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 September 30, 1996 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 91601
(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 November 11, 1996 the Registrant had 2,795,000 shares of its Common Stock,
$.01 par value, issued and outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Incorporated herein is the following unaudited financial information:
Consolidated Balance Sheets as of September 30, 1996 and June 30, 1996
Consolidated Statement of Operations for the three-month periods ended
September 30, 1996 and September 30, 1995
Consolidated Statement of Stockholders' Equity as of June 30, 1996
Consolidated Statements of Cash Flows for the three-month periods ended
September 30, 1996 and September 30, 1995
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,056,059 $2,181,223
Accounts receivable 535,965 93,817
Notes receivable 450,000 350,000
Due from officer 194,876 194,876
Production costs, net 72,854 65,209
Other 12,062 54,407
TOTAL CURRENT ASSETS 2,321,816 2,939,532
EQUIPMENT, Net 937,719 568,993
DEFERRED ACQUISITION COSTS 185,035 113,396
DEPOSITS AND OTHER ASSETS 110,410 83,518
$3,554,980 $3,705,439
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 335,567 $ 209,615
Accrued expenses 18,833 80,775
TOTAL CURRENT LIABILITIES 354,400 290,390
MINORITY INTEREST 500 500
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; 2,795,000
shares issued and outstanding 27,950 27,950
Additional paid-in capital 3,533,331 3,533,331
Accumulated deficit (361,201) (146,732)
TOTAL STOCKHOLDERS EQUITY 3,200,080 3,414,549
$3,554,980 $3,705,439
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Production $3,114,176 $4,992,290
Licensing - -
TOTAL REVENUES 3,114,176 4,992,290
EXPENSES:
Production 2,843,716 4,519,072
General and administrative 512,031 426,689
TOTAL EXPENSES 3,355,747 4,945,761
OPERATING INCOME (LOSS) (241,571) 46,529
OTHER INCOME (EXPENSE):
Interest income 27,102 -
Other income - -
Interest expense - (1,624)
TOTAL OTHER INCOME (EXPENSE) 27,102 (1,624)
INCOME/(LOSS) BEFORE PROVISION FOR INCOME (214,469) 44,905
TAXES AND MINORITY INTEREST
PROVISION FOR INCOME TAXES - 14,000
MINORITY INTEREST - -
NET INCOME (LOSS) $(214,469) 30,905
NET INCOME (LOSS) PER COMMON SHARE $ (0.08) 0.02
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 2,795,000 1,860,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Number Additional Retained Net
of Number of Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE - June 30, 1996 - - 2,795,000 $27,950 $3,533,331 $(146,732) $3,414,549
Issuance of common stock - - - - - - -
in public offering
Exercise of warrants - - - - -
Net Income - (Unaudited) - - - - (214,469) (214,469)
Balance - Sept. 30, 1996 - - 2,795,000 $27,950 $3,533,331 $(361,201) $3,200,080
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Sept. 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (214,469) $ 30,905
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 40,307 250
Changes in operating assets and liabilities:
(Increase)/decrease in accounts receivable (442,148) 379,732
(Increase)/decrease in production costs (7,645) -
(Increase)/decrease in other current assets 42,345 932
(Increase)/decrease in deposits and other assets (26,892) (19,313)
(Increase)/decrease in accounts payable 125,952 (58,111)
(Increase)/decrease in accrued expenses (61,942) (42,671)
(Increase)/decrease in deferred revenue - (153,553)
(370,330) 107,016
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (544,492) 138,171
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (409,033) (1,759)
NET CASH USED IN INVESTING ACTIVITIES (409,033) (1,759)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in deferred acquisition costs (71,639) -
(Increase) in notes receivable (100,000) -
(Increase) decrease in due from officer - (5,037)
(Increase) decrease in deferred registration costs (47,738)
Proceeds from bridge financing 250,125
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (171, 639) 197,350
NET INCREASE (DECREASE) IN CASH (1,125,164) 333,762
Cash, beginning of period 2,181,223 338,231
Cash, end of period $1,056,059 $ 671,993
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ - $ 1,624
Cash paid for income taxes $ - $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION
The accompanying unaudited 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, 1996 included in the Form 10K-SB
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 September 30, 1996, and the results of operations and cash flows
for the three month periods ended September 30, 1996, and 1995 have been
included.
The results of operations for the three month period ended September 30, 1996,
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 Form 10K-SB as filed with the
Securities and Exchange Commission for the year ended June 30, 1996.
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/RECEIVABLE FROM RELATED PARTY
On November 20, 1995, the Company's Chief Executive Officer entered into a
promissory note with the Company in the amount of $194,876, bearing interest at
7.25% per annum. The entire unpaid principal balance and all accrued interest is
due on May 20, 1997.
<PAGE>
MERGER AGREEMENT WITH VIDESSENCE, INC.
On April 26, 1996, the Company entered into a definitive merger agreement with
Videssence, Inc., a company that designs, manufactures and distributes media
lighting products which incorporate the patented and trademarked SRGB light
technology for the illumination of studios, stages and other production
environments in the sound stage, media picture, theater and theme park
industries. On August 5, 1996, the stockholders of the Company approved the
proposed purchase of Videssence. Upon the satisfaction of certain closing
conditions, which includes $2 million to be provided to Videssence for operating
capital, Videssence will become a wholly- owned subsidiary of the Company. Under
the terms of the agreement, the Company will acquire all of the outstanding
common stock of Videssence in exchange for a minimum of 522,000 shares of the
Company's Common Stock, valued at $9.00 per share. The Videssence shareholders
can earn up to an additional maximum of 788,000 shares of the Company's Common
Stock upon Videssence achieving certain performance based criteria.
