<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 December 31, 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.)
38705 Seven Mile Road, Suite 435, Livonia, MI 48152
---------------------------------------------------
(Address of principal executive office)
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code: (248) 380-6070
- --------------------------------------------------------------------------------
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: 18,021,616 Shares of Common
Stock, Par Value $.001 as of February 3, 1998.
<PAGE> 2
INDENET, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets --
December 31, 1997 and March 31, 1997................................. 1
Consolidated Statements of Operations -Three and Nine-months
Ended December 31, 1997 and 1996..................................... 3
Consolidated Statement of Changes in Stockholders'
Equity - Nine-months Ended December 31, 1997......................... 4
Consolidated Statements of Cash Flows --
Nine-months Ended December 31, 1997 and 1996......................... 5
Notes to Consolidated Financial Statements........................... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................................ 10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.................................................... 13
Item 4. Submission of matters to a vote of security holders.................. 13
Item 6. Exhibits and Reports on Form 8-K..................................... 13
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDENET, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,548,676 $ 2,885,406
Restricted cash 2,735,673 1,514,902
Accounts and other receivables, net 3,315,840 8,425,017
Inventories -- 311,434
Notes receivable, current portion 2,096,368 434,080
Equity securities held for sale -- 2,341,262
Prepaid expenses 548,478 922,344
----------- -----------
Total current assets 11,245,035 16,834,445
Property and equipment, less accumulated depreciation and
amortization 2,748,175 11,872,587
Notes receivable, net of current portion 1,792,556 2,407,314
Equity securities held for investment 1,600,000 --
Capitalized software development costs, net 1,686,452 838,837
Customer list, net 15,680,384 14,195,501
Goodwill, net 3,220,634 6,320,092
Other long-term assets 201,000 324,531
----------- -----------
TOTAL ASSETS $38,174,236 $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>
December 31, March 31,
1997 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 5,051,831 $ 10,323,132
Deferred income 2,785,170 2,406,977
Notes payable, current portion 5,689,942 9,089,520
Notes payable to shareholders of acquired companies,
current portion 20,241 6,844,117
Capital lease obligations, current portion 729,522 645,755
------------ ------------
Total current liabilities 14,276,706 29,309,501
Notes payable to shareholders of acquired companies,
net of current portion 188,129 172,123
Notes payable, net of current portion 2,005,329 4,896,228
Capital lease obligations, net of current portion 1,284,778 702,321
Other long-term liabilities 8,113 65,486
------------ ------------
TOTAL LIABILITIES 17,763,055 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
Issued and outstanding - none and 216,667 -- 22
Preferred stock, Series C, $.0001 par value
Authorized - 1,200 shares
Issued and outstanding - 142 and 789 1 1
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 18,021,616 and 17,181,064 18,022 17,181
Additional paid-in capital 43,225,264 49,209,922
Accumulated deficit (23,234,106) (32,036,455)
Foreign currency translation adjustment 401,999 456,976
------------ ------------
Total stockholders' equity 20,411,181 17,647,648
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,174,236 $ 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 December 31, Nine Months Ended December 31,
------------------------------- ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 6,248,537 $ 11,991,331 $ 24,573,137 $ 33,821,850
Cost of sales 2,754,031 4,023,781 11,926,742 12,608,036
------------ ------------ ------------ ------------
Gross profit 3,494,506 7,967,550 12,646,395 21,213,814
Operating expenses:
Selling, general and administrative 1,950,147 7,276,924 9,174,767 19,843,681
Depreciation and amortization 505,219 1,795,672 2,461,705 4,669,602
Research and development 139,955 121,815 139,955 635,402
Corporate 362,192 451,489 1,153,024 1,624,021
Non-cash write-down of assets -- 8,545,563 -- 8,545,563
Restructuring charges including severance -- 1,581,500 495,527 1,581,500
------------ ------------ ------------ ------------
2,957,513 19,772,963 13,424,978 36,899,769
------------ ------------ ------------ ------------
