SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
Filed by the Registrant [ x ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[x ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or 240.14a-12
Netter Digital Entertainment, Inc.
(Name of Registrant as Specified In its Charter)
Netter Digital Entertainment, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ x ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11. (Previously paid)
1) Title of each class of securities to which transaction applies:
Common Stock
2) Aggregate number of securities to which transaction applies:
1,300,000
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3) Per unit price of other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1
$9.00 per Merger Agreement
4) Proposed maximum aggregate value of transaction:
$11,700,000
1 Set forth the amount on which the filing fee is calculated and state how
it was determined.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $2,340
2) Form, Schedule or Registration Statement No.: Schedule 14A
3) Filing Party: Netter Digital Entertainment, Inc.
4) Date Filed: July 2, 1996
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July 11, 1996
Dear Shareholder:
On June 20, 1996 your Company celebrated its seventh
month as a publicly traded company. I am pleased to
tell you that management's commitment to you, the
shareholders, in increasing shareholder value
continues to grow. It has been an exciting time for
us and I would like to share some of the events of the
last seven months with you.
In our report of results for the fiscal third quarter
and for the nine months ended March 31, 1996, revenues
had increased 54% for the quarter when compared to the
same period in 1995, and for the nine month period,
revenues were up 50%.
Netter Digital continues to expand in production
services capability in an effort to become a broader-
based entertainment company. In April 1996, the
Company entered into a definitive merger agreement
with Videssence, Inc. located in Burlingame,
California, 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. Terms of the Agreement call for an
exchange of the stock of Videssence with the common
stock of Netter Digital, with Netter Digital's stock
valued at $9.00 per share.
Netter Digital appointed Jamie L. Smith as Vice-President
of Development. In May 1996, the Company acquired worldwide
television rights to the "Jungle Bots" children's television
series from Conceptual Realities, Inc. "Jungle Bots"
will feature a combination and live action and
computer-generated imagery for the story set in a world
thick with lush foliage and inhabited by wild robotic
animals.
"Babylon 5," the two-time Emmy Award-winning
syndicated prime time series the Company produces, has
recently been renewed for a fourth season. This makes five
consecutive years for "Babylon 5" which is distributed worldwide
by Warner Brothers. The "Official Babylon 5 Fan Club," owned by
the Company, has been launched with a growing membership and
has become very active on the Internet. I am happy to enclose
a copy of the first fan club newsletter for your reading
enjoyment.
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In April, ABC placed "Hypernauts," a science fiction
children's series which combines live action and
computer graphics, on hiatus, leaving the continued
airing of the series on ABC very uncertain. The
Company is currently seeking a new home for
"Hypernauts" with other cable and network outlets.
Netter Digital's Post Production Center is up and operational,
and generating greater than anticipated savings. Our current
capabilities include the auto assembling of television shows, 3D
optical effects, titling, compositing, rotoscoping and animation-
all functions previously handled by third party vendors. With the
acquisition of these systems, the Company continues its move towards
maximum effectiveness of people and equipment.
We will continue to keep you informed as Netter
Digital implements its growth plan.
The management and Board of Directors have unanimously
approved this merger and we respectfully ask that you return
your proxy vote for approval as soon as possible.
ENCLOSED YOU WILL FIND YOUR PROXY REQUESTING YOUR
APPROVAL VOTE FOR THE COMPLETION OF THE VIDESSENCE
MERGER.
Thank you for your confidence and support.
Sincerely,
Douglas Netter
Chairman and CEO
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<PAGE>
July 11, 1996
Dear Warrantholder:
On August 5, 1996, the Company will conduct a
stockholders' meeting to consider and vote upon the
merger of the Company and Videssence, Inc. As a
holder of Company warrants, you have no right to vote
by proxy or at the meeting. However, if you exercise
any or all of your warrants and hold shares of
underlying Common Stock on August 4, 1996, you will
have the same rights as any other stockholder to vote
the shares you hold on August 4, 1996 by proxy or at
the meeting. Consequently, enclosed please find a
notice of meeting, proxy statement and ballot for you
to consider and use should you choose to exercise any
or all of your warrants prior to August 4, 1996. The
check for the amount of the exercise price of the
warrants and the notice of exercise issued as part of
the warrant must have been received at the Company's
offices, 5200 Lankershim Blvd., Suite 280, North
Hollywood, California 91601, on or before August 4,
1996 for the warrants to be considered exercised on or
before August 4, 1996.
Sincerely,
Douglas Netter
Chairman and CEO
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<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC.
5200 Lankershim Blvd., Suite 280
North Hollywood, California 91691
(818) 753-1990
______________________________
Notice of Special Meeting of Stockholders
To Be Held August 5, 1996
______________________________
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders
of Netter Digital Entertainment, Inc., a Delaware corporation
("NDEI"), will be held at 5200 Lankershim Blvd., North Hollywood,
California, 91691, on August 5, 1996 at 10:00 a.m. to consider and
vote upon a proposal to approve and adopt an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement") providing for the
merger (the "Merger") into NDEI's wholly-owned subsidiary, Netter
Acquisition Corp., a California corporation ("NAC"), and Videssence,
Inc., a California corporation ("Videssence"), pursuant to which,
among other things, Videssence will become a wholly owned subsidiary
of NDEI and each outstanding share of Videssence Common Stock will
be converted into the right to receive 522,000 shares of NDEI Common
Stock valued at $9.00 per share. The shareholders of Videssence
will also be entitled to earn up to an additional 788,000 shares of
NDEI Common Stock, valued at $9.00 per share, upon achieving certain
performance criteria.
The Merger Agreement is described in the accompanying Proxy
Statement and is attached as Appendix A thereto.
The Board of Directors has fixed the close of business on June
24, 1996, as the record date for determination of those stockholders
and warrantholders entitled to notice of the meeting or any
adjournments thereof. Only stockholders of record at the close of
business on that date and warrantholders of record at the close of
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business on that date who exercise their warrants on and hold the
underlying NDEI Common Stock on August 4, 1996 will be entitled to
vote at the meeting.
By Order of the Board of
Directors,
/s/ John Copeland
________________________________
John Copeland
Secretary
June 26, 1996
North Hollywood, California
PLEASE DATE, SIGN, AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING.
EXECUTION OF THE PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU
ARE PRESENT AT THE MEETING.
PAGE
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Netter Digital Entertainment, Inc.
PROXY STATEMENT
This Proxy Statement is being furnished to stockholders of
Netter Digital Entertainment, Inc., a Delaware corporation ("NDEI"),
in connection with the solicitation of proxies by the NDEI Board of
Directors from holders of NDEI's Common Stock ("Common Stock"), for
use at a Special Meeting of Stockholders of NDEI to be held on
August 5, 1996, and any adjournment or postponement thereof.
At the Meeting, stockholders will consider and vote upon a
proposal to approve and adopt an Agreement and Plan of
Reorganization and Merger (the "Merger Agreement") providing for
the merger (the "Merger") of NDEI's wholly-owned subsidiary, Netter
Acquisition Corp. ("NAC"), a California corporation, with and into
Videssence, Inc., a California corporation ("Videssence"), pursuant
to which, among other things, Videssence will become a wholly-owned
subsidiary of NDEI and each outstanding share of Videssence Common
Stock will be converted into the right to receive 522,000 shares of
NDEI Common Stock, valued at $9.00 per share. The shareholders of
Videssence will also be entitled to earn up to an additional 788,000
shares of NDEI Common Stock, valued at $9.00 per share, upon
Videssence achieving certain performance criteria. See "The Merger --
Recommendation of the Board of Directors-Business Reasons for the
Merger" and "The Merger -- Conditions and Terms of the Merger" and
the documents referred to therein.
June 24, 1996 has been fixed by the Board of Directors as the
record date for the determination of the stockholders and
warrantholders entitled to notice of the Meeting. Only stockholders
of record on that date and warrantholders of record on that date who
exercise some or all of their warrants and hold the underlying NDEI
Common Stock on August 4, 1996 will be entitled to vote at the
meeting. This Proxy Statement and the enclosed form of proxy are
first being sent to stockholders and warrantholders on July 15,
1996. All proxies must be received by NDEI on or before August 4,
1996 to be voted at the Meeting. Stockholders may revoke their
proxies orally or in writing at any time prior to the vote on the
Merger Agreement at the Meeting.
THE BOARD OF DIRECTORS OF NDEI BELIEVES THAT THE MERGER
AGREEMENT IS IN THE BEST INTERESTS OF NDEI AND ITS STOCKHOLDERS AND
HAS UNANIMOUSLY APPROVED THE TERMS OF THE MERGER AGREEMENT AND
HAS UNANIMOUSLY RECOMMENDED THAT THE STOCKHOLDERS OF NDEI VOTE IN
FAVOR OF THE MERGER AGREEMENT. STOCKHOLDERS SHOULD NOTE THE CONFLICT
OF INTEREST OF GEOFFREY TALBOT, A DIRECTOR OF NDEI, REFERRED TO HEREIN.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Proxy Statement is July 15, 1996.
PAGE
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TABLE OF CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . .7
VOTING AND PROXIES . . . . . . . . . . . . . . . . . .7
Date, Time and Place of the Meeting . . . . . . .7
Record Date, Stockholders Entitled to Vote,
Quorum 7
Proxies and Vote Required . . . . . . . . . . . .8
Solicitation of Proxies . . . . . . . . . . . . .8
THE MERGER . . . . . . . . . . . . . . . . . . . . . .8
General . . . . . . . . . . . . . . . . . . . . .8
Background of the Merger. . . . . . . . . . . . .9
Reasons for Structure as a Merger . . . . . . . .9
Prior Relationships . . . . . . . . . . . . . . 10
Recommendation of the Board - Business Reasons
for Merger 10
Conditions and Terms of the Merger. . . . . . . 11
Exchange of Stock Certificates. . . . . . . . . 14
Federal Income Tax Consequences . . . . . . . . 14
Dissenters' Rights. . . . . . . . . . . . . . . 14
BUSINESS OF NDEI . . . . . . . . . . . . . . . . . . 15
Overview. . . . . . . . . . . . . . . . . . . . 15
Corporate History . . . . . . . . . . . . . . . 15
Productions and Projects. . . . . . . . . . . . 16
The Industry and Business Strategy . . . . . . 19
The Virtual Studio. . . . . . . . . . . . . . . 19
Merchandising . . . . . . . . . . . . . . . . . 20
Internet. . . . . . . . . . . . . . . . . . . . 20
Technology and Production Service Division. . . 20
Competition . . . . . . . . . . . . . . . . . . 20
Regulation of Television and Motion Picture
Industry 21
Copyrights. . . . . . . . . . . . . . . . . . . 21
Facilities. . . . . . . . . . . . . . . . . . . 21
Employees . . . . . . . . . . . . . . . . . . . 21
Legal Proceedings . . . . . . . . . . . . . . . 22
NDEI SELECTED HISTORICAL FINANCIAL DATA. . . . . . . 22
NDEI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 23
Results of Operations . . . . . . . . . . . . . 23
Liquidity and Capital Resources . . . . . . . . 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. . . 25
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<PAGE>
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . 26
General . . . . . . . . . . . . . . . . . . . . 26
Delaware Law and Certain Charter and Bylaw
Provisions 26
Common Stock. . . . . . . . . . . . . . . . . . 26
Section 203 of the Delaware Law . . . . . . . . 26
MARKET PRICES OF NDEI COMMON STOCK . . . . . . . . . 27
BUSINESS OF VIDESSENCE . . . . . . . . . . . . . . . 28
General Business Development and Overview . . . 28
Corporate History . . . . . . . . . . . . . . . 28
Technology. . . . . . . . . . . . . . . . . . . 28
Videssence Products . . . . . . . . . . . . . . 29
Products in Development . . . . . . . . . . . . 32
Rental Market . . . . . . . . . . . . . . . . . 33
Manufacturing and Supplies. . . . . . . . . . . 33
Marketing . . . . . . . . . . . . . . . . . . . 33
Competition . . . . . . . . . . . . . . . . . . 34
Research and Development and Consumer Research. 35
Patents, Trademarks and Licenses. . . . . . . . 35
Seasonality . . . . . . . . . . . . . . . . . . 36
Backlog Order Policy. . . . . . . . . . . . . . 36
Employees . . . . . . . . . . . . . . . . . . . 36
Property. . . . . . . . . . . . . . . . . . . . 36
Government Regulation . . . . . . . . . . . . . 36
Legal Proceedings . . . . . . . . . . . . . . . 37
VIDESSENCE SELECTED HISTORICAL FINANCIAL DATA. . . . 37
Overview. . . . . . . . . . . . . . . . . . . . 37
VIDESSENCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION . . . . . . . . . . . . . . 38
Results of Operations . . . . . . . . . . . . . 38
Liquidity and Capital Resources . . . . . . . . 39
INCORPORATION BY REFERENCE . . . . . . . . . . . . . 39
VIDESSENCE FINANCIAL STATEMENTS . . . . . . . . . . .F-1
PRO FORMA FINANCIAL STATEMENTS . . . . . . . . . . . F-14
EXHIBIT A - Agreement and Plan of Merger and
Reorganization, as amended
<PAGE>
<PAGE>
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of NDEI of proxies to be
voted at the NDEI Special Meeting. The purpose of the Meeting is to
consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Reorganization and Merger dated as of April 26, 1996
(the "Merger Agreement"), among NDEI, Videssence and NAC which
provides for the merger of NAC into Videssence pursuant to which
Videssence becomes a wholly-owned subsidiary of NDEI (the "Merger").
A copy of the Merger Agreement is attached to this Proxy Statement
as Appendix A and is incorporated by reference herein. This is the
only matter that may be voted on at the Meeting.
NDEI. NDEI is a digital production studio combining high
technology with entertainment to create television series, movies,
documentaries and multimedia productions. The Company specializes
in creating science fiction programming which combines live action
with computer graphics, as well as family and children's
entertainment. NDEI's principal executive office is located at 5200
Lankershim Blvd., Suite 280, North Hollywood, California 91691 and
its telephone number is (818) 753-1990. See "Business of NDEI."
Videssence. Videssence designs, manufactures and distributes
lighting products, which incorporate the Company's patented SRGB
light technology, for the illumination of studios, stages and other
production environments in the sound stage, motion picture, theater
and theme park industries. Videssence's fluorescent lighting
products emit energy-efficient, low heat light that is 90% more
efficient than incandescent lighting. Videssence's principal
executive office is located at 189 Airport Blvd., Burlingame,
California 94010 and its telephone number is (415) 579-7577. See
"Business of Videssence." Information contained herein concerning
Videssence has been supplied by Videssence without independent
verification thereof by NDEI.
Netter Acquisition Corp. NAC is a wholly- owned subsidiary of
NDEI and has been formed solely for the purpose of facilitating the
Merger Agreement. NAC has no existing business. Its address and
telephone number are the same as those for NDEI.
The principal executive offices of NDEI are located at 5200
Lankershim Blvd., Suite 280, North Hollywood, California 91691
(telephone: (818) 753-1990.
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<PAGE>
VOTING AND PROXIES
Date, Time and Place of the Meeting
A Special Meeting of Stockholders of NDEI will be held on
August 5, 1996 at 10:00 a.m., local time, at 5200 Lankershim Blvd.,
North Hollywood, California 91691. The independent accountants for
NDEI, Feldman Radin & Co., are expected to be present at the
Meeting, will have an opportunity to make a statement if they desire
to do so and are expected to be able to respond to appropriate
questions.
Record Date, Stockholders Entitled to Vote, Quorum
The record date (the "Record Date") for the Meeting has been
fixed by the Board as of the close of business on June 24, 1996.
Only holders of record of Common Stock and holders of record of NDEI
warrants ("Warrants") on the Record Date will be entitled to notice
of the meeting and any adjournment or postponement thereof. Only
stockholders on the Record Date and warrantholders on the Record
Date who subsequently exercise some or all of their Warrants and
hold the underlying NDEI Common Stock on August 4, 1996 will be
entitled, to vote at the Meeting. Each share of Common Stock is
entitled to one vote.
As of the Record Date, there were 2,795,000 shares of Common
Stock outstanding and entitled to vote. As of the Record Date, there
were 544,500 Warrants outstanding which, upon exercise to NDEI
Common Stock prior to August 4, 1996, are entitled to vote at the
Meeting. The presence, either in person or by properly executed
proxy, of the holders of a majority of the shares of Common Stock
outstanding and entitled to vote is necessary to constitute a quorum
at the Meeting.
Proxies and Vote Required
All proxies in the enclosed form that are properly executed
and returned will be voted at the Meeting, or any adjournments
thereof, in accordance with any specifications thereon, or, if no
specifications are made, will be voted FOR approval of the Merger
Agreement. The execution of a proxy will not affect a stockholder's
right to attend the special meeting and vote in person. Any proxy
may be revoked by any stockholder who attends the Meeting and gives
oral notice of his or her intention to vote in person; attendance at
the meeting will not, by itself, revoke a proxy. In addition, any
stockholder may revoke a proxy at any time before it is voted by
executing a subsequent proxy or by delivering a written notice to
the Secretary of NDEI stating that the proxy is revoked.
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The Merger Agreement must be approved by a majority of the
outstanding shares of Common Stock entitled to vote. The Inspector
of Elections will tabulate affirmative and negative votes and
abstentions and broker non-votes. Abstentions and broker non-votes
will be counted as votes "against" in determining whether this
matter is approved.
As of the Record Date, Douglas Netter, Chairman, President and
a Director of NDEI, owned 1,731,000 shares of Common Stock, or
61.93% of the outstanding shares as of the Record Date and 51.83% of
the outstanding shares as of the Record Date, assuming the exercise
of all the Warrants then outstanding. The ownership and control of
61.93% of the Common Stock (51.83% assuming exercise of all the
Warrants) gives Mr. Netter control over the outcome of the vote on
the Merger Agreement. If Mr. Netter votes his shares in favor of
the Merger, the Merger Agreement will be approved, regardless of how
the other NDEI shareholders vote their shares. Mr. Netter has
indicated that he intends to vote in favor of the Merger Agreement.
APPROVAL OF THE MERGER IS THUS ASSURED, HOWEVER, IT IS LIKELY THAT
IF HOLDERS OF MORE THAN TWO PERCENT OF THE OUTSTANDING SHARES OF
NDEI COMMON STOCK VOTE AGAINST THE MERGER AND EXERCISE THEIR
DISSENTER'S RIGHTS, NDEI'S BOARD OF DIRECTORS WILL DECIDE TO
TERMINATE THE MERGER. Dissenters in excess of two percent of the
outstanding shares of NDEI Common Stock will cause the Company to
expend in excess of $500,000 in cash to purchase the dissenters'
shares following the close of the Merger. The Board of Directors is
likely to decide that such a large cash outlay to complete the
transaction is not in the best interests of NDEI. In that event,
the Merger will not be consummated, NDEI will pay approximately
$250,000 in Merger expenses without the benefit of the combined
companies and NDEI will have an outstanding note due from Videssence
of $350,000. See "The Merger -- Conditions and Terms of the
Merger."
Solicitation of Proxies
The expense of printing and mailing this Proxy Statement will
be borne solely by NDEI and are estimated to be $10,000. In addition
to the use of the mails, proxies may be solicited by directors and
officers and regular employees of NDEI, without additional
remuneration, by personal interviews, telephone, telegraph or
otherwise. NDEI may also hire U.S. Stock Transfer Company to
assist it in soliciting proxies. NDEI may also request brokerage
firms, nominees, custodians and fiduciaries to forward proxy
materials to beneficial owners of shares of Common Stock and will
provide reimbursement for their reasonable expenses in so doing.
<PAGE>
THE MERGER
General
The following description of the principal terms of the Merger
is subject to and qualified in its entirety by reference to the
terms of the Merger Agreement, a copy of which is included as
Appendix A to this Proxy Statement and is incorporated herein by
reference. Consummation of the Merger is subject to the condition,
among others, that the Merger Agreement be approved by the
shareholders of NDEI. As previously noted, Mr. Netter owns 61.93%
of the NDEI Common Stock (51.83% assuming esxercise of all the
Warrants then outstanding) and has stated his intention to vote for
the approval of the Merger Agreement.
Upon consummation of the Merger, each outstanding share of
Common Stock held by any Videsssence stockholder will, subject to
dissenters' rights described herein, be exchanged for 0.68 shares of
NDEI Common Stock (the "Conversion Amount"), for a total of 522,222
shares of NDEI Common Stock, valued at $9.00 per share, subject to
tender of the Videssence share certificates for NDEI Common Stock as
described herein. Such shares of Videssence Common Stock will be
reissued to NDEI and Videssence will be operated as a wholly-owned
subsidiary of NDEI. The shareholders of Videssence are entitled to
earn up to an additional 778,000 shares of NDEI Common Stock,
valued at $9.00 per share, upon Videssence achieving certain
performance criteria. The NDEI Common Stock is currently listed on
the Nasdaq-SmallCap System. The Videssence Common Stock is a
privately-held company with 15 shareholders and is not and has never
been listed on any stock exchange.
Background of the Merger
Recently NDEI began searching for acquisition candidates that
satisfied the following criteria: (1) contributes to NDEI's efforts
to expand its production services capability and its movie and
television programming products; (2) provides a more stable
diversified revenue base than NDEI's present revenue base which
relies primarily on television program production revenue; and
(3) presents a good opportunity for growth in the near future.
Videssence has considered a number of merger and acquisition
proposals over the last year and a half. It has also considered a
number of financing alternatives, most recently an initial public
offering, in an effort to obtain the working capital needed to
expand its business into several new markets, including providing
lighting to the television and movie production industries. Since
Videssence projected its working capital needs at less than $3
Million, it ultimately rejected conducting an initial public
offering because the large expense and dilution it would incur to
raise money through a public offering. It also recognized that
until it achieved a certain aggregate revenue base and
profitability, the ongoing additional costs of being a public
company could not be justified.<PAGE>
<PAGE>
In late November 1995, Mr. Talbot, a director of NDEI, and Paul Costa,
President of Videssence, met via telephone to discuss
present financing efforts by Videssence, including alternatives to
conducting an initial public offering. In December 1995,
Mr. Talbot and Mr. Netter met with Mr. Costa to discuss the two
companies and the possibility of a merger. These discussions were
very preliminary, however, as NDEI had only recently conducted an
initial public offering and Videssence was in the process of
preparing for one. In early 1996, Mr. Costa and Mr. Talbot met
again to discuss alternatives for Videssence to raising money
through an initial public offering and the possibility of merging
with an existing public company. The advantages of merging with a
public company, like NDEI, was attractive to Videssence since a
public company had the capability of raising money less expensively
than Videssence and also could provide the combined revenue base
needed to justify the additional ongoing costs of being a public
company. Mr. Talbot and Mr. Costa subsequently spoke a number of
times on this subject, including the possibility of a merger with
NDEI.
It was not until March 1996, however, that management of both
Videssence and NDEI began to explore seriously a merger of the two
companies. In March 1996, Mr. Netter, Mr. Talbot, Mr. Costa and Mr.
Michelson, Videssence's Chief Executive Officer, met to discuss the
feasibility of combining the two companies in a manner that would
create an organization that could more aggressively compete in the
digital production services market, would provide a more stable and
diversified revenue base to NDEI and Videssence, and could provide
needed working capital to Videssence to expand its business,
particularly in the film and movie production market. In these
discussions and after visiting the Videssence offices with its
independent accountants, management of NDEI came to believe that if
Videssence could obtain sufficient working capital to expand its
business, Videssence, with its proprietary technology, presented a
good opportunity for rapid revenue growth in its existing markets
and in those it intended to enter. Management of NDEI also saw
significant synergistic opportunities in Netter's ability to assist
Videssence in entering and competing in the film location lighting
markets, using its contacts and its high-technology production
experience and techniques and in Videssence's ability to assist NDEI
in expanding NDEI's digital production capabilities.
After these meetings and visits, the parties began to
negotiate a term sheet for the merger. The term sheet was later
converted into a draft merger agreement. During the negotiation of
the term sheet and drafting of the merger agreement, management for
NDEI consulted with its professional advisors. On April 22, 1996,
management of NDEI and Videssence, with their respective counsel,
met formally to negotiate the Merger Agreement. The parties left
the meeting with an agreement in principle which was documented as
the Merger Agreement and signed on April 26, 1996.
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Prior Relationships
Prior to the telephone meeting between Mr. Talbot and Mr.
Costa in late November 1995, there were no contacts between NDEI
and Videssence. NDEI and Videssence have not had any business
relationships between them. After the Merger, Videssence will be
operated as a wholly-owned subsidiary of NDEI.
Recommendation of the Board - Business Reasons for Merger
The Board of Directors unanimously recommends approval of the
Merger as in the best interests of all stockholders. As discussed
below, Mr. Talbot has a conflict of interest in voting to approve
the Merger Agreement. See "The Merger -- Completion Fee." It is
anticipated that the Merger will provide NDEI with a more diversified
and stable revenue base and permit it to more rapidly expand its
Technology and Production Service Division.
The recommendation of the Board is the product of the business
judgment of the members, exercised in light of their fiduciary duty
to all stockholders. All material factors considered by the Board
are set forth below.
1. NDEI management has evaluated the patented technology
of Videssence and the technology for which Videssence has patents
pending or has submitted patent applications and has concluded the
Videssence technology is superior to existing production lighting
technology in several important characteristics, including quality
(in certain applications), cost and efficiency. The proof of the
value of this technology stems from the wide acceptance of
Videssence high frequency fluorescent lighting products in the media
lighting market which has in the past been overwhelmingly dominated
by incandescent spot lighting. Similar to what existed in the media
lighting market prior to the entrance of Videssence, NDEI management
and the Board consider the related film/location lighting market to
harbor substantial growth opportunity because innovation in that
market has lagged other film production-related innovation,
particularly digital-related innovation. Management and the Board
believe Videssence, with its innovative, emerging lighting
technology has the capability to fill the technology gap in the
film/location lighting industry similar to what Videssence has done
in the media lighting industry. While Videssence has competitors in
the media lighting market and will have competitors, including at
least one established competitor that sells high frequency
fluorescent lighting products, in the film/location lighting market,
NDEI management and the Board believe that the overall proprietary
technology advantage of Videssence over its competitors will allow
them to rapidly expand into and successfully compete in the
film/location lighting market. Moreover, the synergy provided
between NDEI with its experience in the high technology production
of television and movies and Videssence's proprietary lighting
components and systems presents favorable opportunities for the
combined companies to expand the capabilities of NDEI's Technology
and Production Services Division and more quickly and effectively
enter the film/location lighting market.
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2. Management and the Board believes the addition of
Videssence will provide NDEI with a more stable, diversified revenue
base. NDEI relies primarily on programming production revenue. The
business of Videssence today is primarily television production-related,
but it has no revenue risk associated with television programming.
Videssence, therefore, will provide NDEI with greater
revenue diversification. Videssence has an established sales and
distribution network in the media lighting market which gives
Videssence, with several large credit customers, a more predictable
sales cycle than NDEI. Management and the Board believe the
addition of Videssence will stabilize NDEI's cash flow in the
future. More importantly, the business of Videssence generates high
gross margins which as the business of Videssence expands into new
markets should improve the overall profitability of NDEI.
3. Management and the Board believe the structure of the
Merger and the reduction in the market price for NDEI shares of
Common Stock subsequent to the execution of the Merger Agreement
make the Merger a favorable transaction for NDEI. Although the
Board has not obtained a formal independent valuation of Videssence,
NDEI and Videssence agreed to use a $9.00 per share of NDEI Common
Stock valuation in determining the number of shares of NDEI Common
Stock that Videssence will receive in the Merger. This translates
into an initial purchase price of $4,700,000 and a total purchase
price of $11,700,000 if Videssence meets the performance standards
required by the operating profit escrow and the earn-out. The
closing bid price of the shares of NDEI Common Stock at the time the
parties entered into the Merger Agreement was $7 1/8 and is less
than that as of the date of this Proxy Statement. Structuring the
transaction so that the parties agreed to a set $9.00 per share
valuation eliminates further dilution to the NDEI stockholders from
subsequent reductions in the market price of NDEI shares of Common
Stock prior to the closing of the Merger. Assuming the market price
for NDEI shares of Common Stock stays below $9.00 through the
closing of the Merger, NDEI will actually purchase Videssence for
a reduced purchase price than originally negotiated. In addition,
the structuring of the transaction with both an operating profit
escrow and an earn-out (both discussed in more detail below)
prevents NDEI from paying for potential growth in Videssence and,
instead, NDEI will pay for growth that actually occurs.
4. Videssence has proprietary technology assets that have
on-going development potential and application in a range of
existing and new markets. The ongoing development is not capital
intensive as much of the same patented technology can be applied in
products for the different lighting markets. With additional
capital infusion from the merger, Videssence should be able to begin
entering or more aggressively enter not only the film/location
lighting, but also the video conference/distant learning and digital
photography/pre-press lighting markets. Simultaneous with the entry
into these markets, Videssence has begun to co-develop for
manufacture and distribution commercial lighting fixtures using its
patented technology. While there can be no assurances that these
expansion efforts will be successful, management and the Board
believe that the range of opportunities to expand Videssence reflect
favorably on its overall growth potential.
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5. Properly capitalized, Videssence is ready to enter the
lighting fixtures rental market in which fixtures and installation
will be made available either through operating leases for a
specific project or through longer term lease arrangements where
Videssence retains ownership of the assets. Since television
stations and other production set environments operate under tight
capital expenditure budgets, the lease arrangements will provide a
means for these customers to upgrade to newer Videssence products
sooner than if these customers had purchased the fixtures.
Videssence would generate revenue during the lease term and when the
equipment was returned to it, Videssence would refurbish and sell
the used equipment to a secondary user market at relatively high
margins.
Based upon its consideration of all of the factors described
above, the Board arrived at its conclusion to recommend approval of
the Merger Agreement. In view of the wide variety of factors
considered in connection with the evaluation of the Merger, the
Board did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors considered
in reaching its decision. However, of primary importance to the
Board was its knowledge about the business and prospects of
Videssence.
The Board of Directors unanimously recommends that the
stockholders vote FOR approval and adoption of the Merger Agreement.
Stockholders should note that Geoffrey Talbot has a conflict of
interest in recommending this transaction since he will earn between
approximately $147,000 and $183,500 as a completion fee in
connection with the Merger. See "The Merger -- Completion Fee."
Conditions and Terms of the Merger
The following is a brief summary of the principal terms of the
Merger Agreement and is subject to and qualified in its entirety by
reference to the specific terms set forth in the Merger Agreement,
a copy of which is included as Appendix A to this Proxy Statement.
NDEI stockholders should review the Merger Agreement in its
entirety.
Consummation of the Merger. Upon consummation of the Merger,
each outstanding share of Common Stock held by any Videssence
stockholder will, subject to dissenters' rights described herein, be
exchanged for 0.68 shares of NDEI Common Stock (the "Conversion
Amount"), for a total of 522,222 NDEI shares, valued at $9.00 per
share, subject to tender of the Videssence share certificates for
NDEI Common Stock as described herein. Such shares of Videssence
Common Stock will be reissued to NDEI and Videssence will be
operated as a wholly-owned subsidiary of NDEI. The shareholders of
Videssence are entitled to earn up to an additional 778,000 shares
of NDEI Common Stock, valued at $9.00 per share upon Videssence
achieving certain performance criteria.
