UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 25, 1997
NETTER DIGITAL ENTERTAINMENT, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Commission file number: 0-26884
Delaware 95-3392054
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
611 North Brand Boulevard, 3rd Floor
Glendale, California 91203
(Address of Principal Executive Office) (Zip Code)
(818) 753-1990
(Registrant's telephone number including area code)
This amendment is being filed to include the financial information
which was unavailable at the time of the original filing dated January
10, 1997.
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its current report dated January 10,
1997 on Form 8-K as set forth in the pages attached hereto:
Item 7 (a) - Financial statements of business acquired
Item 7 (b) - Pro forma financial information
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Netter Digital Entertainment, Inc.
Date: March 25, 1997 By: / S / THOMAS L. JORGENSON
-----------------------------
Thomas L. Jorgenson
Chief Operating Officer
Item 7 (a)
Financial Statements of Business Acquired
VIDESSENCE, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
For the year ended December 31, 1996
------------------------------------
Independent Auditors' Report 2
Balance Sheet 3
Statement of Operations 4
Statement of Changes in Stockholders' Deficit 5
Statement of Cash Flows 6
Notes to Financial Statements 7 - 11
For the year ended December 31, 1995
------------------------------------
Independent Auditors' Report 12
Balance Sheet 13
Statement of Operations 14
Statement of Changes in Stockholders' Deficit 15
Statement of Cash Flows 16
Notes to Financial Statements 17 - 23
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders of
Videssence, Inc.
Burlingame, California
We have audited the accompanying balance sheet of Videssence, Inc. as
of December 31, 1996 and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. 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, 1996 and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
/S/ FELDMAN RADIN & CO., P.C.
-----------------------------
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, New York
March 21, 1997
2
VIDESSENCE, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 13,986
Accounts receivable, less allowance for
doubtful accounts of $53,744 400,884
Inventories 927,082
Prepaid expenses 35,351
Deferred tax benefit 32,300
Other current assets 10,000
-------------
TOTAL CURRENT ASSETS 1,419,603
PROPERTY AND EQUIPMENT - net 265,654
OTHER ASSETS 25,000
-------------
$ 1,710,257
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 775,783
Accrued expenses 338,919
Sales taxes payable 99,484
Current portion of long-term debt 186,609
-------------
TOTAL CURRENT LIABILITIES 1,400,795
NOTES PAYABLE 625,000
LONG-TERM DEBT 162,969
-------------
TOTAL LIABILITIES 2,188,764
-------------
COMMITMENTS
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 10,000,000 shares authorized 208,541
Accumulated deficit (687,048)
-------------
TOTAL STOCKHOLDERS' DEFICIT (478,507)
-------------
$ 1,710,257
=============
</TABLE>
See note to financial statements
3
VIDESSENCE, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
SALES $ 4,492,235
COST OF SALES 2,200,291
----------------
GROSS PROFIT 2,291,944
----------------
OPERATING EXPENSES:
Selling 1,609,494
General and administrative 565,599
Engineering 329,779
----------------
2,504,872
----------------
LOSS FROM OPERATIONS (212,928)
----------------
OTHER EXPENSE:
Interest expense (132,566)
Other income 6,991
----------------
(125,575)
----------------
NET LOSS $ (338,503)
================
</TABLE>
See notes to financial statements
4
VIDESSENCE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
---------------------------------- Accumulated
Shares Amount Deficit Total
---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 828,491 $ 208,541 $ (348,545) $ (140,004)
Net loss - - (338,503) (338,503)
---------------- ---------------- -------------- ----------------
BALANCE - DECEMBER 31, 1996 828,491 $ 208,541 $ (687,048) $ (478,507)
================ ================ ============== ================
</TABLE>
See notes to financial statements
5
VIDESSENCE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (338,503)
-----------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 72,274
Changes in assets and liabilities:
Decrease in accounts receivable 43,518
Increase in inventory (295,785)
Decrease in prepaid expenses 7,277
Decrease in other current assets 29,713
Increase in other assets (25,000)
Increase in accounts payable 132,207
Decrease in accrued expenses (9,937)
Increase in sales taxes payable 62,250
-----------------
16,517
-----------------
NET CASH USED IN OPERATING ACTIVITIES (321,986)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (154,697)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 640,331
Payment of long-term debts (217,604)
-----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 422,727
-----------------
NET DECREASE IN CASH (53,956)
CASH, beginning of period 67,942
-----------------
CASH, end of period $ 13,986
=================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid $ 132,566
=================
Income taxes paid $ -
=================
Noncash activity:
Purchase of equipment through note payable $ 31,267
=================
</TABLE>
See notes to financial statements
6
VIDESSENCE, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
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.
