SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(X) Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1998 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC.
(Exact name of Small Business Issuer in its Charter)
Delaware 95-3392054
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
5125 Lankershim Boulevard
North Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818-753-1990
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
- ------------------- Which Registered
----------------
Common Stock, $.01 Par Value NASDAQ
Common Stock Purchase Warrants NASDAQ
Securities registered under Section 12(g) of the Exchange Act:
None
Check 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 ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K-SB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for the most recent fiscal year were $ 32,312,551.
The aggregate market value of the voting stock held by non-affiliates of the
Company, based upon the closing price of the Common Stock on the NASDAQ
Automated Quotation System on September 23, 1998 was $2,711,000. Shares of
Common Stock held by each officer and director and by each person who owns
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates.
As of September 23, 1998, there were 3,334,405 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction E(3) to this form, the information required by
Items 9, 10, 11, 12 and 13 of Part III hereof is incorporated by reference from
the registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders scheduled to be held on November 16, 1998.
Transitional Small Business Disclosure Format:
Yes________________ No X
PART I.
ITEM 1. BUSINESS
Introduction
Netter Digital Entertainment, Inc. (the "Company") is engaged in three primary
business activities:
- - Entertainment Production. The Company is engaged in the acquisition,
development and production of television series, made-for-television movies,
documentaries, theatrical motion pictures, theme park attractions and multimedia
products (collectively and individually referred to as the "Productions" or
"Projects"). The Company specializes in combining live action film production
with computer graphics and other digital imaging in the creation of dramatic
series, documentaries, and children's programming, utilizing state-of-the-art
entertainment production technology. With its recent work on the children's
series, "Voltron:The Third Dimension" ("Voltron"), the Company is at the
forefront of the fully animated or animation intensive production market for
television. The Company's general practice has been to sell or license its
Productions under a production contract with a major entertainment studio or
distributor who is responsible for the production costs of the Production.
Since its November 1995 initial public offering, the Company has increased the
number of Projects it has in development for sale to the major studios and
distributors. The Company's unique, vertically integrated digital production
process which closely links live-action film production with computer graphics
production and digital post-production, is well suited to attract state-of-the-
art creative projects that can be produced efficiently while being digitally
pre-purposed for various multimedia software platforms.
- - Computer Animation and Visual Effects Production Services. As an outgrowth of
its traditional core business of developing and producing media Productions, the
Company has entered the business of providing digital media production services
to outside clients. In support of its own Productions, the Company has
developed significant expertise in computer graphics production, digital
post-production and various other digital imaging techniques. The quality and
popularity of the Company's productions has created industry-wide recognition of
its creative and technical skills in these areas. The Company believes that
an active market exists for projects requiring creative, high quality, cost
effective digital graphics and effects. In order to more fully exploit its
strengths in these areas, the Company formed the Netter Digital Technologies
division in the fourth quarter of fiscal 1997 to market computer graphics and
digital post-production services to outside clients.
- - Videssence(tm) 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
television, 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.
Additionally, they generate light without the higher level of heat that
traditional incandescent production lighting products generate. As a result,
they are much more comfortable for the talent working under them. The Company
markets its lighting products in the USA and internationally through a network
of manufacturer's representatives, distributors, dealers, and direct sales
staff.
1
Background
The Company commenced operations as a television production company in 1979
doing business as Rattlesnake Productions, Inc. ("RPI"). In September 1995,
the Company was reincorporated under the laws of the State of Delaware and
changed its name to Netter Digital Entertainment, Inc. The Company's
first production was the network mini-series "Louis L'Amour's The Sacketts."
The Company has produced thirteen productions, most recently, the award winning
primetime television series "Babylon 5" and an all new computer animated
children's series, "Voltron." Throughout this period, the Company has employed
leading edge digital production techniques, such as three dimensional computer
graphics, digitally created virtual sets, surround stereo audio mixing, and
digital editing of both picture and sound. The Company's production methodology
employs standard desktop computer platforms that are relatively inexpensive and
easily upgradable. This creates substantial efficiencies, allowing projects to
be produced at lower costs.
The Company has demonstrated it can develop and deliver Projects at production
costs and quality levels consistent with market requirements. Historically, it
has contained operating overhead by supplementing its permanent staff with
freelance production staff as required for each Production. Further, over the
past year, the Company has expanded its in-house capacities with broader based
in-house computer graphics, animation and post production capabilities. These
expanded in-house facilities, combined with the Company's internally developed
production methodology and techniques, has yielded particularly competitive
production costs in its recent Projects.
The Company completed its initial public offering of securities in November
1995. The Company's Common Stock and Stock Purchase Warrants are listed on the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") and are traded in the NASDAQ Small Cap Market under the symbol
"NETT" and "NETTW," respectively.
In January 1997, the Company branched into manufacturing with its acquisition of
Videssence, Inc. ("Videssence"), a designer, manufacturer, and distributor of
lighting products which incorporate its patented SRGB(tm) light technology for
the illumination of studios, stages and other production environments in the
television, motion picture, theater and theme park industries. Videssence was
founded in 1989 and initially marketed products to the television studio market.
These products proved to be a viable alternative to traditional incandescent
lights which generate an abundance of "heat" for the relatively low amount of
usable light which they produce. Today, Videssence's lighting fixtures are
installed in over 500 studios throughout the world, covering forty countries,
including CNN, CBS, NBC ABC, and the BBC.