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Escrow Shares. The Merger Agreement provides for two separate
escrows of NDEI Common Stock. The first escrow requires 133,333
shares of NDEI Common Stock of the 522,222 shares of NDEI Common
Stock paid as initial merger consideration to be placed in escrow to
cover any liabilities arising from any misrepresentation, breach of
warranty or breach or default of any covenant, agreement or other
provision of the Merger Agreement by Videssence. The remaining
377,778 shares of NDEI Common Stock paid as initial Merger
consideration is be paid to the Videssence shareholders at the
closing of the Merger. A further 144,444 shares of NDEI Common
Stock (in addition to the 522,222 shares of NDEI Common Stock paid
as initial merger consideration) will be placed in escrow by NDEI
and released upon Videssence achieving certain operating profit
criteria. NDEI structured the Merger with this operating profit
escrow to assist NDEI in accurately valuing Videssence, which is
difficult to do since Videssence is at an early stage in its
development. By meeting the projections, Videssence will have more
fully validated its internally projected value, providing
justification for NDEI in paying a greater purchase price for
Videssence. Videssence will receive all of the operating profit
escrow shares if it achieves an operating profit of $347,500 for the
period commencing January 1, 1996 and ending March 31, 1997 and a
proportionally lesser amount if Videssence achieves an operating
profit between $173,750 and $347,500 for the same period.
Videssence will receive none of the operating profit escrow shares
if its operating profit for such period is less than $173,750.
Earn-Out Shares. The principal shareholders of Videssence
(Paul Costa, Steve Michelson, Delwin Francis, and Sam Cercone) (the
"Videssence Principal Shareholders") are entitled to additional
shares of NDEI Common Stock (the "Earn-Out Shares") based upon
Videssence achieving specified earnings before interest and taxes
("EBIT"). The earn-out is structured to incentivize the Videssence
Principal Shareholders to generate profit through Videssence
operations over the next five years. During the period commencing
July 1, 1996 and ending June 30, 2001 for every $45,000 in EBIT that
exceeds $1.25 Million, the Videssence Principal Shareholders will be
entitled to the greater of (i) 5,000 shares of NDEI Common Stock
or (ii) the product of (a) 5,000 shares of NDEI Common Stock and
(b) the quotient of (x) $9.00 and (y) the average of the closing
bid and closing ask price of shares of NDEI Common Stock on
June 30 for the year for which the Earn-Out is being calculated.
Regardless of EBIT for this period, in no event will the Principal
Shareholders receive more than 633,334 Earn-Out Shares. Immediately
upon the earlier of a Videssence Principal Shareholder being terminated
for cause or a Videssence Principal Shareholder terminating his
employment for other than good reason or a Principal Shareholder's
material breach of his non-competition agreement, that Principal
Shareholder shall no longer be entitled to earn his pro rata share
of any additional Earn-Out Shares. The Earn-Out shall be terminated
on June 30, 1999 in the event the cumulative EBIT does not equal
or exceed $1.25 Million on that date.
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Board Appointment. The Merger Agreement requires NDEI to make
its best efforts to appoint and elect a representative of
Videssence, Mr. Paul Costa, to the NDEI Board of Directors.
Following the Merger, NDEI anticipates the Board of Directors of
NDEI will consist of 7 members, including Mr. Netter, Mr. Copeland,
Mr. Talbot, Ms. Forte, Mr. Perkins, Mr. Silverman and Mr. Costa.
Effective Time of the Merger. If approved by the
stockholders, the Merger will become effective when the Agreement of
Merger and certain related documents are filed in the office of the
Secretary of State of the State of California (the "Effective
Time"), which is anticipated to be promptly after the Meeting,
subject to the fulfillment or waiver of all conditions to the
Merger.
Indemnification of Directors. The Merger Agreement provides
that for a period of five (5) years after the closing of the
transaction, subject to certain limitations and exceptions, NDEI and
Videssence shall from and after the Effective Time of the Merger,
indemnify each person who was prior to the Effective Time, a
director or officer of Videssence to the fullest extent permissible
by law, and in no event less than the indemnification provided to
officers and directors of NDEI. The officers and directors of
Videssence shall have no indemnification rights for liabilities
which one or more of such officers and directors knew of prior to
the closing of the transaction, but failed to disclose to NDEI, or
which result from a breach of representation, warranty or covenant
under the Merger Agreement.
Conditions of Merger and Termination. The respective
obligations of each party to effect the Merger are subject to the
satisfaction of various conditions, including: (i) the approval of
the Merger Agreement by a majority of the outstanding shares of NDEI
Common Stock and by the unanimous approval of the outstanding shares
of Videssence Common Stock, (ii) the obtaining of all required
consents, authorizations, orders and approvals of, and filings and
registrations with, any governmental authority or any other person,
(iii) the absence of any pending governmental action or proceeding
and no injunction which prohibits or restrains the consummation of
the Merger, (iv) no material adverse change in the business or
prospects of NDEI or Videssence, (v) the satisfactory completion of
due diligence by NDEI and Videssence; (vi) the execution of
non-competition and employment agreements by the Videssence Principal
Shareholders; (vii) the entry into a management protocol on terms
satisfactory to Videssence and NDEI; (viii) the receipt by NDEI of
proceeds from either debt or equity financing in an amount of at
least $2,000,000; and (ix) the satisfactory resolution of
outstanding patent litigation.
The condition that NDEI raise $2,000,000 is to provide working
capital to Videssence as Videssence expands into new markets. As
provided in the Merger Agreement, NDEI initially loaned Videssence
$250,000 of the $2,000,000 for working capital prior to the closing
of the Merger. NDEI has subsequently loaned Videssence an
additional $100,000 for working capital needs prior to the closing
of the Merger.
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The Merger Agreement may be terminated and the Merger
abandoned prior to the Effective Time (i) by the mutual consent of
NDEI and Videssence, (ii) by either NDEI, on the one hand, or
Videssence, on the other hand, if there has been a material
violation or breach of any provision of the Merger Agreement by the
other party which shall not have been cured within 5 days after the
breaching party has been notified thereof, (iii) by Netter if any of
the Videssence conditions to closing have not been satisfied or have
become impossible to satisfy by August 31, 1996 and have not been
waived by Netter; (iv) by Videssence if any of the Netter conditions
to closing have not been satisfied or have become impossible to
satisfy by August 31, 1996 and have not been waived by Videssence, or
(v) by either of NDEI or Videssence if the Effective Time has not
occurred on or before August 31, 1996. See "The Merger - Conditions
and Terms of the Merger."
Exclusive Dealing. The Merger Agreement provides that
Videssence shall not, directly or indirectly, encourage, initiate or
engage in discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity
or group, other than NDEI, concerning any sale of substantially all
of its assets, the purchase of its stock, a merger or similar
transaction involving Videssence or the capital stock, business or
assets of Videssence. See "The Merger - Conditions and Terms of the
Merger" and "Recommendations of the Board - Business Reasons for the
Merger."
Regulatory Requirements. There are no federal or state
regulatory requirements which must be complied with or approvals
which must be obtained in connection with the effectiveness of the
Merger Agreement.
Completion Fee for Geoffrey Talbot
Mr. Talbot is a director of and consultant to NDEI. Upon
consummation of the Merger, Mr. Talbot will be entitled to receive
a completion fee calculated as follows: (i) 5% of the first million
dollars, or part thereof, paid by the Company for Videssence; (ii)
4% of the second million; (iii) 3% of the third million; (iv) 2% of
the fourth million; (v) 1% of the fifth million; and (vi) 1/2% of
any amount over $5,000,000. Consequently, Mr. Talbot will receive
a minimum completion fee of $147,000 and a maximum completion fee of
$183,500 in connection with the Merger.
Exchange of Stock Certificates
Promptly after consummation of the Merger, the shareholders of
Videssence will deliver to NDEI Shareholder's Representation and
Transmittal Letters concerning certain securities law and tax
representations and the surrender of Videssence stock certificates.
Upon delivery, a Videssence shareholder will be entitled to receive
shares of NDEI Common Stock in an amount calculated by multiplying
the number of shares of Videssence Common Stock delivered by the
Videssence shareholder times the Conversion Amount. The Videssence
shareholders will be entitled to receive up to 788,000 additional
shares of NDEI Common Stock upon Videssence achieving certain
performance criteria.
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Federal Income Tax Consequences
The following summary is a general discussion of certain
expected federal income tax consequences of the Merger to NDEI and
does not discuss any aspect of state, local or foreign tax laws.
The Merger is intended to constitute a tax-free reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code of 1986 (the "Code"). Neither NDEI nor
Videssence has sought or will seek a ruling from the Internal
Revenue Service concerning the federal income tax consequences of
the Merger. If the Merger does constitute a reorganization within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code,
it should not result in recognition of income to NDEI or Videssence.
In such case, Videssence's tax basis in its assets and liabilities
would not be affected by the Merger. The Merger of Videssence into
NAC will be considered a change of ownership for purposes of Section
382 of the Code. As a result, the use of net operating loss by
Videssence for tax purposes will be limited as set forth in Section
382 of the Code.
Dissenters' Rights
Each holder of NDEI Common Stock on the Record Date and each
holder of NDEI Warrants on the Record Date who subsequently
exercises such Warrants and holds the underlying NDEI Common Stock
on August 1, 1996 may, by complying with Chapter 13 of the General
Corporation Law of the State of California, require NDEI to purchase
for cash at their fair market value the shares of NDEI Common Stock
owned by such stockholder which are dissenting shares. Fair market
value for this purpose is determined as of the day before the first
announcement of the terms of the Merger, excluding any appreciation
or depreciation in consequence of the Merger. Such date in this
case is April 26, 1996 and the closing bid price of Common Stock on
that date was $7.125. IN ORDER TO EXERCISE DISSENTERS' RIGHTS,
SHARES MUST BE VOTED AGAINST THE MERGER.
NDEI is required to mail to each stockholder voting against
the Merger a notice of the approval of the Merger by the holders of
Common Stock within 10 days of the date of such approval,
accompanied by certain information including a statement of the
price determined by NDEI to represent the fair market value of any
dissenting shares and a summary of the procedure to be followed to
exercise dissenters' rights. The statement of price will constitute
an offer by NDEI to purchase, at the price stated, any dissenting
shares. Within 30 days after the date on which notice of approval
of the Merger by the holders of Common Stock is mailed by NDEI, each
such stockholder electing to exercise dissenting stockholder rights
also must submit to NDEI at its principal office or at the office of
any transfer agent thereof a demand letter and such stockholder's
certificates representing any shares of Common Stock which the
stockholder demands that NDEI purchase. Such demand letter is required
to state (i) the number of shares of Common Stock held of record by the
stockholder which the stockholder demands that NDEI purchase and (ii)
what the stockholder claims to be the fair market value of those shares
as of the day before the announcement of the Merger. Such statement
of fair market value will constitute an offer by the stockholder to
sell the shares at such price.
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If NDEI and the dissenting holder of Common Stock agree that
the holder's shares are dissenting shares and agree upon the price
of the shares, payment of the agreed price, with interest, shall be
made within 30 days after the amount thereof has been agreed or
within 30 days after any statutory or contractual conditions to the
Merger have been satisfied, whichever is later. If NDEI denies that
a holder's shares are dissenting shares, or NDEI and the holder fail
to agree upon the fair market value of the shares, then such holder,
within six months after the date on which notice of the approval of
the Merger is mailed to the holder, but not thereafter, may file a
complaint in the Superior Court of the proper county in California
seeking a finding of whether the holder's shares are dissenting
shares or the fair market value of the shares, or both, or may
intervene in any similar action. In such proceeding, the holder
will be entitled to judgment against NDEI in the amount of the fair
market value of any dissenting shares, as determined, with interest
from the date of judgment. The costs of the action, including
reasonable compensation to the appraisers, shall be assessed as the
court considers equitable, but, if the appraisal exceeds the price
offered by NDEI, then NDEI shall pay costs as provided by California
law.
NDEI may terminate the Merger in the event that holders
representing in excess of two percent of the outstanding shares of
NDEI Common Stock vote against the merger and exercise their
dissenter's rights. IT IS LIKELY THAT IF HOLDERS OF MORE THAN TWO
PERCENT OF THE OUTSTANDING SHARES OF NDEI COMMON STOCK VOTE
AGAINST THE MERGER AND EXERCISE THEIR DISSENTER'S RIGHTS, NDEI'S BOARD
OF DIRECTORS WILL DECIDE TO TERMINATE THE MERGER. Dissenters in excess
of two percent of the outstanding shares of NDEI Common Stock will
cause the Company to expend in excess of $500,000 in cash to
purchase the dissenter's shares following the close of the Merger.
The Board of Directors is likely to decide that such a large cash
outlay to complete the transaction is not in the best interests of
NDEI. In the event the Board decides not to complete the Merger,
NDEI will pay approximately $250,000 in Merger expenses without the
benefits of the Merger. Moreover, NDEI will have an outstanding
note due from Videssence of $350,000.
BUSINESS OF NDEI
Overview
NDEI is a digital production studio combining high technology
with entertainment to create television series, movies,
documentaries and multimedia productions. NDEI specializes in
creating science fiction programming, which combines live action
with computer graphics, as well as family and children's
entertainment. NDEI is presently expanding its capabilities from
being primarily a production company creating properties which are
exploited by other organizations into a broader-based entertainment
company in which NDEI maintains a more significant ownership
interest in and distribution rights to the properties it develops,
acquires, and produces. Accordingly, NDEI has established
merchandising operations to license some of its rights to develop,
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produce and distribute merchandising items related to its
entertainment programs such as toys, T-shirts, buttons and posters,
as well as CD-ROMs and other multimedia entertainment-based
software, including soundtracks, electronic games and books.
Corporate History
NDEI, formerly "Rattlesnake Productions, Inc.," was originally
organized under the laws of the State of California in 1979. In
September 1995, NDEI was reincorporated under the laws of the State
of Delaware and as part of the reincorporation changed its name to
"NDEI Entertainment, Inc.". NDEI's first production contracts were
to produce two four hour mini-series for Metromedia Producers
Corporation, the forerunner to Fox Television, entitled "Wild
Times," produced in 1979, and "Roughnecks," produced in 1980. In
1981, NDEI became one of the first independent production companies
to arrange an affiliation with Walt Disney Studios ("Disney"). As
part of that transaction, NDEI entered into a production services
contract with Disney. The first project with Disney was a
television pilot, airing on the CBS Network, entitled "Louis
L'Amour's, The Cherokee Trail." After the pilot, Disney contracted
with NDEI to produce a series based on the same concept, renaming it
"Five Mile Creek," which was written for and filmed on location in
the Australian Outback. "Five Mile Creek" was one of the family
series used to launch The Disney Channel cable service, and aired on
The Disney Channel for three seasons. "Five Mile Creek" also marked
the start of NDEI's use of leading-edge technology, becoming one of
the first television series to be shot on film and completed using
an electronic post-production process.
In 1987, NDEI, in association with the Landmark Entertainment
Group, produced "Captain Power and the Soldiers of the Future,tm"
which aired in syndication for 22 episodes. "Captain Power" marked
what management believes to be the first time that 3-dimensional
("3-D") computer-generated characters appeared in scenes with live
actors in an ongoing television series. In 1989, NDEI co-produced
the television movie "Captain Power and the Soldiers of the Future:
The Legend Begins," which was broadcast internationally. NDEI also
produced under contract with Lockheed, in 1988 and 1989, two films
heralding the technological advances and superiority of the "YF-22
Stealth air superiority fighter aircraft." These films were part of
the successful campaign for Lockheed's bid for the contract to build
the next generation air superiority fighter for the United States
Air Force.
In 1992, NDEI created and produced the critically acclaimed
ten hour documentary series, "The Wild West." The series aired on
commercial television in prime time and was distributed by Warner
Bros. and PTEN. NDEI developed a production management system for
the series, utilizing digital technologies and computer management
software that management believes, until that time, had never been
applied to documentary production. NDEI tracked approximately
14,000 period photographs, paintings and documents, sorting and
arranging these images for each of the ten hours of programming
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using an integrated relational data base which tracked digitized
images, text and audio. NDEI started with an existing software
package for its data base, and created an operating template to
relate the stored data in a way conducive to managing the large
volumes of images and text necessary for the production of the
documentary. NDEI's resulting production management system and
proprietary software can be used in many ways beyond documentary
production and is a key to archiving and Prepurposing program
content for exploitation in various media. Consequently, the "The
Wild West" was also NDEI's first experience in simultaneously
Prepurposing entertainment materials for several different delivery
media: television program, home video, CD-ROM, book, and sound track
album.
As part of this proprietary project management system, NDEI
established its own virtual studio (the "Virtual Studio"), creating
a full service studio without walls. The Virtual Studio connects
members of the production staff who are located around the world via
computer modems and permits them to participate in the production
process offsite. NDEI has since improved its Virtual Studio concept
and is presently applying it to the production of "Babylon 5."
Productions and Projects
Current Productions
"Babylon 5." NDEI, through its 51%-owned subsidiary,
Babylonian Productions, Inc., produces the Emmy Award-winning prime-time
science fiction syndicated series, "Babylon 5," in association
with J. Michael Straczynski, the creator. "Babylon 5" is produced
under a production agreement between Babylonian Productions, Inc.
and PTEN. NDEI earns half of the total executive producer fees paid
by PTEN under the production agreement for services rendered in that
capacity. The results of operations of Babylonian Productions, Inc.
are consolidated with the results of operations of NDEI. Revenues
derived from the "Babylon 5" series account for approximately 98%
and 87% of the NDEI total revenue for the fiscal years ended June
30, 1995 and 1994, respectively. "Babylon 5," distributed by Warner
Bros., is shown on approximately 200 television stations nationwide
and in 90 foreign countries. The Company recently completed
production of a third season of 22 episodes of "Babylon 5," which
will air through the Fall of 1996. To date, the production total
for "Babylon 5" is 66 one hour episodes. PTEN ordered a fourth
season of 22 episodes of "Babylon 5" to be produced commencing in
the late Summer of 1996.
In 1994, "Babylon 5" received its second Prime Time Emmy Award
for Outstanding Individual Achievement in Make-Up for a Series. The
series had previously won the 1993 Prime Time Emmy Award for
Outstanding Individual Achievement in Special Visual Effects for a
Series. According to the A.C. Nielsen ratings, an average of
approximately 3.2 million households in the United States tuned into
"Babylon 5" each week during the 1995-1996 season. The series
features such television stars as Bruce Boxleitner, Claudia
Christian, Jerry Doyle, Mira Furlan, Richard Biggs, Bill Mumy, Jason
Carter, Stephen Furst, Jeff Conway, Peter Jurasik and Andreas
Katsulas.<PAGE>
A high percentage of the "Babylon 5" audience are daily
computer users and active on-line subscribers. Consequently, over
the last year NDEI has interacted with fans of "Babylon 5" via the
various on-line "Internet" services in an effort to build up and
maintain interest in "Babylon 5." In the Spring of 1996, NDEI
launched the "Babylon 5" Fan Club and will establish its own
Internet Web Site in the Fall of 1996. NDEI continues to explore
the development of one or more "Babylon 5" CD-ROMs. See "BUSINESS
OF THE COMPANY -- Future Developments."
"Hypernauts." Hypernauts is a science fiction children's
series which combines live action and computer graphics. NDEI has
completed for ABC the production of 13 episodes of "Hypernauts."
The series aired nationally on Saturday mornings in the Spring of
1996. In April 1996, ABC placed "Hypernauts" on hiatus. While NDEI
management awaits further decision from ABC on future airings of
"Hypernauts," it has begun taking steps to place the program with
another distributor.
Projects in Development.
The development of new material or properties for television
and new multimedia productions is essential to the future growth of
NDEI. NDEI may obtain new properties from three sources: (i)
acquisition of existing properties; (ii) co-development of new
properties; and (iii) development of new properties internally.
When acquiring existing properties, NDEI may pay a nominal fee for
an option against a more substantial purchase price. This option
usually enables NDEI to develop the property on its own during the
option period before committing to its acquisition. Securing an
option also enhances NDEI's ability to obtain financing or a
production commitment before actually buying the property. Option
periods customarily run for a minimum of one year and contain
provisions that enable NDEI to extend the option for additional
periods. Terms of options vary significantly and are dependent
upon, among other factors, the credibility and prior success of the
writer/owner of the property, the level of revenues or profits that
NDEI estimates can be received from the exploitation of the
property, and the estimated cost of further development and
production of the property. Agreements relating to these projects
often provide for additional payments to writers upon their sale,
production and/or distribution. Certain agreements also provide for
participation, at various percentage levels, and/or profits from
these projects.
In some cases, where NDEI already has a working relationship
with outside creative personnel, NDEI will agree to co-develop a
property. Generally, NDEI will set up a corporation or similar
entity under which it will develop and possibly produce the
property. Otherwise NDEI will enter into an agreement to co-develop
the property with the owner or creator. Like options, the terms of
NDEI co-development agreements can vary significantly.
<PAGE>
During the development phase of a project, a screenplay is
written and commitments are sought from external sources such as the
major entertainment studios, distributors, broadcast networks and
production companies. As indicated, it is not the practice of NDEI
to expend substantial sums of its own in the development process
unless it has reason to believe that there is a strong likelihood of
a financing or production commitment for the project from such
external sources.
The following projects are currently in various stages of
development. NDEI is seeking, but has not obtained, financing or
production commitments for any of these projects. There can be no
assurances any of these programs will be produced, or even if
produced, that they will generate revenue for NDEI.
Project Description Stage of Development
Dark Zone Action adventure television Treatment written
series and companion
interactive website; J.
Michael Straczynski, Creator
Jungle Bots Live action television Treatment written
children's series
Young Bucks Western syndicated television Treatment written
series; John Copeland and J. and video produced
Smith, writers
Guardians Science fiction television 2-hour pilot screen-
series; J. Michael play completed
Straczynski, creator and
writer
Millennium Documentary film based on book, Treatment written
Prophecies "Millennium Prophecies," by
Stephen Skinner
Lefors Television movie; Peter First draft screenplay
Kinloch, writer written
Sudden Death 2-hour action adventure Screenplay completed
television movie; proposed
television movie series
<PAGE>
The Industry and Business Strategy
The entertainment industry is an approximately $30 billion per
year industry which is presently undergoing strategic changes as new
technologies proliferate in both the development and production of
projects and in the electronic distribution of entertainment
programming. The development and growth of the 500 channel cable
system, DBS (Direct Broadcast Satellite), Pay Cable, home video,
Virtual Reality parlors and systems, CD-ROMs and other interactive
multimedia are creating many more opportunities for the distribution
of entertainment programming to the consumer, while at the same time
reducing the overall market share for any one program. At the same
time, viewers have generally become more sophisticated as they
become accustomed to higher quality audio and visual effects and
computers. Even with these changes, management believes it is
largely the creative content of the programming and not the delivery
vehicle or technology used to develop a program which drives market
share. Consequently, management believes there is, and is likely to
continue to be, a growing demand for quality content-based
entertainment products that can be produced more efficiently.
Management believes that to meet this growing demand, its
productions must be increasingly innovative and flexible. Current
and long-established production methodologies and techniques will no
longer satisfy the marketplace and new project management techniques
must be employed. Management believes an effective approach must
allow for the manipulation of production elements and the cross-marketing of
a program to multiple audiences using varying electronic media: commercial
television, cable, feature films, music soundtracks, books, CD-ROMs and
other interactive multimedia platforms.
The Virtual Studio
The Production Process. NDEI's production and post-production
process is organized in digital workstations, using personal
computer platforms, linked together by local area networks, modems
and, when necessary, transportable digital tape cassettes. Using
this approach, NDEI can use resources and talent throughout the
world to produce a project without the expense such collaboration
has historically entailed. For instance, a writer in the
Northeast, a graphic artist from Montana, musicians from Great
Britain, and producers from Hollywood may all collaborate on the
creation, development, production and completion of a project
without having to move equipment and personnel from location to
location. Presently, the Virtual Studio electronically links NDEI
to facilities and individuals in Los Angeles, Northern California,
Australia and Europe. In this way, NDEI can take advantage of an
international talent pool without incurring many of the high costs
of "Hollywood" overhead.
<PAGE>
NDEI's Virtual Studio consists of the following production
departments: (i) script writing; (ii) film production; (iii) visual
effects, which include computer-generated imaging and digital
animation; (iv) compositing, which combines live action footage with
computer-generated backgrounds and animation; (v) editing, which
assembles the film footage into a completed program; (vi) music
composition and scoring; (vii) final audio mixing; (viii) digital
database management, including the storage of all the production
elements in digital medium; and (ix) concurrent with the work of the
other departments, the use of the digital database used to create
hybrid entertainment products.
Prepurposing. The Virtual Studio concept combined with NDEI's
project management system and proprietary software permits NDEI to
bring quality production values to various entertainment markets
while minimizing the cost. Once an image or a script has been
created and archived into a digital medium, it is capable of being
purposed for use in any number of entertainment media. The
digitizing of film, audio and script early in the production process
allows not just for the development of a theatrical movie or
television show, but also for the Prepurposing of production
elements for different entertainment markets such as CD-ROM,
electronic games, soundtrack albums, books and other entertainment-
based software. Many production companies "Repurpose" data for
exploitation in other entertainment media after they have completed
the production of a television program or theatrical film. NDEI is
capable of Prepurposing, or designing in flexibility to accommodate
multiple entertainment vehicles during pre-production and
production. Prepurposing, as opposed to Repurposing, can simplify
the development process for the products in the other entertainment
media, reduce the overall cost and permit NDEI to exploit multiple
entertainment markets at the same time. For example, NDEI presently
has the capability to create a program for television, while
simultaneously producing an interactive CD-ROM, a teacher's
classroom guide and help disk, a virtual reality game, and a book.
This Prepurposing, particularly for products to which NDEI maintains
the ancillary rights, can generate additional revenues for NDEI
while enhancing the overall interest in the television series or
movie.
Merchandising
NDEI has established a merchandising operation to control the
merchandising and licensing of television programming related items.
NDEI entered into a contract with Playmates, Inc. to develop toys
based on NDEI children's television show, "Hypernauts." The
prospects for the "Hypernauts" merchandising effort remain in doubt,
however, as ABC remains undecided as to continued airing of
"Hypernauts" and NDEI management seeks another distributor for the
show. Management believes that several of its projects in
development hold potential for merchandising-related licensing.
Nonetheless, there can be no assurances NDEI will ever be able to
generate significant revenue from the "Hypernauts" series or from
any other of its proposed merchandising efforts.
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<PAGE>
Internet
The Internet is the world's largest computer network allowing
people with computers around the world to interact with each other.
At present, there are approximately 30 million people world-wide
connected to the Internet. For the last year, NDEI has interacted
with fans of "Babylon 5" via the various on-line services currently
available. In the Fall of 1996, NDEI intends to expand its presence
on the Internet by establishing its own "Web Site," which will
provide an electronic storefront for NDEI to market television
program related consumer products such as hats, posters and toys,
and provides 24 hour international on-line access for fans of
"Babylon 5."
Technology and Production Service Division
The Company has expanded its post production facilities by
purchasing post production related software and equipment. This
software and equipment is used primarily for editing and special
effects. This software and equipment replaces units formerly
rented, and performs services that were formally outsourced.
Consequently, the new software and equipment allows NDEI to more
effectively use existing personnel and reduce the need for outside
vendors. The added control and scheduling flexibility allow for
measurable increases in post production revenues going to NDEI. In
addition to the editing equipment purchased, NDEI has also purchased
additional animation and composing workstations to expand
capabilities and reduce dependence on outside suppliers. It is
anticipated that additional personnel will be hired in the near
future to operate this equipment.
Competition
Competition in the television production, distribution and
syndication industries is intense since there are numerous suppliers
of product, including the major entertainment studios, motion
picture companies, television networks and independent television
production companies. NDEI competes with the major entertainment
companies and others for the acquisition of artistic properties and
the services of creative and technical personnel. NDEI's ability to
acquire artistic properties and engage the services of creative and
technical personnel is and will be limited by its financial
resources. NDEI competes for available production financing and
favorable distribution arrangements, and for the public's interests
in, and acceptance of, its creative products. There are also
numerous other competitive factors in this industry including, among
others, the timing of products and the marketing efforts which
accompany and precede the airing of the products. As NDEI attempts
to expand its product base, it will face more intense competition
from larger entities with greater experience and financial resources
than NDEI. There can be no assurance that NDEI will be able to
compete successfully, particularly as it seeks to expand its product
base.
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<PAGE>
As NDEI expands further into the CD-ROM, multimedia,
merchandising and other entertainment-related markets, it expects to
face increasing competition from other developers of content
materials, toys, merchandising materials and related entertainment
products. It is likely that NDEI will also face competition in its
post-production services business from an increasing number of
independent post-production companies.
Regulation of Television and Motion Picture Industry
United States television stations and networks, as well as
foreign governments, impose restrictions on the content of its
programs. The Code and Ratings Administration of the Motion Picture
Association of America, an industry trade association, decides
ratings for age group suitability for domestic theatrical
distribution of motion pictures. To the extent that NDEI's projects
do not comply with such standards and practices, they may be
required to be further edited before exhibition on applicable
television stations, networks and in foreign territories.
Copyrights
Distribution rights to television programming are granted
legal protection under the copyright laws of the United States and
most foreign countries which provide substantial civil and criminal
sanctions for unauthorized duplication and exhibition of television
productions. Television productions, scripts, musical works, sound
recordings, art work, and still photography are all separate works
subject to copyrights under most copyrights laws, including the
United States Copyright Act of 1976. NDEI plans to take what
management believes are appropriate and reasonable measures to
secure, protect and maintain or obtain agreements to secure, protect
and maintain copyright protection for all of its properties under
the laws of applicable jurisdictions. No assurance can be given,
however, that others will not infringe upon NDEI proprietary rights,
in which event, NDEI may not have sufficient resources to enforce or
defend these rights. See "RISK FACTORS."
Facilities
NDEI's principal executive offices and its post-production
facilities are located at The Academy of Arts and Science building,
5200 Lankershim Boulevard, Suite 280, North Hollywood, California
91601. NDEI is presently leasing 2,667 square feet on a month to
month basis at $4,934 per month in anticipation of expanding its
operations upon completion of this offering.
NDEI also leases its studio facility containing approximately
66,000 square feet in Sun Valley, California, with a minimum monthly
rental of approximately $25,200 and a lease expiration date of June
1997.
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<PAGE>
Employees
Presently, NDEI has approximately 25 full time employees and
90 part-time employees. To augment its staff, NDEI contracts with
independent writers, technical personnel or other production talent
on a freelance basis for which there is a large talent pool. NDEI
is a party to collective bargaining agreements with the Directors
Guild of America, the Screen Actors Guild, the Writers Guild of
America and International Alliance of Theatrical Stage Employees
("IATSE"). NDEI is not a party to any other collective bargaining
agreement. In connection with its production and other activities,
NDEI may employ personnel, such as writers, directors and performing
artists, who are members of unions that are parties to collective
bargaining agreements. Action by these guilds or unions can
significantly disrupt production and have a material adverse effect
on NDEI. In addition, it is possible that some of NDEI's future
business activities will be affected by the existence of collective
bargaining agreements relating to persons whom it may employ who are
members of unions. The extent to which the existence of collective
bargaining agreements may affect NDEI in the future is not
accurately determinable.
Legal Proceedings
There are no material proceedings to which NDEI is a party, or to
which any of its properties are subject, are pending, or are known
to be contemplated, and NDEI knows of no material legal proceedings,
pending or threatened, or judgments entered against any director or
officer of NDEI in his capacity as such.