On April 26, 1996, the Company and Videssence entered into a promissory note in
the amount of $250,000 bearing interest at 9% per annum in connection with the
merger. Any unpaid principal (all of which is outstanding as of September 30,
1996) and accrued interest is payable on the closing date pursuant to the merger
agreement or December 20, 1996, whichever is earlier. On June 10, 1996, the
Company and Videssence entered into a secondary promissory note in the amount of
$275,000 bearing interest at 9% per annum in connection with the aforementioned
transaction. Any unpaid principal and accrued interest is payable on the closing
date pursuant to the merger agreement or December 20, 1996, whichever is
earlier. As of September 30, 1996, $450,000 had been advanced under this
agreement. $100,000 was advanced during the quarter.
Pursuant to the terms of the merger transaction, and as a condition to closing,
the company intends to raise a minimum of $2 million which will be used for
expansion and operating capital purposes at Videssence. On September 5, 1996,
the Company and an investment banking firm, acting as placement agent, agreed to
undertake a "Limited Public Offering," to be marketed over the Internet and
IPONet, for the issuance by the Company of Class A Cumulative Convertible
Preferred Stock. The Class A Preferred Stock will bear a Class A Preferred Stock
dividend of 10% per annum and is expected to be offered at a price of $9.00 per
share. The holders of Class A Preferred Stock may convert their shares into
common stock at a conversion ratio of 3:1. The offering has been structured on a
basis of a minimum of $2 million and a maximum of $5 million. In the event the
offering is not completed, it is possible that the Company may not recover the
amounts loaned to Videssence under the terms of the promissory notes signed.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's operations have primarily been as a provider of production
services to distributors such as The Walt Disney Company and Warner Bros. and to
networks such as the ABC and NBC Networks. It has been the Company's practice to
utilize external sources for 100% of its production funding. Employing this
strategy, the Company minimizes the risk of loss on productions by generating
production fees to cover production expenses, while limiting its ongoing revenue
participation as the distributor or network retains a significant portion of the
rights to the main and ancillary markets. Revenues are recognized when earned
which is typically upon receipt. Costs associated with these revenues are
recognized on the same basis. These revenues are primarily dependent on the
number of projects being produced by the Company and the agreements relating to
such projects. Accordingly, year to year comparisons of production revenues from
these sources are not necessarily indicative of future revenues.
To date, the Company's principal business has been to develop and produce
projects for the major studios and television distributors, for which it
receives production services revenues and producer fees. To increase production
margins the Company set up additional in-house post production capabilities that
were effectively implemented in the later part of the third season of "Babylon
5" and the production of "Hypernauts" in the third and fourth quarters of fiscal
1996. The Company also retained the merchandising rights for the Hypernauts
Production of 13 episodes, which were sold to the ABC Network. Pursuant to the
Hypernauts agreement, the Company established a merchandising licensing division
which concluded a master toy license with a major toy manufacturer. The
merchandising of "Hypernauts" was suspended when the production was not renewed
for the 1996 Fall television season period and, subsequently, the merchandising
division overhead was eliminated. The production and merchandising of
"Hypernauts" will only be reinstated if and when the Company is successful in
finding an alternative distributor to finance the production.
In April 1996, pursuant to the Company's strategy of expanding its technology
and production services operations the Company entered into a definitive merger
agreement with Videssence, Inc. ("Videssence"), a designer, manufacturer and
distributor of patented media lighting technology for the illumination of
studios, stages, and other production environments in the television and
production markets. At a special meeting of stockholders held on August 5, 1996,
the stockholders of the Company approved the Videssence merger. The Videssence
merger is expected to close in November or December 1996 subject to certain
closing conditions including the raising of $2 million of new equity capital by
the Company.
<PAGE>
Results of Operations
Net Revenues. Net Revenues decreased 38% to $3.11 million for the quarter ended
September 30, 1996 as compared to $4.99 million in net revenues for the quarter
ended September 30, 1995. The decrease in net revenues for the first quarter of
$1.88 million resulted primarily from the production of the new season of
"Babylon 5" starting on August 26, 1996 compared to July 31, 1995 in the first
quarter of last year. The decrease in revenue from "Babylon 5" in the first
quarter will be recouped over the remainder of the current fiscal year as the
number of episodes to be produced is the same in both years.
Gross Margin. The Company's gross margin for the quarter ended September 30,
1996 was $270,460, or 8.7 % of net revenues, compared with $473,218 or 9.5% for
the quarter ended September 30, 1995. The decrease in gross margin dollars and
percent was caused primarily by the lower revenue level experienced due to the
later start date of production of "Babylon 5" in the current season.
General and Administrative Expenses. General and administrative expenses
increased 20% to $512,031 for the quarter ended September 30, 1996 as compared
to $426,689 for the quarter ended September 30, 1995. The increase was caused by
the creation of the project development group, the expansion of the Company's
technology operations and the staffing, legal, regulatory, accounting and other
expenses that resulted from being a publicly traded company as of November 1995.
Additionally, the Company incurred non-recurring operating expenses in
connection with the curtailment of the merchandising activities for the
"Hypernauts" project totaling approximately $70,000.
Other Income and Expenses. Interest income increased to $27,102 for the quarter
ended September 30, 1996 compared to no interest income for the quarter ended
September 30, 1995. The increase was due primarily to interest earned on
proceeds from the Company's initial public offering which was completed in
November 1995.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash flows from
operations, the initial public offering of Common Stock and Warrants completed
in November 1995, which generated net proceeds of approximately $3.2 million,
and from the proceeds received from exercises of stock warrants, which generated
approximately $.3 million.
Cash used in operating activities was approximately $544,492 for the quarter
ended September 30, 1996. The primary uses of cash were to fund an increase of
$442,148 in accounts receivable and to fund the $214,469 net loss for the
quarter. These uses of cash were partially offset by an increase in accounts
payable.
<PAGE>
Investments in capital equipment totaled approximately $409,033 for the quarter
ended September 30, 1996. The use of cash was primarily for additions of
computer and post production equipment for the expansion of the technology
group, primarily for post production and animation activities.