2
RELEASED PROJECTS
Title Principal Cast Members Programming Air Date
or Voices
- ----- ---------------------- ----------- --------
Voltron:The Third Tim Curry, Billy West Children's 1998
Dimension Television Series
Babylon 5 Bruce Boxleitner, Tracy Television Series * 1993 -
Scoggins** Present
Hypernauts Glenn Herman, Heidi Lucas, Children's 1996
Marc Daniel Television Series
The Gathering Michael O'Hare, Mira Furlan TV Movie/Pilot for 1993
"Babylon 5" series
Siringo Brad Johnsen, Chad Lowe, Television Movie 1995
Crystal Bernard
The Wild West Jack Lemmon, James Coburn, Documentary Series 1993
Helen Hunt, Bruce Boxleitner
Captain Power Tim Dunnigan, Peter MacNeill, Television Movie 1989
and The Soldiers Jessica Steen
of the Future;
The Legend Begins
Captain Power Tim Dunigan, Peter MacNeill, Children's Series 1987-1988
and the Soldiers Jessica Steen
of the Future
Five Mile Creek Louise Caire Clark, Cable 1983-1986
Rod Mullinar Television Series
Louis L'Amour's Cindy Pickett, Mary Larkin Network Pilot 1982
Cherokee Trail Timothy Scott
Wild Times Sam Elliot, Ben Johnson, Television 1980
Bruce Boxleitner Mini-Series
Roughnecks Ana Alicia, Vera Miles, Television 1980
Cathy Lee Crosby, Steve Mini-Series
Forrest, Harry Morgan
The Buffalo Stan Shaw, Richard Lawson, Network Pilot 1979
Soldiers John Beck, Hilly Hicks
Louis L'Amour's Sam Elliot, Tom Selleck Network 1979
The Sacketts Glenn Ford, Ben Johnson Mini-Series
* Five seasons of 22 one hour episodes were produced, one season per year, in
1993 through 1997. A spin-off of this series, called "Crusade," consisting of
22 one hour episodes is currently in production for delivery in the 1998-1999
television season. In addition, the Company has produced two made for
television movies which aired in 1998 and is currently producing two additional
movies for Turner Network Television which will air in 1999.
** Tracy Scoggins replaced Claudia Christian in the fifth season.
3
Business Strategy
Historically, the Company's strategy has been to develop and produce high
quality leading edge programming which is financed 100% by the major
entertainment studios, networks and television distributors, with the Company
avoiding the financial risk of funding its Projects. Because the Company
receives the full cost of the production, its profit potential is usually
limited to production margins, producer fees and a share of the distributors'
net profits, if any. The key elements of the Company's strategic growth plan
are:
- -Entertainment Production. The Company's increased in-house post production and
graphics/animation capacity has helped to streamline its production times and
increase its ability to handle more projects. This division's strategic plan is
to achieve a capacity to concurrently produce three major television or feature
film projects. These would be either joint venture productions in conjunction
with a major studio or distributor, or will be the Company's own Productions.
Discussions along these lines are on-going and will come to fruition if and when
projects that meet the Company's criteria for profitability and success are
successfully developed and placed. The Company has also established an
objective to retain greater equity participation in the projects it produces.
The retention of ancillary exploitation rights such as merchandising, and the
licensing of individual multimedia markets or entertainment platforms such as
the Internet, are areas of particular interest to the Company.
- - Computer Animation and Visual Effects Production Services. 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 digital imaging techniques and has gained growing recognition
throughout the entertainment industry for producing highly creative visual
effects while maintaining tight budgetary control. In order to more fully
exploit these strengths, the Company formed the Netter Digital Technologies
division in the fourth quarter of fiscal 1997 to market computer graphics and
digital post-production services to outside clients. The Company has provided
visual effects and post-production work in the feature film, television
production, television promotion, industrial/corporate video and television
commercial segments. In the fourth quarter, the Division finalized deals which
started production on a 3-D animated children's series, "Voltron," and the
graphics for a new electronic video game, bringing it into two new segments.
The Company is increasing its efforts in this area and will continue to bid on
numerous outside projects on a larger scale, including feature films, television
mini-series and commercials.
- - Videssence Lighting Products. Videssence's strategic growth plan is to use its
SRGB(tm) technology and its association with the Company to create new products
for entry into new market segments that it feels will provide significant growth
potential. In the middle of the year, the Company introduced new products
which were developed for the film production markets which utilize film rather
than video cameras, as well as, a line of portable and kit oriented products
that are being marketed to the location and portable studio markets for both
film and video camera production applications. In regards to general lighting,
film and video media are formulated differently and require specific lighting
calibrations. The Company believes that a large market exists in film lighting
applications and that the same product advantages that prompted a wide
acceptance in video camera production applications will also be successful in
film production applications. The Company hopes that it will be able to
steadily increase its market share in the film lighting arena in the coming
year. In the latter part of fiscal 1998, Videssence also introduced the Zones,
a line of low price point lighting instruments aimed at non-studio applications
such as corporate video production, teleconferencing, schools
(distant learning), government council chambers, and many other areas. The
Company believes that this will also be a growing market for its lighting
products.
4
Entertainment Production
Current Production. Since 1993, the Company, through its 51%-owned subsidiary,
Babylonian Productions, Inc., has produced the award winning television series,
"Babylon 5," in association with its creator, J. Michael Straczynski, for Warner
Bros. Prime Time Entertainment Network ("PTEN"). By the end of fiscal 1998, the
"Babylon 5" series consisted of 110 original one-hour episodes. While
traditionally seen in syndication, the fifth season of "Babylon 5" premiered on
Turner Network Television ("TNT") in January 1998. At the end of fiscal 1998,
the Company began production on an all new, "spin-off" series to this popular
franchise entitled "Crusade," which will air on TNT in January 1999. The
Company is scheduled to produce 22 episodes throughout fiscal 1999. In addition,
work has commenced on two all new "Babylon 5" made for television movies, one of
which will serve as a transition from "Babylon 5" to "Crusade." TNT began airing
the fifth season of "Babylon 5" and re-runs of the first four seasons in January
1998, making TNT the exclusive "home" of the "Babylon 5" franchise in the United
States. Warner Bros. continues to directly market the series overseas. With
the new production of the series "Voltron" underway through its Netter Digital
Technologies division, the Company is now positioned to undertake additional
children's and prime-time series utilizing 100% computer animation.