<PAGE>
<PAGE>
NDEI SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected financial data
for NDEI and should be read in conjunction with the financial
statements of NDEI and the notes thereto included elsewhere in this
Proxy Statement.
(In Thousands Except Shares and Per Share Data)
12 Months 12 Months 9 Months 9 Months
Ended Ended Ended Ended
6/30/95 6/30/94 3/31/96 3/31/95
Income Statement Data
Net Revenues 19,259 17,806 $22,071 $14,687
Earnings (Loss) Before Taxes 142 175 36 90
Taxes on Income 44 30 29 32
Earnings (Loss) After Taxes 97 145 7 58
Earnings (Loss) Per Share $0.05 $0.08 -- $0.03
Balance Sheet Data
Net Working Capital 5 (206) 3,379 (420)
Total Assets 961 1,000 4,722 1,505
Long-Term Debt - - - -
Stockholders' Equity 132 14 3,683 72
Shares Outstanding 1,860,000 1,860,000 2,795,000 1,860,000
<PAGE>
NDEI MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
Results of Operations
For the nine months ended March 31, 1996, NDEI reported a net
profit of $7,109 on revenues of approximately $22.0 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." NDEI 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
<PAGE>
completed in the Fourth Quarter 1996. The "Babylon 5" series has
been renewed for another season and 22 additional episodes have been
ordered. "Hypernauts" will not be renewed by the same network.
Consequently, NDEI is seeking alternative distribution, including
cable and syndication outlets, for the "Hypernauts" series.
However, there can be no assurance that additional episodes of
Hypernauts will be ordered, produced and distributed in the coming
1996/1997 television season.
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 NDEI's post production facilities
contributed to the increased costs for the same three month period.
NDEI continues to expand operations in technology, merchandising and
project development. The benefits from this expansion will take
time to materialize.
The increase in interest income was principally due to
interest earned on proceeds received from NDEI'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.
Liquidity and Capital Resources
As of March 31, 1996, NDEI had cash and cash equivalents of
approximately $3.5 million. and accounts receivable of $665,406
(aggregate of $4,197,428). NDEI 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
<PAGE>
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.
NDEI'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 NDEI during the production stage of a project and
upon its completion. NDEI has in the past been able to secure
production financing from a major studio or distributor. While NDEI
believes that similar financing arrangements can be made for future
productions, there can be no assurance NDEI will be successful in
obtaining such financing. In that event, its working capital will
be reduced accordingly. Moreover, as NDEI 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 NDEI 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.
NDEI's cash receipts are presently principally derived from
external production funding of its projects, related merchandising
revenue, and producer fees. NDEI's revenues are affected by the
third party distribution of its projects and the number of projects
for which NDEI receives producer fees. Therefore, NDEI 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, NDEI continues to expand its production
services capabilities in an effort to become a broader-based
entertainment company. In April 1996, NDEI 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 NDEI. Under the terms of the
Agreement, NDEI 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
<PAGE>
criteria. The combined revenues of NDEI 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, NDEI intends to raise a minimum of $2 million which it
will provide to Videssence for working capital purposes.
NDEI 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.
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
NDEI's needs for at least the next twelve months. Nonetheless, the
foregoing activities are dependent in the long term upon NDEI'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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the Record Date, the following persons or entities are
believed by NDEI to beneficially own more than 5% of the Common
Stock:
Name and Address of Amount and Nature Precent of
Beneficial Owner of Ownership Class
Douglas Netter
1115 N. Beverly Drive
Beverly Hills, CA 90210 1,731,000(1) 61.93%
John Copeland
11170 Valley Spring Place
Studio City, CA 90102 150,000(1) 5.37%
<PAGE>
As of the Record Date, the following individual directors, and
directors and officers as a group, owned shares of Common Stock, as
indicated:
Name of Beneficial Amount and Nature Percent of
Owner of Beneficial Ownership Class
Douglas Netter 1,731,000(1) 61.93%
John Copeland 150,000(1) 5.37%
Geoffrey Talbot 125,000(1) 4.47%
Rowland Perkins 30,000(2) 1.06%
Kate Forte 30,000(2) 1.06%
George Johnsen 10,000(2) *
Suzanne Jealous 4,000(2) *
All Directors and
Officers as a group (10
persons) 2,080,000 72.5%
____________________
* Less than one percent
(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. In July 1994, Mr. Netter granted
Mr. Talbot an option to purchase 200,000 shares owned by Mr.
Netter, exercisable at $0.01 per share. In September 1995,
Mr. Netter and Mr. Talbot mutually agreed to cancel 50,000
options previously granted by Mr. Netter to Mr. Talbot. Of
Mr. Talbot's options, 25,000 have been transferred by Mr.
Talbot to Ms. D'Angelo, NDEI's former Chief Financial Officer.
Mr. Talbot presently has options to purchase 125,000 of Mr.
Netter's shares of Common Stock. Neither Mr. Talbot's nor Ms.
D'Angelo's options have been exercised
(2) Mr. Perkins, Ms. Forte, Mr. Johnsen and Ms. Jealous have
options to purchase from NDEI 30,000, 30,000, 10,000 and 4,000
shares of NDEI Common Stock, respectively, exercisable at
$5.00 per share.
<PAGE>
DESCRIPTION OF SECURITIES
General
NDEI is authorized to issue 6,000,000 shares of Common Stock,
$.01 par value per share; 2,000,000 shares of Preferred Stock, $.001
par value per share. After the closing of this Merger, 3,317,222
shares of Common Stock will be issued and outstanding (assuming no
exercise of the Warrants, Representative's Warrants, Bridge Warrants
and other outstanding warrants and before releasing any Operating
Profit Escrow Shares or issuing any Earn-Out Shares). No shares of
Preferred Stock are outstanding or will be outstanding after the
closing of the Merger.
Delaware Law and Certain Charter and Bylaw Provisions
The Bylaws provide that the number of directors of NDEI shall
consists of not less than three nor more than seven with the exact
number to be determined by a vote of a majority of the stockholders
or the Board. The Board has currently fixed the number at seven.
Any vacancies on the Board may be filled for the unexpired portion
of the term by a majority vote of the remaining directors. NDEI's
Certificate of Incorporation and Bylaws permit stockholders of NDEI
with the requisite voting power to take action by written consent
without a meeting of stockholders.
Common Stock
NDEI is authorized to issue 6,000,000 shares of Common Stock,
$.01 par value per share, of which 2,795,000 shares are currently
outstanding. Each share of Common Stock entitles the holder thereof
to one vote on all matters submitted to a vote of the stockholders,
except that the holders have cumulative voting rights for the
election of directors. The holders of Common Stock do not have
preemptive rights or rights to convert their Common Stock into other
securities. Holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of
funds legally available therefor. In the event of a liquidation,
dissolution or winding up of NDEI, holders of the Common Stock have
the right to a ratable portion of the assets remaining after payment
of liabilities. All shares of Common Stock outstanding and to be
outstanding upon completion of this offering are and will be fully
paid and non-assessable.
Warrants
There are 544,500 Redeemable Common Stock Purchase Warrants
outstanding (not counting Representatives' Warrants). Each Warrant
entitles the holder thereof to purchase at any time prior to November
21, 1998 one share of Common Stock at a price of $6.50, subject to
adjustment in accordance with the anti-dilution and other provisions
of the Warrant Agreement. The Warrants may be exercised at any time
in whole or in part at the applicable exercise price until expiration
of the Warrants. No fractional shares will be issued upon exercise of
the Warrants. Commencing February 18, 1996 the Warrants are subject to
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<PAGE>
redemption at $.01 per Warrant on 30 days' prior written notice to the
Warrantholders if the closing bid price of the shares of Common
Stock as reported by Nasdaq 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. In the event that the Company exercises the right to
redeem the Warrants, such Warrants will be exercisable until the
close of business on the date for redemption fixed in such notice.
If any Warrant called for redemption is not exercised by such time,
it will cease to be exercisable and its holder will be entitled only
to the redemption price.
Section 203 of the Delaware Law
Generally, Section 203 of the Delaware General Corporation Law
("DGCL") prohibits certain Delaware corporations from engaging in a
"business combination" with an "interested stockholder" for a period
of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to the date of
the business combination, the transaction is approved by the board
of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock, or (iii) on or after the consummation date
that the business combination is approved by the board and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder. "Business
combinations" include mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and
associates, owns (or within the last three years, did own) 15% or
more of the corporation's voting stock. A Delaware corporation may
"opt out" from the application of Section 203 of the DGCL through a
provision in its certificate of incorporation or by-laws. The
Company has not "opted out" of application of Section 203.
MARKET PRICES OF NDEI COMMON STOCK
The following table sets forth, for the periods indicated, the
high and low bid prices per share of Common Stock as reported on the
NASD Small Capitalization Market System from November 21, 1995 to
date. Information presented is for calendar quarters.
High Low
1995
Fourth Quarter $4.875 $4.375
1996
First Quarter $11.00 $4.25
Second Quarter (for the period ended May 31,
1996) $7.875 $5.25
<PAGE>
<PAGE>
On April 26, 1996, the last full day on which the Common Stock
traded prior to the public announcement of the principal terms of
the Merger Agreement, the high ask and low bid prices for the NDEI
Common Stock were $8.25 and $7.125, respectively.
No dividends have been paid on the Common Stock during the
above periods.
<PAGE>
BUSINESS OF VIDESSENCE
General Business Development and Overview
Videssence designs, manufactures and distributes lighting
products, which incorporate Videssence patented SRGB light
technology, for the illumination of studios, stages and production
environments in the sound stage, motion picture, theater
and theme park industries. Videssence's fluorescent lighting
products emit energy-efficient, low-heat light that is up to 90% more
efficient than traditional incandescent lighting.
Corporate History
Videssence was organized under the laws of the State of
California in 1981. Videssence selected the television studio
industry as the initial target market for Videssence technology and
products because the unique needs of the television studio market
are not addressed by incandescent lighting. Over one billion
dollars worth of incandescent lighting, originally developed for
stage and theatrical lighting applications, is currently used in
television studios: this incandescent lighting offers no specific
enhancement or design features for television studio application.
Incandescent light primarily generates "heat" and requires large
amounts of electrical power to produce relatively small amounts of
RGB light, which is the type of light that stimulates television
cameras. Videssence believes that SRGB lighting offers an
attractive alternative for the television studio industry.
In 1988, television station KCRA-TV Sacramento, California was
chosen to test and evaluate certain of Videssence's new products in
actual operation. The station's news television studio was equipped
with a complete Videssence lighting system. The beta-site
relationship with KCRA was extended for a five-year period through
1993.
In 1989, Videssence provided lighting for Ultimatte, Inc., a
leading supplier of electronic composite imaging matte products, in
their composite image demonstration for the National Association of
Broadcasters ("NAB") annual convention. As the convention closed,
Videssence was voted "Pick of the Show" for new television
technology for 1989.
Today, Videssence's lighting fixtures are installed in over
450 studios throughout the world, including CNN, CBS, NBC and ABC
owned stations. Internationally, Videssence products have been sold
in over forty countries.
Videssence has recently developed product lines to serve the
the video conference/distant learning industry and the digital
photography industry. Videssence has conducted market research and
begun sales, marketing and distribution efforts in these markets.
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Videssence launched products for motion picture/location production
lighting at the ShowBiz trade show in Los Angeles, California on
June 28-30, 1996 and received a positive response from both filmmakers
and the lighting rental companies. Videssence believes there is a
substantial market for its products in these markets as companies
replace aging and costly incandescent technology with more efficient
"highspeed" fluorescent lighting delivered by Videssence.
Technology
Overview
Television, motion picture and electronic imaging cameras
matrix over 20,000,000 colors and 1,100 shades of gray from three
primary light stimulations: red, green and blue ("RGB") light. Traditional
lighting, 3200K (Kelvin) ("3200K") incandescence presents to the camera
a consistent relationship between the RGB color values. As the color
content of an incandescent light source is presented to the camera,
the camera creates a matrix for color rendering that expects a relatively
low blue value, medium green value and high red value.
Standard fluorescent lighting does not emit suitable color
values for image processing, and creates a strobe and flicker that
prevents it from optimizing the camera's performance. SRGB light is
an improved form of fluorescence, which utilizes trichromatic lamps,
high frequency ballasts and proper fixture design to create intense
emissions of RGB light and remove evidence of strobing and
flickering. In addition, the color relationship between the red,
green and blue in color values in SRGB 3000K (Kelvin) is comparable
to that of incandescent 3200K. In each case, the visible light
stimulation of blue light is less than green and green light is less
than red. This common characteristic makes both light sources
acceptable to a critical media camera.
Operational Advantages
While incandescent lighting has traditionally been accepted as
the standard in media production, SRGB lighting offers several
important operational advantages over incandescent lighting. SRGB
lighting reduces by 90% the electrical energy needed to produce an
equivalent amount of camera visible light with incandescent
lighting. Unlike incandescent lighting which emits heat-intense
light, SRGB lighting emits low-heat visible light thereby reducing by
85% the air conditioning requirements for studio environments. In
addition, because the tri-chrome fluorescent lamps used in producing
SRGB lighting are relatively inexpensive and last over 10,000 hours
compared to traditional tungsten lamps which last only 200 to 300
hours, SRGB lighting reduces lamp replacement costs by 95%. SRGB
lighting provides more consistent light than incandescent lighting
because the RGB color values emitted by a SRGB light remain constant
over time and in relation to other lights on the set. This
consistency combined with heightened RGB color values improve camera
imaging and performance.
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Videssence Products
Videssence has organized its SRGB lighting products into four
market service groups and corresponding product lines: the
studio/sound stage market ("Studio 2000"), the location and studio
quality portable production lighting market ("FYI," "BestBoy" and
"CoolHeads"), the video conference and distant learning market
("VID-COM"), and the digital photography market ("Photolight" and
collectively, with VID-LITE and VID-COM, "Studio 1000".) Many of
its product offerings contain Videssence's "SuperBallast," ET-250,
technology. The ballast is a light's electronic drive component.
The "SuperBallast" was developed over a three year period, is
certified by Underwriter's Laboratory, provides dimming capability
under digital or analogue control and has one of the higher ratios
of light output to watt of energy consumed in the lighting industry.
Videssence field-tested the "SuperBallast" technology by lighting
the sound stage operations of Home Shopping Network (Clearwater
Florida) over the past year. This testing has permitted Videssence
to refine the "SuperBallast" so that Videssence can now mass produce
its "SuperBallast" equipped products.
Studio/Sound Stage Lighting Systems
Through its Studio 2000 product line, Videssence has been
supplying lighting fixtures to television news operations since
1989. In 1990, Videssence introduced its SRGB technology to the
Society of Motion Pictures and Television Engineers, a North
American group that sets standards for the motion picture and
television industries. Since then, Videssence believes that
Videssence technology has been considered the standard in television
news operations. Videssence lighting fixtures are currently
installed in over 450 studios throughout the world, including those
of CNN, CBS, NBC and ABC. CNN is in the process of re-lighting its
entire operation, with the expectation that such process will
conclude by the end of 1996.
Videssence has also completed design and installed studio
quality equipment in the sound stage, motion picture, theater and
theme park industries.
To date virtually all of Videssence's revenues have been
generated by the sale of its Studio 2000 products. Sales of
Videssence's Studio 2000 products were $4,460,000 in 1995,
comprising 95% of the Company's net sales, and $3,500,000 in 1994,
comprising 95% of Videssence's net sales. Revenue generated from
the service and installation of Studio 2000 products was less than
5% and 2% of overall revenues in the years ended December 31, 1995
and 1994, respectively.
There are seven families of SRGB fixtures that have been
offered to the media lighting market beginning in 1992. The first
four families are "projector" fixtures that can, with the proper
accessories, emulate incandescent "spot" lights. This is a desired
effect in most stage quality lighting applications. These fixture
<PAGE>
families are: (1) Quanta, the smallest of small zone light pattern
fixtures designed to replace small incandescent spot lights studio
lighting fixtures in the 104-192 watt power range; (2) Star,
small/medium zone light pattern fixtures designed to replace small
incandescent spot lights or broad sources in the 150-250 watt power
range; (3) Quasar, medium zone light pattern fixtures designed to
replace larger incandescent spot and powerful broad sources in
studios in the 240-500 watt power range; (4) Sky, large zone light
pattern fixtures designed to replace large incandescent spot and
powerful broad sources in studios in the 240-1025 watt power range;
(5) Baselights, five different fixtures ranging from small to large
zone light pattern that represent a versatile product group for
studios that have a variety of productions over a small period of
time designed for the 110-660 watt power range; (6) Modular, four
different modular lighting fixtures designed to replace any
incandescent medium zone light system in the 40-110 watt power
range; such fixtures are lengths of composite extrusions that house
lamps, electronics reflectors, lens and accessories with
interlocking tracks and can be joined together to form larger arrays
of lighting output; and (7) Specialty, "custom" stage craft or
special effect lighting products designed to provide a number of
specific functions and have wide range power output, accessories and
hardware configurations generally used to illuminate the "other-than-
talent" areas of a scene.
Production/Location Lighting Systems
In 1995, Videssence completed market research and development
of the film/location lighting product line. These products
are designed to be energy-efficient, portable lighting systems as
most film and television entertainment programs are produced on
location or in rented bare wall studios. The fixtures are light
weight so they can be carried and used on stands. Each fixture is
supplied with daylight and tungsten color temperature lamps because
location production may occur in diverse environments. The fixtures
range in power output from 6 to 660 watts and have a variety of
configurations. These products were used in several feature film
projects in 1995-1996. Videssence has not yet begun to manufacture
or sell its film production/location lighting products in
significant quantities.
The "BestBoy" on a feature film location is the professional
that outfits the lighting truck and distributes lighting out of the
truck on location. These professionals need light weight,
technically correct, cool operating and energy efficient lighting
instruments. Management believes its "BestBoy" product line meets
these criteria. Constructed with light weight aircraft aluminum and
finished in an epoxy powder coat, the "BestBoy" fixtures and systems
can be configured to light virtually any location. The "Best Boy"
product line consists of combinations of two, four or six, 32 to 40
watt, Biax, T-8 or T-12 lamps. It also includes the "BestBoy"
CarKit which is a two lamp multi configuration lighting kit that is
powered by a 12 volt DC source (cigarette lighter) and is often used
to light auto interiors or tight spaces.
<PAGE>
<PAGE>
The "CoolHead" products are designed to be light weight, low
cost fixtures that augment high output SRGB location lighting
products. These fixtures are constructed of light weight corrugated
plastic materials. The fixtures are not engineered to produce "spot
light" or projection value lighting. They are used in close quarter
location and small set production application where they can easily
be mounted to a wall or hidden within a prop. These products are
designed and packaged to be rented to production lighting
professionals or sold across retail counters to the production
lighting professionals. These "CoolHead" products are 2 foot and
4 foot long fixtures with either a single, double, or quadruple set
of T-12 lamps.
The FYI-Kits are groups of modular extrusion shapes that can
be ganged together to form large arrays of lighting, long pipes of
light or single instruments placed within a space or set to operate
as a system. These FYI-Kits allow the lighting professional an
extensive "toolbox" approach to what would normally be difficult
lighting situations. The FYI Kits are a cross between the breakaway
systems, components used in other products and Videssence's
"Modular" extrusion designs used in media lighting. The resulting
FYI Kits give the professional a long list of options as to how a
large fixture is made or a number of small individual fixtures can
be placed around a studio or set.
FYI Kit Products will be released in the following formats:
(1) FYI-Kits 40, components for a two lamp system with two 24"
lamps, wiring, electronics, fixture bodies, reflectors, a variety of
mounting hardware and connectivity; (2) FYI-Kits 80, components for
a four lamp system with four 24" lamps, wiring, electronics, fixture
bodies, reflectors, a variety of mounting hardware and connectivity;
(3) FYI-Kits 41, components for a two lamp system with two 48"
lamps, wiring, electronics, fixture bodies, reflectors, a variety of
mounting hardware and connectivity; and (4) FYI-Kits 81, components
for a four lamp system with four 48" lamps, wiring, electronics,
fixture bodies, reflectors, a variety of mounting hardware and
connectivity.
Video Conference/Distant Learning Environment Systems
Videssence has developed its VID-COM product line for sale
to the video conference and distant learning industries. In 1992,
Videssence completed a video conference SRGB standards project with
AT&T's/Bell Labs Video Product Division. With the completion of this
project, AT&T has equipped their Video Product's Demonstration and Training
Center in Middletown, New Jersey, with Videssence lighting products.
Tridom/AT&T is the non-entertainment uplink/satellite/downlink
service provider business unit of AT&T. Tridom/AT&T in late 1996 will
offer a VID-COM video conference studio system that can be
purchased as a complete set, purchased a la carte, or rented for
short term usage. Tridom/AT&T has offered to include VID-COM
product lines in the Tridom/AT&T global catalogue in the
second half of 1996 as part of its video conference studio system.
<PAGE>
The VID-COM lighting systems can be used for desktop video to large
audience conferencing. To date, Videssence has only manufactured
and sold its VID-COM products on a limited basis for purposes of
field-testing these products.
Digital Photography/Digital Pre-Press
Videssence has developed its Photolight product line for use
by digital photography studios and in pre-press print imaging.
Dicomed and Phase One Pre-Press Imaging, leaders in the new high
resolution electronic camera industry, have incorporated the
Photolight product line into their own marketing efforts.
Videssence includes the following products in its Photolight line:
(1) Photolight 330 and Photolight 660, products designed with
outboard and detached electronics to illuminate digital photography
studios and pre-press print imaging; large products with remote
electronics and a power output of 330 and 660 watts, respectively
and (2) Shadowcaster, incandescent point light source that
Videssence has developed with Osram/Sylvania, Inc., a lighting
company specializing in the production of high-speed fluorescent
tubes and ballasts; compatible with SRGB 3000K light to provide a
photographer with an "effect" spot light. To date, Videssence has only
manufactured and sold its Photolight products on a limited basis for
field-test purposes.
Power Distribution, Dimming Control, Environmental Control
Dove Systems, located in San Luis Obispo, California, is one
of the founding companies in the digital signal lighting controls
industry. Dove System has assisted Videssence in designing and
manufacturing a group of fluorescent lighting products with power,
dimming and environmental control features. This line of products
was first released in April 1996 at NAB, the major television
industry trade show and includes: (1) VISTA 1, small digital dimming
control board that could control 192 channels of SRGB or
incandescent lighting; (2) VISTA 2, programmable dimming control
console suitable for large studio and stage lighting control,
capable of controlling 512 channels of lighting and has memory
capability for long or complicated programs; and (3) VID-STICS,
large power strips that contain dimming components, are distributed
out in a studio grid and "decentralize" the power and the control
hardware in the studio, placing them close to the fixtures that they
affect.
<PAGE>
Products in Development
Lamp Development Project- OSRAM/Sylvania, Inc. - Kodak
A key component of media lighting is the relationship between
specific targets (like film emulsion or video camera charged
coupling devices) and the particular light/color values that are
emitted from a fluorescent lamp. It was the discovery of this
relationship that formed Videssence's first patent and also
attracted the television media industry to using the SRGB lighting
technologies. Recently, Videssence has made efforts to expand its
understanding of the needs of specific video cameras and film
emulsions, recognizing the need for lamps that were formulated with
precision to match a specific media's requirements for light and
color.
Videssence has begun working with Osram/Sylvania, Inc. to
produce lamps for Videssence products that provide optimized
stimulation to Kodak film emulsions. Kodak has supplied the
necessary scientific information regarding their products needs,
Videssence has begun formulating samples and revised samples of the
phosphorescent compounds for lamps which will be evaluated by Kodak
until the formulae obtain Kodak's stamp of approval. Videssence
will then order from Osram/Sylvania, Inc. those specially designed
lamps for Videssence to distribute globally to the SRGB media
specific markets. Management of Videssence anticipates, but cannot
guarantee, that the first such products, listed below, will be
released in the Fourth Quarter of 1996: (1) 6 watt T-5 3200K SRGB
Lamp; (2) 6 watt T-5 5500K SRGB Lamp; (3) 32 watt T-5 Triple Dulux
3200 K SRGB Lamp; (4) 32 watt T-5 Triple Dulux 5500K SRGB Lamp; (5)
20 watt T-8 3200K High Output (HO) Lamp; (6) 20 watt T-8 5500K HO
Lamp; (7) 32 watt T-8 3200K HO Lamp; (8) 32 watt T-8 5500K HO Lamp;
(9) 40 watt T-5 Dulux 3200K SRGB Lamp; (10) 40 watt T-5 Dulux 5500K
SRGB Lamp; (11) 55 watt T-5 Dulux 3200K SRGB Lamp; and (12) 55 watt
T-5 Dulux 5500K SRGB Lamp. There can be no assurances that these
products will ever be taken to market and, even if such products are
taken to market, that such products will generate significant
revenues for Videssence.
Digital Production Technology Products
Videssence has a number of strategic business alliances to develop
new digital production technologies and systems. Videssence, together
with Parker Vision, Inc., Play, Inc. and Legacy Storage Systems, Inc. hopes
to develop broadcast quality, reduced expense production technology
packages which would include Videssence lighting products. These products
will represent either single components to operate in the television or
film production industries or complete "turnkey" production studios in
shippable flight cases. Videssence anticipates that product
offerings will begin to appear in the second half of 1996 or first
half of 1997. There can be no assurances, however, that this joint
venture will occur and, even if it does occur, that these proposed
products will generate significant revenues for Videssence.
<PAGE>
Commercial Lighting Products
Videssence is also attempting to form a joint venture with
Lights of America ("LOA"), to design and develop for manufacture and
distribution SRGB commercial lighting fixtures. These products
called "Cartridge" lights are intended to be a cost effective, high
quality ceiling fluorescent replacement or retrofit product
offering. They will be designed to fit into the frame that holds
the plastic diffusion lens on conventional fluorescent ceiling
fixtures. In new construction, Videssence management anticipates
that the Cartridge light can be installed with less expense, weight
and man-hours than present fluorescent ceiling fixtures. In retrofit,
Videssence management expects a contractor will be able to remove the
plastic diffusion frame in an existing fixture, insert the 1" thick
cartridge into the frame, connect power from the old fixture to the
cartridge, and close the frame into the old fixture. In either case,
Videssence management anticipates that the installed cartridge light is
lower priced, will be easier to install, will be higher in lighting
quality, will last longer and will be more energy efficient than
most existing fluorescent fixture offerings. The management of
Videssence expects that these products will be manufactured at the
200,000 square foot LOA factory in consultation with Videssence.
Management expects that the "Cartridge" products will be released
sometime in the second half of 1996 or first half of 1997. There
can be no assurances, however, that the joint venture with Lights of
America will be formed, that the "Cartridge" light products will
ever be developed or taken to market, and, even if they are brought
to market, that these products will ever generate significant
revenues for Videssence.
Rental Market
The majority of stage, studio and production lighting used in
the entertainment industries is rented for a specific limited time
use. These industries support a large rental service business
comprised of companies that own and distribute that equipment to
production outfits. Videssence expects to begin marketing its
product lines for sales to the rental service distributors in the
second half of 1996. Videssence also intends to form a network of
outlets for the rental of its lighting equipment beginning in the
second half of 1996. These lighting products will be manufactured
specifically for this level of distribution. There can be no
assurances, however, that the rental of lighting equipment will ever
generate significant revenues for Videssence.
Manufacturing and Supplies
The principal materials used by Videssence in the manufacture
of its products are metal work, electronic components and
fluorescent lamps, most of which (other than as described below) are
readily available. While Videssence purchases most of such
materials from outside sources, Videssence is not dependent upon a
single source of supply for any materials essential to its business.
<PAGE>
Videssence purchases specific electronic components and tri-chrome
fluorescent lamps from the largest lighting companies, including
General Electric, Philips, and Siemens (the leading providers of
high-quality luminescent lighting products.) For the most part
Videssence has been able to obtain adequate supplies of raw
materials, and no shortage of such materials is currently
anticipated.
Videssence produces certain electronic components for use in
its products (including high-speed ballasts) and requires the most
advanced integrated circuit components to produce such electronic
components. These items are available but require long lead times
for orders. If large numbers of such circuit components are
required, Videssence must begin the process of ordering and
procuring these items approximately one year prior to the date of
production. While in the past Videssence has been able to obtain
adequate supplies of such circuit components on a timely basis,
there can be no assurance Videssence will not experience material
delays or problems with procuring such circuit components in the
future.
Marketing
Overview
Videssence currently utilizes a combination of direct
marketing with trade promotions and advertising to reach its
customer base. Videssence employs newsletters, direct mail, trade
show appearances, and traditional display advertising to communicate
with customers. Videssence believes that by combining these means
with its own full time dedicated regional sales managers, and a
network of established third party dealers, Videssence will best be
able to serve its marketplace.
Videssence has compiled and manages a database of over 19,000
contacts and prospective buyers in the United States and 23 foreign
countries. These names are broken into groups or categories. For
each such group or category, Videssence has a method of periodic
communication with the contacts.
Customers
To date, Videssence sales have been almost exclusively to
television studio operations. Approximately 95% and 95% of
Videssence's net sales in 1995 and 1994, respectively were to
television studio operations, 10% and 15%, respectively, of which
were to Videssence's ten largest customers. Videssence's two
largest customers are Home Shopping Network and CNN, representing a
combined total of 12% and 5% of total sales in the year ended
December 31, 1995 and the three months ended March 31, 1996,
respectively. In the remainder of 1996, Videssence hopes to
increase sales in the television studio market, and begin more
aggressive sales to the sound stage, theater/stage, production/
location, video conference and distant learning and digital
photography lighting markets.
<PAGE>
Customer Service
Unlike some of its competitors, Videssence offers computer
aided design system services and installation services to its
customers.
Sales and Distribution Organization
From 1989 to 1994, Videssence supported all sales from its
headquarters in Burlingame, California and from Videssence East,
Videssence's exclusive distributor for 18 eastern states located
near Pittsburgh, Pennsylvania. In 1995, Videssence began
reorganizing its sales distribution network to include multiple
channels of distribution. Videssence's sales network is now headed
up by a Vice President and six full time regional Sales Managers
(five domestic and one international).
Videssence is in the process of establishing a domestic
distribution network that is divided into two principal channels,
one that services professional end users such as broadcast
television networks, network-affiliated television stations,
production sound stations and cable television channels and another
that services non-professional end users such as corporate/industrial,
educational and government customers. Videssence intends to distribute
to its professional end users, which currently consist almost
exclusively of television studio operations, through a network of
manufacturer's representatives, Studio 2000 distributors and system
integrators and to its non-professional end-users through a network
of Studio 1000 distributors. Videssence directs its international
business through a network of 35 international distributors.
Videssence's policy, domestically and internationally, is to
enter into exclusive, renewable contracts with its sales
representatives for one year. Videssence has over 75 sales
organizations under contract in the Company's sales distribution
network.
Competition
The media lighting industry is highly competitive. Videssence
believes that maintaining and enhancing its position in media
lighting will require achieving and maintaining technological
superiority, attracting and retaining qualified personnel,
developing production and marketing expertise, developing
proprietary products and processes, and maintaining patents,
trademarks and licensing opportunities.
Videssence competes with manufacturers of traditional
incandescent lighting and with other manufacturers of high-speed
fluorescent lighting. There is a well established incandescent
end-user community that resists Videssence's new technology and relies
primarily on incandescent lighting product suppliers, including:
Mole Richardson, Desisti, Aniflex, LTM and Strand. Of these five
companies, Desisti and Strand have entered into SRGB trademark
licensing arrangements with Videssence; neither of which have
generated significant revenues for Videssence.
