delivery to television and radio
stations and who also provide proof of delivery. The Company believes that the
deployment of The IndeNet will greatly enhance the Company's ability to provide
these services to its clients.
The principal customers in its broadcast advertising business during
the fiscal year ended March 31, 1996 included ads delivered for McDonald's
Corporation, Coca-Cola, King World, Warner Bros., Taco Bell, Best Buy Company
and Toyota Motor Sales.
Program Syndication. The program syndication market consist of
providing analog satellite transmission services to syndicators of television
programming. Starcom operates an earthstation in North Hollywood which it uses
to transmit programming via AT&T's SKYNET satellite system. Mediatech purchases
for third parties and resells to its syndicator customers satellite transponder
space, uplink services and downlink services. It also provides playback and
record services, integrates advertising spots into the program being
distributed, and communicates with the stations that are to receive the program
on behalf of the syndicator. Additional editing and encoding services are also
provided as is tape duplication and physical distribution of the programs to
those stations which are unable or unwilling to accept a satellite feed.
This market is dominated by production companies that view the program
distribution services that the Company provides as a subset or an additional
service to the production of the program itself. These companies tend to include
the distribution services as part of their bid to produce the program. There
are, however, a number of competitors that provide only distribution services to
program syndicators and which compete directly with the Company.
The Company distributes 25 to 30 hours of programming each day from its
uplink location in Studio City and from third party uplink facilities in Chicago
and New York. The right to distribute programs is won through a bidding process
and the winning bidder generally distributes that program for its on-air life.
If a program is canceled the distributor loses a revenue source.
The Company's syndicated programming clients include Columbia/Tri-Star,
Buena Vista TV, King World, Warner Bros. Domestic Television Distribution, and
Tribune Entertainment. During the fiscal year ended March 31, 1996, some of the
syndicated programs were distributed by the Company include "The Oprah Winfrey
Show," "Inside Edition," "American Journal," "Rolanda Watts," "Jeopardy" and
"Wheel of Fortune."
Corporate Education. The corporate education market is served by
providing duplication and distribution services to corporate clients that use
video or audio programs to provide training or business information to their
employees, customers or stockholders. This information is typically provided on
VHS video cassettes, 3/4" video cassettes or audio cassettes and is frequently
accompanied by ancillary support materials. The Company also provides these
services to program owners that serve the consumer home video market with
entertainment or special interest programming.
This corporate education market is served on a national level by
several high-volume duplicators that specialize in producing very large
quantities of copies at very low prices for the consumer market and by hundreds
of smaller duplicators that serve special market niches or local customers. The
corporate education market is known to have substantial overcapacity resulting
in highly competitive pricing strategies and narrow operating margins.
The Company provides a wide range of services to this market segment
including program duplication, distribution services, warehousing services,
component acquisition services, specialized packaging services, inventory
tracking services and customized information reporting services. These
additional services also provide additional revenue in a very price-competitive
industry.
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NETWORK SERVICES: THE INDENET - A DIGITAL SPOT DELIVERY NETWORK
Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats. Digital video, however, unlike analog video,
can be compressed, which allows for increased storage capability and
transmission efficiencies as well as the ability to transmit and reproduce video
images without image degradation. Digital video also permits superior editing
capabilities because of its greater compatibility with computers.
Video and audio programs and commercial messages are today recorded on
tape and physically distributed via common carriers to the nation's television
and radio stations. This physical delivery process imposes several important
limitations on the utility of these messages including the inability to edit the
message after it is delivered to the station without transferring it to another
medium and the time constraints imposed by the delivery schedules of the common
carriers. To minimize this latter constraint many advertisers use air freight
services to deliver their spots, thus minimizing the time constraint but
incurring expensive delivery costs.
Distributing video programs in an analog format via satellite or other
electronic delivery method has a number of inherent shortcomings. Among them are
the fact that analog video signals can only be recorded on tape or other
physical media. This requires that each receiving site has a recording device
available and is ready to receive the signal at the time it is sent. In practice
this results in uneven quality of the recorded signal as each station uses
different levels of quality in the recording devices employed, the tape media
used and the personnel operating the recording equipment.
The electronic delivery system which the Company is deploying provides
specific answers to the problems involved with electronic delivery today. The
key features of The IndeNet are the conversion of the signal from analog to
digital, the compression of the digital signal and the delivery of the
compressed digital signal to an intelligent receiving device. Once the signal is
converted to a digital format it can be treated in an equivalent manner as are
computer data files and can be transported, stored and manipulated similar to a
computer file. Digital video can also be copied from one medium to another
without the generational loss of quality which analog signals experience in
transfer. Digital video is also easier to compress and decompress than is analog
video as each pictel can be more precisely defined as digital data than it can
as analog video. Compression of the data permits faster and thus less expensive
transmission of the data and reduces the costs of storing the transmitted data.
Storing the spot or program as a digital file will permit the system to
manipulate the spot, add tags to it, edit it or delete it in a seamless fashion.
Spots can be sent at any time of the day or night avoiding the constraints
imposed by air carriers.
Other benefits to be gained by this technology deployment include the
improved timeliness and quality of information on the delivery and playback of
spots or programs, higher quality of video signals being played on air, easier
storage and retrieval of video spots or programs by station personnel and lower
net delivered costs of programming or spots. Also, the ability to deliver the
message in a higher quality digital format, to address it to a specific
receiver, to include traffic instructions, and to reduce the net delivered cost
of the message are defined benefits that will increase the value of these
products and services to the Company's customers. The Company believes that its
ability to deliver spots digitally upon the implementation of The IndeNet will
provide it with a competitive advantage in the advertising and programming
services market.
Because a standard for video compression is required in order for
compressed video to be shared among various products, a number of industry
leaders in consumer electronics, computers and communications joined together
through the International Standards Organization (the "ISO") to define a
standard for compression of audio and video to CD-ROM called MPEG (Motion
Picture Experts Group)-1. MPEG-1 was adopted by the ISO in 1991. In 1994, the
ISO adopted a standard for compression of audio and video to broadcast systems
called MPEG-2. MPEG-2 permits better picture resolution than MPEG-1, but
requires about four times as much data.
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The IndeNet. The Company is currently deploying the first large-scale,
broadcast quality digital spot satellite delivery network in the United States.
The digital spot delivery network, known as The IndeNet, will be owned by
IndeNet and operated from the facilities of Mediatech in Chicago, Illinois. The
purpose of The IndeNet is to enable the Company to deliver spot television
advertising and programming to most major broadcast television stations through
digital satellite transmission. The IndeNet is expected to have the following
advantages over other delivery systems currently in effect.
- Transmission will be digital, with all the benefits described
above.
- Satellite delivery is almost instantaneous, thereby providing
the advertiser with faster service.
- Satellite transmissions can be directed simultaneously to
multiple sites.
- Satellite transmission can occur 24 hours a day.
- For most delivery purposes, satellite delivery is more cost
effective.
- Satellite delivery eliminates the cost of video tape and
courier delivery costs.
In September 1995, Mediatech, on behalf of the Company, entered into
two agreements with Hughes Network Systems, Inc., doing business as DirectPCTM
("Hughes"), in connection with the operation of The IndeNet. Both agreements
have a three-year term and both agreements will automatically be renewed for
successive one-year periods unless either party delivers notice of termination
to the other at least 90 days before the end of the then current term.
Pursuant to one of the agreements, Hughes has agreed to broadcast via
its satellite the audio and video materials provided to it by the Company. In
addition, Hughes has agreed to provide the Company with confirmation of the
satellite transmission, which confirmation Hughes receives from each addressed
receiver via an automatic dial-up system.
The second agreement with Hughes appoints the Company as a reseller of
the equipment and software produced by Hughes and used in receiving satellite
transmissions (the "Hughes Systems"). Pursuant to the agreement, the Company is
authorized to offer and sell the Hughes Systems to unaffiliated customers of the
Company. The Company has agreed to purchase at least 600 Hughes Systems during
the three-year term of the agreement. The Hughes Systems, including the small
satellite dish, are installed at the television stations and connected to the
Company's SpotServer.
The digital transmission of ads and programming is expected to be
accomplished as follows: First, the video masters are transmitted to the
Company's facilities in Chicago. The Company has implemented a system referred
to as MAP (Master Acquisition Plan) that permits the ads and programming to be
transmitted to the Company's Network Operations Center in Chicago almost
instantaneously in a digital format via fiber optic cable from any of 12
metropolitan centers in the U.S. and Canada. Thereafter, at the Network
Operations Center, the MPEG-2 encoded material is stored on IndeNet's production
control server for transmission to the Hughes uplink facility. The ads and
programming, encoded with the television station's traffic instructions, are
then sent to the Hughes uplink facility via a high capacity T1
telecommunications line, fiber optic line, or other similar means. Hughes then
broadcasts the material.
The Company's clients receive the satellite transmission of the spots
via a SpotServer, the video file server that is manufactured by Channelmatic for
the Company. The SpotServer includes an integrated satellite IRD and an MPEG-2
decoder. Spot files with embedded traffic instructions are received and
immediately confirmed back to the Company's Network Operations Center in Chicago
via an automatic dial-up system. The SpotServer supports interfaces to the
television station's automation software and can play spots live, off
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load to a station library management system or pass media files to other local
servers complying with the MPEG-2 standard, providing end-to-end commercial
delivery.
In order for the television broadcast stations and cable operators to
be able to receive and use advertisements or programming that is distributed
digitally via satellite, the television stations will need to install the
Company's SpotServers. Each SpotServer is addressable and can be activated by a
remotely generated signal which will eliminate the need for the station to man
the device. Once deployed, the SpotServers will be able to receive spots or
programs delivered via satellite. Since all stations that agree to use The
IndeNet will have the same equipment, the quality of the signal recorded at each
station will be consistent.
The roll-out of The IndeNet initially involves the
installation of SpotServers and Hughes Systems in up to 400 television broadcast
stations by the end of 1996. The Company estimates the cost to be $10,000 per
station. Since the announcement of its intent to create The IndeNet in April
1996, the Company has installed 100 SpotServers. The Company is installing the
SpotServers at no cost to the stations. The Company hopes to install
approximately 400 SpotServers by the end of 1996 and believes that approximately
350-400 SpotServers need to be installed before The IndeNet can be operated
profitably. The top 400 television stations currently account for 75% of all of
the advertising spot deliveries in the United States. To date, the Company has
not received commitments for the installation of the remaining SpotServers, and
no assurance can be given that the deployment of 400 SpotServers can be achieved
by the end of 1996, or ever.
After the initial deployment of 350-400 SpotServers and the
commencement of commercial traffic over The IndeNet, the Company plans to
gradually deploy, through sales or other means, additional SpotServers. The
Company's goal is to install a SpotServer in up to 800 of the nation's 1,200
television stations.
The Company has tested The IndeNet but has not commenced commercial use
of the network. The Company intends to commence commercial traffic on The
IndeNet once between 350 and 400 SpotServers have been installed, a target the
Company hopes to achieve during 1996.
BROADCAST STATION SERVICES
The Company's television station services are provided by Enterprise
and CCMS and by Channelmatic. Enterprise and CCMS design, develop and distribute
traffic, billing, revenue and program management products for television
stations and cable operators, while Channelmatic develops, manufactures,
assembles and distributes the equipment and software for advertising insertion
into cable television programming.
Enterprise was incorporated in 1977 in England and Wales. Enterprise,
headquartered in Thames Ditton, Surrey, England (near London), also has offices
in the United States, Australia, New Zealand and South Africa. Enterprise
currently employs over 200 employees worldwide. CCMS was incorporated in 1983 in
Michigan. CCMS, headquartered in the City of Wyoming, Michigan, currently has 15
employees. Enterprise and CCMS were acquired by IndeNet after the end of fiscal
1996. Accordingly, the actual consolidated financial statements included in Item
7 of the Annual Report do not include financial information regarding these
subsidiaries.
Channelmatic, in business since 1976, has three offices and facilities
located in Southern California. Channelmatic currently has approximately 70
employees.
Traffic and Billing
The Company, through its recently acquired subsidiaries, Enterprise and
CCMS, designs, develops and integrates traffic and billing, revenue management,
and program management software products for use by broadcast television and
radio stations, as well as the cable industry, in the management of advertising
time and programming. The Company currently provides its software products to
over 140 domestic broadcast
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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. The Company's broadcast television and radio station's customers, which
typically enter into five year contracts licensing the Company's products,
include such major television networks as NBC Television Stations and Fox
Television Stations in the United States, Laser Sales and VTM in Europe, Network
10 in Australia and TVNZ in New Zealand. The Company's cable advertising
industry clients, which typically enter into perpetual software license
agreements for a one-time up-front fee, and annual support agreements, include
major multi-system cable operators such as Time-Warner Cable, TCI Cable and
Pacific Telesys. The Company also provides a range of related services to its
customers including hardware installation, customer support, ongoing training,
and custom development of software programs.
The Company believes that, based on the concentration of its customer
base in the top television markets in the United States and other parts of the
world, and the nature and extent of its contractual relationships with its
customers, it is one of the leading providers of advertising time and
programming management software products to broadcast television stations.
The Traffic and Billing Industry. Over the past several years, the
broadcast and cable industries have undergone significant changes primarily as a
result of new technologies, an increase in the number of television channels and
changes in industry regulation, both in the United States and abroad. These
changes have led to a dramatic increase in the number of television and radio
stations, and a corresponding increase in the amount of available advertising
time. Television and radio stations derive revenue primarily from the sale of
advertising time, the level of which is directly dependant upon the amount of
available time that is sold and the price at which such time is sold. Television
and radio stations are finding it increasingly difficult to sell advertising
time at the price levels that they had been sold for in the past, as a result of
the increase in competition for the sale of advertising time. This increased
supply of advertising time, together with an increased ability of advertisers to
identify their target audiences, has also led to advertisers and agencies
demanding a higher quality of service, with improved targeting of
advertisements. As a result, television and radio stations require more
sophisticated methods of determining how to price, package and deliver their
inventory of advertising time. The Company believes that the products and
services it has developed address the changing informational requirements of the
broadcast and cable industries.
Products and Services. The Company has developed a number of integrated
and interactive computer systems for use in specific geographic markets, both
domestic and abroad, which can also be customized to satisfy individual client
requirements. The products are typically made available to broadcast television
and radio clients through five-year licensing arrangements and to cable
advertisers through perpetual licenses. The Company also provides a full line of
related services to its customers, including project management, customer
support and ongoing training.
Broadcast Television and Radio Station
Traffic and Billing Management Software Systems. The Company's traffic
and billing management software systems for broadcast television and radio
stations are designed to provide maximum flexibility and support for broadcast
management. The systems incorporate a comprehensive set of programs which
provide the user with information on a range of areas, including sales orders,
program scheduling, financial, transmission logs, invoicing, and credit and
collections. The systems can be configured to handle individual operations, full
networks and multichannel environments.
The Company's systems enable television and radio stations' sales teams
to identify the inventory of available advertising spots and support their sales
initiatives using sales history, external market research (for example, ratings
data obtained from A.C. Nielsen Company) and pricing data. The sales inventory
is updated immediately as orders are input. The systems automatically identify
and highlight any gaps in the inventory
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and recommend how the inventory can be optimized to maximize revenue. As soon as
final orders and available slots within the inventory have been matched, the
systems automatically update the station's transmission log, which contains the
schedule of programs and advertisements, downloads the log details to the
transmission equipment and updates historic sales data files and financial and
accounting records.
Program Management Software Systems. The Company's program management
software systems for broadcast television and radio stations give customers
complete control with respect to their inventory of feature films, syndicated
series, cartoons, specials and other programs. The systems provide customers
with extensive search capabilities, leading to better management of programming
decisions. Examples of these capabilities include searches for a particular
actor or theme, and searches based on past ratings or last play date. The
systems also provide information which can assist customers in purchasing
programming. Other features of the systems include monthly amortization
forecasting, comparison of program revenue with the amortized cost of the
program and cash requirements reporting.
Revenue Management Systems - "Landmark". In an effort to develop
systems which best match the needs of its customers, the Company recently
designed and implemented a "revenue management system" known as "Landmark."
Unlike the systems that are offered by the Company's competitors, Landmark
places the inventory of airtime in a station's sales system, rather than in the
traffic system. This enables customers to manipulate their inventory from a
sales prospective. In addition to traffic and billing functions, the Landmark
system also incorporates the following features:
- Yield Management - the system can evaluate airtime sales with
projected audience delivery statistics, against current
inventory availability.
- Deal Management - the system can monitor a particular
advertising campaign and track deviations from projected
results such that corrective measures can be taken before the
campaign is completed.
- Audience Research - audience research information included in
the system enables the assessment of the relationship between
demographics and revenue potential.
- Sales Information Base - the system includes a comprehensive
sales information data bank which includes all relevant sales,
historical business, inventory availability and audience
ratings information.