On April 26, 1996, the Company entered into a definitive merger agreement with
Videssence, Inc., a company that designs, manufactures and distributes media
lighting products which incorporate the patented and trademarked SRGB light
technology for the illumination of studios, stages and other production
environments in the sound stage, media picture, theater and theme park
industries. On August 5, 1996, the stockholders of the Company approved the
proposed purchase of Videssence. Upon the satisfaction of certain closing
conditions, which includes $2 million to be provided to Videssence for operating
capital, Videssence will become a wholly owned subsidiary of the Company. Under
the terms of the agreement, the Company will acquire all of the outstanding
common stock of Videssence in exchange for a minimum of 522,000 shares of the
Company's Common Stock, valued at $9.00 per share. The Videssence shareholders
can earn up to an additional maximum of 788,000 shares of the Company's Common
Stock upon Videssence achieving certain performance based criteria. For the
quarter ended September 30, 1996, the Company used approximately $71,369 in
deferred acquisition costs in support of the Videssence transaction. On April
26, 1996, the Company and Videssence entered into a promissory note in the
amount of $250,000 bearing interest of 9% per annum in connection with the
merger. Any unpaid principal (all of which is outstanding as of September 30,
1996) and accrued interest is payable on the closing date pursuant to the merger
agreement or December 20, 1996, whichever is earlier. On June 10, 1996, the
Company and Videssence entered into a second promissory note in the amount of
$275,000 bearing interest at 9% per annum in connection with the aforementioned
transaction. Any unpaid principal and accrued interest is payable on the closing
date pursuant to the merger agreement or December 20, 1996, whichever is
earlier. As of September 30, 1996, $ 450,000 had been advanced under this
agreement. $100,000 was advanced during the quarter.
Pursuant to the terms of the merger transaction, and as a condition to closing,
the Company intends to raise a minimum of $2 million which will be used for
expansion and operating capital purposes at Videssence. On September 5, 1996,
the Company and an investment banking firm, acting as placement agent, agreed to
undertake a "Limited Public Offering," to be marketed over the Internet and
IPONet, for the issuance by the Company of Class A Cumulative Convertible
Preferred Stock. The Class A Preferred Stock will bear a Class A Preferred Stock
dividend of 10% per annum and is expected to be offered at a price $9.00 per
share. The holders of Class A Preferred Stock may convert their shares into
common stock at a conversion ratio of 3:1. The offering has been structured on a
basis of a minimum of $2 million and a maximum of $5 million. In the event the
offering is not completed, it is possible that the Company may not recover the
amounts loaned to Videssence under the terms of the promissory notes signed.
Management believes that its present cash position and overall liquidity will
enable the Company to meet its operating commitments for the next twelve months.
As of September 30, 1996, the Company's sources of liquidity included cash and
cash equivalents totaling approximately $1.1 million. The Company had no debt
outstanding as of September 30, 1996.
<PAGE>
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. These monies are received by the Company during
the production stage of a Project. The Company has in the past been able to
secure production financing from a major studio or distributor for all of its
Projects. While the Company believes that similar financing arrangements can be
made for future productions, there can be no assurance the Company will be
successful in obtaining such production financing. In that event, its working
capital will be reduced accordingly. Moreover, as the Company continues to
develop new forms of high technology production activities and projects for new
entertainment ancillary markets, it may elect to make additional commitments for
these new projects and to cover the resulting increased overhead with these
endeavors. These financial commitments create additional risk for the Company as
to whether they will recover the costs of investment and generate a profit.
Future Commitments
The Company will continue to expand its post production and technology
facilities through the purchase of more post production and computer graphics
equipment and increasing its staff of animators and technical support personnel.
Management believes this will facilitate greater creative control of its
projects while reducing production costs. In addition, new revenue sources will
result from the Company's own production budgets, plus third party productions
using the Company's facilities and services.
On August 15, 1996 the Company launched its Website for the "Babylon 5" Fan Club
Website on the Internet's World Wide Web in response to the strong interest in
the television series and the Company's successful formation of the Official
Babylon Fan Club ("Fan Club") in April 1996. The Website provides 24 hour access
to the fans of the television series and in the future it will provide marketing
of licensed merchandise. The Website will also be linked to approximately 260
"Babylon 5" Internet sites that have been established by fans to discuss the
series. Management believes this profit center will produce a solid
merchandising outlet, strengthened by the Fan Club's promotional efforts, and
that additional revenue streams may originate through advertising on the
"Babylon 5" Website. This unique Website has been designed to provide
demographic information of visitors/users of the Website to potential
advertisers. There can be no assurances, however, that the Company will derive
any significant revenues from sales of merchandise over its Website.
The Company continues to focus on prospective acquisitions in the technology and
production services segment of the media and entertainment industry.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
On September 30, 1996, the Board of Directors approved a new class of
capital stock, Series A Convertible Preferred Stock. The total number of
authorized shares of the Series A Convertible Convertible Preferred Stock is One
Million Two Hundred Thousand. The Series A Convertible Preferred Stock cumulates
dividends which are payable semi-annually in shares of Series A Convertible
Preferred Stock, commencing on the date of issue in an amount per share equal to
10% per annum. No dividends on Common Stock may be paid until the dividends on
the Series A Convertible Preferred Stock are paid in full. The Series A
Convertible Preferred Stock also participates in any dividend declared on Common
Stock such that for every share of Common Stock to which a share of Series A
Convertible Preferred Stock is convertible, the Series A Convertible Preferred
Stock will receive an amount equal to 50% of the dividend payable on a share of
Common Stock. The Series A Convertible Preferred Stock is convertible, in whole
or in part, at the option of the holder at any time, unless previously redeemed,
into shares of Common Stock, at a conversion ratio of three shares of Common
Stock for one share of Series A Convertible Preferred Stock, subject to
adjustment in certain circumstances. The Series A Convertible Preferred Stock
has a liquidation preference of 9.00 per share prior to any liquidation payments
to holders of Common Stock. In addition, after the shares of Common of Stock
have received a liquidation payment of $9.00 per share, any liquidation proceeds
remaining, if any, shall be shared ratably between the Common Stock and Series A
Convertible Preferred Stock, as converted. The Series A Convertible Preferred
Stock is redeemable by the Company at any time after proper notice is given, in
whole or in part, at the option of the Company, for cash at a redemption price
of $9.00 per share. Other than as required by law and as set forth in the
Certificate of Designation, the Series A Convertible Preferred Stock and the
Common Stock shall vote together, as one class, on all matters on which the
holders of shares of Common Stock are entitled to vote. In such cases, shares of
Series A Convertible Preferred Stock shall be entitled to such number of votes
as the number of shares of Common Stock into which the Series A Convertible
Preferred Stock is then entitled to convert. If dividends on the Series A
Convertible Preferred Stock are in arrears for four semi-annual dividend
<PAGE>
periods, holders of the Series A Convertible Preferred Stock (voting as a single
class) will have the right to elect two additional directors to serve on the
Company's Board of Directors until such dividend arrearage is eliminated.
