<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A-2
(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, 1998
( ) 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
ENTERPRISE SOFTWARE, INC. (FORMERLY INDENET, INC.)
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 68-0158367
- --------------------------------------------------------------------------------
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
38705 Seven Mile Rd., Suite 435, Livonia, MI 48152
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 380-6070
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
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. ( )
Revenues for the issuer's most recent fiscal year ended March 31, 1998 are
$24,175,736.
As of June 24, 1998 there were 18,052,425 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 $32 million.
Documents incorporated by reference: The Proxy Statement for the Annual Meeting
of Shareholders estimated to be held in September 1998, is incorporated by
reference of this Annual Report on Form 10-KSB.
1
<PAGE> 2
The registrant hereby amends its Form 10-KSB for the fiscal year ended
March 31, 1998 to change Item 7 as set forth below:
Item 7. Financial Statements
The financial statements begin on page F-1.
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Item 13(a)(1) Exhibits
Exhibit Number Description
- --------------------------------------------------------------------------------
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
-2-
<PAGE> 3
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
-3-
<PAGE> 4
Enterprise Software, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INDENET, INC.
Signed By: /s/ Andre A. Blay Dated: August 12, 1998
Andre A. Blay
Chairman of the Board and Chief Executive Officer
By: /s/ D. W. Martin Dated: August 12, 1998
David W. Martin,
Chief Financial Officer
-3-
<PAGE> 5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Certified Public Accountants.................... F-2
Report of BDO Seidman, LLP, Independent Certified Public Accountants......................... F-3
Consolidated Balance Sheets as of March 31, 1998 and 1997.................................... F-4
Consolidated Statements of Operations for the years ended March 31, 1998 and 1997............ F-6
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1998
and 1997................................................................................ F-7
Consolidated Statements of Cash Flows for the years ended March 31, 1998
and 1997................................................................................ F-9
Notes to Consolidated Financial Statements................................................... F-13
</TABLE>
F-1
<PAGE> 6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Enterprise Software, Inc.
We have audited the accompanying consolidated balance sheet of Enterprise
Software, Inc. (formerly IndeNet, Inc.) and subsidiaries as of March 31, 1998,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year 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 audit 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 audit provides 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
Enterprise Software, Inc. and subsidiaries as of March 31, 1998 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Detroit, Michigan
May 29, 1998
F-2
<PAGE> 7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
IndeNet, Inc.
We have audited the accompanying consolidated balance sheets of IndeNet, Inc.
and subsidiaries as of March 31, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year 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 audit 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 audit provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
IndeNet, Inc. and subsidiaries as of March 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, California
June 18, 1997
F-3
<PAGE> 8
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,169,383 $ 2,885,406
Restricted cash - 1,514,902
Accounts and other receivables, net of allowance for
doubtful accounts of $288,699 and $230,063 in 1998 and 1997,
respectively 4,142,186 8,425,017
Inventories - 311,434
Notes receivable, current portion 745,213 434,080
Marketable securities 1,135,000 2,341,262
Prepaid expenses 570,910 922,344
----------- ------------
Total current assets 12,762,692 16,834,445
Property and equipment, less accumulated depreciation and
amortization 3,142,661 11,872,587
Notes receivable, net of current portion 3,011,892 2,407,314
Capitalized software development costs, net of accumulated
amortization of $55,366 in 1997 - 838,837
Customer list, net of accumulated amortization of
$1,837,065 and $835,030 in 1998 and 1997, respectively 13,193,465 14,195,501
Goodwill, net of accumulated amortization of $336,703 and
$1,313,414 in 1998 and 1997, respectively 6,221,592 6,320,092
Other long-term assets 626,549 324,531
------------ ------------
TOTAL ASSETS $ 38,958,851 $ 52,793,307
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 9
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 5,273,106 $ 10,323,132
Deferred income 3,073,557 2,406,977
Notes payable, current portion 3,504,519 9,089,520
Notes payable to related parties,
current portion 779,637 6,844,117
Capital lease obligations, current portion 785,475 645,755
----------- ------------
Total current liabilities 13,416,294 29,309,501
Notes payable, net of current portion 1,088,490 4,896,228
Notes payable to related parties,
net of current portion 8,976,384 172,123
Capital lease obligations, net of current portion 1,400,312 702,321
Other long-term liabilities 183,432 65,486
----------- ------------
TOTAL LIABILITIES 25,064,912 35,145,659
Commitments and contingencies - -
Redeemable Preferred Stock
Preferred stock, Series A, $.0001 par value
Authorized - 1,200 shares, 190 shares issued and outstanding 1 1
Preferred stock, Series B, $.0001 par value
Authorized - 250,000 shares
Issued and outstanding - 216,667 shares in 1997 - 22
Stockholders' equity:
Preferred stock, Series C, $.0001 par value
Authorized - 1,200 shares
Issued and outstanding - 789 shares in 1997 - 1
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 18,052,425 and 17,181,064
in 1998 and 1997, respectively 18,052 17,181
Additional paid-in capital 43,412,279 49,209,922
Accumulated deficit (29,873,798) (32,036,455)
Foreign currency translation adjustment 337,405 456,976
----------- ------------
Total stockholders' equity 13,893,938 17,647,625
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,958,851 $ 52,793,307
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 10
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For Years Ended March 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Revenue $24,175,736 $ 23,390,131
Cost of sales 8,710,473 12,386,594
----------- ------------
Gross profit 15,465,263 11,003,537
Operating expenses:
Selling, general and administrative 10,437,650 10,448,068
Depreciation and amortization 2,154,941 3,319,664
Research and development 139,955 746,451
Restructuring, impairment and other nonrecurring charges 5,907,321 15,597,258
Occupancy costs 1,256,683 975,753
----------- ------------
19,896,550 31,087,194
----------- ------------
Operating loss (4,431,287) (20,083,657)
Other income (expense):
Interest expense (1,088,323) (2,040,006)
Interest income 581,542 221,255
Severance costs (495,527) -
Net gain on extinquishment of debts 2,986 -
Settlement of lawsuits - (802,256)
Gain on sale of Channelmatic, Inc. - 30,466
Loss on sale of marketable securities (501,607) -
Miscellaneous, net (198,325) (4,010)
----------- ------------
(1,699,254) (2,594,551)
----------- ------------
Loss from from continuing operations before income
taxes and allocation to minority interest (6,130,541) (22,678,208)
Income tax benefit (819,892) (1,373,997)
----------- ------------
Loss from continuing operations before allocation to minority interest (5,310,649) (21,304,211)
Allocation to minority interest - (731,910)
----------- ------------
Loss from continuing operations (5,310,649) (20,572,301)
Discontinued operations
Loss from operations, net of income
tax benefits of $221,000 and $61,000 in 1998 and 1997, respectively (1,024,903) (5,027,815)
Gain on disposal of Starcom Mediatech, net of
income taxes of $1,057,000 8,890,442 -
----------- ------------
Net income (loss) 2,554,890 (25,600,116)
Dividends to preferred shareholders 392,233 2,126,486
----------- ------------
Net income/(loss) allocable to common shareholders $ 2,162,657 $(27,726,602)
=========== ============
Basic and diluted earnings/(loss) per share:
Loss per share from continuing operations $ (0.32) $ (1.42)
=========== ============
Earnings/(loss) per share from discontinued operations $ 0.44 $ (0.31)
=========== ============
Basic and diluted earnings/(loss) per share $ 0.12 $ (1.73)
=========== ============
Weighted Average common shares outstanding 17,598,839 16,022,847
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 11
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Series C Preferred Stock
------------------------
Number of Preferred
Shares Stock
----------- ------------
<S> <C> <C>
Balances at March 31, 1996 - -
Issuance of Series A Preferred
Stock - -
Exercise of warrants - -
Shares issued for purchase of
CCMS - -
Shares issued for purchase of
Enterprise - -
Adjustment to purchase price
of Starcom acquisition - -
Cashless exercise of employee
stock options - -
Stock issuance for settlement of
accounts payable - -
Shares issued from conversion
of Series A Preferred Stock - -
Shares issued for the conversion
of convertible debt to Common
Stock - -
Shares issued for the conversion
of shareholder notes to Common
Stock - -
Deferred interest payable in Common
Stock - -