On January 10, 1997, the Company was merged into Netter Digital
Entertainment, Incorporated ("NDEI"). Under an Agreement and Plan of
Merger (the "Plan"), NDEI acquired all of the outstanding common stock
of the Company in exchange for 522,221 shares of NDEI's Common Stock.
As a result of the merger, the Company shareholders have become
shareholders of NDEI and the Company is wholly-owned subsidiary of
NDEI.
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 reported period.
Actual results could differ from those estimates.
7
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:
Raw Materials $ 500,969
Work In Process 143,580
Finished Goods 282,533
----------------
$ 927,082
================
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.
8
Stock Options:
There are 62,770 stock options outstanding at December 31, 1996. All
such stock options were converted into 62,770 shares common stock in
January 1997.
2. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Computer equipment $ 121,732
Furniture and office equipment 110,912
Rental lights and grips 168,607
Leasehold improvements 37,432
Other equipment 71,983
-------------
510,666
Less: accumulated depreciation 245,012
-------------
Property and equipment, net $ 265,654
=============
3. NOTE PAYABLE - NDEI
During 1996, the Company received various notes from NDEI totaling
$625,000. The notes bear interest at the rate of 9% per annum. NDEI
does not intend to call these notes prior to January 1, 1998.
Therefore, the notes have been classified as long-term.
9
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<S> <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. $ 134,894
Note payable to bank, guaranteed by the two principle
stockholders, payable in monthly principal payments of $1,450, plus
interest at the bank's reference rate (11.25% at December 31, 1996
plus 3%. The entire unpaid principal and interest balance is due on
October 1, 1999. 47,572
Note payable to vendor, 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, 1996) plus 1%. The entire unpaid
principal and interest balance is due on June 15, 1998. 48,140
Notes payable with monthly payments of $868 and $1,094 with final
maturities of August 15, 1998 and October 15, 1999 respectively. 42,475
Payable on demand to related parties (stockholders) interest at
10% commencing at various dates. Notes are subordinate to the bank
notes. 76,497
---------------
349,578
Less: current portion 186,609
---------------
$ 162,969
===============
</TABLE>
Long-term debt maturities for the next four years are as follows:
1997 $ 186,606
1998 93,689
1999 65,639
2000 3,644
10
5. INCOME TAXES
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:
Deferred tax asset:
Net operating loss carryforward $ 94,000
Tax credits carry forward 10,000
-----------
Total 104,000
Less: valuation allowance 71,700
-----------
Net deferred tax asset $ 32,300
===========
The Company has net operating loss carryforwards for tax purposes
totaling $823,000 at December 31, 1996 expiring in the years 2009 to
2012. Substantially all of the carryforwards are subject to limitations
on annual utilization because there are "equity structure shifts" or
"owner shifts" involving 5% stockholders (as these terms are defined in
section 382 of the Internal Revenue Code), which have resulted in a
more than 50% change in ownership. The annual limitation is based on
the value of the Company as of the date of the ownership change
multiplied by the applicable Federal Long Term Tax Exempt Bond Rate.
6. FACTOR AGREEMENT
The Company factors its accounts receivable. Under the terms of the
factoring agreement the Company pays 2% interest for 10 days and
additional 1% for every 10 days of collection subsequent to the billing
date. This agreement is secured by all of the Company's accounts
receivable. Under the agreement the Company retains all risk relating
to the receviables, accordingly, the Company accounts for the agreement
as a financing transaction.
7. COMMITMENTS
Rent expense under all operating leases was $82,637 for the year ended
December 31, 1996. The future minimum rental payments to be made under
noncancellable operating leases, principally for facilities, as of
December 31, 1996 are as follows:
1997 $ 101,300
1998 15,600
11
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders of
Videssence, Inc.