Cable Industry
The principal product offered by the Company to its cable industry
clients is the Ad Manager 20/20 System, a complete traffic management, billing
and sales management system designed to manage all activities of the advertising
sales operation. The system is designed to incorporate all of the information
contained within a client's advertising contracts, as well as the advertising
spots associated with each contract and the network programs within which spots
are to be scheduled. The Ad Manager 20/20 can manage up to 3,000 contracts at
any one time, while the Ad Manager 20/20 EX (an enhanced version of the Ad
Manager 20/20) can handle up to 5,000 contracts at any one time. The Company
offers a single-user version of the system, as well as a multi-user version to
allow for access by several users simultaneously. Certain of the features of the
Company's systems include (i) automatic or manual scheduling of advertising spot
data, according to specific client requirements; (ii) maintenance of client
advertising insertion tape libraries and assistance with tape editing
procedures; (iii) generation of an advertising insertion schedule and (iv)
automatic verification and reconciliation of advertising spots that have aired,
and the automatic scheduling of "make-goods" for spots that were missed.
In order to keep pace with the rapidly evolving needs of the cable
advertising industry, the Company recently introduced Novar, the next generation
traffic and billing system for the cable industry.
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The Company typically enters into a customer service and support
agreement with its cable industry clients, pursuant to which the Company
provides customers with all software updates and enhancements generally offered
by the Company to its customers, and grants unlimited telephone access to the
Company's Grand Rapids, Michigan customer service department. The agreements are
typically entered into for one year terms, with automatic renewals, unless
cancelled by either party.
Insertion Products
Channelmatic is a leading supplier of products used to insert
commercials and automate program play-back primarily for cable television
systems and small to medium size broadcast television stations, domestically and
internationally.
Advertising Insertion. The cable TV industry currently represents the
largest market for the Company's Channelmatic subsidiary. Channelmatic's
products enable a cable operator to insert local commercials into national cable
network satellite feeds. Local ad insertion allows a cable operator to increase
revenues without increasing subscriber fees. Currently, cable operators generate
approximately $1.3 billion annually in local/spot advertising. Presently the
industry is inserting commercials on roughly 22,500 channels nationwide. The
Company's installed base is approximately 9,000 channels. The price per channel
for Channelmatic equipment varies from $1,000 to $12,000 depending on the
configurations selected by the customer. Revenues from ad insertion equipment
sales represented approximately 75% of Channelmatic's total revenues for the
12-months ended March 31, 1996. The balance of Channelmatic's revenues
constituted customer service and maintenance revenues.
Interconnects and Ad Distribution Systems. A related market to local ad
insertion, the cable advertising interconnect, requires additional equipment for
the distribution and insertion of regional advertisements. An interconnect is an
association of independent cable systems in one metropolitan media center,
formed to collectively sell metropolitan-wide advertising.
The Company was recently awarded a contract by National Cable
Communications ("NCC") to install a 80 channel, 5 zone, MPEG 2 MVP digital ad
insertion system for the Chicago Interconnect (the "NCC Agreement"), the third
largest interconnect in the U.S. The value of the initial contract from the
consortium of system owners is estimated to be approximately $1,500,000, and the
system will be the second cable interconnect in the country to be outfitted with
a SpotServer, allowing television commercials to be delivered in an MPEG 2
digital format via satellite rather than analog video tape. The NCC Agreement
also provides for the grant to NCC of a non-transferable, non-exclusive and
perpetual right and license to use the software in connection with NCC's
operation of the insertion system. Pursuant to the NCC Agreement, the Company
has deposited in escrow $450,000 to secure the timely performance of the
Company's obligations under the contract.
NCC, which is a partnership owned by Katz Media Group, Inc.,
Time-Warner, Inc., Continental Cable, Inc., Comcast, Inc. and Cox
Communications, Inc., is the largest domestic cable advertising firm selling
available spot inventories directly to advertisers and their agencies for 11
major interconnects out of the top 25 media markets. Installation of the NCC
system is scheduled to be completed in August 1996.
Sony and Channelmatic have created the MVP/VideoStore(TM) solution
specifically for large multiple channel and zone systems. The Chicago
Interconnect system will have: a capacity of 2,500 thirty second spots; dynamic
real time traffic interface; and regional and local zoning. The system will
serve 49 individual headends of which 25 have Channelmatic's remote control
switches. The NCC Agreement represents the first major sale of the
MVP/VideoServicer(TM) cooperative product. Channelmatic's signal switching
hardware and software coupled with Sony's high resolution MPEG 2 video output at
10 megabits per second, the highest quality available today, offer advertisers
superior picture and sound, real time traffic interface, and advanced spot
management capabilities previously unavailable to advertisers. Both of
Channelmatic's and Sony's domestic sales forces are marketing the
MVP/VideoStore(TM) product.
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Broadcast and Direct Broadcast Satellite. Historically, the use of
automation systems has not been wide spread in the broadcast industry. Due to
economic pressures from cable, telephone companies and others, many broadcast
stations are looking to reduce cost through automation. These markets currently
represent a small part of Channelmatic's business, but the Company intends to
focus its marketing efforts in this area.
Direct broadcast satellite ("DBS") is a new source of television
programming for consumers. DBS will compete directly with cable operators and
satellite dish programmers, by enabling viewers to buy a small inexpensive
satellite dish to receive cable style service. Signals are distributed from a
central national site. In 1993, Channelmatic delivered an ad insertion,
automated playback system for United States Satellite Broadcasting, the first
digitally delivered DBS provider.
Products. Channelmatic provides turnkey systems that incorporate
proprietary as well as third party products. The large variety of switching and
control equipment manufactured by Channelmatic provide customized configurations
not offered by the competition. Two of Channelmatic's primary products currently
consist of the Managed Video Playback ("MVP") and Digital LITE.
In December 1995, Channelmatic introduced MVP, a comprehensive content
and network management system for media distribution, playback and insertion.
The MVP consists of digital ad insertion hardware and software developed and
manufactured by Channelmatic. Developed for cable and broadcast television
applications, MVP integrates the latest video file server technology from
SONY(R) Electronics, Inc. ("Sony"), the VideoStore(TM), with that of the traffic
and billing function and network management.
The VideoStore(TM) works in tandem with Channelmatic's MVP ad insertion
equipment, creating a MPEG 2 digital video server capable of storing and
replaying as many as 7,600 television commercials, or 60 hours of on-line
storage. Expansion is possible from one television channel to several hundred
and the VideoStore(TM) is engineered with swappable disk drives, circuitry, and
power supplies. In addition to the VideoStore's(TM) large digital storage
capabilities, the RAID (Redundant Array of Independent Drives) architecture
provides high fault tolerance, unlike other LAN and WAN intensive competitive
designs. The MVP/VideoStore(TM) product has full traffic and billing interface
as well as simultaneous outputs to all channels, and is intended to replace
existing tape based systems.
The MVP, combined with the Sony VideoStore(TM) provides playback
control and management of ad insertion and playback operations, which allows for
flexibility. Some of the benefits to the combination of the Sony VideoStore and
the Channelmatic MVP are as follows: (i) MVP/VideoStore(TM) has the ability to
handle multiple zones of insertion and share commercial inventory across these
multiple zones in a wide area network implementation, which allows customers to
select the wide area network model which is most cost effective; (ii) by
providing a dynamic real-time interface to the traffic and billing system, MVP
can respond quickly to late arriving commercials, last minute changes in
schedule and a global commercial delete and replace; (iii) MVP provides
real-time network status and control; (iv) MVP/VideoStore(TM) allows users to
make last second changes to the playlist, so that users can continue to sell
spots until the time that the spots need to be inserted; (v) a Sony predictive
maintenance system provides the ability to alert a user of potential component
failures prior to the failure actually occurring, which allows the user to take
action and replace the component before failure; (vi) an embedded clip ID allows
verification that the clip actually played back and that it was the correct
clip; and (vii) spots can be played in any order, on any channel, and even
simultaneously.
Digital LITE, first introduced in December 1995, is a digital insertion
system that functions similarly to the MVP but is designed for smaller cable
stations with 1 to 12 channels which do not need the capacity of an MVP. Because
the Digital LITE is a single channel, component-based product, a small cable
system customer can expand his cable system at a lower cost per channel simply
by adding one Digital LITE per additional channel.
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License Agreements. Channelmatic recently entered into an agreement
with SONY(R) Electronics, Inc. (the "Sony License Agreement") wherein
Channelmatic is granting license to Sony to sublicense, and a right to resell in
the U.S., the MVP manufactured by Channelmatic. The Sony License Agreement
authorizes Sony(R)'s VideoStore(TM) salespeople to sublicense Channelmatic's MVP
products and support services. Channelmatic may also directly sell or license
the hardware and software. The Sony License Agreement will expire in April 1997
and may be renewed at Sony's option.
MARKETING AND SALES
As part of the Company's goal to horizontally integrate the services
that the Company provides to advertisers, television programmers, television
stations and cable systems, the Company has commenced coordinating the marketing
and sales efforts of its various subsidiaries under the supervision of IndeNet's
marketing director. Although each subsidiary of IndeNet engages its own sales
agents and representatives, the sales personnel of the various subsidiaries
coordinate their sales efforts and actively engage in cross-selling the
Company's other products and services.
COMPETITION
Competition in each of the Company's businesses is highly competitive.
Each of the Company's subsidiaries competes in its business with numerous
competitors and potential competitors, many of whom are substantially larger in
size and have greater financial, technical, marketing, customer service and
other resources available than the Company. Certain of the Company's competitors
and potential competitors have technological capabilities or other resources
that would allow them to develop alternative products or provide alternative
services which could compete directly with the Company's products and services.
Although no competitors of the Company currently provide digital delivery of
video advertising content via satellite, a number of other companies have
announced their intentions to establish competing digital satellite delivery
systems.
The Company currently competes in the market for the distribution of
video and audio advertising spots to television stations. The principal
competitive factors affecting this market are production quality, customer
service, price, timeliness and accuracy of delivery. The Company competes with a
variety of duplication and delivery companies that have traditionally
distributed commercials on video tape via air and ground courier. Some
duplication and delivery companies currently offer satellite or electronic
delivery, and have long-standing customer relationships, resulting in
significant customer loyalty. Moreover, other companies have announced systems
for delivering video advertising content electronically or via satellite.
Competitors include Cycle-Sat, Inc., VDI Media, MGS Services, and a number of
smaller regional firms. Digital Generation Systems, Inc., a leading provider of
electronic distribution of audio spot advertising to radio stations, has also
announced its intent to deliver television spot ads electronically. In addition,
telecommunications providers or cable television operators could enter the
market as competitors with lower delivery costs.
The Company's major competitors in the ad insertion product marketplace
include SeaChange Technology, Texscan MSI, a subsidiary of Texscan Corp.,
StarNet Development, Inc. a division of the Lenfest Group, and Digital Equipment
Corporation.
The Company's principal competitor in the traffic and billing market in
the United States is Columbine/JDS, Inc., a provider of traffic and billing
management systems. Enterprise also competes to a limited extent with the
internal data processing departments of television and radio stations, to the
extent such departments generate traffic and billing systems in-house.
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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company primarily relies upon a combination of trademark,
tradename, and trade secret laws and license agreements to establish and protect
proprietary rights in its technologies. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
hardware, software or technology without authorization or to develop similar
technology independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries.
Because the Company's business is characterized by rapid technological
change, the Company believes that factors such as the technological and creative
skills of its personnel, new computer hardware, software and telecommunications
developments, frequent hardware and software enhancements, name recognition, and
reliable customer service and support are more important to establishing and
maintaining a leadership position than the various legal protections of its
technology.
The Company believes that its patent, software, trademarks and other
proprietary rights do not infringe the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert such
infringement by the Company with respect to current or future software, hardware
or services. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause software release delays or might require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company.
EMPLOYEES
As of June 1, 1996, the Company had approximately 500 employees. Other
than at the subsidiary levels, the Company had 12 employees as of June 1, 1996,
five of whom perform management and administrative functions and seven of whom
are engaged in deploying and operating The IndeNet. The Company's employees are
not represented by any collective bargaining organization.
GOVERNMENT REGULATION
Transmissions from the Company's earth stations to satellites must be
made pursuant to a license or other authorization granted by the Federal
Communications Commission (the "FCC"). FCC licensing decisions or changes in
U.S. government policies increasing or decreasing access to satellites could
adversely affect the Company. No FCC authorization is required for reception of
transmission from domestic satellites from points within the United States.
Mediatech transmits its domestic, analog satellite traffic through
earth stations operated by third parties. IndeNet relies on Hughes to transmit
traffic for The IndeNet to the Hughes satellite for broadcast by Hughes'
satellite to the various subscribing television stations. Neither IndeNet nor
Mediatech holds an FCC license and both companies rely on the licenses or
authorizations of their respective earth station operators.
Starcom has to date relied on a license to transmit domestic satellite
traffic that is held by Jupiter Radio, Inc. In connection with the acquisition
of Starcom, all of the outstanding capital stock of Jupiter Radio, Inc. was
assigned and transferred to Starcom, subject only to obtaining the FCC's
approval to the assignment. The approval of the FCC to the transfer of Jupiter
Radio's stock has not yet been obtained.
The FCC establishes technical standards for satellite transmission
equipment which change from time to time and also requires coordination of earth
stations with land-based microwave systems at certain frequencies to assume
noninterference. Transmission equipment must also be installed and operated in a
manner that avoids exposing humans to harmful levels of radio-frequency
radiation. The placement of earth stations or other antennae is typically
subject to regulation under local zoning ordinances.
RESEARCH AND DEVELOPMENT
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The Company intends to devote a significant amount of its resources to
the development of new or enhanced products. For the fiscal year ended March 31,
1996, research and development expenses were approximately $447,000, which
amount represents expenses incurred in the development of new products by
Channelmatic and the costs incurred in developing The IndeNet. Since the Company
had no operations in the prior fiscal year, the Company did not incur any
research and development expenses. The Company expects that its research and
development expenses will increase in future periods.
SIGNIFICANT CUSTOMERS
During the fiscal year ended March 31, 1996, revenues derived from
McDonald's Corporation and King World represented 11.1% and 10.4% of the
Company's total revenues, respectively. Due to the increase in the Company's
revenues as a result of the acquisitions of Enterprise and CCMS after March 31,
1996, the Company does not expect the revenues derived from any single customer
to exceed 10% of the Company's total revenues for the year ended March 31, 1997.
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PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading provider of television advertisement delivery
services for national advertisers and programmers. It also develops, assembles,
and distributes software and hardware for advertising insertion into television
programming and through its two acquisitions subsequent to March 31, 1996
designs and develops traffic billing, revenue and program management software
products for the management of advertising time and programming. The Company
operates in one business segment. In 1995, the Company changed its fiscal
year-end from December 31 to March 31. As a result of this change, comparisons
are for fiscal 1996 and 1994. For information regarding results of the three
months ended March 31, 1995 see Notes to Consolidated Financial Statements.
References to "fiscal 1996" represent the year ended March 31, 1996 and
references to "fiscal 1994" represent the fiscal year ended December 31, 1994.
OVERVIEW
The Company did not have any operations during fiscal 1994. Operations
of the Company commenced through its first acquisition in February 1995. The
acquisitions completed by the Company to date are as follows: (i) Mediatech,
Inc. ("Mediatech") in February 1995, (ii) Channelmatic, Inc. ("Channelmatic") in
November 1995, (iii) Starcom Television Services, Inc. ("Starcom") in February
1996, (iv) Cable Computerized Management Systems, Inc. ("CCMS") in May 1996 and
(v) Enterprise Systems Group Ltd. ("Enterprise") in May 1996. The results of
operations discussed herein reflect (i) the actual operating results of the
Company during fiscal 1994 and fiscal 1996 on a consolidated basis with such
subsidiaries as IndeNet actually owned during such periods of ownership and (ii)
the pro forma consolidated operating results as if IndeNet had owned
Channelmatic, Mediatech and Starcom since the beginning of fiscal 1994.
As a result of the acquisitions, the Company will have recorded
approximately $35.4 million of goodwill on its pro forma balance sheet which
will be amortized over 20 years and will result in annual charges to income of
approximately $1.8 million. Future acquisitions will likely result in additional
amortization charges. See the Unaudited Pro Forma Results of Operations and the
Consolidated Financial Statements included elsewhere herein.
Except for historical information contained herein, statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecast results.
ACTUAL RESULTS FOR FISCAL 1996 COMPARED TO FISCAL 1994
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1994
------------------------------------
<S> <C> <C>
Revenue $20,868,899 $ -
Cost of sales 9,791,964 -
Selling, general and administrative 10,166,713 -
Depreciation and amortization 2,076,590 25,000
Research and development 446,525 -
Corporate 1,023,659 1,221,082
Other income (expense), net (459,641) 496,299
Income tax expense 17,255 -
Allocation to minority interest (156,416) -
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C>
Net loss $(2,957,032) $(749,783)
</TABLE>
As discussed above, the Company did not have any operations during
fiscal 1994 as it was transitioning between different segments of the
entertainment industry. The Company did not commence operations until the
acquisition of Mediatech in February 1995. Accordingly, since IndeNet did not
have any Revenues, Cost of Sales, or Selling, General and Administrative
Expenses in fiscal 1994, all increases in Revenue, Cost of Sales, and Selling,
General and Administrative Expenses are attributable to the three operating
companies acquired prior to and during fiscal 1996.