Conversion of Series A to Series
C Preferred Stock 789 1
Redemption of Series A
conversion fractional shares - -
Deferred accretion on Series A
and Series C Preferred Stock - -
Amount paid in Common Stock
related to stated accretion and put
options on Series A and Series
C Preferred Stock - -
Preferred stock dividend - -
Net loss - -
Foreign currency translation
adjustment - -
-------- ------
Balances at March 31, 1997 carried 789 $ 1
forward
<CAPTION>
Common Stock Foreign
--------------------------- Additional Currency
Number of Common Paid-in Accumulated Deferred Translation
Shares Stock Capital Deficit Accretion Adjustment Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1996 12,451,815 12,451 23,169,510 (4,309,853) - - 18,872,108
Issuance of Series A Preferred
Stock - - 11,183,605 - - - 11,183,605
Exercise of warrants 178,876 179 414,520 - - - 414,699
Shares issued for purchase of
CCMS 587,612 588 2,647,339 - - - 2,647,927
Shares issued for purchase of
Enterprise 2,276,200 2,277 8,665,493 - - - 8,667,770
Adjustment to purchase price
of Starcom acquisition (362,500) (363) (1,449,637) - - - (1,450,000)
Cashless exercise of employee
stock options 314,125 314 (314) - - - -
Stock issuance for settlement of
accounts payable 98,595 99 278,349 - - - 278,448
Shares issued from conversion
of Series A Preferred Stock 1,032,485 1,032 (1,032) - - - -
Shares issued for the conversion
of convertible debt to Common
Stock 487,694 488 1,226,396 - - - 1,226,884
Shares issued for the conversion
of shareholder notes to Common
Stock 116,162 116 232,208 - - - 232,324
Deferred interest payable in Common
Stock - - 847,000 - - - 847,000
Conversion of Series A to Series
C Preferred Stock - - (1) - - - -
Redemption of Series A
conversion fractional shares - - (52,000) - - - (52,000)
Deferred accretion on Series A
and Series C Preferred Stock - - 1,312,469 - (1,312,469) - -
Amount paid in Common Stock
related to stated accretion and put
options on Series A and Series
C Preferred Stock - - 736,017 - - 736,017
Preferred stock dividend - - - (2,126,486) 1,312,469 - (814,017)
Net loss - - - (25,600,116) - (25,600,116)
Foreign currency translation
adjustment - - - - - 456,976 456,976
---------- -------- ------------ ------------- ----------- --------- -----------
Balances at March 31, 1997 carried 17,181,064 $ 17,181 $ 49,209,922 $ (32,036,455) - $ 456,976 $17,647,625
forward
</TABLE>
F-7
<PAGE> 12
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Series C Preferred Stock Common Stock
------------------------- --------------
Number of Preferred Number of
Shares Stock Shares
------------ ------------ --------------
<S> <C> <C> <C>
Balances at March 31, 1997
brought forward 789 1 17,181,064
Conversion of Series B Preferred
Stock to Common Stock - - 392,452
Repurchase of Series C Preferred
Stock (789) (1) 591,705
Cashless exercise of employee
stock options - - 152,571
Purchase and cancellation of
treasury shares - - (265,745)
Amount to be paid in Common
Stock related to stated accretion
on Series A and Series C
Preferred Stock - - -
Warrants issued in connection with
subordinated debentures
Preferred stock dividends - - -
Net income - - -
Foreign currency translation
adjustment - - -
------------ ------------ -------------
Balances at March 31 1998 - $ - 18,052,047
============ ============ =============
<CAPTION>
Common Stock Foreign
----------------- Additional Currency
Common Paid-in Accumulated Deferred Translation
Stock Capital Deficit Accretion Adjustment Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1997
brought forward $ 17,181 $49,209,922 $ (32,036,455) - $ 456,976 17,647,625
Conversion of Series B Preferred
Stock to Common Stock 393 (371) - - - 22
Repurchase of Series C Preferred
Stock 592 (6,574,649) - - - (6,574,058)
Cashless exercise of employee
stock options 152 (152) - - - -
Purchase and cancellation of
treasury shares (266) (549,734) - - - (550,000)
Amount to be paid in Common
Stock related to stated accretion
on Series A and Series C
Preferred Stock - 366,233 - - - 366,233
Warrants issued in connection with
subordinated debentures 961,030 - - 961,030
Preferred stock dividends - - (392,233) - - (392,233)
Net income - - 2,554,890 - - 2,554,890
Foreign currency translation
adjustment - - - - (119,571) (119,571)
---------- ------------ ------------- ----------- ----------- ------------
Balances at March 31 1998 $ 18,052 $ 43,412,279 $ (29,873,798) $ - $ 337,405 $ 13,893,938
========== ============ ============= =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE> 13
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS For the Years Ended
-------------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -------------
<S> <C> <C>
Net income/(loss) $ 2,554,890 $ (25,600,116)
Adjustments to reconcile net income/(loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,038,729 5,992,944
Amortization of deferred interest - 847,000
Non-cash write-down of assets 5,408,350 -
Provision for restructuring charges - 17,781,415
Gain on sale of subsidiaries (10,412,442) (30,466)
Gain on extinguishment of debt (2,986) -
Loss on sale of marketable securities 501,607 -
Gain on sale of building and other property and equipment (38,410) (143,216)
Unrealized loss on notes receivable due to foreign exchange 148,605 -
Allocation of loss to minority interest - (731,910)
Changes in operating assets and liabilities:
Restricted cash 214,876 185,190
Accounts and other receivables 18,209 (1,491,085)
Inventories 53,153 332,334
Prepaid expenses 494,127 (466,870)
Other assets (111,724) 189,209
Accounts payable and accrued expenses (1,089,175) 2,537,615
Deferred income 29,870 (293,250)
Other long-term liabilities 767,995 87,983
----------- -------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 1,575,674 (803,223)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (646,669) (1,855,507)
Capitalized software development costs (2,159,782) (4,565,053)
Advances on notes receivable 429,490 -
Deferred financing costs (595,595) (456,950)
Net proceeds from sale of building and other property and equipment 598,202 1,326,890
Net proceeds from sale of subsidiaries 13,495,794 5,250,000
Proceeds from sales of marketable securities 1,839,655 -
Acquisitions net of cash received (3,932,625) (11,036,522)
Cash of acquired businesses 120,600 933,550
Cash of divested business (42,451) (451,872)
----------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,106,619 (10,855,464)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capitalized leases and notes payable (7,119,659) (6,931,447)
Repayment of notes payable to related parties (4,819,518) (3,670,038)
Proceeds from notes payable 11,690,916 9,859,140
Proceeds from issuance or exercise of warrants and options - 414,699
Net proceeds from private placements - 11,183,606
Repurchase of Series C preferred stock (6,574,055) -
Purchase and cancellation of treasury stock (550,000) (52,000)
Dividends on preferred stock (26,000) (78,000)
----------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,398,316) 10,725,960
----------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,283,977 (932,727)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,885,406 3,818,133
----------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR 6,169,383 2,885,406
=========== ============
Supplemental Disclosure of Cash Flow Information
CASH PAID DURING THE YEAR FOR:
Interest 857,074 1,463,411
Income taxes 3,910 264,297
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE> 14
Supplemental Disclosure of Noncash Investing and Financing Activities
During the year ended March 31, 1998, the company entered into an agreement
with a creditor of the company, to reduce their note payable by $15,000 of
principal and $12,246 of related interest due to an acceleration of payment.
During the year ended March 31, 1998, the Company incurred capital lease
obligations of $2.6 million.
During the year ended March 31, 1998, the Company increased its hedging loss by
$1.3 million, with an offset to Restricted Cash. In March 1998, the loan and
the restricted cash was reduced by $2.6 million.
Effective April 1, 1997, in connection with a Share Purchase agreement with
United News and Media Plc ("UN&M") the Company acquired Media Information
Services Limited ("MIS") from United in exchange for $1,300,000 in cash and
a note payable of $1,000,000.
Effective March 31, 1998, in connection with a Share Purchase agreement with
Boss Associates Limited, ("Boss") the Company received assets of
approximately $981,000 and assumed liabilities of approximately $788,000 in
exchange for $1,900,000 in cash and notes payable of $1,500,000.
During the year ended March 31, 1998, the Company recorded deferred accretion
charges of $86,000 related to Series A Preferred Stock and $280,233 related
to Series C Preferred Stock.
At March 1998, the Company revalued marketable securities to their fair market
value and recognized a loss of $465,000.
Effective May 16, 1996, in conjunction with an Agreement and Plan of Merger
with Cable Computerized Management Systems, Inc., ("CCMS") the Company
received assets of approximately $568,000 (including cash of $276,779) and
assumed liabilities of approximately $366,000 in exchange for $1,036,522 in
cash and 587,612 shares of the Company's common stock valued, for book
purposes, at $4.48 per share.
Effective May 24, 1996, in connection with a Share Purchase Agreement with
Enterprise Systems Group Limited, ("Enterprise") the Company received assets
of approximately $16,961,000 (including cash of $656,771) and assumed
liabilities of approximately $8,281,000 in exchange for $10,000,000 in cash,
notes payable of $5,000,000, and 2,276,200 shares of the Company's common
stock valued, for book purposes, at $3.81 per share.
