<PAGE>
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC.
(exact name of registrant as specified in charter)
Delaware 95-3392054
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
5200 Lankershim Blvd., Suite 280
No. Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818/753-1990
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
As of May 09, 1996 the Registrant had 2,795,000 shares of its
Common Stock, $.01 par value, issued and outstanding.
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
March 31, June 30,
1996 1995
__________________________
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,532,022 $ 338,231
Accounts receivable 665,406 426,732
Receivable from related party 194,876 194,876
Production costs, net 26,008 -
Prepaid expenses - 932
____________ __________
Total Current Assets 4,418,312 960,771
Equipment, net of Accumulated Depreciation 231,848 3,539
Deferred Registration Costs -- 60,363
Deposits and Other Assets 72,218 63,289
____________ __________
$ 4,722,378 $1,087,962
___________ __________
Liabilities and Stockholders' Equity
Accounts payable $ 728,954 $ 377,530
Accrued expenses -- 74,377
Note payable - line of credit -- 110,000
Deferred revenue 309,885 393,923
___________ __________
Total Current Liabilities 1,038,839 955,830
Minority Interest 1,000 500
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock, $.001 par value,
2,000,000 shares authorized; no shares
issued and outstanding -- --
Common stock, $.01 par value, 6,000,000
shares authorized; 2,795,000 shares
issued and outstanding 27,950 18,600
Additional paid-in capital 3,537,368 2,920
Retained earnings 117,221 110,112
Total Stockholders' Equity 3,682,539 131,632
___________ __________
$ 4,722,378 $1,087,962
___________ __________
The accompanying notes are an integral part of the consolidated financial
statements.<PAGE>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31,
1996 1995 1996 1995
_____________________ _____________________
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Production income $7,932,226 $5,405,713 $21,659,544 $14,687,377
Merchandising
income 350,000 -- 350,000 --
Interest income 27,362 -- 46,131 --
Other income 14,095 -- 15,098 --
___________ __________ ___________ ___________
8,323,683 5,405,713 22,070,773 14,687,377
Expenses:
Production expenses 7,818,507 5,255,632 21,100,813 13,872,926
General and
administrative
expenses 446,487 126,066 923,271 717,596
Interest expense 944 813 10,780 6,512
__________ __________ __________ __________
8,265,938 5,382,511 22,034,864 14,597,034
__________ __________ __________ __________
Income/(Loss) Before
Income Taxes 57,745 23,202 35,909 90,343
Provision for Income
Tax 19,633 7,889 28,800 32,165
__________ __________ __________ __________
Net Income (Loss) $ 38,112 $ 15,313 $ 7,109 $ 58,178
__________ __________ _________ __________
Net Earnings/(Loss)
Per Share $ 0.01 $ 0.01 $ -- $ 0.03
__________ __________ _________ __________
Weighted Average
Number of Common
Shares $2,795,000 1,860,000 2,795,000 1,860,000
__________ _________ _________ _________
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Preferred Common Net
Stock - Stock - Additional Retained Stock-
Number Number Paid-In Earnings holders'
Of Shares Amount of Shares Amount Capital (Deficit) Equity
_________ ______ _________ ______ _________ _________ ________
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE -
June 30,
1995 -- -- 1,860,000 $18,600 $ 2,920 $110,112 $ 131,632
Issuance of
common stock in
public offering -- -- 860,000 8,600 3,234,448 -- 3,243,048
Exercise of
warrants __ __ 75,000 750 300,000 __ 300,750
Net Income-
(Unaudited) -- -- -- -- -- 7,109 7,109
________________________________________________________________
Balance -
March 31, 1996 -- -- 2,795,000 $27,950 $3,537,368 $117,221 $3,682,539
_________________________________________________________________
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Nine Months Ended March 31,
1996 1995
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $ 7,109 $ 58,178
____________ ___________
Noncash items included in income: -- --
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable (238,674) (140,731)