Depreciation and amortization increased from fiscal 1994 due to (i) the
inclusion of depreciation and amortization of the acquired companies which is
not included in fiscal 1994 results and (ii) amortization of goodwill as a
result of those acquisitions. Depreciation and amortization is expected to
increased in future periods due to (i) the inclusion of the depreciation and
amortization of the acquired companies for a full reporting period, (ii)
amortization of goodwill as a result of the companies acquired prior to March
31, 1996 for a full reporting period, and (iii) depreciation and amortization of
CCMS and Enterprise and of any other companies that may be acquired subsequent
to March 31, 1996, and, in each case, the amortization of goodwill attributable
to those subsequent acquisitions.
Corporate expense is attributable to the expenses of IndeNet, the
parent company. Such expenses include salaries, legal, professional and other
miscellaneous costs. Corporate expenses decreased in fiscal 1996 from fiscal
1994 by $197,423 or 16% due primarily to a reduction of legal fees. During
fiscal 1994, the Company was involved in lawsuits that have been settled. The
Company expects that corporate expenses may increase in future periods due to
the hiring of additional personnel in assisting in the Company's acquisitions or
managing the acquired businesses.
Interest income decreased from fiscal 1994 by $138,438 or 50% due to a
reduction in cash balances maintained by the Company during fiscal 1996 and the
repayment in fiscal 1996 of a $900,000 note receivable. The Company expects
interest income to decrease in future periods due to the use of cash in funding
and deployment of the Company's digital delivery system.
Interest expense increased from fiscal 1994 by $746,306 due to (i) the
inclusion of interest expense of the acquired companies in fiscal 1996 for the
period that the subsidiaries were owned and (ii) interest expense incurred on
the promissory notes delivered by IndeNet as partial payment of the purchase
price of each of the acquisitions. Interest expense is expected to increase in
future periods due to (i) the inclusion of interest expense incurred by each of
the acquired companies for a full reporting period, (ii) interest expense
related to the purchase price promissory notes for a full reporting period, and
(iii) the inclusion of interest expense of the companies acquired subsequent to
March 31, 1996 and interest expense from the purchase price promissory notes
attributable to those subsequent acquisitions.
At March 31, 1996, the Company (excluding Channelmatic) has a net
operating loss carryforward of approximately $7,700,000 for federal income tax
purposes of which $2,700,000 is subject to a separate return limitation. The
carryforward expires in varying amounts and years through 2011. This loss
carryforward also gives rise to a deferred tax asset of approximately
$2,600,000. This tax asset has a 100% valuation allowance as the Company cannot
determine if it is more likely than not that the deferred tax asset will be
realized. Because of changes in the Company's ownership, there is an annual
limitation on the usage of the net operating loss carryforward. Income tax
expense for fiscal 1996 represents state taxes for the various states in which
the Company does business and corporate tax.
The allocation to minority interest represents 33.33% of the net loss
of the majority-acquired entity Channelmatic. The amount allocated to minority
interest will differ in future periods based on the operations of Channelmatic.
PRO FORMA FOR FISCAL 1996 COMPARED TO PRO FORMA FISCAL 1994
21
<PAGE> 22
<TABLE>
<CAPTION>
Pro forma Pro forma
Fiscal 1996 Fiscal 1994
-------------------------------
<S> <C> <C>
Revenue $28,503,409 $31,448,205
Cost of sales 13,878,456 14,965,315
Selling, general and administrative 12,466,771 12,651,550
Depreciation and amortization. 3,446,777 3,704,512
Research and development 536,727 669,672
Corporate 1,023,659 1,221,082
Other income (expense), net (802,869) (249,536)
Income tax expense 5,902 31,532
Allocation to minority interest. (162,641) 294,993
Net loss $(3,495,111) $(2,339,987)
</TABLE>
The following discusses the results of operations for the Company,
Mediatech, Channelmatic and Starcom as if the three subsidiaries had been
acquired at the beginning of each of the fiscal years. See the Unaudited Pro
Forma Results of Operations and the Consolidated Financial Statements included
elsewhere herein.
Revenue decreased by $2,944,796 or 9% from $31,448,205 to $28,503,409
due primarily to a decrease in the revenue of Channelmatic. Channelmatic's
decrease in revenue is due to Channelmatic migrating from analog to digital
product lines. During fiscal 1994, Channelmatic's primary business was in the
development, assembly and sale of analog advertisement insertion equipment; in
fiscal 1996, the Company developed, assembled and sold the current line of
digital advertisement insertion equipment. Because of the industry's change from
the traditional analog systems to the new digital format in fiscal 1996,
Channelmatic's sales of its analog product line decreased dramatically in fiscal
1996. The lost analog sales were not replaced by sales of digital products
because Channelmatic's digital products were not yet fully developed and
available to the company's clients. The Company believes that, because of the
various benefits digital ad insertion equipment appears to have over existing
analog systems, the cable industry will convert existing systems to the digital
format. Because Channelmatic now also offers digital ad insertion equipment, the
Company expects revenue to increase in future periods as existing analog systems
are replaced by Channelmatic's new digital advertisement insertion equipment.
Cost of sales decreased by $1,086,859 or 7% from $14,965,315 in fiscal
1994 to $13,878,456 in fiscal 1996. As a percentage of sales, cost of sales
increased from 48% to 49% because the decrease in costs was less than the
decrease in revenue. Overall cost of sales as a percentage of revenue is
expected to increase based on the profit margins of the additional companies
acquired subsequent to March 31, 1996; however cost of sales as a percent of
revenue is expected to remain constant for the aforementioned companies.
Selling, general and administrative expenses decreased $184,779 or 1%
from $12,651,550 to $12,466,771. As a percent of sales, selling general and
administrative expenses increased from 40% to 44%. The increase in selling,
general and administrative expenses as a percent of sales is due primarily to
fact that selling, general and administrative expense of Channelmatic remained
constant while, as discussed above, sales decreased from prior periods. Although
sales decreased, Channelmatic maintained the same level of trade show activity
and administrative and selling personnel. As discussed above, based on the
Company's assumptions, revenue attributable to Channelmatic is expected to
increase, however, selling, general and administrative expense is not expected
to increase in proportion to that increase due to the fact that Channelmatic is
appropriately staffed for increased production.
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<PAGE> 23
Depreciation and amortization decreased by $257,735 or 7% from
$3,704,512 to $3,446,777. The decrease was due primarily to certain fixed assets
being fully depreciated during fiscal 1996. Depreciation and amortization is
expected to remain constant in future periods for Channelmatic.
Research and development decreased $132,945 or 20% from $669,672 to
$536,727. The decrease was due to the combination of a decrease in research and
development expense by Channelmatic and to the fact that during fiscal 1994,
Channelmatic expensed 100% of the incurred research and development costs and
commencing January 1, 1995, Channelmatic capitalized certain research and
development expenses as defined under generally accepted accounting principles.
Research and development expenses are expected to increase in future periods due
to (i) increased development of the Company's digital delivery system, and (ii)
increased research and development related to new product lines developed by
Channelmatic.
Corporate expense is attributable to the expenses of IndeNet, alone.
Because IndeNet actually incurred these expenses during all of fiscal 1996 and
fiscal 1994, the pro forma corporate expenses are also the actual corporate
expenses discussed above in "Actual Results For Fiscal 1996 Compared to Fiscal
1994."
Interest income decreased $155,323 or 45% from $345,485 to $190,162 as
a result of lower cash balances held by the Company on a consolidated basis
during fiscal 1996. Interest income is expected to decrease in future periods
based on the utilization of cash for the deployment of the digital delivery
system and resultant lower cash balances.
Interest expense increased $159,776 or 16% from $996,944 to $1,156,720
as the result of higher interest rates on notes which have variable interest
rates tied to the Prime or LIBOR rates. Interest expense may increase in future
periods due to any increase in the Prime or LIBOR rates.
Income tax expense for fiscal 1994 represents income taxes incurred by
Channelmatic and for fiscal 1996 represents minimum state and corporate taxes.
Allocation of minority interest represents allocation of 33.33% of
Channelmatic's net operations to the minority shareholder.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses,
capital expenditures, development of the digital delivery system, and
acquisitions. The Company's primary sources of cash have been from bank
borrowings, private placements, and exercise of warrants and options.
IndeNet's subsidiaries are generally cash flow positive from the date
of acquisitions, and as such the Company's capital needs primarily relate to (i)
the development and deployment of the digital spot delivery system; (ii) funding
corporate expenses; (iii) acquisitions; (iv) payment on promissory notes
delivered by IndeNet as partial payment of the purchase price of certain of the
acquisitions; and (v) notes payable as a result of the private placements.
In February 1996, IndeNet raised $4.0 million from a private placement
of the issuance of 224,795 shares of its common stock and the issuance of a $3.0
million convertible note. The funds from the sale of the stock and the note are
being used primarily for the development and deployment of the Company's digital
delivery spot network.
In April 1996, IndeNet raised $12.0 million in cash from the issuance
of 1,200 shares of IndeNet's Series A preferred stock. The net proceeds of this
offering was used primarily for the acquisition of Enterprise.
23
<PAGE> 24
In May 1996, IndeNet raised an additional $2.5 million in cash from the
issuance of a convertible note. The funds are being used for general product
development.
In May 1996, the Company sold its office building in Los Angeles,
California for $1.25 million and used part of the proceeds to pay-off a mortgage
loan of approximately $.75 million.
As of March 31, 1996, the Company had approximately $3.8 million in
cash and cash equivalents and working capital of approximately $1.9 million. For
the fiscal year ended March 31, 1996, the Company's unrestricted cash balances
increased by $3,338,599. During fiscal 1996, the Company used $905,151 in
operations, primarily due to the operating loss of the Company. The Company used
$1,901,242 in investing activities, primarily for normal ongoing capital
expenditures and capital expenditures for the digital spot delivery system, and
$510,707 on capitalized costs. These amounts are net of $583,604 payments on a
note receivable, which will not be recurring. The Company generated $6,144,992
in financing activities, primarily from the $4,000,000 proceeds from a private
placement of the issuance of the Company's Common Stock and a note, and the
exercise of warrants and options which netted the Company $4,938,320; the latter
amounts were offset by payments on notes payable of $2,534,728. It is not
expected that the Company will receive this level of proceeds from the exercise
of warrants and options in the future. In addition, during the three month
period ended March 31, 1995, the Company paid $3,000,000 in cash to the former
shareholders of Mediatech as part of the consideration of the acquisition of
Mediatech.
The Company expects to spend approximately an additional $4.0 million
to complete and deliver its digital spot delivery system. The Company believes
that, with the new financings described above, it has adequate working capital
to fund the deployment of the digital spot delivery system. The Company also
expects to enter into a line-of-credit arrangement for its subsidiary
Channelmatic in order to fund Channelmatic's working capital needs.
Since the end of fiscal 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. See "Item 3. Legal
Proceedings." 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 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.
The Company's debt obligations consist of debt owed by IndeNet, Inc.
and by certain of its subsidiaries. Most of the debt obligations of IndeNet
consist of indebtedness owed to affiliates of the Company, whereas the debt
obligations of the subsidiaries are loans owed to third party institutional
lenders. See "Item 12. Certain Relationships and Related Transactions." Because
of the Company's current liquidity position, the Company and its affiliates have
agreed that certain of the payments due to affiliates during the fiscal year
ended March 31, 1997 will be deferred. 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
24
<PAGE> 25
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'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.
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. However, the
Company and the stockholders have since the end of the 1996 fiscal year 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
number of shares issued to the stockholders of Starcom was 637,500, or 362,500
shares less than the number of shares reserved in the March, 31 1996 audited
financial statements included in this annual report. Since no cash was paid or
payable in connection with the purchase of Starcom, the acquisition and the
subsequent resolution of the purchase price dispute had no effect on the
Company's liquidity.
Any future acquisitions will be funded from equity and/or debt
financing. Payments on promissory notes and notes payable as the result of the
private placements are expected to be paid from either (i) future fund raising
or (ii) funds from IndeNet's subsidiaries. The notes payable as a result of the
private placements may also be converted to common stock at the option of either
the holder or IndeNet. There is no assurance given that anticipated future
capital financings will be successful or that funds will be available from
IndeNet's subsidiaries to meet capital requirements.
Inflation
The Company does not believe that inflation will have a material impact
on the Company's future operations.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which included plant and equipment, and certain
identifiable intangible assets, should be recognized and how important losses
should be measured. The Company does not expect adoption to have a material
effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the Company's
financial position and results of operations is currently unknown. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.
ITEM 7. FINANCIAL STATEMENTS
25
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The financial statements begin on page F-1.
26
<PAGE> 27
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
MANAGEMENT OF THE COMPANY
Set forth below is certain information with respect to the directors
and executive officers of the Company during the Company's last fiscal year and
with respect to the director nominees:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Robert W. Lautz, Jr. 48 Chairman, Chief Executive
Officer and Director
Thomas H. Baur 50 Chief Executive Officer and Chairman of
Mediatech, and Director
Robert E. Derham 51 Executive Vice President of Mediatech
William A. Kunkel 43 Director and Member of the
Compensation and Audit Committees
Cary S. Fitchey 43 Director and Member of Compensation
and Audit Committees
Andre A. Blay 58 Director
William D. Killion 64 Director
Graeme R. Jenner 44 Chief Operating Officer and Director
Richard L. Schleufer 43 Director
Richard J. Parent 37 Chief Financial Officer and Secretary
</TABLE>
All Directors hold office until after the next annual meeting of the
Company's stockholders when their successors are elected and qualified. The
officers are elected by the Board of Directors at the first meeting after each
annual meeting of the Company's stockholders and hold office until their
successors are duly elected and qualified in accordance with the By-laws of the
Company.
No Director or executive officer is related to any other Director or
executive officer. None of the Company's officers, Directors or nominees hold
any directorships in any other company with a class of securities registered
pursuant to Section 12 of the Exchange Act or subject to the requirements of
Section 15(d) of the Exchange Act or any company registered as an investment
company under the Investment Company Act of 1940, as amended. The Company has no
standing nominating committees of the Board of Directors, or committees
performing similar functions; however, effective December 14, 1992 and June 17,
1993 respectively, the Company empaneled compensation and audit committees. The
audit committee is currently made up of Robert W. Lautz, Jr., Cary S. Fitchey,
and William A. Kunkel. For the purposes of the Company's 1992 Stock Option Plan,
as amended (the "Plan"), Cary S. Fitchey and William A. Kunkel are the
"Disinterested Persons" who administer the Plan. The function of the
compensation committee is to report to the Board of Directors relative to
executive compensation issues when such issues arise. The function of the
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<PAGE> 28
Disinterested Persons under the Plan is to award options in their discretion
pursuant to the Plan. The compensation committee has met two times during the
last fiscal year.
Robert W. Lautz, Jr. has been President since May 11, 1993 and Chief
Executive Officer and a member of the Board of Directors of the Company since
May 9, 1991 and has served as a Chief Executive Officer and was a member of the
Board of Directors of Coral, Inc. from July of 1990 until it was acquired by the
Company in May 1991. Mr. Lautz spent seven years with Citibank N.A. in New York
holding various senior management positions within the Operations Group
including Senior Financial Officer, head of Strategic Planning and head of
Acquisitions and Venture Capital. He subsequently purchased various other
computer service, database and manufacturing concerns that required financial
and managerial assistance and resold the businesses to multinational
corporations and investment banking concerns. Immediately prior to joining the
Company, Mr. Lautz operated his own Small Business Investment Company (SBIC
licensed by the SBA) specializing in venture investments. Mr. Lautz was awarded
the degree Bachelor of Science in business in 1970 from the Miami University of
Ohio, and was also awarded the degree of Masters in International Management
from the American Graduate School of International Management.
Thomas H. Baur has been a Director of the Company since March 17, 1995, and
the Chairman and Chief Executive Officer of Mediatech, Inc., now a subsidiary of
the Company ("Mediatech") since 1975. Mr. Baur began his media career on the
sales force of Channel 44, a Chicago television station. He was the Sales
Manager for Cinema Processors, a Chicago post-production Company, from 1972 to
1973, and from 1973 to 1975 formed and owned Tanski & Baur wherein he
represented nine production and post-production companies. Mr. Baur founded
Mediatech in 1975. Mr. Baur is also the Chairman and largest stockholder of
Travel Technology Group, a private corporate travel management Company. Mr. Baur
is a member of the Board of Directors of the Chicago Museum of Broadcast
Communication, was a founder of the International Television Association, the
Chicago Coalition, and received the Arthur Andersen & Co. small business award
for excellence in 1989. Mr. Baur also received the Alumnus of the Year Award
from Southern Illinois University in 1990. Mr. Baur received a Bachelors Degree
in Business and Mass Communications from Southern Illinois University in 1970.