Operating income/(loss) 536,993 (11,805,413) (778,583) (15,685,955)
Other income (expense):
Interest income 128,758 39,638 429,245 189,146
Interest expense (160,653) (524,055) (1,058,781) (2,232,790)
Gain on sale of subsidiaries -- -- 10,412,442 --
Gain on extinquishment of debt -- -- 774,740 --
Loss on sale of equity securities -- -- (501,607) --
Miscellaneous, net (126,590) 33,869 (78,964) 224,596
------------ ------------ ------------ ------------
(158,485) (450,548) 9,977,075 (1,819,048)
------------ ------------ ------------ ------------
Income/(loss) before income tax expense and
allocation to minority interest 378,508 (12,255,961) 9,198,492 (17,505,003)
Income taxes -- 68,432 3,910 125,872
------------ ------------ ------------ ------------
Income/(loss) before allocation to minority interest 378,508 (12,324,393) 9,194,582 (17,630,875)
Allocation to minority interest -- (272,255) -- (596,671)
------------ ------------ ------------ ------------
Net income/(loss) 378,508 (12,052,138) 9,194,582 (17,034,204)
Dividends to preferred shareholders 72,436 172,650 392,233 1,953,388
------------ ------------ ------------ ------------
Net income/(loss) allocable to common shareholders $ 306,072 $(12,224,788) $ 8,802,349 $(18,987,592)
============ ============ ============ ============
Net income/(loss) per share $ 0.02 $ (0.71) $ 0.50 $ (1.21)
============ ============ ============ ============
Net income/(loss) per share-assuming dilution $ 0.02 $ (0.71) $ 0.50 $ (1.21)
============ ============ ============ ============
Weighted average number of
common shares outstanding 17,761,854 17,114,389 17,451,955 15,736,345
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
INDENET, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended December 31, 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
Conversion of Series B Preferred
Stock to Common Stock -- - (216,667) (22) -- -
Conversion of Series C Preferred
Stock to cash and common stock -- - -- -- (647) -
Reclassification of securities yield
on convertible debt to accrued
expenses -- - -- -- -- -
Cashless exercise of employee
stock options -- - -- -- -- -
Purchase and cancellation of
treasury shares -- - -- -- -- -
Amount to be paid in Common
Stock related to stated accretion
on Series A and Series C
Preferred Stock -- - -- -- -- -
Preferred stock dividends -- - -- -- -- -
Net income -- - -- -- -- -
Foreign currency translation
adjustment -- - -- -- -- -
--- -- -------- ---- ---- --
Balance at December 31, 1997 190 $1 -- $ -- 142 $1
=== == ======== ==== ==== ==
</TABLE>
<TABLE>
<CAPTION>
Common Stock Foreign
--------------------- 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
Conversion of Series B Preferred
Stock to Common Stock 392,452 393 (371) -- -- --
Conversion of Series C Preferred
Stock to cash and common stock 591,820 592 (5,001,664) -- -- (5,001,072)
Reclassification of securities yield
on convertible debt to accrued
expenses -- -- (799,000) -- -- (799,000)
Cashless exercise of employee
stock options 122,025 122 (122) -- -- --
Purchase and cancellation of
treasury shares (265,745) (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
Preferred stock dividends -- -- -- (392,233) -- (392,233)
Net income -- -- -- 9,194,582 -- 9,194,582
Foreign currency translation
adjustment -- -- -- -- (54,977) (54,977)
----------- -------- ------------ ------------ --------- ------------
Balance at December 31, 1997 18,021,616 $ 18,022 $ 43,225,264 $(23,234,106) $ 401,999 $ 20,411,181
=========== ======== ============ ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 7
INDENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Nine Months December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 9,194,582 $(17,034,204)
Adjustments to reconcile net income/(loss) to net cash used in
operating activities:
Depreciation and amortization 2,461,705 4,669,602
Amortization of deferred interest -- 847,000
Non-cash write-down of assets -- 8,545,563
Provision for restructuring charges -- 1,581,500
Gain on sale of subsidiaries (10,412,442) --
Gain on extinguishment of debt (774,740) --
Loss on sale of equity securities 501,607 --
Gain on sale of building and other property and equipment (22,417) (128,811)
Unrealized loss on notes receivable due to foreign exchange 106,796 --
Allocation of loss to minority interest (596,671)
Changes in operating assets and liabilities:
Restricted cash 146,039 451,444
Accounts receivable 249,808 (1,896,040)
Inventories 53,153 (100,457)
Prepaid expenses 336,011 (178,025)
Other assets (187,349) 169,271
Accounts payable and accrued expenses (1,866,773) 1,961,625
Deferred income 324,641 (52,052)
Other long-term liabilities (57,571) 38,226
