<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number: 0-18034
INDENET, INC.
(Exact name of registrant as specified in charter)
Delaware 68-0158367
- --------------------------------------------------------------------------------
(State or other jurisdiction IRS Employer
of incorporation) Identification No.)
16000 Ventura Blvd., Suite 700, Encino, CA 91436
(Address of principal executive office)
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code: (818) 461-8525
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X NO ___
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 17,573,516 Shares of Common
Stock, Par Value $.001 as of August 8, 1997.
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INDENET, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
No.
Consolidated Balance Sheets --
June 30, 1997 and March 31, 1997...................................................... 1
Consolidated Statements of Operations --Three-months Ended June 30, 1997 and 1996..... 3
Consolidated Statements of Changes in Stockholders'
Equity -- Three-months Ended June 30, 1997............................................ 4
Consolidated Statements of Cash Flows --
Three-months Ended June 30, 1997 and 1996............................................. 5
Notes to Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...................................... 7
</TABLE>
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INDENET, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,100,320 $ 2,885,406
Restricted cash 1,531,292 1,514,902
Accounts and other receivables, net 8,662,588 8,425,017
Inventories 302,950 311,434
Note receivable, current portion 461,941 434,080
Equity securities held for sale 2,341,262 2,341,262
Prepaid expenses 595,139 922,344
----------- -----------
Total current assets 15,995,492 16,834,445
Property and equipment, less accumulated depreciation and
amortization 12,015,364 11,872,587
Notes receivable, net of current portion 2,232,549 2,407,314
Capitalized software development costs, net 1,109,668 838,837
Customer list, net 16,191,996 14,195,501
Goodwill, net 6,234,571 6,320,092
Other long-term assets 456,915 324,531
----------- -----------
TOTAL ASSETS $54,236,555 $52,793,307
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 4
INDENET, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 9,516,816 $ 10,323,132
Deferred income 2,426,384 2,406,977
Notes payable, current portion 10,548,486 9,089,520
Notes payable to shareholders of acquired companies,
current portion 2,751,640 6,844,117
Capital lease obligations, current portion 839,235 645,755
------------ ------------
Total current liabilities 26,082,561 29,309,501
Notes payable to shareholders of acquired companies,
net of current portion 4,264,600 172,123
Notes payable, net of current portion 5,926,714 4,896,228
Capital lease obligations, net of current portion 1,067,467 702,321
Other long-term liabilities 9,322 65,486
------------ ------------
TOTAL LIABILITIES 37,350,664 35,145,659
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A, $.0001 par value
Authorized - 1,200 shares, 190 issued and outstanding 1 1
Preferred stock, Series B, $.0001 par value
Authorized - 40,000,000 shares, 216,667 issued and outstanding 22 22
Preferred stock, Series C, $.0001 par value
Authorized - 1,200 shares, 789 issued and outstanding 1 1
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 17,181,064 17,181 17,181
Additional paid-in capital 49,396,222 49,209,922
Accumulated deficit (32,940,953) (32,036,455)
Foreign currency translation adjustment 413,417 456,976
------------ ------------
Total stockholders' equity 16,885,891 17,647,648
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,236,555 $ 52,793,307
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
INDENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue $ 11,485,956 $ 8,982,716
Cost of sales 5,714,576 4,041,067
------------ ------------
Gross profit 5,771,380 4,941,649
Operating expenses:
Selling, general and administrative 4,431,740 4,621,421
Depreciation and amortization 1,167,454 1,161,917
Research and development -- 249,594
Corporate 353,922 548,805
------------ ------------
5,953,116 6,581,737
------------ ------------
Operating loss (181,736) (1,640,088)
Other income (expense):
Interest income 80,438 92,387
Interest expense (533,312) (425,905)
Miscellaneous, net (63,288) 156,276
------------ ------------
(516,162) (177,242)
------------ ------------
Loss before income tax expense and
allocation to minority interest (697,898) (1,817,330)
Income taxes 800 3,193
------------ ------------
Loss before allocation to minority interest (698,698) (1,820,523)
Allocation to minority interest -- (83,717)
------------ ------------
Net loss (698,698) (1,736,806)
Dividends to preferred shareholders (205,800) (221,633)
------------ ------------
Net loss allocable to common shareholders $ (904,498) $ (1,958,439)
============ ============
Net loss per share $ (0.05) $ (0.14)
============ ============
Weighted average number of
common shares outstanding 17,181,064 13,760,904