In July 1996, the holder of convertible debt converted debt of $1,215,000 and
accrued interest of $11,884 into 487,694 shares of common stock valued at
$2.51 per share, its then fair market value.
During the year ended March 31, 1997, the Company issued 98,595 shares
of common stock as payment for accounts payable totaling $278,448.
During the year ended March 31, 1997, the Company recorded deferred
interest of $847,000 related to the placement of convertible notes totaling
$5.5 million. The amount was fully amortized and charged to interest expense
during the same period.
During the year ended March 31, 1997, the Company recorded deferred
dividends of $1,312,469 related to the issuance of convertible Series A
Preferred Stock. The amount was recognized as dividends in full during the
same period.
During the year ended March 31, 1997, the Company recorded $736,017 of
accretion, to be paid in Common Stock, related to Series A Preferred Stock.
During the year ended March 31, 1997, the Company issued 116.162 shares of
common stock valued at $2.00 per share, its then fair value, from
conversions of $232,324 of shareholder notes.
Effective March 24, 1997, in connection with the sale of the Company's 66.67%
interest in Channelmatic, Inc., the Company divested assets of approximately
$6,026,000 (including cash of $451,872) and liabilities of approximately
$4,030,000 in exchange for $5,250,000 in cash, $2,841,394 in notes
receivable from and $2,841,262 of a short-term equity investment in LIMT AB.
See accompanying notes to consolidated financial statements
6
F-10
<PAGE> 15
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Enterprise Software, Inc. (formerly IndeNet, Inc.) and Subsidiaries (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), Cable Computerized
Management Systems, Inc. ("CCMS") (since its acquisition on May 16, 1996),
Enterprise Systems Group, Ltd. ("Enterprise") (since its acquisition on May 24,
1996), Media Information Services, Ltd. ("MIS") (since its acquisition April 2,
1997), Boss Associates, Ltd. ("Boss") (since its acquisition on March 31, 1998)
and its 66.67% subsidiary Channelmatic, Inc. ("Channelmatic") (since its
acquisition on November 27, 1995). The Company's interest in Channelmatic was
sold on March 24, 1997, effective for accounting purposes on March 31, 1997. In
addition, the Company sold its interest in Mediatech and Starcom on July 18,
1997. All material intercompany transactions and balances have been eliminated.
ORGANIZATION AND BUSINESS
The Company, a Delaware corporation, designs, develops, sells and
supports traffic, billing, revenue and program management software products for
the management of television and radio advertising time and programming. It also
was a provider of television advertisement delivery services for national
advertisers and programmers. Until the sale of the Company's interest in
Channelmatic on March 24, 1997, it also developed, assembled, and distributed
software and hardware for advertising insertion into television programming. The
Company believes that all of its current operations should be considered one
business segment. The Company's customers are located throughout the world and
are serviced by operating facilities located in Colorado Springs, Colorado;
Thames Ditton, England; Sydney, Australia; Johannesburg, South Africa; Auckland,
New Zealand; and Grand Rapids and Livonia, Michigan.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Company's foreign subsidiaries is the
local currency. The assets and liabilities of subsidiaries whose functional
currencies are other than the U.S. dollar are translated into U.S. dollars at
the current exchange rate in effect at the balance sheet date. Income and
expense items are translated using the average exchange rate during the year.
Cumulative translation adjustments are reflected as a separate component of
stockholders' equity, until there is a realized gain or loss of the investment
in the foreign operations, in which case the transaction gains and losses are
included in results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
F-11
<PAGE> 16
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided using the
straight-line method. The estimated useful lives are as follows:
Building and improvements 10-20 years
Equipment 3-7 years
Furniture and fixtures 5-7 years
Vehicles 4 years
Leasehold improvements are written-off over their estimated useful life
or the life of the related lease, whichever is shorter.
SOFTWARE DEVELOPMENT COSTS
Software development costs related to the Company's software products
are capitalized upon the establishment of technological feasibility until ready
for sale. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgement
by management with respect to certain external factors such as anticipated
future revenue, estimated economic life and changes in software and hardware
technologies. At each balance sheet date, using an undiscounted cash flow
method, the Company evaluates whether events and circumstances warrant revised
estimates of amortization and whether capitalized software development costs
have a continuing value.
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, which is not significantly
different from the estimated revenue stream to be generated. The Company wrote
off capitalized development costs of $2.8 million and $13.1 million during the
fiscal years ended March 31, 1998 and 1997, respectively. Approximately $2
million of the 1998 write off was recorded in the fourth quarter. The Company
wrote-down those assets as it determined that the carrying value of those assets
would not be recoverable due to management's change in product strategy.
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 acquisitions of
Mediatech, Channelmatic, Starcom, CCMS, MIS and Boss. Goodwill is amortized on a
straight-line basis over periods ranging from 7 to 20 years. During fiscal 1997,
the Company wrote-off goodwill of $2.5 million related to the acquisitions of
Mediatech and Starcom. The Company wrote-down the goodwill as it determined that
the carrying value of these assets would not be recoverable due to changes in
the business affecting its valuation. In determining the amount of the
impairment loss, the fair value of the asset was calculated as the sum of the
undiscounted cash flows estimated to be generated from the utilization of the
respective assets.
At each balance sheet date, using an undiscounted cash flow method, the
Company evaluates whether events and circumstances warrant revised estimates of
amortization and whether the respective goodwill has a continuing value.
F-12
<PAGE> 17
CUSTOMER LIST
Customer List represents an identifiable intangible asset acquired in
connection with the acquisition of Enterprise. The Customer List is supported by
long-term contracts held by Enterprise.
Customer List is being amortized on a straight-line basis over 15 years.
At each balance sheet date, using an undiscounted cash flow method, the
Company evaluates whether events and circumstances warrant revised estimates of
amortization and whether the Customer List has a continuing value.
REVENUE RECOGNITION
Revenue is recognized at the time products are shipped to or installed
with the customer or at the time services rendered are completed.
DEFERRED INCOME
Deferred income represents amounts received for products or services
not yet supplied at the balance sheet date.
INCOME TAXES
The Company accounts for income taxes under the provisions of 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 for the years in which
the differences are expected to reverse.
EARNINGS OR LOSS PER SHARE
Basic earnings or loss per share is calculated by taking the net income
or loss minus preferred stock dividends divided by the weighted average number
of common shares outstanding. Dilutive earnings per share recognizes common
stock equivalents, such as stock options, warrants and convertible preferred
stock in determining the amount of common shares outstanding.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
trading equity securities, accounts payable, accrued expenses, and notes payable
approximates fair value due to the short maturities of these instruments. The
fair value of the Company's notes receivable and long-term debt is estimated
based on the quoted market price for the same or similar financial instruments
issued, or on the current rates offered to the Company for financial instruments
of the same remaining maturities.
F-13
<PAGE> 18
STOCK-BASED COMPENSATION
The Company utilizes the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), which establishes a fair value method of accounting for stock-based
compensation plans. In accordance with SFAS 123, the Company has chosen to
continue to account for stock-based compensation utilizing the intrinsic value
method prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
compensation is measured at the grant date based on the value of the award and
recognizes this cost over the service period. The value of the stock-based award
is determined using a pricing model whereby compensation cost is the excess of
the fair market value of the stock as determined by the model at grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements in prior years to conform to the current year's presentation.
2. ACQUISITIONS AND SALES OF ASSETS
BOSS ASSOCIATES, LTD.
Effective March 31, 1998, the Company completed its acquisition of Boss
for approximately $3.4 million. Under the terms of the agreement, the Company
paid approximately $1.9 million in cash and issued promissory notes for the
remainder of the purchase price. The promissory notes are payable in quarterly
installments including interest at 8% per annum beginning June 30, 1998 and
maturing March 31, 2000. The acquisition was accounted for as a purchase. Based
on appraised value, a portion of the purchase price was allocated to purchased
in process research and development. The preliminary allocation resulted in a
pre-tax charge of approximately $2.2 million to the Company's operations in the
fourth quarter of fiscal 1998. In connection with the acquisition, the Company
recorded goodwill of approximately $1.2 million. The goodwill is being amortized
on a straight-line basis over 20 years.
MEDIA INFORMATION SERVICES, LTD.
In April 1997, the Company completed its acquisition of MIS for
approximately $2.3 million. The acquisition was accounted for as a purchase. In
connection with the acquisition, the Company signed a system support management
contract and licensing agreement for a period of seven years. Based on appraised
value, a portion of the purchase price was allocated to purchased in process
research and development which had not reached technological feasibility and had
no alternative future use. The allocation resulted in a pre-tax charge of
approximately $847,000. Approximately $1.4 million was recorded as goodwill with
this acquisition. The goodwill is being amortized on a straight-line basis over
a 7 year period.