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 53,051 (1,722,029)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (340,554) (1,753,366)
Capitalized software development costs (1,000,813) (3,442,902)
Collection on notes receivable 339,480 --
Deferred financing costs -- (446,721)
Net proceeds from sale of building and other property and equipment 1,158,186
Net proceeds from sale of subsidiary 13,495,794 --
Proceeds from sales of equity securities 1,839,655 --
Purchase of customer list/businesses (1,427,625) (11,036,522)
Cash of acquired businesses -- 933,550
Cash of divested business (42,451) --
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,863,486 (14,587,775)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and capitalized leases (5,108,752) (184,968)
Repayment of notes payable to shareholders (4,022,059)
Proceeds from notes payable 1,454,616 2,500,000
Proceeds from exercise of warrants and options -- 414,699
Net proceeds from private placements -- 11,183,606
Repurchase of Series C preferred stock (5,001,072)
Purchase and cancellation of treasury stock (550,000)
Dividends on preferred stock (26,000) (58,500)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (13,253,267) 13,854,837
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (336,730) (2,454,967)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,885,406 3,818,133
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,548,676 $ 1,363,166
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 8
INDENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest 857,074 778,545
Income taxes 3,910 250,167
------------ ------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended December 31, 1997, the Company incurred capital
lease obligations of $2.3 million.
During the nine months ended December 31, 1997, the Company increased its
hedging loan by $1.3 million, with an offset to Restricted Cash.
Effective May 16, 1996, in conjunction with an Agreement and Plan of Merger with
Cable Computerized Management Systems, Inc., ("CCMS") the Company received
assets of approximately $568,000 (including cash of $276,779) and assumed
liabilities of approximately $366,000 in exchange for $1,036,522 in cash and
587,612 shares of the Company's common stock valued, for book purposes, at
$4.48 per share.
Effective May 24, 1996, in connection with a Share Purchase Agreement with
Enterprise Systems Group Limited, ("Enterprise") the Company received assets
of approximately $16,961,000 (including cash of $656,771) and assumed
liabilities of approximately $8,281,000 in exchange for $10,000,000 in cash,
notes payable of $5,000,000, and 2,276,200 shares of the Company's common
stock valued, for book purposes, at $3.81 per share.
In July 1996, the holder of convertible debt converted debt of $1,215,000 and
accrued interest of $11,884 into 487,694 shares of common stock.
During the nine months ended December 31, 1996, the Company issued 98,595 shares
of common stock as payment for accounts payable totaling $311,184.
During the nine months ended December 31, 1996, the Company recorded deferred
interest of $847,000 related to the placement of convertible notes totaling
$5.5 million. The amount was fully amortized and charged to interest expense
during the same period.
During the nine months ended December 31, 1996, the Company recorded deferred
dividends of $1,478,400 related to the issuance of convertible Series A
Preferred Stock. The amount was recognized as dividends in full during the
same period.
During the nine months ended December 31, 1996, the Company recorded $416,488 of
accretion, to be paid in Common Stock, related to Series A Preferred Stock.
See accompanying notes to consolidated financial statements
6
<PAGE> 9
INDENET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments, consisting solely of adjustments of
a normal recurring nature, 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 and nine-month periods ended December 31, 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., plus the accounts of its subsidiaries during the
periods that such subsidiaries were owned by IndeNet. The subsidiaries
include the wholly-owned subsidiaries of Mediatech (through its sale on
July 18, 1997), Starcom (through its sale on July 18, 1997), CCMS (since
its acquisition on May 16, 1996), Enterprise (since its acquisition on
May 24, 1996) and its 66.67% owned subsidiary Channelmatic (through its
sale on March 24, 1997) (collectively "the Company"). On April 1, 1997,
Starcom and Mediatech merged into Starcom Mediatech, Inc. On July 18,
1997, all of the stock of Starcom Mediatech, Inc. was sold. See Note 6
below for further discussion on the sale of Starcom Mediatech, Inc.