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To the extent the end-user selects high-speed fluorescence as
a lighting method, Videssence has four primary competitors: Strand,
Kinoflo, Balcar and LightTech. Strand, Balcar and LightTech are
manufacturing or will manufacture products using technology licensed
from Videssence. One of these licensing arrangements have produced
significant revenues for Videssence. Kinoflo does not presently
license Videssence technology . Kinoflo has built a substantial
market position in the film/location lighting market and has begun
marketing studio lighting with luminescent technology to compete
with Videssence in the media lighting market. Videssence intends
to compete directly with Kinoflo in the film/location lighting
industry. Videssence expects this competition to be intense as
Kinoflo's leading market position in supplying high frequency
fluorescent lighting products to this market is well established.
There can be no assurances that Videssence will compete successfully
with Kinoflo.
In the second half of 1996, Videssence intends to release new
products in the film/location, video conference and digital
photography lighting markets. Videssence can expect competitors in
all of these markets. Videssence management also expects the major
lighting companies which have not yet entered into the luminescent
lighting market to enter into the competition as the market share
for luminescent lighting increases and incandescent sales begin to
falter from the increasing cost of electrical energy. Most of
Videssence's competitors and potential competitors are significantly
larger and have significantly greater capital and management
resources than Videssence. Videssence expects that competition will
continue to be intense in the markets addressed and to be addressed
by Videssence, and there can be no assurance that Videssence will
compete successfully.
Research and Development and Consumer Research
Videssence maintains research and development programs at its
facility in Burlingame, California. The programs are directed by
the CEO and the Director of Engineering of Videssence.
Videssence believes its research and development programs
contribute to the improvement of existing products and the
development of new products and provide technical assistance and
support to Videssence's manufacturing activities.
Videssence has conducted a significant amount of research and
development. The results of this research and development are
evidenced by the wide array of products developed and in development
for a variety of markets.
Videssence is in the process of developing its own technical
platforms to replace traditional and high-frequency ballasts.
Videssence has already completed a significant portion of the
research and development for three basic electronic component
platforms. The first such platform, the ET-250, has been approved
for certification by Underwriter's Laboratory and has been
submitted for approval to other agencies abroad prior to
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international distribution. Videssence hopes to complete the
development of its two additional electronic component platforms in
1996. Videssence has begun to integrate the ET-250 into its SRGB
products and intends to integrate the other two platforms into many
of Videssence's existing SRGB products when ready.
Videssence relies on industry and other sources, various
attitude and usage studies prepared by independent marketing firms
on behalf of Videssence and direct sales information from its
largest customers. The information is used to identify consumer
needs and preferences and to allow Videssence to tailor new product
introduction, line extensions and promotions to meet changing
consumer demands. Videssence marketing department and prototype
laboratory work together to develop new products and to redesign or
reformulate existing products.
Patents, Trademarks and Licenses
Videssence owns two United States patents pertaining to SRGB
technology used in Videssence's products: Patent Number 5,012,396
(the "396 Patent"), issued in 1993 and expiring in 2010 and Patent
Number 5,235,497 (the "497 Patent"), issued in 1991 and expiring in
2008. Both patents were issued to Paul Costa, President and CEO
of Videssence, and were licensed by Videssence from February 14,
1991 until they were transferred to Videssence for $1.00 pursuant
to a Patent Assignment Agreement dated April 26, 1996 (the
"Patent Assignment") between Mr. Costa and Videssence.
Videssence has several patent applications and patents pending
on a number of new inventions. There can be no assurances patents
will be granted for any of these inventions, however. Videssence
has no patents outside the United States. Videssence has issued
four licenses to lighting companies that were approaching the media
lighting market with their versions of Videssence's technology,
including two licenses issued pursuant to agreements entered into in
settlement of litigation relating to the patents.
Videssence owns and uses the following trademarks in
connection with the marketing and sales of its products: VIDESSENCE,
SRGB, VID-LITE, VID-COM, PHOTOLIGHT, RGB Cosmetics, BestBoys,
CoolHeads and FYI.
Seasonality
Videssence's Studio 2000 products are sold to television
studio operations. Annual budgets for these operations are
established in the first quarter and generally not expended until
the fourth quarter. The television industry's largest trade show
exhibition, through which new products are introduced to the
industry, is the NAB exhibition which is usually held at the
beginning of the second quarter of each year. Television studio
operations generally evaluate their options, make final
determinations on product selection and place orders in the third
quarter. Thus Videssence has historically seen low sales volume in
<PAGE>
the first quarter, growing sales volume in the second and third
quarters and very strong sales volumes in the fourth quarter.
Videssence hopes to reduce seasonal effects of the broadcast market
by expanding into the location lighting, teleconference, and photo
markets. Videssence hopes that these markets will provide counter
cycle revenues to offset seasonal buying patterns in the television
studio lighting market.
Backlog Order Policy
Videssence maintains a floating backlog status that ranges
from 2-6 weeks at any time. In dollar values the backlog may range
between $200,000 to $450,000.
Employees
As of May 1, 1996, Videssence had approximately 29 full-time
employees, of which 9 were engaged in sales and sales support, 10
were engaged in manufacturing and the remainder were engaged in
management, engineering or administration, and one part-time
employee, none of whom were represented by a labor union.
Videssence believes its relations with its employees are
satisfactory.
Property
Videssence maintains its executive offices and manufacturing
facilities in 7,200 square feet of building space located at 189
Airport Blvd., Burlingame, California. Videssence leases these
facilities under a lease which expires on November 30, 1997, at an
annual cost of approximately $56,400. Videssence also leases a
1,750 square foot facility located at 290 Broadhead Rd., Suite 101,
Coraopolis, Pennsylvania for use as a sales and distribution
facility for the Eastern United States. The lease for this facility
provides for annual rent of $12,000 and expires on September 30,
1996. Videssence can elect to renew the lease for an additional two
years for annual rent of $14,400 for the first additional year and
$15,600 for the second additional year.
Government Regulation
Certification Requirements
Currently there are no governmental requirements for the
certification of Videssence's products. However, Videssence has
submitted its proprietary electronic components to Underwriter's
Laboratory (UL). Certification of these products is expected in the
near future as testing is in final stages. The UL certification
will add value to Videssence product offering as well as reduce
liability potentials. The international markets will also respond
well to the UL certification upon Videssence's product offering as
more and more of the to submit it for compliance when it is
determined that the EC will police and enforce the ruling.
Videssence intends to make every effort to comply with governmental
requirements to certify its products for international markets.
product line is certified.
<PAGE>
The European Community has established a CE certification
program, requiring that by the end of 1996, imported products must
bear the mark for sale into the EC. Videssence is preparing to
submit several of its products for CE certification in the next few
months.
Legal Proceedings
Videssence recently settled its only outstanding lawsuit with
LightTech, Inc. There are no other material proceedings to which
Videssence is a party, or to which any of its properties are subject,
are pending, or are known to be contemplated, and Videssence knows of
no material legal proceedings, pending or threatened, or judgments entered
against any director or officer of Videssence in his capacity as such.
VIDESSENCE SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected financial data
for Videssence and should be read in conjunction with the financial
statements of Videssence and the notes thereto included elsewhere in
this Proxy Statement.
(In Thousands Except Shares and Per Share
Data)
12 Months 12 Months 3 Months 3 Months
Ended Ended Ended Ended
12/31/95 12/31/94 3/31/96 3/31/95
Income Statement Data
Net Revenues 4,702 3,726 1,371 829
Earnings (Loss) Before Taxes (624) 120 111 (185)
Taxes on Income (114) 42 13 0
Earnings (Loss) After Taxes (510) 78 97 (185)
Earnings (Loss) Per Share
Balance Sheet Data
Net Working Capital 55 500 128 345
Total Assets 1,410 1,173 1,395 1,459
Long-Term Debt 243 250 227 1,077
Stockholders' Equity (36) 381 61 382
VIDESSENCE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
Overview
From inception, the Company has been a provider of media lighting products
for the illumination of television studios for broadcasters such as the CNN/
TBS, NBC, ABC, and CBS networks, and the general television station and video
production sound stage market. The annual television studio lighting market
is estimated to be approximately $150 million. To date, the Company has
completed over 450 installations in the United States and the international
markets for an average transaction size of $45,000.
<PAGE>
Historically, the Company has financed its operations from internal cash
flow, bank lines of credit, trade credit and by discounting accounts
receivables. Videssence management believes that the limited availability of
operating capital has restricted the growth rate of its core media lighting
business and its ability to exploit expansion opportunities in new production
environment markets such as the sound stage, motion picture production, theme
entertainment and other lighting markets.
With the availability of additional working capital, it is the strategy
of Videssence management to systematically expand into new related markets.
Videssence also plans to provide rental arrangements, operating leases and
specifically structured financing facilities to major clients which demonstrate
the potential for taking an ongoing upgrade path for their lighting
requirements. The Company is providing media lighting fixtures to
international broadcasters on a rental basis for special events,
including the 1996 Summer Olympic Games in Atlanta and the 1996 Republican
and Democratic party conventions in Chicago and San Diego.
Videssence management believes that its technology, experience and track
record in the media lighting industry is a favorable platform for expansion
into new lighting markets. To further exploit the available markets,
Videssence is developing a series of joint ventures and distribution and
licensing arrangements with entities that have strategic distribution
channels around the world. The Company is also developing other industry
related media production technologies with the objective of generating
additional revenue potential through its established media lighting
distribution channels.
Results of Operations
Sales revenue for the three month period ended March 31, 1996 increased
60% or $542,105 to approximately $1.4 million as compared to $826,802 for
the three month period ended March 31, 1995. Gross profit increased from 64%
to $895,909 from $577,487 for the three months ended March 31, 1996 and 1995,
respectively. The increase in sales and gross margin in the current period
were primarily due to the efforts of Videssence to expand its presence and
sales activities in both the domestic and foreign markets. Sales to date have
primarily been limited to television news studios. Subsequent to March 31,
1996, the Company has begun to expand its distribution system to include the
rental market, specifically where sales are made through a local lighting
distributor. Management believes, but cannot guarantee, that the rental
market will provide new business and opportunities for expansion of revenues,
operating income and the long term growth of assets.
For the three month period ended March 31, 1996, costs related to
revenue increased 35% to $567,239 as compared to $421,210 for the three month
period ended March 31, 1995. The increased sales and marketing expenses in
the current period reflected primarily commissions associated with the
expanded sales operations discussed above. The Company manages a contracted
sales force of representatives, system integrators, designer/specifiers,
dealers and distributors. Research and development for the three month period
ended March 31, 1996 was approximately $62,000 or a 30% reduction from the
same three month period in the prior year. This decrease was primarily due
to less activity in building prototypes of new lighting fixtures.
<PAGE>
<PAGE>
General and administrative expenses decreased 35% for the three month
period ended March 31, 1996 as compared to the three month period ended March
31, 1995. The dismissal of various lawsuits against the Company and the
corresponding reduction in legal fees significantly contributed to the
reduction in expenses. The Company anticipates increasing its overhead in
subsequent quarters by hiring additional administrative personnel for the
rental operation discussed above.
Interest expenses increased from $5,746 for the period ended March 31,
1995 to $35,799 for the period ended March 31, 1996. This increase was
primarily the result of increased debt as well as increased costs associated
with factoring of receivables.
Years ending December 31, 1994 and 1995
Net revenues for the year ending December 31, 1995 increased 27% or
$975,851 to $4,701,959 as compared to approximately $3.7 Million for
the period ending December 31, 1994. Gross profit increased 55% to
$895,909 from $577,487 for the years ended December 31, 1994 and
1995, respectively.
Liquidity and Capital Resources
From its inception, Videssence has funded its operations through the
use of bank debt, a working capital line of credit, by discounting accounts
receivable and cash generated from operations. Working capital as of
March 31, 1996 was approximately $128,000 down from approximately $345,000
at March 31. 1995. The decrease in working capital is due primarily to cash
used in the expansion of marketing and operations which has resulted in
increased revenues. Management has estimated that the working capital
needed for expansion of the media lighting core business and the expansion
into the film production market is approximately $2 million. Expansion into
the rental market may require additional capital to own equipment inventory
and for rental operations. The equipment financing would he funded by
joint venture planners and asset-based bank lines from institutions
that specialize in equipment rental.
Management believes that the $2 million working capital to be
provided by Netter Digital pursuant to the proposed merger together with
anticipated operating revenue will be sufficient to fund its working
capital and expansion requirements for the next twelve months. The
$2 million working capital includes the $350,000 short term loan already
advanced by Netter Digital to Videssence. Additionally the Company does
intend to seek new bank lines of credit and other debt related financing
for both its core business operations and the expansion of its rental
inventory. The availability of additional banking and other financing
facilities may not be obtainable and will restrict the expansion strategy
of the Company.
<PAGE>
INCORPORATION BY REFERENCE
This Proxy Statement incorporates certain documents by
reference which are not presented herein or delivered herewith.
These documents are available upon request from the Office of the
Corporate Secretary, NDEI Entertainment, Inc., 5200 Lankershim
Blvd., North Hollywood, CA 990601, telephone number (818) 753-1990.
In order to ensure timely delivery of these documents, any request
should be made by July 31, 1996.
NDEI hereby undertakes to provide by first-class mail within
one business day of receipt of such request, without charge, to each
person, including any beneficial owner, to whom a copy of this Proxy
Statement has been delivered, upon the written or oral request of
any such person, a copy of any and all of the documents referred to
below which have been or may be incorporated by reference herein,
other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference herein. Requests for such
documents should be directed to the office indicated above.
The following documents, which have been filed with the
Securities and Exchange Commission (the "Commission") pursuant to
the Securities Exchange Act of 1934 (the "Exchange Act") are
incorporated by reference herein:
NDEI's Form SB-2 Registration Statement, dated
November 20, 1995;
and
NDEI's Quarterly Reports on Form 10-Q for the six
and nine month periods ended December 31, 1995
and March 31, 1996.
The information relating to NDEI contained in this Proxy
Statement does not purport to be complete and should be read
together with the information in the documents incorporated by
reference.
All documents filed by NDEI pursuant to the Exchange Act after
the date hereof and prior to the date of the meeting shall be deemed
to be incorporated by reference herein and to be a part hereof from
the date of filing of such documents. All information appearing in
this Proxy Statement is qualified in its entirety by the information
and financial statements (including notes thereto) appearing in the
documents incorporated by reference herein. Any statement contained
in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein
or in any other subsequently filed document which is deemed to be
incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part
of this Proxy Statement.
<PAGE>
Netter Digital Entertainment, Inc.
For Special Meeting of Stockholders - August 5, 1996
The undersigned hereby appoints Douglas Netter and John
Copeland, and each of them, proxies each with full power of
substitution, for and in the name of the undersigned at the Special
Meeting of Stockholders of NDEI Entertainment, Inc. to be held at
the 5200 Lankershim Blvd., North Hollywood, California 91691, on
August 5, 1996 at 10:00 a.m. and at any and all adjournments, to
vote all shares of Common Stock which the undersigned is entitled to
vote, as specified below.
FOR the AGAINST the ABSTAIN*
Merger Agreement Merger Agreement
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR THE ABOVE
PROPOSAL.
*Note: An abstention will not protect a shareholder's dissenters' rights.
(Please Sign and Date the Proxy on Reverse Side)
DATED: ________________________, 1996
____________________________________
(signature)
____________________________________
(signature)
Sign exactly as name appears hereon. Give your full title
if signing in other than individual capacity. All joint
owners should sign.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders of
Videssence, Inc.
Burlingame, California
We have audited the accompanying combined
balance sheet of Videssence, Inc. as of December 31,
1995 and the related statements of operations,
stockholders' equity and cash flows for the years
ended December 31, 1995 and 1994. 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
audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform the audit
to obtain reasonable assurance about whether the
financial statements are free of material
misstatement. 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 audits provide 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 Videssence, Inc.
as of December 31, 1995 and the results of its
operations and cash flows for the years ended December
31, 1995 and 1994 in conformity with generally
accepted accounting principles.
FELDMAN RADIN & COMPANY
Certified Public Accountants
New York, New York
May 10, 1996
<PAGE>
VIDESSENCE, INC.
COMBINED BALANCE SHEETS
March 31, December 31,
1996 1995
__________ ___________
(Unaudited)
ASSETS
[S] [C] [C]
CURRENT ASSETS:
Cash $ 36,834 $ 67,942
Accounts receivable,
less allowance for
doubtful accounts of
$56,100 for both periods 488,768 444,402
Tax refunds receivable 24,171 24,171
Inventories 597,740 631,297
Prepaid expenses 39,365 42,628
Deferred tax benefit 32,300 32,300
Other current assets 15,542 15,542
__________ __________
TOTAL CURRENT ASSETS 1,234,720 1,258,282
PROPERTY AND EQUIPMENT - net 160,458 151,965
__________ __________
$1,395,178 $1,410,247
__________ __________
<PAGE>
LIABILITY AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of long-
term debt $ 231,711 $ 277,510
Accounts payable 531,943 643,727
Accrued payroll and
payroll taxes 25,101 21,601
Accrued expenses 281,543 223,431
Deferred liabilities 36,422 37,234
__________ __________
TOTAL CURRENT LIABILITIES 1,106,720 1,203,503
LONG-TERM DEBT 227,273 243,074
TOTAL LIABILITIES 1,333,993 1,446,577
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY (DEFICIT)
Common stock, no par value;
10,000,OOO shares authorized 208,541 208,541
Accumulated deficit (147,356) (244,871)
__________ __________
TOTAL STOCKHOLDERS
EQUITY (DEFICIT) 61,185 (36,330)
__________ __________
$1,395,178 $1,410,248
__________ __________
See notes to financial statements
PAGE
<PAGE>
<TABLE>
VIDESSENCE, INC.
COMBINED STATEMENTS OF OPERATIONS
<CAPTION>
Three months
ended March 31, Year ended December 31,
1996 1995 1994
_______________ __________ ____________
(Unaudited)
<S> <C> <C> <C>
SALES $ 1,370,907 $ 4,701,959 $ 3,726,108
COST OF SALES 474,998 1,886,332 1,247,954
___________ ___________ ___________
GROSS PROFIT 895,909 2,815,627 2,478,154
___________ ___________ ___________
OPERATING EXPENSES:
Selling 567,239 2,141,825 1,460,039
General and
administrative 120,333 798,402 583,835
Engineering 61,948 329,001 286,321
___________ ___________ ___________
749,520 3,269,228 2,330,195
___________ ___________ ___________
INCOME (LOSS) FROM
OPERATIONS 146,389 (453,601) 147,959
___________ ___________ ___________
OTHER INCOME (EXPENSE):
Interest income - - 3,229
Interest expense (35,799) (46,078) (30,979)
Write-off of
registration costs - (124,499) -
___________ ___________ ___________
(35,799) (170,577) (27,750)
INCOME(LOSS) BEFORE
INCOME TAX EXPENSE
(BENEFIT) 110,590 (624,178) 120,209
INCOME TAX EXPENSE
(BENEFIT) 13,075 (113,910) 41,607
___________ ___________ ___________
NET INCOME (LOSS) $ 97,515 $ (510,268) $ 78,602
___________ ___________ ___________
See notes to financial statements
PAGE
<PAGE>
</TABLE>
<TABLE>
VIDESSENCE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Retained
Common Stock Earnings
Shares Amount (Deficit) Total
______ ______ _________ _____
<S> <C> <C> <C> <C>
BALANCE-
DECEMBER 31, 1993 638,000 $ 109,045 $ 186,795 $ 295,840
Common shares
issued in
connection with
acquisition 21,385 2,021 - 2,021
Common shares
issued 3,546 1,656 - 1,656
Common shares
issued for cash 139,655 81,000 - 81,000
Net income - - 78,602 78,602
________ _________ _________ _________
BALANCE-
DECEMBER 31, 1994 802,586 193,772 265,397 459,119
Common shares
issued 25,905 14,819 - 14,819
Net loss - - (510,268) (510,268)
________ _________ __________ _________
BALANCE-
DECEMBER 31, 1995 828,491 208,541 (244,871) (36,330)
Net income
(unaudited) - 97,515 97,515
BALANCE-
MARCH 31, 1996
(unaudited) 828,491 $ 208,541 $(147,356) $ 61,185
________ _________ __________ _________
See notes to financial statements
PAGE
<PAGE>
</TABLE>
<TABLE>
VIDESSENCE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<CAPTION>
Three months
ended March 31, Year ended December 31,
1996 1995 1994
______________ __________ ____________
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ 97,515 $ (510,258) $ 78,602
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation 11,570 48,730 36,107
Provision for
uncollectible accounts
receivable - 36,900 19,200
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable (44,366) (8,084) (82,861)
(Increase) decrease in
inventory 33,557 (92,221) (184,211)
(Increase) decrease in
prepaid expenses and
other current assets 3,263 (41,554) 28,252
Increase in tax refunds
receivable - (24,171) -
(Increase) decrease in
deferred income taxes - (76,170) 21,550
Increase (decrease) in
accounts payable and
accrued expenses (51,062) 470,393 85,629
Increase (decrease) in
income taxes payable 889 (13,516) 11,756
Increase (decrease) in
deferred liabilities (812) (1,065) 4,799
_________ ________ ________
(49,961) 299,242 (59,779)
<PAGE>
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES 50,554 (211,026) 18,823
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (20,062) (10,372) (140,878)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of notes
payable (61,600) - (37,654)
Proceeds from notes
payable - 235,259 -
Issuance of common
stock - 14,819 84,677
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES (61,600) 250,078 47,023
NET INCREASE (DECREASE)
IN CASH (31,108) 28,680 (75,032)
CASH, beginning of period 67,942 39,262 114,294
CASH, end of period $ 36,834 $ 67,942 $ 39,262
_________ __________ _________
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the
period for:
Interest paid $ 30,400 $ 38,800 $ 28,500
Income taxes paid $ - $ 16,000 $ 17,000
See notes to financial statements
<PAGE>
<PAGE>
VIDESSENCE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background:
Videssence, Inc. (the Company) was founded in April 1989, as a
California corporation. The Company manufactures and distributes
SRGB lighting products for the industries of television,
stage/theater, theme park, entertainment and motion picture
studio/location, video conferencing, distant-learning, and pre-press
digital photography.
Principles of Combination:
The combined financial statements include the accounts of
Videssence, Inc. and Videssence Systems, Inc., a related company.
Material intercompany accounts and transactions have been
eliminated in combination.
Allowance on Accounts Receivables:
In the event that the facts and circumstances indicate that the
collectability of a trade receivable may be impaired, an
evaluation of recoverability is performed which results in an
allowance for uncollectible receivables.
Accounting Estimates:
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make significant estimates and assumptions that effect the
reporting amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Inventories:
Inventories are recorded at the lower of cost or market. Cost is
determined using the average cost method. Inventories are
primarily comprised as follows:
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
___________ ____________
<S> <C> <C>
Raw Materials $ 381,657 $ 403,088
Work In Progress 95,340 100,698
Finished Goods 120,743 127,511
___________ ___________
$ 597,740 $ 631,297
Property and Equipment:
Property and equipment is stated at cost. Depreciation of
leasehold improvements is calculated using straight-line method
over their estimated useful lives. Depreciation of equipment is
calculated using straight-line or accelerated methods over the
estimated lives of the assets, which are generally 3 to 5 years.
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation or amortization are removed from
the accounts and any gain or loss on disposal is recognized
currently.
Repairs and maintenance are expensed as incurred. Expenditures
which significantly increase values, change capacities, or extend
useful lives are capitalized.
Product Warranty:
The Company accrues for an estimate of expenses relating to the
one-year warranty covering all parts and labor relating to the
sale of its products.
Income Taxes:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which
requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based
on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the year plus or minus the
change in deferred tax assets and liabilities during the year.
<PAGE>
<PAGE>
Stock Options:
There are 62,770 stock options outstanding at March 31, 1996 and
December 31, 1995. Each stock option is convertible into one
share of common stock.
Acquisition of Videssence East:
On December 29, 1994, the Company acquired Solo Album, Inc.
(d.b.a. Videssence East). The transaction was accounted for by
the purchase method of accounting. The Company issued 21,385
shares of common stock in exchange for all the shares of
Videssence East common stock.
Pro forma income information for 1994 (unaudited) as if Solo
Album, Inc. was acquired on January 1, 1994 is stated as follows:
Sales $ 5,323,332
Net income $ 138,550
Unaudited Interim Financial Statements:
In the opinion of management, the unaudited interim financial
statements for the three months ended March 31, 1996 are presented
on a basis consistent with the audited annual financial statements
and reflect all adjustments consisting only normal recurring
accruals necessary for fair presentation of the results of such
periods. The results of operations for the period ended March 31,
1996 are not necessarily indicative of the results to be expected
for the year ending December 31, 1996.
2. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Computer equipment $ 109,758 $ 100,016
Furniture and office equipment 79,643 69,710
Rental lights and grips 73,849 73,850
Leasehold improvements 37,432 37,432
Other equipment 57,586 53,387
358,268 334,395
Less: accumulated depreciation 197,810 182,429
Property and equipment, net $ 160,458 $ 151,966
3. LONG-TERM DEBT
Long-term debt consisted of the following:
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Bank line of credit of $200,000.
In January 1996, the Company
negotiated to convert the line
of credit to an unsecured term
note. The Company paid off a
principal balance of $25,000
and extended $175,000 of principal
over 48 months with principal
payments of $3,646 plus interest
at prime (8.25%) plus 4.5%
with the first monthly payment
commencing February 15, 1996. $ 167,725 $ 200,000
Note payable to bank, guaranteed
by the two principal stockholders,
payable in monthly principal
payments of $1,450, plus interest
at the bank's reference rate
(11.25% at December 31, 1995)
plus 3%. The entire unpaid
principal and interest balance
is due on October 1, 1999. 62,350 66,700
Note payable to bank, guaranteed
by a stockholder, payable in
monthly principal payments of
$2,250, plus interest at the
bank's prime rate (8.25% at
December 31, 1995) plus 1%.
The entire unpaid principal
and interest balance is due on
June 15, 1996. 6,750 13,500
Note payable dated December 14,
1995, guaranteed by a shareholder,
payable in monthly payments of
$2,936 including interest at 12%
per annum with final maturity
on June 14, 1996. 69,165 75,764
<PAGE>
Miscellaneous notes payable with
monthly payments of $2,787 and
$868 with final maturities of
December 7, 1995 and August 15,
1998 respectively. 31,828 43,454
Payable on demand to related
parties (stockholders) interest
at 10% commencing at various
dates, net of unamortized deferred
debt expense of $15,331. Notes
are subordinate to the bank notes. 121,166 121,166
458,984 520,584
Less: current portion 231,711 277,510
___________ ___________
$ 227,273 $ 243,074
___________ ___________
Maturities of long-term debt at December 31, 1995 are as follows:
1996 $ 277,510
1997 102,708
1998 78,476
1999 58,252
2000 3,638
___________
$ 520,584
<PAGE>
4. COMMON STOCK
Common stock issued and outstanding in the Combined Financial
Statements consist of the following:
</TABLE>
<TABLE>
<CAPTION>
VIDESSENCE VIDESSENCE COMBINED
INC. SYSTEMS TOTALS
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance-
December 31, 638,000 $109,045 - $ - 638,000 $109,045
1993
Common shares
issued in
connection with
acquisition 21,385 2,021 - - 21,385 2,021
Common shares
issued 3,546 1,656 - - 3,546 1,656
Common shares
issued for
cash - - 139,655 81,000 139,655 81,000
----------------------------------------------------------------------
Balance-
December 31, 662,931 112,722 139,655 81,000 802,586 193,722
1994
Common shares
issued 25,905 14,819 - - 25,905 14,819
----------------------------------------------------------------------
Balance-
December 31, 688,836 127,541 139,655 81,000 828,491 208,541
1995
----------------------------------------------------------------------
Balance-
March 31, 1996
(unaudited) 688,836 $127,541 139,655 $81,000 828,491 $208,541
<PAGE>
On December 29, 1994 with the acquisition of Solo Album, Inc. the
Company issued 21,385 common shares for all the shares of Videssence
East common stock (see Note 1).
On October 7, 1994, the Company issued 3,546 shares to two officers in
connection with certain corporate debt obligations.
On December 29, 1995, the Company issued 23,905 shares of common stock
to related parties as part of the agreement with respect to certain
notes payable (see Note 6). Additionally, 2,000 common shares were
issued for past services provided to the Company.
5. INCOME TAXES
The net provision for income taxes (benefit) is composed of the
following:
</TABLE>
<TABLE>
<CAPTION>
Three months
ended March 31, Year ended December 31,
1996 1995 1994
(Unaudited)
<S> <C> <C> <C>
======================================================================
Current:
Federal $ 11,010 $ (24,000) $ 14,323
State 2,065 - 5,734
_________ __________ _________
13,075 (24,000) 20,057
Deferred:
Federal - (77,900) 15,600
State - (12,010) 5,950
Total provision _________ __________ ________
(benefit) $ 13,075 $ (113,910) $ 41,607
<PAGE>
A reconciliation between the Company's effective tax rate and the
statutory rate follows:
</TABLE>
<TABLE>
<CAPTION>
Three months
ended March 31, Year ended December 31,
1996 1995 1994
(Unaudited)
<S> <C> <C> <C>
====================================================================
Tax at expected
statutory rate $ 38,833 $ (218,062) $ 42,073
Net operating losses
not utilized - 93,962 -
Use of lower brackets (2,200) 18,000 (7,498)
Adjustment of deferred
tax asset valuation
allowance (24,900) - -
State Taxes 1,342 (7,810) 7,032
Income tax expense _________ ___________ ________
(benefit) $ 13,075 $ (113,910) $ 41,607
<PAGE>
Deferred tax assets and liabilities arise from differences in the tax
consequences derived from the timing of recognition of income and
expense items for financial reporting and taxation purposes. Listed
below are the tax effects of the items related to the Company's net
deferred tax asset:
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
______________________________
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforward $ 69,100 $ 94,000
Tax credits carry forward 10,000 10,000
__________ _________
Total 79,100 104,000
Less: valuation allowance 46,800 71,700
__________ _________
Net deferred tax asset $ 32,300 $ 32,300
RELATED PARTY TRANSACTIONS
Royalties of $67,664 were paid to the majority stockholder of the
Company who holds the rights to the patents of the technology. At
December 31, 1994, royalties payable was $2,149. During 1995, a
royalty agreement was entered into between the majority shareholder
and the Company whereby the rights to the patents have passed to the
Company and no royalties will be paid any longer.
The Company also has notes payable to related parties which are due on
demand and bear interest of 10%. The balance outstanding at December
31, 1995 was $136,497. In October 1995, the Company issued 23,905
shares of common stock to the related parties as part of the agreement
of the notes. The notes are subordinate to the bank note discussed in
Note 5.
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
During 1994, the Company entered into leases for office space and a
forklift operating lease, both of which expire in 1997. Total rental
expense for these leases for 1995 and 1994 were $64,196 and $47,250
respectively.
The following is a schedule of future minimum lease payments required
under the leases that leave initial or remaining noncancellable lease
terms in excess of one year at December 31, 1995.
1996 $ 60,400
1997 55,700
____________
$ 116,100
8. WRITE-OFF OF REGISTRATION COSTS
During 1995, the Company was contemplating going public and incurred
costs of approximately $125,000. The public offering was abandoned
and the Company wrote these registration costs off to other expenses.