Development. The development of new material or properties for television, film
and new multimedia productions is essential to the Company's future growth. It
is the Company's intention to begin to take greater equity ownership of certain
future Projects, thus creating the potential for greater ancillary
rights and profit participation. Typically, the Company either acquires an
option to purchase, or creates or co-creates its own, concept, outline,
treatment, script, or literary rights (a "Property") on which it will base
a television series or movie. When acquiring existing Properties by option, the
Company will usually pay a nominal fee for a six-month or longer option against
a more substantial price if the Company exercises the option and purchases the
Property. Such options enable the Company to develop and secure a production
commitment before actually acquiring the property. Terms of the options vary
significantly and are dependent upon the credibility of and prior success of the
writer/owner of the Property, the revenues the Company estimates can be received
from exploitation of the Property and the estimated cost of further development
and production. Certain agreements may provide for additional payments to
writers upon the sale, production, or distribution of a Project and may also
provide for participation in revenues or profits from these Projects.
On a continuing basis, the Company has numerous projects in various stages of
development. The Company allocates a significant portion of the time and energy
of its staff to search for potentially viable material and for the development
of concepts, treatments and screenplays. As of June 30, 1998, approximately
$250,000 had been spent or committed by the Company in connection with the
development of Projects that are currently active. Although a number of
projects which the Company develops are subsequently abandoned, the Company
believes that these expenditures are necessary if the Company is to develop
suitable Projects which have a chance of achieving commercial success. It is
not the practice of the Company, however, to expend substantial sums on a per
project basis, unless it believes that there is a strong likelihood of a
financing, production and/or distribution commitment from third parties.
Financing. Traditionally, the Company's practice has been to fund production
costs for particular Projects through production contracts with studios,
networks and distributors who cover 100% of the production funding. The Company
has been able to secure such production financing to date, and intends to
continue this general practice for financing its projects in the foreseeable
future. However, as discussed above, for certain future Projects, the Company's
strategic intent is to retain equity participation including, for example,
5
the retention of ancillary exploitation rights such as merchandising. While
this strategy may require additional overhead and equity investment by the
Company, as well as corresponding additional financial risk, it is expected to
provide a greater upside on successful projects through equity participation.
These projects will be considered by management on a case by case basis.
Competition. The Company's entertainment production activities are subject to
intense competition. The Company's competitors include major entertainment
studios, television and cable networks and numerous independent production
companies, many of which have significantly greater experience and financial
resources than the Company. All of these studios and production companies
compete for available literary properties, writers and other creative talent,
production financing, and distribution. In recent years, an increase in the
international market and the number of both production companies and television
and motion picture products has intensified this competition.
The entertainment business in general, and the television, multimedia and motion
picture businesses in particular, are undergoing significant changes, primarily
due to technological developments. These developments have resulted in the
availability of alternative forms of leisure time entertainment, expanded pay
television services, the Internet and more readily available multimedia home
entertainment equipment. The number of episodes of a television series and the
ability to retain ancillary rights remains a critical factor in generating
revenues in other media. Given the nature of technological development and
shifting consumer tastes, it is impossible to predict what effect technological
and other changes will have on the potential overall revenue from television and
motion pictures.
Computer Animation and Visual Effects Production Services
Current Outside Client Productions. The Company, under its Netter Digital
Technologies division, began to solicit work for its digital media production
services business in the fourth quarter of fiscal 1997. As the process for
orchestrating the integration of outside service work with the Company's own
current in-house productions was new, the Company started with a small number of
jobs in different segments of the market. Since then, the Company has provided
visual effects and post-production work in the feature film, television
production, television promotion, industrial/corporate video and television
commercial segments. In the fourth quarter of fiscal 1998, the Division
finalized deals and started production on a 3-D animated children's series
entitled "Voltron:The Third Dimension" and the graphics for a new electronic
video game with a major entertainment company, bringing it into two new
segments. "Voltron" is the biggest undertaking to date of the division and
represents the first time a U.S. company has created a television series
entirely in 3-D animation. This children's series consists of 22 episodes and
will begin airing in September 1998. The Company is continuously bidding on
numerous outside projects on a larger scale, including feature films,
television mini-series and commercials.
Growth Strategy. Through its work on "Babylon 5," the Company has pioneered
many aspects of visual effects creation utilizing desktop computers. The
Company's strategy is to combine its technical expertise with the cost
efficiencies resulting from its production methodology, to penetrate what the
Company believes is an active market for projects requiring creative, high
quality digital graphics and effects produced in a cost effective manner.
Further, the Company is one of the few companies which offer the ability to
perform visual effects and post-production work under the same roof.
In July 1997, the Company moved into a new state-of-the-art facility in North
Hollywood, a center of the entertainment and communications media industry.
Within this facility, the Company designed an infrastructure that would allow
the animation, compositing and post-production division to be on the cutting
6
edge of network and rendering technology. As the entertainment industry
continues to advance through technology, the Company hopes to be at the
forefront of the service providers.
The Company now offers a multitude of services such as: digital visual effects,
3D modeling and animation, compositing, matte painting, roto, online editing,
offline editing, art direction, and on-set supervision. The Company also has a
state-of-the-art motion capture facility which enables it to efficiently
animate 3-D character movements. All of these services run on multiple hardware
platforms and utilize many different software programs such as: Alias, Discreet
Logic, SoftImage, Lightwave 3D, Illusion, After Effects, Electric Image, and
Matador Paint. The Company employs these platforms on numerous hardware
platforms including SGI, Windows NT, and Macintosh computers. All of these
different platforms give the Company the luxury of flexibility that most other
facilities do not enjoy.
Competition. The Production Services business faces significant competition
from numerous independent visual effects and post-production houses. The
entertainment industry, especially in Southern California, is filled with
companies, large and small, which offer these services. With the advancements
of technology, the costs of the computer systems used to create special effects,
along with the associated software, have fallen dramatically opening up the
market to many start-up companies. As the Company expands in this market, it
will face competition from larger entities with greater experience and financial
resources such as Industrial Light and Magic, Digital Domain and Digital Magic.