2 Until the sale of Mediatech, the Company leased office, production and
warehousing facilities in its Chicago, Illinois location from real
estate partnerships in which a former shareholder of Mediatech has a
controlling interest. Total rent expense paid to these partnerships for
the three-months ended December 31, 1997 and 1996 was $0 and $183,551
and for the nine-months ended December 31, 1997 and 1996 was $184,886
and $652,337. The Company leased office space in Alpine, California from
a director and stockholder of the Company, and a shareholder of
Channelmatic. Total rent expense paid to the officer for the three and
nine-months ended December 31, 1996 was $19,500 and $58,500.
3 In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings
per Share." SFAS 128 establishes new standards for computing and
presenting earnings per share and was effective for the Company's
interim and annual periods ending after December 15, 1997. SFAS 128
requires restatement of all previously reported earnings per share data
that are presented. SFAS 128 replaces primary and fully diluted earnings
per share with basic and diluted earnings per share.
Net income per share was determined by dividing net income less
preferred stock dividends by the weighted average number of shares and
common share equivalents outstanding during the period. The impact of
common share equivalents on the determination of basic and diluted
earnings per share is not material for the three and nine-months ended
December 31, 1997.
Net loss per share is calculated by taking the sum of the net loss plus
preferred stock dividends divided by the weighted average number of
common shares outstanding. Common stock equivalents, such as stock
options, warrants and convertible preferred stock, have not been
included since their effect would be anti-dilutive.
7
<PAGE> 10
4 During the nine-months ended December 31, 1997, the Company repaid notes
payable to related parties which had principal balances aggregating
$4.73 million and accrued and unpaid interest of $512,000 for $4.47
million in cash; resulting in a gain on retirement of debt of $774,740.
The gain is included in "gain on extinguishment of debt" in the
consolidated statements of operations for the nine-months ended December
31, 1997. See also note 7.
5 In September 1997, the Company repurchased 197 shares of its Series C
Preferred Stock "(Series C") having an aggregate value of $2.19 million
for $1.58 million in cash. The $2.19 million amount is comprised of
stated value of $1.97 million, $98,000 of an accrued 5% premium, and
accrued accretion of $118,000. During the three-months ended December
31, 1997, holders of Series C exercised their "put-options" resulting in
the Company issuing 591,820 shares of its common stock and $3.42 million
in cash. During the month of January 1998, the holders of the Series C
exercised their "put-option" resulting in the Company paying the holders
$1.58 million in cash.
6 On July 18, 1997, the Company sold all of the issued and outstanding
shares (the "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: (i) $14.0 million in cash; (ii) 324,355 restricted shares
of Digital Common Stock valued at $1.6 million; (iii) Digital's
Subordinated Promissory Note, dated July 18, 1997 ("Subordinated Note"),
in the principal amount of $2.2 million; and (iv) 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 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. The Purchase
Agreement provided for an adjustment to the purchase price based on
certain financial measurements as of July 18, 1997. As a result of those
financial measurements, on October 27, 1997, the parties entered into an
agreement whereby the purchase price was reduced by $625,000. The
parties agreed that $25,000 of the purchase price adjustment was
immediately payable in cash and that the Subordinated Note be reduced by
$600,000. Accordingly, the originally issued note of $2.2 million was
cancelled and a new note of $1.6 million was issued (the "New Note").
The New 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 $10.4 million and is included in other income in the consolidated
statements of operations.
7 During July 1997, the Company's Chief Executive Officer left the
Company. The former Chief Executive Officer was paid a severance amount
of $495,527. In addition, the former Chief Executive Officer was paid
$348,310 in connection with two related party notes owed to him by
Company. At the time of payment, the related party notes had an
aggregate principal balance of $366,452 and accrued interest of $43,325.
The Company realized a gain of $61,467 with respect to the payment, and
the amount of gain is included in "gain on extinguishment of debt" in
the consolidated statements of operations. The Chairman of the Board
subsequently became the Chief Executive Officer as well as retaining the
Chairman's duties. Effective August 1, 1997, the Company and the new
Chief Executive Officer entered into an employment agreement whereby the
Chief Executive Officer is to be paid a salary of $20,000 per month plus
a car allowance of $850 per month. In year two, the salary increases to
$25,000 per month, and in year three, the salary increases to $30,000
per month. The employment agreement also provides for other customary
employee benefits.
8 During the three-months ended December 31, 1997, the Company purchased
and cancelled 265,745 shares of its common stock for $550,000 in cash.