Robert E. Derham has been the Executive Vice President and Managing Director
of Mediatech since 1983. Mr. Derham was certified as a Certified Public
Accountant in 1975, while employed by Arthur Young & Co. In 1975, Mr. Derham
joined the McDonalds Corporation as the Regional Controller where he remained
for seven years in increasingly responsible capacities in Boston, Sidney
Australia, Atlanta, Los Angeles, and at the world headquarters in Oakbrook,
Illinois. In 1978, Mr. Derham was chosen as one of 25 Company wide employees to
be awarded the President's Award for outstanding contributions to McDonalds
Corporation. Mr. Derham joined Mediatech after leaving McDonalds Corporation in
1981. Mr. Derham also holds the position of Managing Director of Travel
Technology Group. Mr. Derham graduated from Loyola University in Chicago,
Illinois in 1971 with a B.S. degree in Accounting after serving four years in
the United States Marine Corps.
Andre A. Blay has been a member of the Board of Directors of the Company
since February 1996, as a result of the acquisition of Starcom Television
Services, Inc. ("Starcom"). Mr. Blay is also currently a major investor and
Director of Media Station, a multimedia Company based in Ann Arbor, Michigan,
serves on the board of Directors of Geppetos Workshop, a privately-held software
Company and is an advisor to the Enterprise Development Fund and Michigan State
University Foundation. Mr. Blay founded Magnetic Video Corp., the world's first
pre-recorded video cassette Company in 1969, which was acquired by Twentieth
Century Fox in 1979. He also founded the Blay Corp. in 1981 with offices in
Detroit and London. The Blay Corp. was subsequently acquired by Coca-Cola. Mr.
Blay has also produced motion pictures for Universal, Columbia and Paramount. In
1990, Mr. Blay acquired a major interest in Avalon Communications, a cable
programming Company which was subsequently sold to BET Holdings, a New York
Stock Exchange cable Company. Mr. Blay attended Michigan State University from
which he received a B.A. in 1959 and an M.B.A. in 1970.
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<PAGE> 29
William D. Killion has been a Director of the Company since November 1995 as
a result of the acquisition by the Company of a majority interest in
Channelmatic, Inc. ("Channelmatic"), which was founded by Mr. Killion in 1976
from which time Mr. Killion was sole stockholder and chief executive officer.
Mr. Killion also serves as chairman of the board of the Channelmatic subsidiary
from his offices in Alpine, California.
Cary S. Fitchey has been a member of the Board of Directors of the Company
since December 1991. Mr. Fitchey was the Chief Executive Officer of Coral, Inc.,
the predecessor to the Company, from January 1990 until July 1990. Mr. Fitchey
serves on the Compensation and Audit Committees of the Board. Mr. Fitchey is
currently a Partner of Dartford Partners, a private investment partnership. Mr.
Fitchey was previously Managing Director of Triad Partners, Ltd., a consulting
and investment Company he founded in 1985 to provide services to clients in the
areas of strategic management, acquisitions, divestitures and restructurings.
From 1983 to 1985 Mr. Fitchey was the Vice President of Business Planning for
PepsiCo, Inc. In addition to these activities, Mr. Fitchey was a partner with
the international management consulting firms of Strategic Planning Associates
and A.T. Kearney. Mr. Fitchey received his B.S. degree from Purdue University in
1974, and a MBA with honors from The University of Michigan in 1976.
William A. Kunkel has been a Director of INDE since April 1995. Mr. Kunkel
is the Executive Vice President and a Partner of Maxam Entertainment, a New York
City syndicator of television and other broadcast media. From 1990 to 1994, Mr.
Kunkel was Senior Vice President and General Manager of Hearst Entertainment
Distribution, also engaged in the worldwide sales of syndicated television
properties where Mr. Kunkel managed all facets of the business including all
sales and marketing activities, advertising and finance. From 1986 to 1990, Mr.
Kunkel was President of domestic distribution for Tri-Star Pictures, Inc. for
whom his duties included the development and management of the television
distribution division for Tri-Star Pictures. Mr. Kunkel held a variety of
positions in the television syndication and distribution industry commencing in
1978. During this period of time, he was General Sales Manager for Metro-Goldwyn
Mayer, United Artists Entertainment and President of Marketing and Sales for
Tribune Entertainment/Tribune Company. Mr. Kunkel received his Bachelors Degree
in 1974 from Indiana University.
Graeme R. Jenner was the Chief Executive Officer of Enterprise from 1987
until September 1996, at which time he was appointed as the Chief Operating
Officer of the Company. From 1978 until his appointment as the Chief Executive
Officer of Enterprise, Mr. Jenner was employed by Enterprise in various
capacities, including General Manager and the managing Director of Enterprise's
UK-based software companies.
Richard L. Schleufer was the President and Chief Executive Officer of
Enterprise Systems Group, Inc., the North American subsidiary of Enterprise,
from 1987 until September 1996, at which time he was appointed as the Chief
Executive Officer of Enterprise. Mr. Schleufer joined Enterprise Systems Group,
Inc. in 1986 as its Vice President of Finance and Administration. Mr. Schleufer
received his bachelor's degree in Business Management and Accounting from the
University of Colorado in 1975, and has been a certified public accountant in
Colorado since 1976.
Richard J. Parent has been an employee of the Company since 1993 and the
Secretary and Chief Financial Officer of the Company since May 1996. Prior to
joining the Company, Mr. Parent was an audit manager at BDO Seidman in Los
Angeles, California from 1990 to 1993. Mr. Parent received his bachelor's degree
from the University of Southern California in 1982 and was certified as a public
accountant in California in 1988.
Compliance with Section 16(a) of the Exchange Act
Based on review of Forms 3, 4 and 5, and amendments thereto, the Company is
not aware of any person who, was an officer, Director or 10% or greater holder
(or any other person subject to Section 16) and failed to file on a timely basis
the reports required by Section 16(a) during the most recent fiscal year or
prior fiscal years.
29
<PAGE> 30
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
(a) (b) (c) (d) (f) (g) (i)
Name and Restricted All Other
Principal Stock Compensation
Position Year Salary($) Bonus($) Awards(2)(3) Options ($)
- -------- ---- --------- -------- ------------ ------- ---
<S> <C> <C> <C> <C> <C> <C>
Robert W.
Lautz, Jr., 1996 $160,000 $60,000 --- 335,000 $9,000(1)
Chief Executive 1994 $90,000 $--- --- 232,000 $9,000(1)
Officer, 1993 $180,000 $--- 50,000(4) 50,000 $9,000(1)
Director
Lewis K.
Eisaguirre,
Former Chief
Financial and 1996 $127,000 $30,000 6,000(2) 265,000 $9,000(1)
Accounting 1994 $90,000 $--- --- 164,000 $9,000(1)
Officer, 1993 $120,000 $--- --- --- $9,000(1)
Secretary,
Director
Thomas A. Baur 1996 $125,000 $--- ---- 100,000 $6,000(1)
Chief Executive
Officer of
Mediatech and
Director
Robert E. 1996 $125,000 $--- ---- 135,000 $6,000(1)
Durham, Managing
Director of
Mediatech
</TABLE>
- -------------
(1) Automobile allowance.
(2) Outright stock grant in lieu of salary.
(3) Shares awarded will receive dividends on the same conditions as all other
shares in the same class.
(4) In May 1993, the entire Board of Directors and the Compensation Committee
approved the grant of 50,000 shares to retain the services of Mr. Lautz.
30
<PAGE> 31
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
(a) (b) (c) (d) (e)
% of Total Options
Granted to Employees Exercise or Base
Name Options Granted (#) in Fiscal Year Price ($/Share) Expiration Date
- ---- ------------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Robert W. Lautz, Jr., 335,000 22% 200,000 @$1.38/Sh. 2/21/98
Chief Executive Officer 135,000 @ $3.25/Sh. 12/31/00
or 1 yr. following
termination,
whichever is earlier
Lewis K. Eisaguirre, 265,000 17% 130,000 @ $1.38/Sh. 2/21/98
Chief Financial and 135,000 @ $3.25/Sh. 12/31/00 or 1 yr.
Accounting Officer, following
Secretary termination,
whichever is earlier
</TABLE>
31
<PAGE> 32
- ---------------
(1) This includes options issued over a 15-month year during the transitional
year and would normally have been issued during two fiscal years.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year (15 months)
and Fiscal Year End Option Values
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End(#) at Fiscal Year End($)
Exercisable/
Shares Acquired Value Realized Exercisable/ Unexercisable
Name on Exercise (#) ($) Unexercisable
- ---- --------------- ------------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Robert W. Lautz, Jr., 314,366 $1,040,396 200,000 $550,000
Chief Executive Officer
Lewis K. Eisaguirre, 277,478 $1,162,276 130,000 $357,500
Chief Financial and
Accounting Officer,
Secretary
</TABLE>
Employment Agreements
Robert W. Lautz, Jr. has entered into a three-year employment agreement with
the Company pursuant to which he serves as President and Chief Executive Officer
for a term ending on March 31, 1998. The terms of this agreement were amended by
Board resolution on December 29, 1995. Pursuant to the amended terms, the annual
base salary of Mr. Lautz is $190,000 and he is entitled to receive an annual
discretionary bonus consisting of up to 60% of such amount each year plus stock
options of up to 200,000 shares at an exercise price equal to the market price
on the date of the grant. At the beginning of the second year, the Executive
Compensation Committee of the Board of Directors is required to increase Mr.
Lautz's base salary by between 5% and 20%, and at the beginning of the third
year, the Executive Compensation Committee of the Board of Directors is required
to increase Mr. Lautz's salary by between 5% and 20%, using his second-year
salary as the base. Mr. Lautz will participate in the Company's executive profit
sharing plan, whereby the Board of Directors or a committee so designated by
them has the authority to grant Mr. Lautz additional compensation in an amount
not to exceed $37,500. Upon his execution of the employment agreement, Mr. Lautz
was granted immediately vested options to purchase 135,000 shares of Common
Stock at the exercise price of $1.375. The employment agreement may be
terminated at any time without cause by the Company upon 30 days written notice.
In the event of such termination, the Company shall be obligated to pay Mr.
Lautz a severance allowance equal to one year of service at the then effective
rate plus any bonus to which he is entitled. In the event of a termination
during the first two years of his three-year term, Mr. Lautz shall also be
entitled to the $45,000 of compensation due him under a previous employment
agreement, all of which he forgave upon entering the current employment
agreement.
32
<PAGE> 33
In connection with the acquisition of Mediatech, the Company entered into an
employment agreement with Thomas H. Baur pursuant to which Mr. Baur agreed to
serve as the President and Chief Executive Officer of Mediatech until December
31, 1998. Pursuant to the employment agreement, Mr. Baur is entitled to receive
an annual base salary of $125,000 and is entitled to an annual cash bonus,
payable in the sole discretion of the Company's Board of Directors, of up to
$50,000 per year. This agreement was amended April 1, 1996 to reduce Mr. Baur's
annual salary to $50,000 and to extend the expiration date until March 31, 1999.
Mr. Baur is entitled to a severance allowance in the amount of one year's salary
if the employment agreement is terminated by the Company without cause.
In connection with the acquisition of the Company's interest in Channelmatic
(i) the Company entered into a five-year option to acquire the remaining
one-third interest in Channelmatic's outstanding capital stock and (ii)
Channelmatic entered into an employment agreement with William D. Killion.
Pursuant to the employment agreement, Mr. Killion agreed to act as the Chairman
of the Board of Directors of Channelmatic and as an advisor of Channelmatic. The
employment agreement may be terminated (i) by the Company upon 30 days written
notice if the Company has exercised in full its option to buy the remaining
one-third interest in Channelmatic's capital stock, (ii) upon Mr. Killion's
death, or (iii) by Mr. Killion at any time by giving 30 days written notice to
the Company. Pursuant to the employment agreement, Mr. Killion is entitled to an
annual salary of $90,000. In the event that the employment agreement is still in
effect after November 30, 2000, the annual salary payable to Mr. Killion shall
thereafter increase, until the agreement is terminated, to $200,000.
In connection with the acquisition of Enterprise, the Company entered into
an employment agreement with Graeme R. Jenner pursuant to which Mr. Jenner has
agreed to act as the Chief Executive Officer of Enterprise. The employment
agreement has an initial term of three years, which initial term shall be
automatically extended for successive one-year periods thereafter until
terminated by either party. Mr. Jenner's salary during the first year of the
employment agreement shall be $233,250 and his base compensation during the
second and third year shall be increased by an amount equal to 5% to 20%
annually, the exact amount to be established by the Board of Directors. Mr.
Jenner shall also be entitled to participate in the Company's Executive Profit
Sharing Plan, with Mr. Jenner's share to be up to $56,250. The employment
agreement may be terminated at any time without cause by the Company upon 30
days written notice. In the event of such termination, the Company shall be
obligated to pay Mr. Jenner a severance allowance equal to one-year's salary
plus any bonus due for such period. In connection with his employment by the
Company, Mr. Jenner was granted an option to purchase 125,000 shares at a price
of $6.37 per share, which price was equal to the closing sales price of the
Common Stock on Nasdaq on the date of grant. The option may be exercisable at
any time through March 23, 1999.
In connection with the acquisition of Enterprise, the Company entered into
an employment agreement with Richard L. Schleufer pursuant to which the Company
employed Mr. Schleufer as the President and Chief Executive Officer of
Enterprise Systems Group, Inc., the North American subsidiary of Enterprise. The
employment agreement has a term of three years, which term shall automatically
be extended for successive one-year periods unless terminated by either the
Company or Mr. Schleufer. During the first year of the employment agreement, Mr.
Schleufer's salary is $160,000 per year. During the second and third years of
the employment agreement, Mr. Schleufer's base compensation shall be increased
by between 5% and 20% annually, the exact amount to be determined by the Board
of Directors of the Company. Mr. Schleufer also shall be permitted to
participate in the Company's Executive Profit Sharing Plan, and is entitled to
additional compensation thereunder in an amount up to $80,000 plus 5% of
"over-target" profits of Enterprise Systems Group, Inc. The employment agreement
may be terminated by the Company at any time upon 30 days' written notice,
provided that Mr. Schleufer shall, upon such termination, be entitled to a
severance allowance equal to 12 months' salary, plus any bonus due for such
period. In connection with his employment by the Company, Mr. Schleufer was
granted an option to purchase 75,000 shares at a price of $6.37 per share, which
price was equal to the closing sales price of the Common Stock on Nasdaq on the
date of grant. The option may be exercisable at any time through March 23, 1999.
Director Compensation
33
<PAGE> 34
The Company does not have any standard arrangements pursuant to which
directors are compensated for any services provided as a director. However, the
Company has in the past granted options to non-employee directors as
compensation for services provided to the Company as directors. During the last
fiscal year, the Company granted each of its non-employee directors (Messrs.
Kunkel, Fitchey and Blay) five-year non-qualified options. Messrs. Kunkel and
Fitchey each received 50,000 options at an exercise price of $3.25 and Mr. Blay
received 45,833 options at an exercise price of $5.94. The exercise prices were
equal to the market price of the Common Stock on the dates of grant. The options
vest over a period of 12 months.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
34
<PAGE> 35
On December 14, 1992, the Company implemented the Plan as a Section 16
qualified employee stock option plan. The purpose of the Plan, as amended, is to
further the success of the Company by making Common Stock available for purchase
by employees and directors and to provide an incentive to such individuals. An
aggregate of 1,000,000 shares of Common Stock was reserved by the Board of
Directors for issuance under the Plan which was approved at the annual meeting
held in July 1993. As of March 31, 1996, options to issue up to 1,676,459 shares
were outstanding under the Plan. Since March 31, 1995, options were exercised in
a manner which resulted a net of 342,695 shares remaining available under the
Plan. Because of recent changes in the regulations promulgated under Section 16
of the Securities Exchange Act of 1934, the Board of Directors intends to
terminate the Plan and replace it with a more flexible plan providing for
benefits comparable to those under the Plan to employees, directors and outside
consultants.
During December 1991, the Board of Directors adopted a plan that allows for
bonus compensation of up to 15% of the Company's net income to be distributed in
cash to its key executives and employees. This bonus compensation is to be
awarded at the discretion of the Board of Directors. No bonus compensation
expense was charged to operations for either fiscal years 1994 or 1993. Bonuses
totaling $90,000 were granted during 1995, however these grants were not within
this plan.
On February 3, 1995, the Company acquired 96.33% of the issued and
outstanding capital stock of Mediatech from Thomas H. Baur for an aggregate
consideration of approximately $8,700,000. At the time of the acquisition, Mr.