Videssence Lighting Products
Current Products. Videssence has successfully manufactured and marketed a broad
line of lighting products utilizing its patented SRGB(tm) lighting technology
since 1989. This patented technology has stabilized the fluorescent light source
by eliminating the "flicker" or "strobe effect" thus rendering it effective for
media production lighting. SRGB(tm) lighting fixtures utilize tri-color content
(red, blue and green color values) lamps enclosed in proper reflectors and
fixtures. Since 1989, Videssence has successfully developed the first energy
efficient, technically color correct alternative to the incandescent lighting
used in television, motion picture production and photography. Videssence's
high-tech fluorescent lights consume far less energy and generate light with a
lower level of heat than incandescent lights. Historically, Videssence's
products have been marketed to customers who operate video production facilities
or television news studios, both of which utilize video cameras in production.
The end-users in these markets have accepted Videssence's Studio 2000 product
line which has generated the majority of the company's sales to date. These
products are now installed in over 500 news studios around the world including
CNN, ABC World News Tonight With Peter Jennings, CBS and affiliates, NBC and
affiliates, the BBC, China Central Television (CCTV) and numerous other
prominent news broadcasters. Videssence's products have also been introduced
into the video conference/distant learning market and the digital photography
market.
Since July 1995, Videssence has been adapting technology from the Studio 2000
product line and has been developing new product components to work in
conjunction with film (vs. video) applications and productions. The new
Vid-Strip power distribution and Vista dimming control products have been tested
and proven on the Company's "Babylon 5" sound stage and have been well received.
With the development of the custom phosphor SRGB(tm) Cinelamps and the custom
remote ballast, the ET-250 SRGB(tm) E-Drive which are compatible with the
existing Studio 2000 products, Videssence has prepared itself for entry into all
production markets, whether in operations using film or video technology.
In the beginning of calendar year 1998, Videssence completed a new line of
products to be marketed to the location and portable studio markets for all
media production lighting applications. Its Koolite and Koolhead line are a
7
range of lightweight metal fixtures and folding plastic fixtures, respectively,
suitable for sale to the rental or production lighting industries. The new
Koolkits represent prepackaged Koolite products for media production
professionals needing studio quality lighting when they are in the field.
Product Development. At the end of fiscal 1998, Videssence completed
development on the Zones product line which represent a nine fixture family of
SRGB(tm) lighting capable of replacing 500 to 5000 watt incandescent fixtures.
Each fixture is sold with accessories that convert a fixture's pattern from very
large to small zones of lighting. The concept of this line was to be a simple,
low-cost "solution" to any lighting professional who desired an inexpensive,
easy to adopt and use lighting system. The Company will market the Zones
products for non-studio applications such as corporate video production,
teleconferencing, schools (distant learning), government council chambers, and
many other areas.
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 from alternative suppliers. Videssence purchases specific electronic
components and tri-chrome fluorescent lamps from the largest lighting companies,
including General Electric, Philips and Siemens. Videssence produces certain
electronic components for use in its products (including high speed ballasts)
and requires advanced integrated circuit components to produce such electronic
components. These items are available but sometimes require long lead times for
delivery. While in the past Videssence has been able to obtain an adequate
supply of such circuit components on a timely basis, there can be no assurance
that the company will not experience delays or problems in the future in
procuring needed materials.
Marketing. Videssence markets its products in the USA and internationally
through a network of manufacturer's representatives, dealers, distributors and
direct sales staff. The company utilizes direct marketing with trade promotions,
advertising, attendance at recognized industry trade shows and a detailed
internet web site to reach its customer base and support its sales/distribution
network. With its new product offerings and new target markets, Videssence
restructured and expanded its sales and distribution network in fiscal 1998
signing on a significantly increased number of professional selling
organizations compared to a year ago. Furthermore, with the advent of its new
Zones line, Videssence has entered an agreement with a major New York based
international mass marketer to feature the Zones in their upcoming direct mail
catalog.
Competition. The media production lighting business is highly competitive.
Videssence competes with manufacturers of traditional incandescent lighting
products as well as other manufactures of fluorescent lighting products. To the
extent the end user selects high speed fluorescence as the lighting method, the
company has four primary competitors: Strand, Kinoflo, Balcar and LightTech.
Strand, Balcar and LightTech are manufacturing product (or will) using
technology licensed from Videssence, although these companies have not generated
significant revenues for Videssence. The company will meet new competitors as
it releases its new film and portable/kit products. Some of these competitors
are significantly larger than the company and have significantly greater capital
and management resources. As such, there can be no assurance that Videssence
will be successful in marketing its new products.
Employees
At June 30, 1998, the Company employed 69 persons full-time in its principal
executive offices and post-production/animation facilities. Of such persons,
four are officers. The balance are production, clerical and administrative
personnel. The Company is currently staffed to handle its current workload and
a specific amount of incoming outside production services business. The Company
8
anticipates increasing its technology, computer graphics animation and post
production facilities as well as its staffing requirements in the upcoming
fiscal year as new projects are undertaken. The Company is continuing to review
its staffing requirements and additions or reductions in staff may be made if
appropriate in the opinion of management.
When the Company is in production, as many as 120 additional people may be
engaged by the Company at its production studio for periods of nine months or
longer. The Company has granted, and will grant, to actors, directors,
screenwriters, and other important creative and financial elements, rights to
participate in the net profits or gross revenues of particular projects.
Similar participation is required pursuant to the terms of certain collective
bargaining agreements.
Some of the Company's or subsidiary's employees are represented by labor unions
and the Company believes that it has good relationships with its employees. The
Company or certain of its subsidiaries are signatories to various agreements
with unions and guilds that operate in the entertainment industry. Although the
Company considers its employee relations to be satisfactory at present, the
renewal of these union contracts does not depend on the Company's activities or
decisions alone. If, prior to the expiration of an existing union contract, the
representatives of the employers were unable to negotiate a new contract
with the union, any resulting work stoppage could adversely affect the Company.
