SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(X) Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1996 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC.
(Exact name of Small Business Issuer in its Charter)
Delaware 95-3392054
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5200 Lankershim Boulevard, Suite 280
North Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818-753-1990
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
Which Registered
Common Stock, $.01 Par Value NASDAQ
Common Stock Purchase Warrants NASDAQ
Securities registered under Section 12(g) of the Exchange Act:
None
Check 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 ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10K-SB
or any amendment to this Form 10-KSB. [X]
The Registrant's revenues for the most recent fiscal year were $23,655,054.
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of the
Company, based upon the closing price of the Common Stock on the NASDAQ
Automated Quotation System on September 27, 1996 was $3,856,000. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed affiliates.
As of September 27, 1996, there were 2,795,000 shares of common stock
outstanding.
Documents Incorporated By Reference
The following documents are incorporated by reference into Part III of this
Annual Report on Form 10-KSB:
Registration Statement on Form SB-2 declared effective on November 20, 1995.
Registration Statement on Form 8-A dated November 20, 1995.
Form 10-QSB for the quarter ended December 31, 1995.
Form 10-QSB for the quarter ended March 31, 1996.
<PAGE>
PART I.
ITEM 1. BUSINESS
General
Netter Digital Entertainment, Inc. (the "Company") is a digital film production
company engaged in the acquisition, development and production of television
series, made-for-television movies, documentaries and theatrical motion pictures
(collectively and individually referred to as the "Productions " or "Projects").
The Company specializes in combining live action film production with computer
graphics and other digital imaging in the creation of science fiction,
documentary, family and children's programming, utilizing state-of-the-art
entertainment production technology. Historically, the Company sells or licenses
its Productions on the basis that it produce the Projects under a production
services contract with a major entertainment studio or distributor who is
responsible for the financial risk of the Project.
The Company intends to increase its ongoing revenue participation in its
Productions through the retention of ancillary exploitation rights such as
merchandising or by licensing the distribution rights for the individual markets
or software platforms. The Company has increased the number of properties it has
in development for sale or licensing to the major studios and distributors. The
Company's high technology production capabilities are suitable to attract talent
and state-of-the-art creative projects that can be produced efficiently and
digitally pre-purposed for multimedia software platforms.
In addition to the core business of developing and producing creative
programming, the Company is strategically expanding its high technology
capabilities as a digital studio and new entertainment technology based
"Production Services Group" focused on servicing the expanding production
markets beyond its in-house Productions.
The Company completed its initial public offering of securities in November
1995. The Company's Common Stock and Stock Purchase Warrants are listed on the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") and are traded in the NASDAQ's Small Cap Market under the symbol
"NETT" and "NETTW," respectively.
History
The Company commenced operations as a television production company in 1979
doing business as Rattlesnake Productions, Inc. ("RPI"). In September 1995, the
Company was reincorporated under the laws of the State of Delaware and changed
its name to Netter Digital Entertainment, Inc. The Company's first production
was the network mini-series "Louis L'Amour's The Sacketts". The Company has
produced eleven Productions and most recently the award winning primetime
television series "Babylon 5".
The Company has demonstrated it can develop and deliver Projects at production
costs consistent with the quality required by the market. The Company avoids
substantial operating overheads by maintaining a small permanent staff and
engaging free-lance production staff only as required for each production. In
addition, by expanding the in-house capacities of the technology division with
broader based in-house computer graphics, animation and post production
capabilities, combined with the implementation of the Company's internally
developed production methodology and techniques, the production costs on several
of its recent Projects are particularly competitive.
<PAGE>
RELEASED PROJECTS
Title Principal Cast Members Programming Air Date
- - --------------------------------------------------------------------------------
Babylon 5 Bruce Boxleitner,
Claudia Christian Television Series* 1993 -
Present
Hypernauts Glenn Herman, Heidi Lucas, Children's Television
Marc Daniel Series 1996
The Gathering Michael O'Hare, Mira Furlan TV Movie/Pilot for
"Babylon 5" series 1993
Siringo Brad Johnsen, Chad Lowe, Television Movie
Crystal Bernard 1995
The Wild West Jack Lemmon, James Coburn, Documentary Series 1993
Helen Hunt, Bruce Boxleitner
Captain Power Tim Dunigan, Peter MacNeill, Television Movie 1989
and the Jessica Steen
Soldiers of
the Future;
The Legend
Begins
Captain Power Tim Dunigan, Peter MacNeill, Children's Series 1987-1998
and the Jessica Steen
Soldiers
of the Future
Five Mile Louise Caire Clark, Cable Television Series 1983-1986
Creek Rod Mullinar
Louis L'Amour's Cindy Pickett, Mary Larkin, Network Pilot 1982
Cherokee Trail Timothy Scott
Wild Times Sam Elliot, Ben Johnson, Television Mini-Series 1980
Bruce Boxleitner
Roughnecks Ana Alicia, Vera Miles, Television Mini-Series 1980
Cathy Lee Cosby, Steve
Forrest, Harry Morgan
The Buffalo Stan Shaw, Richard Lawson, Network Pilot 1979
Soldiers John Beck, Hilly Hicks
Louis L'Amour's Sam Elliot, Tom Selleck, Network Mini-Series 1979
The Sacketts Glenn Ford, Ben Johnson
* Three seasons of 22 one hour episodes were produced in 1993, 1994 and 1995
respectively. A fourth season of 22 one hour episodes are currently in
production for delivery over 1996 and 1997 years.
<PAGE>
Business Strategy
The Company's strategy has been to develop and produce high quality leading edge
programming which is financed 100% by the major entertainment studios and
television distributors and not to take the financial risk of any Project.
Because the Company receives the full cost of the production, the profit
potential is usually limited to production margins, producer fees and a share of
the distributors' net profits, if any.
The Company is increasing the number of Projects being developed and produced as
quickly as possible. For certain future Projects the objective is to retain
greater ongoing equity participation when the project is sold to a major studio
or distributor. The retention of these ancillary exploitation rights such as
merchandising, and the licensing of individual multimedia markets or
entertainment platforms such as the Internet, are areas of particular interest
to the Company. In the future, the Company may also sell the licensing rights to
Projects on a market by market basis and finance a Production from banking
institutions on a non- recourse basis. The financing approach is industry
practice for low budget feature films.
In addition to the core business of developing and producing Projects, the
Company is strategically expanding its capabilities as a digital studio and
technology based "Production Services Group" focused on specific niches
identified in the multimedia and entertainment production environments. The
Company is well advanced in the process of expanding its in-house digital
production capabilities, and intends to continue to grow through the strategic
acquisition of production services and technology based entities that provide
additional income and asset growth opportunities that are independent of the
Company's own in-house Productions.
Current Production
"Babylon 5" is produced in association with its creator, J. Michael Straczynski
for Warner Bros. Prime Time Entertainment Network ("PTEN"). This Production
includes a two hour made-for-television Babylon 5 movie followed by three
television seasons of 22 one hour episodes making a total of 66 one hour
episodes already produced. The Company is currently producing the fourth season
of 22 one hour episodes which are scheduled for completion in July 1997. At that
time the Babylon 5 series will consist of 88 original one hour episodes. Warner
Bros. has also licensed the re-run rights to " Babylon 5" to Turner Network
Television ("TNT") for syndication on cable commencing in the 1997-1998
television season.
For the past 10 years, the Company has employed leading edge digital production
techniques, such as three dimensional computer graphics, digitally created
virtual sets, surround stereo audio mixing, and digital editing of both picture
and sound. The Company's production methodology creates substantial
efficiencies, allowing projects to be produced utilizing desk top computer
platforms that are relatively inexpensive and easily upgradable.
Development
The Company either acquires an option to purchase or creates or co-creates its
own concept, outline, treatment, script, or literary rights (a "property") on
which it will base a television series or movie. These properties are usually
acquired by options for a nominal fee against the purchase price; typically for
a term of one year or longer. These options enable the Company to develop and
secure a production commitment before actually acquiring the property. Terms of
the options vary significantly and are dependent upon, inter alia, the
credibility of and prior success of the writer/owner of the property, the level
of revenues the Company estimates can be received from the exploitation of the
property and the estimated cost of further development and production of the
property. Certain agreements may provide for additional payments to writers upon
the sale, production, or distribution of a project and may also provide for
participation in revenues or profits from these projects.