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
INDENET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock
---------------------- ---------------------- ----------------------
Number of Preferred Number of Preferred Number of Preferred
Shares Stock Shares Stock Shares Stock
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997 190 $1 216,667 $22 789 $1
-------- -------- -------- -------- -------- --------
Amount to be paid in Common Stock
related to stated accretion on
Series A and Series C
Preferred Stock - - - - - -
Preferred stock dividends - - - - - -
Net loss - - - - - -
Foreign currency translation
adjustment - - - - - -
-------- -------- -------- -------- -------- --------
Balance at June 30, 1997 190 $1 216,667 $22 789 $1
======== ======== ======== ======== ======== ========
Foreign
Common Stock Additional Currency
Number of Common Paid-in Accumulated Translation
Shares Stock Capital Deficit Adjustment Total
---------- ------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997 17,181,064 $17,181 $49,209,922 $(32,036,455) $456,976 $17,647,648
Amount to be paid in Common Stock
related to stated accretion on
Series A and Series C
Preferred Stock - - 186,300 - - 186,300
Preferred stock dividends - - - (205,800) - (205,800)
Net loss - - - (698,698) - (698,698)
Foreign currency translation
adjustment - - - - (43,559) (43,559)
---------- ------- ----------- ------------ -------- -----------
Balance at June 30, 1997 17,181,064 $17,181 $49,396,222 $(32,940,953) $413,417 $16,885,891
========== ======= =========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
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INDENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Three Months June 30,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (698,698) $ (1,736,806)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,167,454 1,161,917
Amortization of deferred interest -- 93,042
Allocation of loss to minority interest -- (83,717)
Gain on sale of building and other PP&E -- (128,811)
Unrealized loss on notes receivable due to foreign exchange 69,915 --
Changes in operating assets and liabilities:
Restricted cash 5,565 3,340
Accounts receivable 290,077 (1,218,271)
Inventories 8,578 (884,669)
Prepaid expenses 400,906 14,419
Other assets (114,256) (86,965)
Accounts payable and accrued expenses (852,046) 800,565
Deferred income (7,318) 183,935
Other long-term liabilities (56,298) 55,710
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 213,879 (1,826,311)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (359,556) (851,174)
Capitalized software development costs (285,938) (834,822)
Collection on notes receivable 76,989 --
Deferred financing costs -- (234,140)
Net proceeds from sale of building and other PP&E -- 1,158,186
Purchase of businesses (1,444,809) (11,036,522)
Cash of acquired businesses -- 880,618
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,013,314) (10,917,854)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (723,973) (1,896,256)
Proceeds from notes payable 1,757,822 --
Proceeds from exercise of warrants and options -- 289,699
Net proceeds from private placement -- 13,683,606
Dividends on preferred stock (19,500) (19,500)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,014,349 12,057,549
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (785,086) (686,616)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,885,406 3,818,133
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,100,320 $ 3,131,517
============ ============
</TABLE>
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Supplemental Disclosure of Cash Flow Information 1997 1996
------------ ------------
<S> <C> <C>
Cash paid during the period for:
Interest 319,309 356,568
Income taxes 3,530 3,193
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 8
INDENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments, consisting solely of adjustments of
a normal recurring nature, necessary to present fairly the financial
position, results of operations and cash flows for the periods
presented. These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not contain all
the information and footnotes required in a complete set of financial
statements. These statements should be read in conjunction with the
Company's consolidated financial statements and footnotes thereto as of
March 31,1997 included in the Company's Form 10-KSB. The results of
operations for the three-month period ended June 30, 1997 is not
necessarily indicative of the results for the year ending March 31,
1998.
The accompanying consolidated financial statements include the accounts
of IndeNet, Inc., its wholly-owned subsidiaries Mediatech, Starcom
(since its acquisition on February 7, 1996), CCMS (since its
acquisition on May 16, 1996), Enterprise (since its acquisition on May
24, 1996) and its 66.67% owned subsidiary Channelmatic (since its
acquisition on November 27, 1995 and subsequent sale on March 24, 1997)
(collectively "the Company"). On April 1, 1997, Starcom and Mediatech
merged and are hereinafter referred to as Mediatech.