ITEM 4. Submission of Matters to a Vote of Security Holders.
On August 5, 1996, the Company held a special meeting of the stockholders.
At the meeting the stockholders approved the merger of a wholly-owned subsidiary
of the Company with Videssence, Inc. such that, upon completion of the merger,
Videssence, Inc. will become the wholly-owned subsidiary of the Company. The
results of the vote are as follows: 2,352,500 shares were voted for the Merger
and 800 shares voted against the Merger.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhiits are filed herewith. Exhibit numbers refer to
Item 601 of Regulation S-B.
Exhibit 3.3 Certificate of Designation
(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.
Registrant
Dated: November 14,1996 By: /s/Geoffrey Talbot
__________________________________
Geoffrey Talbot
Acting Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Method of Filing
3.3 Certificate of Designation Filed herewith electronically
CERTIFICATE OF DESIGNATION
OF
NETTER DIGITAL ENTERTAINMENT, INC.
A Delaware Corporation
The undersigned, Douglas Netter and John Copeland, certify that:
1. They are the president and secretary, respectively, of Netter Digital
Entertainment, Inc., a Delaware corporation (the "Corporation").
2. The authorized number of shares of Preferred Stock of the Corporation is
Two Million (2,000,000), none of which has been issued.
3. The board of directors of the Corporation duly adopted the following
recitals and resolutions:
WHEREAS, the certificate of incorporation authorizes the Preferred Stock of
the Corporation to be issued in series and authorizes the board of
directors to determine the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock
and to fix the number of shares and designation of any such series; and
WHEREAS, the board of directors is authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock, and to fix and determine the
designation thereof; and
WHEREAS, the Corporation has not heretofore issued any shares or series of
such Preferred Stock, and the board of directors desires, pursuant to its
authority as aforesaid, to designate a series thereof and to determine and
fix the rights, preferences, privileges and restrictions relating to said
series of Preferred Stock, and the number of shares constituting said
series, and has determined that such actions would be in the best interest
of the Corporation and its stockholders;
NOW, THEREFORE, BE IT RESOLVED, that the board of directors hereby
fixes and determines the designation of, the number of shares
constituting, and the rights, preferences, privileges and restrictions
relating to, said initial series of Preferred Stock as follows:
A. Designation and Amount. This series of Preferred Stock shall
be designated as Series A Convertible Preferred Stock (the "Series A
1
<PAGE>
Convertible Preferred Stock"), and the authorized number of shares
constituting such series shall be One Million Two Hundred Thousand
(1,200,000).
B. Dividend Provisions.
(i) Series A Convertible Preferred Stock Dividends. The
holders of shares of Series A Convertible Preferred Stock shall
be entitled to receive dividends prior and in preference to any
declaration or payment of any dividend on the common stock of
this Corporation ("Common Stock"), at the rate of 10% per annum,
payable in shares of Series A Convertible Preferred Stock (i.e.
for every 10 shares of Series A Convertible Preferred Stock held,
the holder shall receive 1 share of Series A Convertible
Preferred Stock as a dividend each year). The dividend shall be
payable semi-annually, commencing six months after the first
closing of the offering in which the Series A Convertible
Preferred Stock is first sold. Such dividends shall accrue from
day to day, whether or not earned or declared. Such dividends
shall be cumulative so that, if such dividends in respect of any
previous or current semi-annual dividend period, at the annual
rate specified above, shall not have been paid, the deficiency
shall first be fully paid before any dividend or other
distribution shall be paid on or declared and set apart for the
Common Stock. Any accumulation of dividends on the Series A
Convertible Preferred Stock shall not bear interest. Dividends
payable on the Series A Convertible Preferred Stock for any
period less than a full dividend period will be computed on the
basis of twelve 30-day months and a 360-day year.
Holders of Series A Convertible Preferred Stock shall not receive
fractional shares of Series A Convertible Preferred Stock as
dividends; provided, however, such fractional shares shall carry
over from dividend payment period to dividend payment period
until such fractional shares become a whole share, at which point
such whole share shall be paid as a dividend. Notwithstanding the
foregoing, each Holder of Series A Convertible Preferred Stock
shall be entitled to multiply the number of shares of Series A
Convertible Preferred Stock held by any fractional share
representing any unpaid part of a dividend on a share of Series A
Convertible Preferred Stock, and the Holder shall receive such
number of whole shares of Series A Convertible Preferred Stock as
such product shall equal, and any remaining fractional share
shall be equally allocated to all then outstanding shares of
Series A Convertible Preferred Stock held by such Holder.
Notwithstanding the above, fractional shares shall not accrue
dividends or entitle holders to dividends on such fractional
shares during the period such fractional shares are being carried
over.