8
<PAGE> 11
9 During the three and nine-months ended December 31, 1997, the Company
sold its interest in equity securities of LIMT AB. The Company acquired
the equity securities in LIMT AB in connection with the sale of the
Company's 66.67% interest in its subsidiary Channelmatic to LIMT AB for
cash, notes, and stock in March 1997. The Company acquired the equity
securities for $2.8 million and realized $2.3 million in cash on sale of
the equity securities. A corresponding $501,607 loss on sale of equity
securities is recorded in other income (expense) in the consolidated
statements of operations.
10 On October 1, 1997, the Company entered into an agreement with the
holder of two convertible notes in the principal amount of $4.285
million, whereby the Company paid the holder $4.675 million in cash on
October 1, 1997 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 December 31, 1998. The convertible
notes were originally issued in February and May 1996, whereby the
holder of the notes had rights to convert the notes and any accrued and
unpaid interest into common stock at 82% of an average market price
calculation. During fiscal year ended March 31, 1997, the Company
recorded a non-cash interest expense charge of $847,000 related to the
18% securities yield and recorded the offset of the charge to
stockholders' equity. At December 31, 1997, included in Accounts Payable
and Accrued Expenses is $1.215 million which is comprised of accrued
interest of $416,000 and $799,000 of deferred interest which was
reclassified from stockholders' equity.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the three and nine-months ended December 31, 1996, the operations of the
Company were conducted solely through its subsidiaries Starcom Mediatech, Inc.
and Channelmatic. In addition, included in the operations of the Company for the
nine-months ended December 31, 1996 were eight months of operations of CCMS and
seven months of operations of Enterprise. Included in the operations of the
Company for the three-months ended December 31, 1996, were three months
operations of Enterprise and CCMS. The results of operations for the
three-months ended December 31, 1997 include the operations of the Company,
Enterprise and CCMS.
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. Reference is made to the risks identified
elsewhere in this Report and in the Company's other reports and registration
statements on file with the Securities and Exchange Commission.
The Company is currently in evaluating its corporate strategic plans and may, as
result of the plans change the Company's name and its fiscal year-end.
Revenue
The decrease in revenue from the prior periods was primarily a net result of the
sales attributable to the subsidiaries sold in March and July 1997. It is
anticipated that revenue in future periods for the Company on a consolidated
basis will increase compared to the three-month period ended December 31, 1997
due to the expected realization of revenue from the recent increase in customer
contracts.
Cost of Sales
The decrease in cost of sales from the prior periods was primarily a net result
of the cost of sales attributable to the subsidiaries sold in March and July
1997. It is anticipated that cost of sales as a percent of revenue in future
periods for the Company on a consolidated basis will remain fairly consistent
with the three-month period ended December 31, 1997.
Selling, General and Administrative
The decrease in selling, general and administrative from the prior periods was
primarily a net result of the selling, general and administrative expenses
attributable to the subsidiaries sold in March and July 1997. It is anticipated
that selling, general and administrative in future periods for the Company on a
consolidated basis will remain fairly consistent with the three-month period
ended December 31, 1997.
10
<PAGE> 13
Depreciation and Amortization
The decrease in depreciation and amortization from the prior periods was
primarily a net result of the depreciation and amortization attributable to the
subsidiaries sold in March and July 1997. The Company continues to evaluate on a
regular basis the appropriateness of its capitalized software asset. If
management determines that the future value of the capitalized asset will not be
sufficient to justify the recorded assets, a writedown of the asset may occur.
The Company also evaluates the recorded value of its goodwill and customer list
intangible assets. Should the projected future cash flows, on a non-discounted
basis, be less than the recorded asset, an adjustment may be necessary. The
Company is in the midst of a review of its strategic plans and evaluating the
future value of its assets.
Corporate
Corporate overhead represents general and administrative expenses related to the
administration of IndeNet, exclusive of expenses of the subsidiaries. These
expenses for three and nine-months ended December 31, 1997 compared to the
comparative prior period decreased by $139,297 and $520,997. The decrease is due
primarily to a reduction of personnel and marketing costs. Future periods'
corporate expenses overall are expected to remain constant with the current
period. Some additional costs are may be incurred in connection with the
corporate office move from Los Angeles, California to Detroit, Michigan.
Interest Income
Interest income increased due to higher cash balance on hand which earned
interest. The higher cash balance was a result of the cash received from the
sales of Channelmatic and Starcom Mediatech. Interest income in future periods
is expected to fluctuate based on cash balances.
