Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly
Period Ended December 31, 1995 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC..
(exact name of registrant as specified in charter)
Delaware 95-3392054
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
5200 Lankershim Blvd., Suite 280
No. Hollywood, California 91607
(Address of principal executive office)
Registrant's telephone number, including area code: 818/753-1990
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 such filing
requirements for the past 90 days.
YES X NO ____
As of February 12, 1996 the Registrant had 2,720,000 shares of its Common Stock,
$.01 par value, issued and outstanding.
Page 1 of 11
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
December 31, June 30,
1995 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,390,571 $ 338,231
Accounts receivable 157,985 426,732
Receivable from related party 213,785 194,876
Prepaid Expenses 52,604 932
------------ ------------
Total Current Assets 3,814,945 960,771
EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 4,782 3,539
DEFERRED REGISTRATION COSTS -- 60,363
DEPOSITS AND OTHER ASSETS 93,608 63,289
------------ ------------
$ 3,913,335 $ 1,087,962
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 381,391 $ 377,530
Accrued expenses 32,354 74,377
Note payable - line of credit -- 110,000
Deferred revenue 138,635 393,923
------------ ------------
Total Current Liabilities 552,380 955,830
MINORITY INTEREST 1,000 500
COMMITMENT AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 6,000,000 shares
authorized; 2,720,000 shares issued and
outstanding 27,200 18,600
Additional paid-in capital 3,253,646 2,920
Retained earnings 79,109 110,112
------------ ------------
Total Stockholders' Equity 3,359,955 131,632
------------ ------------
$ 3,913,335 $ 1,087,962
------------ ------------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
1995 1994 1995 1994
------------------------------- -----------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Production Income $ 8,735,028 4,827,869 $ 13,727,318 $ 9,425,214
Interest Income 18,769 -- 18,769 --
Other Income 1,003 -- 1,003 --
------------ --------- ----------- ----------
8,754,800 4,827,869 13,747,090 9,425,214
EXPENSES:
Production expenses 8,441,611 4,379,766 12,960,683 8,617,294
General and administrative expenses 410,693 389,554 837,382 717,596
Interest Expense 762 9,777 2,386 22,551
------------ --------- ----------- ----------
8,853,066 4,769,320 13,800,451 9,357,441
INCOME (LOSS) BEFORE INCOME TAXES ------------ --------- ----------- ----------
(98,266) 58,549 (53,361) 67,773
Provision for Income Tax (36,358) 24,884 (22,358) 24,907
------------ --------- ----------- ----------
NET INCOME (LOSS) $ (61,908) 33,665 $ (31,003) $ 42,866
------------ --------- ----------- ----------
Net Earnings (Loss) Per Share $ (0.02) 0.02 $ (0.01) 0.02
------------ --------- ----------- ----------
Weighted Average Number of
Common Shares $ 2,720,000 1,860,000 $2,720,000 $ 1,860,000
------------ --------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
NETTER ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
Preferred Stock Common Stock
------------------- -------------------
Additional Retained Net
Number of Number of Paid-in Earnings Shareholders'
Shares Amount Shares Amount Capital (Deficit) Equity
---------- ------ --------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - June 30, 1995 -- -- 1,860,000 $ 18,600 $ 2,920 $110,112 $ 131,632
Issuance of common stock in
public offering -- -- 860,000 $ 8,600 $3,250,726 -- $3,259,326
Net Loss -- -- -- -- -- $(31,003) $ (31,003)
---------- ------ --------- -------- ---------- --------- -----------
Balance - December 31, 1995 -- -- 2,720,000 $ 27,200 $3,253,646 $ 79,109 $3,359,955
---------- ------ --------- -------- ---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
Six Months Ended December 31,
-----------------------------
1995 1994
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $ (31,003) $ 42,866
---------- ----------
Noncash items included in income:
Depreciation 250 750
Charges in assets and liabilities:
Increase/(decrease) in accounts receivable 268,747 (15,968)
(Increase)/decrease in prepaid expenses (51,672) 67,930
(Increase)/decrease in other current assets -- --
(Increase)/decrease in deposits and other assets (30,319) 22,826
Increase/(decrease) in accounts payable 3,861 (78,112)
Increase/(decrease) in accrued expenses (42,023) 1,202
Increase/(decrease) in deferred revenue (255,288) (341,517)
----------- ----------
Total Adjustments (106,444) (342,889)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (137,697) (300,023)
----------- ----------
INVESTING ACTIVITIES
Capital expenditures (1,243) (2,003)
----------- ---------
Net cash used in investing activities (1,243) (2,003)