<PAGE>
On a continuing basis, the Company has numerous projects in various stages of
development. The Company allocates a significant portion of the time and energy
of its staff to search for potentially viable material and for the development
of concepts, treatments and screenplays. As of June 30, 1996, approximately
$65,000 had been spent or committed by the Company in connection with the
development of Projects that are currently active. Although a number of projects
which the Company develops are subsequently abandoned, the Company believes that
these expenditures are necessary if the Company is to develop suitable Projects
which have a chance of achieving commercial success. It is not the practice of
the Company, however, to expend substantial sums on a per project basis, unless
it believes that there is a strong likelihood of a financing, production and/or
distribution commitment from third parties.
Financing
It has been the Company's practice to utilize third party sources of financing
to cover the primary cost of production for the programming developed and
produced by the Company. For the foreseeable future the Company will continue to
have its productions financed by major entertainment studios and distributors.
For certain new projects it is the Company's strategy to retain certain
ownership and ancillary distribution rights such as merchandising. This strategy
may require overhead and equity investment by the Company which will be
considered by management on a case by case basis.
The principal sources of funds for the Company have been (i) the sale of equity
in the Company and (ii) the Company's internally-generated funds, primarily from
the financing of projects/productions by third-party distributors.
Employees
At June 30, 1996, the Company employed approximately 38 persons full-time in its
North Hollywood office. Of such persons, five are officers. The balance are
production, clerical and administrative personnel. The Company anticipates
increasing its technology, computer graphics animation and post production
facilities as well as its staffing requirements in the upcoming fiscal year.
Some of the Company's or subsidiary's employees are represented by labor unions
and the Company believes that it has good relationships with its employees. The
Company is continuing to review its staffing requirements and additions or
reductions in staff may be made if appropriate in the opinion of management.
When the Company is in production as many as 100 people are engaged by the
Company at its production studio for periods of nine months or longer. The
Company has granted, and will grant, to actors, directors, screenwriters, and
other important creative and financial elements, rights to participate in the
net profits or gross revenues of particular projects. Similar participation is
required pursuant to the terms of certain collective bargaining agreements.
The Company or certain of its subsidiaries are signatories to various agreements
with unions and guilds that operate in the entertainment industry. Although the
Company considers its employee relations to be satisfactory at present, the
renewal of these union contracts does not depend on the Company's activities or
decisions alone. If, prior to the expiration of an existing union contract, the
representatives of the employers were unable to negotiate a new contract with
the union, any resulting work stoppage could adversely affect the Company.
<PAGE>
Competition
The Company is subject to intense competition in all phases of its operations.
The Company's competitors include major entertainment studios, television and
cable networks and numerous independent production companies, many of which have
greater financial resources than the Company. All of these studios and
production companies compete for available literary properties, writers and
other creative talent, production financing, and distribution of completed
projects. In recent years, an increase in the international market and the
number of both production companies and television and motion picture products
has intensified this competition.
The entertainment business in general, and the television, multimedia and motion
picture business in particular, are undergoing significant changes, primarily
due to technological developments. These developments have resulted in the
availability of alternative forms of leisure time entertainment, expanded pay
television services, the Internet and more readily available multimedia home
entertainment equipment. The number of episodes of a television series and the
ability to retain ancillary rights remains a critical factor in generating
revenues in other media. Given the nature of technological development and
shifting consumer tastes, it is impossible to predict what effect technological
and other changes will have on the potential overall revenue from television and
motion pictures.
ITEM 2. REAL PROPERTY
The Company leases its principal executive offices on a month to month basis and
its studio facilities on an annual basis. Accordingly, no long-term lease
commitments exist. Rent expense for the years ended June 30, 1996 and 1995 was
approximately $404,000 and $324,000, respectively. The lease for the studio
facilities provides for annual option renewals through May 1999 with an annual
minimum rental of $288,000.
ITEM 3. LEGAL PROCEEDINGS
In connection with a sexual harassment claim for unspecified damages filed
against the Company and other third parties in the Los Angeles Superior Court on
June 27, 1995, the matter has been settled as of June 30, 1996 to the mutual
satisfaction of all parties. All settlement costs have been paid by a third
party. Accordingly, no provisions by the Company were necessary.
In the normal course of business, the Company is from time to time party to
various actions which in the aggregate are not believed by management to be
material to its financial condition
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the NASDAQ Small Cap Market under the
symbol "NETT" since November 20, 1995. In addition, warrants to purchase up to
544,400 of the Company's Common Stock are listed on the NASDAQ market under the
symbol "NETTW." The terms of the warrants provide the holder the right to
purchase any time prior to November 21, 1998 one share of Common Stock at a
price of $6.50. The warrants are redeemable at the Company's option upon 30 days
notice to the warrant holders at $0.01 per share if the closing bid price of the
Common Stock averages in excess of 110% of the then current exercise price of
the warrants for a period of 20 consecutive trading days ending within 15 days
of the date of the notice of redemption.
The following table sets forth the high and low bid price per share of the
Common Stock as reported by NASDAQ for each quarter within the last fiscal year.
Quarter Ended High bid Low Bid
December 31, 1995 $5.00 $4.375
March 31, 1996 $12.00 $4.250
June 30, 1996 $8.375 $4.500
On September 27, 1996, the closing prices of the Common Stock as reported by
NASDAQ were $4.00 bid and $4.375 ask. On such date there were 17 holders of
record of the Common Stock. The number of shareholders does not take into
account shareholders for whom shares are being held in the name of brokerage
firms or clearing agencies.
The Company has never paid any dividends on the Common Stock. The Company
intends to retain earnings and capital for use in its business. No cash
dividends are expected to be paid on the Common Stock in the foreseeable future.
The Company intends to sell shares of preferred stock in a limited public
offering to be commenced in October, 1996. The preferred stock will have a
dividend preference such that dividends on preferred stock must be paid prior to
the payment of dividends on common stock.
ITEM 6. 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.
<PAGE>
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 used in the later part of the third season of "Babylon 5" and
the production of "Hypernauts." 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 substantially reduced. 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. The Videssence merger is expected to close in October 1996
subject to certain closing conditions including the raising of $2 million of new
equity capital by the Company.
Results of Operations
Net Revenues. Net Revenues increased to $23.7 million for the fiscal year ended
June 30, 1996, an increase of 25% when compared to $18.9 million in net revenues
for the fiscal year ended June 30, 1995. The growth in net revenues has resulted
primarily from increased revenues from "Babylon 5" of $19.5 million in the
fiscal year ended June 30, 1996 compared to $18.5 million in the fiscal year
ended June 30, 1995, and from the addition of the "Hypernauts" Production which
added $4.2 million to total revenues in the fiscal year ended June 30, 1996. Of
the $4.2 million from "Hypernauts", $3.9 million was for production revenues and
$300,000 was for licensing fees for merchandising activities.
Gross Margin. The Company's gross margin for the fiscal year ended June 30, 1996
was $1,165,446, or 4.9% of net revenues, compared with $791,290 or 4.2% for the
fiscal year ended June 30, 1995. The increase in the gross margin percent was
achieved primarily due to the addition of the merchandising activity for the
"Hypernauts" project. Associated expenses for the merchandising activity were
recorded in general and administrative expenses as explained below.
General and Administrative Expenses. General and administrative expenses
increased to $1,524,864 in the fiscal year ended June 30, 1996; compared to
$646,668 for the fiscal year ended June 30, 1995, an increase of 136%. The
increase was primarily attributable to the start up costs and operating expenses
of the "Hypernauts" merchandising division, the creation of the project
development group, the expansion of the Company's technology operations and the
staffing costs, legal, regulatory, accounting and other expenses that resulted
from being a publicly traded company as of November 1995. The Company also
launched the "Official Babylon 5 Fan Club" ("Fan Club") in April 1996. The Fan
Club incurred marketing and operational costs relating to its startup prior to
the Company receiving any associated revenues. The Fan Club as of September 6,
1996 had approximately 5000 members worldwide. Subsequent to June 30, 1996, and
as a result of ABC placing "Hypernauts" on an indefinite hiatus, the Company
suspended its merchandising division, resulting in curtailment of overhead
expenses. In fiscal 1996, consistent with the activities of the new project
development group, the Company capitalized approximately $65,000 as production
costs for projects currently in development. No such costs were capitalized in
the fiscal year ended June 30, 1995.