9. SUBSEQUENT EVENTS
(a) On April 29, 1996, the Company announced that they have entered
into a definitive merger agreement with Netter Digital Entertainment,
Inc. and will become a wholly-owned subsidiary of Netter Digital.
(b) In January of 1996, the Company engaged a factor to finance their
accounts receivable. The terms are 2% interest for 10 days and
additional 1% for every 10 days of collection subsequent to the
billing date.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet presents
the pro forma financial position of Netter Digital Entertainment, Inc. and
Subsidiaries (the "Company") and Videssence, Inc. ("Videssence") at
March 31, 1996 as if the proposed merger of the two companies had been
consummated at such date. Included are adjustments to reflect the
acquisition of Videssence by the Company and the recording of the
associated goodwill. Additionally, the pro forma balance sheet reflects
the proposed sale by the Company of $3,500,000 of 10% cumulative,
convertible preferred stock which will provide the Company with the
working capital to develop the business of Videssence.
The unaudited pro forma consolidated statements of operations for
the nine months ended March 31, 1996 and the year ended June 30, 1995
reflect the combined results of the Company and Videssence as if the
transactions summarized in the preceding paragraph had occurred at the
beginning of the first period presented and then carried forward through
the subsequent interim period, adjusted to reflected new costs directly
attributable to the transactions and the effect of cumulative preferred
stock dividends on per share amounts available to common shareholders.
The unaudited pro forma consolidated statements of operations do
not necessarily represent actual results that would have been achieved
had the companies been together at the beginning of each respective
period, nor may they be indicative of future operations. These
unaudited pro forma consolidated financial statements should be read in
conjunction with the companies' respective historical financial
statements and notes thereon.
<PAGE>
</TABLE>
<TABLE>
NETTER DIGITAL ENTERTAINMENT, INC./VIDESSENCE, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
<CAPTION>
Historical Pro Forma Adjustments
NDEI Videssence DR CR Total
______ __________ _______ ______ ______
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash
equivalents $3,532,022 $ 36,834(7) 3,000,000(1) 325,000 $6,243,856
Accounts
receivable 665,406 488,768 1,154,174
Tax refund
receivable --- 24,171 24,171
Receivable from
related party 194,876 --- 194,876
Inventory 26,008 597,740 623,748
Prepaid expenses --- 39,365 39,365
Deferred tax
benefit --- 32,300 32,300
Other current assets --- 15,542 15,542
Total Current _________ _________ _______
Assets 4,418,312 1,234,720 8,328,032
EQUIPMENT, NET OF
ACCUMULATED
DEPRECIATION 231,848 160,458 392,306
GOODWILL (1) 2,222,148 2,222,148
DEPOSITS AND OTHER
ASSETS 72,218 --- 72,218
__________ __________ __________
$4,722,378 $1,395,178 $11,014,704
LIABILITIES AND
STOCKHOLDERS
EQUITY
CURRENT LIABILITIES
Accounts payable $ 728,954 $ 531,943 $1,260,897
Accrued expenses --- 306,644 306,644
Current portion
of long-term
debt ___ 231,711 231,711
Deferred revenue 309,885 36,422 346,307
__________ _________ __________
Total Current
Liabilities 1,038,839 1,106,720 2,145,559
LONG TERM DEBT --- 227,273 227,273
TOTAL LIABILITIES 1,038,839 1,333,993 2,372,832
MINORITY INTEREST 1,000 --- 1,000
STOCKHOLDERS'
EQUITY
Preferred stock,
$5 par value,
10% cumulative;
2,000,000 shares
authorized; no
shares issued and
outstanding actual,
700,000 shares
pro forma (2) 3,500,000 3,500,000
Common stock, $.01
par value,
6,000,000 shares
authorized;
2,795,000 shares
issued and
outstanding actual;
3,317,222 pro
forma 27,950 208,541(1) $ 208,541 (1) 5,222 33,172
Additional paid-
in capital 3,537,368 ---(2) $ 500,000 (1) 1,953,111 4,990,479
Retained earnings 117,221 (147,356) $ (1) 147,356 117,221
(deficit) _________ _________ __________ _________ __________
Total Stockholders'
Equity 3,682,539 61,185 8,640,872
__________ __________ __________
$4,722,378 $1,395,178 $5,930,689 $5,930,689 $11,014,704
__________ __________ __________ __________ ___________
See Notes to Pro Forma Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
NETTER DIGITAL ENTERTAINMENT,INC./VIDESSENCE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
<CAPTION>
Historical Pro Forma Adjustments
NDEI Videssence DR CR Total
___________ __________ ________ ________ ___________
<S> <C> <C> <C> <C> <C>
REVENUE $19,259,084 $4,419,269 $23,678,353
EXPENSES:
Cost of
Sales 17,702,123 1,580,224 19,282,347
Operating
costs
and
expenses 1,412,339 2,775,998 4,188,337
Amortization
of
goodwill (1) 111,107 111,107
Interest
expense (net) 2,877 133,040 135,917
$19,117,339 4,489,262 23,717,708
Income
(loss)
before
income
taxes 141,745 (69,993) (39,355)
Income tax
expense/
(benefit) 44,350 (21,698) 22,652
Net Income
(loss) 97,395 (48,295) (62,007)
<PAGE>
Cumulative
preferred
stock
dividend - - (2) 350,000 (350,000)
Net income
(loss) to
common
share-
holders $ 97,395 $ (48,295) $ (412,007)
Net income
(loss) per
common
share $ 0.05 $ - $ (0.17)
Weighted
average
common
shares
out-
standing 1,860,000 322,222 2,382,222
See notes to pro forma consolidated financial statements
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
A. The following unaudited pro forma
adjustments are included in the
accompanying unaudited pro forma
consolidated balance sheet at March 31,
1996:
(1) To record the acquisition of
Videssence, Inc. by Netter Digital
Entertainment, Inc. (the "Company")
in exchange for 522,222 common shares
of the Company. The common stock is
valued at the fair market value of
$3.75 per share (reflecting the $5.00
quoted market price, reduced by a 25%
discount to reflect resale
restrictions). Expenses of the
acquisition total $325,000. The
resulting goodwill is derived as
follows:
Purchase price consideration
(522,222 shares @ $3.75) $1,958,333
Acquisition costs 325,000
___________
2,283,333
Net fair value of assets
acquired 61,185
___________
Cost in excess of net
book value of assets
acquired $2,222,148
============
(2) To record the proposed sale of
700,000 shares of preferred stock of
the Company for $5.00 per share. The
preferred stock has a cumulative
annual dividend at 10% and is
convertible into common at a ratio of
one to one.
<PAGE>
B. The following pro forma adjustments are
included in the accompanying unaudited pro
forma consolidated statements of operations
for the nine months ended March 31, 1996
and the year ended June 10, 1995:
(1) To record goodwill amortization over
a twenty year term.
(2) To record cumulative preferred stock
dividends as a reduction to per share
amounts available to common
shareholders.
<PAGE>
[TYPE] EXHIBIT A
[DESCRIPTION] AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
TABLE OF CONTENTS
Page
ARTICLE I - CERTAIN DEFINITIONS. . . . . . . . . . . . . . 1
ARTICLE II - PRE-MERGER LOAN . . . . . . . . . . . . . . . 2
ARTICLE III - THE MERGER AND RELATED TRANSACTIONS. . . . . 2
Section 3.1 The Merger. . . . . . . . . . . . . . 2
Section 3.2 The Closing .. . . . . . . . . . . . . 3
Section 3.3 The Second Closing. . . . . . . . . . 3
Section 3.4 Actions at the Closing.. . . . . . . . 3
Section 3.5 Effect of Merger. . . .. . . . . . . . 3
3.5.1 General . . . . . . . . . . . . . . . 3
3.5.2 Conversion of Videssence Shares . . . 3
Section 3.6 Exchange of Videssence Shares. . .. . 4
Section 3.7 Additional Merger Consideration . .. . 5
3.7.1 Calculation of Additional Merger
Consideration . . . . . . . . . . . . 5
3.7.2 Determination of 1996 Videssence
Operating Profit. . . . . . . . . . . 5
3.7.3 Fractional Shares . . . . . . . . . . 5
3.7.4 Notice of Objection . . . . . . . . . 5
Section 3.8 Escrow Deposit. . . . . . . . . . .. . 6
Section 3.9 Earn-Out. . . . . . . . . . . . . .. . 6
3.9.1 Calculation of Earn-Out . . . . .. . 6
3.9.2 Definition of EBIT. . . . . . . . . . 6
3.9.3 Calculation of EBIT . . . . . . . . . 7
3.9.4 Notice of Objection . . . . . . . . . 7
3.9.5 Payment . . . . . . . . . . . . . . . 7
3.9.6 Termination of Earn-Out . . . . . . . 7
3.9.7 Management Protocol During Earn-Out
Period. . . . . . . . . . . . . . . . 7
Section 3.10 Dispute Resolution. . . . . . . . .. . 8
Section 3.11 Maximum Consideration/Buy-Out . . .. . 8
Section 3.12 Appointment to Netter Board
of Directors. . . . . . . . . . . . . 9
Section 3.13 Indemnification . . . . . . . . . . . 9
ARTICLE IV - REPRESENTATIONS, WARRANTIES AND COVENANTS OF
VIDESSENCE AND THE SHAREHOLDERS . . . . . . . 9
Section 4.1 Existence: Good Standing: Corporate
Authority and Authorization . . . . . . . . . 9
4.1.1 Videssence. . . . . . . . . . . . . . 9
4.1.2 Subsidiaries. . . . . . . . . . . . .10
Section 4.2 No Legal Bar; Conflicts . . . . . . . 10<PAGE>
Section 4.3 Capital Stock and Exclusive Dealing . 11
Section 4.4 Restrictive Documents . . . . . . . . 11
Section 4.5 Financial Statements and No Material
Changes. . . . . . . . . . . . . . . . . . .11
Section 4.6 Absence of Undisclosed Liabilities. . 12
Section 4.7 No Changes Prior to Closing Date. . . 12
Section 4.8 Books and Records . . . . . . . . . . 12
Section 4.9 Title to Properties: Encumbrances. . 13
Section 4.10 Real Property and Leases. . . . . . . 13
Section 4.11 Fixed Assets. . . . . . . . . . . . . 14
Section 4.12 Material Contracts. . . . . . . . . . 14
Section 4.13 Litigation. . . . . . . . . . . . . . 15
Section 4.14 Taxes . . . . . . . . . . . . . . . . 15
Section 4.15 Permits . . . . . . . . . . . . . . . 16
Section 4.16 Insurance . . . . . . . . . . . . . . 16
Section 4.17 Product Warranty. . . . . . . . . . . 16
Section 4.18 Intellectual Property . . . . . . . . 17
Section 4.19 Compliance With Laws. . . . . . . . . 18
Section 4.20 Inventory . . . . . . . . . . . . . . 18
Section 4.21 Accounts Receivable . . . . . . . . . 18
Section 4.22 Employment Relations. . . . . . . . . 18
Section 4.23 Employee Benefit Plans. . . . . . . . 19
4.23.1 List of Plans . . . . . . . . . . . .19
4.23.2 Status of Plans . . . . . . . . . . .19
4.23.3 Contributions . . . . . . . . . . . .20
4.23.4 Tax Qualification . . . . . . . . . .20
4.23.5 Transactions. . . . . . . . . . . . .20
4.23.6 Other Plans . . . . . . . . . . . . .20
4.23.7 Documents . . . . . . . . . . . . . .20
Section 4.25 Interests in Clients, Suppliers, Etc. 22
Section 4.26 Customers, Distributors and Independent
Sales Representatives . . . . . . . . . . . .22
Section 4.27 Bank Accounts, Powers of Attorney and
Compensation of Employees . . . . . . . . . .22
Section 4.28 Disclosure. . . . . . . . . . . . . . 23
Section 4.29 Broker's or Finder's Fees . . . . . . 23
Section 4.30 Certain Conditions for Accounting
and Tax Treatment . . . . . . . . . . . . . .23
Section 4.31 Cooperation . . . . . . . . . . . . . 23
ARTICLE V - REPRESENTATIONS OF NETTER. . . . . . . . . . .24
Section 5.1 Representations of Netter . . . . . . 24
Section 5.2 Existence and Good Standing . . . . . 24
Section 5.3 Corporate Authority and
Authorization . . . . . . . . . . . . . . . . .24
Section 5.4 Capital Stock and Exclusive Dealing . 24
Section 5.5 Compliance With Laws. . . . . . . . . 24
Section 5.6 Restrictive Documents . . . . . . . . 25
Section 5.7 Broker's or Finder's Fees . . . . . . 25
Section 5.8 Accuracy of Public Information. . . . 25
Section 5.9 Disclosure. . . . . . . . . . . . . . 25
Section 5.10 Interests in Clients, Suppliers,
Etc. . . . . . . . . . . . . . . . . . . . . . 26
Section 5.11 Litigation. . . . . . . . . . . . . . 26
<PAGE>
<PAGE>
ARTICLE VI - CONDUCT OF BUSINESS . . . . . . . . . . . . .26
Section 6.1 Conduct of Business of Videssence . . 26
Section 6.2 Conduct of Business by Netter . . . . 27
Section 6.3 Exclusive Dealing . . . . . . . . . . 27
Section 6.4 Disclosure Memorandum . . . . . . . . 27
Section 6.5 Review. . . . . . . . . . . . . . . . 27
6.5.1 Review of Videssence. . . . . . . . .27
6.5.2 Review of Netter. . . . . . . . . . .28
Section 6.6 Best Efforts. . . . . . . . . . . . . 28
Section 6.7 Fulfillment of Agreement. . . . . . . 28
ARTICLE VII - CONDITIONS TO OBLIGATIONS OF NETTER. . . . .29
Section 7.1 Opinion of Videssence's Counsel:
Certificate of Videssence . . . . . . . . . 29
Section 7.2 Good Standing and Tax Certificates. . 29
Section 7.3 No Material Adverse Change. . . . . . 29
Section 7.4 Truth of Representations and
Warranties . . . . . . . . . . . . . . . . . .29
Section 7.5 Performance of Agreements . . . . . . 30
Section 7.6 No Litigation Threatened. . . . . . . 30
Section 7.7 Creditor Assurances and
Representations . . . . . . . . . . . . . . . 30
Section 7.8 Governmental Approvals. . . . . . . . 30
Section 7.9 Intra-Company Debt. . . . . . . . . . 30
Section 7.10 NonCompetition Agreement. . . . . . . 30
Section 7.11 Employment Agreements . . . . . . . . 30
Section 7.12 Registration Rights Agreements. . . . 30
Section 7.13 Shareholders Agreement. . . . . . . . 30
Section 7.14 Management Protocol . . . . . . . . . 31
Section 7.15 Execution of Escrow Agreements. . . . 31
Section 7.16 Receipt of Financing. . . . . . . . . 31
Section 7.17 Netter Shareholder and Board of Director
Approval. . . . . . . . . . . . . . . . . . .31
Section 7.18 Proceedings . . . . . . . . . . . . . 31
Section 7.19 Videssence Shareholder Approval . . . 31
Section 7.20 Videssence Subsidiary Dissolution . . 31
ARTICLE VIII - CONDITIONS TO VIDESSENCE'S OBLIGATIONS. . .31
Section 8.1 Opinion of Counsel for Netter . . . . 31
Section 8.2 Good Standing Certificate . . . . . . 32
Section 8.3 No Material Adverse Change. . . . . . 32
Section 8.4 Tax Certificate of Merger Corp. . . . 32
Section 8.5 Truth of Representations and
Warranties . . . . . . . . . . . . . . . . . .32
Section 8.6 Employment Agreements . . . . . . . . 32
Section 8.7 NonCompetition Agreements . . . . . . 32
Section 8.8 Registration Rights Agreements. . . . 32
Section 8.9 Management Protocol . . . . . . . . . 32
Section 8.10 Performance of Agreements . . . . . . 32
Section 8.11 Governmental Approvals. . . . . . . . 32
Section 8.12 Proceedings . . . . . . . . . . . . . 33
Section 8.13 Videssence Shareholder Approval . . . 33
<PAGE>
ARTICLE IX - SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY; ESCROW . . . . . . . . . . . . . .33
Section 9.1 Videssence Bound. . . . . . . . . . . 33
Section 9.2 Survival of Representations, Warranties
and Indemnities . . . . . . . . . . . . . . .33
Section 9.3 Scope of Indemnification Liabilities
and Obligations . . . . . . . . . . . . . . .33
Section 9.4 Representations, Warranties, Covenants
and Agreements. . . . . . . . . . . . . . . .33
Section 9.5 Indemnification . . . . . . . . . . . 34
Section 9.6 Notice and Resolution of Claims
Opportunity to Defend . . . . . . . . . . . .34
ARTICLE X - TERMINATION. . . . . . . . . . . . . . . . . .37
Section 10.1 Termination Events. . . . . . . . . . 37
Section 10.2 Effect of Termination . . . . . . . . 38
Section 10.3 Return of Documents in Event
of Termination . . . . . . . . . . . . . . . 38
ARTICLE XI - MISCELLANEOUS . . . . . . . . . . . . . . . .38
Section 11.1 Professional Expenses . . . . . . . . 38
Section 11.2 Governing Law . . . . . . . . . . . . 38
Section 11.3 Arbitration . . . . . . . . . . . . . 38
Section 11.4 "Person" Defined. . . . . . . . . . . 39
Section 11.5 Gender. . . . . . . . . . . . . . . . 39
Section 11.6 Captions. . . . . . . . . . . . . . . 39
Section 11.7 Publicity . . . . . . . . . . . . . . 39
Section 11.8 Notices . . . . . . . . . . . . . . . 39
Section 11.9 Parties in Interest . . . . . . . . . 40
Section 11.10 Counterparts. . . . . . . . . 41
Section 11.11 Entire Agreement. . . . . . . 41
Section 11.12 Amendments. . . . . . . . . . 41
Section 11.13 Severability. . . . . . . . . 41
Section 11.14 Third Party Beneficiaries . . 41
Section 11.15 Rules of Construction . . . . 42
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
and entered into April 26, 1996, by and among NETTER DIGITAL
ENTERTAINMENT, INC., a Delaware corporation ("Netter"); Netter's wholly
owned subsidiary, NETTER ACQUISITION, INC., a California corporation
("Merger Corp."); and Videssence, Inc., a California corporation
("Videssence").
W I T N E S S E T H:
WHEREAS, Videssence is engaged in the business of designing,
manufacturing and distributing lighting products for the illumination of
studios, stages and other production environments (the "Business").
WHEREAS, Netter is engaged, in part, in the business of producing
television series, movies, documentaries, and multi-media productions, and
desires to acquire Videssence through a tax-free merger of Merger Corp.,
its wholly-owned subsidiary, into Videssence pursuant to Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"). The parties
intend that this Agreement constitute a "plan of reorganization" within
the meaning of Sections 1.368-2(g) and 1.368-3(c) of the Income Tax
Regulations.
NOW, THEREFORE, in consideration of the recitals and of the
respective covenants, representations, warranties and agreements herein
contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
"Closing" has the meaning set forth in Section 3.2 below.
"Closing Date" has the meaning set forth in Section 3.2 below.
"Escrow Release Date" has the meaning set forth in Section 3.7.5
below.
"Videssence Share" means a share of the common voting stock, with no
par value, of Videssence.
"Netter Share" means a Share of the common voting stock, with $.01
par value per share, of Netter.
"Effective Time" means 12:01 a.m. on the date as of which the Merger
of Merger Corp. with and into Videssence, is effective which, for purposes
of this Agreement, is intended to be, and may be used interchangeably
with, the Closing Date.
<PAGE>
"Knowledge" and the phrase "to the best knowledge" mean
Videssence's actual knowledge, information and belief following such
reasonable investigation and review as a reasonably prudent corporation
would conduct or commission in light of the prevailing facts and
circumstances.
"Merger" means the merger of Merger Corp. with and into Videssence.
"Surviving Corporation" or "Videssence" means Videssence.
"Tax" means any federal , state, local and foreign income, gross
receipts, capital stock, profits, franchise, sales, stamp, occupation,
employment, unemployment, disability, withholding security, worker's
compensation, use, occupancy, transfer, value added, exercise, property
(whether real, personal or mixed) and other taxes and assessments
(including interests and penalties).
ARTICLE II
PRE-MERGER LOAN
Section 2.1 Upon the execution of this Agreement, the completion by
Videssence of a preliminary Disclosure Memorandum as described in Article
IV, the satisfactory completion by Netter of preliminary due diligence
which shall occur no later than May 1, 1996, and the final settlement of
the Lighttech lawsuit, to the reasonable satisfaction of Netter, which
shall include dismissal of the Lighttech lawsuit with prejudice, Netter
shall loan to Videssence $250,000 (the "Initial Loan"), according to the
terms and conditions set forth in the promissory note, attached hereto as
Exhibit 1 ("Promissory Note"). The Initial Loan shall be secured by the
Company's assets as set forth in the security agreement, attached hereto
as Exhibit 2 (the "Security Agreement"). The Initial Loan shall be used
for working capital purposes and may not be used to pay existing or future
Videssence debt or to fund litigation without the express prior written
consent of Netter. Upon the Closing, the Promissory Note and the Security
Agreement shall terminate and the proceeds of the Initial Loan shall
become part of the total proceeds made available to Videssence by the Loan
(as defined below), according to the same terms and conditions as the
Loan.
ARTICLE III
THE MERGER AND RELATED TRANSACTIONS
Section 3.1 The Merger. Subject to the terms and conditions of this
Agreement, Merger Corp. will merge with and into Videssence, at the
Effective Time. Videssence shall be the corporation surviving the Merger
(the "Surviving Corporation"). The terms of the Merger will be as set
forth herein and in the Merger Agreement in the form attached hereto as
Exhibit 3.
<PAGE>
Section 3.2 The Closing. A Closing of the Merger and related
transactions contemplated by this Agreement (the "Closing") shall take
place at the offices of Luce, Forward, Hamilton & Scripps, 777 South
Figueroa, Suite 3600, Los Angeles, California 90017, on or about May 31,
1996 or such other time and place as is mutually agreeable to the parties
and following the satisfaction or waiver of all other conditions to the
obligations of the parties to consummate the Merger and related
transactions contemplated hereby (the "Closing Date").
Section 3.3 Actions at the Closing. At the Closing, (i) Videssence will
deliver to Netter the various certificates, instruments, and documents
referred to in Article VII below; (ii) Netter and Merger Corp. will
deliver to Videssence the various certificates, instruments and documents
referred to in Article VIII below; and (iii) Merger Corp. and Netter will
file the Merger Agreement, together with the Officers' Certificates
required pursuant to Section 1103 of the California Corporations Code (the
"CCC"), with the Secretary of State of the State of California (the
"Secretary of State") in the form of Exhibit 4 hereto.
Section 3.4 Effect of Merger.
3.4.1 General. The Merger shall become effective at the time
the Agreement of Merger is filed with the Secretary of State or at such
later time stated in the Agreement of Merger. The Merger shall have the
effect set forth in Section 1107 of the CCC. The Surviving Corporation
may, at any time after the Effective Time, take any action (including
executing and delivering any document) in the name and on behalf of such
entity or the entity with which it merged in order to carry out and
effectuate the transactions contemplated by this Agreement.
3.4.2 Conversion of Videssence Shares. At the Effective
Time, each Videssence Share then issued and outstanding shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into and represent the right to receive that number of Netter
Shares equal to the quotient of (i) 666,666 and (ii) the number of
outstanding shares (the "Outstanding Number") of capital stock of
Videssence as of the Effective Time (collectively, the "Merger
Consideration") and each share of Merger Corp. common stock, shall by
virtue of the Merger and without any actions on the part of the holder
thereof, be converted into and represent the right to receive one
Videssence Share. The Merger Consideration will be proportionately
adjusted in the event of any stock split or combination of the outstanding
Netter Shares occurring, or any stock dividend payable to holders of
Netter Shares the record date of which is, prior to the Effective Time.
Section 3.5 Exchange of Videssence Shares.
3.5.1 At the Closing, Netter shall make available for
exchange or conversion for the benefit of the holders of Videssence
Shares, such number of Netter's Shares as shall be issuable (less, the
Operating Profit Escrow Shares and, in the case of the Principal
Shareholders (as defined below), the Indemnification Escrow Shares) and
such amount of cash as may be payable in lieu of fractional Netter Shares
in connection with the Merger.
<PAGE>
3.5.2 Prior to the Closing, Netter shall deliver to each
holder of record (other than Netter, Videssence or any subsidiary of any
of them) ("Videssence Shareholder") of a certificate or certificates which
immediately prior to the Effective Time represented outstanding Videssence
Shares (the "Certificates") a shareholder's representation and transmittal
letter, in a form mutually agreeable to Netter and Videssence
("Shareholder's Representation and Transmittal Letter").
3.5.3 Upon surrender of the Certificates for cancellation to
Netter, together with the Shareholder's Representation and Transmittal
Letters, duly executed, all to occur at the Closing, Netter shall deliver
to the holders of each such Certificate that number of Netter Shares equal
to (i) the number of Videssence Shares represented by such Certificate
time the quotient of (A) 522,222 and (B) the Outstanding Number, in the
case of non-Principal Shareholders; and (ii) the difference (x-y) between
(x) that number of Videssence Shares represented by such Certificate times
the quotient of (A) 522,222 and (B) the Outstanding Number, and (y) that
number of Videssence Shares represented by such Certificate times the
quotient of (A) 133,333 and (B) the total number of Videssence Shares held
by the Principal Shareholders at the Effective Time, in the case of the
Principal Shareholders, plus any cash for fractional shares to the holders
of each such Certificate.
3.5.4 In the event of a transfer of ownership of Videssence
Shares which is not registered in the transfer records of Videssence, it
shall be a condition to the issuance of Netter Shares that the Certificate
so surrendered shall be properly endorsed or be otherwise in proper form
for transfer and that such transferee shall (a) pay to Netter any transfer
or other taxes required, or (b) establish to the satisfaction of Netter
that such tax has been paid or is not payable. All Netter Shares and cash
for any fractional share issued and paid upon the surrender for exchange
of Videssence Shares in accordance with this Agreement shall be deemed to
have been issued in full satisfaction of all rights pertaining to such
Videssence Shares.
3.5.5 No certificates or scrip representing fractional Netter
Shares shall be issued upon the surrender for exchange of Certificates, no
dividend or distribution of Netter shall relate to any fractional share,
and such fractional share interests shall not entitle owner thereof to
vote or to any rights as a shareholder of Netter. In lieu of any
fractional share, Netter shall pay to each holder of Videssence Shares who
otherwise would be entitled to receive a fractional Netter Share an amount
of cash (without interest) determined by multiplying (a) $9.00 by (b) the
fraction of a share to which such holder would otherwise be entitled.
3.5.6 In the event any Certificates shall have been lost,
stolen or destroyed, Netter shall issue in exchange for such lost, stolen
or destroyed Certificate, upon the making of an affidavit of that fact by
the holder thereof, such Netter Shares and cash for fractional shares, if
any, as may be required pursuant hereto; provided, however, that Netter
may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificate
to deliver a bond in such reasonable sum as it may direct as indemnity
against any claim that may be made against Netter, Merger Corp.,
Videssence, or any other party with respect to the Certificate alleged to
have been lost, stolen or destroyed.
<PAGE>
Section 3.6 Escrow Deposit.
3.6.1 At the Closing, and as a condition precedent to it, (i)
Netter and the Videssence Shareholders shall enter into an escrow
agreement on terms and conditions mutually agreeable to the parties hereto
(the "Escrow Agreement" ) with a financial institution to be agreed to by
the parties, as escrow agent (the "Escrow Agent"); and (ii) Netter shall
deliver to the Escrow Agent, to be held in escrow ("Escrow") pursuant to
the terms of the 277,777 Netter Shares (the "Escrow Shares"). Of the
Escrow Shares, 144,444 Netter Shares shall be used and released upon
Videssence achieving certain operating profit criteria (the "Operating
Profit Escrow Shares") and 133,333 Netter Shares shall be used and
released to cover indemnification responsibilities of the Principal
Shareholders (defined below) (the "Indemnification Escrow Shares").
3.6.2 Operating Profit Escrow Shares. On the Escrow Release
Date, provided Surviving Corporation achieves 1996 Videssence Operating
Profit (defined below) of $347,500 for the calendar year ended December
31, 1996, 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 calendar year ended December 31, 1996, 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 calendar year
ended December 31, 1996, the Videssence Shareholders shall receive none of
such Operating Profit Escrow Shares, all 144,444 of which the Escrow
Agent shall deliver to Netter.
3.6.3 Indemnification Escrow Shares. As provided in the
Escrow Agreement, the Indemnification Escrow Shares placed in Escrow shall
be applied toward any liabilities of Videssence arising under Articles IX.
At the Escrow Release Date (as defined below) the Escrow Agent shall
release from Escrow to the Principal Shareholders (on a pro rata basis)
66,667 Indemnification Escrow Shares less that number of Netter Shares
equal to the quotient of (i) the paid claims or and the outstanding claims
filed by Netter with the Escrow Agent; and (ii) the average of the
average of the Wall Street Journal's reported closing bid and ask prices
of the Netter Shares on the Nasdaq SmallCap Market (or the Netter Shares
primary trading market, if different) over the ten trading days ending on
the trading day prior to the Escrow Release Date. On December 31, 1997,
the Escrow Agent shall release from Escrow to the Principal Shareholders
(on a pro rata basis) the balance of the Indemnification Escrow Shares
less that number of Netter Shares equal to the quotient of (i) the paid
claims and outstanding claims filed by Netter with the Escrow Agent; and
(ii) the average of the average of the Wall Street Journal's reported
closing bid and ask prices of the Netter Shares on the Nasdaq SmallCap
Market (or the Netter Shares primary trading market, if difference) over
the then trading days ending on the trading day prior to the Escrow
Release Date. Any Netter Shares remaining in Escrow after December 31,
<PAGE>
1997 and following the resolution and payment of all outstanding claims
shall be released by the Escrow Agent to the Principal Shareholders (on a
pro rata basis).
3.6.4 Representative. Until the termination of the Escrow
Agreement as provided under its terms, Paul D. Costa and Steve Michelson
("Representative") shall act with full power of substitution as the
Representative of the Videssence Shareholders and the Principal
Shareholders, to give and receive all notices and to take or omit to take
all such other actions as he may deem necessary or appropriate and to act,
all as provided under the Escrow Agreement.
3.6.5 Determination of 1996 Videssence Operating Profit. The
"1996 Videssence Operating Profit" shall be calculated as set forth in the
Videssence financial projections, attached hereto as Exhibit 5, and in
accordance with generally accepted accounting principles and procedures,
as determined by Netter's accountants. For purposes of calculating 1996
Videssence Operating Profit, the $2,000,000 advance to be made to
Videssence by Netter upon the Closing (the "Loan") shall bear no interest.
3.6.6 Fractional Shares. The procedures for delivery of the
Operating Profit Escrow Shares relating to fractional shares shall be
substantially the same as set forth in Section 3.6.5.