----------- ---------
Cash flows from financing activities
Increase in due from officer (18,909) (13,474)
Decrease in deferred registration costs 60,363 (20,655)
Proceeds from public offering 3,259,326 --
Increase in Minority Interest 500 --
Proceeds from note payable - line of credit -- --
Repayment of note payable - line of credit (110,000) --
----------- ---------
Net cash provided by (used in) financing
activities 3,191,280 (34,129)
----------- ---------
Net increase/(decrease) in cash 3,052,340 (336,155)
Cash at beginning of period 338,231 487,891
----------- ---------
Cash at end of period $3,390,571 $151,736
----------- --------
Amounts Paid for:
Interest $ 2,386 $ 22,551
Taxes $ -- $ 9 ,881
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial statements
should be read in conjunction with the consolidated financial statements and
related footnotes for the year ended June 30, 1995 included in the Company's
Registration Statement on Form SB-2 for the year then ended.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of December 31, 1995, and the results of operations and cash flows
for the three and six month periods ended December 31, 1995, and 1994 have been
included.
The results of operations for the three and six month periods ended December 31,
1995, are not necessarily indicative of the results to be expected for the full
fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Registration
Statement on Form SB-2 as filed with the Securities and Exchange Commission for
the year ended June 30, 1995 and the quarter ended September 30, 1995.
Earnings per share has been calculated based upon the weighted average number of
common shares outstanding. Stock options have been excluded as common stock
equivalents because they are either antidilutive or their effect is not
material.
DUE FROM OFFICER
As of November 20, 1995, the officer entered into a promissory note agreement
for the amount advanced, bearing interest at the prime rate plus 2%.
PUBLIC OFFERING OF SECURITIES
In November 1995, the Company completed a public offering of its securities. The
Company sold 860,000 shares of common stock and 430,000 warrants for net
proceeds (after deducting underwriting commissions and related expenses) of
approximately $3,300,000.
NOTE PAYABLE -LINE OF CREDIT
One June 1, 1995, the Company renewed a $250,000 revolving line of credit with a
bank, at an index rate equal to the certificate of deposit interest rate plus 3%
interest per annum. Interest is payable monthly through maturity at which time
the principle balance plus any accrued interest is due and payable. The
revolving line of credit is due and payable on June 3, 1996. As of December 31,
1995 there was no outstanding principal on the line of credit.
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENT AND CONTINGENCIES
The Company recently settled a claim for damages and costs made by a former
vendor in connection with termination of the vendors' services. The Company is
not obligated to make any payments and has not incurred any liability as a
result of the settlement.
The Company is defending a sexual harassment claim for damages and costs made by
a former employee. The Company believes it has meritorious defenses and intends
to vigorously defend the action. The Company believes that the outcome will not
materially affect the Company's financial position and results of operations.
Accordingly, no provision has been made for this contingency.
PRODUCTION AND GENERAL AND ADMINISTRATIVE EXPENSES
Certain expense classifications in fiscal 1995 have been reclassed to conform
with fiscal 1996 classifications.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
In November 1995, the Company completed its public offering of securities and
expanded its operations to include merchandising and new project development
operations.
Results of Operations
For the six months ended December 31, 1995, the Company reported a net loss of
$31,001 on revenues of approximately $13.7 million compared to a net profit of
$42,866 on revenues of approximately $9.4 million for the same period last year.
Revenues during the three month period ended December 31, 1995 increased from
approximately $4.8 million during the three month period ended December 31, 1994
to $8,754,800 during the current three month period ended December 31, 1995.
Revenues for the current period increased from the prior year primarily as a
result of production related revenues for "Babylon 5" and the new children's
series, "Hypernauts". Management believes that continued dependence on "Babylon
5" will continue to decrease as a result of additional productions and expansion
of operations including the new merchandising operations, but there can be no
assurance that such lessened dependence will occur.
