Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC.
(exact name of registrant as specified in charter)
Delaware 95-3392054
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
5125 Lankershim Blvd.
North Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818/753-1990
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
As of November 10, 1997 the Registrant had 3,338,950 shares of its Common Stock,
$.01 par value, issued and outstanding.
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
FORM 10-Q
September 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited) NUMBER
Consolidated Balance Sheet as of September 30, 1997 3
Consolidated Statement of Operations for the
three-month periods ended September 30, 1997
and September 30, 1996 4
Consolidated Statements of Cash Flows for the
three-month periodsended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition an Results of Operations 7-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Page 2 of 11
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
1997
-------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,210,275
Accounts receivable, net of allowances of $20,566 1,474,520
Due from officer 155,897
Inventory 1,216,877
Production costs, net 305,685
Other 150,476
---------
TOTAL CURRENT ASSETS 4,513,730
EQUIPMENT, net 1,924,327
GOODWILL, net 2,016,668
DEPOSITS AND OTHER ASSETS 233,455
---------
$8,688,180
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and production fee advances $1,512,503
Accrued expenses 295,064
Deferred revenue 371,988
Short term notes payable 573,756
Current portion of long-term debt 140,688
Current portion of capital lease obligations 221,367
---------
TOTAL CURRENT LIABILITIES 3,115,366
LONG-TERM DEBT 11,251
CAPITAL LEASE OBLIGATIONS 486,165
MINORITY INTEREST 500
--------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 2,000,000 shares
authorized; 49,502 shares issued and outstanding 283,150
Common stock, $.01 par value, 6,000,000 shares
authorized; 3,338,950 shares issued and outstanding 33,390
Additional paid-in capital 4,726,125
Retained Earnings 32,233
---------
TOTAL STOCKHOLDERS EQUITY 5,074,898
---------
$8,688,180
==========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 12
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Sept.30,
---------------------------
1997 1996
------------- -------------
(Unaudited) (Unaudited)
REVENUES:
Production $5,844,337 $3,114,176
Sales 929,533 -
--------- ----------
TOTAL REVENUES 6,773,870 3,114,176
--------- ----------
EXPENSES:
Production 5,114,389 2,843,716
Cost of goods sold 458,737 -
General and administrative 1,106,792 512,031
Amortization of goodwill 26,078 -
--------- ----------
TOTAL EXPENSES 6,705,996 3,355,747
--------- ----------
OPERATING INCOME (LOSS) 67,874 (241,571)
--------- ----------
OTHER INCOME (EXPENSE):
Interest income 9,910 27,102
Interest (expense) (53,759) -
Other income/(expense) 8,026 -
--------- ----------
TOTAL OTHER INCOME (EXPENSE) (35,823) 27,102
--------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 32,051 (214,469)
PROVISION FOR INCOME TAXES 18,500 -
--------- ----------
NET INCOME (LOSS) $13,551 $(214,469)
========= ==========
Cumulative preferred stock dividend 10,611 -
Net Income to common shareholders $2,940 $(214,469)
========= ==========
Net Income per common share $0.00 $(0.08)
========= ==========
Weighted average common shares outstanding 3,327,742 2,795,000
========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 12
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30,
1997 1996
--------------------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,551 $(214,469)
----------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 108,583 40,307
Amortization 26,078 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (608,447) (442,148)
(Increase)/decrease in other current assets (32,363) 42,345
(Increase) in inventory (226,822) -
(Increase) in production costs (10,966) (7,645)
(Increase)/decrease in deposits and other assets 54,865 (26,892)
Increase/(decrease) in accounts payable (899,134) 125,952
(Decrease) in accrued expenses (24,114) (61,942)
(Decrease) in deferred revenue (158,863) -
----------- -----------
(1,771,183) (330,023)
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (1,757,632) (544,492)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54,345) (409,033)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (54,345) (409,033)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) in deferred acquisition costs - (71,639)
(Increase) in notes receivable - (100,000)
Proceeds from line of credit 537,259 -
Notes payable principal payments (42,990) -
Principal payments of capital lease obligations (46,539) -
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 447,730 (171,639)
----------- -----------
NET (DECREASE) IN CASH (1,364,247) (1,125,164)
Cash, beginning of period 2,574,522 2,181,223
----------- -----------
Cash, end of period $1,210,275 $1,056,059
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Cash paid for interest $ 53,759 $ -
Cash paid for income taxes $ 9,800 $ -
Noncash activity:
Stock issued for legal fee settlement $ 50,000 $ -
Stock dividend $ 10,611 $ -
Purchase of equipment through leases payable $ 531,531 $ -
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 12
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes for the year ended June 30, 1997 included in
the Form 10-KSB for the year then ended.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of September 30, 1997, and the results of operations and cash flows
for the three-month periods ended September 30, 1997, and 1996 have been
included.