Other Income and Expenses. Interest income increased to $98,262 for the fiscal
year ended June 30, 1996 compared to $1,368 for the fiscal year ended June 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.
<PAGE>
Cash used in operating activities was approximately $590,000 for the fiscal year
ended June 30, 1996. Approximately $257,000 was used to fund the net loss,
approximately $65,000 was used to fund projects in development, accounts payable
decreased by approximately $168,000 and a decrease in accounts receivable of
approximately $333,000 was largely offset by a decrease in deferred revenue of
approximately $394,000 to comprise the majority of the cash used in operating
activities.
Cash used for capital equipment investment was approximately $593,000 for the
fiscal year ended June 30, 1996. The use of cash was primarily for additions of
computer and post production equipment for the expansion of the technology group
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
fiscal year ended June 30, 1996, the Company used approximately $113,000 in
deferred acquisitions 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 June 30, 1996)
and accrued interest is payable on the closing date pursuant to the merger
agreement or October 31, 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 October 31, 1996, whichever is earlier.
As of June 30, 1996, $100,000 had been advanced under this agreement.
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 $7.00 per
share. The holders of Class A Preferred Stock may convert their shares into
common stock at a conversion ratio yet to be determined between the Company and
the placement agent. 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, 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 June 30, 1996, the Company's sources of liquidity included cash and cash
equivalents totaling approximately $2.2 million. The Company had no debt
outstanding as of June 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 will provide 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.
ITEM 7 FINANCIAL STATEMENTS
NETTER DIGITAL ENTERTAINMENT, INC. AND
SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEET - June 30, 1996 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS -
for the years ended June 30, 1996 and 1995 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
for the years ended June 30, 1996 and 1995 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS -
for the years ended June 30, 1996 and 1995 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-14
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Netter Digital Entertainment, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Netter
Digital Entertainment, Inc. and Subsidiaries as of June 30, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended June 30, 1996 and 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netter Digital
Entertainment, Inc. and Subsidiaries as of June 30, 1996 and the results of its
operations and its cash flows for the years ended June 30, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ Feldman Radin & Co., P.C.
__________________________________
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
New York, New York
September 13, 1996
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $2,181,223
Accounts receivable 93,817
Notes receivable 350,000
Due from officer 194,876
Production costs 65,209
Other 54,407
TOTAL CURRENT ASSETS 2,939,532
EQUIPMENT, net 568,993
DEFERRED ACQUISITION COSTS 113,396
DEPOSITS AND OTHER ASSETS 83,518
$3,705,439
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 209,615
Accrued expenses 80,775
TOTAL CURRENT LIABILITIES 290,390
MINORITY INTEREST 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
Additional paid in capital 3,533,331
Accumulated deficit (146,732)
TOTAL STOCKHOLDERS' EQUITY 3,414,549
$3,705,439
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-3
<TABLE>
NETTER DIGITAL ENTERTAINMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
Production $23,305,054 $18,878,661
Licensing 350,000 --
TOTAL REVENUES 23,655,054 18,878,661
EXPENSES:
Production 22,489,608 18,087,371
General and administrative 1,524,864 646,668
TOTAL EXPENSES 24,014,472 18,734,039
OPERATING INCOME (LOSS) (359,418) 144,622
OTHER INCOME (EXPENSE):
Interest income 98,262 1,368
Other income 15,098
Interest expense (10,786) (4,245)
TOTAL OTHER INCOME (EXPENSE) 102,574 (2,877)
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES AND MINORITY INTEREST (256,844) 141,745
PROVISION FOR INCOME TAXES -- (44,350)
MINORITY INTEREST -- --
NET INCOME (LOSS) $ (256,844) $ 97,395
NET INCOME (LOSS) PER COMMON SHARE $ (0.11) $ 0.05
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 2,404,356 1,860,000
The accompanying notes are an integral part of the financial statements.
F-4
</TABLE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Preferred Common Retained
Stock Stock Additional Earnings Total
Number of Number of Paid in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 -- $ -- 1,860,000 $18,600 $ (17,080) $ 12,717 $ 14,237
Grant of stock options -- -- -- -- 20,000 -- 20,000
Net income -- -- -- -- -- 97,395 97,395
Balance, June 30, 1995 -- -- 1,860,000 18,600 2,920 110,112 131,632
Sale of common stock
in public offering -- -- 860,000 8,600 3,231,161 -- 3,239,761
Exercise of warrants -- -- 75,000 750 299,250 -- 300,000
Net loss -- -- (256,844) (256,844)
Balance, June 30, 1996 -- $ -- 2,795,000 $27,950 $3,533,331 $(146,732) $3,414,549
The accompanying notes are an integral part of the financial statements.
F-5
</TABLE>
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Preferred Common Retained
Stock Stock Additional Earnings Total
Number of Number of Paid in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 -- $ -- 1,860,000 $18,600 $ (17,080) $ 12,717 $ 14,237
Grant of stock options -- -- -- -- 20,000 -- 20,000
Net income -- -- -- -- -- 97,395 97,395
Balance, June 30, 1995 -- -- 1,860,000 18,600 2,920 110,112 131,632
Sale of common stock
in public offering -- -- 860,000 8,600 3,231,161 -- 3,239,761
Exercise of warrants -- -- 75,000 750 299,250 -- 300,000
Net loss -- -- (256,844) (256,844)
Balance, June 30, 1996 -- $ -- 2,795,000 $27,950 $3,533,331 $(146,732) $3,414,549
The accompanying notes are an integral part of the financial statements.
F-5
</TABLE>
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND 1995
1. ORGANIZATION:
Rattlesnake Productions, Inc. was incorporated in June 1979 under the laws
of the State of California. Babylonian Productions, Inc., a majority owned
subsidiary (51%), was incorporated in June 1993 under the laws of the State
of California. In September 1995, Rattlesnake Productions, Inc. merged into
a Delaware corporation, Netter Digital Entertainment, Inc. Hereafter,
Netter Digital Entertainment, Inc. and Babylonian Productions, Inc. are
collectively referred to as the "Company". The Company is engaged in the
development, acquisition and production of prime time television series and
movies, children's series and theatrical movies. The Company is in the
process of expanding its production technologies division and expanding
into technology related production services. In August 1996, the Company
agreed to purchase all the outstanding shares of Videssence, Inc.
("Videssence"), a company that designs, manufactures and distributes media
lighting products which incorporate the patented SRGB light technology for
the illumination of studios, stages and other production environments in
the sound stage, media picture, theater and other theme park industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Financial statements - The financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1995 presentation to
conform to the 1996 presentation. These 1995 reclassifications
resulted in a net decrease to revenues and general and administrative
expenses in the amounts of $380,423 and $765,671, respectively, and a
net increase to production expenses in the amount of $385,248.
B. Cash and cash equivalents - The Company considers all highly liquid
temporary cash investments with an original maturity of three months
or less when purchased, to be cash equivalents.
F-7
<PAGE>
C. Revenue recognition: Production revenues - The Company derives
revenues primarily from providing contract production services to
distributors including producers-profit participation. Revenues are
recognized as earned. Amounts advanced under production contracts are
deferred and not recognized as revenues until obligations under such
contracts are performed. Conversely, amounts expended under production
contracts not yet reimbursed are recorded as a receivable. Management
has determined that as of June 30, 1996 all receivables are
collectible. Accordingly, no allowance for doubtful accounts has been
recorded. To date, the Company has not recognized any material
revenues from producers-profit participation.
Licensing revenues - Licensing revenues representing guaranteed
royalties are recognized as income when the Company meets all
commitments and obligations related to the royalty agreement.
D. Equipment - Equipment is recorded at cost. Depreciation is calculated
using the straight line method based on the estimated useful lives of
the related assets, which range from three to seven years.
E. Net income (loss) per common share - Net income (loss) per common
share is computed using the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during
the respective periods.
F. Income taxes - Effective July 1, 1993, the Company adopted Statement
of Financial Accounting Standards No.109, "Accounting for Income
Taxes" ("SFAS No.109"). SFAS No.109 requires the Company to recognize
deferred tax assets and liabilities based on the difference between
the financial statements carrying amount and the tax basis of assets
and liabilities, using the effective tax rates in the years in which
the differences are expected to reverse. A valuation allowance related
to deferred tax assets is also recorded when it is probable that some
or all of the deferred tax asset will not be realized.