STARCOM
On February 7, 1996, the Company acquired 100% of the common stock of
Starcom for 637,500 shares of the Company's restricted common stock. The
restricted common stock was valued for book purposes at $4.00 per share (which
price represented approximately 70% of the average quoted price of the Company's
common stock at the time of acquisition), which management believes was its fair
value.
F-14
<PAGE> 19
The acquisition was accounted for as a purchase. The results of
operations of Starcom are included in the accompanying consolidated statement of
operations as of the date of acquisition through its subsequent sale date of
July 18, 1997. The excess purchase price over the fair value of the identifiable
net assets acquired was $4.9 million, of which $2.9 was allocated to purchased
equipment and $2.0 million to goodwill. The purchased equipment was being
amortized on a straight-line basis over five years and goodwill on a
straight-line basis over 20 years. On April 1, 1997, Starcom and Mediatech were
merged to form Starcom Mediatech, Inc. On July 18, 1997, all of the stock of
Starcom Mediatech, Inc. was sold. See the following discussion on the sale of
Mediatech for further discussion of the sale of Starcom.
MEDIATECH
On July 18, 1997, the Company sold all of the issued and outstanding
shares of capital stock of StarCom Mediatech, Inc. to Digital Generation
Systems, Inc., a California corporation ("Digital"). The initial consideration
paid by Digital for the shares consisted of the following: (1) $13.75 million in
cash; (2) 324,355 restricted shares of Digital common stock valued at $1.6
million; (3) Digital's Subordinated Promissory Note, dated July 18, 1997
("Subordinated Note") in an adjusted amount of $1.6 million; and (4) assumption
of an aggregate of $2.2 million owed by the Company to Thomas H. Baur, Chairman
of Mediatech and a director and stockholder of the company. The Subordinated
Note is payable in installments of $150,000 plus accrued interest on December
31, 1997, June 30, 1998, December 31, 1998 and June 30, 1999, with the remaining
installments payable on the last day of each successive calendar quarter
thereafter until fully paid on March 31, 2001. The Company recorded a gain with
respect to this transaction of $9.9 million and is included in gain on disposal
of discontinued operations in the accompanying consolidated statement of
operations. The net assets of Starcom Mediatech were approximately $6.9 million
at March 31, 1997.
CHANNELMATIC
On March 24, 1997, the Company sold its 66.67% interest in Channelmatic
to Limt Local Insertion Media Technology AB, a Swedish corporation ("LIMT") for
$10.91 million. The total consideration consisted of (i) $5.25 million in cash;
(ii) 237,000 shares of LIMT capital stock; (iii) LIMT's Convertible Subordinated
Debenture, dated May 1, 1997, in the amount of SEK (Swedish Krona) 10,697,500
("Note 1"); and (iv) LIMT's Subordinated Debenture, dated May 1, 1997, in the
principal amount of SEK 10,696,494 ("Note 2"). Based on the conversion rate in
effect between the United States dollar and SEK, Note 1 and Note 2 had an
aggregate principal balance of U.S. $2.8 million at the time of sale. The
237,700 shares of LIMT stock were valued at $2.84 million, which management
believed was its fair value. The two notes bear interest at a rate of 5.5% per
annum, with interest payable quarterly. The entire principal balance of Note 1
is due and payable on April 30, 2000. Note 1 provides that its outstanding
principal balance, together with any accrued interest thereon, may be prepaid,
in full or in part, at any time prior to December 31, 1998. After December 31,
1998, Note 1 will be convertible at the option of the Company into shares of
common stock of LIMT at the rate of one share for each SEK 90 of
principal amount to be converted. Commencing June 30, 1997, Note 2 is payable
in 12 quarterly equal principal installments of SEK 891,372 plus interest. Note
2 may be prepaid at any time. If the entire principal balance of Note 2 is
prepaid in full prior to December 31, 1998, such prepayment may be made in the
amount of 80% of the then unpaid principal balance, plus accrued but unpaid
interest. In the event of a default in payment under Note 2, in addition to any
other available remedies, the holder of Note 2 may convert the unpaid portion
of the Note into LIMT's common stock at a conversion rate equal to 80% of the
conversion rate applicable under Note 1. Note 2 is convertible at the option of
the Company into shares of common stock of LIMT at the rate of one share for
each SEK72 of principal amount to be converted.
The Company used part of the cash consideration received of $5.25
million to pay-off a shareholder note payable, which was secured by the
Company's stock ownership in Channelmatic. The amount used to the pay-off the
debt plus accrued interest was $3.45 million. In a separate agreement, the
Company and the holder of the shareholder note agreed to transfer 42,000 shares
of LIMT common stock received by IndeNet from LIMT in the sale of Channelmatic
to the holder for $500,000, the Company's costs basis in the stock. The $500,000
receivable is included in accounts and other receivables on the balance sheet as
of March 31, 1997.
F-15
<PAGE> 20
As a result of the $10.91 million recorded as consideration for the
sale of the Company's interest in Channelmatic, the Company realized a gain of
$30,466.
In September 1997, the Company sold its investment in the common stock
of LIMT for approximately $1.8 million. A corresponding $501,607 loss on sale of
marketable equity securities is recorded as other income (expense) in the
accompanying consolidated statement of operations.
CCMS
On May 16, 1996 the Company completed the acquisition of CCMS for a
purchase price of $4.8 million. The acquisition was effected through the merger
of CCMS into a newly formed wholly owned subsidiary of the Company. The
acquisition was funded through a cash payment of $1.0 million and the issuance
of 587,612 unregistered shares of the Company's common stock to the CCMS
shareholders. The shares are subject to certain "dribble-out" provisions through
May 1998. The number of shares issued to the CCMS shareholders was based on the
existing trading price of the Company's common stock, approximately $6.40 per
share, discounted by 30%, which management believes was its fair value.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the net assets of $3.6 million is included in Goodwill and
is being amortized over 20 years. The results of operations of CCMS are included
in the accompanying consolidated statement of operations as of the date of
acquisition.
ENTERPRISE
On May 24, 1996, the Company completed the acquisition of Enterprise, a
private company incorporated in England and Wales for a purchase price equal to
$27.3 million. The acquisition was funded through (i) a cash payment of $10.0
million (ii) the issuance of $5.0 million in promissory notes ("the Enterprise
Notes") and (iii) the issuance of 2,276,200 shares of Common Stock, valued at
$5.44 per share, which management believes was its fair value. The Enterprise
Notes earn interest at a rate of 8% per annum, mature May 31, 2000, and require
equal quarterly payments of principal commencing on November 30, 1996. Effective
November 24, 1996, the Enterprise Notes were 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 acquisition have certain
demand and piggy-back registration rights. In connection with the acquisition of
Enterprise, the Company elected two designees of the former Enterprise
shareholders to the Company's Board of Directors. During fiscal 1997, note
holders converted $232,324 of principal into 116,162 shares of the Company's
common stock. The Company had not made the scheduled note payments beginning
November 1996 through May 1997. During September 1997, the Company paid off the
Enterprise Notes in their entirety for $4.47 million in cash; resulting in a
gain on retirement of debt of $775,000. The gain is included in "gain on
extinguishment of debt" in the accompanying consolidated statements of
operations.
The acquisition was accounted for as a purchase. A portion of the
purchase price, $15.0 million, was allocated to customer list and is being
amortized over 15 years. The customer list is supported by long-term contracts
held by Enterprise. The results of operations of Enterprise are included in the
accompanying consolidated statement of operations as of the date of acquisition.
F-16
<PAGE> 21
3. RESTRICTED CASH
At March 31, 1997, the Company had $1.5 million in a restricted account
to be used as an offset for a corresponding current liability of $1.3 million.
The liability represented a hedging facility to mitigate the Company's exposure
to currency fluctuations between the United States dollar and British pound. The
liability was paid off during March 1998, and accordingly, the restrictions
placed on the cash were removed. The Company is currently reviewing various
strategies to hedge against possible reductions in values of certain anticipated
foreign cash flows.
4. INVENTORY
Inventories at March 31, 1998 and 1997 were $0 and $311,434,
respectively, and consisted principally of raw materials.
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
----------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 3,682,959 $14,597,567
Leasehold improvements 21,160 391,862
Furniture and fixtures 369,496 154,179
Vehicles 390,297 482,068
----------------------------------------------------------------------------
4,463,912 15,625,676
Less accumulated depreciation and
amortization 1,321,251 3,753,089
----------------------------------------------------------------------------
Property and equipment, net $ 3,142,661 $11,872,587
============================================================================
</TABLE>
Depreciation and amortization related to property and equipment for the
years ended March 31, 1998 and 1997 was $1.2 million and $3.5 million,
respectively.