Burlingame, California
We have audited the accompanying combined balance sheets of Videssence,
Inc. as of December 31, 1995 and the related statements of operations,
stockholders' deficit and cash flows for the year then ended. 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 year
then ended in conformity with generally accepted accounting principles.
/S/ FELDMAN RADIN & CO., P.C.
-----------------------------
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, New York
May 10, 1996
12
VIDESSENCE, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995
ASSETS
CURRENT ASSETS
Cash $ 67,942
Accounts receivable, less allowance for
doubtful accounts of $56,100 444,402
Inventories 631,297
Prepaid expenses 42,628
Deferred tax benefit 32,300
Other current assets 39,713
----------------
TOTAL CURRENT ASSETS 1,258,282
PROPERTY AND EQUIPMENT - net 151,965
----------------
$ 1,410,247
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 643,727
Accrued expenses 348,706
Deferred liabilities 37,234
Current portion of long-term debt 277,510
----------------
TOTAL CURRENT LIABILITIES 1,307,178
LONG-TERM DEBT 243,074
----------------
TOTAL LIABILITIES 1,550,252
----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 10,000,000 shares authorized 208,541
Accumulated deficit (348,545)
----------------
TOTAL STOCKHOLDERS' DEFICIT (140,004)
----------------
$ 1,410,247
================
See notes to financial statements
13
VIDESSENCE, INC.
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
SALES $ 4,067,266
COST OF SALES 1,886,332
--------------
GROSS PROFIT 2,180,934
--------------
OPERATING EXPENSES:
Selling 1,507,132
General and administrative 808,315
Engineering 329,001
-------------
2,644,448
-------------
LOSS FROM OPERATIONS (463,514)
-------------
OTHER EXPENSE:
Interest expense (86,078)
Write-off of registration costs (124,499)
-------------
(210,577)
-------------
LOSS BEFORE INCOME
TAX BENEFIT (674,091)
INCOME TAX BENEFIT (113,910)
-------------
NET LOSS $ (560,181)
=============
See notes to financial statements
14
VIDESSENCE, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Retained
Common Stock Earnings
Shares Amount (Deficit) Total
--------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 802,586 $ 193,722 $ 211,636 $ 405,358
Common shares issued 25,905 14,819 - 14,819
Net loss - - (560,181) (560,181)
--------------- ---------------- ----------------- -------------
BALANCE - DECEMBER 31, 1995 828,491 $ 208,541 $ (348,545) $ (140,004)
================ ================= ================= ==============
</TABLE>
See notes to financial statements
15
VIDESSENCE, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (560,181)
-----------------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 48,730
Provision for uncollectible accounts receivable 36,900
Changes in assets and liabilities:
(Increase) in accounts receivable (8,084)
(Increase) in inventory (92,221)
(Increase) in prepaid expenses (38,899)
(Increase) in deferred income taxes (32,300)
(Increase) in other current assets (26,826)
Increase in accounts payable 258,514
Increase in accrued expenses 248,276
(Decrease) in deferred liabilities (44,935)
-----------------
349,155
-----------------
NET CASH USED IN OPERATING ACTIVITIES (211,026)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,370)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 233,601
Issuance of common stock 14,819
-----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 248,420
-----------------
NET INCREASE IN CASH 27,024
CASH, beginning of period 40,918
-----------------
CASH, end of period $ 67,942
=================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid $ 38,800
=================
Income taxes paid $ 16,000
=================
</TABLE>
See notes to financial statements
16
VIDESSENCE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
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 reported 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:
17
Raw Materials $ 403,088
Work In Process 100,698
Finished Goods 127,511
-----------------
$ 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.
18
Stock Options:
There are 62,770 stock options outstanding at December 31, 1995. Each
stock option is convertible into one share of common stock.
Financial Statements:
Certain reclassifications have been made to the 1995 presentation to
conform to the 1996 presentation. The effect on the financial
statements for 1995 is an increase in the loss by $103,674 and a
corresponding increase in the accumulated deficit.
2. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Computer equipment $ 100,016
Furniture and office equipment 69,710
Rental lights and grips 73,850
Leasehold improvements 37,432
Other equipment 53,387
----------------
334,395
Less: accumulated depreciation 182,430
----------------
Property and equipment, net $ 151,965
================
19
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<S> <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. $ 200,000
Note payable to bank, guaranteed by the two principle 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. 66,700
Note payable to vendor, 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. 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. 75,764
Miscellaneous notes payable with monthly payments of $2,787 and $868
with final maturities of December 7, 1995 and August 15, 1998
respectively. 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
------------
520,584
Less: current portion 277,510
-------------
$ 243,074
=============
</TABLE>
20
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
=============
4. COMMON STOCK
Common stock issued and outstanding in the Combined Financial
Statements consist of the following:
<TABLE>
<CAPTION>
VIDESSENCE, INC. VIDESSENCE COMBINED TOTALS
SYSTEMS
Shares Amount Shares Amount Shares Amount
------------- --- ------------- ------------ -- ------------ ------------ --- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 662,931 $ 112,722 139,655 $ 81,000 802,586 $ 193,722
Common shares issued 25,905 14,819 - - 25,905 14,819
------------- --- ------------- ------------ -- ------------ ------------ --- ------------
Balance - December 31, 1995 688,836 $ 127,541 139,655 $ 81,000 828,491 $ 208,541
------------- --- ------------- ------------ -- ------------ ------------ --- ------------
</TABLE>
In connection with loans made to the Company by certain related
parties (Note 6), the Company issued 23,905 shares valued at $13,675
to such related parties as additional compensation relative to the
aforementioned loans. In addition, the Company issued 2,000 shares of
common stock (valued at $1,144) to an individual for services rendered
to the Company.
21
5. INCOME TAXES
The net provision for income taxes (benefit) is composed of the
following:
Current:
Federal $ (24,000)
State -
-----------------
(24,000)
Deferred:
Federal (77,900)
State (12,010)
-----------------
Total provision
(benefit) $ (113,910)
=================
A reconciliation between the Company's effective tax rate and the
statutory rate follows:
Tax at expected statutory rate $ (218,062)
Net operating losses not utilized 93,962
Use of lower brackets 18,000
Adjustment of deferred tax asset
valuation allowance -
State Taxes (7,810)
-------------
Income tax expense (benefit) $ (113,910)
=============
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:
Deferred tax asset:
Net operating loss carryforward $ 94,000
Tax credits carry forward 10,000
--------------
Total 104,000
Less: valuation allowance 71,700
--------------
Net deferred tax asset $ 32,300
==============
22
6. 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.
7. COMMITMENTS AND CONTINGENCIES
During 1994, the Company entered into leases for office space and a
forklift under operating leases 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 have 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.
23
Item 7 (b)
Pro Forma Financial Information
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 December 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 sale by the Company of $424,305 of 10%
Cumulative, Convertible Preferred Stock which will contribute to the expenses
of the Videssence acquisition and the working capital necessary to develop the
business of Videssence.
The unaudited pro forma consolidated statements of operations for the
year ended December 31, 1996 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, adjusted to reflect 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 are they
necessarily indicative of future results. These unaudited pro forma consolidated
financial statements should be read in conjunction with the companies'
respective historical financial statements and notes thereto.
