Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1996 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC.
(exact name of registrant as specified in charter)
Delaware 95-3392054
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
5200 Lankershim Blvd., Suite 280
No. Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818/753-1990
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
As of February 13, 1997 the Registrant had 3,317,221 shares of its Common Stock,
$.01 par value, issued and outstanding.
Page 1 of 12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Incorporated herein is the following unaudited financial information:
Consolidated Balance Sheet as of December 31, 1996
Consolidated Statement of Operations for the three-month and six-month
periods ended December 31, 1996 and December 31, 1995
Consolidated Statements of Cash Flows for the six-month periods ended
December 31, 1996 and December 31, 1995
Page 2 of 12
<PAGE>
<TABLE>
<CAPTION>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
1996
-----------------
(Unaudited)
<S> <C>
Assets
- --------
Current Assets:
Cash and cash equivalents $ 1,089,890
Accounts receivable 405,679
Notes receivable 625,000
Due from officer 194,876
Production costs, net 144,090
Prepaid Expenses 46,661
-----------------
Total Current Assets 2,506,196
Equipment, net 978,882
Deferred Acquisition Costs 424,987
Deferred Registration Costs 102,722
Deposits and Other Assets 199,266
-----------------
$ 4,212,053
=================
Liabilities and Stockholder's Equity
- ------------------------------------------
Current Liabilities:
Accounts Payable $ 678,052
Accrued Expenses 160,181
-----------------
Total Current Liabilities 838,233
Minority Interest 500
Stockholder's Equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized; no shares issued and outstanding -
Common stock, $.01 par value, 6,000,000 shares authorized;
2,795,000 shares issued and outstanding 27,950
Additional paid-in capital 3,534,234
Accumulated deficit (188,864)
-----------------
Total Stockholder's Equity 3,373,320
-----------------
$ 4,212,053
=================
<FN>
<F1>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
Page 3 of 12
<PAGE>
<TABLE>
<CAPTION>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Dec. 31, Six Months Ended Dec. 31,
--------------------------------- -----------------------------------
1996 1995 1996 1995
--------------- --------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Production $ 6,307,436 $ 8,735,028 $ 9,421,612 $ 13,727,318
--------------- --------------- ---------------- ----------------
Total Revenues 6,307,436 8,735,028 9,421,612 13,727,318
--------------- --------------- ---------------- ----------------
Expenses:
Production 5,645,634 8,441,611 8,489,350 12,960,683
General and administrative 519,592 410,693 1,031,623 837,382
--------------- --------------- ---------------- ----------------
Total Expenses 6,165,226 8,852,304 9,520,973 13,798,065
--------------- --------------- ---------------- ----------------
Operating Income (Loss) 142,210 (117,276) (99,361) (70,747)
--------------- --------------- ---------------- ----------------
Other Income (Loss):
Interest and other income 30,127 19,010 57,229 17,386
--------------- --------------- ---------------- ----------------
Total Other Income (Expense) 30,127 19,010 57,229 17,386
--------------- --------------- ---------------- ----------------
Income/(Loss) before provision for
income taxes and minority interst 172,337 (98,266) (42,132) (53,361)
Provision for income taxes - (36,358) - (22,358)
Minority Interest - - - -
--------------- --------------- ---------------- ----------------
Net Income (Loss) $ 172,337 $ (61,908) $ (42,132) $ (31,003)
=============== =============== ================ ================
Net Income (Loss) per
common share $ 0.06 $ (0.02) $ (0.02) $ (0.01)
=============== =============== ================ ================
Weighted average number of
common shares 2,795,000 2,720,000 2,795,000 2,720,000
=============== =============== ================ ================
<FN>
<F1>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
Page 4 of 12
<PAGE>
<TABLE>
<CAPTION>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31,
----------------------------------
1996 1995
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) $ (42,132) $ (31,003)
---------------- ----------------
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation 115,679 250
Changes in operating assets and liabilities:
(Increase)/decrease in accounts receivable (311,862) 268,497
Decrease/(increase) in prepaid expenses 7,746 (51,672)
(Increase) in production costs (78,881) -
(Increase) in deposits and other assets (115,748) (30,319)
Increase in accounts payable 468,437 3,861
Increase/(decrease) in accrued expenses 79,406 (42,023)
(Decrease) in deferred revenue - (255,288)
---------------- ----------------
164,777 (106,694)
---------------- ----------------
Net cash provided by (used in) operating activities 122,645 (137,697)
---------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures (525,568) (1,243)
---------------- ----------------
Net cash (used in) investing activities (525,568) (1,243)
---------------- ----------------
Cash Flows from Financing Activities:
(Increase) in deferred acquisition costs (311,591) -
(Increase) in notes receivable (275,000) -
(Increase) in due from officer - (18,909)
(Increase)/decrease in deferred registration costs (102,722) 60,363
Increase in additional paid in capital 903 -
Proceeds from public offering - 3,259,326
Increase in minority interest - 500
Repayment of note payable - line of credit - (110,000)
---------------- ----------------
Net cash (used in) provided by financing activities (688,410) 3,191,280
---------------- ----------------
Net (decrease)/increase in cash (1,091,333) 3,052,340
Cash, beginning of period 2,181,223 338,231
---------------- ----------------
Cash, end of period $ 1,089,890 $ 3,390,571
================ ================
<FN>
<F1>
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 2,386
Cash paid for income taxes $ - $ -
<F2>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
Page 5 of 12
<PAGE>
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes for the year ended June 30, 1996 included in
the Form 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 December 31, 1996, and the results of operations and cash flows
for the three and six month periods ended December 31, 1996, and 1995 have been
included.