Baur was not affiliated with the Company. In connection with the acquisition,
Mr. Baur was elected as a Director of the Company and was hired to be the
President and Chief Executive Officer of Mediatech. See "Item 12 -- Employment
Agreement." The purchase price paid by the Company consisted of 866,970 shares
of Common Stock, $2,889,900 in cash, and an unsecured promissory note (the "Baur
Note"), the principal amount of which was subject to adjustment based on the
average trading price of the Common Stock during a specified 60-day trading
period. After the required adjustments, the principal balance of the Baur Note
was reduced to $4,332,000. At the time of the acquisition, Mediatech had
approximately $3,900,000 of indebtedness outstanding to its primary bank, the
repayment of which indebtedness was guaranteed by Mr. Baur. In addition to the
payment of the purchase price, the Company also agreed to cause Mr. Baur to be
released from the personal guaranty of Mediatech's indebtedness. Mr. Baur's
guarantees of Mediatech's bank indebtedness were released on February 1, 1996.
On June 30, 1995, Mr. Baur converted $2,250,000 of the principal amount of
the Baur Note into 750,000 shares of Common Stock at a value of $3.00 per share.
The closing price of the Common Stock on the date of conversion was $2.50 per
share.
Mediatech currently leases certain of its office and warehouse facilities
from companies that are owned, wholly or in part, by Mr. Baur. During the fiscal
years ended December 31, 1994 and March 31, 1996, Mediatech paid $955,000 and
$868,000, respectively, to these leasing companies that are affiliated with Mr.
Baur.
Lewis K. Eisaguirre was the Chief Financial Officer of the Company from
March 1990 until May 1996. Mr. Eisaguirre also was a Director of the Company
from May 1993 through May 1996. Upon his resignation from all of the positions
he held with the Company in May 1996, the Company entered into a consulting
agreement with Mr. Eisaguirre pursuant to which Mr. Eisaguirre has agreed to
provide consulting services to the Company in connection with the Company's
proposed acquisitions for a consulting fee of $10,000 per month on a
month-to-month basis.
In November 1995, the Company acquired its 66.67% interest in Channelmatic
from a Company owned and controlled by Mr. William Killion. At the time of the
acquisition, Mr. Killion was not affiliated with the Company. The purchase price
paid by the Company consisted of a $5,602,500 secured, five-year promissory
note, and 1,530,000 shares of Common Stock. In addition, in connection with the
acquisition, Channelmatic entered into an employment agreement with Mr. Killion
pursuant to which Channelmatic is obligated to pay Mr. Killion $90,000 per year.
35
<PAGE> 36
Channelmatic currently leases two of its facilities from Mr. and Mrs.
Killion. Pursuant to the leases for these facilities, Channelmatic is obligated
to pay Mr. and Mrs. Killion lease payments of $78,000 per year through February
2000. Although the foregoing leases were entered into prior to the Company's
investment in Channelmatic, the Company believes that the terms of the leases
are approximately as favorable to the Company as those that the Company could
receive from unaffiliated third parties.
The Company acquired Starcom in January 1996 from certain unaffiliated
stockholders, including the Andre A. Blay Trust, a trust affiliated with Mr.
Blay. In connection with the acquisition, the Company issued a total of 188,195
shares of Common Stock to Andrew Blay and the Andre A. Blay Trust.
The Company acquired all of the capital shares of Enterprise in May 1996
from the unaffiliated stockholders of Enterprise, including Mr. Graeme R. Jenner
and Mr. Richard Schleufer. The amount of consideration paid to Mr. Jenner for
his shares in Enterprise consisted of cash in the amount of $276,224, a $142,500
promissory note and 71,101 shares of Common Stock. The amount of consideration
paid to Mr. Schleufer for his shares in Enterprise consisted of cash in the
amount of $206,283, a $106,456 promissory note and 53,427 shares of Common
Stock. In addition, in connecting with the acquisition of Enterprise, the
Company also entered into three-year employment agreements with each of Mr.
Jenner and Mr. Schleufer, pursuant to which agreements the Company has agreed to
pay Mr. Jenner and Mr. Schleufer salaries of at least $233,250 and $160,000 per
year, respectively.
Enterprise obtained marketing services from Thames Business Services until
April 30, 1996 when the arrangement expired. Mr. Graeme Jenner owns a
controlling interest in, and is the Managing Director of, Thames Business
Services. Enterprise paid Thames Business Services $76,875 and $88,125 in 1994
and 1995, respectively. Although these transactions occurred prior to the
acquisition of Enterprise by the Company, the Company believes that the
foregoing transactions were on terms as favorable to Enterprise as those
Enterprise could have received from unaffiliated third parties.
36
<PAGE> 37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................................... F-2
Consolidated Balance Sheet as of March 31, 1996 and December 31, 1994........................ F-3
Consolidated Statement of Operations for the years ended March 31, 1996 and
December 31, 1994....................................................................... F-5
Consolidated Statement of Stockholders' Equity for the years ended March 31, 1996
and December 31, 1994................................................................... F-6
Consolidated Statement of Cash Flows for the years ended March 31, 1996
and December 31, 1994................................................................... F-7
Notes to Consolidated Financial Statements................................................... F-9
</TABLE>
F-1
<PAGE> 38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
IndeNet, Inc.
We have audited the accompanying consolidated balance sheets of IndeNet, Inc.
and subsidiaries as of March 31, 1996 and December 31, 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
IndeNet, Inc. and subsidiaries as of March 31, 1996 and December 31, 1994, and
the results of their operations and their cash flows for each of the two years
then ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
June 18, 1996
<PAGE> 39
INDENET, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 3,818,133 $ 3,250,554
Restricted cash (Note 4) 453,340 706,280
Receivables
Accounts and other receivables, net of allowance 5,159,651 16,559
for doubtful accounts of $245,932 and $0
Note receivable, current portion -- 909,605
----------- -----------
Total receivables 5,159,651 926,164
Inventories (Notes 1 and 5) 2,143,927 --
Prepaid expenses 209,822 41,500
----------- -----------
Total current assets 11,784,873 4,924,498
Property and equipment, less accumulated
depreciation and amortization (Notes 1, 6 and 7) 13,646,419 --
Capitalized costs, net (Note 1) 721,701 --
Other long-term assets 525,387 --
Goodwill, net of accumulated amortization of $511,321 (Notes 1 and 3) 16,514,557 --
----------- -----------
TOTAL ASSETS $43,192,937 $ 4,924,498
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 40
INDENET, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1996 1994
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 7,667,159 $ 424,457
Notes payable, current portion (Note 7) 1,047,694 500,000
Notes payable to shareholders of acquired companies,
current portion (Notes 3 and 7 ) 1,197,226 --
------------ ------------
Total current liabilities 9,912,079 924,457
Notes payable to shareholders of acquired companies,
net of current portion (Notes 3 and 7) 4,676,221 --
Notes payable, net of current portion (Note 7) 8,152,051 --
------------ ------------
Total liabilities 22,740,351 924,457
Minority interest (Note 3) 1,580,456 --
Commitments and contingencies (Note 11)
Stockholders' equity (Note 9):
Preferred stock, Series B, $.0001 par value
Authorized - 40,000,000 shares
216,667 issued and outstanding (Note 7) 22 --
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 12,451,815
and 4,050,143 12,451 4,050
Additional paid-in capital 23,169,510 4,532,818
Accumulated deficit (4,309,853) (536,827)
------------ ------------
Total stockholders' equity 18,872,130 4,000,041
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,192,937 $ 4,924,498
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 41
INDENET, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
---------------------------------
March 31, December 31,
------------ ------------
1996 1994
------------ ------------
<S> <C> <C>
Revenue $ 20,868,899 $ --
Cost of sales 9,791,964 --
------------ ------------
Gross profit 11,076,935 --
Operating expenses:
Selling, general and administrative 10,166,713 --
Depreciation and amortization (Notes 1, 6 and 7) 2,076,590 25,000
Research and development (Note 1) 446,525 --
Corporate 1,023,659 1,221,082
------------ ------------
13,713,487 1,246,082
------------ ------------
Operating loss (2,636,552) (1,246,082)
Other income (expense):
Interest income 138,765 277,203
Interest expense (Note 7) (811,306) (65,000)
Gain from reduction of accounts payable (Notes 11 and 12) -- 211,727
Gain from settlement of lawsuits (Note 12) 145,000 102,280
Miscellaneous, net 67,900 (29,911)
------------ ------------
Loss before income tax expense and
allocation to minority interest (3,096,193) (749,783)
Income tax expense (Notes 1 and 8) 17,255 --
------------ ------------
Loss before allocation to minority interest (3,113,448) (749,783)
Allocation to minority interest (Note 3) (156,416) --
------------ ------------
Net loss (2,957,032) (749,783)
Dividends to preferred shareholders (54,000) --
------------ ------------
Net loss allocable to common shareholders $ (3,011,032) $ (749,783)
============ ============
Net loss per share (Note 1) $ (0.35) $ (0.19)
============ ============
Weighted average number of
common shares outstanding 8,615,055 3,936,668
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 42
INDENET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 1996 and December 31, 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -------------------
Retained
Number of Number of Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
------- ----- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 -- $ -- 3,764,472 $ 3,764 $ 4,127,933 $ 212,956 $ 4,344,653
Officers' compensation from
stock issuances and stock
options granted (Note 9) -- -- 146,000 146 260,613 -- 260,759
Stock issued in settlement
of lawsuit (Note 9) -- -- 40,000 40 97,680 -- 97,720
Stock warrants exercised
(Note 9) -- -- 100,000 100 124,900 -- 125,000
Purchase of Class A warrants
(Note 9) -- -- -- -- (77,920) -- (77,920)
Purchase of common stock -- -- (329) -- (388) -- (388)
Net loss -- -- -- -- -- (749,783) (749,783)
------- ----- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1994 -- -- 4,050,143 4,050 4,532,818 (536,827) 4,000,041
Cashless exercise of stock
options (Note 9) -- -- 430,680 431 (431) --
Stock issued in lieu of
officers' compensation
(Note 9) -- -- 24,000 24 29,976 30,000
Issuance of common stock for
purchase of Mediatech
(Note 3) -- -- 900,000 900 1,502,100 1,503,000
Net loss -- -- -- -- -- (761,994) (761,994)
------- ----- ---------- ------------ ------------ ------------ ------------
Balance at March 31, 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 7) 166,667 17 -- -- 499,983 -- 500,000
Conversion of debt to
common stock
(Notes 3 and 9) -- -- 848,951 849 2,644,954 -- 2,645,803
Sale of preferred stock
(Note 7) 50,000 5 -- -- 145,395 -- 145,400
Shares issued for
purchase of
Channelmatic, Inc.
(Note 3) -- -- 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 3) -- -- 1,000,000 1,000 3,999,000 -- 4,000,000
Buy-back of common stock
from officers, at fair
market value -- -- (77,778) (78) (349,922) -- (350,000)
Shares issued in connection
with private placement
(Note 9) -- -- 224,795 225 917,767 -- 917,992
Preferred dividends -- -- -- -- -- (54,000) (54,000)
Net loss -- -- -- -- -- (2,957,032) (2,957,032)
------- ----- ---------- ------------ ------------ ------------ ------------
Balance at March 31, 1996 216,667 $ 22 12,451,815 $ 12,451 $ 23,169,510 $ (4,309,853) $ 18,872,130
======= ===== ========== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 43
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Year Ended
----------------------------------
March 31, December 31,
------------ ---------------
1996 1994
------------ ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,957,032) $ (749,783)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,076,590 25,000
Stock issued in lieu of officers' compensation - 260,759
Provision for losses on accounts receivable (3,520) 77,200
Allocation of loss to minority interest (156,416) -
Settlement of lawsuits - (102,280)
Gain from reduction of accounts payable - (211,727)
Changes in operating assets and liabilities:
Restricted cash 235,486 125,436
Accounts receivable (126,365) 242,189
Inventories (158,463) -
Prepaid expenses 8,622 (41,500)
Other assets (135,619) -
Accounts payable and accrued expenses 311,566 (98,688)
----------- -----------
NET CASH USED IN OPERATIONS (905,151) (473,394)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,042,710) -
Capitalized costs (510,707) -
Cash of acquired entity Channelmatic 68,571 -
Collection of note receivable 583,604 1,005,204
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,901,242) 1,005,204
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of lines of credit (321,620) -
Repayments of notes payable (5,213,108) (90,000)
Proceeds from note payable 3,000,000 -
Proceeds from exercise of warrants 4,938,320 125,000
Purchase of Class A warrants - (77,920)
Proceeds from sale of preferred stock 145,400 -
Proceeds from private placement 4,000,000 -
Purchase and cancellation of treasury stock (350,000) (388)
Dividends on preferred stock (54,000) -
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,144,992 (43,308)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,338,599 488,502
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 479,534 2,762,052
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,818,133 $ 3,250,554
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 44
INDENET, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
<TABLE>
<S> <C> <C>
Interest $ 95,747 $ 65,000
Income taxes 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 up to 1,000,000 shares of the Company's common stock valued
at $4.00 per share.
During 1994, the Company canceled indebtedness relating to the settlement of a
lawsuit in the amount of $97,720 through the issuance of stock.
See accompanying notes to consolidated financial statements
F-8
<PAGE> 45
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of IndeNet, Inc. and Subsidiaries (formerly Independent TeleMedia Group, Inc.),
(the "Company") and its wholly-owned subsidiaries Mediatech, Inc. ("Mediatech")
(since its acquisition on February 3, 1995), Starcom Television Services, Inc.
("Starcom") (since its acquisition on February 7, 1996) and its 66.67%-owned
subsidiary Channelmatic, Inc. ("Channelmatic") (since its acquisition on
November 27, 1995). All material intercompany transactions and balances have
been eliminated.
ORGANIZATION AND BUSINESS
The Company was organized under the laws of the State of Colorado on
April 4, 1988. The Company is a leading provider of television advertisement
delivery services for national advertisers and programmers. It also develops,
assembles, and distributes software and hardware for advertising insertion into
television programming. The Company considers itself in one business segment.
The Company's customers are located throughout the United States and are
serviced by operating facilities located in Chicago, Illinois; New York, New
York; Los Angeles, California; and Alpine, California. Effective June 30, 1995,
the Company re-incorporated as a Delaware corporation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Depreciation of property and equipment is provided using the
straight-line method. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Building and improvements 10-20 years
Equipment 5-7 years
Furniture and fixtures 5-7 years
Automobiles 5 years
</TABLE>
Leasehold improvements are written off over the estimated useful lives
or the life of the related lease, whichever is shorter.
F-9
<PAGE> 46
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SOFTWARE DEVELOPMENT COSTS
Software development costs related to the Company's digital
advertisement insertion equipment are capitalized upon the establishment of
technological feasibility until ready for sale. Costs are also capitalized for
product enhancements.
Amortization of capitalized software development costs is provided on a
product-by product- basis computed on the straight-line method over the
estimated useful life of the products not to exceed five years. Capitalized
software development costs was $449,048 at March 31, 1996, net of accumulated
amortization of $57,105. Capitalized software development costs at December 31,
1994 was $0. The Company assesses the net realizable value of its capitalized
software development costs on an ongoing basis.
All other research and development costs are charged to research and
development expense in the period incurred.
GOODWILL
Goodwill represents the excess of cost over the fair value of the
identifiable net assets acquired in connection with the February 3, 1995
acquisition of Mediatech, the November 27, 1995 acquisition of Channelmatic, and
the February 7, 1996 acquisition of Starcom. Goodwill is amortized over 20
years.
At each balance sheet date, using an undiscounted cash flow method, the
Company evaluates the realization and period of amortization to determine
whether events and circumstances warrant revised estimates of amortization and
whether the goodwill has continuing value.
REVENUE RECOGNITION
Revenue is recognized at the time products are shipped to the customer
or at the completion of services rendered. The Company provides a warranty
reserve for possible product defects.
INCOME TAXES
The Company accounts for income taxes using Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting, Standard No. 109
(SFAS 109) "Accounting for Income Taxes." SFAS 109 requires a company to
recognize deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in a company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years which the differences are expected to reverse.
LOSS PER SHARE
Net loss per share is calculated by taking the net loss plus preferred
stock dividends divided by the average number of common shares outstanding.
Common stock equivalents, such as stock options, warrants and convertible
preferred stock, have not been included since their effect would be
anti-dilutive.
F-10
<PAGE> 47
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on
the quoted market price for the same or similar issued or on the current rates
offered to the Company for debt of the same remaining maturities.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of"
(SFAS No. 121) issued by the FASB is effective for financial statements for
fiscal years beginning after December 15, 1995. The new standard establishes new
guidelines regarding when impairment losses on long-lived assets, which include
plant and equipment, and certain identifiable intangible assets, should be
recognized and how important losses should be measured. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the FASB is effective for
specific transactions entered into after December 15, 1995. The new standard
establishes a fair value method of accounting for stock-based compensation plans
and for transactions in which an entity acquires goods or services from
nonemployees in exchange for equity instruments. At the present time, the
Company has not determined if it will change its accounting policy for stock
based compensation or only provide the required financial statement disclosures.