At June 30, 1998, Videssence employed 22 persons full-time at its principal
executive offices, manufacturing/distribution facility, and satellite sales
offices in Pennsylvania and Illinois. Of such persons, one is an officer, 6 are
engaged in sales and sales support, 6 were engaged in manufacturing and the
remainder were engaged in management, marketing, engineering or administration.
Videssence believes its relations with its employees are satisfactory.
ITEM 2. REAL PROPERTY
The Company leases its principal executive offices and post-production and
animation facilities in a new, state-of-the-art building with 22,000 square feet
located at 5125 Lankershim Blvd., North Hollywood, California 91601. The lease,
which started in July 1997, is for seven years with annual minimum rent of
$277,000. The Company has an option to extend the lease for two additional five
year terms. The Company leases approximately 80,000 square feet of studio
facilities located at 8615 Tamarack Avenue, Sun Valley, California 91352 on an
annual basis under two leases which expire in June 1999. The aggregate annual
minimum rent for these facilities is $385,000, and one of the two leases for the
studio facilities, representing approximately 20,000 square feet, has three
options to renew for one year each. The Company also leases two spaces for
Videssence's manufacturing facilities, warehousing, and administrative offices
which are located at 341 and 360 Beach Rd., Burlingame, California 94010. The
lease for the former facility is for 4,500 square feet and expires in December
1998 while the second is for 8,000 square feet and expires in November 2000
with an annual minimum rent of $77,000. The Company is currently evaluating its
overall space requirements for its Videssence subsidiary. Rent expense for the
year ended June 30, 1998 was approximately $790,000.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is from time to time party to
various actions which in the aggregate are not believed by management to be
material to its financial condition
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal 1998.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ Small Cap Market under the
symbol "NETT" since November 20, 1995. In addition, warrants to purchase up to
494,500 of the Company's Common Stock are listed on the NASDAQ Small Cap Market
under the symbol "NETTW." The terms of the warrants provide the holder the right
to purchase any time prior to November 21, 1998 one share of Common Stock at a
price of $6.50. The Company's Common Stock is also traded on the Pacific
Exchange.
The following table sets forth the high and low sales price per share of the
Common Stock as reported by NASDAQ for each quarter within the last two fiscal
years.
Quarter Ended High sales Low sales
------------- ---------- ---------
September 30, 1996 $5.75 $3.50
December 31, 1996 $4.38 $1.75
March 31, 1997 $4.69 $2.50
June 30, 1997 $4.44 $3.50
September 30, 1997 $3.88 $2.13
December 31, 1997 $3.25 $1.75
March 31, 1998 $2.75 $1.50
June 30, 1998 $6.00 $1.63
On September 23, 1998, the closing prices of the Common Stock as reported by
NASDAQ were $1.63 bid and $1.94 ask. On such date there were 34 holders of
record of the Common Stock. The number of shareholders does not take into
account shareholders for whom shares are being held in the name of brokerage
firms or clearing agencies.
The Company has never paid any dividends on the Common Stock. The Company
intends to retain earnings and capital for use in its business, and no cash
dividends are expected to be paid on the Common Stock in the foreseeable future.
ITEM 6. 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 6 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, INCLUDING THOSE DISCUSSED UNDER THE
HEADING "RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-3 (Registration No.333-56963) FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JUNE 16, 1998, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT.
10
General
Historically, the Company's primary operations have been to develop and produce
media entertainment Projects under agreements with studios, networks and
distributors who fund 100% of production costs of the Project. 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 agreement relating to such Projects. Accordingly, year
to year comparisons of production revenues from these sources are not
necessarily indicative of future revenues. During fiscal 1998 and fiscal 1997,
the Company derived approximately 93% and 99%, respectively, of its
entertainment production revenues from Warner Bros. for the "Babylon 5"
television series. In fiscal year 1999, the Company is contracted to produce a
spin-off to its popular "Babylon 5" entitled "Crusade" which will be in
production through May 1999. As discussed above in "PART I. ITEM 1. BUSINESS,"
the Company's business strategy is to expand its entertainment production
business as well as to broaden its business base through Videssence's
manufacture and sale of lighting products and through the Company's marketing of
its computer animation and visual effects production services to outside
clients. Of course, there can be no assurance that this strategy will be
successful, and, if the "Crusade" series is not renewed after the first season
or replaced by a series generating comparable revenues, the Company's
financial condition and operations could be materially adversely affected.
Results of Operations
Net Revenues. Net revenues increased to approximately $32.3 million for the
fiscal year ended June 30, 1998, an increase of 25.7%, as compared to
approximately $25.7 million for the fiscal year ended June 30, 1997. This
increase resulted from several factors. First, revenues from entertainment
production increased $3.2 million as the production on two new television movies
provided $4.5 million of additional revenues to offset a $1.3 million decrease
in the "Babylon 5" Season 5 revenue compared to Season 4. The latter difference
stemmed from production timing. Second, the first full year of Netter Digital
Technologies generated $1.4 million of new revenue. Third, as Videssence was
acquired in January 1997, fiscal 1998 benefited from a full year of revenue
compared to only six months in fiscal 1997 which contributed additional revenues
of $1.5 million to the Company. Other areas of the Company, from the
"Babylon 5" Fan Club with its expanding merchandise sales and fan base to
computer graphics work on promotional activities to other production contracts,
also contributed an increase of $500,000 of revenues.
Gross Margin. The Company's gross profit for fiscal 1998 was approximately
$5.0 million, or 15.4% of revenues, as compared to approximately $3.3 million,
or 12.8% of revenues, for fiscal 1997. The Company's entertainment production
business generated approximately $3.1 million (approximately 11.0% of revenues
from entertainment production activities) in fiscal 1998, up from approximately
$2.0 million (approximately 8.8% of revenues from entertainment production) in
fiscal 1997, because the Company has continued to improve its operating
methodologies and the business generated from Netter Digital Technologies has
been able to generate higher margins than the traditional core entertainment
production business. Videssence generated approximately $1.88 million of gross
profit (approximately 47.9% of net revenues) in fiscal 1998 as compared to $1.25
million of gross profit (approximately 52.0% of net revenues) in the second half
of fiscal 1997 (Videssence was acquired in January 1997.) This decrease
resulted from the expansion of the dealer network during the sales restructuring
and a change in the product mix of sales to incorporate the new products which
have somewhat lower gross margins in the second half of fiscal 1998.