3.6.7 Notice of Objection. In the event that the
Representative does not object to the determination by Netter of the 1996
Videssence Operating Profit by written notice of objection (the "Notice of
Objection") delivered to Netter within ten (10) days after the Videssence
Shareholders' receipt of such determination, such Notice of Objection to
describe in reasonable detail the Representative's proposed adjustments to
the proposed 1996 Videssence Operating Profit determination, the proposed
1996 Videssence Operating Profit shall be deemed final and binding.
3.6.8 Escrow Release Date. The Escrow Release Date shall be
the date (i) following satisfactory review or audit by Netter's outside
accountants of the Surviving Corporation's financial statements for the
period ended December 31, 1996, or such other time as is mutually
agreeable to the parties, and in any event no later than March 31, 1997,
plus (ii) such number of days as is required to resolve any objection as
provided for in Sections 3.6.7 and 3.8; provided, however, that if any
such objections are outstanding on the date specified in clause (i) (the
"Review Date"), then the Escrow Release Rate with respect to the
undisputed portion of the 1996 Videssence Operating Profit shall be the
Review Date.
Section 3.7 Earn-Out.
3.7.1 Calculation of Earn-Out. Paul Costa, Steve Michelson,
Delwin Francis, and Sam Cercone (the "Principal Shareholders") shall be
entitled to earn additional Netter Shares based on Surviving Corporation's
EBIT (as defined below) from the period commencing July 1, 1996 and ending
June 30, 1999 (the "Earn-Out Period"). During the Earn-Out Period, upon
Surviving Corporation achieving EBIT of at least $1.5 Million (or $1.25
Million in the event Surviving Corporation achieves 1996 Videssence
<PAGE>
Operating Profit of at least $347,500 for the calendar year ended December
31, 1996), on the next succeeding Earn-Out Payment Date (as defined
below), Netter shall deliver to the Principal Shareholders 5,000 Netter
Shares (the "Earn-Out Shares") for every $45,000 in EBIT that exceeds $1.5
Million (or $1.25 Million, as the case may be). Thereafter, during the
Earn-Out Period on each next succeeding Earn-Out Payment Date, Netter
shall deliver to the Principal Shareholders an additional 5,000 Netter
Shares for every additional $45,000 in EBIT.
3.7.2 Definition of EBIT. For the purposes of this
Section 3.7, "EBIT" shall mean, for the fiscal year ended June 30 ("Fiscal
Year"), Surviving Corporation's net operating profit (or net operating
loss): (i) before deducting interest expense for debt incurred on or after
the Closing Date and income tax expense; (ii) after deducting for Ordinary
Operating Depreciation (defined below); (iii) adjusted to include only the
cash impact of deferred revenue and deferred rental expense and (iv)
before deducting extraordinary or unusual losses or adding in
extraordinary or unusual gains . For purposes of calculating EBIT, the
Loan shall bear no interest. For purposes of this Section 3.8.2,
"Ordinary Operating Depreciation" shall mean the appropriate amount of
depreciation for Surviving Corporation's plant and equipment and other
depreciable assets such as vehicles, calculated in accordance with
generally accepted accounting principles and procedures as determined by
Netter's accountants.
3.7.3 Calculation of EBIT. At such time as Netter shall
determine EBIT for a Fiscal Year (which shall be no later than 90 days
following the end of such Fiscal Year), Netter shall provide the
Representative with a statement setting forth the calculation of EBIT for
such Fiscal Year.
3.7.4 Notice of Objection. In the event that the
Representative does not object to the determination by Netter of EBIT for
a Fiscal Year by written notice of objection (the "Notice of Objection")
delivered to Netter within ten (10) days after the Representative's
receipt of such determination, such Notice of Objection to describe in
reasonable detail the Representative's proposed adjustments to the
proposed EBIT determination, the proposed EBIT for such Fiscal Year shall
be deemed final and binding (the "Earn-Out Payment Date").
3.7.5 Payment. Netter shall issue and deliver to the
Principal Shareholders the Earn-Out Shares, if any, to be issued and
delivered for each Fiscal Year within 5 days after the calculation for
such Fiscal Year shall have become final and binding on the parties(the
"Earn-Out Payment Date").
3.7.6 Termination of Earn-Out. Immediately upon the earlier
date of (i) a Principal Shareholder being terminated by Surviving
Corporation "For Cause" as defined in his employment agreement to be
entered into upon the Closing; (ii) a Principal Shareholder's voluntary
termination of employment for other than "Good Reason" as defined in his
employment agreement to be entered into upon the Closing; (iii) or a
<PAGE>
Principal Shareholder's material breach of his NonCompetition Agreement
(the "Principal Shareholder Termination Date"), such Principal Shareholder
shall no longer be entitled to earn additional Earn-Out Consideration. In
that event, Netter shall deliver to such Principal Shareholder on the next
succeeding Earn-Out Payment Date, any additional Earn-Out Shares earned by
such Principal Shareholder prior to the Principal Shareholder Termination
Date. At any time during the Earn-Out Period, if the cumulative EBIT
represents a loss of in excess of $1,000,000, the Earn-Out shall
immediately terminate and this Section 3.8 shall be of no further force
and effect.
3.7.7 Management Protocol During Earn-Out Period. The
management of Surviving Corporation during the Earn-Out Period shall be
conducted in accordance with the management protocol, to be entered into
on terms mutually agreeable to the parties hereto at the Closing
("Management Protocol").
Section 3.8 Dispute Resolution. If the Representative does deliver a
Notice of Objection to Netter in accordance with either Section 3.6.7 or
3.7.4, then the dispute shall be resolved as follows:
3.8.1 The Representative and Netter shall promptly endeavor
to agree upon the calculation of 1996 Videssence Operating Profit or EBIT
for such Fiscal Year (as the case may be). In the event that a written
agreement determining the amount of 1996 Videssence Operating Profit or
EBIT for such Fiscal Year (as the case may be) has not been reached within
ten (10) days after the date of receipt by Netter from the Representative
of the Representative's Notice of Objection thereto, then Netter's
determination of 1996 Videssence Operating Profit or EBIT for such Fiscal
Year (as the case may be) shall be submitted to a nationally recognized,
independent auditing firm upon which the Representative and Netter shall
agree (the "Accountants") .
3.8.2 Within thirty (30) days of the submission of any
dispute concerning the determination of 1996 Videssence Operating Profit
or EBIT for a Fiscal Year (as the case may be) to the Accountants, the
Accountants shall render a decision in accordance with this Section 3.8
along with a statement of reasons therefor. The decision of the
Accountants shall be final and binding upon each party hereto.
3.8.3 The fees and expenses of the Accountants for any
determination under this Section 3.10 shall be borne equally by Netter and
the Principal Shareholders.
3.8.4 In determining 1996 Videssence Operating Profit or EBIT
for a Fiscal Year (as the case may be), Netter shall provide the
Representative and its representatives reasonable access to the books,
records, facilities and employees of Netter and Netter shall cooperate
with the Principal Shareholder's and their representatives. The
Principal Shareholders shall also be entitled to have reasonable access to
the work papers of any accountants retained by Netter in connection with
the determination of 1996 Videssence Operating Profit or EBIT for such
Fiscal Year (as the case may be) and shall be entitled to discuss such
working papers with Netter and those persons responsible for the
preparation thereof.
<PAGE>
<PAGE>
Section 3.9 Maximum Consideration/Buy-Out. In no event shall Netter
issue to the Principal Shareholders pursuant to this Agreement (as Merger
Consideration, and as Earn-Out Shares) more than an aggregate of 1.3
Million Netter Shares (the "Maximum Earn-Out Consideration"). Netter
shall have the right at any time to deliver to the Principal Shareholders
the balance of the Maximum Earn-Out Consideration at which point this
Section 3.9 shall be of no further force and effect. During the Earn-Out
Period and upon Netter selling or transferring substantially all of the
assets or capital stock of Videssence to an unaffiliated third party or
conducting an initial public offering of Videssence capital stock, Netter
shall deliver to the Principal Shareholders the balance of the maximum
Earn-Out Consideration.
Section 3.10 Appointment to Netter Board of Directors. Effective at the
Closing, the directors of Netter shall cause to be appointed to the Netter
Board of Directors, a mutually agreeable nominee of Videssence.
Section 3.11 Indemnification. For a period of five years after the
Closing Date, the indemnification provided to Surviving Corporation's
officer and directors (the "Surviving Corporation Indemnified Parties") by
the Surviving Corporation and Netter shall be to the fullest extent
permitted under applicable law and in no event less than the
indemnification provided to the officers and directors of Netter;
provided, however, until all the Escrow Shares have been released pursuant
to the Escrow Agreement, such Surviving Corporation Indemnified Parties
shall have no indemnification rights for matters (i) in which one or more
of such Surviving Corporation Indemnified Parties has knowledge of and
fails to disclose to Netter prior to the Closing Date, or (ii) which
constitute a breach of a representation, warranty or covenant hereunder.
This Section 3.11 shall survive the consummation of the Merger, is
intended for the benefit of the Surviving Corporation Indemnified Parties
and shall be binding on all successors and assigns of the Surviving
Corporation and Netter.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF VIDESSENCE AND THE SHAREHOLDERS
Representations of Videssence . Except as set forth in the
Disclosure Memorandum to be prepared, delivered and have the legal effect
as provided in Section 6.6 hereof, Videssence represents and warrants to
Netter and Merger Corp. and agrees as follows:
Section 4.1 Existence: Good Standing: Corporate Authority and
Authorization.
4.1.1 Videssence. Videssence is a corporation duly
organized, validly existing and in good standing under the laws of the
State of California. Videssence is qualified to do business and is in
good standing in all other jurisdictions in which the character or
location of the properties owned or leased by it or the nature of the
business conducted by it makes such qualification necessary and where the
<PAGE>
failure to so qualify would have a material adverse effect upon
Videssence. Set forth in the Disclosure Memorandum, is a list of each
jurisdiction in which Videssence is qualified to do business as a foreign
corporation. Videssence has the power to own its property and to carry on
its business as now being conducted. Videssence has the full power and
authority to enter into and perform its obligations under this Agreement
and under each other instrument and document executed and delivered by
Videssence pursuant hereto or in connection herewith, and to take all
actions required of it to consummate the Merger.
4.1.2 Subsidiaries. The Disclosure Memorandum sets forth the
following information regarding each subsidiary of Videssence
("Subsidiary" and, hereinafter "Videssence" shall refer to both Videssence
and its Subsidiaries): (i) name of corporation; (ii) state of
incorporation; (iii) authorized capitalization; (iv) issued and
outstanding capital stock and other securities. Each Subsidiary is duly
organized and validly existing and in good standing under the laws of the
jurisdiction of its incorporation or other organization, and has full
corporate power and authority to own, lease or otherwise hold its assets
and properties and to carry on its business as now conducted. Each
Subsidiary is duly qualified or licensed to do business and is in good
standing as a foreign corporation or other business entity in the
respective which are all of the jurisdictions in which each such
Subsidiary owns or leases any real property or conducts any business, so
as to require such qualification or licensing, except for instances where
the failure to so qualify would not materially adversely affect the
business or financial condition of each such Subsidiary. All of the
outstanding shares of capital stock or other voting interests of each
Subsidiary are validly issued and outstanding, fully paid and
nonassessable, and owned by Videssence or another Subsidiary free of any
claims, liens, charges or encumbrances of any nature whatsoever. No
Subsidiary is engaged in or has been engaged in an active trade or
business.
Section 4.2 No Legal Bar; Conflicts. Neither the execution and
delivery of this Agreement or any other instrument or document executed and
delivered by Videssence pursuant hereto or in connection herewith, nor
the consummation of the transactions contemplated hereby or thereby (i)
violates or conflicts with any provision of the articles of incorporation
or by-laws of Videssence or any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge or other restriction
of any government, governmental agency or court to which Videssence is
subject, or (ii) results in the breach or termination of any provision of,
result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, require any notice or constitute
a breach or default under any Material Contract (as defined in Section
4.12 below) or by which any of the properties or assets of Videssence may
be subject, bound or affected. Except for the filing of appropriate
certificates to effect the Merger, no authorization, consent or approval
of any public body or authority is necessary to the validity of the
transactions contemplated by this Agreement. All necessary approvals of
the parties under any Material Contracts or any other person required to
<PAGE>
permit Videssence to perform its obligations in connection with
consummation of the transactions contemplated in this Agreement have been,
or the best efforts of Videssence will be expended by Videssence so that
such approvals will be, obtained by Videssence on or before the Closing
Date. Videssence is not a party to any contract or subject to any other
legal restriction that would prevent or restrict complete fulfillment of
all of the terms and conditions of this Agreement or compliance with any
of its obligations under it. Videssence has taken all necessary corporate
actions to authorize and approve the execution, delivery and performance
of this Agreement and the Merger (other than obtaining the approval of
each of the Videssence Shareholders). This Agreement constitutes a legal,
valid and binding obligation of Videssence, enforceable against
Videssence in accordance with its terms.
Section 4.3 Capital Stock and Exclusive Dealing. Videssence (not
including the Subsidiaries) has an authorized capitalization consisting of
(i) Ten Million (10,000,000) shares of voting common stock, no par value
, of which Six Hundred Ninety-Six Thousand Seven Hundred Eight-Six
(696,786) shares are issued and are outstanding. All such outstanding
shares have been duly authorized, are validly issued, and are fully paid
and nonassessable. There are no other shares of stock of Videssence
issued and outstanding. There are no outstanding options, warrants,
rights, preemptive rights, calls, commitments , conversion rights, rights
of exchange, plans or other agreements of any character providing for the
purchase, issuance or sale of any shares of the capital stock of
Videssence, except as contemplated by this Agreement. None of the
outstanding Videssence Shares have been issued in violation of any
preemptive right or agreement, commitment or obligation binding on
Videssence or any of the Shareholders or any applicable securities laws.
Section 4.4 Restrictive Documents. Videssence is not subject to, or a
party to, any charter, bylaw, mortgage, lien, lease, license, permit,
agreement, contract, instrument, or any law, rule, ordinance, regulation,
order, judgment or decree, or any other restriction of any kind or
character, which materially adversely affects Videssence or, which would
prevent consummation of the transactions contemplated by this Agreement or
the continued operation of Videssence after the date hereof or the Closing
Date on substantially the same basis as heretofore operated or which would
restrict its ability to acquire any property or conduct business in any
area.
Section 4.5 Financial Statements and No Material Changes. Videssence has
heretofore furnished Netter with the balance sheets of Videssence for the
periods ended December 31, 1993, 1994, and 1995 and the related statements
of income, shareholders' equity and changes in financial position for the
years ended December 31, 1994 and 1995. The balance sheet and related
statement of income of Videssence for the periods mentioned above are
hereinafter collectively referred to as the "Balance Sheets" and are in
the form attached hereto as Exhibit 6. All such financial statements and
all other financial statements of Videssence, including the footnotes
thereto, except as indicated therein, have been prepared in accordance
with generally accepted accounting principles consistently applied
<PAGE>
throughout the periods indicated. The Balance Sheets fairly present the
financial condition of Videssence at the date thereof , and the related
statement of income, shareholders' equity and changes in financial
position fairly present the results of the operations of Videssence, if
any, and the changes in the financial position for the period indicated.
Since December 31, 1995 (the "Balance Sheet Date") there has been no
material adverse change in the assets or liabilities, or in the business
or financial condition or in the results of operations, of Videssence,
whether as a result of any legislative or regulatory change, revocation of
any license or rights to do business, litigation, administrative action,
fire, explosion, accident, casualty, labor trouble, flood, drought, riot,
storm, condemnation or act of God or other public force or otherwise and
no fact or condition exists or is contemplated by Videssence or, to the
best knowledge of Videssence, threatened which might cause such a change
in the future. Netter acknowledges receipt and review of certain trial
balance sheets of Videssence dated March 31, 1996 (the "Trial Balance"),
a copy of which is attached as Exhibit 7 hereof. Netter further
acknowledges that, assuming the truth, accuracy and completeness of the
Trial Balance, none of the information presented thereon constitutes a
material adverse change for purposes of this Section 4.5.
Section 4.6 Absence of Undisclosed Liabilities. Except as set forth in
the Balance Sheets, Videssence does not have any outstanding claims
against it, liabilities or indebtedness, contingent or otherwise, other
than (i) liabilities not of a character or amount required to be shown,
accrued or escrowed against on the Balance Sheets under generally accepted
accounting principles and (ii) liabilities incurred subsequent to the
Balance Sheet Date in the ordinary course of business, consistent with
past practices and, to the extent so incurred after the Balance Sheet Date
and before March 31, 1996, the same are set forth in the Trial Balance.
Videssence does not know and has no reason to know of any basis for the
assertion against Videssence of any material liability of any nature not
fully reflected or reserved against in the Balance Sheets or the balance
sheet included in the Trial Balance or expressly disclosed by this
Agreement. The adjusted tax basis and the fair market value of the assets
of Videssence exceed the liabilities of Videssence as of the date hereof
and will exceed the liabilities of Videssence as of the Closing Date.
Section 4.7 No Changes Prior to Closing Date. Since January 1, 1996,
Videssence has not and will not: (i) incur any liability or obligation of
any nature (whether accrued, absolute, contingent or otherwise), except in
the ordinary course of business, (ii) permit any assets to be subjected to
any mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind, except in the ordinary course of business, (iii) sell
transfer or otherwise dispose of any assets, except in the ordinary course
of business, (iv) make any capital expenditure or commitment therefor,
except in the ordinary course of business, (v) declare or pay any dividend
or make any distribution on any shares of capital stock, or redeem,
purchase or otherwise acquire any shares of capital stock or any option,
warrant or other right to purchase or acquire any such shares, (vi) make
any bonus payments or profit sharing distributions or payments of any
kind, (vii) increased its indebtedness for borrowed money, except current
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borrowings from banks in the ordinary course of business, or made any loan
to any employee, person or entity, (viii) write off as uncollectible any
notes or accounts receivable, except write-offs in the ordinary course of
business charged to applicable reserves, none of which individually or in
the aggregate exceeds $25,000, (ix) grant any increase in the rate of
wages, salaries, bonuses or other remuneration to any executive employee
or, except in the ordinary course of business, to any other employee,
(x) cancel or waive any claims or rights of substantial value, (xi) make
any change in any method of business accounting or entered into any
transaction, except in the usual and ordinary manner and in the ordinary
course of business, (xii) change the ownership of its shares of stock or
its capital structures (whether by the issuance, redemption or transfer of
shares) in contemplation of effecting the Merger, (xiii) retire, purchase,
redeem or reacquire any shares of common stock, (xiv) pay any management
fees, rent, compensation or other similar fees or expenses to any
Videssence Shareholder or any of their affiliates in an amount
inconsistent with past practices, or (xv) agree, whether or not in
writing, to do any of the foregoing.
Section 4.8 Books and Records. The minute books of Videssence, as made
available to Netter and its representatives contain accurate records of
all official meetings of and official corporate actions or written
consents by the shareholders and Board of Directors. The records,
systems, controls, data or information recorded, stored, maintained,
operated or otherwise wholly or partly dependent upon or held by any means
(including any electronic, mechanical or photographic process, whether
computerized or not and including all means of access thereto and
therefrom) of Videssence are under the exclusive ownership and direct
control of Videssence.
Section 4.9 Title to Properties: Encumbrances. Except for properties
and assets reflected in the Balance Sheets or acquired since the Balance
Sheet Date which have been sold or otherwise disposed of in the ordinary
course of business, Videssence has good, valid and merchantable title to
(a) all its properties and assets (personal, tangible and intangible),
including, without limitation, all the properties and assets reflected in
the Trial Balance Sheet, and (b) all the properties and assets purchased
since the Balance Sheet Date; in each case, each such property is subject
to no encumbrance, lien, charge or other restriction of any kind or
character, except for liens consisting of zoning or planning
restrictions, easements and other restrictions or limitations on the use
of real property or irregularities in title thereto which are set forth in
the Disclosure Memorandum and which do not materially detract from the
value of, or impair the use of, or otherwise impair the marketability of,
the title or affect the use of such property by Videssence in the
operation of its business and liens for current taxes, assessments or
governmental charges or levies on property not yet due and not delinquent.
Section 4.10 Real Property and Leases. Videssence does not own and has
never owned any real property. The Disclosure Memorandum contains an
accurate and complete list and description (including the location of an
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executed copy thereof) of the terms of all leases to which Videssence is
a party as lessee. Each lease set forth in the Disclosure Memorandum (or
required to be set forth in the Disclosure Memorandum) is in full force
and effect; all rents and additional rents due to date on each such lease
have been paid; in each case, the lessee has been in peaceable possession
since the commencement of the original term of such lease and is not in
default thereunder and no waiver, indulgence or postponement of the
lessee's obligations thereunder has been granted by the lessor; and there
exists no event of default or event, occurrence, condition or act
(including the Merger) which, with the giving of notice, the lapse of time
or the happening of any further event or condition, would become a default
under such lease (other than payments not yet due which would become a
default if not paid when due). Videssence has not knowingly violated or
been given notice of violation of any of the terms or conditions under any
such lease, and to the best knowledge of Videssence , all of the covenants
to be performed by any other party under all such leases have been fully
performed. All of the properties leased by Videssence are in a state of
good maintenance and repair and are adequate and suitable for the purposes
for which they are presently being used. None of such leased buildings,
structures or appurtenances (or any equipment therein), nor the operation
or maintenance thereof, violate, any restrictive covenant or any provision
of any federal, state or local law, ordinance, rule or regulation, or
encroaches on any property owned by others. No condemnation proceeding is
pending or threatened which would preclude or impair the use of any such
property by Videssence for the purposes for which it is currently used.
Section 4.11 Fixed Assets. The Disclosure Memorandum sets forth a list
and location of Videssence's material items of machinery, equipment,
furniture, fixtures, tools, signs, and other items of tangible personal
property (excluding inventory) which are owned by Videssence and used in
or useful or pertain to Videssence's business or the operation thereof,
whether or not reflected on the books of, or in the possession of,
Videssence and whether or not presently in use (collectively, the "Fixed
Assets"). For purposes of this Section 4.11 only, "material" shall mean
any item having a value of at least $1,000.
Section 4.12 Material Contracts. The Disclosure Memorandum contains a
list of all Contracts (as defined below) of the following types to which
Videssence is as of the date of this Agreement a party: (a) each contract
of employment of any officer, employee or consultant or with any labor
union or association and any bonus, deferred compensation, pension, profit
sharing, stock option, employee stock purchase, retirement or other
employee benefit plan; (b) each agreement, indenture or other instrument
which contains restrictions with respect to payment of dividends or any
other distribution in respect of its capital stock; (c) each contract or
series of related contracts involving payments either individually or in
the aggregate in excess of $20,000 in or pursuant to which any person who
is or was an officer, director, stockholder or employee of Videssence has
a material interest; (d) each contract relating to the borrowing or
lending of money or the guarantee of any obligations for borrowed money or
otherwise, excluding endorsements made for purposes of collection in the
ordinary course of business; (e) each contract continuing for a period of
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more than one year from its date involving payments in excess of $20,000
in any year or $40,000 in the aggregate; (f) each contract for charitable
contributions in excess of $1,000; (g) each contract for the sale and/or
installation of any equipment where the purchase price for such equipment
is not less than $15,000, and each contract for equipment maintenance
involving total payments of not less than $25,000, including each contract
for the sale and/or installation of any equipment where such sale and/or
installation has been completed, but Videssence has a continuing
obligation, contingent or otherwise; (g) each contract for capital
expenditures or for the purchase of materials, supplies, equipment or
services involving payments in excess of $20,000; (i) each license or
royalty agreement (other than standard software manufacturer's licenses
included in the packaged software sold by Videssence or under which
Videssence's use of software in its own business operations is licensed);
(j) each distribution, dealer, reseller, manufacturer's representative,
sales agency or franchise agreement; (k) each contract relating to
advertising, promotion or public relations, or with any contractor or
subcontractor, not terminable without penalty by Videssence or such
subsidiary on 30 days' or less notice; (l) each contract with any
government or agency or instrumentality thereof; (m) each management
service, consulting or any other similar type of contract; (n) each option
to purchase any of the Videssence's assets, properties or rights; (o) each
agreement under which price discounts have been granted to customers other
than in the ordinary course of business; (p) each contract with respect to
the discharge or removal of effluent, hazardous wastes or pollutants of
any nature; (q) each contract containing covenants not to compete in any
business or geographical area or not to use or disclose any information in
the possession of Videssence or any of its subsidiaries; (r) all contracts
for the leasing or rental of real or personal property; (s) any agreement
imposing liability for consequential damages, penalties for late payment
or non-performance or containing a liquidated damages provision; and (t)
any other contract not made in the ordinary course of business.
"Contract" shall mean any contract, lease, commitment, sales order,
purchase order, agreement, indenture, mortgage, franchise, note, bond,
lien, instrument, plan, permit or license. Videssence has delivered to
Netter true and correct copies of each Contract listed in the Disclosure
Memorandum and a written description of each material oral arrangement so
listed.
4.12.1 As of the date of this Agreement, all such
Contracts are, and as of the Effective Time will be, valid, enforceable in
accordance with their terms and in full force and effect, and, to the
knowledge of Videssence , Videssence is not, and as of the Effective Time
Videssence will not be, in default thereunder. Videssence as of the date
of this Agreement, has not received notice that any party to any such
contract intends to cancel or terminate such contract.
Section 4.13 Litigation. There is no action, suit or proceeding at law
or in equity by any person or entity, or any arbitration or any
administrative or other proceeding by or before, or to the best knowledge
of Videssence , any investigation by, any governmental or other
instrumentality or agency, pending, or to the best knowledge of
<PAGE>
Videssence, threatened, against or affecting Videssence or any of its
properties or rights which could materially and adversely affect the right
or ability of Videssence to carry on its business as now conducted, or
which could materially and adversely affect the financial condition, or
properties of such companies. Videssence does not know of any valid
basis for any such action, proceeding or investigation. Videssence is not
subject to any judgment, order or decree entered in any lawsuit or
proceeding which may have an adverse effect on any of its operations,
business practices or on its ability to acquire any property or conduct
business in any area.
Section 4.14 Taxes. Videssence has filed, will file or has caused to be
filed, within the times and within the manner prescribed by law, all Tax
returns and all other Tax reports which are required to be filed by, or
with respect to, it. Such returns and reports reflect accurately all
required and appropriate liability for taxes of Videssence for the periods
covered thereby, except for Taxes that have been adequately reserved for
in its books, the Balance Sheets and the Trial Balance. The Taxes
payable by, or due from, Videssence have been fully paid or adequately
disclosed and fully provided for in its books and financial statements,
including the Balance Sheets. No examination, audit or inquiry of any Tax
return of Videssence is currently in progress and Videssence has not
received notice of intent to commence any inquiry, audit or examination of
any such Tax return from any taxing authority. There are no outstanding
agreements or waivers extending the statutory period of limitations
applicable to any Tax return of Videssence.
Section 4.15 Permits. Set forth in the Disclosure Memorandum is a
complete and accurate list of all material permits, licenses, approvals,
franchises, notices, authorizations issued by governmental entities or
other regulatory authorities, federal, state or local (collectively the
"Permits") held by Videssence in connection with the Business. The
Permits are all the permits required for the conduct of the business of
Videssence. Each Permit is in full force and effect, and Videssence has
not engaged in any activity which would cause or permit revocation or
suspension of any such Permit, and no action or proceeding looking to or
contemplating the revocation or suspension of any such Permit is pending
or, to Videssence's knowledge threatened. There are no existing defaults
or events of default or events or states of fact which with notice or
lapse of time or both would constitute a default by Videssence under any
such Permit. Videssence has no knowledge of any default or claimed or
purported or alleged default or state of facts which with notice or lapse
of time or both would constitute a default on the part of any other party
in the performance of any obligation to be performed or paid by any other
party under any Permit. The consummation of the transactions contemplated
hereby will in no way affect the continuation, validity or effectiveness
of the Permits. Neither Videssence nor its facility nor any of its assets
is required to be specially licensed by, nor is it subject to specific
regulation of, any governmental or regulatory body by reason of the
conduct of the business of Videssence.
<PAGE>
Section 4.16 Insurance. The Disclosure Memorandum contains a complete
and accurate list of insurance policies which Videssence maintains with
respect to its business, properties or employees. All such policies are
in full force and effect and there currently exists no right of
termination on the part of the insurance as a result of any prior default
on the part of Videssence. Such policies, with respect to their amounts
and types of coverage, are believed by the Shareholders to be adequate to
insure against material risks to which Videssence and its property and
assets are normally exposed in the operation of its business. Since the
Balance Sheet Date, there has not been any material adverse change in
Videssence's relationship with its insurers or in the premiums payable
pursuant to such policies.
Section 4.17 Product Warranty. Each product manufactured, sold, leased,
licensed or delivered by Videssence conforms with all applicable
contractual commitments and all express and implied warranties.
Videssence has no liability and, to the best knowledge of Videssence,
there is no basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand which may give
rise to any liability for replacement or repair thereof or other damages
in connection therewith, subject only to the reserve for product warranty
claims set forth in the Balance Sheets,. No product manufactured, sold,
leased, or delivered by Videssence is subject to any guaranty, warranty,
or other indemnity beyond the applicable standard terms and conditions of
sale or lease, all of which are reproduced and described in detail in the
Disclosure Memorandum in addition to copies of the standard terms and
conditions of sale or lease for Videssence, containing applicable
guaranty, warranty, and indemnity provisions have been provided to Netter
by Videssence.
Section 4.18 Intellectual Property.
4.18.1 All domestic and foreign patents, patent
applications, copyrighted works, copyright applications and registrations,
trade secrets, inventions, developments, customer lists, manufacturing and
secret processes, hardware designs, programming processes, software and
other information, and know-how (if any) that are used by, owned by or
licensed to Videssence and that relate to the Business (collectively, the
"Intellectual Property") are listed in the Disclosure Memorandum which
indicates, with respect to each, the nature of Videssence's interest
therein and the expiration date thereof or the date on which Videssence's
interest therein terminates. Registered copyrights, patents, trademarks
and service marks that are owned by or licensed to Videssence and that
relate to the business of Videssence have been duly registered in, filed
in or issued by, as the case may be, the United States Patent and
Trademark Office, the United States Register of Copyrights or the
corresponding offices of other countries identified on such Schedule, and
have been properly maintained and renewed in accordance with all
applicable provisions of law and administrative regulations in the United
States and each such country. The Intellectual Property is the only
intellectual property used in or otherwise necessary to operate the
Business as currently conducted.
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<PAGE>
4.18.2 Use of the Intellectual Property and any other
intellectual property used by Videssence in its business does not require
the consent of any other person and the same are freely transferable
(except as otherwise provided by law) and are owned exclusively by
Videssence, free and clear of any attachments, liens, encumbrances or
adverse claims, and to the best knowledge of Videssence, neither its
present nor contemplated activities or products infringe, misappropriate,
dilute, impair or constitute unfair competition with respect to any
patent, trade name, trademark, copyright or other proprietary rights of
others.
4.18.3 No other person has an interest in or right or
license to use, or the right to license others under the Intellectual
Property. There are no claims or demands of any other person pertaining
thereto and no proceedings have been instituted, are pending or, to the
best knowledge of Videssence, threatened that challenge the rights of
Videssence in respect thereof and Videssence does not know of any fact
that could be the basis of any such claim. Videssence is not aware of any
infringement of any of the Intellectual Property by others nor is any of
the Intellectual property subject to any outstanding order, decree,
judgment, stipulation, settlement, lien, charge, encumbrance or
attachment. No claim or demand has been made and no proceeding has been
filed or, to the best knowledge of Videssence , is threatened to be filed
charging Videssence with infringement of any patent, trade name,
trademark, service mark or copyright and Videssence does not know of any
facts which could be the basis of any such claims. There are no
royalties, honoraria, fees or other payments payable by Videssence to any
person with respect to any of the Intellectual Property.