As such, the impact on the Company's financial position and results of
operations is currently unknown. The Company does not expect adoption to have a
material effect on its financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 1996 presentation.
F-11
<PAGE> 48
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. TRANSITION REPORT
During fiscal year 1996, the Company amended its By-laws to change its
fiscal year-end from December 31 to March 31 commencing with the period ended
March 31, 1995.
Results of operations for the three months ended March 31, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Revenue $3,004,259
Gross profit 1,761,048
Net loss (761,994)
Net loss per common share $(0.16)
</TABLE>
3. ACQUISITIONS
MEDIATECH
Effective February 3, 1995 and amended as of March 14, 1995, the
Company acquired 100% of the outstanding common shares of Mediatech under a
Stock Purchase Agreement with Mediatech's shareholders for $9,107,500. Under the
terms of the Agreement with the shareholders of Mediatech, the Company issued
900,000 shares of restricted common stock valued at $1,503,000, paid $3,000,000
in cash and issued notes of $4,604,500. Principal and interest payments on the
notes are payable quarterly and begin 90 days from the date of close and will
equal $18,750 per quarter for the first four quarters; will increase to $141,033
for the fifth through the twelfth quarters; and will remain at $122,283 for the
remaining term of the notes. Effective June 30, 1995, a former shareholder of
Mediatech converted $2,250,000 of a note payable to 750,000 shares of the
Company's common stock at $3.00 per share. Effective January 1, 1996, another
former shareholder of Mediatech converted $100,000 of a note payable plus
accrued interest of $7,359 to 26,840 shares of the Company's common stock at
$4.00 per share. The shareholder has agreed to "lockup" the shares until July 1,
1996; at which time the shareholder may demand registration rights.
The acquisition is being accounted for as a purchase. The results of
operations of Mediatech are included in the statement of operations as of the
date of acquisition. See Notes 10 and 14 for unaudited pro forma results of
operations which include Mediatech.
CHANNELMATIC
Effective November 27, 1995, the Company entered into an Asset Purchase
and Contribution Agreement with Channelmatic pursuant to which the Company
agreed to purchase 66.67% of the assets, business and operations of
Channelmatic. The purchase price paid by the Company for its 66.67% interest
consisted of the following: (i) a $5,602,500 promissory note; and (ii) 1,530,000
restricted shares of the Company's Common Stock. The restricted common stock was
valued at $2.82 per share (which price represents 70% of the average quoted
price of the Company's common stock at the time of acquisition), which
management believes was its fair value. In addition, the Company agreed to
contribute $3,000,000 to the capital of Channelmatic, which amount is payable
over an 18-month period with interest at an 8% annual rate. On November 27,
1995, the Company made a $755,000 payment on this note. The Company also has
obtained a five-year option to purchase some or all of the remaining 33.33%
interest in Channelmatic for a purchase price of up to $6,000,000 on a pro rata
basis.
F-12
<PAGE> 49
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The $5,602,500 promissory note bears interest at a rate of 8% per
annum. A $2,000,000 principal payment was made on January 5, 1996 and a $500,000
payment was made on April 1, 1996. Commencing in July 1996, the Company will
make monthly payments of principal and interest equal to $58,962. Based on the
foregoing payment schedule, the entire promissory note will be paid in full
within 72 months after the closing date of the acquisition. The Company's
obligations under the promissory note are secured by a lien on the Company's
66.67% common stock interest in Channelmatic, a blanket lien on substantially
all of Channelmatic's assets, and by a guaranty of Channelmatic.
The acquisition is being accounted for as a purchase. The results of
operations of Channelmatic are included in the statement of operations as of the
date of acquisition. See Notes 10 and 14 for unaudited pro forma results of
operations which include Channelmatic.
STARCOM
On February 7, 1996, the Company acquired 100% of the common stock of
Starcom for up to 1,000,000 shares of the Company's restricted common stock. The
restricted common stock was valued for book purposes at $4.00 per share (which
price represents 70% of the average quoted price of the Company's common stock
at the time of acquisition), which management believes was its fair value.
The number of shares issued to the Starcom shareholders can be adjusted
according to the "Formula Value." The Formula Value is based primarily on the
gross profit of Starcom business from January 1, 1996 through March 31, 1996.
The Company issued 500,000 shares of Common Stock to the shareholders of Starcom
on February 7, 1996 and will issue the remaining shares of Common Stock in July
1996 after the adjusted gross profit of Starcom for the period January 1, 1996
through March 31, 1996 and level of acquired liabilities has been agreed to.
The acquisition is being accounted for as a purchase. The results of
operations of Starcom are included in the statement of operations as of the date
of acquisition. See Notes 10 and 14 for unaudited pro forma results of
operations which include Starcom.
4. RESTRICTED CASH
At March 31, 1996, the Company had approximately $453,000 in an escrow
account for payment of past due payroll taxes. These payroll tax liabilities
were acquired through the purchase of Starcom. Subsequent to March 31, 1996, the
Company paid approximately $438,000 for payroll taxes from this escrow account.
At December 31, 1994, the Company had approximately $163,000 in an
escrow account related to a lawsuit which was settled during fiscal 1996. The
settlement resulted in the Company releasing the funds to the opposing party. In
addition, at December 31, 1994, the Company had approximately $543,000 in an
escrow account as collateral against the Company's $500,000 note payable. See
Note 7.
F-13
<PAGE> 50
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1994
---------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $1,283,372 $-
Work in process 401,467 -
Finished goods 644,289 -
---------------------------------------------------------------------------------
2,329,128 -
Less reserve for obsolescence 185,201 -
---------------------------------------------------------------------------------
Total inventories $2,143,927 $-
=================================================================================
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31,
1996 1994
---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 500,000 $ -
Building and improvements 628,753 -
Equipment 14,400,290 50,000
Leasehold improvements 376,945 40,882
Furniture and fixtures 148,079 -
Vehicles 59,596 -
---------------------------------------------------------------------------------
16,113,663 90,882
Less accumulated depreciation and
amortization 2,467,244 90,882
---------------------------------------------------------------------------------
Property and equipment, net $13,646,419 $ -
=================================================================================
</TABLE>
Depreciation and amortization related to Property and Equipment for the
year ended March 31, 1996 and December 31, 1994 was $1,615,708 and $25,000.
F-14
<PAGE> 51
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND LINE-OF-CREDIT
<TABLE>
<CAPTION>
March 31, December 31,
1996 1994
----------------------------------------------------------------------------------------------
<S> <C> <C>
Notepayable - former 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. $3,618,947 $ -
Notes payable - former shareholders of Mediatech; bearing
interest at 8.0%; due in quarterly installments of $141,033
through February 1998 with quarterly installments of $122,283
thereafter; due from May 2001 through February
2005; unsecured 2,254,500 -
$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 (8.1% at March
31, 1996). The line is secured by substantially all the
assets of Mediatech. 1,850,000 -
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 is
secured by substantially all the assets of Mediatech. 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 -
Line of credit, interest at the bank's prime rate plus 3%
(11.25% at March 31, 1996). Borrowings may not exceed
$2,000,000 with availability limited based on various
factors. The agreement expires on January 31, 1998 and is
subject to renewal. As of March 31, 1996, $811,395 in
borrowing capacity remained available. 1,188,605 -
Various notes payable to vendors, interest ranging from 0% to
21.07%, monthly payments ranging from $400 to $7,000, due
from May 1, 1996 to May 1, 1997. 1,046,757 -
Note payable to a financial institution, interest at 10%,
monthly payments of $4,559, due on December 1, 1996 46,067 -
Note payable to a financial institution, interest at 8%,
monthly payments of $3,134, due on December 1, 1997. 54,903 -
$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. 3,000,000 -
</TABLE>
F-15
<PAGE> 52
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND LINE-OF-CREDIT (CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1994
------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable of $500,000. Effective June 30, 1995, the holder of the
note converted the debt to 166,667 shares of Series B Convertible
Preferred Stock. The preferred stock was valued at $3.00 per
share and provides for a 12% annual dividend, payable monthly for
a period of up to five years. Commencing July 1, 1997, the
preferred stock is convertible into the Company's common stock
for $3.00 per common share (i.e., one preferred share for one
common share) or market, whichever is less. In addition, the
holder purchased an additional 50,000 shares of Series B
Convertible Preferred Stock, valued at $3.00 per share. This
issuance of preferred stock has the same terms as the previously
issued preferred stock. Net proceeds to the Company of the
issuance of the 50,000 shares of preferred
stock, after legal and professional expenses, was $145,400. - 500,000
------------------------------------------------------------------------------------------------
15,073,192 500,000
Less current potion 2,244,920 500,000
================================================================================================
Net long-term $12,828,272 $-
================================================================================================
</TABLE>
The carrying cost of the above debt instruments to third parties
approximates the fair value of the instruments.
As of March 31, 1996, the aggregate amounts of long-term debt maturing
in succeeding years are as follows:
<TABLE>
<CAPTION>
Years ended March 31, Related Party Third Party Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $1,197,226 $1,047,694 $ 2,244,920
1998 932,569 6,819,258 7,751,827
1999 934,994 1,299,536 2,234,530
2000 1,010,761 28,506 1,039,267
2001 1,092,167 4,751 1,096,918
Thereafter 705,730 - 705,730
------------------------------------------------------------------------------------------
$5,873,447 $9,199,745 $15,073,192
==========================================================================================
</TABLE>
8. INCOME TAXES
At March 31, 1996, the Company (excluding Channelmatic) has a net
operating loss carryforward of approximately $7,700,000 for federal income tax
purposes of which $2,700,000 is subject to a separate return limitation. The
carryforward expires in varying amounts and years through 2011. This loss
carryforward also gives rise to a deferred tax asset of approximately
$2,600,000. This tax asset has a 100% valuation allowance as the Company cannot
determine if it is more likely than not that the deferred tax asset will be
realized. Because of changes in the Company's ownership, there is an annual
limitation on the usage of the net operating loss carryforward. Income tax
expense for fiscal 1996 represents state taxes for the various states in which
the Company does business and corporate tax.
The Company's total deferred tax assets and valuation allowance
consisted of the following at December 31, 1994 and March 31, 1996:
F-16
<PAGE> 53
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1994 March 31, 1996
----------------- --------------
<S> <C> <C>
Loss carryforwards $ 245,000 $ 2,600,000
Tax effects of temporary differences:
Depreciation and amortization - 167,000
Other - 12,000
----------- -----------
Total deferred tax assets 245,000 2,779,000
Valuation Allowance (245,000) (2,779,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
A 100% valuation allowance has been provided since the Company cannot
determine it is more likely than not 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>
December 31, 1994 March 31, 1996
----------------- --------------
<S> <C> <C>
Statutory U.S. federal benefit -34% -34%
Goodwill amortization not deductible
for tax purposes - 5%
Change in valuation allowance 34% 29%
-- --
Effective tax rate 0% 0%
== ==
</TABLE>
F-17
<PAGE> 54
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY
Private Placements
On February 28, 1996, the Company completed a Regulation D private
placement of 224,795 of its common stock for $1,000,000 and a Convertible Note
("the Note") for $3,000,000 to a single accredited institutional investor. The
Note accrues interest at a rate of 7% annually, payable quarterly in cash or the
Company's common stock at the Company's option and has a term of two years. The
principal amount of the Note, together with interest is convertible in ninety
days subsequent to the offering at a conversion rate based on 82% of the average
closing bid price of the common stock for the five days immediately preceding
the conversion date. The Company shall have the right to convert all or part of
the Note any time after 90 days from closing date into the underlying stock. In
addition, the Note is redeemable for cash in whole or in part anytime after 90
days from closing in an amount equal to 122% of the principal balance of the
Note. See Note 14 for discussion of private placement subsequent to March 31,
1996.
In August 1994, the Company distributed a private Tender Offer to the
warrant holders from a private placement in 1993 offering either to purchase
each existing warrant for $.40 per warrant or to exchange for three existing
warrants one share of available common stock. Warrant holders sold back to the
Company 194,800 warrants for a total price of $77,920. In addition, during 1996,
the Company called both and A and B warrants associated with the private
placement, which resulted in the Company receiving net proceeds of $3,703,132
and issuing 2,382,579 shares of common stock.
Stock Grants
During fiscal 1994, officers received 146,000 shares of common stock in
lieu of cash compensation. The shares were valued at $1.25 per share.
Compensation expense of $205,759 was recorded in connection with this
transaction. There were no shares issued in lieu of cash compensation in fiscal
1996.
During the three months ended March 31, 1995, officers received 24,000
shares of common stock valued at $1.25 per share in lieu of cash compensation.
Compensation expense of $30,000 was recorded in connection with this
transaction.
Other Stock Issuances
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.
Stock Compensation Plan
On December 14, 1993, the Company implemented a qualified stock option
plan ("the Plan"). The purposes of the Plan was to further the success of the
Company be making common stock of the Company available for purchase by
employees and to provide an incentive to such individuals. A total of 1,000,000
shares of common stock of the Company have been approved by the shareholders for
issuance under the Plan.
F-18
<PAGE> 55
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the transactions related to the
Company's stock option plan:
<TABLE>
<CAPTION>
Number of Aggregate
Shares Exercise Price Value
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1994 1,304,306 $1.25 to $6.60 $4,123,520
Options granted 345,000 $1.25 to $1.43 452,850
Options exercised 100,000 $1.25 125,000
Options expired 466,506 $6.60 3,078,940
Balance at December 31, 1994 1,082,800 $1.25 to $1.43 1,372,430
Options granted 605,000 $1.38 834,900
Options exercised 757,800 $1.25 947,250
Balance at March 31, 1995 930,000 $1.25 to $1.43 1,260,080
Options granted 1,036,585 $1.38 to $3.25 2,759,901
Options exercised 575,126 $1.25 to $2.25 791,091
Balance at March 31, 1996 1,391,459 $1.25 to $3.25 $3,228,890
Options exercisable (vested) at
March 31, 1996 938,126 $1.25 to $3.25 $1,763,890
</TABLE>
All options issued during the fiscal years ended December 31, 1994 and
March 31, 1996, and the three-month period ended March 31, 1995 had exercise
prices that were at fair market value at grant date.
During 1994, $55,000 was recorded as compensation expense in connection
with 55,000 stock options with an exercise price of $1.25 issued to officers in
1993 that vested upon the market price of the shares reaching $2.25.
During the three months ended March 31, 1995, various employees of the
Company effected the cashless exercises of a total of 757,800 options at an
exercise price of $1.25 per share in exchange for stock, resulting in the
issuance of 430,680 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 387,949 shares of common
stock.
F-19
<PAGE> 56
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
The following table summarizes the transactions related to the
Company's warrants to purchase common stock:
<TABLE>
<CAPTION>
Number of Exercise Price Aggregate
Shares Value
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1994 2,186,041 $1.25 to $3.25 $4,606,183
Warrants granted - - -
Warrants exercised - - -
Warrants canceled or expired 294,800 $1.25 to $2.50 493,500
Balance at December 31, 1994 1,891,241 $1.25 to $3.25 4,112,683
Warrants granted - - -
Warrants exercised - - -
Warrants canceled or expired - - -
Balance at March 31, 1995 1,891,241 $1.25 to $3.25 4,112,683
Warrants granted 2,224,692 $2.00 to $5.00 5,228,735
Warrants exercised 3,234,344 $1.25 to $3.50 5,714,816
Warrants canceled or expired 117,800 $1.25 to $2.50 288,000
Balance at March 31, 1996 763,789 $2.00 to $5.00 $3,338,602
Warrants exercisable (vested) at
March 31, 1996 763,789 $2.00 to $5.00 $3,338,602
</TABLE>
During fiscal 1996, warrant holders exercises 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.
All warrants issued during the fiscal years ended December 31, 1994 and
March 31, 1996, and the three-month period ended March 31, 1995 had exercise
prices that were at the fair market value at grant date.
In January 1994, the Company entered into an agreement whereby the
Company granted 100,000 warrants for $5,000 to purchase the Company's common
stock at $1.25. During 1994, the warrants were exercised.
10. UNAUDITED PRO FORMA RESULTS OF OPERATIONS
Condensed unaudited pro forma results of operations of the Company,
Mediatech, Channelmatic, and Starcom, as if the respective purchases occurred at
the beginning of the following two fiscal years, are presented below. The
unaudited pro forma financial statements have been prepared for comparative
F-20
<PAGE> 57
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purposes only and are not necessarily indicative of what would have occurred had
the acquisitions been completed as of those dates or of any results that may
occur in the future.