NETTER DIGITAL ENTERTAINMENT, INC. / VIDESSENCE, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Historical
--------------------------------------
Pro Forma Adjustments
Netter Digital ---------------------
Entertainment, Inc. Videssence, Inc. DR CR Total
------------------- ---------------- ------------ ------------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,089,890 $ 13,986 $ 351,166 (1) $ 19,000 (2) $ 1,436,042
Accounts receivable 405,679 400,884 806,563
Note receivable 625,000 - $ 625,000 (3) -
Receivable from related party 194,876 - 194,876
Inventory/Production Costs 144,090 927,082 1,071,172
Prepaid expenses 46,661 35,351 82,012
Deferred tax benefit - 32,300 32,300
Other current assets - 10,000 10,000
----------- ------------ ------------
Total Current Assets 2,506,196 1,419,603 3,632,965
EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION 978,882 265,654 1,244,536
DEFERRED REGISTRATION COSTS 102,722 - 102,722 (1) -
DEFERRED ACQUISITION COSTS 424,987 - 19,000 (2) 443,987 (2) -
GOODWILL - - 2,061,397 (2) 2,061,397
DEPOSITS AND OTHER ASSETS 199,266 25,000 26,572 (2) 197,694
------------ ------------ ------------
$4,212,053 $ 1,710,257 $ 7,136,592
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 678,052 $ 775,783 $ 1,453,835
Accrued expenses 160,181 338,919 499,100
Sales Taxes Payable - 99,484 99,484
Current portion of long-term debt - 186,609 186,609
---------- ------------ -------------
Total Current Liabilities 838,233 1,400,795 2,239,028
NOTES PAYABLE - 625,000 625,000 (3) -
LONG-TERM DEBT - 162,969 162,969
---------- ------------ -------------
TOTAL LIABILITIES 838,233 2,188,764 2,401,997
MINORITY INTEREST 500 - 500
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10% cumulative;
2,000,000 shares authorized; no shares issued
and outstanding actual, 47,144 shares pro forma - - 248,444 (1) 248,444
Common stock, $.01 par value, 6,000,000 shares
authorized; 2,795,000 shares issued and
outstanding actual; 3,317,221 pro forma 27,950 208,541 208,541 (2) 5,222 (2) 33,172
Additional paid-in capital 3,534,234 - 1,107,109 (2) 4,641,343
Retained earnings(deficit) (188,864) (687,048) 687,048 (2) (188,864)
---------- ------------ ------------
Total Stockholders' Equity 3,373,320 (478,507) 4,734,095
---------- ------------ ----------- ---------- ------------
$4,212,053 $ 1,710,257 $ 3,265,104 $ 3,265,104 $ 7,136,592
=========== ============= ============ ============ ============
</TABLE>
NETTER DIGITAL ENTERTAINMENT, INC. / VIDESSENCE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Historical
--------------------------------------
Netter Digital Pro Forma Adjustments
--------------------------
Entertainment, Inc. Videssence, Inc. DR CR Total
------------------- ---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
REVENUE $ 19,349,348 $ 4,492,235 $ 23,841,583
--------------- -------------- -------------
EXPENSES:
Cost of Sales 17,696,652 2,200,291 19,896,943
Operating costs and expenses 2,065,608 2,497,881 4,563,489
Amortization of goodwill - - $ 103,038 (1) 103,038
Interest expense/(income) (net) (135,778) 132,566 (3,212)
--------------- -------------- ------------
19,626,482 4,830,738 24,560,258
--------------- -------------- ------------
Income (loss) before income taxes (277,134) (338,503) (718,675)
Income tax expense/(benefit) (9,167) - 9,167 (2) -
--------------- -------------- ------------
Net income (loss) (267,967) (338,503) (718,675)
Cumulative preferred stock dividend - - 42,431 (3) (42,431)
--------------- -------------- ------------
Net income (loss) to common shareholders $ (267,967) $ (338,503) $ (761,106)
=============== ============== ============
Net income (loss) per common share $ (0.10) - $ (0.23)
=============== ============== ============
Weighted average common shares
outstanding 2,795,000 - 522,221 3,317,221
=============== ============== ============ ============
</TABLE>
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
December 31, 1996:
(1) To record the sale of 47,145 shares of preferred stock of the
Company for $9.00 per share (net of commissions and offering
expenses of $175,861), for a total of $248,444. The preferred
stock has a cumulative annual dividend of 10% and is
convertible into common at a ratio of three to one.
(2) To record the acquisition of Videssence, Inc. by Netter
Digital Entertainment, Inc. (the "Company") in exchange
for 522,221 common shares of the Company. The common stock
is valued at the fair market value of $2.13 per share (equal
to the $2.84 per share quoted market price, reduced by a
25% discount to reflect resale restrictions). Costs of the
acquisition total $470,559. The resulting goodwill is
derived as follows:
Purchase price consideration (522,221 shares @ $2.13) $ 1,112,331
Acquisition costs 470,559
------------
1,582,890
Net fair value of liabilities assumed (478,507)
------------
Cost in excess of net book value of assets acquired $ 2,061,397
============
(3) To eliminate intercompany notes receivable and payable.
B. The following pro forma adjustments are included in the accompanying
unaudited pro forma consolidated statements of operations for the year
ended December 31, 1996:
(1) To record goodwill amortization over a twenty year term.
(2) To eliminate income tax benefit.
(3) To record cumulative preferred stock dividends as a reduction
to per share amounts available to common shareholders.