4.18.4 There are no payments that are required to be made
by Videssence for the use of its Intellectual Property. Videssence is not
using or in any way making any unlawful or wrongful use of any
confidential information or Intellectual Property of any third party,
including without limitation any former employer of any present or past
employee of Videssence or of any of Videssence's predecessors. Videssence
is not a party to any non-competition or confidentiality agreement related
to the business of Videssence with any party other than Videssence or
Netter.
Section 4.19 Compliance With Laws. Videssence is in compliance with all
applicable laws, regulations, orders, judgments and decrees of each and
every jurisdiction in which it is doing business, including applicable
federal laws and regulations, the violation of which would have a material
adverse effect on its operations.
Section 4.20 Inventory. The inventory as reflected on the Balance Sheets
or acquired thereafter has been acquired and maintained in the ordinary
course of business; is of good and merchantable quality; consists
substantially of a quality, quantity, and condition usable, leasable or
saleable in the ordinary course of business within a period of one (1)
year from the Closing Date; and is not subject to any write down or write
off for obsolescence or otherwise under generally accepted accounting
principles. Videssence is not under any liability or obligation with
respect to the return of inventory in the possession of any third party.
<PAGE>
<PAGE>
Section 4.21 Accounts Receivable. The accounts receivable of Videssence
as reflected in the Balance Sheets and the balance sheets included in the
Trial Balance are, to the extent uncollected on the date of this
Agreement, valid and existing and fully collectible through the use of
ordinary collection procedures (net of reserves set forth in such
financial statements as at such dates, which reserves were adequate and in
an amount consistent with Videssence's historical accounting policies),
represent monies due for goods sold and delivered or services rendered,
and are subject to no refunds, discounts, rebates or other adjustments
(except discounts for prompt payment given in the ordinary course of
business) and to no defenses, rights of setoff, assignments, restrictions,
encumbrances or conditions enforceable by third parties on or affecting
any thereof. Videssence has never factored any of its accounts
receivable.
Section 4.22 Employment Relations. Videssence is (i) in compliance
with all federal, state or other applicable laws respecting employment and
employment practices, terms and conditions of employment, wages and hours,
equal employment opportunity, nondiscrimination, occupational safety and
health, and payment of social security and similar taxes and, to the best
knowledge of Videssence, has not and is not engaged in any unfair labor
practice; (ii) no unfair or unlawful labor practice complaint against
Videssence is pending before the National Labor Relations Board or other
governmental agency or commission; (iii) there is no labor strike,
dispute, slowdown or stoppage actually pending or, to the best knowledge
of Videssence, threatened against or involving Videssence; (iv) no
representation question exists respecting the employees of Videssence;
(v) no grievance which might have a material adverse effect on the
condition of Videssence taken as a whole or the conduct of their
respective businesses exists, no arbitration proceeding arising out of or
under any collective bargaining agreement is pending and no claim therefor
has been asserted; (vi) no collective bargaining agreement is currently
being negotiated by Videssence; (vii) has not experienced any material
labor difficulty; and (viii) no "plant closing" or "mass layoff" within
the meaning of the Worker Adjustment and Retraining Notification Act has
occurred with respect to Videssence. There has not been, and to the best
knowledge of Videssence , there will not be, any change in relations with
employees of Videssence as a result of the transactions contemplated by
this Agreement which could have a material adverse effect on Videssence.
There exist no employment, consulting, severance or indemnification
agreements between Videssence and any director, officer, employee or agent
of Videssence or any agreement that would give any person or entity the
right to receive any payment from Videssence as a result of the Merger.
There exists no contract or arrangement which would limit in any way
Videssence's right to discharge any employee of Videssence following the
Closing or which would entitle any such discharged employee to receive
compensation from Videssence on account of such discharge.
Section 4.23 Employee Benefit Plans.
4.23.1 List of Plans. Set forth in the Disclosure
Memorandum is an accurate and complete list of all employee benefit plans
("Employee Benefit Plans") within the meaning of Section 3(3) of the
<PAGE>
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
whether or not any such Employee Benefit Plans are otherwise exempt from
the provisions of ERISA, established, maintained or contributed to by
Videssence (including, for this purpose and for the purpose of all of the
representations in this all employers (whether or not incorporated) which
by reason of common control are treated together with Videssence and/or
any of the Shareholders as a single employer within the meaning of Section
414 of the Code).
4.23.2 Status of Plans. Videssence does not maintain or
contribute to any such Employee Benefit Plan subject to ERISA which is not
in substantial compliance with ERISA, or which has incurred any
accumulated funding deficiency within the meaning of Section 412 or 418B
of ERISA, or which has applied for or obtained a waiver from the Internal
Revenue Service of any minimum funding requirement under Section 412 of
the Code. Videssence has not incurred any liability to the Pension
Benefit Guaranty Corporation ("PBGC") in connection with any Employee
Benefit Plan or ceased operations at any facility or withdrawn from any
such Plan in a manner which could subject it to liability under
Section 4062(f), 4063 or 4064 of ERISA. Videssence does not know of any
facts or circumstances which might give rise to any liability to the PBGC
under Title IV of ERISA on which could reasonably be anticipated to result
in any claims being made against Videssence or Netter by the PBGC.
Videssence has not incurred any withdrawal liability (including any
contingent or secondary withdrawal liability) within the meaning of
Sections 4201 and 4202 of ERISA, to any Employee Benefit Plan which is a
multi-employer Plan (as defined in Section 4001 of ERISA), and no event
has occurred, and there exists no condition or set of circumstances, which
presents a material risk of the occurrence of any withdrawal from or the
partition, termination, reorganization or insolvency of any multi-employer
Plan which could result in any liability to a multi-employer Plan.
4.23.3 Contributions. Full payment has been made of all
amounts which Videssence is required, under applicable law or under any
Employee Benefit Plan or any agreement relating to any Employee Benefit
Plan to which Videssence is a party, to have paid as contributions thereto
for or with respect to the most recent fiscal year of such Employee
Benefit Plan ended prior to the date hereof. Videssence has made adequate
provisions for reserves to meet contributions that have not been made
because they are not yet due under the terms of any Employee Benefit Plan
or related agreements . All payments and contributions to any such
Employment Benefit Plans have been finally determined and paid for the
period ended December 31, 1995. No contributions have been made nor are
any contributions contemplated to be made to any Employee Benefit Plan for
the period subsequent to December 31, 1995.
4.23.4 Tax Qualification. To the best knowledge of
Videssence, each Employee Benefit Plan intended to be qualified under
Section 401(a) of the Code has been determined to be so qualified by the
Internal Revenue Service and nothing has occurred since the date of the
last such determination which resulted or is likely to result in the
revocation of such determination.
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<PAGE>
4.23.5 Transactions. No reportable event (as defined in
Section 4043 of ERISA) for which the 30-day notice requirement has not
been waived by the PBGC has occurred with respect to any Employee Benefit
Plan, and Videssence has not engaged in any transaction with respect to
any Employee Benefit Plan which would subject it to a tax, penalty or
liability for prohibited transactions under ERISA or the Code, nor have
any of its directors, officers or employees, to the extent they or any of
them are fiduciaries with respect to such plans, materially breached any
of their responsibilities or obligations imposed upon fiduciaries under
Title I of ERISA or which would result in any claim being made under or by
or on behalf of any such plans by any party with standing to make such
claim.
4.23.6 Other Plans. Videssence does not presently
maintain any employee benefit plans or any other pension, welfare or
retirement benefit plans other than those listed in the Disclosure
Memorandum.
4.23.7 Documents. Videssence and the Shareholders have
delivered or caused to be delivered to Netter and its counsel true and
complete copies of (i) all Employee Benefit Plans as in effect, together
with all amendments thereto which will become effective at a later date,
as well as the latest Internal Revenue Service determination letter
obtained with respect to any such Employee Benefit Plan qualified under
Section 401 or 501 of the Code and (ii) Form 5500 with respect to each
such Plan for each of the last two fiscal years, and will provide when
completed Form 5500 for the most recently completed fiscal year for each
Employee Benefit Plan required to file such form.
Section 4.24 Environmental Laws and Regulations. The Disclosure
Memorandum sets forth all information relating to the following items: (a)
the nature and, if material, quantities of any hazardous substances (as
defined below) generated, transported or disposed of by Videssence during
the past five years (other than raw material awaiting manufacturing,
work-in process or finished goods or through the sale of products in the
ordinary course of business), together with a description of the location
of each such activity, and (b) a summary of the nature and, if material,
quantities of any hazardous substances that have been disposed of or found
at any site or facility owned or operated presently or at any previous
time by Videssence (other than raw material awaiting manufacturing,
work-in-process or finished goods or through the sale of products in the
ordinary course of business). Videssence's existing and prior uses of all
real property leased or owned by Videssence complies and has at all times
during their occupancy complied with, and Videssence is not in violation
of, and has not violated, in connection with the ownership, lease,
occupancy, use, maintenance, or operation of such property or the conduct
of its business, any applicable federal, state, county or local statutes,
laws, regulations, rules, ordinances, codes, licenses or permits relating
in any way to the protection of the environment, including, without
limitation, the Clean Air Act, the Federal Water Pollution Control Act of
1972, the Resource Conservation and Recovery Act of 1976 ("RCRA"), the
<PAGE>
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), the Toxic Substances Control Act, any analogous state
laws, and any amendments or extensions of the foregoing and the
regulations promulgated thereunder (collectively, the "Environmental
Laws"). Videssence has not received any notice of any work, repairs,
construction or capital expenditures required by the Environmental Laws
with respect to any of its properties or its businesses. None of
Videssence's leased or owned properties is contaminated by or contains any
hazardous substance. No claim, action, suit or proceeding is pending or,
to Videssence's knowledge, threatened against Videssence, before any court
or other governmental authority or arbitration tribunal, relating to
hazardous substances, pollution or the environment, and there is no
outstanding judgment, order, writ, injunction, decree or award against or
affecting Videssence or its assets with respect to the same. There has
never been, and there is not presently occurring, any release of any
hazardous substance on or from any of Videssence's leased or owned
properties, Videssence has not received any notice from any government
agency or private or public entity advising Videssence that it is
responsible for response costs with respect to a release, a threatened
release or clean up of chemicals produced by, or resulting from, any
business, commercial, or industrial activities, operations, or processes,
including, but not limited to, hazardous substances, and Videssence has
not received any information requests under CERCLA from any government
agency. There are no facts or circumstances which Videssence or any of
the Shareholders reasonably expect could form the basis for the assertion
of any Claim (as defined below) against Videssence relating to
environmental matters including, but not limited to, any Claim arising
from past or present environmental practices asserted under the
Environmental Laws, which Videssence or any of the Shareholders believe
might have a material adverse effect on the business, results of
operations, financial condition or prospects of Videssence taken as a
whole.
As used herein, "hazardous substances(s)" include any pollutants,
contaminants, dangerous substances, toxic substances, solid waste,
hazardous wastes, hazardous materials, or hazardous substances as defined
in or pursuant to RCRA or CERCLA, or any other federal, state or local
environmental law, ordinance, rule or regulation, except that, for
purposes of this Agreement, "petroleum" (including crude oil or any
fraction thereof) shall be deemed a "hazardous substance." "Release" and
"disposal" shall have the same meanings as defined in CERCLA and RCRA.
"Claim" shall mean any and all claims, demands, causes of actions, suits,
proceedings, administrative proceedings, losses, judgments, attorneys'
fees, and any other expenses incurred, assessed or sustained by or against
Videssence.
Section 4.25 Interests in Clients, Suppliers, Etc.
Neither Videssence nor any officer or director of Videssence owns or
possesses, directly or indirectly, any financial or proprietary interest
in, or is a director, officer or employee of, any corporation, limited
liability company, partnership, association, trust, joint venture or other
business entity which is engaged in the same or similar business as
Videssence, or is a competitor or potential competitor of Videssence.
Ownership of securities of a company whose securities are registered
under the Securities Exchange Act of 1934, not in excess of 5% of any
class of such securities, shall not be deemed to be a financial interest
for purposes of this Section 4.25.
Section 4.26 Customers, Distributors and Independent Sales
Representatives. The Disclosure Memorandum sets forth the names and
addresses of all customers to which, and independent sales representatives
and distributors through which, Videssence has sold or distributed in
excess of $50,000 of its products or services in the Business during any
of the last two fiscal years of Videssence. During such period and
through the date hereof, no such customer, distributor or independent
sales representative has canceled or otherwise terminated in its
relationship with Videssence or decreased materially its usage or purchase
of the products or services of Videssence, except for changes in customer
relationships that have occurred in the ordinary course of business the
aggregate value of which has not exceeded $250,000. To the knowledge of
Videssence, no such customer, independent sales representative or
distributor has any plan or intention to terminate, cancel or otherwise
modify its relationship with Videssence in a manner that would be adverse
to Videssence.
Section 4.27 Bank Accounts, Powers of Attorney and Compensation of
Employees. The Disclosure Memorandum contains an accurate and complete
list showing (a) the name and address of each bank in which Videssence has
an account or safe deposit box, the number of any such account or any such
box, the names of all persons authorized to draw thereon or to have access
thereto and the current balances maintained in all such accounts, (b) the
names of all persons, if any, holding powers of attorney from Videssence
and a summary statement of the terms thereof, and (c) the names of all
persons whose compensation from Videssence, in the aggregate, for the
current fiscal years of Videssence exceed an annualized rate of Fifty
Thousand and No/100 Dollars ($50,000.00), together with a statement of the
full amount paid or payable to each such person for services rendered
during such fiscal year.
Section 4.28 Disclosure. No representation, warranty or covenant in
Article IV of this Agreement, the financial statements referred to in
Section 4.5 above (including the footnotes thereto), or any attached
schedule, exhibit or certificate delivered in accordance with the terms
hereof or, to the best knowledge of Videssence, any document or statement
in writing which has been supplied by or on behalf of Videssence in
connection with Netter's review of Videssence pursuant to Section 6.5.1
below, contains any untrue statement of a material fact, or omits any
statement of a material fact necessary in order to make the statements
contained herein or therein not misleading. There is no fact known to
Videssence or any of the Shareholders which materially and adversely
affects the businesses, prospects or financial condition of Videssence,
its properties or assets, which has not been disclosed and set forth in
this Agreement.
<PAGE>
Section 4.29 Broker's or Finder's Fees. No agent, broker, person or firm
acting on behalf of Videssence are, or will be, entitled to any commission
or broker's or finder's fees from any of the parties hereto, or from any
person controlling, controlled by or under common control with any of the
parties hereto, in connection with any of the transactions contemplated
herein.
Section 4.30 Certain Conditions for Accounting and Tax Treatment.
Videssence has not been a subsidiary or division of another corporation;
has not changed the ownership of the shares of its common stock or its
capital structure (whether by the issuance, redemption or transfer of
shares) in contemplation of effecting the transaction contemplated herein
during the period beginning on the date of its organization and ending on
the date of this Agreement; or has ever reacquired any of the shares of
its common stock. Videssence represents that there have been no
extraordinary distributions of cash or other assets in contemplation of
the transactions described herein, whether or not disclosed herein, and
that any distributions not within the normal and ordinary course of
business of Videssence that may have been made prior to the date of this
Agreement, whether or not disclosed herein, were made in advance of any
discussions regarding the transactions described herein and without any
plan or intention to pursue the Merger described herein.
Section 4.31 Cooperation. From and after the date of this Agreement,
Videssence and its officers, directors, accountants, attorneys, agents and
other representatives, and each of the Shareholders will cooperate fully
with Netter (i) in the preparation of all statements and reports
contemplated by this Agreement and required pursuant to the registration
and other requirements provided in the 1933 Act and the 1934 Act, and (ii)
to facilitate the consummation of the transactions provided for herein,
all in accordance with federal and state regulatory requirements.
ARTICLE V
REPRESENTATIONS OF NETTER
Section 5.1 Representations of Netter. Except as set forth in the Netter
Disclosure Memorandum, delivered to Videssence from time to time until the
Netter Disclosure Memorandum is finalized prior to the Closing, Netter
represents, warrants and agrees as follows:
Section 5.2 Existence and Good Standing. Netter is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware. Netter has the corporate power to own its properties
and to carry on its business as now being conducted. Merger Corp. is a
corporation duly organized, validly existing and in good standing under
the laws of the State of California. Netter is qualified to do business
and is in good standing in all other jurisdictions in which the character
or location of the properties owned or leased by it or the nature of the
business conducted by it makes such qualification necessary and where the
failure to so qualify would have a material adverse effect on Netter.
<PAGE>
Section 5.3 Corporate Authority and Authorization. Netter and Merger
Corp. each have the corporate power and authority to make, execute,
deliver and perform this Agreement, this Agreement has been duly
authorized and approved by all required corporate action of Netter and has
been approved by the Board of Directors of Merger Corp. Neither the
execution nor delivery of this Agreement nor Merger Corp.'s performance
hereunder, will conflict with or result in the breach of the terms,
conditions or provisions of, or constitute a default under the Articles of
Incorporation of Merger Corp. or any agreement or instrument to which
Merger Corp. is a party or which it is bound. This Agreement is a valid
and binding obligation of Netter and Merger Corp. enforceable against them
in accordance with its terms.
Section 5.4 Capital Stock and Exclusive Dealing. Netter has an
authorized capitalization consisting of (i) Six Million (6,000,000) shares
of voting common stock, with $.01 par value per share, of which as of
April 24, 1996, Two Million Seven Hundred Ninety-Five Thousand (2,795,000)
shares were issued and were outstanding, and (ii) Two Million (2,000,000)
shares of preferred stock, with $.001 par value per share, of which no
shares are issued and outstanding. The Netter Shares to be issued
pursuant to the Agreement are duly authorized and, when issued pursuant to
the Agreement, will be validly issued, fully paid and nonassessable. All
such outstanding shares have been duly authorized, are validly issued, and
are fully paid and nonassessable. There are no other shares of stock of
Netter issued and outstanding. Other than as provided in the Company's
SEC Documents (defined below), there are no outstanding options, warrants,
rights, preemptive rights, calls, commitments , conversion rights, rights
of exchange, plans or other agreements of any character providing for the
purchase, issuance or sale of any shares of the capital stock of Netter,
except as contemplated by this Agreement. None of the outstanding Netter
Shares have been issued in violation of any preemptive right or agreement,
commitment or obligation binding on Netter or any applicable securities
laws.
Section 5.5 Compliance With Laws. Netter is in compliance with all
applicable laws, regulations, orders, judgments and decrees of each and
every jurisdiction in which it is doing business, including applicable
federal laws and regulations, the violation of which would have a material
adverse effect on its operations.
Section 5.6 Restrictive Documents. Neither Netter nor Merger Corp. is
subject to any charter, bylaw, mortgage, lien, lease, agreement,
instrument, order, law, rule, regulation, judgment or decree, or any other
restriction of any kind or character, which would prevent consummation of
the transactions contemplated by this Agreement.
Section 5.7 Broker's or Finder's Fees. Other than payments to be made
to Trital Acquisition Corp. and Geoffrey Talbot , no agent, broker, person
or firm acting on behalf of Netter or Merger Corp. is, or will be,
entitled to any commission or broker's or finder's fees from any of the
parties hereto, or from any person controlling, controlled by or under
common control with any of the parties hereto, in connection with any of
the transactions contemplated herein. Any such broker's or finder's fees
will be paid by Netter.
<PAGE>
Section 5.8 Accuracy of Public Information. Netter has furnished
Videssence with the Final Prospectus of Netter dated November 20, 1995 and
Netter's quarterly report of Form 10-Q for the period ended December 31,
1995, any subsequent reports filed by Netter with the SEC pursuant to the
Securities and Exchange Act of 1934, as amended (the "1934 Act"),
(collectively, the "SEC Documents"). The SEC Documents (i) were prepared
in accordance with the requirements of the 1933 Act or the 1934 Act, as
the case may be, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. Each of
the consolidated financial statements (including, in each case, any
related notes thereto) contained in the SEC Documents has been prepared in
accordance with generally accepted accounting principals applied on a
consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and each fairly presents the consolidated
financial position of Netter and its subsidiaries as at the respective
dates thereof and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount.
Section 5.9 Disclosure. No representation, warranty or covenant in
Article V of this Agreement, the Netter Disclosure Memorandum or any
attached Exhibit or certificate delivered in accordance with the terms
hereof or any document or statement in writing which has been supplied by
or on behalf of Netter, or, to the best knowledge of Netter, in connection
with Videssence's review of Netter pursuant to Section 6.5.2 below ,
contains any untrue statement of a material fact, or omits any statement
of a material fact necessary in order to make the statements contained
herein or therein not misleading. There is no fact known to Netter which
materially and adversely affects the businesses, prospects or financial
condition of Netter, its properties or assets, which has not been
disclosed and set forth in this Agreement.
Section 5.10 Interests in Clients, Suppliers, Etc. Neither Netter nor any
officer or director of Netter owns or possesses, directly or indirectly,
any financial or proprietary interest in, or is a director, officer or
employee of, any corporation, limited liability company, partnership,
association, trust, joint venture or other business entity which is
engaged in the same or similar business as Netter, or is a competitor or
potential competitor of Netter. Ownership of securities of a company
whose securities are registered under the Securities Exchange Act of 1934,
not in excess of 5% of any class of such securities, shall not be deemed
to be a financial interest for purposes of this Section 5.10.
Section 5.11 Litigation. Other than as set forth in the SEC Documents,
there is no action, suit or proceeding at law or in equity by any person
or entity, or any arbitration or any administrative or other proceeding by
or before, or to the best knowledge of Netter, any investigation by, any
governmental or other instrumentality or agency, pending, or to the best
knowledge of Netter, threatened, against or affecting Netter or any of its
properties or rights which could materially and adversely affect the right
or ability of Netter to carry on its business as now conducted, or which
<PAGE>
could materially and adversely affect the financial condition, or
properties of such companies. Netter does not know of any valid basis for
any such action, proceeding or investigation. Netter is not subject to
any judgment, order or decree entered in any lawsuit or proceeding which
may have an adverse effect on any of its operations, business practices or
on its ability to acquire any property or conduct business in any area.
ARTICLE VI
CONDUCT OF BUSINESS
Section 6.1 Conduct of Business of Videssence. Videssence represents,
warrants and agrees that during the period from the date hereof to the
Closing Date, Videssence shall have conducted its business operations
according to the ordinary and usual course of business and used its best
effort to preserve intact its business organization, keep available the
services of its officers and employees, and maintained satisfactory
relationships with vendors, licensors, suppliers, distributors, clients
and others having business relationships with Videssence. Notwithstanding
such agreements, pending the Closing Date and except as may be first
approved by Netter or as is otherwise permitted or required by this
Agreement, Videssence and the Shareholders will cause (a) Videssence's
articles of incorporation and by-laws to be maintained in their form as of
the date of this Agreement, (b) the compensation payable or to become
payable by Videssence, in the aggregate, to any person being paid Fifty
Thousand and No/100 Dollars ($50,000.00) per year or more on the Balance
Sheet Date to be maintained at no more than their existing levels as of
such date, (c) Videssence to refrain from making any bonus, pension,
retirement or insurance payment (other than regularly scheduled payments
in the ordinary course consistent with past practice) or arrangement to or
with any such persons except those that may have been approved by Netter
or those that are subject to and in accordance with the provisions of this
Agreement, (d) Videssence to refrain from entering into any contract or
commitment, except contracts involving a commitment by either party to
such contract of less than $10,000 in the aggregate and (e) Videssence to
refrain from making any change affecting any of their bank, safe deposit
or power of attorney arrangements. During the period from the Balance
Sheet Date to the Closing Date, Videssence shall cause Videssence to,
confer on a regular and frequent basis with one or more designated
representatives of Netter to report material operational matters and to
report the general status of ongoing business operations of Videssence.
Videssence shall notify Netter of any unexpected emergency or other change
in the normal course of its business or in the operation of its properties
and of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), adjudicatory
proceedings (including lawsuits, arbitrations or mediations), budget
meetings or submissions involving any material property of Videssence, and
to keep Netter fully informed of such events and permit its
representatives prompt access to all materials prepared in connection
therewith.
<PAGE>
Section 6.2 Conduct of Business by Netter. Netter agrees that during
the period from the date hereof to the Closing Date, except as may be first
approved by Videssence or as is otherwise permitted or required by this
Agreement, Netter will not (a) amend Netter's certificate of incorporation
and bylaws; (b) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of any of its capital stock; or (c) take or agree in
writing or otherwise to take any action which would make any of the
representations or warranties of Netter contained in this Agreement untrue
or incorrect or prevent Netter from performing or cause Netter not to
perform its covenants hereunder.
Section 6.3 Exclusive Dealing. Through the Closing Date, Videssence
shall not have taken any action to, directly or indirectly, encourage,
initiate or engage in discussions or negotiations with, or provide any
information to, any corporation, partnership, person, or other entity or
group, other than Netter, concerning any sale of substantial assets,
purchase of stock, merger or similar transaction involving Videssence, or
the capital stock, business or assets of Videssence.
Section 6.4 Disclosure Memorandum. As soon as practicable but in no
event later than May 1, 1996, Videssence shall deliver to Netter a
preliminary draft of the Disclosure Memorandum and all schedules and
exhibits to be attached thereto. The final Disclosure Memorandum:
(i) shall be executed on behalf of Videssence , (ii) shall be and contain
accurate, true and correct information and data, and (iii) to the extent
expressly set forth herein, shall be accompanied by a copy of each
document referenced to therein. Terms used and defined in this Agreement
shall have the same definition when used in the Disclosure Memorandum.
Section 6.5 Review.
6.5.1 Review of Videssence. Prior to the Closing Date,
Netter may directly and through its representatives make such
investigation of the assets and business of Videssence (including, without
limitation, investigation of its title to property and the condition of
its property and equipment, and the confirmation of its cash, inventories,
accounts receivable and liabilities) as Netter deems necessary or
advisable. Netter and its representatives shall have, at reasonable times
after the date of execution hereof, full access to the premises and to all
the books and records of Videssence, and Videssence shall cause to be
furnished to Netter such financial and operating data and other
information with respect to the business and properties of Videssence as
Netter shall from time to time reasonably request. As soon as practicable
and in any event by May 22, 1996, Netter shall give Videssence notice if,
on the basis of any information contained in the final Disclosure
Memorandum or any schedules or exhibits thereto, or of any information
obtained during the course of its investigation pursuant to this Section
6.5.1, it has decided that it wishes to terminate this Agreement. Such
notice shall specify the information contained in the final Disclosure
Memorandum, the schedules or exhibits thereto, or obtained during such
investigation which is the basis for such decision. Videssence shall have
until May 29, 1996 to review with Netter such information, and if Netter
does not withdraw such notice by May 31, 1996, then all further
obligations of Netter and of Videssence under this Agreement shall
<PAGE>
terminate without further liability of Netter to Videssence or of
Videssence to Netter, subject, however, to the obligations of Videssence
under Section 2.1. If Netter does not advise Videssence by May 29, 1996
that it wishes to terminate this Agreement, Netter shall be deemed to have
been satisfied with the information relating to Videssence contained in
the final Disclosure Memorandum, such schedules or exhibits and obtained
during the course of its investigation. Thereupon, Netter and Videssence
shall proceed with the Merger as soon as possible thereafter. Except
where this Agreement requires an update of information in the Disclosure
Memorandum or a schedule, the information in the final Disclosure
Memorandum, which shall be delivered on or before May 15, 1996 and dated
the date of its delivery, shall be deemed complete and full disclosure and
shall constitute the only exceptions, if any, to the representations and
warranties of Videssence and the Shareholders made to Netter under and
pursuant to this Agreement.
6.5.2 Review of Netter. Prior to the Closing Date,
Videssence may directly and through its representatives make such
reasonable investigation of the assets and business of Netter as
Videssence deems necessary. Videssence and its representatives shall
have, at all reasonable times after the date hereof, reasonable access to
the premises and to all the books and records of Netter.
Section 6.6 Best Efforts. Subject to the terms and conditions herein
provided, each of Videssence and Netter shall cooperate and use their
respective best efforts to take, or cause to be taken, all appropriate
action, and to make, or cause to be made, all filings necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including,
without limitation, their respective best efforts to obtain, prior to the
Closing Date, all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to
contracts with Videssence as are necessary for consummation of the
transactions contemplated by this Agreement and to fulfill the conditions
to the Merger and to rectify any event or circumstance which could impede
consummation of the transactions contemplated by this Agreement; provided,
however, that no loan agreement or contract shall be required to be
amended or modified or otherwise require the payment of money or to
increase the amount payable thereunder or otherwise to be more burdensome to
Videssence in order to obtain any such consent, approval or authorization
without first obtaining the written approval of Netter.
Section 6.7 Fulfillment of Agreement. Each party hereto shall deliver
or cause to be delivered on the Closing Date, and thereafter at such other
times and places as shall be reasonably agreed upon, such additional
instruments as any other party hereto may reasonably request for the
purpose of consummating and carrying out this Agreement and its terms,
conditions and requirements.
<PAGE>
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF NETTER
Conditions to Obligations of Netter. The obligations of Netter and
Merger Corp. to consummate the Merger and other transactions described
herein on the Closing Date are subject to satisfaction of the following
conditions.
Section 7.1 Opinion of Videssence's Counsel: Certificate of Videssence
. Videssence shall have furnished Netter with a favorable opinion, dated
the Closing Date, of their counsel and Certificates of Videssence in form
and substance reasonably satisfactory to Netter and its counsel.
Section 7.2 Good Standing and Tax Certificates. Videssence shall have
delivered to Netter (a) copies of Videssence's articles of incorporation,
including all amendments thereto, certified by the Secretary of State or
other appropriate official of the State of California, (b) certificates
from the Secretary of State or other appropriate official of the State of
California to the effect that Videssence is in good standing or existing
in such jurisdiction and listing all charter documents of Videssence on
file, (c) a certificate from the Secretary of State or other appropriate
official in each state in which Videssence is qualified to do business to
the effect that Videssence is in good standing in such state and (d)
certificates as to the tax status of Videssence in the State of California
and each state in which Videssence is qualified to do business.
Section 7.3 No Material Adverse Change. Since the Balance Sheet Date
there shall have been no material adverse change in the assets or
liabilities, the business or financial condition, the results of
operations, or prospects of Videssence, whether as a result of any
legislative or regulatory change, revocation of any license or rights to
do business, fire, explosion, accident, casualty, labor trouble, flood,
drought, riot, storm, condemnation or act of God or other public force or
otherwise, other than any such change caused by the effect of transactions
contemplated by this Agreement, and Videssence shall have delivered to
Netter a certificate, dated the Closing Date, to such effect.
Section 7.4 Truth of Representations and Warranties. The representations
and warranties of Videssence contained in this Agreement or in any Exhibit
or Schedule delivered pursuant thereto shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing
Date (as though made on and as of the Closing Date) except (i) to the
extent such representations and warranties are by their express provisions
made as of a specified date and (ii) for the effect of transactions
contemplated by this Agreement, and Videssence shall have delivered to
Netter on the Closing Date a certificate, dated the Closing Date, to such
effect.
Section 7.5 Performance of Agreements. Each and all of the agreements
of Videssence to be performed on or before the Closing Date pursuant to
the terms hereof shall have been duly performed in all material respects,
and Videssence shall have delivered to Netter a certificate, dated the
Closing Date, to such effect.
<PAGE>
Section 7.6 No Litigation Threatened. No action or proceeding shall have
been instituted or, to the best knowledge of Videssence, shall have been
threatened before a court or other government body or by any public
authority to restrain or prohibit any of the transactions contemplated
hereby. Videssence shall have delivered to Netter a certificate, dated
the Closing Date, to such effect.