UNAUDITED
<TABLE>
<CAPTION>
Historical
IndeNet Acquisitions Combined Pro Forma
Year Year Year Year
Ended Ended Ended Pro forma Ended
3/31/96 3/31/96 3/31/96 Adjustments 3/31/96
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $20,868,899 $ 8,941,510 $29,810,409 $(1,307,000) $28,503,409
Cost of sales 9,791,964 5,876,492 15,668,456 (1,790,000) 13,878,456
Net (loss) income (2,957,032) (1,420,843) (4,377,875) 882,763 (3,495,111)
Net (loss) per $ (0.35) (0.34)
share
Number of shares 8,615,055 10,468,388
</TABLE>
F-21
<PAGE> 58
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Historical
IndeNet Acquisitions Combined Pro forma
Year Year Year Year
Ended Ended Ended Pro forma Ended
12/31/94 12/31/94 12/31/94 Adjustments 12/31/94
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ - $34,626,205 $34,626,205 $(3,178,000) $31,448,205
Cost of sales - 17,293,315 17,293,315 (2,328,000) 14,965,315
Net (loss) income (749,783) 85,119 (664,664) (1,675,323) (2,339,987)
Net (loss) per share $ (0.19) $ (0.32)
Number of shares 3,936,668 7,366,668
</TABLE>
Pro forma adjustments include (a) adjustments to reflect elimination of certain
Starcom product lines; (b) adjustments to reflect application of existing lower
Mediatech inventory purchasing to Starcom inventory; (c) adjustments to reflect
reduction in payroll of principal officers with employment contracts and
reduction of general payroll of Starcom due to a redundancy of staff with
Mediatech. The Company has combined the Starcom operations with the existing
Mediatech operations; (d) adjustments to reflect non-recurring rent expense due
to the closure of the Starcom offices and Company's corporate office; (e)
adjustments to reflect non-recurring expenses such as property insurance,
building costs, and data processing due to the closure of the Starcom offices;
(f) adjustments to reflect amortization of goodwill for both Channelmatic and
Starcom over 20 years and amortization of step-up of equipment over five years;
(g) adjustments to reflect interest expense related to the $5,602,500 note
payable to the former Channelmatic shareholder; and (h) adjustments to reflect a
33.33% allocation of operations from Channelmatic to its 33.33% minority
shareholder.
11. COMMITMENTS, CONTINGENCIES AND LITIGATION
Employment Agreements
On April 1, 1995, employment agreements with two of the Company's
officers were amended and (i) provided annual salaries of $120,000 each; (ii)
were subject to annual raises between 5% and 20%; (iii) provided discretionary
bonuses of up to $37,500 each; (iv) terminate on March 31, 1998; and (v) provide
for stock options of 135,000 shares at an exercise price of $1.375 (market price
at April 1, 1995). On December 29, 1995, through Board resolution, both
agreements were amended to provide annual salaries aggregating $340,000, and
discretionary bonuses of 60% and 35% of base salaries and stock options
aggregating 330,000 at $3.25 (market price at December 20, 1995). On March 15,
1996, one of the officers resigned as an employee and member of the Board of
Directors.
In connection with the acquisition of Mediatech, the Company entered
into employment agreements with two of Mediatech's officers. The agreements
expire on January 31, 1998 and provided for annual salaries of $125,000 each.
The agreements also provide for each officer to participate in the Company's
profit sharing bonus as determined by the Board of Directors. On April 1, 1996,
both of the employment agreements were amended. The new agreements provide for
the same benefits as the previous agreements and expire on March 31, 1999 and
the annual salary was also reduced to $50,000 for one of the officers. On March
13, 1995, Mediatech entered into an employment agreement with an individual to
serve as an officer. The agreement terminates March 13, 1998; provides for an
annual base salary of $100,000; a bonus based upon the employee's annual
performance as assessed and determined by the Board of Directors; and is
cancelable by Mediatech with thirty days' notice with a severance payment equal
to one year's salary if terminated without just cause.
F-22
<PAGE> 59
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the acquisition of Channelmatic, Channelmatic
entered into employment agreements with three of its officers. The agreement for
one of the officers provides for an annual salary of $90,000 through November
30, 2000, and $200,000 for each subsequent year, a $750 monthly car allowance
and employee benefits. The agreement for the other two officers provide for an
initial base salary of $190,000 per annum (adjusted in subsequent years based on
Channelmatic sales levels); total bonuses equal to 3.5% of the adjusted net
income when the annual adjusted net income of Channelmatic reaches or exceeds 5%
of gross sales; and employee benefits. The agreement is in effect until November
27, 1998.
In connection with the acquisition of Starcom, Starcom entered into a
consulting agreement with one of Starcom's officers. The agreement expires on
February 6, 1997 and provides for an annual salary of $215,000.
In connection with the acquisition of CCMS (see Note 14), the Company
entered into three employment agreements with the officers of CCMS. The
agreement for two of its officers is for a term of two years, terminating May
15, 1998, with an option to the employee to extend the agreement for a
consecutive third year; provides for an annual salary of $90,000 for the first
year; $90,000 plus a percent raise between 5% and 20% as approved by the
Executive Compensation Committee of the Board of Directors for the second year;
a similar increase in the third year if the option is exercised, and a bonus up
to 5% of the Company's net income before interest, depreciation, taxes and
amortization as approved by the Company's Board of Directors. These two
agreements provide for 60,000 stock options at $6.44 (market price at the
closing date of acquisition). The agreement for the third officer is for a term
of five years, terminating May 16, 2001, and provides for an annual salary of
$75,000 for the first year; $90,000 for the second year; and increases of
between 5% and 20% as approved by the Executive Compensation Committee of the
Board of Directors for years three through five, and a bonus up to 5% of the
Company's net income before interest, depreciation, taxes and amortization as
approved by the Company's Board of Directors. The agreement also provides the
employee a monthly automobile allowance of $500, and 40,000 stock options at
$6.44 (market price at the closing date of the acquisition).
In connection with the acquisition of Enterprise (see Note 14), the
Company entered into employment agreement with three of Enterprise's officers.
The agreements provide for aggregate annual salaries of $495,000. All three
agreement are for a term of three years terminating May 23, 1999, and provide
for a yearly percent increase between 5% and 20% as approved by the Executive
Compensation Committee of the Company's Board of Directors, provide for
participation in the Company's Executive Profit Sharing Plan up to the following
amounts: Chief Executive of Enterprise Systems Group, Ltd. - $56,250; Group
Chief Financial Officer of Enterprise Systems Group, Ltd. - up to 1% of
Enterprise Systems Group's profit after tax; Chief Executive Officer of
Enterprise Systems Group, Inc. - up to $80,000, plus 5% of "over target" profits
as defined in the agreement of Enterprise Systems Group, Inc.
Leases
The Company leases office and warehouse facilities under various
operating lease agreements. Certain of these facilities are owned by companies,
all of which are owned or majority owned by an officer of Mediatech. Another
facility is owned by an officer of Channelmatic. In addition to monthly rentals,
the Company is responsible for insurance, property taxes, utilities and normal
maintenance of the facilities.
F-23
<PAGE> 60
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under noncancelable operating leases as
of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Related Party Third Party Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 946,308 $ 361,150 $1,307,458
1998 769,094 332,000 1,101,094
1999 237,444 196,909 434,353
2000 230,944 135,372 366,316
2001 159,444 120,372 279,816
Thereafter 93,009 540,963 633,972
------------------------------------------------------------------------------------------
$2,436,243 $1,686,766 $4,123,009
==========================================================================================
</TABLE>
Rental expense on operating leases amounted to $1,122,970 and $11,423
for the fiscal years 1996 and 1994, including $894,000 in fiscal 1996 for the
related party leases described above.
Litigation
Allstate
On July 16, 1993, Allstate Communications, Inc. ("Allstate") filed a
lawsuit in Los Angeles Superior Court for the County of Los Angeles against the
Company. The Complaint alleges the following courses of action: breach of
contract, breach of implied covenant of good faith and fair dealings, fraud,
negligent misrepresentation, constructive fraud, common count, declaratory
relief, statutory misrepresentation of trade secrets, intentional interference
with prospective economic advantage, negligent interference with prospective
economic advantage, temporary restraining order, preliminary injunction and
permanent injunction, and for an accounting. In 1993, the Company accrued an
estimated liability of $240,000 related to this litigation.
On June 29, 1994, the Court provided Allstate an attachment of
approximately $161,000 of the Company's funds. For the fiscal year ended
December 31, 1994, the original estimated liability of $240,000 reduced by
$77,183 to approximately $161,000. This adjustment is included in gain from the
reduction of accounts payable. The plaintiffs have reduced the scope of their
complaint to eliminate all direct and indirect securities claims. At March 31,
1995, the Company had accrued $251,000 with respect to this matter. The amount
reflects the Company's settlement during fiscal 1996 with Allstate which
resulted in the Company paying to Allstate the $161,000 in the escrow account
plus an additional $90,000 for accrued interest and related expenses.
Sutro & Co. Incorporated
In May 1996, Sutro & Co. Incorporated ("Sutro"), a Nevada corporation,
engaged primarily in the business of assisting publicly and privately held
companies in securing equity and debt financing, filed an action in the Superior
Court of the State of California for the County of Los Angeles against the
Company for damages for breach of contract and quantum meruit, and injunctive
relief. Sutro seeks approximately $2,000,000 in damages for breach of the
contract and approximately $1,000,000 in quantum meruit. The injunction being
sough would force the Company to deliver 100,000 warrants to purchase shares of
the Company's common stock, including unlimited "piggy-back" registration rights
and all costs and expenses in connection with such registration.
Sutro bases its allegations of contractual breach on a letter
agreement, dated on or about June 21, 1995, whereby the Company retained Sutro
as its exclusive financial advisor regarding the private placement of
equity-related securities in a transaction. The letter agreement also stated
that the Company
F-24
<PAGE> 61
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
would provide Sutro with a right of first refusal until June 1997 to serve as
exclusive financial advisor on any merger, business combination,
recapitalization or sale of the Company's assets.
Sutro alleges that it is entitled to receive fees based on (i) the
Company's sale of $4,000,000 of the Company's debt and securities in February
1996, (ii) the Company's sale of $12,000,000 of Series A Preferred Stock in May
1996, and (iii) the Company's failure to provide Sutro with a right of first
refusal in connection with the Company's acquisition of CCMS and Enterprise.
The Company effected the foregoing securities issuance because Sutro
had not obtained any financing for the Company during the eight-month period
following the execution of the June 21, 1995 letter agreement. The net proceeds
from the February 1996 and May 1996 securities issuances were used to fund the
Company's working capital needs and the acquisition of Enterprise. Sutro was
fully informed of the Company's need for the offering proceeds and of the
Company's acquisition of Enterprise. The Company did not use any financial
advisor in connection with the acquisitions of either Enterprise or CCMS.
The Company intends to vigorously contest the action. However, there
can be no assurance that the foregoing litigation will be decided in favor of
the Company or that any settlement of this litigation will not have a material
adverse effect on the Company.
Other
During 1994, the Company settled two lawsuits resulting in a net gain
of $102,280. The first lawsuit involved the Company and other parties in a
lawsuit filed in 1991 against the National Basketball Association ("NBA")
claiming that the NBA has violated the Antitrust laws and tortiously interfered
with the Company's contractual right to promote a pay-per-view television
program. The Company's net share of the proceeds from this matter was $200,000.
The second lawsuit was a claim against the Company filed in 1990 for breach of
contract among other claims. The Company settled with the plaintiff through the
issuance of 40,000 shares of the Company's common stock as full settlement for
the claim. The shares issued were valued at $97,720, the fair market value at
the date of settlement.
During fiscal 1996, the Company settled a lawsuit with one of its
former tenants. The result of the settlement was a net gain to the Company of
$145,000.
The Company is subject to various lawsuits and claims arising out of
the normal course of its business. In the opinion of management, the ultimate
liability to the Company as a result of any legal proceedings will not have a
material effect on the financial position of the Company.
12. GAIN FROM REDUCTION OF ACCOUNTS PAYABLE
During 1994, the Company settled with a vendor as a result of a dispute
over amounts that the Company owed for services. As of December 31, 1993, the
Company had accrued a liability of $250,000. During fiscal 1994, the Company and
the vendor reached a full settlement in which the Company paid $115,456 to the
vendor. The remaining balance of $134,544 was recorded as a gain on reduction of
accounts payable. The operations to which this settlement related were
discontinued in a prior year.
13. 401(k) PLAN AND PROFIT PARTICIPATION PROGRAM
The Company's subsidiary Mediatech has a 401(k) defined contribution
plan covering substantially all of its full-time employees. The Company
contributes a percentage of participants' contributed earnings to the plan.
Contributions amounted to approximately $30,000 and $36,000 for the years ended
March 31, 1996 and December 31, 1994.
F-25
<PAGE> 62
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mediatech also has a profit participation program whereby the Company
will allocate a percentage of its pretax profits to eligible supervisors and
managers of the Company. No amounts were allocated under this program for the
years ended March 31, 1996 and December 31, 1994.
14. SIGNIFICANT CUSTOMERS
Sales to two customer represented approximately 22% of the Company's
net sales for the year ended March 31, 1996. The related accounts receivable
from these customers represented 12% of the accounts receivable at March 31,
1996.
F-26
<PAGE> 63
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
Private Placement
On April 29, 1996, the Company completed a private placement of Class A
Preferred Stock for $12,000,000, used primarily for the acquisition of
Enterprise Systems Group, Ltd. The placement consisted of 1,200 shares of
Convertible Class A Preferred Stock which pays a dividend of 6% annually,
payable in cash or common stock at the Company's option, and has a term of three
years. The Class A Preferred Stock is convertible into common stock at a rate
determined by the average trading price of the Company's common stock at the
time of conversion not to exceed $7.00 per share. The common stock carries
registration rights and the Company has the option to repurchase the Class A
Preferred Stock at the time of conversion at a 15% premium to the principal
amount and has the right to call the Class A Preferred Stock at a 30% premium to
the principal amount after 12 months, declining to a 15% premium after 30
months.
In May 1996, the Company completed a Regulation D private placement of
a $2,500,000 Convertible Note ("the Note") to a single accredited institutional
investor, used primarily for product development. The Note accrues interest at a
rate of 7% annually, payable quarterly in cash or the Company's common stock at
the Company's option and has a term of two years. The principal amount of the
Note, together with interest is convertible no later than 120 days subsequent to
the offering at a conversion rate based on 82% of the average closing bid price
of the commons stock for the five days immediately preceding the conversion
date. The Company shall have the right to convert all or part of the Note any
time after 210 days from closing date into the underlying stock. In addition,
the Note is redeemable for cash in whole or in part anytime after 120 days from
closing in an amount equal to 122% of the principal balance of the Note.
Acquisitions
CCMS
On May 16, 1996 the Company completed the acquisition of Cable
Computerized Management Systems ("CCMS") for a purchase price of $4,800,000. The
acquisition was effected through the merger of CCMS into a newly-formed
wholly-owned subsidiary of the Company. The purchase price was paid at the
closing by the Company paying $1,036,522 in cash and by the Company issuing
587,612 unregistered shares of the Company's common stock to the CCMS
shareholders. The number of shares issued to the CCMS shareholders was based on
the trading price of the Company's common stock, approximately $6.40 per share.
The amount of the purchase price was based on a multiple of CCMS's earnings
before interest, taxes, depreciation and amortization. The cash portion of the
purchase price was paid from the Company's existing working capital reserves.
CCMS is a designer and distributor of "traffic and billing" software
that is used by the cable television industry to manage the airing and invoicing
of TV commercials. The principal assets acquired by the Company consisted of
CCMS's software, cash and accounts receivable. Although the Company intends to
continue CCMS's operations, the Company may integrate CCMS with the Company's
other complimentary businesses in the future.
The acquisition is being accounted for as a purchase. The results of
operations of CCMS are included in the following unaudited pro forma results of
operations and balance sheet.
F-27
<PAGE> 64
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise
On May 24, 1996 the Company completed the acquisition of Enterprise
Systems Group Limited , a private company incorporated in England and Wales
("Enterprise") for a purchase price equal to the U.S. dollar equivalent of eight
times EBITDA (earnings before interest, taxes, depreciation and amortization) of
Enterprise for the 12 months ended March 31, 1996. The purchase price was paid
(i) at the closing by the Company paying $10,000,000 in cash and $5,000,000 in
promissory notes ("the Notes") and (ii) by the Company agreeing to pay
$12,379,210 in unregistered shares of the Company's common stock to the
Enterprise shareholders. The number of shares to be issued is based on the
average closing price of the stock (as reported by The Nasdaq Stock Market) for
a 60-day trading period consisting of a defined 30 trading days in February and
March 1996 and 30 trading following the closing (the "Share Price"). The shares
are expected to be issued in mid-July 1996. The Notes earn interest at a rate of
8% per annum, mature May 31, 2000, with equal payments due quarterly commencing
on November 30, 1996. Commencing November 24, 1996, the Notes are convertible
into the Company's common stock at the holders' option at a conversion price of
150% of the Share Price. The holders of the common stock issued in this
transaction have certain demand and piggy-back registration rights. The cash
portion of the purchase price was paid from proceeds of a private placement. In
connection with the acquisition of Enterprise, the Company agreed to elect two
designees of the former Enterprise shareholders to the Company's Board of
Directors.