The results of operations for the three and six month periods ended December 31,
1996, are not necessarily indicative of the results to be expected for the full
fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-KSB as filed
with the Securities and Exchange Commission for the year ended June 30, 1996.
Earnings per share has been calculated based upon the weighted average number of
common shares outstanding. Stock options have been excluded as common stock
equivalents because they are either antidilutive, or their effect is not
material.
DUE FROM OFFICER/RECEIVABLE FROM RELATED PARTY
On November 20, 1995, the Company's Chief Executive Officer entered into a
promissory note with the Company in the amount of $194,876, bearing interest at
7.25% per annum. The entire unpaid principal balance and all accrued interest is
due on May 20, 1997.
MERGER AGREEMENT WITH VIDESSENCE, INC.
On April 26, 1996, the Company entered into a definitive merger agreement with
Videssence, Inc., a company that designs, manufactures and distributes media
lighting products which incorporate the patented and trademarked SRGB light
technology for the illumination of studios, stages and other production
environments in the sound stage, media picture, theater and theme park
industries. On August 5, 1996, the stockholders of the Company approved the
proposed merger with Videssence which closed on January 10, 1997. The Company
acquired all of the outstanding common stock of Videssence in exchange 522,221
Page 6 of 12
<PAGE>
shares of the Company's Common Stock, valued at $9.00 per share. The Videssence
shareholders can earn up to an additional maximum of 788,000 shares of the
Company's Common Stock upon Videssence achieving certain performance based
criteria over the next five years.
Prior to December 31, 1996, the Company made $625,000 of advances to Videssence,
Inc. which were evidenced by written promissory notes bearing interest at 9% per
annum; $175,000 was advanced during the second quarter. The unpaid principal
and accrued interest will be eliminated in consolidation when the Company begins
accounting for Videssence as a wholly owned subsidiary.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
MATTERS ADDRESSED IN THIS ITEM 2 CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT.
General
- ----------
The Company's operations have primarily been as a provider of production
services to distributors such as Warner Bros. and The Walt Disney Company and to
networks such as ABC and NBC. It has been the Company's practice to utilize
external sources to provide 100% of its production funding while retaining back-
end producer's profit participation. Employing this strategy, the Company
minimizes the risk of production by generating production fees to cover all
production expenses. This approach has limited the Company's ongoing revenue
participation, however, as the distributor or network retains a significant
portion of the rights to the main and ancillary markets in return for assuming
the risk of production. Revenues are recognized when earned which is typically
upon receipt. Costs associated with these revenues are recognized on the same
basis. These revenues are primarily dependent on the number of projects being
produced by the Company and the agreements relating to such projects.
Accordingly, year to year comparisons of production revenues from these sources
are not necessarily indicative of future revenues.
To increase production margins, the Company has invested in additional in-house
post production and computer graphics/animation facilities that were implemented
in the third and fourth quarters of fiscal 1996 and the first quarter of fiscal
1997. These leading-edge production technologies are used intensively to create
the visual effects for "Babylon 5" and the Company's other production activities
enabling it to generate more special effects per season than previously
possible. By investing in cost-effective technologies, the Company has been
able to effectively eliminate the need for contracting out to third party
vendors, thus allowing it to realize higher margins on its services. With these
expanded facilities now in place, the Company is positioned to offer its
Page 7 of 12
<PAGE>
technology services to outside companies, thus creating a potential new revenue
stream.