Section 7.7 Intellectual Property Matters. The Lighttech lawsuit shall
have been settled to the reasonable satisfaction of Netter, which shall
include dismissal of such lawsuit with prejudice. The two patents
registered in Mr. Costa's name (Patent Numbers 5,012,396 and 5,235,497)
shall have been assigned to Videssence, in a form reasonably satisfactory
to Netter, and such assignments shall have been filed with the U.S. Patent
Office.
Section 7.8 Creditor Assurances and Representations. Netter shall have
received reasonably satisfactory estoppel letters from each financial
institution and other creditor to whom Videssence is, in the aggregate,
indebted in an amount in excess of $50,000.
Section 7.9 Governmental Approvals. Governmental and other consents and
approvals, if any, necessary to permit the consummation of the
transactions contemplated by this Agreement shall have been received by
Netter.
Section 7.10 Intra-Company Debt. All indebtedness to Videssence, other
than travel and similar advances in the ordinary course of business, from
any of the Shareholders, or any directors, officers and employees of
Videssence shall have been repaid to the Videssence in full.
Section 7.11 NonCompetition Agreement. Paul Costa, Steve Michelson,
Delwin Francis and Sam Cercone shall have entered into noncompetition
agreements with the Surviving Corporation in such forms as shall be
mutually agreeable to the parties thereto ("NonCompetition Agreements").
Section 7.12 Employment Agreements. Paul Costa, Steve Michelson, Delwin
Francis and Sam Cercone shall have entered into employment agreements with
the Surviving Corporation in such forms as shall be mutually agreeable to
the parties thereto ("Employment Agreements").
Section 7.13 Registration Rights Agreements. The Videssence Shareholders
shall have entered into registration rights agreements with Netter in such
form as shall be mutually agreeable to the parties thereto ("Registration
Rights Agreements").
Section 7.14 Shareholder's Representation and Transmittal Letters. Each
of the Shareholders shall have entered into and delivered the
Shareholder's Representation and Transmittal Letters to Netter regarding
ownership of the Videssence Shares, investment representations and
securities and tax law matters in such form as shall be mutually agreeable
to the parties thereto.
<PAGE>
Section 7.15 Management Protocol. The Shareholders shall have entered
into the Management Protocol with Netter, referenced in Section 3.7.7, in
such form as shall be mutually agreeable to the parties thereto.
Section 7.16 Execution of Escrow Agreement. Videssence and the Videssence
Shareholders shall have executed the Escrow Agreement, referenced in
Section 3.6, pursuant to which the Videssence Shareholders pledge for the
benefit of Netter, Netter Shares to be issued to them pursuant to the
Merger in the amount specified in Section 3.6 in order to partially secure
their obligations arising under this Agreement.
Section 7.17 Receipt of Financing. Netter shall have obtained, on terms
and conditions acceptable to it, proceeds from either debt or equity
financing (or a combination thereof), after the date hereof, in an amount
at least equal to $2,000,000. Netter shall not be deemed to have obtained
financing, for purposes of the foregoing provision, by virtue of the
availability to it of amounts drawn or available to be drawn by it under
its existing bank credit line.
Section 7.18 Netter Shareholder and Board of Director Approval. The
members of the Board of Directors of Netter and the Netter Shareholders
shall have approved the Merger. Holders of no more than 2% of the
outstanding shares of Netter Common Stock shall have exercised dissenter's
rights as provided under Chapter 13 of the CCC.
Section 7.19 Proceedings. All proceedings to be taken in connection with
the transactions contemplated by this Agreement, and all documents
incident thereto, shall be reasonably satisfactory in form and substance
to Netter and its counsel.
Section 7.20 Videssence Shareholder Approval. Each of the Videssence
Shareholders shall have approved the Merger and the Agreement in
accordance with Chapter 12 of the CCC.
Section 7.21 Videssence Systems Dissolution. Videssence shall have
dissolved, or merged into Videssence, Videssence Systems, Inc.
ARTICLE VIII
CONDITIONS TO VIDESSENCE'S OBLIGATIONS
Conditions to Videssence's Obligations. The obligations of
Videssence to consummate the Merger and other transactions described
herein on the Closing Date are subject to satisfaction of the following
conditions.
Section 8.1 Opinion of Counsel for Netter. Netter shall have furnished
the Shareholders with a favorable opinion, dated the Closing Date, of
Luce, Forward, Hamilton & Scripps in form and substance reasonably
satisfactory to Videssence and its counsel.
<PAGE>
Section 8.2 Good Standing Certificate. Netter shall have delivered to
the Shareholders a certificate from the Secretary of the State to the
effect that Merger Corp. is in good standing in the State of California.
Section 8.3 No Material Adverse Change. Since the Balance Sheet Date
there shall have been no material adverse change in the assets or
liabilities, the business or financial condition, the results of
operations, or prospects of Netter, whether as a result of any legislative
or regulatory change, revocation of any license or rights to do business,
fire, explosion, accident, casualty, labor trouble, flood, drought, riot,
storm, condemnation or act of God or other public force or otherwise,
other than any such change caused by the effect of transactions
contemplated by this Agreement, and Netter shall have delivered to
Videssence a certificate, dated the Closing Date, to such effect.
Section 8.4 Tax Certificate of Merger Corp. Prior to or simultaneous
with the Closing, Merger Corp. shall file or cause to be filed a
certificate of satisfaction of the Franchise Tax Board evidencing the fact
that all taxes imposed by said Franchise Tax Board have been paid or
secured.
Section 8.5 Truth of Representations and Warranties. The
representations and warranties of Netter and Merger Corp. contained in
this Agreement shall be true and correct in all material respects on and
as of the Closing Date with the same effect as though such representations
and warranties had been made on and as of such date; and Netter shall have
delivered to Videssence on the Closing Date a certificate, dated the
Closing Date, to such effect.
Section 8.6 Employment Agreements. Netter shall have entered into the
Employment Agreements.
Section 8.7 NonCompetition Agreements. Netter shall have entered into
the NonCompetition Agreements.
Section 8.8 Registration Rights Agreements. Netter shall have entered
into the Registration Rights Agreements.
Section 8.9 Management Protocol. Netter shall have entered into the
Management Protocol with the Shareholders, referenced in Section 3.7.7, in
such form as shall be mutually agreeable to the parties.
Section 8.10 Performance of Agreements. Each and all of the agreements
of Netter and Merger Corp. to be performed on or before the Closing Date
pursuant to the terms hereof shall have been duly performed in all
material respects, and Netter shall have delivered to the Shareholders a
certificate, dated the Closing Date, to such effect.
Section 8.11 Governmental Approvals. All governmental and other consents
and approvals, if any, necessary to permit the consummation of the
transactions contemplated by this Agreement shall have been received by
Netter.
<PAGE>
Section 8.12 Proceedings. All proceedings to be taken in connection with
the transactions contemplated by this Agreement and all documents incident
thereto shall be reasonably satisfactory in form and substance to the
Shareholders and their counsel.
Section 8.13 Videssence Shareholder Approval. Each of the Videssence
Shareholders shall have approved the Merger and the Agreement in
accordance with Chapter 12 of the CCC.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNITY; ESCROW
Section 9.1 Videssence Bound. This Article is intended to provide
recourse by Netter following consummation of the Merger in the event of
any breach by Videssence of the representations, warranties, covenants and
agreements of Videssence contained in this Agreement.
Section 9.2 Survival of Representations, Warranties and Indemnities.
The representations, warranties and indemnities included or provided herein,
or in the Disclosure Memorandum or any exhibit or certificate or other
document delivered pursuant hereto, shall survive the Closing Date and
until the termination of the Escrow established under the Escrow Agreement
(the "Escrow").
Section 9.3 Scope of Indemnification Liabilities and Obligations. The
liabilities and obligations of Videssence and the Principal Shareholders
hereunder shall be limited to the Netter Shares received in the Merger and
retained in the Escrow and shall be limited as to claims asserted pursuant
to a Notice of Claim made by an Indemnitee on or prior to the date on
which the Escrow terminates as provided in the Escrow Agreement provided,
however, that the Indemnitee shall not be indemnified and held harmless
hereunder from Loss (defined below) unless and until Losses (defined
below) exceed in the aggregate $100,000, in which event the Indemnitee
shall be indemnified and held harmless hereunder in full for the entire
aggregate amount of all Losses.
Section 9.4 Representations, Warranties, Covenants and Agreements.
Videssence hereby agrees that all representations, warranties, covenants
and agreements made by or on behalf of Videssence in this Agreement or in
the Disclosure Memorandum or any exhibit, document, instrument or
certificate delivered pursuant hereto shall be deemed to have been made to
Netter and Merger Corp. by Videssence, (a) at and as of the date of the
Agreement and (b) at and as of the Closing Date. Videssence hereby
further agrees that, notwithstanding any right of Netter or Merger Corp.
under the Agreement to investigate fully the affairs of Videssence, and
notwithstanding any knowledge of facts determined or determinable by
Netter or Merger Corp. pursuant to such investigation, Netter has the
right to rely fully upon the representations, warranties, covenants and
agreements of Videssence contained in this Agreement and upon the accuracy
of the Disclosure Memorandum and any document, instrument, exhibit or
certificate given or delivered to Netter or Merger Corp. pursuant to this
Agreement.
<PAGE>
Section 9.5 Indemnification.
9.5.1 Subject to and to the extent provided in Section 9.3
hereof, the Principal Shareholders shall indemnify defend and hold
harmless Netter, Surviving Corporation, their directors and officers and
each person, if any, who controls Netter within the meaning of the
Securities Act of 1933, as amended, (collectively, the "Indemnitee")
against, and to hold the Indemnitee harmless from, any and all damages,
losses, claims, liabilities, charges, suits, penalties, costs and
expenses, including court costs, attorneys' fees and expenses and other
costs of collection (collectively "Loss" or "Losses"), which the
Indemnitee may sustain, or to which the indemnitee may be subjected,
arising out of or attributable to any misrepresentation or breach of
warranty by Videssence in, or any breach or default by Videssence of or
under any of the covenants, agreements or other provisions of, the
Agreement including the Disclosure Memorandum or any documents,
instruments, exhibits or certificates delivered by or on behalf of
Videssence pursuant to the Agreement.
Section 9.6 Notice and Resolution of Claims -- Opportunity to Defend.
9.6.1 If at any time an Indemnitee shall claim
indemnification from the Principal Shareholders for any Loss or, in the
reasonable judgment of Indemnitee, for what, in the future, may result in
Loss due to the filing, at or before the time of such claim, of an action,
claim or suit with an arbitrator, mediator, court or other governmental
entity ("Anticipated Loss") ,then Indemnitee shall send written notice of
the same (a "Notice of Claim") to the Principal Shareholders and the
Escrow Agent. A Notice of Claim shall specify the basis for such claim
and shall be supported by relevant information and documentation with
respect thereto and the total amount claimed.
9.6.2 If the Principal Shareholders shall object to such
action, proceeding or claim, they shall give written notice of such
objection (a "Notice of Objection") to the Indemnitee and to the Escrow
Agent, within 60 days after receipt by the Principal Shareholders of the
Notice of Claim sent to the Principal Shareholders. If the Principal
Shareholders do not give a Notice of Objection within 60 days of such
receipt, or shall have agreed to pay such claim in whole or in part within
such 60-day period, the Principal Shareholders shall thereupon be liable
for the payment of such claim. Within ten days of any such agreement to
pay, a notice thereof which shall be executed by the Indemnitee and
acknowledged by the Principal Shareholders (a "Notice of Resolution")
shall be delivered to the Escrow Agent, instructing the Escrow Agent to
satisfy the claim as provided in the Escrow Agreement.
9.6.3 In the event that the Principal Shareholders shall have
timely given a Notice of Objection in whole or in part to any Notice of
Claim, during the 60-day period following the date that the Principal
Shareholders mailed the Notice of Objection to the Indemnitee, the
Principal Shareholders and the Indemnitee shall privately attempt to
resolve or compromise the claim. If the parties resolve or compromise the
claim within such 60-day period, a Notice of Resolution shall be delivered
to the Escrow Agent, instructing the Escrow Agent to satisfy the claim as
provided in the Escrow Agreement.
<PAGE>
9.6.4 If an indemnification claim has been made for an
Anticipated Loss, the parties may agree to postpone resolution until the
time when the incurrence of such Anticipated Loss shall have occurred or
passed. During that time, Escrow Shares necessary to pay such claim shall
remain in Escrow.
9.6.5 If the Principal Shareholders and the Indemnitee shall
have failed to resolve or compromise or agree to postpone resolution of
the claim within the period of 60 days from the date the Principal
Shareholders shall have mailed the Notice of Objection, then the claim
shall be settled by arbitration in California, as determined by the three
arbitrators referred to in Section 9.6.5.1 below, in accordance with the
rules of the American Arbitration Association and the procedures set forth
below.
9.6.5.1 Each of (i) the Indemnitee and (ii) the
Principal Shareholders shall appoint one arbitrator, and the two
arbitrators so appointed shall then together appoint a third arbitrator
("neutral arbitrator") from a list of persons supplied by the American
Arbitration Association in Los Angeles. If one party shall fail to
appoint the arbitrator to be appointed by it within 14 days of the end of
the 60-day period provided for in Section 9.6.3 above, the arbitrator
appointed by the other party shall select from a list of persons supplied
by the American Arbitration Association a person who shall serve as the
single neutral arbitrator for purposes of the arbitration. If each party
shall have appointed one arbitrator; but such designees cannot agree on
the person to act as the neutral arbitrator within a period of 14 days
after the appointment of the second arbitrator, then either party may
apply to the American Arbitration Association in Los Angeles which shall
appoint a neutral arbitrator. As used hereafter the term "arbitrator"
shall include the singular and the plural as applicable. The arbitrator
shall conduct the arbitration with all reasonable dispatch in accordance
with the rules of the American Arbitration Association, provided, however,
that the parties to such arbitration shall take such action and execute
such instruments as shall be necessary to cause the California Rules of
Civil Procedure pertaining to pre-trial discovery to be applicable in
respect of such proceeding. The arbitrator shall render a written award
(the "Award") which shall be delivered to the Indemnitee, the Principal
Shareholders and to the Escrow Agent. An Award hereunder may be used as
a basis for the entry of judgment in any jurisdiction. In the event the
parties have submitted an Anticipated Loss indemnification claim to
arbitration under this Section 9.6.5.1, then the arbitrator may, in its
sole discretion, postpone resolution of the claim until the time which it
has determined, in its sole discretion, to be the time when such
Anticipated Loss shall have occurred or passed has been reached. During
that time, Escrow Shares necessary to pay such claim shall remain in
Escrow
9.6.5.2 Prior to making the Award, the arbitrator
shall direct the Indemnitee and the Principal Shareholders to submit
statements describing any element of Loss or Anticipated Loss as to which
indemnification is claimed hereunder that is attributable to attorneys'
fees, disbursements, and any similar costs incident to such Loss or
Anticipated Loss, supported by affidavits showing that such costs actually
<PAGE>
have been or are likely to be incurred, and all such attorneys' fees,
disbursements and other costs shall be apportioned as determined by the
arbitrator. All fees of the arbitrator and administrative expenses of the
American Arbitration Association shall be treated as costs for purposes of
this Article. As a part of each Award made pursuant to this Agreement,
the arbitrator shall allow interest thereon (other than on the portion of
the Award representing attorneys' fees, disbursements and costs) from the
date of the Loss or the date the Anticipated Loss becomes a Loss to the
date of payment at the rate of 10% per annum.
9.6.5.3 The Award shall be a conclusive determination
of the matter and shall be binding upon the Indemnitee and the Principal
Shareholders, and shall not be contested by any of them. In the event
that the arbitrator shall determine that the Indemnitee shall be entitled
to any indemnification by reason of its claim for attorneys' fees or
interest as above provided (a "Fee Award"), an executed copy of the Fee
Award setting forth the amount of the indemnification shall be delivered
to the Principal Shareholders and to the Escrow Agent. When the time for
filing an application for correction of the Fee Award or filing a petition
to vacate or correct the Fee Award has passed (or immediately if such
rights are waived by the parties before or after the Fee Award) then the
Principal Shareholders shall be liable for the payment of such claim. The
Fee Award shall be satisfied in the same manner as an undisputed claim in
such amount (including the arbitrator's fee) would be satisfied under the
Escrow Agreement, and the Escrow Agent shall be directed to mail to the
arbitrator its check in payment of the arbitrator's fee to the extent of
funds available, Netter shall pay any balance of such fee up to the value
of the indemnity Shares (defined in the Escrow Agreement) remaining in
Escrow and such payment by Netter shall be deemed a Loss, which shall be
due and payable as an Award in favor of Indemnitee which shall be
satisfied and paid as herein provided.
9.6.5.4 If a matter claimed to be subject to
indemnification involves a third-party claim which has not yet been
determined, the arbitrator may in his discretion make a separate
determination solely as to whether the third-party claim is one for which
indemnification may be had or may defer a determination as to whether
indemnification may be had pending the further development of information
as to the nature of the third-party claim. If the arbitrator determines
that the third-party claim is not subject to indemnification, he shall set
forth the basis of his decision in detail, which decision shall be deemed
to be an "Award" hereunder.
9.6.5.5 Promptly after the assertion by any third
party of any claim against the Indemnitee that, in the judgment of the
Indemnitee, may result in the incurrence by the Indemnitee of Loss for
which the Indemnitee would be entitled to indemnification, the Indemnitee
shall deliver to the Principal Shareholders and the Escrow Agent a Notice
of Anticipated Loss describing in reasonable detail such claim and the
Principal Shareholders may, at their option, assume the defense of the
Indemnitee against such claim (including the employment of counsel, who
shall be counsel satisfactory to the Indemnitee,) and the payment of
expenses. The Indemnitee shall have the right to employ separate counsel
in any such action or claim and to participate in the defense or contest
<PAGE>
thereof, but the fees and expenses of such counsel shall not be at the
expense of the Principal Shareholders unless (i) the Principal
Shareholders shall have failed to assume the defense of such claim, within
a reasonable time after having been notified by the Indemnitee of the
existence of such claim as provided in the preceding sentence, (ii) the
employment of such counsel has been specifically authorized by the
Principal Shareholders or (iii) the named parties to any such action
(including any impleaded parties) include both the Indemnitee and one or
more of the Principal Shareholders and the Indemnitee shall have been
advised in writing by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Principal Shareholders (it being understood, however,
that the Principal Shareholders shall not, in connection with any one such
action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one
separate firm of attorneys for the Indemnitee). The Principal
Shareholders shall not be liable to indemnify the Indemnitee for any
settlement of any such action or claim effected without the consent of the
Principal Shareholders, but if settled with the written consent of the
Principal Shareholders, or if there be a final judgment for the plaintiff
in any such action, the Principal Shareholders shall indemnify and hold
harmless the Indemnitee from and against any Loss by reason of such
settlement or judgment and Videssence and its Shareholders shall thereupon
be liable for the payment of such Loss, and, the Principal Shareholders
and the Indemnitee shall execute a Notice of Resolution with regard
thereto and shall deliver it as provided in Section 9.7.3 above. In the
event an Anticipated Loss indemnification claim is not resolved by the
Escrow Release or December 31, 1997 (as the case may be), the Escrow Agent
shall maintain sufficient indemnity Shares in Escrow to cover the amount
of the Anticipated Loss just as it would for any other outstanding claim.
ARTICLE X
TERMINATION
Section 10.1 Termination Events. This Agreement may, by notice given
prior to or at the Closing, be terminated:
10.1.1 by either Netter or Videssence if a material
Breach of any provision of this Agreement has been committed by the other
party and such Breach has not been waived or cured within 5 days after the
breaching party has been notified thereof:
10.1.2 by Netter if any of the conditions in Article VII
have not been satisfied as of the July 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 July 31, 1996; or
10.1.3 by Videssence, if any of the conditions in Article
VIII not been satisfied as of June 30, 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 July 31, 1996;
<PAGE>
10.1.4 by mutual consent of Netter and Videssence; or
10.1.5 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 July 31, 1996, or such later date as the parties
may agree upon.
Section 10.2 Effect of Termination. Each party's right of termination
under Section 10.1 is in addition to any other rights it may have under
this Agreement or otherwise, and the exercise of such right of
termination will not be an election of remedies. If this Agreement is
terminated pursuant to Section 10.1, all further obligations of the
parties under this Agreement will terminate, except that the obligations
in Sections 2.1, 10.3, 11.1, 11.2, 11.3, 11.7 and 11.8 will survive;
provided, however, that if this Agreement is terminated by a party because
of a breach of the Agreement by the other party or because one or more of
the conditions to the terminating party's obligations under this Agreement
is not satisfied as a result of the other party's failure to comply with
its obligations under this Agreement, the terminating party's right to
pursue all legal remedies will survive such termination unimpaired.
Section 10.3 Return of Documents in Event of Termination. In the
event of the termination of this Agreement for any reason, Netter and
Videssence will deliver to the other party all documents, work papers and
other material obtained from it relating to the transactions contemplated
hereby, whether so obtained before or after execution hereof, and will
take all practicable steps to have any information so obtained kept
confidential. Unless and until the transactions contemplated hereby are
consummated, the parties shall both hold confidential all information and
copies of documents and records obtained in the course of such
investigation or heretofore in connection with the transactions
contemplated hereby and shall not disclose them to any person, except as
may be required by applicable law or stock exchange rules and to its
professional advisors.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Professional Expenses. Videssence and Netter (on behalf of
it and Merger Corp.) shall each pay all of their own professional expenses
relating to negotiating, drafting and closing the transactions
contemplated by this Agreement, including, without limitation, the fees
and expenses of their respective counsel, financial advisers and
accountants; provided, however, that only such expenses incurred by
Videssence in excess of $30,000 shall be included for purposes of
calculating 1996 Videssence Operating Profit and from any calculations
relating to the Earn-Out.
Section 11.2 Governing Law. The interpretation and construction of this
Agreement and all matters relating hereto shall be governed by the laws of
the State of California.
<PAGE>
Section 11.3 Arbitration. For any and all controversies or claims (other
than those to be expressly resolved pursuant to the Article IX or Article
X) arising out of, resulting from or in any way related to this Agreement
or any transactions provided for or contemplated herein, or the breach
thereof, other than a claim for injunctive relief, or a claim for specific
performance prior to the Closing Date, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("the AAA") in effect at the time demand for
arbitration is made by any party hereto. Notwithstanding any rule of the
AAA to the contrary, any dispute submitted to arbitration pursuant to the
terms of this Section 11.3 shall be submitted to a single arbitrator
mutually appointed by the parties hereto. In the event that the parties
hereto cannot agree on a single arbitrator, then the dispute shall be
submitted to a panel of three arbitrators selected in accordance with the
rules of the AAA. Arbitration shall occur in Los Angeles, California, or
such other location as is unanimously agreed by the parties hereto. The
award made by all or a majority of the arbitrators shall be final and
binding, and judgment with respect thereto may be entered in any court of
law having competent jurisdiction. The prevailing party in any such
arbitration shall be entitled to recover from, and have paid by, the other
party thereto all fees and disbursements of such arbitration, as well as
its reasonable attorneys' fees, costs and expenses, including both pre and
post award interest.
Section 11.4 "Person" Defined. "Person" shall mean and include an
individual, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or other department or agency
thereof.
Section 11.5 Gender. Unless the context otherwise requires a different
meaning, words of a masculine gender shall be deemed and construed to
include correlative words of the feminine and neuter genders, words
importing the singular number shall include the plural number, and vice
versa, and the terms "hereof," "hereby," "hereto," "hereunder," "herein,"
and similar terms mean this Agreement.
Section 11.6 Captions. The Article and Section captions used herein are
for reference purposes only, and shall not in any way affect the meaning
or interpretation of this Agreement.
Section 11.7 Publicity. Except as otherwise required by law, or as may
be mutually consented and agreed to, none of the parties hereto shall
issue any press release or make any other public statement, in each case
relating to or in connection with or arising out of this Agreement or the
matters contained herein, without obtaining the prior approval of both
Netter and Videssence to the contents and the manner of presentation and
publication thereof, provided, however, Netter shall have the right to
make a public announcement of the execution of this Agreement and a
disclosure of the basic terms and conditions of this Agreement if advised
to do so by its legal counsel in connection with the reporting and
disclosure obligations of Netter under the federal securities laws and/or
the NASDAQ SmallCap System.
<PAGE>
Section 11.8 Notices. Any notice or other communications required or
permitted hereunder shall be sufficiently given if delivered in person or
sent by express mail or by registered or certified mail, postage prepaid,
or by facsimile transmission, receipt confirmed, addressed as follows:
(i) If to Netter, Merger Corp. or,
following the Merger, Videssence:
c/o Netter Digital Entertainment, Inc.
5200 Lankershim Boulevard, Suite 280
North Hollywood, California 91601
Facsimile: (818) 753-7655
Attention: Douglas Netter, President
With a copy to:
Robert G. Copeland, Esquire
Luce, Forward, Hamilton & Scripps
600 West Broadway, Suite 2600
San Diego, California 92101
(619) 236-1414
Facsimile: (619) 232-8311
(ii) If to Videssence or, after Merger, the Representative:
Videssence, Inc.
189 Airport Boulevard
Burlingame, California 94103
Facsimile: (415) 579-7579
Attention: Paul Costa/Steve Michelson
With a copy to:
William H. Hinman, Esquire
Shearman & Sterling
555 California Street
San Francisco, California 94104
Facsimile: (415) 616-1199
or such other address as shall be furnished in writing by any such party,
and such notice or communication shall be deemed to have been given as of
the date so delivered, sent or mailed.
Section 11.9 Parties in Interest. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto, other than by
operation of law. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
Section 11.10 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
<PAGE>
Section 11.11 Entire Agreement. This Agreement, including the other
documents referred to herein which form a part hereof, contains the entire
understanding of the parties hereto with respect to the subject matter
contained herein and therein. This Agreement supersedes all prior
agreements and understandings among the parties with respect to such
subject matter.
Section 11.12 Amendments. This Agreement may not be changed orally, but
only by an agreement in writing signed by Netter and the Shareholders.
Section 11.13 Severability. In case any provision in this Agreement shall
be held invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.
Section 11.14 Third Party Beneficiaries. Each party hereto intends that
this Agreement shall not benefit or create any right or cause of action in
or on behalf of any person other than the parties hereto; provided,
however, that Sections 3.6 and 3.8, Section 3.7 and Section 3.11 are
intended for the benefit of the Videssence Shareholders, the Principal
Shareholders and the Surviving Corporation Indemnified Parties,
respectively.
Section 11.15 Rules of Construction. The normal rules of
construction which require the terms of an agreement to be construed most
strictly against the drafter of such agreement are hereby waived since each
party has been represented by counsel in the drafting and negotiation of
this Agreement.
<PAGE>
IN WITNESS WHEREOF, each of the parties herein below stated has
executed this Agreement as of the date and year first above written.
NETTER:
NETTER DIGITAL ENTERTAINMENT,
INC., a Delaware corporation
/s/ Douglas Netter
By__________________________
Douglas Netter, President
MERGER CORP.:
NETTER ACQUISITION, INC.
/s/ Douglas Netter
By:_________________________
Douglas Netter, President
VIDESSENCE:
VIDESSENCE, INC., a California
corporation
/s/ Paul Costa
By:__________________________
Paul D. Costa, President
<PAGE>
<PAGE>
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION
This First Amendment to Agreement and Plan of Merger
and Reorganization ("Amendment") is made effective as of July 3,
1996, between NETTER DIGITAL ENTERTAINMENT, INC., a
Delaware corporation ("NDEI"), NETTER ACQUISITION
CORP., 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 wish to 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 as modified in this
Amendment.
C. 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.
NOW, THEREFORE, the parties hereby agree as follows:
1. Modification to Merger Agreement: The Merger
Agreement is hereby modified as follows:
1.1. Section 3.6.2 to the Merger Agreement 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 March 31,
1997, 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 March 31, 1997, then Escrow Agent shall
deliver from the Operating Profit Escrow Shares to the Videssence
<PAGE>
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 March 31, 1997, 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 3.7 to the Merger Agreement shall
be amended and restated as follows:
Calculation of Earn-Out. Paul Costa,
Steve Michelson, Delwin Francis, and Sam Cercone (the "Principal
Shareholders") shall be entitled to earn additional Netter Shares
based on Surviving Corporation's EBIT (as defined below) from the
period commencing July 1, 1996 and ending June 30, 2001 (the
"Earn-Out Period"). During the Earn-Out Period, upon Surviving
Corporation achieving EBIT of at least $1.25 Million on the next
succeeding Earn-Out Payment Date (as defined below), Netter shall
deliver to the Principal Shareholders, for every $45,000 in EBIT
that exceeds $1.25 Million, such number of Netter Shares
calculated as the greater of (i) 5,000 Netter Shares or (ii) the
product of (a) 5,000 Netter Shares and (b) the quotient of (x) $9.00
and (y) the average of the closing bid and closing ask price on June
30 of the year for which EBIT is being calculated (the "Earn-Out
Shares"). Thereafter, during the Earn-Out Period on each next
succeeding Earn-Out Payment Date, Netter shall deliver to the
Principal Shareholders, for every additional $45,000 in EBIT, such
number of Netter Shares as determined by the calculation in the
preceding sentence.
1.3. Section 3.7.6 to the Merger Agreement shall
be modified to add the following sentence to the end of Section
3.7.6:
In the event the cumulative EBIT for the
period commencing July 1, 1996 and ending June 30, 1999 does
not equal or exceed $1.25 Million, the Earn-Out shall be
immediately terminated and this Section 3.7 shall be of no further
force and effect.
1.4. New subsection 6.8 shall be added to the
Merger Agreement to read as follows:
Each Principal Shareholder shall vote to
approve the Merger and the Agreement in accordance with Chapter
12 of the CCC. The Principal Shareholders shall make their best
efforts to cause the other Videssence Shareholders to vote to
approve the Merger and the Agreement in accordance with Chapter
12 of the CCC.<PAGE>
1.5. Section 10.1.2 to the Merger Agreement
shall be amended and restated as follows:
by Netter if any of the conditions in Article
VII have not been satisfied as of the August 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 August 31, 1996; or
1.6. Section 10.1.3 to the Merger Agreement
shall be amended and restated as follows:
by Videssence, if any of the conditions in
Article VIII not been satisfied as of August 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 August 31, 1996;
1.7. Section 10.1.5 to the Merger Agreement
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 August 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 Merger
Agreement shall remain unmodified and in full force and effect. In
the event of a conflict between the 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.
<PAGE>
IN WITNESS WHEREOF, this Amendment is effective as
of the date first set forth above.
NETTER DIGITAL ENTERTAINMENT, INC.,
a Delaware corporation
/s/ Douglas Netter
By______________________________
Douglas Netter, President
VIDESSENCE, INC., a California corporation
/s/ Paul Costa
By________________________________
Paul Costa, President
NETTER ACQUISITION CORP., a California
corporation
/s/ Douglas Netter
By____________________________
Douglas Netter, President
By execution hereof, the undersigned, Principal Shareholders,
agree to undertake the actions required by Section 1.4 of this
Amendment.
/s/ Paul Costa /s/ Steve Michelson
_______________________ ________________________
Paul Costa Steve Michelson
/s/ Delwin Francis /s/ Sam Cercone
_______________________ ________________________
Delwin Francis Sam Cercone
</TABLE>