The results of operations for the three-month periods ended September 30, 1997,
are not necessarily indicative of the results to be expected for the full fiscal
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-KSB as filed with the
Securities and Exchange Commission for the year ended June 30, 1997.
Earnings per share has been calculated based upon the weighted average number of
common shares outstanding. Stock options have been excluded as common stock
equivalents because they are either antidilutive, or their effect is not
material.
DUE FROM OFFICER/RECEIVABLE FROM RELATED PARTY
On November 20, 1995, the Company's Chief Executive Officer entered into a
promissory note with the Company in the amount of $194,876, bearing interest at
7.25% per annum. The unpaid principal balance and accrued interest is due on May
20, 1998.
VIDESSENCE, INC.
On January 10, 1997, the Company completed its acquisition of Videssence, Inc.
("Videssence") through the merger of Videssence into NDEI. The following
schedule combines the pro-forma results of operations of the Company and
Videssence, Inc. as if the acquisition had occurred on July 1, 1996 and
includes such adjustments which are directly attributable to the acquisitions.
It should not be considered indicative of the results that would have been
achieved had the acquisition not occurred or the results that would have been
obtained had the acquisition actually occurred on July 1, 1996.
Page 6 of 11
Three months ended
September 30, 1996
------------------
Revenue $ 4,412,198
Net loss ($ 243,194)
Net loss per share ($ 0.07)
Shares used in computation 3,317,221
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Historically, the Company's primary operations have been to develop and produce
media entertainment projects ("Productions" or "Projects") under agreements with
studios, networks and distributors such as Warner Bros., The Walt Disney
Company, ABC and NBC. While entertainment production remains the Company's
principal activity, (1) in January 1997 it entered the business of designing,
manufacturing and distributing lighting products in various entertainment
industries, through its acquisition of Videssnce, and (2) in the fourth quarter
of fiscal 1997, it began marketing its computer animation and visual effects
services to outside clients. Its business activities now are:
Entertainment Production. It has been the Company's practice to arrange for the
studio, network or distributor to fund 100% of the production costs of its
Projects, while retaining a back-end producer's profit participation. Employing
this strategy, the Company avoids the financial risk of funding such production
costs, but limits its ongoing revenue participation since the studio, network or
distributor retains a significant portion of the rights to the main and
ancillary markets for the Projects. Under these arrangements, revenues are
recognized when earned (typically upon receipt) and associated costs are
recognized when incurred. These revenues are primarily dependent on the number
of Projects being produced by the Company and the agreements relating to such
Projects. Accordingly, year to year comparisons of production revenues from
these sources are not necessarily indicative of future revenues.
To increase production margins, the Company has invested in in-house post
production and computer graphics/animation facilities. These leading-edge
production technologies are used intensively to create the visual effects for
"Babylon 5" and the Company's other production activities and have enabled the
Company to significantly reduce the need for contracting out to third party
vendors, thus allowing it to realize higher margins on its Projects.
Computer Animation and Visual Effects Production Services. As an outgrowth of
its traditional core business of developing and producing media Productions, the
Company has recently entered the business of providing digital media production
services to outside clients. From experience gained in producing its own
Projects, especially "Babylon 5," the Company has developed significant
expertise in computer graphics, digital post-production and various other
Page 7 of 11
digital imaging techniques which it can utilize to service outside clients. The
Company believes that an active market exists for projects requiring creative,
high quality, cost effective digital graphics and effects. These activities
have generated relatively minor revenues to date and there can be no assurance
that the Company will successfully market these new services.