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Unless full dividends on the Series A Convertible Preferred Stock
for all past dividend periods and the then current dividend
period shall have been paid or declared and a sum sufficient for
the payment thereof set apart: (A) no dividend whatsoever shall
be paid or declared, and no distribution shall be made, on any
Common Stock, and (B) except as provided in Section C below, no
shares of Common Stock shall be purchased, redeemed, or acquired
by the Corporation and no funds shall be paid into or set aside
or made available for a sinking fund for the purchase,
redemption, or acquisition thereof.
(ii) Common Stock Dividend. In the event the Corporation
grants dividends on its Common Stock ("Common Stock Dividend"),
the Series A Convertible Preferred Stock shall participate in
such Common Stock Dividend by receiving 50% of the Common Stock
Dividend payable on a share of Common Stock for every share of
Common Stock into which a share of Series A Convertible Preferred
Stock is convertible.
C. Liquidation Preference of Series A Convertible Preferred
Stock. Other than the Series A Convertible Preferred Stock, including
without limitation, any liquidation preference set forth in this
section (C), in the event of any liquidation, dissolution, or winding
up of the Corporation, either voluntary or involuntary, distributions
to the stockholders of the Corporation shall be made in the following
manner:
(i) The holders of Series A Convertible Preferred Stock
shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the
Corporation to the holders of any other outstanding security of
the Corporation, including the Common Stock, by reason of their
ownership of such stock, the amount of $9.00 per share plus the
amount of any accrued, but unpaid dividend (adjusted for any
stock split, stock combination, consolidation, stock
distribution, or stock dividend with respect to such shares) (the
"Liquidation Preference"). If the assets and funds thus
distributed among the holders of the Series A Convertible
Preferred Stock shall be insufficient to permit the payment to
such holders of the full aforesaid Liquidation Preference, then
the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the holders
of the Series A Convertible Preferred Stock in such a manner that
the amount distributed to each holder of Series A Convertible
Preferred Stock shall equal the amount obtained by multiplying
the entire assets and funds of the Corporation legally available
for distribution hereunder by a fraction, the numerator of which
shall be the number of shares of Series A Convertible Preferred
Stock then held by such holder, and the denominator of which
shall be the total number of shares of Series A Convertible
Preferred Stock then outstanding.
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(ii) After payment to the holders of the Series A
Convertible Preferred Stock of the Liquidation Preference as set
forth in Section C(i) above, the holders of the Common Stock
shall be entitled to receive from the assets and funds of the
Corporation then legally available for distribution, if any, the
amount of $9.00 per share for each share of Common Stock then
held by them. If the assets and funds thus distributed among the
holders of the Common Stock shall be insufficient to permit the
payment to such holders of the full $9.00 per share, then the
entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of
the Common Stock in such a manner that the amount distributed to
each holder of Common Stock shall equal the amount obtained by
multiplying the entire assets and funds of the Corporation
legally available for distribution hereunder by a fraction, the
numerator of which shall be the number of shares of Common Stock
then held by such holder, and the denominator of which shall be
the total number of shares of Common Stock then outstanding.
(iii)After payment to the holders of the Series A
Convertible Preferred Stock of the Liquidation Preference as set
forth in Section C(i) above and the Common Stock as set forth in
C(ii) above, the entire remaining assets and funds of the
Corporation legally available for distribution, if any, shall be
distributed among the holders of the Common Stock and the Series
A Convertible Preferred Stock in proportion to the shares of
Common Stock then held by them and the shares of Common Stock
which they have the right to acquire upon conversion of the
shares of Series A Convertible Preferred Stock then held by them.
(iv) Whenever the distribution provided for in this Section
C shall be payable in securities or property other than cash, the
value of such distribution shall be the fair market value of such
securities or other property as determined in good faith by the
Corporation's board of directors.
(v) Neither a consolidation or merger of the Company with
another corporation, a statutory share exchange by the Company
nor a sale or transfer of all or substantially all of the
Company's assets will be considered a liquidation, dissolution or
winding up, voluntary or involuntary, of the Company.
D. Redemption.
(i) Voluntary Redemption.
(a) At any time and from time to time after the
issuance of the Series A Convertible Preferred Stock, the
Corporation may,
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at the option of the board of directors, and out of the
assets at the time legally available therefor, redeem all or
part (selected pro rata from among all of the shares of
Series A Convertible Preferred Stock) of the outstanding
shares of Series A Convertible Preferred Stock at the
Redemption Price as defined in subsection (ii) below. The
Corporation shall give written notice by mail, postage
prepaid, to the holders of the Series A Convertible
Preferred Stock to be redeemed at least thirty (30) days
prior to the date specified for redemption (a "Redemption
Date"). The notice shall further call upon such holders to
surrender to the Corporation on or before the Redemption
Date at the place designated in the notice such holder's
certificate or certificates representing the shares to be
redeemed and shall state that, in lieu of redemption, a
holder may, prior to the Redemption Date, convert its Series
A Convertible Preferred Stock into Common Stock in
accordance with Section E below. Upon sending notice of
redemption, the holders of the Series A Convertible
Preferred Stock shall no longer be entitled to dividends
that have not accrued on or before the date of notice. On
the Redemption Date, the Series A Convertible Preferred
Stock called for redemption by the Corporation shall be
deemed redeemed and cease to be outstanding. On or after the
Redemption Date, each holder of shares of Series A
Convertible Preferred Stock called for redemption shall
surrender the certificate evidencing such shares to the
Corporation, except that such number of shares shall be
reduced by the number of shares which have been converted
into Common Stock between the date of notice and the
Redemption Date, at the place designated in such notice and
shall thereupon be entitled to receive payment of the
Redemption Price. In the event less than all the shares
represented by any such certificates are redeemed, a new
certificate shall be issued representing the unredeemed
shares. Any shares of Series A Convertible Preferred Stock
not redeemed shall remain outstanding and entitled to all
the rights and preferences provided herein.
(b) The Series A Convertible Preferred Stock may be
redeemed at a cash price equal to Nine Dollars ($9.00) per
share adjusted for any stock split, stock combination,
consolidation, stock distribution or stock dividend with
respect to such shares (the "Redemption Price").