G. Concentration of credit risk - Financial instruments that potentially
subject the Company to significant concentrations of credit risk
consisting of cash and trade receivables. At times the cash in any one
bank may exceed the FDIC $100,000 limit. The Company places its cash
with high credit quality financial institutions. In regards to trade
receivables, the risk is relatively limited due to the customers being
national and foreign distributors.
H. Minority interest - Minority interest represents the minority
shareholders' proportionate share of the equity
F-8
<PAGE>
of the Company's subsidiary, which was 49% at June 30, 1996 and 1995.
The minority interest is adjusted for the minority's share of the
earnings or loss of the Company's subsidiary.
I. Stock based compensation - The Company accounts for stock transactions
in accordance with APB Opinion No.25, "Accounting for Stock Issued to
Employees." In accordance with Statement of Financial Accounting
Standards No.123, "Accounting for Stock based Compensation," the
Company intends to adopt the pro forma disclosure requirements of
Statement No.123 in fiscal 1997.
J. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reporting amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
3. NOTES RECEIVABLE:
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 acquisition. Any unpaid principal (all of which is
outstanding as of June 30, 1996) and accrued interest is payable on the
closing date pursuant to the merger agreement or October 31, 1996,
whichever is earlier. On June 10, 1996, the Company and Videssence entered
into a 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 October 31, 1996, whichever is earlier. As of June
30, 1996, $100,000 had been advanced under this agreement.
4. DUE FROM OFFICER:
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.
5. RELATED PARTY TRANSACTION:
During the years ended June 30, 1996 and 1995, the Company contracted with
a computer graphics company to produce certain
F-9
<PAGE>
visual effects for two of its productions for approximately $1,834,000 and
$1,000,000, respectively. Until February 1996, the computer graphics
company was 10% owned by the spouse of an officer of the Company.
During the years ended June 30, 1996 and 1995, the Company rented trailers,
in connection with one of its productions, for approximately $118,000 per
annum, from a company which is 50% owned by an officer of the Company and
his spouse.
During fiscal years ended June 30, 1996 and 1995, the Company leased some
of its recording equipment for approximately $55,000. The supplier is a
company owned by an officer of the Company's son and administered by the
officer's wife.
In March 1996, the Company entered into a six month business consulting
agreement with one member of its Board of Directors ("Consultant") for a
monthly fee of $5,000. Under the terms of the agreement, the Consultant is
to locate suitable acquisitions or joint ventures or assist the Company in
consummating similar transactions. In the event he is successful, he is
entitled to a performance fee calculated as a percentage of the
consideration paid by the Company for the acquiree.
In a separate consulting agreement entered into by the same board member
with the Company in June, 1996, the Company agreed to pay $10,000 per month
for two months to assist with completion of the Videssence merger.
6. PRODUCTION COSTS:
Production costs consist of the following at June 30, 1996:
Story rights and scenarios: $65,209
Production costs are deferred and will be amortized under the "Individual
Film Forecast Method" as required by Statement of Financial Accounting
Standards No.53, "Financial Reporting by Producers and Distributors of
Motion Picture Films." Production costs will be amortized in relation to
the revenue recognized from each production, and amortization will be
calculated based on management's latest estimate of the production's gross
profit margin over its remaining life, which requires the Company to use
estimates of the future revenue generating potential of each production.
Such estimates are subject to a variety of cost factors. These estimates
will be re-evaluated periodically and, when necessary, production costs
will be written down to net realizable value.
F-10
<PAGE>
7. EQUIPMENT:
Equipment consists of the following at June 30, 1996:
Post-production equipment $ 568,720
Office furniture and equipment 33,370
-------------
602,090
Less: accumulated depreciation 33,097
$ 568,993
=============
8. DEFERRED ACQUISITION COSTS:
Deferred acquisition costs, which relate to the Videssence acquisition,
will be capitalized as part of the purchase price upon successful
completion of the Company's proposed merger and private placement. In the
event the merger is not completed, the costs will be charged to expense.
9. COMMITMENT AND CONTINGENCIES:
The Company leases its principal executive offices on a month to month
basis and its studio facilities on an annual basis. Accordingly, no
long-term lease commitments exist. Rent expense for the years ended June
30, 1996 and 1995 was approximately $404,000 and $324,000, respectively.
The lease for the studio facilities provides for annual option renewals
through May 1999 with an annual minimum rental of $288,000.
10. STOCKHOLDERS' EQUITY:
In September 1995, the Company issued an aggregate of 125,000 three year
warrants in connection with a bridge financing. Each warrant is exercisable
for one share of common stock at a price of $4.00 per share. As of June 30,
1996, 75,000 of these warrants were exercised for proceeds of $300,000.
In November 1995, the Company completed a public offering of its
securities, selling 860,000 shares of common stock and 430,000 warrants for
net proceeds of approximately $3,200,000. The warrants are exercisable to
purchase one share of common stock at a price of $6.50 per share. The
warrants are exercisable at any time after issuance and expire in November
1997. The warrants are redeemable at the Company's option
F-11
<PAGE>
commencing February 18, 1996 upon 30 days notice to the warrantholders at
$.01 per warrant if the closing bid price of the common stock averages in
excess of 110% of the then current exercise price of the warrants for a
period of 20 consecutive trading days ending within 15 days of the notice
of redemption. The underwriters of the public offering received a warrant
to purchase up to 129,000 shares or warrants, or any combination thereof.
The warrant will be exercisable for a period of four years commencing
November 20, 1996 at an exercise price of $6.00 per share and $.012 per
warrant.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock,
$.001 par value, the terms of which (including, without limitation,
dividend rate, conversion rates, voting rights, terms of redemption and
liquidation preferences) may be fixed by the Board of Directors at their
sole discretion.
Stock Options and Warrants
The Company adopted a Stock Option Plan ("Plan") in September 1995. The
Plan is administered by a committee of two ("Committee") appointed by the
Board of Directors and provides that the Committee has sole discretion to
select options and to establish terms and conditions of each option,
subject to provisions of the Plan. If options granted are "incentive stock
options", the exercise price of the options may not be less than 100% of
the fair market value of the Company's common stock on the date of grant
(110% of the fair market value if the grant is to an employee who owns more
than 10% of the outstanding common stock). Nonstatutory options may be
granted under the Plan at an exercise price of not less than 85% of fair
market value of the common stock at the date of grant. The maximum grant
term is 10 years. The Plan is designed for officers, directors, and other
key employees and is authorized to grant up to 500,000 options. As of June
30, 1996, 402,000 options have been granted and no options have been
exercised.
11. EMPLOYMENT AGREEMENTS:
The Company entered into agreements for the services of certain of its
officers and others. These agreements expire through June 30, 2001 and
provide for aggregate compensation of approximately $706,000 for the year
ended June 30, 1996, and approximately $910,000 annually thereafter.
Certain of these agreements provide for additional compensation based on
future financing and certain revenue or other operating result
F-12
<PAGE>
targets. Some of these agreements also provide for payments by the Company
in the event of death, disability, or termination.
12. INCOME TAXES:
The provision for income taxes consists of the following:
June 30,
----------------------------------
1996 1995
-------------- --------------
Current federal and state income taxes $ - $ 48,193
Deferred federal and state - (3,843)
Provision for income taxes $ - $ 44,350
============== ==============
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income (loss) before provision for
income taxes and minority interest as follows:
June 30,
------------------------------------
1996 1995
--------------- ---------------
Income tax provision (benefit)
computed at the statutory rate $ (90,000) $ 48,193
Income tax benefit of disqualifying
dispositions 9,000
Income tax benefit not recognized 90,000 -
Provision for state income taxes - 8,183
Miscellaneous - (3,026)
Income tax provision $ - $ 44,350
=============== ===============
The Company has a net operating loss carryforward for tax purposes totaling
approximately $256,000 at June 30, 1996 that expires in the year 2011.
F-13
<PAGE>
The following table illustrates the sources and status of the Company's
major deferred tax assets and (liability) items at June 30, 1996:
Tax benefit of net operating $ 102,000
loss carryforward
---------------
Net deferred tax asset 102,000
Valuation allowance (102,000)
Net deferred tax asset recorded $ -
===============
13. SIGNIFICANT CONCENTRATIONS:
During the year ended June 30, 1996, the Company derived approximately 83%
of its revenue from one distributor and approximately 17% from another. In
June 1996, the former distributor exercised their option to extend the
contract for a fourth season of production through approximately August
1997. If the option with this distributor is not renewed after a fourth
season, the Company's financial condition and operations could be adversely
affected.