Videssence Lighting Products. The Company's Videssence subsidiary manufactures
and distributes media lighting products which incorporate its patented SRGB(tm)
lighting technology. These products are used for the illumination of studios,
stages and other production environments in the sound stage, motion picture,
theater and theme park industries, as well as in the video conferencing, distant
learning, and pre-press digital photography markets. The Company's high-tech
fluorescent lights consume significantly less electricity than traditional
incandescent production lighting products while generating greatly reduced
amounts of heat. Thus, these lights are easier for talent to work under and can
generate significant electricity and air-conditioning related savings. The
Company markets its lighting products in the USA and internationally through a
network of distributors, dealers, and direct sales staff. To date, Videssence
sales have been primarily to television studio and video production operations.
The Company is currently in the process of introducing new products which have
been developed for the film production markets. Of course, there can be no
assurance that the Company will successfully enter these markets.
Results of Operations
Net Revenues. Net Revenues increased 118% to $6.77 million for the three months
ended September 30, 1997, as compared to $3.11 million in net revenues for the
three months ended September 30, 1996. This increase primarily resulted from
three factors. First, the Company realized approximately $400,000 of additional
revenue from its "Babylon 5" television series which represents increased
production activity for the quarter. This difference will even out over the
duration of fiscal 1998 as budgets for the varying seasons are relatively
similar. Second, during the three months ended September 30, 1997, the Company
continued production on two all new made for television movies for Turner
Network Television, which contributed approximately $2.15 million in revenues.
Third, Videssence contributed approximately $930,000 in revenues from sales of
its lighting products. However, the Videssence revenues were lower than
expected, which management attributes to lower international sales as compared
to the respective quarter in the prior year.
Gross Margin. The Company's gross profit for the three months ended September
30, 1997 was $1.2 million, or 17.7% of net revenues, compared with $270,460, or
8.7%, for the three months ended September 30, 1996. This increase resulted
from two factors: First, the gross profit from the Company's entertainment
production business increased to approximately $730,000 (approximately 12.5% of
revenues from entertainment production activities) for the period ended
September 30, 1997, up from approximately $270,460 (approximately 8.7%) from the
same period the previous year. This increase was the result of the Company
bringing in-house a significant amount of post-production and graphics/animation
work, greatly reducing its need for outside production services. Second, sales
of the Videssence lighting products generated gross profits of approximately
$471,000 (approximately 50.7% of revenues from sales of such products).
Page 8 of 11
General and Administrative Expenses. General and administrative expenses
increased 116% to $1,106,792, or 16.3% of net revenues, for the three months
ended September 30, 1997 as compared to $512,031, or 16.4% of net revenues, for
the three months ended September 30, 1996. This increase was primarily
attributable to the addition of Videssence's operations which added
approximately $570,000 to such expenses.
Operating Income (Loss). The Company achieved operating income of $67,874 for
the quarter ended September 30, 1997, as operating income of $191,008 from its
Entertainment Production activities outweighed an operating loss of $123,134
from its Videssence activities. This Videssence loss resulted primarily from
the lower than expected sales as discussed above.
Other Income and Expenses. Interest income decreased to $9,910 for the three
months ended September 30, 1997 compared to $27,102 for the three months ended
September 30, 1996, as proceeds from the Company's November 1995 initial public
offering were drawn from short term investments and used for expansion of its
in-house post-production and graphics/animation facilities during fiscal 1997
and working capital for Videssence. Interest expense increased to $53,759 for
the three months ended September 30, 1997 from $0 in the same period of the
previous year due to the acquisition of Videssence which has long-term debt and
the Company's new utilization of capital lease lines for continued expansion of
its computer animation and visual effects facilities.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash from
operations, its initial public offering of Common Stock and Warrants completed
in November 1995 which generated net proceeds of approximately $3.2 million and,
with respect to production costs for particular entertainment Projects, through
production contracts with studios, networks and distributors who cover 100% of
the production funding. Such production funds are received by the Company
during the production stage of a Project. To date, the Company has been able to
secure production financing from a major studio, network or distributor for all
its Projects. While the Company believes that similar financing arrangements
can be made for future productions, there can be no assurance that the Company
will be successful in obtaining such production financing. In that event, the
Company would have to secure alternative sources for financing Projects.