11
General and Administrative Expenses. General and administrative expenses
increased to approximately $4.5 million, or approximately 13.9% of the Company's
net revenues, as compared to approximately $3.1 million, or approximately 12% of
revenues, in fiscal 1997. The increase was primarily attributable to the
addition of Videssence's operations which added an additional $1.1 million to
expenses during its first full year within the Company. To a lesser degree,
rent and other facility expenses increased as the Company moved to its new,
larger building. Also, travel and consulting costs increased as management
worked to restructure Videssence and increase communication with the investment
community.
Operating Income (Loss). The Company achieved operating incomes of
approximately $376,000 and $157,000 for the years ended June 30, 1998 and
June 30, 1997, respectively. In fiscal 1998, operating income of approximately
$776,000 from its entertainment production and production services activities
(as compared to $48,000 in fiscal 1997) offset an operating loss of
approximately $400,000 from its Videssence operations (as compared to operating
income of approximately $109,000 in fiscal 1997.) The increase in operating
income from the entertainment production and production services activities was
primarily due to revenues from the additional made-for-television movies for TNT
and the additional series, "Voltron." The operating loss of Videssence can be
attributed to lower than expected sales, especially from the international
markets during the fourth quarter of fiscal 1998.
Other Income and Expenses. Interest income decreased to approximately
$22,000 for fiscal 1998, as compared to approximately $83,000 for fiscal 1997,
as proceeds from the Company's November 1995 initial public offering were fully
drawn from short term investments and used for expansion of its in-house
post-production and graphics/animation facilities and working capital for
Videssence. Interest expense increased to approximately $206,000 in fiscal
1998, from approximately $59,000 in fiscal 1997, due to the acquisition of
Videssence which had more long term debt and credit facilities and the use in
fiscal 1998 of lease lines to finance capital expansion in its
graphics/animation facilities.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash flows from
operations, the initial public offering of Common Stock and Warrants completed
in November 1995, which generated net proceeds of approximately $3.2 million
and, a February 1997 preferred stock placement which raised $424,000 in gross
proceeds. With respect to production costs for particular entertainment
Projects, production contracts are entered into with studios, networks and
distributors which 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 overhead and equity
commitments for these new projects.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 fiscal 1998 and fiscal 1997, the Company derived approximately 93% and
99%, respectively, of its entertainment production revenues from its agreements
with Warner Bros. relating to the production of the "Babylon 5" series and the
associated made for television movies. During fiscal 1998, the Company was
contracted to produce a spin-off of "Babylon 5" entitled "Crusade" which will
be in production from July 1998 through approximately May 1999. The Company has
12
also begun production on two new made for television movies. If the "Crusade"
series is not renewed through an additional agreement extension after the first
season 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 $878,000 for the fiscal year
ended June 30, 1998. The biggest uses of cash were a build-up of inventory at
Videssence due to the development of a new line of lighting products for the
film industry, and an increase in accounts receivable both at Videssence and
Netter Digital Entertainment. The accounts receivable increases resulted from
the termination of a factoring agreement at Videssence and an increase in sales
from both companies. Partially offsetting these uses was an increase in
deferred revenue as the Company began to start its new production season for
"Crusade."
Cash used for capital equipment investment was approximately $139,000 for fiscal
1998. The use of cash was primarily for additions of computer and post
production equipment to expand its post-production and graphics/animation
facilities as well as additional office equipment at Videssence.
Since January 1, 1997, the Company has advanced approximately $2 million of
additional working capital to its Videssence subsidiary.
Effective July 1997, the Company's subsidiary Videssence 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 20, 1998, the Company owes an
outstanding principal amount of $607,000 on such line, which was borrowed to
repay monies advanced by the Company's factor in conjunction with terminating
the Company's factoring agreement.
Management believes that its present cash position and overall liquidity will
enable the Company to meet its operating commitments for the next twelve months.
Year 2000
Based on a preliminary review of Year 2000 issues, the Company believes that the
impact will not be material to the Company's business, operations or financial
condition. The Company is also assessing how it could be affected by the
failure of third parties (e.g. vendors and customers) to mitigate their own
Year 2000 issues.
13
ITEM 7. FINANCIAL STATEMENTS
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEET - June 30, 1998 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS-
for the years ended June 30, 1998 and 1997 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
for years ended June 30, 1998 and 1997 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS -
for years ended June 30, 1998 and 1997 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Netter Digital Entertainment, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Netter Digital
Entertainment, Inc. and Subsidiaries as of June 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 1998 and 1997. 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 our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 Netter Digital Entertainment,
Inc. and Subsidiaries as of June 30, 1998 and the results of its operations and
its cash flows for the years ended June 30, 1998 and 1997 in conformity with
generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
-------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
New York, New York
August 22, 1998
F-2
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,634,809
Accounts receivable, net of allowances of $46,000 2,285,011
Inventories 1,631,025
Due from officer 155,897
Production costs 251,632
Other 134,537
--------------
TOTAL CURRENT ASSETS 6,092,911
EQUIPMENT, net 3,157,394
GOODWILL, net 1,938,434
DEPOSITS AND OTHER ASSETS 333,760
--------------
$ 11,522,499
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and production fee advances $ 2,304,092
Accrued expenses 265,582
Deferred revenue 1,106,957
Due to stockholder 36,497
Credit facilities 525,717
Current portion of capital lease obligations 734,329
--------------
TOTAL CURRENT LIABILITIES 4,973,174
--------------
CAPITAL LEASE OBLIGATIONS 1,337,186
MINORITY INTEREST 500
--------------
STOCKHOLDERS' EQUITY :
Preferred stock, $.001 par value, 2,000,000 shares
authorized; 51,859 shares issued and outstanding 304,366
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,334,405 shares issued and outstanding 33,344
Additional paid-in capital 4,726,171
Retained Earnings 147,758
--------------
TOTAL STOCKHOLDERS EQUITY 5,211,639
--------------
$ 11,522,499
=============
See notes to financial statements.