2 The Company leases office, production and warehousing facilities in its
Chicago, Illinois location from real estate partnerships in which a
former shareholder of Mediatech has a controlling interest. Total rent
expense paid to these partnerships for the three-months ended June 30,
1997 and 1996 was $156,339 and $205,118. The Company leased office
space in Alpine, California from a director who was the sole
shareholder of Channelmatic. Total rent expense paid to the officer for
the three-months ended June 30, 1996 was $19,500.
3 Net loss per share is calculated by taking the sum of the net loss plus
preferred dividends divided by the average number of common shares
outstanding. Common stock equivalents, such as stock options, warrants
and convertible preferred stock, have not been included since their
effect would be anti-dilutive.
4. On July 18, 1997, the Company sold all of the issued and outstanding
shares (the "Shares") of capital stock of Mediatech, Inc. to Digital
Generation Systems, Inc., a California corporation ("Digital"). The
consideration paid by Digital for the Shares consisted of the
following: (i) $13,988,730 in cash; (ii) 324,355 shares of Digital
Common Stock valued at $1,600,000; (iii) Digital Subordinated
Promissory Note, dated July 18, 1997 ("Subordinated Note"), in the
principal amount of $2,243,806; and (iv) assumption of an aggregate
of $2,206,194 owed by the Company to Thomas H. Baur, Chairman of
Mediatech and a director and stockholder of the Company. The
Subordinated Note bears interest at 9% per annum and is payable in 13
equal quarterly installments of principal and interest, commencing on
October 1, 1997. All unpaid principal and accrued interest on the
Subordinated Note is due and payable on October 1, 2001. Digital
provides electronic distribution services to the broadcast industry.
6
<PAGE> 9
INDENET, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the three-months ended June 30, 1996, the operations of the Company were
conducted solely through its subsidiaries Mediatech, Starcom, Channelmatic. In
addition, included in the operations of the Company for the three-months ended
June 30, 1996 were two months of operations of CCMS and one month of operations
of Enterprise. The results of operations for the three-months ended June 30,
1997 include the operations of the above-mentioned subsidiaries excluding
Channelmatic, which was sold on March 24, 1997.
Except for historical information contained herein, statements in this report
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecast results.
Revenue
The increase in revenue from the prior period was primarily a net result of an
increase from the consolidation of revenue from the subsidiaries acquired during
the comparative prior period and a decrease from the exclusion of revenue from
Channelmatic. It is anticipated that revenue in future periods for the Company
on a consolidated basis will decrease in comparison to revenue in the current
period due to the sale of Mediatech on July 18, 1997.
Cost of Sales
The increase in cost of sales from the prior period was primarily a net result
of an increase from the consolidation of the cost of sales of the subsidiaries
acquired subsequent to the comparative prior period and a decrease from the
exclusion of cost of sales from Channelmatic. It is anticipated that cost of
sales in future periods for the Company on a consolidated basis will decrease in
comparison to cost of sales in the current period due to the sale of Mediatech
on July 18, 1997.
Selling, General and Administrative
The decrease in selling, general and administrative expense from the prior
period was primarily a net result of an increase from the consolidation of the
selling, general and administrative expense of the subsidiaries acquired
subsequent to the comparative prior period and a decrease from the exclusion of
selling, general and administrative expenses from Channelmatic and cost
reductions. It is anticipated that selling, general and administrative expense
in future periods for the Company on a consolidated basis will decrease in
comparison to selling, general and administrative expenses in the current period
due to the sale of Mediatech on July 18, 1997.
7
<PAGE> 10
Depreciation and Amortization
The increase in depreciation and amortization from the prior period was
primarily a net result of an increase from the consolidation of the depreciation
and amortization of the subsidiaries acquired subsequent to the comparable prior
period and a decrease from the exclusion of depreciation and amortization from
Channelmatic. It is anticipated that depreciation and amortization in future
periods will decrease in comparison to depreciation and amortization in the
current period due to the sale of Mediatech on July 18, 1997.