F-17
<PAGE> 22
\
6. NOTES PAYABLE, LONG-TERM DEBT AND LINES-OF-CREDIT
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable - former shareholders of Mediatech; bearing interest at
8.0%; one note due in monthly installments of $40,658 through
November 2002. This note was paid off in July 1997; other notes
due in aggregate quarterly installments of $4,587
through February 2005 when remaining principal is due; unsecured 172,123 2,248,564
Notes payable - former shareholders of Enterprise; bearing
interest at 8.0%; due in quarterly installments in 1997 of
$447,214 and $3,483 in 1998 through May 2000, secured by a
nominal percentage of the capital stock of Enterprise 37,788 4,767,676
Line of credit, interest at the bank's prime rate plus 2.25%
(10.75% at March 31, 1997). Interest is due monthly. The maximum
amount available under the agreement is the lesser of $2,925,000
or 80% of the eligible unbilled accounts receivables plus the
lesser of $600,000 or 80% of the eligible unbilled accounts
receivable, as specified in the agreement. The line is
secured by substantially all the assets of Mediatech. - 2,191,213
Note payable - bank, bearing interest at prime plus 2.25% (10.75% at
March 31, 1997); payable in monthly installments through March
1, 2002. The line is secured by substantially all the assets of
Mediatech. - 2,458,333
Various notes payable to vendors, interest ranging from 0% to
21.07%, monthly payments ranging from $400 to $7,000, due
through September 1999. - 309,447
$3,000,000 Convertible note - See Note 10 - 1,785,000
$2,500,000 Convertible note - See Note 10 - 2,500,000
Line of credit, interest at the bank's base rate plus 2% (9.25% at
March 31, 1998). Borrowings may not exceed $1,255,950. The
agreement is renewable on May 31, 1998. The line is secured
by the assets of Enterprise. 1,255,950 1,237,500
Line of credit, bearing interest at the bank's base rate plus 2%
(9.25% at March 31, 1998). Borrowings may not exceed
$1,675,000. The agreement is renewable on May 31, 1998 and
is subject to renewal. At March 31, 1998, $1,052,799 in
borrowing capacity remained available. The line is secured
by the assets of Enterprise. 622,201 1,401,496
Hedging loan, bearing interest at LIBOR plus 1% (7.1% at March 31,
1997); due June 30, 1997, secured by a like amount included
in Restricted Cash (See Note 3). - 1,300,026
Note payable - bank, bearing interest at bank's base rate plus
2.5% (9.5% at March 31, 1998); due in quarterly installments of
$61,875 through May 1998; secured by the assets of Enterprise. 62,798 307,733
</TABLE>
F-18
<PAGE> 23
6. NOTES PAYABLE, LONG-TERM DEBT AND LINES-OF-CREDIT (CONTINUED)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable - bank, bearing interest at bank's base rate plus 2%
(8.0% at March 31, 1997); due in quarterly installments of
$165,000 through May 1998; secured by the assets of
Enterprise. - 495,000
Note payable - bearing interest at 6%, due September 1998,
interest payable quarterly in cash or the Company's common
stock. See Note 10 810,000 -
Note payable - with notional value of $9,000,000 bearing no interest,
due in annual installments of $334,920 through April 2000 1,004,760 -
Note payable - bearing interest at 14.5% due March 2003,
interest payable monthly, secured by all assets of the
Company. 8,038,970 -
Note payable - Founders of Boss Associates, Ltd., bearing
interest at 8%, due in quarterly installments including
interest of $204,492 secured by guarantee of IndeNet, Inc. 1,507,140 -
Note payable - bank, bearing interest at bank's base rate plus
2% (9.5% at March 31, 1999); due in quarterly installments
of $62,798 through March 2000 837,300 -
-------------------------------------------------------------------------------------------------
Notes payable 14,349,030 21,001,988
Less current portion 4,284,156 15,933,637
-------------------------------------------------------------------------------------------------
Notes payable, less current portion $10,064,874 $ 5,068,351
=================================================================================================
</TABLE>
The carrying amount of the above debt instruments to third parties
approximates the fair value of the instruments.
As of March 31, 1998, the aggregate amounts of long-term debt maturing
in succeeding years are as follows:
<TABLE>
<CAPTION>
Years ended
March 31, Related Parties Other Total
---------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 779,637 $ 3,504,519 $ 4,284,156
2000 771,685 753,570 1,525,255
2001 8,924 334,920 343,844
2002 6,016 - 6,016
2003 6,525 - 6,525
Thereafter 8,183,234 - 8,183,234
---------------------------------------------------------------------------
$ 9,756,021 $ 4,593,009 $14,349,030
===========================================================================
</TABLE>
F-19
<PAGE> 24
7. CAPITAL LEASE OBLIGATIONS
The following is a schedule of future minimum lease payments of
capitalized leases, representing underlying property and equipment having a cost
of $2.2 million, together with the present value of the net minimum lease
payments as of March 31, 1998:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------------------
<S> <C>
1999 $ 940,878
2000 694,119
2001 484,721
2002 362,235
2003 167,900
Thereafter 4,880
---------------------------------------------------------------
Total minimum lease payments 2,654,733
Less amount representing interest (effective
interest ranging from 4% to 18.7%) 468,946
---------------------------------------------------------------
Present value of minimum capital lease
obligations 2,185,787
Less - current portion 785,475
---------------------------------------------------------------
Capital lease obligations, net of current
portion $1,400,312
===============================================================
</TABLE>
8. INCOME TAXES
At March 31, 1998 and 1997 the Company (excluding Channelmatic)
has net operating loss carryforwards of $18.5 million and $19.8 million,
respectively for federal income tax purposes of which $2.7 million
is subject to a separate return limitation. The carryforwards expires in
varying amounts and years through 2012. These loss carryforwards give rise to a
deferred tax asset of $6.3 million and $8.2 million at March 31, 1998 and 1997,
respectively. The Company has determined that it is more likely than not that
the deferred tax asset will not be realized and accordingly, a valuation
allowance has been recorded. Because of changes in the Company's ownership,
there is an annual limitation on the usage of the net operating loss
carryforwards. An income tax benefit for fiscal 1997 primarily represents the
reversal of a deferred tax liability, in connection with the write-off of
capitalized software development costs which previously gave rise to the
deferred tax liability. Income tax expense for fiscal 1998 represents state
taxes for the various states in which the Company does business and federal
alternative minimum tax.
The Company's total deferred tax assets and valuation allowance consist
of the following:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Loss carryforwards $6,300,000 $8,178,000
Tax effects of temporary differences:
Deferred revenue - 836,000
Accrued litigation 11,000 221,000
Accrued restructuring expenses 50,000 162,000
Depreciation and amortization 60,000 49,000
Accrued expenses 179,000 20,000
-----------------------------------------------------------------------------------
Total deferred tax assets 6,600,000 9,466,000
Valuation allowance (6,400,000) (9,300,000)
-----------------------------------------------------------------------------------
Net deferred tax assets $ 200,000 $ 166,000
-----------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE> 25
The consolidated effective tax rate differs from the statutory U.S.
federal tax rate for the following reasons and by the indicated percentages:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
--------------------------------------------------------------------------------------
<S> <C> <C>
Statutory U.S. federal benefit 34% (34%)
Goodwill amortization and write-offs not
deductible for tax purposes 24% 8%
Expenses related to convertible notes not
deductible for tax purposes 8% 1%
Taxable gain (loss) on sale of subsidiary
stock not recognized for book 50% (4%)
Other (2%) 2%
Change in valuation allowance (113%) 22%
--------------------------------------------------------------------------------------
Effective tax rate 1% (5%)
======================================================================================
</TABLE>
9. REDEEMABLE PREFERRED STOCK
On April 29, 1996, the Company completed a private placement under
Regulation S of Series A Preferred Stock ("Series A") for $12.0 million. The net
proceeds, after costs of approximately $800,000, were used primarily for the
acquisitions of CCMS and Enterprise. The placement consisted of 1,200 shares of
Series A stock with a 6% annual accretion. For accounting purposes, the
accretion is being treated as a dividend. The Series A was convertible into
common stock based on 85% of the average closing bid price of the Company's
Common Stock for the five days immediately preceding the conversion date, but
not to exceed $7.00 per share. The Common Stock carried registration rights and
the Company had the option to repurchase the Series A at the time of conversion
at an 18% premium to the principal amount and has the right to call the Series A
at a 30% premium to the principal amount after 12 months declining to a 15%
premium after 30 months. As of March 31, 1997, $2.9 million of the Series A plus
accrued accretion had been converted, resulting in the issuance of 1,032,485
shares of the Company's Common Stock. Subsequent to March 31, 1998, the Company
redeemed the remaining 190 shares of Series A for approximately $2.1 million in
cash.