14. SUBSEQUENT EVENTS:
On August 5, 1996, the Company held a special meeting of the stockholders
to vote on the proposal to adopt an "Agreement and Plan of Reorganization
and Merger" providing for the merger of Videssence into a wholly owned
subsidiary of the Company. All of the outstanding shares of Videssence
common stock will be converted into the right to receive 522,000 shares of
the Company's common stock at a price of $9.00 per share. Upon achieving
certain performance criteria, the shareholders of Videssence will also be
entitled to earn up to an additional 788,000 shares of the Company's common
stock also at a price of $9.00 per share. The matter was approved and is
subject to certain closing conditions and terms, including the Company
obtaining financing. The possible acquisition will follow the purchase
method of accounting.
On September 5, 1996, the Company and an investment banking firm agreed to
undertake an offering for the issuance by the Company of Class A Cumulative
Convertible Preferred Stock in a limited public offering. The Class A
Preferred Stock will bear a preferred stock dividend of 10% per annum and
will be offered at a price $7.00 per share. The holders of Class A
Preferred Stock may convert their shares into Common Stock on a share for
share basis plus an amount equal to unpaid dividends. The pricing of the
offering and conversion ratio of the Series A Preferred Stock may be
subject to alteration by the Company and the placement agent if prevailing
market conditions require.
F-14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information with respect to the directors and
executive and other officers of the Company. Directors are elected at the annual
meeting of stockholders to serve for a term of one year and until their
successors are elected and qualified. Officers serve at the discretion of the
Board of Directors of the Company. Except as noted below, there are no other
family relationships between any of the executive officers and directors.
Name Age Position with Company
Douglas Netter 75 Chairman of the Board, Chief Executive
Officer, and President
John Copeland 45 Executive Vice President, Secretary
and Director
Thomas Jorgenson 41 Chief Operating Officer
George Johnsen 42 Senior Vice President - Post
Production and Technology
Geoffrey Talbot 48 Acting Chief Financial Officer,
Director
Kate Netter Forte 40 Director
Rowland Perkins 61 Director
Leonard Silverman 58 Director
Officers and Directors
Douglas Netter, Chairman of the Board of Directors, Chief Executive Officer, and
President has been an officer and director of the Company since its inception in
1979. Mr. Netter has spent his entire career in the motion picture and
television industry. From 1969 to 1975, he was a member of the Board of
Directors and Chief Operating Officer of the MGM group of companies which during
his tenure produced over 75 feature films and an extensive list of television
shows. Prior to 1969, Mr. Netter was involved in the production of David Lean's
"Lawrence of Arabia," the "Matt Helm" films for Columbia, Jack Lemmon's "How to
Murder Your Wife" and "April Fools," and Samuel Goldwyn's "Porgy and Bess." Mr.
Netter was also General Manager of Todd AO during the production of "Oklahoma,"
"South Pacific" and "Around the World in Eighty Days."
John Copeland has been with the Company since its inception serving as a
producer on many of the Company's television movies, series and documentaries.
He has been the Executive Vice President and Secretary of the Company since
September 1995. He is currently producer of the Company's two-time Emmy Award
winning prime time television series "Babylon 5." In the past several years, he
also produced the Emmy-nominated documentary series "The Wild West" and the
television movie, "Siringo." Mr. Copeland's functions include administration and
management of productions and assisting in the business and financial planning
for the Company. In addition, he is involved in the development and acquisition
of properties for additional projects to be produced by the Company. He received
a Bachelor of Arts degree from Chapman College with majors in both Film and
Theater.
<PAGE>
Thomas Jorgenson joined the Company as Chief Operating Officer in August 1996.
His functions include administration and management of the Company's
non-production activities as well as the business and financial planning for the
Company as a whole. Mr. Jorgenson is also responsible for performing due
diligence on, and as necessary, operationally integrating and managing
acquisition and merger candidates that the Company may pursue in fulfillment of
its business plan. Mr. Jorgenson has over fifteen years experience as a senior
executive in finance, administration, business planning and
operations/manufacturing management. From 1994 to 1995, Mr. Jorgenson was
Co-chairman of the Board, Chief Operating Officer and Chief Financial Officer of
Spectral, Inc., a manufacturer of digital audio editing hardware and software
products for the multimedia, post production and music production markets. From
1984 to 1994, Mr. Jorgenson held various financial, business planning and
operations management positions in the operating business units and the
corporate office at Harman International Industries, Inc., a Fortune 500
manufacturer of audio equipment for the consumer, professional and automotive
OEM markets. Mr. Jorgenson holds a Bachelor of Science degree in Accounting from
San Diego State University and an Masters of Business Administration from the
University of Southern California.
George Johnsen joined the Company as the Senior Vice President of Post
Production and Technology and as an Associate Producer in 1993. Prior to joining
the Company, Mr. Johnsen founded and operated a digital studio facility for
twelve years servicing companies in film, television and special venue
production. In this capacity, he acquired experience in working with
animatronics, 3-D images, large format projected images, HDTV and simulator
motion base interfaces. Mr. Johnsen's functions are to establish and manage the
Technology and Production Services Division including: managing post production
of Company produced projects; generating income from the acquisition and
application of new technologies; and marketing production services to outside
producers.
Geoffrey P. Talbot has been a consultant to the Company since July 1994 and
joined the Board of Directors in September 1995. Mr. Talbot is presently the
Acting Chief Financial Officer of the Company. Mr. Talbot has 26 years of
international business experience primarily in the corporate finance, media,
entertainment and transportation industries where he has held numerous senior
executive positions. Mr. Talbot founded and is presently the President of Trital
Acquisition Inc., a corporate advisory and merchant banking firm specializing in
media and entertainment investments. In September 1992, Mr. Talbot co-founded
Classics International Entertainment, Inc. ("CIE") and later became its Chief
Executive Officer, President and director in which capacities he served until
June 1994. Between 1989 and 1992, Mr. Talbot provided financial advisory
services to companies in the media, environmental, consumer products and
equipment leasing industries.
Kate Netter Forte joined the Board of Directors in September 1995. From 1991 to
the present, Ms. Netter Forte has been the Executive Vice President of
Production and Development of Oprah Winfrey's Harpo Productions, Inc., where she
is responsible for the development and production of feature films and
made-for-television movies. She also serves as producer for Harpo Films.
Previously, from 1981 to 1991, she worked at Marion Rees & Associates, Inc., a
developer of television programming, serving as its Director of Development. Ms.
Netter Forte is the daughter of Douglas Netter.
Rowland Perkins joined the Board of Directors in September 1995. Mr. Perkins
founded and is presently President of The Rowland Perkins Company, Inc.,
established to develop and produce feature network and cable films, television
series and special Broadway shows and other entertainment products. Prior to
that and from 1975 to 1994, Mr. Perkins co-founded and became President of
Creative Artists Agency, Inc., a theatrical agency, which also provides
diversified services encompassing advertising, investment banking and consulting
for communications and technology companies pursuing the information super
highway. From 1959 to 1975, he worked for the William Morris Agency, a
theatrical agency, serving as its Director of TV Talent Department and as Vice
President of Creative Services.
<PAGE>
Leonard Silverman joined the Board of Directors in June 1996. Dr. Silverman
spent most of his professional career at USC and since 1977 has been a Full
Professor of Electrical Engineering. His administrative career began in 1982
when he was elected Chairman of the Electrical Engineering-Systems Department.
He was appointed as the fifth Dean of Engineering at USC in 1984. Dr. Silverman
is internationally known for his pioneering work in the theory and application
of multi-variable control systems and signal processing and has more than 100
publications to his credit.
The Company does not currently pay or intend to pay cash compensation to its
directors for their services in that capacity; however, directors who are not
employees are reimbursed for out-of-pocket expenses incurred in connection with
their attendance at Board of Directors meetings or committee meetings. The
Company has granted its non-employee directors a non-discretionary grant of
50,000 options each under its Option Plan as compensation for their services.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons owning more than 10 percent of a
registered class of the Company's equity securities, to file with the securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent shareholders are required by SEC
regulations to furnish the Company with copies of Section 16(a) forms they file.