Corporate
Corporate overhead represents general and administrative expenses related to the
administration of IndeNet, exclusive of expenses of the subsidiaries. These
expenses for three-months ended June 30, 1997 compared to the comparative prior
period decreased by $194,883 from $548,805 to $353,922. The decrease is due to a
reduction of personnel and marketing costs. Future periods' expenses are
expected to decrease relative to the current period due to additional personnel
reductions and a consolidation of the corporate office from Los Angeles to the
Enterprise offices in Colorado Springs.
Interest Income
Interest income did not change significantly. Interest income in future periods
is expected to fluctuate based on cash balances.
Interest Expense
Interest expense increased $107,407 from $425,905 to $533,312 for the
three-months ended June 30, 1997 compared to the prior period due to (i) the
inclusion of interest expense of the companies acquired during to the comparable
prior period and (ii) interest expense incurred on the promissory notes
delivered by IndeNet as partial payment of the purchase price of each of those
acquisitions. Interest expense is expected to decrease in future periods due to
the sale of Mediatech on July 18, 1997. Prior to the sale, Mediatech's interest
bearing obligations were $5.9 million.
Income Tax Expense
At June 30, 1997, the Company has a net operating loss carryforward of
approximately $20.0 million for federal income tax purposes of which $2.7
million is subject to a separate return limitation. The carryforward expires in
varying amounts and years through 2012. This loss carryforward also gives rise
to a deferred tax asset of approximately $8.2 million. This tax asset has a
valuation allowance as the Company cannot determine if it is more likely than
not that the deferred tax asset will be realized. Due to changes in the
Company's ownership, there is an annual limitation on the usage of the net
operation loss carryforward. Income tax expense for the three months ended June
30, 1997 represents minimum state taxes paid for the various states in which the
Company does business.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had $2.1 million in cash and cash equivalents
and a working capital deficit of $10.1 million. During the three-months ended
June 30, 1997, cash and cash equivalents decreased $785,086. The Company
generated $213,878 from operations. The Company used $2.0 million in investing
activities, primarily for purchases of capital expenditures, capitalized
software costs, and
8
<PAGE> 11
purchase of customer list. The Company generated $1.0 million in financing
activities, primarily from increase borrowings under lines-of-credit.
On July 18, 1996, the Company sold its interest in Mediatech which improved the
Company's cash position by $13.2 million (after costs) and reduced IndeNet's
debt by $2.2 million. The amount of cash received is expected to be sufficient
to service IndeNet's obligations for the next twelve months.
Based on the projected operations of the Company's subsidiaries (Enterprise and
CCMS), the Company currently believes that its consolidated operations will
generate sufficient cash to fund the subsidiaries working capital needs for the
next twelve months. Such projections are based on financial information that the
Company has obtained from its acquired subsidiaries and is based on projected
benefits to be derived from the integration of the operations of the
subsidiaries. No assurance can be given that the projected operations or
projected integration benefits will be realized.
Any future acquisitions will be funded from equity and/or debt financing.
Payments on promissory notes and notes payable as a result of prior private
placements of convertible notes that were completed earlier in 1996 are expected
to be paid from the proceeds of the sale of Mediatech. 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.
9
<PAGE> 12
INDENET, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned hereunto duly authorized.
INDENET, INC.
Signed By: /s/ Richard J. Parent
--------------------------------------
Richard J. Parent
Chief Financial Officer and Corporate
Secretary (Principal Financial and Chief
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 2,100,320
<SECURITIES> 2,314,262
<RECEIVABLES> 8,891,588
<ALLOWANCES> 229,000
<INVENTORY> 302,950
<CURRENT-ASSETS> 15,995,492
<PP&E> 16,588,233
<DEPRECIATION> 4,572,869
<TOTAL-ASSETS> 54,236,555
<CURRENT-LIABILITIES> 26,082,561
<BONDS> 0
0
24
<COMMON> 17,181
<OTHER-SE> 16,868,686
<TOTAL-LIABILITY-AND-EQUITY> 54,326,555
<SALES> 11,485,956
<TOTAL-REVENUES> 11,485,956
<CGS> 5,714,576
<TOTAL-COSTS> 5,953,116
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 533,312
<INCOME-PRETAX> (697,898)
<INCOME-TAX> 800
<INCOME-CONTINUING> (904,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (904,498)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