Effective September 30, 1996, the Company and the holders of 76%, or
$7.71 million of the then $10.2 million outstanding Series A agreed to exchange
their shares for a new Series C Preferred Stock ("Series C"). Series C has the
following features: conversion into common stock is fixed at $5.00 per share, no
conversions can occur for six months, it is non-voting and bears an 8% accretion
rate. For accounting purposes, the accretion is being treated as a dividend.
After a six-month lock-up period, conversion into common stock is limited to 10%
of Series C shares per month. Any Series C shares outstanding at September 30,
1999 shall be automatically converted into common stock at $5.00 per share. At
the time of exchange, the holders also received common stock purchase warrants
with an exercise price of $5.00; the number of which equaled 10% of the issue
price of their Series C shares divided by $5.00. Up to 3.9% of the original
Class C Preferred Stock issuance was convertible during the first 90 day period
and up to 3.9% during the next 90 day period at a conversion price of $3.32 per
share.
From October 1, 1997 to January 31, 1998, the holders of the Series C
shares were entitled to require the Company to redeem up to 25% per month of
their remaining shares at a rate of 105% of each share plus accrued accretion
for cash or common stock - at the Company's option - valued at market at the
time of the redemption. During this period, the Company redeemed all of the 789
shares of Series C stock for approximately $6.6 million in cash, and the
issuance of approximately 592,000 shares of common stock.
F-21
<PAGE> 26
Series B Preferred Stock ("Series B") provides monthly dividends of
1% of the Liquidation Preference ($3.00 per share). After July 1, 1997,
the Series B were convertible at the option of the holder into common stock at
a rate based on the quotient of $3.00 plus accrued dividends divided by the
lesser of $3.00 or the average market value for the prior twenty consecutive
business days preceding the redemption. On July 22, 1997 the holder of Series B
elected to convert all 216,667 shares outstanding into 392,452 shares of common
stock.
During the year ended March 31, 1997, the Company recorded a deferred
accretion charge of $1.3 million and fully amortized that amount into dividends.
The deferred accretion amount related to the issuance of Series A. The amount
represents an implied additional dividend rate of 12.3% based on the fair market
value of the 85% conversion feature. The amount was amortized over the period
from the issuance date through the date in which the preferred stock was first
convertible into common stock.
During the year ended March 31, 1998, the Company recorded deferred
accretion charges of $86,000 related to Series A and $280,233 related to Series
C and fully amortized the amounts into dividends. Cash dividends paid on Series
B totaled $26,000.
10. EQUITY
Private Placements
1) On February 28, 1996, the Company completed a private placement
under Regulation D of 224,795 shares of its common stock for $1.0 million and a
Convertible Note ("Note 2") for $3.0 million to a single accredited
institutional investor. Note 2 accrues interest at a rate of 7% annually,
payable quarterly in cash or the Company's common stock at the Company's option
and has a term of two years. The principal amount of Note 2, together with
interest is convertible in ninety days subsequent to the offering at a
conversion rate based on 82% of the average closing bid price of the common
stock for the five trading days immediately preceding the conversion date. The
Company shall have the right to convert all or part of Note 2 any time after 90
days from closing date into the underlying stock. In addition, Note 2 is
redeemable for cash in whole or in part anytime after 90 days from closing in an
amount equal to 122% of the principal balance of the Note.
In July 1996, $1.2 million in principal of the $3.0 million convertible
note plus accrued interest of $11,884 was converted into 487,694 shares of the
Company's common stock.
In May 1996, the Company completed a private placement under Regulation
D of a $2.5 million Convertible Note ("the Note") to a single accredited
institutional investor, used primarily for product development. The investor is
the same investor with whom the Company completed a $4.0 million private
placement on February 28, 1996. (See prior paragraph.) The Note accrues interest
at a rate of 7% annually, payable quarterly in cash or the Company's common
stock at the Company's option and has a term of two years. The principal amount
of the Note, together with interest is convertible no later than 120 days
subsequent to the offering at a conversion rate based on 82% of the average
closing bid price of the common stock for the five trading days immediately
preceding the conversion date. The Company has the right to convert all or part
of the Note any time after 210 days from closing date into the underlying stock.
In addition, the Note is redeemable for cash in whole or in part anytime after
120 days from closing in an amount equal to 122% of the principal balance of the
Note.
In connection with the issuance of these notes, the Company recorded a
deferred interest charge of $847,000 and fully amortized that amount as a charge
to interest expense during the year ended March 31, 1997. The amount of interest
expense represents an implied discount rate of 15.4% based on the fair market
value of the 82% conversion features of both the $3.0 million and $2.5 million
notes, and was amortized over the period from effective date through the dates
in which the notes were first convertible into common stock.
F-22
<PAGE> 27
On October 1, 1997, the Company entered into an agreement with the
holder of the two convertible notes in the principal amount of $4.285 million,
whereby the Company paid the holder $4.675 million in cash and issued a
promissory note for $825,000, interest payable quarterly in arrears beginning
December 31, 1997 at 6% per annum, and a balloon payment due on September 30,
1998. The Company recorded $799,000 in other expense as a result of the
premium paid to purchase the notes. Subsequent to March 31, 1998, the $825,000
note payable was renegotiated and discounted to $810,000, including
accrued interest and the Company paid the entire $810,000 note balance.
2) In March 1998, the Company completed a private placement of a $15.0
million Subordinated Debentures ("Debentures") to a single institutional
investor. The Debentures accrues interest at 14.5% per annum, payable monthly.
The Debenture has two tranches, both maturing in April 1, 2003. Tranche A is
for $9.0 million and Tranche B is for $6.0 million in the aggregate. Tranche A
was funded at closing on March 26, 1998 to make certain acquisitions, redeem the
outstanding shares of Series A stock, and for working capital. Tranche B will
be funded for future acquisitions if the investor approves the acquisition. The
Debenture has a prepayment penalty within the first three years equal to the
interest the Company would have paid on the prepaid balance during the remainder
of the first three years, discounted at the short term treasury rate at the time
of prepayment.
As part of this transaction, the investor received separate and
detachable warrants to purchase the Company's common stock. The warrants, when
exercised, will provide stock ownership in the Company of 3.5% at the time of
exercise. The investor will receive 2.1% warrants with the funding of Tranche
A, and 1.4% warrants with the funding of Tranche B. The exercise price will be
$2.50 or surrender of the equivalent amount of warrants pursuant to a spread
exercise provision. The warrants will expire ten years from the date of the
final payment on the Debentures. The warrants were valued using a fair value
based model at the date of issue to be amortized over the life of the loan.
Other Stock Issuances
During fiscal 1997, in payment of $278,448 owed to two related party
vendors, the Company issued 98,598 shares of its common stock. The common stock
was issued at the fair value at the time of issuance.
Stock Options and Warrants
The Company has a stock option plan for directors, officers, and
employees, which provide for the grant of nonqualified stock options. The Board
of Directors determines the option price (not to be less than fair market value)
at the date of grant. Options granted generally vest over three months and
expire five years from the date of grant.
F-23
<PAGE> 28
The following table summarizes the transactions related to the
Company's stock option plan:
<TABLE>
<CAPTION>
Weighted-
Number of Average Aggregate
Shares Exercise Price Value
<S> <C> <C> <C>
Balance at March 31, 1996 1,391,459 2.32 3,228,890
Options granted 1,725,050 3.50 6,039,325
Options exercised (590,678) 2.79 (1,649,155)
Options expired (173,098) 2.64 (456,127)
-------------- ------------------
Balance at March 31, 1997 2,352,733 3.05 $7,162,933
Options granted 210,000 1.92 403,625
Option exercised (470,900) 2.17 (1,022,525)
Options expired (1,166,000) 4.19 (4,889,299)
-------------- ------------------
Balance at March 31, 1998 925,833 $1.79 1,654,734
============== ==================
Options exercisable (vested) at
March 31, 1998 925,833 1,654,734
============== ==================
</TABLE>
All options issued during the fiscal years ended March 31, 1998 and
1997 had exercise prices that were at fair market value at the grant date.
During fiscal 1998, various employees of the Company effected the
cashless exercises of a total of 570,900 options at exercise prices ranging from
$1.63 to $2.25 per share, resulting in the issuance of 152,834 shares of common
stock.
During fiscal 1997, various employees of the Company effected the
cashless exercises of a total of 590,678 options at exercise prices ranging from
$1.25 to $3.25 per share, resulting in the issuance of 314,125 shares of common
stock.
The Company's Board of Directors granted 1,500,000 options to employees
and directors in February 1998. This grant exceeds the number of available
options under the existing plan provisions. Accordingly, these options are
contingent upon the Company amending the Stock Option Plan to increase the
number of shares allowed under the Plan. A special stockholders' meeting has
been called to approve such an increase.