Costs relating to revenue during the six months ended December 31, 1995
increased as a percentage of revenue to 94% from 91% during the six month period
ended December 31, 1994, and were 97% and 91%% during the three month period
ended 1995 and 1994 respectively. Costs during the six month period ended
December 31, 1995, relate to production costs of "Babylon 5" and "Hypernauts"
the productions discussed above on which revenue was recognized. The six month
period ended December 31, 1994 reflected similar production costs for "Babylon
5" and "Siringo" incurred during that period.
Selling, general, and administrative costs increased by $120,236 or 17% to
$837,382 during the six months ended December 31, 1995. The costs for the
quarter ending December 31, 1995 increased 5% to $410,695 from $389,554 for the
three months ended December 31, 1994. The increased costs are primarily the
result of increased staffing requirements for expansion of the Company's
merchandising and new project development operations. Several executives were
hired to head and run the Company's Merchandising and New Project Development
Divisions. Both divisions were established during the quarter ended December 31,
1995.
Interest expense for the three months ended December 31, 1995, was $762 compared
to $9,777 for the three months ended December 31, 1994. Interest for the six
month period ended December 31, 1995 was $2,386 as compared to $22,551 for the
same period in 1994. The decline reflects a reduction in borrowing and repayment
of the revolving credit facility in the current three month period.
Liquidity and Capital Resources
As of December 31, 1995, the Company had cash and cash equivalents of
approximately $3.4 million. In November 1995, the Company completed a public
offering of its securities receiving net proceeds of approximately $3.3 million.
Of these proceeds, $110,000 was used to repay the Company's revolving credit
facility and approximately $250,000 was used to repay a bridge loan. The balance
of these net proceeds (approximately $3.2 million) has been set aside for
equipment and software purchases, further merchandising operating costs, the
development and acquisition of new properties and production-related
technologies, and working capital.
<PAGE>
Together, proceeds of the public offering and the results of operations for the
period resulted in a current ratio increase of approximately 708% as of December
31, 1995 compared to approximately 90% for the same period last year.
The Company's sources of working capital are principally derived from contract
production receipts from distributors including a major studio and a subsidiary
of a major television network. The Company has in the past been able to secure
production financing from a major studio or distributor. While the Company
believes that such an arrangement can be made for future productions, there can
be no assurance the Company will be successful in obtaining such arrangements
and its working capital will be reduced accordingly. Moreover, as the Company
begins to expand its production and merchandising activities, and develops new
projects for additional ancillary markets, it must make additional financial
commitments to acquire and develop these new properties and projects, and to
cover the resulting increased overhead. These financial commitments create
additional risk for the Company as to whether such projects and properties will
be produced or sold and as to whether they will ever recover the costs of
investment and generate a profit.
In addition, in the past, the Company has relied exclusively on external sources
for production funding. It is possible similar projects will be produced for a
license fee instead of relying on external production funding sources. Entering
into licensing fee arrangements increases the Company's equity position, and
there is a risk the license fee may not cover the total production cost. In that
instance, the Company will be required to generate additional revenue from other
ancillary markets in order to cover the cost of production.
The Company currently has no debt and does not presently intend to pursue
debt-related financing for its production-related and growth activities.
Management may, however, pursue such debt-financing at some time in the future
for expansion by way of acquisitions or mergers.
Management believes that the net proceeds from the recently completed offering,
together with anticipated operating revenue will be sufficient to fund its
working capital and expansion requirements for at least the next twelve months.
Nonetheless, the foregoing activities are dependent in the long term upon the
Company's ability to generate sufficient cash flow to cover its ongoing overhead
expenses by making a sufficient number of productions during each period and
developing successful merchandising operations.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company recently settled a claim for damages and costs made by a former
vendor in connection with termination of the vendors' services. The Company is
not obligated to make any payments and has not incurred any liability as a
result of the settlement. The Company is defending a sexual harassment claim for
damages and costs made by a former employee. The Company believes it has
meritorious defenses and intends to vigorously defend the action. The Company
believes that the outcome will not materially affect the Company's financial
position and results of operations. Accordingly, no provision has been made for
this contingency.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits - None
(b.) Reports on Form 8K - None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Dated: February 12, 1996 /s/Geoffrey Talbot
Acting Chief Financial Officer