F-3
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended June 30,
---------------------------
1998 1997
---------------------------
REVENUES:
Production $ 28,396,765 $ 23,300,891
Sales 3,915,786 2,410,987
------------ ------------
TOTAL REVENUES 32,312,551 25,711,878
------------ ------------
EXPENSES:
Production 25,288,142 21,258,498
Cost of goods sold 2,039,390 1,155,937
General and administrative 4,504,742 3,097,249
Amortization of goodwill 104,311 43,463
------------ ------------
TOTAL EXPENSES 31,936,585 25,555,147
------------ ------------
OPERATING INCOME 375,966 156,731
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 21,785 83,414
Interest (expense) (206,090) (59,054)
Other income 10,337 33,285
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (173,968) 57,645
------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 201,998 214,376
PROVISION FOR INCOME TAXES 41,000 24,000
------------ ------------
NET INCOME (LOSS) $ 160,998 $ 190,376
============ ============
Cumulative preferred stock dividend 42,530 14,354
------------ ------------
Net Income to common shareholders $ 118,468 $ 176,022
============ ============
Net Income per common share,
basic and assuming dilution $ 0.04 $ 0.06
============ ============
Weighted average common shares outstanding 3,334,552 3,056,944
============ ============
See notes to financial statements.
F-4
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Additional Earnings Total
Number of Number of Paid in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
--------- -------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 - $ - 2,795,000 $ 27,950 $ 3,533,331 $ (146,732) $ 3,414,549
Stock issued in connection
with acquisition - - 522,221 5,222 1,107,109 - 1,112,331
Stock issued in connection
with settlement - - 10,000 100 35,803 - 35,903
Sale of preferred stock 47,145 261,939 - - - - 261,939
Stock dividend 1,595 14,354 - - - (14,354) -
Net income - - - - - 190,376 190,376
--------- -------- ---------- --------- -------- ----------- ------------
Balance, June 30, 1997 48,740 $ 276,293 3,327,221 $ 33,272 $4,676,243 $ 29,290 $ 5,015,098
Stock issued in connection
with settlement - - 11,729 117 49,883 - 50,000
Retirement of common stock - - (4,545) (45) 45 - -
Stock dividend 3,119 28,073 - - - (28,073) -
Accrual of stock dividend
payable - - - - - (14,457) (14,457)
Net income - - - - - 160,998 160,998
--------- --------- ---------- --------- --------- ----------- -----------
Balance, June 30, 1998 51,859 $ 304,366 3,334,405 $ 33,344 $4,726,171 $ 147,758 5,211,639
========= ========= ========== ========= ========= =========== ============
<FN>
<FN1>
See notes to financial statements
</FN>
</TABLE>
F-5
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 160,998 $ 190,376
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 520,307 238,087
Amortization 104,311 43,463
Gain on disposal of equipment (10,621) -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,418,930) (371,372)
(Increase) in inventories (640,970) (62,973)
Decrease (increase) in production costs 43,087 (229,510)
(Increase) decrease in other current assets (16,424) 13,945
(Increase) decrease in deposits and other assets (38,912) (211,330)
(Decrease) increase in accounts payable (107,550) 1,426,240
(Decrease) in accrued expenses (50,493) (117,201)
Increase in deferred revenue 576,755 530,202
--------------- ---------------
(1,653,437) 978,001
--------------- ---------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (878,442) 1,449,927
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (138,770) (647,120)
Proceeds from sale of equipment 22,866 -
Advances to subsidiary prior to acquisition - (275,000)
--------------- ---------------
NET CASH (USED IN) INVESTING ACTIVITIES (115,904) (922,120)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquistion costs net of cash required - (342,989)
Issuance of preferred stock - 261,939
Decrease in due from officer - 38,979
Proceed from line of credit 458,606 -
Notes payable principal payments (127,820) (75,675)
Principal payments of capital lease obligations (276,153) (16,762)
--------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 54,633 (134,508)
--------------- -------------
NET (DECREASE) IN CASH (939,713) 393,299
Cash, beginning of year 2,574,522 2,181,223
--------------- -------------
Cash, end of year $ 1,634,809 $ 2,574,522
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 206,090 $ 78,918
Income taxes $ 10,791 $ 1,630
Noncash activity:
Issuance of common stock in connection with
acquisition of Videssence $ - $ 1,112,330
Stock issued for legal fee settlement $ 50,000 $ 35,903
Stock dividend $ 28,073 $ 14,354 -
Purchase of equipment through leases payable $ 2,119,407 $ 202,589
<FN>
<FN1>
See notes to financial statements.
</FN>
</TABLE>
F-6
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1997
1. ORGANIZATION:
Netter Digital Entertainment, Inc. was incorporated in September 1995 under the
laws of the State of Delaware. Babylonian Productions, Inc., a majority owned
subsidiary (51%), was incorporated in June 1993 under the laws of the State of
California. Netter Digital Entertainment, Inc. and Babylonian Productions, Inc.
are collectively referred to as "NDEI". NDEI is engaged in the development,
acquisition and production of television series, made for television movies,
documentaries, theatrical motion pictures and multimedia products.
On January 10, 1997, NDEI purchased all the outstanding shares of Videssence,
Inc. ("Videssence") in exchange for 522,221 shares of NDEI's Common Stock. This
transaction was completed pursuant to an Agreement and Plan of Merger (the
"Plan") dated April 26, 1996 between Videssence and NDEI. Under the Plan the
Videssence shareholders can earn up to an additional maximum of 788,000 shares
of NDEI's common stock upon Videssence achieving certain performance based
criteria over the next five years. Acquisition costs amounted to $495,998. This
merger was accounted for as a purchase. Videssence designs, manufactures and
distributes media lighting products which incorporate the patented SRGB(tm)
light technology for the illumination of studios, stages and other production
environments in the sound stage, media picture, theater and other theme park
industries. Hereafter, NDEI and Videssence are collectively referred to as
(the "Company").