The Company retained the merchandising rights for the Hypernauts Production of
13 episodes, which were sold to the ABC Network and aired in Spring, 1996.
Pursuant to the Hypernauts agreement with the ABC Network, the Company
established a merchandising licensing division which included a master toy
license with a major toy manufacturer. The merchandising of "Hypernauts" was
suspended when the production was not renewed for the 1996 Fall television
season. The merchandising division overhead was eliminated in the first quarter
of fiscal 1997. The production and merchandising of "Hypernauts" will only be
reinstated if and when the Company is successful in finding an alternative
distributor to finance the production.
On April 26, 1996, the Company entered into a definitive merger agreement with
Videssence, Inc., a company that designs, manufactures and distributes media
lighting products which incorporate the patented and trademarked SRGB light
technology for the illumination of studios, stages and other production
environments in the sound stage, media picture, theater and theme park
industries. On August 5, 1996, the stockholders of the Company approved the
proposed merger with Videssence which closed on January 10, 1997. Videssence
became a wholly owned subsidiary of the Company. The Company acquired all of
the outstanding common stock of Videssence in exchange for 522,221 shares of the
Company's Common Stock, valued at $9.00 per share. The Videssence shareholders
can earn up to an additional maximum of 788,000 shares of the Company's Common
Stock upon Videssence achieving certain performance based criteria over the next
five years.
Results of Operations
- ---------------------
NET REVENUES. Net Revenues decreased 31% to $9.42 million for the six months
ended December 31, 1996 as compared to $13.73 million in net revenues for the
six months ended December 31, 1995. The decrease in net revenues for the six
month period of $4.31 million primarily resulted from two factors. First, the
production of the fourth season of "Babylon 5" started on August 26, 1996
compared to July 31, 1995 for the third season, causing revenues to be down
approximately $2 million over the six months. Second, additional revenue was
generated in the previous year with the production of the children's series,
"Hypernauts", which was not renewed for the Fall 96-97 season. For the three
month period ended December 31, 1996, net revenues were down 28% to $6.31
million as compared to net revenues of $8.74 million for the three month period
ended December 31, 1995, primarily due to the "Hypernauts" nonrenewal. The
difference in the "Babylon 5" start date primarily affected the first quarter,
as revenues for this production remained consistent in the second quarters of
both periods. This decrease in revenue from "Babylon 5" will be recouped over
the remainder of the current fiscal year as the total number of episodes to be
produced is the same in both years.
GROSS MARGIN. The Company's gross margin for the six months ended December 31,
1996 was $932,262, or 9.9 % of net revenues, compared with $766,635 or 5.6% for
the six months ended December 31, 1995. For the three month period ended
December 31, 1996, the company's gross margin was $661,802 or 10.5% of net
Page 8 of 12
<PAGE>
revenues, compared with $293,417 or 3.4% of net revenues for the three month
period ended December 31, 1995. Although revenues declined compared to last
year, the Company has been able to attain not only higher margins but higher
gross profits in terms of absolute dollars. This has been achieved through the
aforementioned expansion of the post production and graphics/animation
facilities which have allowed the company to eliminate the need for outside
production services. Additionally, through the integration of technology at its
facilities, the Company is able to achieve top quality productions while
realizing higher profit margins.
GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative expenses
increased 23% to $1,031,623 for the six months ended December 31, 1996 as
compared to $837,382 for the six months ended December 31, 1995. The increase
was caused by the creation of the project development group, the expansion of
the Company's technology operations, and the staffing, legal, regulatory,
accounting and other expenses that resulted from being a publicly traded company
as of November 1995. Additionally, the Company incurred operating expenses
during the first quarter in connection with the curtailment of the merchandising
activities for the "Hypernauts" project totaling approximately $70,000.
OTHER INCOME AND EXPENSES. Interest income increased to $57,062 for the six
months ended December 31, 1996 compared to $18,769 for the six months ended
December 31, 1995. The increase was due primarily to interest earned on
proceeds from the Company's initial public offering which was completed in
November 1995 and from interest earned on advances made to Videssence.
Liquidity and Capital Resources
- --------------------------------------
The Company has funded its operations to date primarily through cash flows from
operations, through the initial public offering of Common Stock and Warrants
completed in November 1995 which generated net proceeds of approximately $3.2
million, and from the proceeds received from exercises of stock warrants, which
have generated approximately $300,000.