(c) From and after the Redemption Date, unless there
shall have been a default in payment of the Redemption
Price, all rights of the holders with respect to such
redeemed shares of Series A Convertible Preferred Stock
(except the right to receive the Redemption Price without
interest upon surrender of their certificate) shall cease
and such shares shall not thereafter be transferred on the
books of this Corporation or be deemed to be outstanding for
any purpose whatsoever.
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<PAGE>
E. Voting. Except as otherwise required by law, the shares of
Series A Convertible Preferred Stock shall vote with the shares of
Common Stock, on all matters on which the shares of Common Stock are
entitled to vote, as if the shares of Series A Convertible Preferred
Stock and the shares of Common Stock were one class of stock. Holders
of Series A Convertible Preferred Stock will be entitled to such
number of votes equal to the number of shares of Common Stock into
which such Holder's shares of Series A Convertible Preferred Stock are
convertible on the record date for such vote. In addition, if four
semi-annual dividends payable on the Series A Convertible Preferred
Stock are in arrears, whether or not earned or declared, the number of
directors then constituting the Board of Directors of the Corporation
will be increased by two and the holders of shares of Series A
Convertible Preferred Stock, voting together as a class, will have the
right to elect two additional directors to serve on the Company's
Board of Directors at an annual meeting of stockholders or special
meeting held in place thereof, or at a properly called special meeting
of the holders of the Series A Convertible Preferred Stock and at each
subsequent annual meeting of stockholders or special meeting held in
place thereof, until all such dividends in arrears and dividends for
the current quarterly period on the Series A Convertible Preferred
Stock have been paid or declared and set aside for payment.
F. Conversion Rights. The holders of Series A Convertible
Preferred Stock shall have conversion rights ("Conversion Rights") as
follows:
(i) Right to Convert.
(a) Subject to subsection (iii) below, each share of
Series A Convertible Preferred Stock shall be convertible,
at the option of the holder thereof, at any time at the
office of this Corporation or any transfer agent for the
Series A Convertible Preferred Stock, into three paid and
nonassessable share of Common Stock. The one-for-three
conversion ratio shall hereinafter be referred to as the
"Conversion Ratio".
(b) In the event of a call for redemption of any shares
of Series A Convertible Preferred Stock pursuant to Section
D hereof, the Conversion Rights shall terminate as to the
shares designated for redemption at the close of business on
the Redemption Date, unless default is made in payment of
the Redemption Price in which case the Conversion Rights
shall continue until the date such Redemption Price is paid
in full.
(ii) Mechanics of Conversion. Before any holder of Series A
Convertible Preferred Stock shall be entitled to convert the same
into shares of Common Stock, he shall surrender the certificate
or certificates therefor, duly endorsed, at the office of this
Corporation or of any transfer agent for the
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<PAGE>
Series A Convertible Preferred Stock and shall give written
notice by mail, postage prepaid, to this Corporation at its
principal corporate office, of the election to convert the same
and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be
issued. This Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of
Series A Convertible Preferred or to the nominee or nominees of
such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such
surrender of the certificate or certificates representing the
shares of Series A Convertible Preferred Stock to be converted
and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of
Common Stock as of such date.
(iii)Conversion Ratio Adjustment of Preferred Stock. The
Conversion Ratio of the Series A Convertible Preferred Stock
shall be subject to adjustment from time to time as follows:
(a) In the event the Corporation should at any time or
from time to time after the Purchase Date fix a record date
for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common
Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment
of consideration at fair market value by such holder for the
additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof, then, as of
such record date (or the date of such dividend distribution,
split or subdivision if no record date is fixed), the
Conversion Ratio of the Series A Convertible Preferred Stock
shall be adjusted so that the number of shares of Common
Stock issuable on conversion of each share of such series
shall be increased in proportion to such increase of the
aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents.
(b) If the number of shares of Common Stock outstanding
at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock, then,
following the record date of such combination, the
Conversion Ratio for the Series A Convertible Preferred
Stock shall be adjusted so that the number of shares of
Common
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<PAGE>
Stock issuable on conversion of each share of such series
shall be decreased in proportion to such decrease in
outstanding shares.
(c) In the event this Corporation shall declare a
distribution payable in securities of other persons,
evidences of indebtedness issued by this Corporation or
other persons, or assets (excluding dividends, rights,
warrants and distributions referred to in F(iii)(a) and (b)
above, and cash dividends and distributions) or options or
rights not referred to in subsection F(iii)(a), then, in
each such case for the purpose of this subsection F(iii)(c),
the holders of the Series A Convertible Preferred Stock
shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number
of shares of Common Stock of the Corporation into which
their shares of Series A Convertible Preferred Stock are
convertible as of the record date fixed for the
determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.
(d) In case, at any time after the date hereof, of any
capital reorganization, or any reclassification of the stock
of the Corporation (other than as a result of a stock
dividend or subdivision, split-up or combination of shares),
or the consolidation or merger of the Corporation with or
into another person (other than a consolidation or merger in
which the Corporation is the continuing entity and which
does not result in any change in the Common Stock), or of
the sale or other disposition of all or substantially all
the properties and assets of the Corporation, the shares of
Series A Convertible Preferred Stock shall, after such
reorganization, reclassification, consolidation, merger,
sale or other disposition, be convertible into the kind and
number of shares of stock or other securities or property of
the Corporation or otherwise to which such holder would have
been entitled if immediately prior to such reorganization,
reclassification, consolidation, merger, sale or other
disposition he had converted his shares of Series A
Convertible Preferred Stock into Common Stock. The
provisions of this clause (d) shall similarly apply to
successive reorganizations, reclassifications,
consolidations, mergers, sales or other dispositions but
shall not apply to transactions provided for in
paragraph 3.C hereof.