Interest Expense
Interest expense decreased $363,402 from $524,055 to $160,653 for the
three-months ended December 31, 1997 compared to the comparable prior period and
decreased $1,174,009 from $2,232,790 to $1,058,781 for the nine-months ended
December 31, 1997 compared to the comparable prior period due to the exclusion
of interest expense of the companies sold during March and July 1997; offset by
interest incurred on convertible debt. Interest expense is expected to fluctuate
based on outstanding debt obligations.
Income Tax Expense
Income tax expense for the three and nine-months ended December 31, 1997
represents minimum state taxes paid for the various states in which the Company
does business.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had $2.5 million in cash and cash
equivalents and a working capital deficit of $3.0 million. During the
nine-months ended December 31, 1997, cash and cash equivalents decreased by
$336,730. Operations provided $53,050 in cash to the Company. The Company
generated $13.1 million in investing activities, primarily from the sale of
subsidiary and proceeds from the sale of equity securities; net of purchases of
capital expenditures, capitalized software costs, and purchase of customer list.
The Company used $13.5 million in financing activities, primarily for debt
repayments and repurchase of common and preferred stock.
11
<PAGE> 14
Based on the projected operations of the Company's remaining subsidiaries
(Enterprise and CCMS), the Company currently believes that its consolidated
operations will generate sufficient cash to fund the Company's working capital
needs for the next twelve months. Such projections are based on financial
information that the Company has obtained from its remaining subsidiaries.
However, no assurance can be given that the projected operations or projected
integration benefits will be realized or that the Company's operations will be
sufficient to fund the Company's working capital needs.
The Company and the holders of the Series A Preferred Stock are in discussions
to modify the terms of the holders' original investment. The modified terms are
expected to result in the Company using a combination of cash, new borrowing and
future equity to redeem the existing Series A Preferred Stock.
Any future acquisitions will be funded from future equity and/or debt financing.
In January 1998, the Company obtained a $1.5 million line-of-credit from a bank
to pay $1.6 million of Series C Preferred Stock redemptions. Payments on the
remaining outstanding promissory notes are expected from cash flows from
Enterprise and CCMS. Corporate costs and its obligations are also expected to be
funded from the operations of Enterprise and CCMS. 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.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 8, 1997, a lawsuit was filed against the Company with the
Superior Court of the State of California and for the County of Los
Angeles by Simitar Entertainment, a Minnesota corporation ("Simitar").
The suit also names Starcom Television Services, a former subsidiary of
the Company and Starcom Entertainment, Inc., an unaffiliated company.
The complaint alleges breach of contract and calls for an accounting,
imposition of a constructive trust and the appointment of a receiver.
Simitar is asking for $600,000 plus costs. The Company believes that it
has meritorious defenses and intends to vigorously defend itself in the
lawsuit
On December 17, 1997, a lawsuit was filed against the Company with the
Superior Court of the State of California and for the County of Los
Angeles by William Hynes ("Hynes"). The suit also names Starcom
Television Services and Mediatech, Inc., former subsidiaries of the
Company. The complaint alleges, among other things, breach of contract.
Hynes is asking for specific damages in excess of $250,000 and other
general damages according to proof. The Company believes that it has
meritorious defenses and intends to vigorously defend itself in the
lawsuit
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Stockholders' meeting on December 4,
1997.
(b) (1) The stockholders voted to elect the slate of board of
director nominees as proposed by the nominating committee of the
board of directors. There were 12,588,655 votes for, 20,965 votes
against, 2,485 votes withheld and no broker non-votes.
(2) The re-appointment of BDO Seidman, LLP, independent public
accountants, as auditors of the Company for the year ending March
31, 1998, was voted on and approved. There were 12,544,286 votes
for, 61,269 votes against, 6,550 votes withheld and no broker
non-votes. The vote was an advisory vote and not binding on the
board of directors. In January 1998, the Company's audit
committee recommended to the board of directors that the Company
change its accountants to KPMG Peat Marwick, LLP ("KPMG"). The
board of directors approved the nomination of KPMG as the
Company's independent accountants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27. Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 12, 1998 with respect
to the change in the Company's independent accountants.
13
<PAGE> 16
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 (Authorized
Officer and Principal Financial and
Chief Accounting Officer)
14
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