To the Company's knowledge, during the fiscal year ended June 30, 1996, all
Section 16(a) filing requirements applicable to its officers, directors, and
greater than ten percent beneficial owners were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation of the Company's executive
officers receiving salary and bonus in excess of $100,000 in any of the last
three fiscal years.
Long Term
Compensation
Name and Principal Position Year Salary($) Bonus($) Options All Other
Douglas Netter 1996 $234,753 $55,417(1) N/A $7,750(2)
CEO/President/Chairman of 1995 $156,000 $42,000(1) N/A N/A
of the Board 1994 $ 39,000 $39,000(1) N/A N/A
John Copeland 1996 $195,156 $29,167(1) 50,000 $3,500(2)
Executive Vice President 1995 $171,600 N/A N/A N/A
1994 $165,000 N/A N/A N/A
George Johnsen 1996 $127,778 $21,667(1) 50,000 N/A
Senior Vice President 1995 $ 86,228 N/A N/A N/A
1994 $ 83,029 N/A N/A N/A
(1) Participation in producer fees of projects produced.
(2) Automobile Allowance
<PAGE>
Employment Agreements
In September 1995, the Company entered into a five year employment agreement
with Douglas Netter. Under this agreement his base salary is $175,000 plus 25%
of the executive producer fees earned by the Company for his services rendered
in that capacity for each production ("Executive Producer Fees" ). Mr. Netter's
total base salary plus Executive Producer Fees are capped at $270,000 for the
first year of service. The Compensation Committee may adjust Mr. Netter's base
salary and base salary cap in its reasonable discretion in any year after the
first year. Under the agreement, Mr. Netter is also entitled to an annual bonus
of 8% of the Company's net income before taxes. If the Company attains projected
net income for the first year, Mr. Netter will receive warrants to purchase
10,000 shares of Common Stock at an exercise price of $6.50 per share. In
subsequent years, Mr. Netter is entitled to 10,000 warrants in any year the
Company attains a net income level determined by the Compensation Committee. Mr.
Netter will be granted "piggyback" registration rights in conjunction with any
such warrant grant. He also receives customary executive benefits and a
$2,000,000 life insurance policy for his designated beneficiary's benefit.
In September 1995, the Company also entered into a five year employment
agreement with John Copeland. Under this agreement his base salary is $140,000
plus 25% of the executive producer fees earned by the Company for his services
rendered in that capacity for each production ("Producer Fees"). Mr. Copeland's
total base salary plus Producer Fees are capped at $190,000 for the first year
of service. The Compensation Committee may adjust Mr. Copeland's base salary and
base salary cap in its reasonable discretion in any year after the first year.
Under the agreement, Mr. Copeland is also entitled to an annual bonus of 2% of
the Company's net income before taxes. If the Company attains projected net
income for the first year, Mr. Copeland also receives warrants to purchase 2,500
shares of Common Stock at an exercise price of $6.50 per share. In subsequent
years, Mr. Copeland is entitled to 2,500 warrants in any year the Company
attains a net income level determined by the Compensation Committee. Mr.
Copeland will be granted "piggyback" registration rights in conjunction with any
such warrant grant. He also receives customary executive benefits and a
$1,000,000 life insurance policy for his designated beneficiary's benefit.
George Johnsen also entered into an employment agreement with the Company in
December 1995 for an unspecified term. Under this agreement, Mr. Johnsen
receives a base salary of $2,500 per week plus 20% of his producer fees earned
by the Company for his services rendered in that capacity for each production he
oversees. After one year the Compensation Committee may adjust Mr. Johnsen's
base salary and additional compensation in its sole discretion. He also receives
customary benefits.
1995 Stock Option Plan
The Company adopted the 1995 Stock Option Plan ("Option Plan") on September 13,
1995. The Plan is administered by a committee of two outside, independent
directors ("Committee") appointed by the Board of Directors and provides that
the Committee has sole discretion to select options and to establish terms and
conditions of each option, subject to provisions of the Option Plan. If options
granted are "incentive stock options", the exercise price of the options may not
be less than 100% of the fair market value of the Company's Common Stock on the
date of grant (110% of the fair market value if the grant is to an employee who
owns more than 10% of the outstanding Common Stock). The exercise price of
nonstatutory options may be granted under the Option Plan at an exercise prices
of not less than 85% of fair market value of the Common Stock at the date of
grant. The Option Plan provides for the grant of options to qualified employees,
including officers, directors, and other key persons associated with the
Company, to purchase an aggregate of 500,000 shares of common stock. Unless
otherwise specified, no stock options may be exercised more than ten years after
grant. As of June 30, 1996, 402,000 options have been granted and no options
have been exercised.
<PAGE>
Option Grants, Exercises and Year-End Values
Shown below is information with respect to the unexercised options held by the
Named Executive Officers, for the year ended June 30, 1996.
% of Total Value of
Options Unexercised
Number of Granted to In-the-Money
Securities Employees Options
Options in Fiscal Exercise At June 30 Expiration
Name Granted 1996 Price 1996 Date
George Johnsen 10,000 2.5% $5.00 $----(1)(2) 2006
(1) Based upon the difference between the closing price of the stock on June 28,
1996 of $5.00 and the option exercise price. (2) Mr. Johnsen was granted 50,000
options under the 1995 Stock Option Plan, of which 10,000 options are presently
exercisable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Principal Stockholders
The following table sets forth certain information, as of September 6, 1996,
concerning ownership of shares of Common Stock by each person who is known by
the Company to own beneficially more than 5% of the issued and outstanding
Common Stock of the Company:
Amount and Nature
Name and Address of Beneficial Owner of Beneficial Ownership Percent of Class
Douglas Netter
5200 Lankershim Boulevard 1,731,000(1) 61.93%
North Hollywood, CA 91601
John Copeland
5200 Lankershim Boulevard 150,000(1) 5.37%
North Hollywood, CA 91601
1) In December 1989, Mr. Netter granted Mr. Copeland an option to purchase
100,000 shares owned by Mr. Netter, exercisable at $0.01 per share, and in
September 1995, Mr. Netter granted Mr. Copeland an option to purchase 50,000
shares owned by Mr. Netter, exercisable at $4.00 per share. Mr. Copeland's
options remain unexercised.
<PAGE>
Security Ownership of Management
The following table sets forth certain information, as of September 6, 1996,
concerning ownership of shares of Common Stock by (i) each director of the
Company, (ii) the CEO of the Company and the two most highly compensated
executive officers whose compensation and bonus exceeds $100,000 per annum, and
(iii) all of the officers and directors and key employees as a group:
Amount Percent of
Name and Address of Beneficial Owner and Nature Beneficial Ownership
Douglas Netter 1,731,000(1)(2) 61.9%
John Copeland 150,000(1) 5.4%
Geoffrey Talbot 125,000(2) 4.5%
Rowland Perkins 30,000(3) 1.1%
Kate Forte 30,000(3) 1.1%
Leonard Silverman 30,000(3) 1.1%
George Johnsen 10,000(4) *
All Directors and Officers
as a group
(7 persons) 1,831,000(5) 63.3%
- - ---------------------
The address for all persons listed is 5200 Lankershim Blvd., North Hollywood, CA
91601.
* Less than 1%
(1) In December 1989, Mr. Netter granted Mr. Copeland an option to
purchase 100,000 shares owned by Mr. Netter, exercisable at $0.01 per
share, and in September 1995, Mr. Netter granted Mr. Copeland an
option to purchase 50,000 shares owned by Mr. Netter, exercisable at
$4.00 per share. Mr. Copeland's options remain unexercised.
(2) In July 1994, Mr. Netter granted Mr. Talbot an option to purchase
200,000 shares owned by Mr. Netter, exercisable at $.01 per share. In
September 1995, Mr. Talbot and Mr. Netter mutually agreed to cancel
50,000 of the previously granted options. Mr. Talbot presently has
options to purchase 125,000 of Mr. Netter's shares of Common Stock,
all of which are presently exercisable.
(3) Under the 1995 Stock Option Plan, Mr. Perkins, Ms. Forte, and Mr.
Silverman were each granted options to purchase from the Company
50,000 shares of Company Common Stock, of which 30,000 are currently
exercisable at $5.00 per share. To date, no options have been
exercised.