Cash provided by operating activities was approximately $122,645 for the six
months ended December 31, 1996. The primary source of cash was net income, as
adjusted for depreciation, as well as a disproportional increase in accounts
payable and accrued expenses over accounts receivable, production costs, and
deposits and other assets.
Investments in capital equipment totaled approximately $525,568 for the six
months ended December 31, 1996. The use of cash was primarily for additions of
computer graphics and post production equipment for the expansion of the
technology group, primarily for post production and 3D animation activities.
For the quarter ended December 31, 1996, the Company used approximately $239,952
in deferred acquisition costs in support of the Videssence transaction.
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 December 31, 1996, the Company's sources of liquidity included cash and
cash equivalents totaling approximately $1.1 million. The Company had no debt
outstanding as of December 31, 1996.
Page 9 of 13
<PAGE>
The Company's sources of working capital are principally derived from contract
production receipts from a major studio for the production of "Babylon 5".
These monies are received by the Company in installments spread over the year
for the production of "Babylon 5" or another project. The Company has in the
past been able to secure production financing from a major studio or distributor
for all of its projects in production. While the Company believes that similar
financing arrangements can be made for future productions, there can be no
assurance the Company will be successful in obtaining such production financing.
In that event, its working capital will be reduced accordingly. Moreover, as
the Company continues to develop new forms of high technology production
activities and projects for new entertainment and multimedia ancillary markets,
it may elect to make additional commitments for these new projects and to cover
the resulting increased overhead with these endeavors. These financial
commitments may create additional risk for the Company as to whether it will
recover the costs of investment and generate a profit.
In October 1996, the Company commenced a "limited public offering" of Class A
Cumulative Convertible Preferred Stock to be marketed over the Internet and
IPONet. This offering, managed by an investment banking firm acting as
placement agent, was intended to raise a minimum of $2 million and a maximum of
$5 million to be used for expansion and for working capital for Videssence's
operations. However, as of February 10, 1997, the offering had achieved only
$200,000 in subscriptions and the Company is now considering whether to extend
or terminate the offering. In either event, the Company intends to identify and
pursue alternative sources of financing deemed necessary to pursue the Company's
plans to grow its business through expansion of Videssence's operations and
through new acquisitions.
PART II. OTHER INFORMATION
Item 5. Other Information
On August 15, 1996 the Company, in association with J. Michael Straczynski,
launched its Website for the "Babylon 5" Fan Club on the Internet's World Wide
Web in response to the strong interest in the television series and the
Company's successful formation of the Official Babylon 5 Fan Club ("Fan Club")
in April 1996. The Website provides 24 hour access to the fans of the
television series and in the future it will provide marketing of Fan Club
merchandise along with "Babylon 5" licensed merchandise. The Website will also
be linked to approximately 300 "Babylon 5" Internet sites that have been
established by fans to discuss the series. Management believes this profit
center will produce a solid merchandising outlet, strengthened by the Fan Club's
promotional efforts, and that additional revenue streams may originate through
offering advertising on the "Babylon 5" Website. This unique Website has been
designed to provide demographic information of visitors/users of the Website to
potential advertisers. There can be no assurances, however, that the Company
will derive any significant revenues from sales of merchandise over its Website.
Page 10 of 12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Exhibit Description
------- ------------------------
27 Financial Data Schedule
(b.) Reports on Form 8K
Following the quarter ended December 31, 1996, the Company filed a
Current Report on Form 8-K dated January 10, 1997, reporting its
acquisition of Videssence, Inc. At the time of such filing, the
financial statements of Videssence, Inc. were not yet available;
accordingly, the Company will timely file an Amendment to this Current
Report on Form 8-K including the required financial statements and pro
forma financial information.
Page 11 of 12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Registrant
Dated: February 13,1997 By: /s/Geoffrey Talbot
----------------------------------
Acting Chief Financial Officer
Page 12 of 12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,089,890
<SECURITIES> 0
<RECEIVABLES> 1,225,555
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,506,196
<PP&E> 1,094,561
<DEPRECIATION> (115,679)
<TOTAL-ASSETS> 4,212,053
<CURRENT-LIABILITIES> 838,233
<BONDS> 0
0
0
<COMMON> 27,950
<OTHER-SE> 3,345,370
<TOTAL-LIABILITY-AND-EQUITY> 4,212,053
<SALES> 0
<TOTAL-REVENUES> 6,307,436
<CGS> 0
<TOTAL-COSTS> 5,645,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 172,337
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,337
<EPS-PRIMARY> .06
<EPS-DILUTED> 0
</TABLE>