(e) The Conversion Ratio of Series A Convertible
Preferred Stock shall be subject to adjustment from time to
time as follows:
(i) If the Corporation hereafter shall issue any Common
Stock for a consideration per share less than the product of
(x) $9.00 and (y) the Conversion Ratio, as adjusted, (the
"Conversion Price") in effect immediately prior to the issuance
of such Common Stock (excluding stock dividends, subdivisions,
split-ups, combinations, dividends or recapitalizations which are
covered by
8
<PAGE>
subparagraphs 3.F(iii)(a), (b), (c), and (d), then, and in each
such case, the Conversion Ratio in effect immediately after each
such issuance shall forthwith (except as provided in this
paragraph 5(e)) be adjusted to a ratio equal to the product of
(AA) the Conversion Ratio and (BB) the quotient obtained by
dividing:
(CC) an amount equal to the sum of
(xx) the total number of shares of Common Stock outstanding
(including any shares of Common Stock issuable upon
conversion of the Series A Convertible Preferred Stock,
or deemed to have been issued pursuant to subdivision
(C)(2), (3) and (4) of this clause (i) but excluding
shares issuable upon the exercise of outstanding
options or warrants otherwise deemed to be outstanding
pursuant to subdivision (C)(1) of this clause (i))
immediately prior to such issuance multiplied by the
Conversion Price in effect immediately prior to such
issuance, plus
(yy) the consideration received by the Corporation upon such
issuance, by
(DD) the total number of shares of Common Stock outstanding
(including any shares of Common Stock issuable upon
conversion of the Series A Convertible Preferred Stock or
deemed to have been issued pursuant to subdivision (C)(2),
(3) and (4) of this clause (i) but excluding shares issuable
upon the exercise of outstanding options or warrants
otherwise deemed to be outstanding pursuant to subdivision
(C)(1) of this clause (i)) immediately after the issuance of
such Common Stock multiplied by the Conversion Price in
effect immediately prior to such issuance.
Except to the limited extent provided for in clauses (C)(3) and (C)(4)
below, no adjustment of any Conversion Ratio pursuant to this
subparagraph 3.F.(iii)(e)(i) shall have the effect of increasing such
Conversion Ratio above the Conversion Ratio in effect immediately
prior to such adjustment. For the purposes of this subparagraph
3.F.(iii)(e)(i), the following provisions shall be applicable:
(A) In the case of the issuance of Common Stock
for cash, the consideration shall be deemed to be the
amount of cash paid therefor after deducting any
discounts or commissions paid or incurred by the
Corporation in connection with the issuance and sale
thereof.
(B) In the case of the issuance of Common Stock
for a consideration in whole or in part other than
cash, the consideration other than cash shall be deemed
to be the fair value thereof as determined by the board
of directors of the Corporation, in accordance with
generally accepted accounting treatment; provided,
however, that if, at the time of such determination,
the Corporation's Common Stock is traded in the
9
<PAGE>
over-the-counter market or on a national or regional
securities exchange, such fair market value as
determined by the board of directors of the Corporation
shall not exceed the aggregate "Current Market Price"
(as defined below) of the shares of Common Stock being
issued.
(C) In the case of the issuance of (i) options to
purchase or rights to subscribe for Common Stock, (ii)
securities by their terms convertible into or
exchangeable for Common Stock, or (iii) options to
purchase or rights to subscribe for such convertible or
exchangeable securities:
(1) the aggregate maximum number of shares of
Common Stock deliverable upon exercise of such
options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued
at the time such options or rights were issued and
for a consideration equal to the consideration
(determined in the manner provided in clauses (A)
and (B) above), if any, received by the
Corporation upon the issuance of such options or
rights plus the minimum purchase price provided in
such options or rights for the Common Stock
covered thereby;
(2) the aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in
exchange for any such convertible or exchangeable
securities, or upon the exercise of options to
purchase or rights to subscribe for such
convertible or exchangeable securities and
subsequent conversion or exchange thereof, shall
be deemed to have been issued at the time such
securities were issued or such options or rights
were issued and for a consideration equal to the
consideration received by the Corporation for any
such securities and related options or rights
(excluding any cash received on account of accrued
interest or accrued dividends), plus the
additional consideration, if any, to be received
by the Corporation upon the conversion or exchange
of such securities or the exercise of any related
options or rights (the consideration in each case
to be determined in the manner provided in clauses
(A) and (B) above);
(3) upon any change in the number of shares
of Common Stock deliverable upon exercise of any
such options or rights or conversion of or
exchange for such convertible or exchangeable
securities, or upon any change in the minimum
purchase price of such options, rights or
securities, other than a change resulting from the
antidilution provisions of such options, rights or
securities, the Conversion Ratio shall forthwith
be recomputed to reflect such change; and
(4) on the expiration of any such options or
rights, the termination of any such rights to
convert or exchange or the expiration of any
options or rights related to such convertible or
exchangeable securities, the Conversion Ratio
shall forthwith be readjusted to such Conversion
Ratio as would have obtained had the adjustment
made upon the issuance of such options, rights,
convertible or exchangeable securities or options
or rights related to such convertible or
10
<PAGE>
exchangeable securities, as the case may be, been
made upon the basis of the issuance of only the
number of shares of Common Stock (and convertible
or exchangeable securities which remain in effect)
actually issued upon the exercise of such options
or rights, upon the conversion or exchange of such
convertible or exchangeable securities or upon the
exercise of the options or rights related to such
convertible or exchangeable securities, as the
case may be.
(f) In case the Corporation shall declare a cash
dividend upon its Common Stock payable otherwise than out of
retained earnings or shall distribute to holders of its
Common Stock shares of its capital stock (other than Common
Stock), stock or other securities of other persons,
evidences of indebtedness issued by the Corporation or other
persons, assets (excluding cash dividends) or options or
rights (excluding options to purchase and rights to
subscribe for Common Stock or other securities of the
Corporation convertible into or exchangeable for Common
Stock), then, in each such case, the holders of shares of a
series of Series A Convertible Preferred Stock shall,
concurrent with the distribution to holders of Common Stock,
receive a like distribution based upon the number of shares
of Common Stock into which such Series A Convertible
Preferred Stock is then convertible.