(Increase)/decrease in prepaid expenses 932 49,987
(Increase)/decrease in deposits and other asset (8,929) 159,048
Increase/(decrease) in accounts payable 351,424 (27,633)
Increase/(decrease) in accrued expenses (74,377) (40,420)
Increase/(decrease) in deferred revenue (84,038) (560,187)
____________ ____________
Total Adjustments (53,662) (559,936)
____________ ____________
Net Cash provided by operating activities (46,553) (501,758)
____________ ____________
Cash flows from investing activities:
Production costs (26,008) --
Capital expenditures (228,309) (2,943)
____________ ____________
Net cash used in investing activities (254,317) (2,943)
_____________ ____________
Cash flows from financing activities:
Decrease in deferred registration costs 60,363 --
Proceeds from public offering 3,543,798 --
Increase in Minority Interest 500 --
Proceeds from note payable - line of credit -- 65,000
Repayment of note payable - line of credit (110,000) --
_____________ ___________
Net cash provided by (used in) financing
activities 3,494,661 65,000
_____________ ___________
Net increase/(decrease) in cash 3,193,791 (439,701)
Cash at beginning of period 338,231 487,891
___________ ____________
Cash at end of period $3,532,022 $ 48,190
___________ ____________
Amounts Paid for:
Interest $ 10,780 $ 6,512
Taxes $ 28,800 $ 32,165
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Item 1. Basis of Preparation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These
financial statements should be read in conjunction with the
consolidated financial statements and related footnotes for the
year ended June 30, 1995 included in the Company's Registration
Statement on Form SB-2 for the year then ended.
In the opinion of the Company's management, all adjustments
(consisting of normal recurring accruals) necessary to present
fairly the Company's financial position as of March 31, 1996,
and the results of operations and cash flows for the three and
nine month periods ended March 31, 1996, and 1995 have been
included.
The results of operations for the three and nine month periods
ended March 31, 1996, are not necessarily indicative of the
results to be expected for the full fiscal year. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Registration
Statement on Form SB-2 as filed with the Securities and Exchange
Commission for the year ended June 30, 1995 and the quarter ended
September 30, 1995.
Earnings per share has been calculated based upon the weighted
average number of common shares outstanding. Stock options have
been excluded as common stock equivalents because they are either
antidilutive, or their effect is not material.
Due From Officer/Receivable From Related Party
As of November 20, 1995, the officer entered into a promissory
note agreement for the amount advanced, bearing interest at the
prime rate plus 2%.
Production Costs
March 31, 1996 June 31, 1995
Production costs consist of:
Story rights and development costs $ 26,008 -----
<PAGE>
Notes to Financial Statements (Continued)
Public Offering of Securities
In November 1995, the Company completed a public offering of its
securities. The Company sold 860,000 shares of common stock and
494,500 warrants for net proceeds (after deducting underwriting
commissions and related expenses) of approximately $3,300,000.
Note Payable - Line of Credit
On June 1, 1995, the Company renewed a $250,000 revolving line of
credit with a bank, at an index rate equal to the certificate of
deposit interest rate plus 3% interest per annum. Interest is
payable monthly through maturity, at which time the principle
balance plus any accrued interest is due and payable. The
revolving line of credit is due and payable on June 3, 1996. As
of March 31, 1996, there was no outstanding principal on the line
of credit.
Commitment and Contingencies
The Company is defending a sexual harassment claim for damages
and costs made by a former employee. The Company believes it has
meritorious defenses and intends to vigorously defend the action.
The Company believes that the outcome will not materially affect
the Company's financial position and results of operations.
Accordingly, no provision has been made for this contingency.