F-24
<PAGE> 29
The following table summarizes the transactions related to the
Company's warrants to purchase common stock:
<TABLE>
<CAPTION>
Weighted-
Number of Average Aggregate
Shares Exercise Price Value
<S> <C> <C> <C>
Balance at March 31, 1996 616,462 2.89 1,780,582
Warrants granted 455,829 4.28 1,952,003
Warrants exercised (178,876) 2.32 (414,699)
Warrants canceled or expired (250,000) 3.10 (775,000)
-------------- -----------------
Balance at March 31, 1997 643,415 $3.95 $2,542,886
Warrants granted 439,328 2.47 1,086,877
Warrants exercised - - -
Warrants canceled or expired (162,586) 3.00 (487,758)
-------------- -----------------
Balance at March 31, 1998 920,157 $3.41 3,142,005
============== =================
Warrants exercisable (vested) at
March 31, 1998 920,157 $3.41 3,142,005
============== =================
</TABLE>
The weighted-average fair value, which is defined as the excess of the
weighted-average fair value over the exercise price, of options and warrants
granted during the fiscal year ended March 31, 1997, was $0.80.
During fiscal 1997, warrant holders exercised 178,876 warrants at
exercise prices ranging from $1.33 to $3.00 per share for cash totaling
$414,699.
The Series B preferred stock was valued at $3.00 per share and provides
for a 12% annual dividend, payable monthly for a period of up to five years.
Commencing July 1, 1997, the Series B Convertible Preferred Stock ("Series B")
was 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 connection with the issuances of Series B preferred stock, the holder
received 212,586 warrants at an exercise price or $3.00 per share. During
fiscal 1997, the holder exercised its rights for 50,000 warrants,
resulting in $150,000 of proceeds to the Company. The remaining 162,586
warrants outstanding at March 31, 1997 expired in August 1997. In July 1997,
the holders of Series B converted its 216,667 shares into 392,452 shares of
common stock.
F-25
<PAGE> 30
All warrants issued during the fiscal years ended March 31, 1998 and
1997 had exercise prices that were at the fair market value at grant date.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumption used for grants in fiscal 1998 and 1997
dividend yield of zero percent; expected volatility of 21 percent; risk-free
interest rate of 6.00 percent in 1998, and 6.73% in 1997; and expected
lives ranging between three and five years. Under the accounting provisions of
FASB Statement 123, the Company's net income (loss) and earnings (loss) per
share for the fiscal years would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Net income (loss) 1998 1997
------------------------------------------------------------------
<S> <C> <C>
As reported $2,554,890 $(25,600,116)
Pro forma $1,754,152 $(27,348,204)
<CAPTION>
Earnings (loss) per
share
------------------------------------------------------------------
<S> <C> <C>
As reported $.12 $(1.73)
Pro forma $.10 $(1.84)
</TABLE>
Due to the fact that the Company's stock option programs vest over many
years and additional awards may be made each year; the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of FASB
123 been applicable to all years of previous grants. The numbers above do not
include the effect of options granted prior to 1997 that vested in 1997 and
1998. Further, the above table does not take into consideration 1,500,000
contingently issued stock options in fiscal 1998.
The following table summarizes information about stock options and
warrants outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Options and Warrants
Number Outstanding Weighted-
Range of Outstanding Average Remaining Weighted-Average
Exercise Prices and Exercisable Contractual Life Exercise Price
at 3/31/98
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.63 - 2.50 1,565,161 3.74 2.12
3.00 - 4.13 25,000 .84 4.13
5.00 - 7.00 255,829 3.04 6.00
-----------------------------------------------------------------------------------------
1.63 - 7.00 1,845,990 3.71 2.30
=========================================================================================
</TABLE>
11. RESTRUCTURING, IMPAIRMENT AND OTHER NONRECURRING CHARGES
On January 28, 1997, the Company announced the details of its business
integration plan. The cost reduction phase of the plan included the
consolidation of administrative functions within the Company, the merging of
the five acquired businesses and start-up division into two operating divisions
organized around core customers, and the centralization of research and
development and marketing functions.
F-26
<PAGE> 31
Overall, the business integration plan called for a reduction in the
number of facilities from 19 to 11 and the elimination of over 150 positions
from the Company's workforce. The Company completed the major phase of the
integration plan by March 31, 1997.
In conjunction with the implementation of the business integration
plan, the Company recorded a pre-tax special charge to earnings of $18 million
in the third and fourth quarters of fiscal 1997. The charge is included in
Restructuring, Impairment and Nonrecurring Charges and Loss from Operations
from Discontinued Operations under in the accompanying consolidated
statement of operations. Included in the charge are cash items such as
severance and other employee costs of $1.0 million, lease obligations and
other exit costs associated with facility closures of $.6 million and $.1
million of other costs related to the implementation of the business
integration plan. Expenditures for the cash restructuring items were
substantially completed during fiscal 1998.
The non-cash items in the $18 million Restructuring, Impairment and
Nonrecurring Charges include $16.7 million related to asset write-downs
to net realizable value for disposals of excess facilities and equipment,
write-offs of goodwill and capitalized software development costs. The Company
wrote-down those assets due to (i) change in product strategy and (ii) a
determination by management that the carrying value of the assets may not be
recoverable. In determining the amount of the impairment loss, the fair value
of the assets were calculated as the sum of the discounted cash flows estimated
to be generated from the utilization of the respective assets.
During fiscal 1998, the company incurred additional nonrecurring
charges. The $5.9 million Restructuring, Impairment and Other Nonrecurring
Charges include $2.8 million related to asset write-downs to net realizable
value of capitalized software development costs. In addition, as previously
discussed in Note 2, the Company wrote off approximately $2.2 million and
$847,000 of purchased in process research and development in connection with
the acquisitions of Boss and MIS, respectively.
12. CUSTOMERS AND GEOGRAPHIC DATA
There were no customers representing over 10% of the Company's business
for 1998 or 1997.
The Company's operations are conducted in the United States and
international markets, principally in Europe, Australia, New Zealand, and South
Africa. Information about the Company's domestic and international operations
for each fiscal year is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Domestic $ 12,848,543 $ 14,559,304
International (including U.S. exports) 11,327,193 8,830,827
---------------------------------------------------------------------------------------
$ 24,175,736 $ 23,390,131
=======================================================================================
Operating loss:
Domestic $ 2,651,734 $ 2,094,298
International (including U.S. exports) (3,759,999) (12,892,250)
---------------------------------------------------------------------------------------
(1,108,265) (10,797,952)
Unallocated expenses and eliminations (3,323,022) (9,285,705)
---------------------------------------------------------------------------------------
$ (4,431,287) $ (20,083,657)
=======================================================================================
Identifiable assets:
Domestic $ 5,810,843 $ 17,843,847
International 7,755,268 4,051,224
---------------------------------------------------------------------------------------
13,566,117 21,895,071
Corporate assets 25,392,740 30,898,236
---------------------------------------------------------------------------------------
$ 38,958,851 $ 52,793,307
=======================================================================================
</TABLE>
F-27
<PAGE> 32
Unallocated expenses and eliminations include corporate administrative
expenses and eliminations of intercompany income and expenses. Identifiable
assets are those used directly in the operations, and exclude non-operating,
corporate and deferred tax assets. Sales between geographic areas are not
material and are made primarily at cost plus a markup.
13. NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). This pronouncement provides
a different method of calculating earnings per share than is currently used in
accordance with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted earnings
per share. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the Statement 128 requirements.
During October 1997, the Accounting Standards Executive Committee
(AcSEC) of the AICPA issued SOP 97-2, Software Revenue Recognition. SOP 97-2
replaces the SOP 91-1 method of distinguishing between significant and
insignificant vendor obligations as a basis for recording revenue with a
requirement that each element of a software licensing arrangement be separately
identified and accounted for based on relative fair values of each element.
Further, in order to recognize revenue for each element as delivered, stringent
requirements for "vendor-specific objective evidence" must be met for each
element's fair value, and no remaining undelivered elements can be essential to
the functionality of the delivered elements. The SOP 97-2 is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Different informal and unauthoritative interpretations of certain provisions of
SOP 97-2 have arisen. AcSEC is already deliberating amendments to SOP 97-2,
including deferral of the effective date of certain provisions of the SOP so
AcSEC can develop and issue an interpretation regarding the applicability and
the method of application of those provisions. Because of the uncertainties
related to the outcome of these amendments, the impact on the future financial
results of the Company is not currently determinable.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15, 1997.
This statement established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The new rule requires that the Company (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid in capital in the equity section of the
balance sheet. The Company plans to adopt SFAS No. 130 in fiscal 1999.