(4) Under the 1995 Stock Option Plan, Mr. Johnsen was granted 50,000
options, of which 10,000 are currently exercisable at $5.00 per share.
To date, no options have been exercised.
(5) Of the shares included as beneficially owned by all directors and
officers as a group, 100,000 shares may be acquired by exercise of
options, not including the 275,000 options granted by Mr. Netter to
Mr. Copeland and Mr. Talbot.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
During the years ended June 30, 1996 and 1995, the Company contracted with a
computer graphics company to produce certain visual effects for two of its
productions in the amounts of approximately $1,834,000 and $1,000,000
respectively. Until February 1996, the computer graphics company was 10% owned
by the spouse of an officer of the Company.
During the years ended June 30, 1996 and 1995, the Company rented trailers, in
connection with one of its productions, for approximately $118,000 per annum,
from a company which is 50% owned by an officer of the Company and his spouse.
During fiscal years ended June 30, 1996 and 1995, the Company leased some of its
recording equipment for approximately $55,000. The supplier is a company owned
by an officer of the Company's son and administered by his wife. Management
believes the terms of the rental agreement is no less favorable than it could
obtain from an unaffiliated third party.
In March 1996, the Company entered into a six month business consulting
agreement with one member of its board of directors ("Consultant") for a monthly
fee of $5000. Under the terms of the agreement, the Consultant is to locate
suitable acquisitions or joint ventures or, assist the Company in consummating
similar transactions. In the event he is successful he is entitled to a
performance fee calculated as a percentage of the consideration paid by the
Company.
In a separate consulting agreement entered into by the same board member and the
Company in June 1996, the Company agreed to pay $10,000 per month for two months
to assist with the completion of the Videssence merger and to advise Videssence
in regard to its current operations.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of regulation S-K).
Exhibit Number Description
2.1 Agreement and Plan of Merger and Reorganization,
as amended.(5)
2.2 Amendment No. 2 to the Agreement of Merger and
Reorganization(6)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
10.1 Mr. Netter's Employment Agreement(1)
10.2 Mr. Copeland's Employment Agreement(1)
10.3 "Babylon 5" Production Agreement(1)
10.4 1995 Stock Option Plan(1)
10.5 Talbot Consulting/Completion Fee Agreement(6)
---------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 declared effective November 20, 1995. Registration Number is
33-97402-LA.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A dated November 20, 1995.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended December 31, 1995.
(4) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1996
(5) Incorporated by reference to the Company's Proxy Statement, dated June
26, 1996 for the approval/disapproval of the proposed merger between
the Company and Videssence.
(6) Filed herewith.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the last quarter of the period
covered by this report.
<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: September 28, 1996 By: /s/Geoffrey Talbot
Geoffrey Talbot, Acting Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/Douglas Netter Chairman of the Board of September 28, 1996
Douglas Netter Directors, Chief Executive
Officer and President
/s/John Copeland Executive Vice President September 28, 1996
John Copeland and Secretary
/s/Thomas L. Jorgenson Chief Operating Officer September 28, 1996
Thomas L. Jorgenson
/s/George Johnsen Senior Vice President, September 28, 1996
George Johnsen Production and Technology
/s/Geoffrey Talbot Acting Chief Financial Officer September 28, 1996
Geoffrey Talbot and Director
/s/Rowland Perkins Director September 28, 1996
Rowland Perkins
/s/Kate Netter Forte Director September 28, 1996
Kate Netter Forte
/s/Leonard Silverman Director September 28, 1996
Leonard Silverman
<PAGE>
Exhibit Index
Exhibit Number Description
2.1 Agreement and Plan of Merger and Reorganization,
as amended.(5)
2.2 Amendment No. 2 to the Agreement of Merger and
Reorganization(6)
3.1 Certificate of Incorporation(1)
3.2 Bylaws(1)
10.1 Mr. Netter's Employment Agreement(1)
10.2 Mr. Copeland's Employment Agreement(1)
10.3 "Babylon 5" Production Agreement(1)
10.4 1995 Stock Option Plan(1)
10.5 Talbot Consulting/Completion Fee Agreement(6)
---------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 declared effective November 20, 1995. Registration Number is
33-97402-LA.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A dated November 20, 1995.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended December 31, 1995.
(4) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1996
(5) Incorporated by reference to the Company's Proxy Statement, dated June
26, 1996 for the approval/disapproval of the proposed merger between
the Company and Videssence.
(6) Filed herewith.
<PAGE>
SECOND AMENDMENT TO
AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION
This Second Amendment to Agreement and Plan of Merger and Reorganization
("Amendment") is made effective as of August 31, 1996, between NETTER DIGITAL
ENTERTAINMENT, INC., a Delaware corporation ("NDEI"), NETTER ACQUISITION INC., a
California corporation ("NAC") and VIDESSENCE, INC., California corporation
("Videssence"), with reference to the following facts:
A. NDEI, NAC and Videssence entered into an Agreement and Plan of Merger
and Reorganization dated April 26, 1996 (the "Merger Agreement")
pursuant to which NAC would merge into Videssence, making Videssence
the wholly-owned subsidiary of NDEI.
B. NDEI, NAC and Videssence entered into the First Amendment to Merger
Agreement, dated July 3, 1996 (the "First Amendment") whereby the
parties amended and modified the Merger Agreement.
C. NDEI, NAC and Videssence wish to amend the First Amendment and further
amend the Merger Agreement to merge NAC into Videssence such that
Videssence becomes the wholly-owned subsidiary of NDEI on the terms
and conditions set forth in the Merger Agreement and the First
Amendment, both as modified in this Amendment.
D. Terms with initial capital letters used in this Amendment and not
otherwise defined herein shall have the same meanings set forth in the
Merger Agreement or the First Amendment.
NOW, THEREFORE, the parties hereby agree as follows:
1. Modification to First Amendment: The First Amendment is hereby modified
as follows:
1.1. Section 1.1 to the First Amendment shall be amended and restated
as follows: Operating Profit Escrow Shares. On the Escrow Release Date, provided
Surviving Corporation achieves 1996 Videssence Operating Profit (defined below)
of $347,500 for the period commencing January 1, 1996 and ending on the date
seven months after the Closing Date, Escrow Agent shall deliver from Escrow to
the Videssence Shareholders (on a pro rata basis based on their ownership
interest immediately prior to the Effective Time) all of the 144,444 Operating
Profit Escrow Shares. In the event Surviving Corporation achieves 1996
Videssence Operating Profit of less than $347,500, but at least $173,750 for the
period commencing January 1, 1996 and ending on the date seven months after the
1
<PAGE>
Closing Date, then Escrow Agent shall deliver from the Operating Profit Escrow
Shares to the Videssence Shareholders (on a pro rata basis) such number of
Netter Shares equal to the product of (i) 144,444, and (ii) the quotient of (x)
the amount by which the actual 1996 Videssence Operating Profit exceeds $173,750
divided by (y) $173,750, and shall deliver to Netter the balance of the
Operating Profit Escrow Shares. If Surviving Corporation fails to achieve 1996
Videssence Operating Profit of at least $173,750 for the period commencing
January 1, 1996 and ending on the date seven months after the Closing Date, the
Videssence Shareholders shall receive none of such Operating Profit Escrow
Shares, all 144,444 of which the Escrow Agent shall deliver to Netter.
1.2. Section 1.5 of the First Amendment shall be amended and restated
as follows: by Netter if any of the conditions in Article VII have not been
satisfied as of October 31, 1996 or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Netter to comply with its
obligations under this Agreement) and Netter has not waived such condition on or
before October 31, 1996; or
1.3. Section 1.6 to the First Amendment shall be amended and restated
as follows: by Videssence, if any of the conditions in Article VIII not been
satisfied as of October 31, 1996 or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Videssence to comply with
their obligations under this Agreement) and Videssence has not waived such
condition on or before October 31, 1996;
1.4. Section 1.7 to the First Amendment shall be amended and restated
as follows: by either Netter or Videssence if the Closing has not occurred
(other than through the failure of any party seeking to terminate this Agreement
to comply fully with its obligations under this Agreement) on or before October
31, 1996, or such later date as the parties may agree upon.
2. Other Provisions Unmodified. Except as expressly modified hereby, the
rights, obligations and terms of the First Amendment and the Merger Agreement
shall remain unmodified and in full force and effect. In the event of a conflict
between the Amendment, the First Amendment and the Merger Agreement, the
Amendment shall be controlling.