Production and General and Administrative Expenses
Certain expense classifications in fiscal 1995 have been
reclassed to conform with fiscal 1996 classifications.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
For the nine months ended March 31, 1996, the Company reported a
net profit of $7,109 on revenues of approximately $22 million,
compared to a net profit of $62,439 on revenues of approximately
$14.6 million for the same period last year. Revenues during the
three month period ended March 31, 1996 increased from
approximately $5.4 million during the three month period ended
March 31, 1995 to $8,282,226 during the current three month
period ended March 31, 1996. Revenues for the current period
increased from the prior year primarily as a result of
production-related revenues for "Babylon 5" and "Hypernauts," as
well as merchandising revenues for "Hypernauts." The Company has
received the majority of the current season production revenues
for the "Babylon 5" and "Hypernauts" series receivable in the
June 30, 1996 fiscal year. Both series are in the final stages
of post production of the production orders of 22 episodes and 13
episodes respectively, which will be substantially completed in
the 4th Quarter 1996. While the Company believes the "Babylon 5"
series will be renewed for another season, the studios and
networks typically do not commit to order episodes for the fall
season until May or June. Further, while "Hypernauts" is
scheduled to continue its 13 episode network airing in June, the
Company does not expect the series to be renewed for the second
season by the same network. Consequently, the Company is seeking
alternative distribution, including cable and syndication
outlets, for the "Hypernauts" series. However, there can be no
assurance that additional episodes of either series will be
ordered, produced and distributed in the coming 1996/1997
television season.
<PAGE>
Costs relating to revenue during the nine months ended March 31,
1996 increased as a percentage of revenue to 96% from 94% during
the nine month period ended March 31, 1995, and were 94% and 97%
during the three month period ended 1996 and 1995 respectively.
Costs during the nine month period ended March 31, 1996, relate
to production costs of "Babylon 5" and "Hypernauts." The nine
month period ended March 31, 1995 reflected similar production
costs for "Babylon 5" and "Siringo" incurred during that period.
Selling, general, and administrative costs increased by $205,675
or 29% to $923,271 during the nine months ended March 31, 1996.
The costs for the quarter ending March 31, 1996 increased 254%
to $446,487 from $126,066 for the three months ended March 31,
1995. The increased costs are primarily the result of increased
staffing requirements for expansion of the Company's
merchandising, technology, and new project development
operations. The divisions were established during the quarter
ended December 31, 1995. Nonetheless, the majority of the costs
for these divisions were incurred during the three month period
ended March 31, 1996. Similarly, the hiring of additional
personnel and the purchase of new equipment for the expansion of
the Company's post production facilities contributed to the
increased costs for the same three month period. Management's
strategy to further develop its technology, merchandising, and
project development divisions requires significant upfront
investments, the benefits of which will take time to materialize.
There can be no assurances, however, such benefits will ever
materialize.
The increase in interest income was principally due to interest
earned on proceeds received from the Company's initial public
offering of securities, which was completed in November 1995.
Interest expense is based on the level of borrowings in each
period. Interest expense was $944 for the three months ended
March 31, 1996, compared to $813 for the three months ended March
31, 1995. Interest for the nine month period ended March 31,
1996 was $10,780, as compared to $6,512 for the same period in
1995.
<PAGE>
Liquidity and Capital Resources
As of March 31, 1996, the Company had cash and cash equivalents
of approximately $3.5 million and accounts receivable of $665,406
(aggregate of $4,197,428). The Company's new divisions have been
primarily financed by the net proceeds received from the public
offering of its securities and proceeds from exercises of stock
warrants. Of these proceeds, approximately $360,000 was used to
retire debt; approximately $260,000 was spent to purchase new
equipment; and approximately $250,000 in the aggregate was
attributable to the continued expansion of merchandising
operations and the development of new projects. The balance of
these net proceeds (approximately $2.6 million) has been set
aside for equipment and software purchases, further merchandising
operating costs, the development and acquisition of new
properties and production-related technologies, and working
capital.
Together, proceeds of the public offering and the results of
operations for the period resulted in a current ratio increase
to approximately 425% as of March 31, 1996, compared to
approximately 144% for the same period last year.