Moreover, as the Company continues to develop new forms of high technology
production activities and projects for new entertainment ancillary markets, it
may elect to make additional commitments for these new projects and to cover the
resulting increased overhead with these endeavors. These potential, new
financial commitments, if pursued, could create additional risk for the Company
as to whether it will recover the costs of its investment and generate a profit.
During the three months ended September 30, 1997, the Company derived
approximately 90% of its entertainment production revenues from its agreements
Page 9 of 11
with Warner Bros. relating to the production of the "Babylon 5" series and the
associated made for television movies. If the "Babylon 5" series is not renewed
through an additional agreement extension after the current fifth season of
production ending approximately May 1998, and the Company is unable to replace
the series with one generating comparable revenues, the Company's financial
condition and operations could be materially adversely affected.
Cash used in operating activities was approximately $1.76 million for the three
months ended September 30, 1997. The biggest uses of cash were a build up of
inventory at Videssence as well as an increase in accounts receivable in the
Company's entertainment production activities. Further, this period saw a large
decrease in accounts payable as pre-billed items for the Company's "Babylon 5"
series and its movies of the week were used for production.
Effective July 1997, the Company's Videssence subsidiary obtained a $750,000
line of credit with a bank, guaranteed by the Company, which required monthly
payments of interest on outstanding principal amounts at 2% above the bank's
reference rate. The loan documents also require the Company to comply with
certain restrictive covenants, including maintaining a minimum working capital
and specific financial ratios. As of September 30, 1997, the Company owed an
outstanding principal amount of $537,000 on such line.
Management believes that its present cash position and overall liquidity will
enable the Company to meet its operating commitments for the next twelve months.
As of September 30, 1997, the Company's sources of liquidity included cash and
cash equivalents totaling approximately $1.2 million, of which approximately
$280,000 is contractually committed to fund specific Projects. The Company has
$725,697 of outstanding debt and $707,532 of outstanding capital leases as of
September 30, 1997. Of the latter, approximately $500,000 was added during the
three months ended September 30, 1997 for equipment additions to its in-house
post-production and graphics/animation facilities.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Exhibit Description
------- -----------
10 Letter agreement, dated October 20, 1997, between the
Company and Martin E. Janis & Company, Inc. (1)
27 Financial Data Schedule. (1)
----------------------
(1) Filed herewith.
(b.) Reports on Form 8-K
None
Page 10 of 11
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Registrant
Dated: November 11, 1997 By: /s/Thomas Jorgenson
-----------------------
Thomas Jorgenson
Chief Operating Officer
By: /s/Chad Kalebic
-----------------------
Chad Kalebic
Chief Financial Officer
MARTIN E. JANIS & COMPANY, INC.
PUBLIC RELATIONS
919 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60611
(312) 943-1100
October 20, 1997
Mr. Douglas Netter
President
NETTER DIGITAL ENTERTAINMENT INC.
5125 Lankershim Blvd.
No. Hollywood, CA 91601
Dear Doug :
I am delighted with the decision of Netter Digital Entertainment
Inc. to retain Martin E. Janis & Company, Inc., and wish to assure
you that we shall apply our best efforts to carry out a public
relations program consistent with our conversations on this subject.
The following shall outline the mutual areas of responsibility in
our program.
Martin E. Janis & Company. Inc. shall begin a six month program ,
commencing on November 1, 1997, to continue though April 30,
1998. At the end of six months, on April 30 1998, either party
shall have the option to cancel the relationship, such termination to
be effective as of the April 30 1998, date. If the program shall
continue after April 30 1998, then a new contract shall be
established at that time.
The agency shall introduce Netter Digital Entertainment Inc. to
specifically interested brokerage firms, at both the broker and
analyst levels; the money managers and research departments of
certain funds and institutions; special situation investing people
and special situation investing groups; and other persons or entities
who may have a direct interest in the stock - and the agency shall
continue to maintain communications with the above described
after the initial contact. Through a series of meetings in selected
cities, the agency shall continue to maintain contact with the
aforementioned. Contact shall also be established and maintained
by written correspondence, fax, personal visits, individual
telephone conversations and teleconferencing.