Enterprise is a London, U.K. based company which designs, develops and
integrates traffic and billing, revenue management, and program management
software products for use by broadcast television stations. The principal assets
acquired by the Company consisted of Enterprise's software, cash and accounts
receivable. Enterprise currently provides its software products to over 140
domestic television and radio stations, and to a total of over 70 television
stations located in the United Kingdom, Western Europe, New Zealand, Australia,
Southeast Asia and South Africa. Enterprise's customers include such major
television networks as NBC Television Stations and Fox Television Stations in
the United States, Laser Sales and VTM in Europe, Network 10 in Australia and
TVNZ in New Zealand. Although the Company intends to continue Enterprise's
operations, the Company may integrate Enterprise with the Company's other
complimentary businesses in the future.
The acquisition is being accounted for as a purchase. The results of
operations of Enterprise are included in the following unaudited pro forma
results of operations and balance sheet.
Unaudited Pro Forma Results of Operations
Condensed unaudited pro forma results of operations of the Company,
Mediatech, Channelmatic Starcom, CCMS and Enterprise as if the respective
purchases occurred at the beginning of the fiscal year (April 1, 1995) is
presented below. The following unaudited pro forma results of operations also
include the above mentioned private placement of $12,000,000 as the private
placement funds were used primarily for the acquisition of Enterprise. The
unaudited pro forma financial statements have been prepared for comparative
purposes only and are not necessarily indicative of what would have occurred had
the acquisitions been completed as of that date or of any results that may occur
in the future.
F-28
<PAGE> 65
INDENET, INC.
PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical Enterprise CCMS Pro forma
INDE 3/31/96 3/31/96 Combined Adjustments Pro forma
---- ------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 3,818,133 $ 2,954,878 $ 263,884 $ 7,036,895 $ 10,870,000 (a) $ 6,870,383
(1,036,512)(b)
(10,000,000)(c)
Restricted cash 453,340 - - 453,340 453,340
Accounts receivable 5,159,651 2,694,491 48,057 7,902,199 7,902,199
Inventory 2,143,927 1,085 - 2,145,012 2,145,012
Other current assets 209,822 333,168 - 542,990 542,990
------------- ----------- --------- ------------ ------------ -------------
Total current assets 11,784,873 5,983,622 311,941 18,080,436 (166,512) 17,913,924
PP&E at cost 24,817,161 5,708,017 226,306 30,751,484 30,751,484
Accumulated depr./amort. (11,170,742) (3,748,960) (170,660) (15,090,362) (15,090,362)
------------- ----------- --------- ------------ ------------ -------------
PP&E, net 13,646,419 1,959,057 55,646 15,661,122 - 15,661,122
Goodwill 16,514,557 - - 16,514,557 23,665,446 (c) 35,045,124
3,669,014 (b)
(148,574)(b)
(8,655,319)(c)
Other long term assets 1,247,088 10,267,558 - 11,514,646 11,514,646
------------- ------------ --------- ------------ ------------ -------------
Total Assets $ 43,192,937 $ 18,210,237 $ 367,587 $ 61,770,761 $ 18,364,055 $ 80,134,816
============= ============ ========== ============= ============= ==============
LIABILITIES
Accounts payable $ 5,158,750 $ 2,331,804 $ 40,326 $ 7,530,880 $ 7,530,880
Accrued expenses 2,508,409 152,650 77,145 2,738,204 2,738,204
Lines of credit 667,903 1,299,999 - 1,967,902 1,967,902
Customer deposits 96,567 96,567 96,567
Deferred income - 2,179,282 2,179,282 2,179,282
Notes payable to S/H-current 1,197,226 1,197,226 1,197,226
Note payable - current portion 379,791 888,840 4,975 1,273,606 1,273,606
------------- ------------ --------- ------------ ------------ -------------
Total current liabilities 9,912,079 6,852,575 219,013 16,983,667 - 16,983,667
Notes payable 8,152,051 1,341,839 - 9,493,890 9,493,890
Notes payable to shareholders 4,676,221 - - 4,676,221 5,000,000 (c) 9,676,221
Other long-term liabilities - 88,687 88,687 88,687
Deferred taxes - 1,271,817 - 1,271,817 1,271,817
------------- ------------ --------- ------------ ------------ -------------
Total long term liabilities 12,828,272 2,702,343 - 15,530,615 5,000,000 20,530,615
Total Liabilities 22,740,351 9,554,918 219,013 32,514,282 5,000,000 37,514,282
Minority Interest 1,580,456 - - 1,580,456 1,580,456
STOCKHOLDERS' EQUITY
Preferred stock 22 - - 22 1,200 (a) 1,222
Common stock 12,451 99,703 10,000 122,154 588 (b) 15,102
2,063 (c)
(10,000)(b)
(99,703)(c)
Additional paid-in capital 23,169,510 4,638,855 - 27,808,365 10,868,800 (a) 45,333,607
2,631,914 (b)
8,663,383 (c)
(4,638,855)(c)
Retained earnings (4,309,853) 3,916,761 138,574 (254,518) (3,916,761)(c) (4,309,853)
(138,574)(b)
------------- ------------ --------- ------------ ------------ -------------
Total Stockholders' Equity 18,872,130 8,655,319 148,574 27,676,023 13,364,055 41,040,078
------------- ------------ --------- ------------ ------------ -------------
Total Liabilities and Equity $ 43,192,937 $ 18,210,237 $ 367,587 $ 61,770,761 $ 18,364,055 $ 80,134,816
============= ============ ========= ============ ============ =============
</TABLE>
F-29
<PAGE> 66
INDENET, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Channelmatic Starcom Enterprise CCMS
Historical 8 months 10 months 12 months 12 months
INDE 11/30/95 1/31/96 3/31/96 3/31/96 Combined
----------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $20,868,899 $4,551,907 $ 4,389,603 $18,384,615 $1,772,545 $49,967,569
Cost of sales 9,791,964 2,906,440 3,000,710 9,147,472 297,018 25,143,604
----------- ---------- ----------- ----------- ---------- -----------
Gross profit 11,076,935 1,645,467 1,388,893 9,237,143 1,475,527 24,823,965
Operating expenses:
Salaries 6,489,944 719,378 693,072 1,346,579 9,248,973
Legal and professional 441,915 37,130 132,236 611,281
Rent 1,122,970 86,209 156,000 1,365,179
Depreciation and amortization 2,076,590 153,434 241,000 1,182,207 43,973 3,697,204
Research and development 446,525 90,270 - 379,087 915,882
Other general and administrative 3,135,543 748,887 1,008,741 5,406,141 10,299,312
----------- ---------- ----------- ----------- ---------- -----------
Total operating expenses 13,713,487 1,835,308 2,231,049 6,967,435 1,390,552 26,137,831
----------- ---------- ----------- ----------- ---------- -----------
Operating (loss) income (2,636,552) (189,841) (842,156) 2,269,708 84,975 (1,313,866)
Other income (expense)
Interest expense (811,306) (42,208) (312,698) (306,296) - (1,472,508)
Interest income 138,765 3,920 173,914 21,468 338,067
Other 212,900 (49,212) - (29,514) - 134,174
----------- ---------- ----------- ----------- ---------- -----------
(Loss) income before income tax expense
and allocation to minority interest (3,096,193) (277,341) (1,154,854) 2,107,812 106,443 (2,314,133)
Income tax expense 17,255 (11,353) 846,227 852,129
----------- ---------- ----------- ----------- ---------- -----------
Loss before allocation to
minority interest (3,113,448) (265,988) (1,154,854) 1,261,585 106,443 (3,166,262)
Allocation to minority interest (156,416) - - - (156,416)
----------- ---------- ----------- ----------- ---------- -----------
Net loss (2,957,032) (265,988) (1,154,854) 1,261,585 106,443 (3,009,846)
Dividends to preferred shareholders (54,000) - - - - (54,000)
----------- ---------- ----------- ----------- ---------- -----------
Net loss allocable to common
shareholders $(3,011,032) $ (265,988) $(1,154,854) $ 1,261,585 $ 106,443 $(3,063,846)
=========== ========== =========== =========== ========== ===========
Net loss per share $ (0.35)
Weighted average number of common
shares outstanding 8,615,055
<CAPTION>
Pro forma
Adjustments Pro forma
--------------- -----------
<S> <C> <C>
Revenue $(1,307,000)(d) $48,660,569
Cost of sales (1,790,000)(d),(e) 23,353,604
----------- -----------
Gross profit 483,000 25,306,965
Operating expenses:
Salaries (920,468)(f) 8,328,505
Legal and professional - 611,281
Rent (84,000)(g) 1,281,179
Depreciation and amortization 1,836,480 (i) 5,533,684
Research and development - 915,882
Other general and administrative (670,000)(h) 9,629,312
----------- -----------
Total operating expenses 162,012 26,299,843
----------- -----------
Operating (loss) income 320,988 (992,878)
Other income (expense)
Interest expense (103,031)(j) (1,415,539)
160,000 (l)
(400,000)(j) (400,000)
Interest income 160,000 (l) 338,067
(160,000)(l)
Other - 134,174
----------- -----------
(Loss) income before income tax expense
and allocation to minority interest (22,043) (2,336,176)
Income tax expense - 852,129
----------- -----------
Loss before allocation to
minority interest (22,043) (3,188,305)
Allocation to minority interest (6,224)(k) (162,640)
----------- -----------
Net loss (15,819) (3,025,665)
Dividends to preferred shareholders (720,000) (774,000)
----------- -----------
Net loss allocable to common
shareholders $ (735,819) $(3,799,665)
=========== ===========
Net loss per share $ (0.29)
Weighted average number of common
shares outstanding (m) 13,119,202
</TABLE>
F-30
<PAGE> 67
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) On April 29, 1996, the Company completed a private placement of Class A
Preferred Stock for $12,000,000, primarily for the acquisition of Enterprise
Systems Group, Ltd. The placement consisted of 1,200 shares of Convertible Class
A Preferred Stock which pays a dividend of 6% annually, payable in cash or
common stock at the Company's option, and has a term of three years. The Class A
Preferred Stock is convertible into common stock at a rate determined by the
average trading price of the Company's common stock at the time of conversion
not to exceed $7.00 per share. The common stock carries registration rights and
the Company has the option to repurchase the Class A Preferred Stock at the time
of conversion at a 15% premium to the principal amount and has the right to call
the Class A Preferred Stock at a 30% premium to the principal amount after 12
months, declining to a 15% premium after 30 months. Net proceeds to the Company
after agent's commission was $10,870,000.
(b) On May 16, the Company completed the acquisition of CCMS for a purchase
price of $4,800,000. The purchase price was paid at the closing by the Company
paying $1,036,522 in cash and by the Company issuing 587,612 unregistered shares
of the Company's common stock to the CCMS shareholders. The number of shares
issued to the CCMS shareholders was based on the trading price of the Company's
common stock, approximately $6.40 per share. The restricted common stock was
valued for book purposes at $4.48 per share (which price represents 70% of the
average quoted price of the Company's common stock at the time of acquisition)
which management believes was its fair value. The Company will acquire net
assets of $148,574 and allocate the remaining purchase price to goodwill. The
Company believes 20 years to be an appropriate life for the goodwill resulting
from the acquisition of CCMS.
(c) On May 24, 1996 the Company completed the acquisition of Enterprise for a
purchase price equal to the U.S. dollar equivalent of eight times EBITDA
(earnings before interest, taxes, depreciation and amortization) of Enterprise
for the 12 months ended March 31, 1996. The purchase price was paid (i) at the
closing by the Company paying $10,000,000 in cash and $5,000,000 in promissory
notes ("the Notes") and (ii) by the Company agreeing to pay $12,379,210 in
unregistered shares of the Company's common stock to the Enterprise
shareholders. The number of shares to be issued is based on the average closing
price of the stock (as reported by The Nasdaq Stock Market) for a 60-day trading
period consisting of a defined 30 trading days in February and March 1996 and 30
trading following the closing (the "Share Price"). The Notes earn interest at a
rate of 8% per annum, mature May 31, 2000, with equal payments due quarterly
commencing on November 30, 1996. The restricted common stock is estimated to
valued for book purposes at $4.20 per share (which price is estimated to
represent 70% of the average quoted price of the Company's common stock at the
time of acquisition) which management believes was its fair value. The Company
will acquire net assets of $8,655,319 and allocate the remaining purchase price
to goodwill. The Company believes 20 years to be an appropriate life for the
goodwill resulting from the acquisition of Enterprise.
(d) Adjustments to reflect elimination of certain Starcom product lines.
(e) Adjustments to reflect application of existing volume discounts realized by
Mediatech to Starcom inventory. See (f) below.
(f) Adjustments to reflect reduction in payroll of principal officers with
employment contracts and reduction of general payroll of Starcom due to a
redundancy of staff with Mediatech. The Company will combine the Starcom
operations with the existing Mediatech operations.
(g) Adjustments to reflect non-recurring rent expense due to the closure of the
Starcom offices and Company's corporate office.
(h) Adjustments to reflect non-recurring expenses such as property insurance,
building costs, and data processing due to the closure of the Starcom offices.
(i) Adjustments to reflect amortization of goodwill both Channelmatic, Starcom,
CCMS and Enterprise over 20 years and amortization of step-up of equipment of
Starcom and Channelmatic over five years.
F-31
<PAGE> 68
INDENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) Adjustments to reflect interest expense related to the $5,602,500 note
payable to the former Channelmatic shareholder and interest expense related to
$5,000,000 notes payable to the former shareholders of Enterprise.
(k) Adjustments to reflect a 33.33% allocation of operations from Channelmatic
to minority shareholder.
(l) Adjustments to record and eliminate intercompany interest income and expense
and eliminate other miscellaneous expenses.
(m) The weighted average number of common shares outstanding on a pro forma
basis are calculated as follows:
<TABLE>
<S> <C>
Weighted average shares - Historical INDE 8,615,055
Adjusted weighted shares issued for Channelmatic acquisition - 8 months 1,020,000
Adjusted weighted shares issued for Starcom acquisition - 10 months 833,333
Adjusted weighted shares issued for CCMS acquisition - 12 months 587,612
Adjusted weighted shares issued for Enterprise acquisition - 12 months 2,063,202
----------
Weighted average shares on a pro forma basis 13,119,202
==========
</TABLE>
F-32
<PAGE> 69
Information Subsequent to the Date
of the Independent Auditors' Report
(Unaudited)
Subsequent to the date to the independent auditors' report of June 18,
1996, a disagreement arose between the Company and the former stockholders of
Starcom regarding the application of the "Formula Value." As discussed in Note
3 to the consolidated financial statements, the Formula Value was to be used to
determine the number of shares of the Company's Common Stock that the Company
was required to issue to the former stockholders of Starcom in exchange for
100% of the common stock of Starcom.
In September 1996, the Company and the former Starcom stockholders
resolved their differences, and the Company has issued to the stockholders all
of the shares of the Company's Common Stock that was determined to be due by
the Formula Value. The total number of shares actually issued to the
stockholders of Starcom was 637,500, or 362,500 shares less than the 1,000,000
shares reserved in the accompanying consolidated financial statements.
F-33
<PAGE> 70
INDENET, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, the
registrant caused this Amendment No. 1 to its Annual Report on Form 10-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
INDENET, INC.
Signed By: /s/ Richard J. Parent
--------------------------------------
Richard J. Parent, Chief Financial and
Accounting Officer, and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1996 DEC-31-1994
<PERIOD-END> MAR-31-1996 DEC-31-1994
<CASH> 3,818,133 3,250,554
<SECURITIES> 0 0
<RECEIVABLES> 5,405,583 16,559
<ALLOWANCES> 245,932 0
<INVENTORY> 2,143,927 0
<CURRENT-ASSETS> 11,784,873 4,924,498
<PP&E> 16,113,663 90,882
<DEPRECIATION> 2,467,244 90,882
<TOTAL-ASSETS> 43,192,937 4,924,498
<CURRENT-LIABILITIES> 9,912,079 924,457
<BONDS> 0 0
0 0
22 0
<COMMON> 12,451 4,050
<OTHER-SE> 18,872,130 3,995,991
<TOTAL-LIABILITY-AND-EQUITY> 43,192,937 4,924,498
<SALES> 20,868,899 0
<TOTAL-REVENUES> 20,868,899 0
<CGS> 9,791,964 0
<TOTAL-COSTS> 13,713,487 1,246,082
<OTHER-EXPENSES> 459,641 (496,299)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 811,306 65,000
<INCOME-PRETAX> (3,096,193) (749,783)
<INCOME-TAX> 17,255 0
<INCOME-CONTINUING> (2,957,032) (749,783)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,957,032) (749,783)
<EPS-PRIMARY> (0.35) (0.19)
<EPS-DILUTED> (0.35) (0.19)
</TABLE>