3. Counterparts. This Amendment may be executed in several counterparts,
and all so executed shall constitute an agreement, binding on all the parties
hereto, notwithstanding that all of the parties are not signatory to the
original or the same counterpart.
2
<PAGE>
IN WITNESS WHEREOF, this Amendment is effective as of the date first set
forth above.
NETTER DIGITAL ENTERTAINMENT, INC.,
a Delaware corporation
By /s/Douglas Netter
_______________________________________
Douglas Netter, President
VIDESSENCE, INC., a California corporation
By /s/Paul Costa
_______________________________________
Paul Costa, President
NETTER ACQUISITION, INC., a California
corporation
By /s/Douglas Netter
______________________________________
Douglas Netter, President
3
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made and effective on March 1,
1996, by and between Netter Digital Entertainment, Inc., a Delaware corporation
(the "Company") and Trital Acquisition Corp. and Geoffrey Talbot (collectively,
the "Consultant"), and is made with reference to the following facts:
The purpose of this Agreement is to set forth the respective rights and
duties of Consultant and the Company in connection with retaining Consultant as
a business consultant for the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
representations and warranties contained herein, the parties agree as follows:
1. Retention. For the term of this Agreement, the Company will retain
Consultant and Consultant accepts such retention on the terms and conditions set
forth below.
2. Term. The term of this Agreement shall be for six (6) months from the
date of this Agreement and this Agreement shall thereafter automatically be
renewed on a monthly basis until either party provides 30-days written notice of
non-renewal .
3. Compensation. For services rendered by Consultant to the Company under
this Agreement, the Company shall pay Consultant as follows:
3.1 Monthly Fee. The Company shall pay to Consultant a monthly fee of
Five Thousand Dollars ($5,000.00) per month, made payable in advance to Trital
Acquisition Corp. at the beginning of each month.
3.2 Performance Fee. In the event the Company acquires a target or
completes a transaction identified by Consultant, the Company shall pay
Consultant a performance fee calculated as follows:
5% of the first million dollars or part thereof, paid by the Company;
4% of the second million;
3% of the third million;
2% of the fourth million;
1% of the fifth million; and
1/2% of any amount over $5,000,000.
The performance fee for any transaction introduced by Consultant during the term
of this Agreement which is completed after the termination of this Agreement
shall be payable to the Consultant upon completion of the transaction. The
Company shall be permitted to deduct from any performance fee due such amounts
the Company has paid in advance for the establishment and operation of
Consultants' Beverly Hills office, including, but not limited to, rent and
utilities payments for such office.
1
<PAGE>
3.3 Due Diligence Fee. For any transaction not introduced by
Consultant, but for which the President of the Company requests Consultant to
perform certain services, a due diligence fee for such services, on mutually
agreeable terms to be negotiated prior to providing such services, shall be paid
by the Company to the Consultant.
4. Required Services. In consultation with the Company, Consultant shall
actively search out and locate suitable acquisition merger, joint venture or
similar targets for the Company, conduct preliminary due diligence and valuation
analysis of potential targets, whether identified by Consultant or not, and
assist the Company, as directed by the President, in consummating acquisitions
or similar transactions found suitable by the Company's Board of Directors. The
parties hereto agree to report all sums paid and received by Trital Acquisition
Corp. under this Agreement to federal and state taxing authorities as sums paid
and received under a Consulting Agreement for consulting services.
5. Expenses. The Company shall reimburse Consultant for any reasonable
business expenses which have been pre-approved in writing by the Company in
advance of being incurred.
6. Independent Contractor. It is understood and agreed that Consultant
shall be acting only in the capacity of an independent contractor insofar as
this Agreement is concerned, and not as a partner, co-venturer, agent, employee,
franchisee or representative of the Company. Consultant shall be responsible for
payment of all state, federal or other taxes due on all sums paid to Consultant
under this Agreement.
7. Entire Agreement. This Agreement contains the entire agreement between
the parties hereto with respect to the transactions contemplated hereby, and
contains all of the terms and conditions thereof and supersedes all prior
agreements and understandings relating to the subject matter hereof. No changes
or modifications of or additions to this Agreement shall be valid unless the
same shall be in writing and signed by each party hereto.
8. Severability. The provisions of this Agreement shall be deemed severable
and the invalidity or unenforceability of any one or more of the provisions
hereof shall not affect the validity and enforceability of the other provisions
hereof.
9. Assignment. The rights and obligations of Consultant under this
Agreement shall not be assignable without the prior written consent of the
Company. The rights and obligations of the Company under this Agreement shall
not be assignable without the prior written consent of Consultant which consent
shall not be unreasonably withheld or delayed; provided, however, no consent is
required in the event of a sale of substantially all of the Company's assets or
similar reorganization . Any attempted assignment in violation of this Agreement
shall be void and of no effect.
10. Waivers. No waiver of any of the provisions of this Agreement shall be
deemed to be or shall constitute a waiver of any other provision of this
Agreement, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver of any provision of this Agreement shall be binding on the
parties hereto unless it is executed in writing by the party making the waiver.
11. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of delivery if delivered personally to the party to whom notice is
to be given, or on the third (3rd) day after mailing if mailed to the party to
whom notice is given, by first class mail, registered or certified, postage
prepaid, and properly addressed as follows:
a. If to Company:
Netter Digital Entertainment, Inc.
5200 Lankershim Blvd., Suite 280
North Hollywood, California 91601
Attention: Douglas Netter
With a copy to:
Luce, Forward, Hamilton & Scripps
600 West Broadway, Suite 2600
San Diego, CA 92101
Attention: Robert G. Copeland, Esq.
b. If to the Consultant:
Geoffrey Talbot
Trital Acquisition Corp.
591 W. Old Mill Road
Lake Forest, Illinois 60045
Either party may change the address to which notices to such party are to
be addressed by giving the other party hereto written notice of such change in
the manner herein set forth.
12. Arbitration of Disputes. Any controversy or claim arising out of or
relating to the between Consultant and the Company shall be settled by
arbitration in accordance with the laws of the State of California by a mutually
agreeable arbitrator, whose approval shall not be unreasonably withheld by
either party. If the parties cannot agree on the appointment of an arbitrator,
then the arbitrator shall be appointed by the American Arbitration Association
in Los Angeles, California. Such arbitration shall be conducted in Los Angeles,
California in accordance with the rules of the American Arbitration Association,
except with respect to the selection of the arbitrator which shall be as
provided in this Section 12. Judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. The party or parties
againt whom the arbitrator shall render an award shall pay the other party's or
parties' reasonable attorneys' fees and other reasonable costs and expenses in
connection with the enforcement of its or their rights under this Agreement
(including the enforcement of any arbitration award in court), unless and to the
extent the arbitrator shall determine that under the circumstances recovery by
the prevailing party or parties of all or a part of any such fees and costs and
expenses would be unjust.
13. No Third-Party Benefits. None of the provisions of this Agreement shall
be for the benefit of, or enforceable by, any third-party beneficiary.
14. Headings. The Section and Subsection headings used herein are for
convenience or reference only, are not a part of this Agreement and are not to
affect the construction of, or be taken into consideration in interpreting, any
provision of this Agreement.
15. Counterparts. This Agreement may be executed in several counterparts
all of which together shall constitute one and the same instrument with the same
force and effect as though each of the parties had executed the same document.
16. Governing Law. This Agreement is made and shall be governed by, and
construed and enforced in accordance with, the laws of the State of California,
without regard to the conflict of laws principles thereof, as the same apply to
agreements executed solely by residents of California and wholly to be performed
within California. Venue for any proceeding shall be only in Los Angeles County,
California.
17. Construction. In the interpretation and construction of this Agreement,
the parties acknowledge that the terms hereof reflect extensive negotiations
between the parties shall not be deemed, for the purpose of construction and
interpretation, that either party drafted this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
CONSULTANT:
Trital Acquisition Corp.
By:/s/Geoffrey Talbot
___________________________________
Geoffrey Talbot, President
/s/Geoffrey Talbot/
___________________________________
Geoffrey Talbot
COMPANY:
Netter Digital Entertainment, Inc.
By:/s/ Douglas Netter/
___________________________________
Douglas Netter, President
<PAGE>