Further, the agency shall create and carry out a financial public
relations and publicity program in the following areas - financial
newspapers, magazines and periodicals; news, feature and financial
sections of the national news magazines; wire services and feature
syndicates; financial, news and feature sections of daily
newspapers; on financial TV and radio programs; and trade
periodicals circulating in Netter Digital Entertainment Inc.'s areas
of activity. This will follow the pattern described in the agency's
conversations on the subject.
The public relations and publicity program shall be centered
around general corporate activity; new shows developed by Netter
Digital Entertainment Inc. and clients acquired; company
personnel and executives; corporate history, past accomplishments
and future goals; sales and earnings; management and management
philosophy; and other salient subjects that will enhance the
corporate image. Such publicity will result from the agency's
distribution of press releases, from press presentations, and from
special press interviews.
The agency shall write , develop and create the financial written
and graphic materials-- the annual report ; the interim reports; and
special communiques to the shareholder and to the financial
community.
Martin E. Janis & Company, Inc. shall be compensated at the rate
of five thousand dollars ($5,000,00) per month, payable on the 1st
day of month, beginning November 1, 1997, and shall invoice
Netter Digital Entertainment Inc. for five thousand (5,000,00) on
the 1st say of each succeeding month. The above mentioned
service fee is payable to the agency upon receipt of said invoice.
In addition to the above quoted retainer fee, routine out-of-pocket
costs covering such items as printing and mailing; clipping
services; long distance telephones; xeroxing; photography; media
entertainment and the like, shall be borne by Netter Digital
Entertainment Inc. These out-of-pocket costs, however, shall not
exceed $300-500 per month unless specified approval is given
thereto by client.
All travel and other costs relating to company analyst meetings on
specific financial centers throughout the country will be budgeted
and presented to the client for approval, prior to incurring said
expenditures. Payment of these out-of-pocket expenditures shall
be made upon receipt of and approval of these submitted estimated
costs by the client prior to said meetings, as these expenses (hotel,
travel, food and beverage, and the like) are paid up front by the
projects, when all the actual bills are in and collated, they shall be
submitted to the client, and an adjustment will be made either way,
equating the actual expense with the estimated advance.
All costs pertaining to graphics -- the annual report, quarterly
interim reports, special shareholder communiques, and the like,
shall likewise be budgeted and presented to Netter Digital
Entertainment Inc. for approval and payment before said
expenditures are incurred.
Martin E. Janis & Company, Inc. shall receive warrants to
purchase 50,000 shares of stock; 15,000 shares at $3.50 per share;
15,000 shares at $4.50 per share; and 20,000 shares at $7.50 per
share. Netter Digital Entertainment Inc. shall submit a signed
Warrant Agreement contract, defining the specific terms of the
agreement, on or before November 1, 1997
An Account Executive, an agency vice president, shall be assigned
to work on this account, along with other agency creative and
executive personnel, in the firm's offices. Martin E, Janis shall be
involved with various agency executives and staff and Netter
Digital Entertainment Inc. executives in the overall coordination
direction and implementation of the program.
I believe this letter covers the pertinent points in our proposed
working relationship . Will you kindly indicate your approval by
signature on the attached copy and return same to me at your early
convenience.
The agency will handle all normal investor relations activities for
Netter Digital Entertainment, Inc.
I look forward to meeting with you and to a successful relationship
with you and your organization over this next period.
Cordially,
MARTIN E. JANIS & COMPANY, INC.
By:/s/Martin Janis
Martin E. Janis, Chairman of the Board
MEJ/mdc
APPROVED:
By:/s/Douglas Netter
Douglas Netter,President
Netter Digital Entertainment Inc.
cc: Michael C. Pocaterra
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 1,210,275
<SECURITIES> 0
<RECEIVABLES> 1,495,086
<ALLOWANCES> (20,566)
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0
283,150
<COMMON> 33,390
<OTHER-SE> 4,726,125
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<SALES> 929,533
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<CGS> 458,737
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