The Company's sources of working capital are principally derived
from contract production receipts from distributors including a
major studio and a subsidiary of a major television network.
These monies are received by the Company during the production
stage of a project and upon its completion. The Company has in
the past been able to secure production financing from a major
studio or distributor. 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 financing. In that event, its working capital will be
reduced accordingly. Moreover, as the Company continues to
expand its production and merchandising activities, and develops
new projects for additional ancillary markets, it must make
additional financial commitments to acquire and develop these new
properties and projects, and to cover the resulting increased
overhead. These financial commitments create additional risk for
the Company as to whether such projects and properties will be
produced or sold, and as to whether they will ever recover the
costs of investment and generate a profit.
<PAGE>
The Company's cash receipts are presently principally derived
from external production funding of its projects, related
merchandising revenue, and producer fees. The Company's
revenues are affected by the third party distribution of its
projects and the number of projects for which the Company
receives producer fees. Therefore, the Company is unable to
accurately predict the level or timing of its future cash
receipts.
While maintaining its core business of producing television
programming and films, the Company continues to expand its
production services capabilities in an effort to become a
broader-based entertainment company. In April 1996, the Company
entered into a definitive merger agreement with Videssence, Inc.,
a designer, manufacturer and distributor of patented lighting
technology for the illumination of studios, stages, and other
production environments in the television broadcast and
production markets. Upon the satisfaction of certain closing
conditions, Videssence, Inc. 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 522,222 shares of Common
Stock valued at $9.00 per share. The Videssence shareholders can
earn up to an additional 777,778 shares of Common Stock, valued
at $9.00 per share, upon Videssence, Inc. achieving certain other
performance based criteria. The combined revenues of the Company
and Videssence, Inc. are projected to be $30 million. There can
be no assurances, however, that the combined companies' revenue
will meet these projections. As part of the merger transaction,
and as a condition to closing, the Company intends to raise a
minimum of $2 million which it will provide to Videssence for
working capital purposes.
The Company currently has no debt and does not presently intend
to pursue debt-related financing for its production-related and
growth activities. Management may, however, pursue such
debt-financing at some time in the future for further expansion
of its acquisitions or merger plans.
<PAGE>
Management believes that its future production-related revenue
and anticipated cash flow, combined with its cash, cash
equivalents and accounts receivable as of March 31, 1996 will be
sufficient for the Company's needs for at least the next twelve
months. Nonetheless, the foregoing activities are dependent in
the long term upon the Company's ability to generate sufficient
cash flow to cover its ongoing overhead expenses by making a
sufficient number of productions during each period and
developing successful merchandising and post production
operations.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is defending a sexual harassment claim for damages
and costs made by a former employee. The Company believes it has
meritorious defenses and intends to vigorously defend the action.
The Company believes that the outcome will not materially affect
the Company's financial position and results of operations.
Accordingly, no provision has been made for this contingency.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits - None
(b.) Reports on Form 8K - None
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Registrant
Dated: May 10, 1996 Suzanne L. Jealous
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 1996 FILED BY NETTER DIGITAL
ENTERTAINMENT, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,352,022
<SECURITIES> 0
<RECEIVABLES> 665,406
<ALLOWANCES> 0
<INVENTORY> 26,008
<CURRENT-ASSETS> 4,418,312
<PP&E> 237,176
<DEPRECIATION> (5,328)
<TOTAL-ASSETS> 4,722,378
<CURRENT-LIABILITIES> 1,038,839
<BONDS> 0
0
0
<COMMON> 27,950
<OTHER-SE> 3,537,368
<TOTAL-LIABILITY-AND-EQUITY> 4,722,378
<SALES> 22,024,084
<TOTAL-REVENUES> 22,070,773
<CGS> 21,100,813
<TOTAL-COSTS> 22,024,084
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,780
<INCOME-PRETAX> 35,909
<INCOME-TAX> 28,800
<INCOME-CONTINUING> 7,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,109
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