F-28
<PAGE> 33
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which is effective for
fiscal years beginning after December 15, 1997. This Statement requires annual
financial statement and interim reports to disclose information about products
and services, geographic areas and major customers based on a management
approach. The management approach requires disclosing financial and descriptive
information about an enterprise's reportable operating segments based on
reporting information the way management organizes the segments for making
business decisions and assessing performance. It also eliminates the requirement
to disclose additional information about subsidiaries that were not
consolidated. The new management approach may result in more information being
disclosed than presently practiced and require new interim information not
previously presented. The Company plans to adopt SFAS No. 131 in fiscal 1999 and
expects any impact to affect the Company's disclosure information and not its
results of operations.
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------
<S> <C> <C>
Loss from Continuing Operations $ (5,310,649) $(20,572,301)
Loss from Discontinued
Operations (1,024,903) (5,027,815)
Gain on Disposal of Discontinued
Operations 8,890,442 -
-----------------------------------------
Net Income (Loss) 2,554,890 (25,600,116)
Dividend to Preferred Shareholders 392,233 2,126,486
-----------------------------------------
Net Income (Loss) Allocable to Common
Shareholders $ 2,162,657 $(27,726,602)
Weighted Average Shares 17,598,839 16,022,847
Effect of Dilutive Securities 173,780 -
-----------------------------------------
Adjusted Weighted Average Shares 17,772,619 16,022,847
-----------------------------------------
</TABLE>
15. UNAUDITED PRO FORMA RESULTS OF OPERATIONS
Condensed unaudited pro forma results of operations of the Company and
Boss Associates, Ltd., as if the purchase occurred at the beginning of the
fiscal years ended March 31, 1998 and 1997, are presented below. The unaudited
pro forma financial statements have been prepared for comparative purposes only
and are not necessarily indicative of what would have occurred had the
acquisitions been completed as of those dates or of any results that may occur
in the future.
UNAUDITED
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Revenue $26,743,011 $27,043,641
Loss from continuing operations (5,823,008) (20,469,984)
Net income (loss) 1,821,531 (25,497,799)
Net income allocable to common shareholders 852,358 (27,761,391)
Net loss from continuing operations per share
- basic and diluted (.35) (1.41)
</TABLE>
F-29
<PAGE> 34
Pro forma adjustments include adjustments to (i) reflect amortization
of goodwill for Boss Associates, Ltd., (ii) reflect interest expense related to
the notes payable to the former shareholders, and (iii) depreciation expense on
property and equipment acquired.
Condensed unaudited pro forma results of operations of the Company and
Boss Associates, Ltd., as if the purchase occurred at the beginning of the
fiscal year ended March 31, 1998 and as if the sale of Mediatech and
Channelmatic occurred at the beginning of the fiscal year ended March 31, 1998
and 1997, respectively, are presented below. The unaudited pro forma financial
statements have been prepared for comparative purposes only and are not
necessarily indicative of what would have occurred had the acquisitions been
completed as of those dates or of any results that may occur in the future.
UNAUDITED
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Revenue $26,743,011 $23,539,658
Loss from continuing operations (5,823,008) (18,236,269)
Net income (loss) 3,756,945 (18,236,269)
Net income (loss) allocable to
common shareholders 2,787,772 (20,559,861)
Net loss from continuing operations per share -
basic and diluted (.35) (1.25)
</TABLE>
For fiscal 1998, pro forma adjustments include (a) adjustments to
reflect the elimination of amortization and depreciation of goodwill and basis
step-up of equipment for Mediatech and (b) an adjustment to reflect the
elimination of interest expense related to a note payable to the shareholders of
Mediatech. For fiscal 1997, pro forma adjustments include (a) adjustments to
reflect the elimination of amortization and depreciation of goodwill and basis
step-up of equipment for Channelmatic and (b) an adjustment to reflect the
elimination of interest expense related to the $5.6 million note payable to the
minority shareholder of Channelmatic.
F-30
<PAGE> 35
16. COMMITMENTS, CONTINGENCIES AND LITIGATION
Leases
The Company leases equipment and office and warehouse facilities under
various operating lease agreements. In addition to monthly rentals, the Company
is responsible for insurance, property taxes, utilities and normal maintenance
of the facilities.
Future minimum lease payments under non-cancelable operating leases as
of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Total
------------------------------------------------------------------
<S> <C>
1999 $ 477,012
2000 422,898
2001 388,551
2002 160,762
2003 -
Thereafter -
------------------------------------------------------------------
$1,449,223
==================================================================
</TABLE>
Rental expense on operating leases amounted to $377,220 and $2.0
million for the fiscal years 1998 and 1997, including $851,000 in fiscal 1997
for related party leases.
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.
17. 401(K) PLAN, PROFIT PARTICIPATION PROGRAM AND PENSION PLAN
Starcom Mediatech had a 401(k) defined contribution plan covering
substantially all of its full-time employees. Starcom Mediatech contributed a
percentage of participants' contributed earnings to the plan. Contributions
amounted to approximately $2,600 and $34,000 for the years ended March
31, 1998 and 1997, respectively.
Starcom Mediatech also had a profit participation program whereby
Starcom Mediatech will allocate a percentage of its pretax profits to eligible
supervisors and managers of the Company. No amounts were allocated under this
program for the years ended March 31, 1998, and 1997.
Enterprise has a defined contribution pension plan. The assets of the
plan are held separately at an independently administered fund. Contributions
amounted to $579,519, and $272,572 for the years ended March 31, 1998 and 1997,
respectively. Enterprise also has a discretionary profit sharing scheme whereby
generally 10% of pre-tax earnings are paid to the certain Enterprise employees.
The profit sharing amount paid to the employees for fiscal 1998 and 1997 was
$364,528 and $114,112, respectively.
F-31
<PAGE> 36
CCMS has a profit sharing plan whereby generally 5% of the pre-tax
profits excluding the profit sharing expense are paid to the employees of CCMS.
The profit sharing amount for fiscal 1998 and 1997 was $31,575 and $19,996,
respectively.
CCMS has a 401(k) defined contribution plan covering substantially all
of its full-time employees. CCMS contributes a percentage of the participants'
earnings to the plan. Contributions amounted to approximately $13,000 for the
year ended March 31, 1998.
18. YEAR 2000 COMPLIANCE (Unaudited)
During fiscal 1998, the Company is aware of the issues associated with
the programming code in existing computer systems as the millennium (Year 2000)
approaches. The Company has to date carried out an in-house comprehensive
review of its software products and liaised with its computer software and
hardware suppliers. The review has identified the need for limited
modifications which have been or are in the process of being made. Accordingly,
the Company does not believe that any significant problems exist in its
software products.
The cost of the review and any modifications to date have amounted to
approximately $127,000 in fiscal 1998. The Company is confident that the
remainder of its software can be reviewed and modified, if necessary, for a
cost of approximately $176,000. This work will be completed by the end of
fiscal 1999. All costs incurred have been expensed.
F-32
<PAGE> 37
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of BDO Seidman, LLP
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 23.1
Board of Directors and Stockholders
Enterprise Software, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-24513) on Form S-3 of Enterprise Software, Inc. (formerly IndeNet, Inc.) of
our report dated May 29, 1998, relating to the consolidated balance sheet of
Enterprise Software, Inc. and subsidiaries as of March 31, 1998 and the related
consolidated statement of operations, changes in stockholders' equity, and
cash flows for the year then ended which report appears in the March 31, 1998,
annual report on Form 10-KSB/A-2 of Enterprise Software, Inc.
/s/ KPMG Peat Marwick LLP
Detroit, Michigan
August 12, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Enterprise Software, Inc. (formerly IndeNet, Inc.)
As independent certified public accountants, we hereby consent to the
incorporation of our report dated June 18, 1997 included in this annual report
on Form 10-KSB/A-2 into the Company's previously filed Form S-3 Registration
Statement. (No. 333-24513)
/s/ BDO Seidman, LLP
Los Angeles, California
August 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1997
<CASH> 6,169,383
<SECURITIES> 0
<RECEIVABLES> 4,430,885
<ALLOWANCES> 288,699
<INVENTORY> 0
<CURRENT-ASSETS> 12,762,692
<PP&E> 4,463,912
<DEPRECIATION> 1,321,251
<TOTAL-ASSETS> 38,958,851
<CURRENT-LIABILITIES> 13,416,295
<BONDS> 0
0
0
<COMMON> 18,052
<OTHER-SE> 13,875,886
<TOTAL-LIABILITY-AND-EQUITY> 38,958,851
<SALES> 24,175,736
<TOTAL-REVENUES> 24,175,736
<CGS> 8,710,473
<TOTAL-COSTS> 20,507,481
<OTHER-EXPENSES> 0
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