(g) For the purpose of any computation pursuant to this
paragraph 3.F.(iii), the "Current Market Price" at any date
of one share of Common Stock, shall be deemed to be the
average of the highest reported bid and the lowest reported
offer prices on the preceding business day as furnished by
the National Quotation Bureau, Incorporated (or equivalent
recognized source of quotations); provided, however, that if
the Common Stock is not traded in such manner that the
quotations referred to in this clause (viii) are available
for the period required hereunder, Current Market Price
shall be determined in good faith by the board of directors
of the Corporation, but if challenged by the holders of more
than 50% of the outstanding Series A Convertible Preferred
Stock, then as determined by an independent appraiser
selected by the board of directors of the Corporation, the
cost of such appraisal to be borne equally by the
Corporation and the challenging parties.
(h) The Corporation will not through any
reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to
be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out
of all the provisions of this paragraph 5 and in the taking
of all such action as may be necessary or appropriate in
order to protect the Conversion Rights of the holders of
Series A Convertible Preferred Stock against impairment.
(i) No shares of Series A Convertible Preferred Stock
which have been converted into Common Stock after the
original issuance thereof shall ever again be
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<PAGE>
reissued and all such shares so converted shall upon such
conversion cease to be a part of the authorized shares of
the Corporation.
(j) No adjustment of the Conversion Ratio will be
required to be made in any case until cumulative adjustments
amount to 1% or more of the Conversion Ratio. Any
adjustments not so required to be made will be carried
forward and taken into account in subsequent adjustments.
(iv) No Fractional Shares and Certificate as to Adjustments.
(a) No fractional shares shall be issued upon
conversion of the Series A Convertible Preferred Stock and
the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of
Series A Convertible Preferred Stock the holder is at the
time converting into Common Stock and the number of shares
of Common Stock issuable upon such aggregate conversion.
Consonant with the foregoing, each Holder of Series A
Convertible Preferred Stock shall be entitled to multiply
the number of shares of Series A Convertible Preferred Stock
held by any fractional share of common stock issuable upon
conversion for a share of Series A Convertible Preferred
Stock, and the Holder shall receive such number of whole
shares of Common Stock as such product shall equal, rounded
to the nearest whole share.
(b) Upon the occurrence of each adjustment or
readjustment of the Conversion Ratio of Series A Convertible
Preferred Stock pursuant to this Section F, this
Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Series A
Convertible Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. This
Corporation shall, upon the written request at any time of
any holder of Series A Convertible Preferred Stock, furnish
or cause to be furnished to such holder a like certificate
setting forth (A) such adjustment and readjustment, (B) the
applicable Conversion Ratio at the time in effect, and (C)
the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon
the conversion of a share of Series A Convertible Preferred
Stock.
(v) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of
its authorized
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<PAGE>
but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Series A
Convertible Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Convertible
Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A
Convertible Preferred Stock, in addition to such other remedies
as shall be available to the holder of such Series A Convertible
Preferred Stock, this Corporation shall take such corporate
action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purposes.
(vi) Notices. Any notice required by the provisions of this
Section F to be given to the holders of shares of Series A
Convertible Preferred Stock shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of this
Corporation.
(vii)Protective Provisions. In addition to any other rights
provided by law, so long as at least 150,000 shares of Series A
Convertible Preferred Stock shall be outstanding, the Corporation
shall not, without obtaining the vote or written consent of the
holders of a majority of the outstanding shares of Series A
Convertible Preferred Stock:
(a) amend or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation
or bylaws if such action would materially alter or change
the rights, preferences, privileges or powers of, or the
restrictions provided for the benefit of, the Series A
Convertible Preferred Stock;
(b) authorize or issue any class or series of equity
securities having any preference or priority as to voting,
dividends or distribution of assets upon liquidation, merger
or otherwise which is superior to or on a parity with any
such preference or priority of the Series A Convertible
Preferred Stock;
(c) declare or pay a dividend on any shares of Common
Stock or other shares of capital stock of the Corporation
which are junior to the Series A Convertible Preferred Stock
in liquidation preference if any dividend on the Series A
Convertible Preferred Stock for the then current fiscal year
remains unpaid;
(d) authorize a merger, consolidation, recapitalization
or reorganization of the Corporation or any other
transaction or related series of transactions pursuant to
which the shareholders of the Corporation would own less
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<PAGE>
than 50% of the voting securities of the surviving
Corporation or authorize the sale of all or substantially
all of the assets of the Corporation; or
(e) apply any of its assets to the redemption,
retirement, purchase or acquisition, directly or indirectly,
of any shares of any class or series of Common Stock, except
pursuant to paragraph 4 and except from employees, advisors,
officers, directors and consultants of, and persons
performing services for, this Corporation or its
subsidiaries on terms approved by the board of directors
upon termination of employment or association.
RESOLVED FURTHER, that the President and Secretary of the Corporation
are hereby authorized and directed to prepare and file a Certificate
of Determination of Netter Digital Entertainment, Inc., a Delaware
corporation, in accordance with the foregoing resolutions and the
provisions of Delaware law.
[Remainder of page left intentionally blank]
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IN WITNESS WHEREOF, the undersigned has executed this Certificate on
October 18, 1996.
/s/ Douglas Netter
_______________________________
Douglas Netter, President
/s/ John Copeland
John Copeland, Secretary
The undersigned, and each of them, declare under penalty of perjury of the
laws of the State of Delaware that they have read the foregoing Certificate of
Determination and know the contents thereof, and that the same is true of their
own knowledge.
Executed at North Hollywood, California, on October 18, 1996.
/s/ Douglas Netter
______________________________
Douglas Netter, President
/s/ John Copeland
______________________________
John Copeland, Secretary
15