The following unaudited pro-forma information reflects the results of operations
of the Company as though the merger had been consummated as of July 1, 1996:
Year ended June
30, 1997
-----------------
Revenue $ 28,096,332
=================
Net loss $ (111,589)
=================
Net loss to common shareholders $ (125,943)
=================
Net loss per share $ (0.04)
=================
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. The accounts of Videssence
have been included for the year ended June 30, 1998 and the six months ended
June 30, 1997 All material intercompany transactions have been eliminated.
B. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reporting amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
C. Cash and cash equivalents - The Company considers all highly liquid temporary
cash investments with an original maturity of three months or less when
purchased, to be cash equivalents.
D. Revenue recognition:
Production revenues - The Company derives revenues primarily from providing
contract production services to distributors including producers-profit
participation. Revenues are recognized as earned. Amounts advanced under
production contracts are deferred and not recognized as revenues until
obligations under such contracts are performed. Conversely, amounts expended
under production contracts not yet reimbursed are recorded as a receivable. To
date, the Company has not recognized any material revenues from
producers-profit participation.
E. Inventories - Inventories are recorded at the lower of cost or market. Cost
is determined using the average cost method.
F. Equipment - Equipment is recorded at cost. Depreciation is calculated using
the straight line method based on the estimated useful lives of the related
assets, which range from three to seven 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.
G. 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.
H. Net income per common share - The Company has adopted Statement of Financial
Accounting Standard No. 128, "Earnings per Share;" specifying the computation,
presentation, and disclosure requirements of earnings per share information.
Basic earnings per share has been calculated based upon the weighted average
number of common shares outstanding. Stock options and convertible preferred
stock have been excluded as common stock equivalents in the diluted earnings per
F-8
share because they are either antidilutive, or their effect is not material.
There is no effect on earnings per share information for the year ended June 30,
1997 related to the adoption of this Standard.
I. Income taxes - The Company recognizes deferred tax assets and liabilities
based on the difference between the financial statements carrying amount and the
tax basis of assets and liabilities, using the effective tax rates in the years
in which the differences are expected to reverse. A valuation allowance related
to deferred tax assets is also recorded when it is probable that some or all of
the deferred tax asset will not be realized.
J. Concentration of credit risk - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consisting of cash and
trade receivables. At times the cash in any one bank may exceed the FDIC
$100,000 limit. The Company places its cash with high credit quality financial
institutions. In regards to trade receivables, the risk is relatively limited
due to the customers being national and foreign distributors.
K. Minority interest - Minority interest represents the minority shareholders'
proportionate share of the equity of the Company's subsidiary, Babylonian
Productions, Inc. which was 49% at June 30, 1998 and 1997. The minority interest
is adjusted for the minority's share of the earnings or loss of Babylonian
Productions, Inc.
L. Stock based compensation - The Company accounts for stock transactions in
accordance with APB Opinion No.25, "Accounting for Stock Issued to Employees."
In accordance with Statement of Financial Accounting Standards No.123,
"Accounting for Stock based Compensation," and has adopted the pro forma
disclosure requirements of Statement No.123.
M. Fair value of financial instruments - The carrying amounts reported in the
balance sheet for cash, receivables, accounts payable, and accrued expenses
approximate fair value based on the short-term maturity of these instruments.
N. Goodwill - Goodwill resulting from the acquisition of Videssence represents
the remaining unamortized value of the excess of the purchase price over the
fair value of the net assets of Videssence. Goodwill is amortized on a
straight line basis over a period of 20 years.
O. Impairment of long - lived assets - The Company reviews long-lived assets for
impairment whenever circumstances and situations change such that there is an
indication that the carrying amounts may not be recovered. At June 30, 1998,
the Company believes that there has been no impairment of its long-lived assets.
F-9
3. BUSINESS SEGMENTS
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In 1997
the Company, with the acquisition of Videssence, operates in two business
segments, entertainment and manufacturing.
Summarized financial information of the business segments are as follows:
<TABLE>
For the year ended June 30, 1998 Entertainment Manufacturing Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenue $ 28,396,765 $ 3,915,786 $ 32,312,551
=============== =============== ===============
Operating profit (loss) $ 775,748 $ (399,782) $ 375,966
=============== =============== ===============
Net income (loss) $ 694,328 $ (533,330) $ 160,998
=============== =============== ===============
Identifiable assets $ 6,222,688 $ 5,299,811 $ 11,522,499
=============== =============== ===============
Depreciation and amortization $ 432,075 $ 192,543 $ 624,618
=============== =============== ===============
Capital expenditures $ 2,217,115 $ 41,062 $ 2,258,177
=============== =============== ===============
For the year ended June 30, 1997 Entertainment Manufacturing Total
--------------- --------------- ---------------
Revenue $ 23,300,891 $ 2,410,987 $ 25,711,878
=============== =============== ===============
Operating profit $ 48,036 $ 108,695 $ 156,731
=============== =============== ===============
Net income $ 145,115 $ 45,261 $ 190,376
=============== =============== ===============
Identifiable assets $ 4,753,204 $ 4,030,037 $ 8,783,241
=============== =============== ===============
Depreciation and amortization $ 198,487 $ 83,063 $ 281,550
=============== =============== ===============
Capital expenditures $ 817,055 $ 32,654 $ 849,709
=============== =============== ===============
</TABLE>
4. INVENTORIES:
Inventories consist of the following:
Raw Material $ 943,472
Work in Process 183,657
Finished Goods 503,896
-------------
$ 1,631,025
=============
F-10
5. DUE FROM OFFICER:
Represents a promissory note due from the Company's Chief Executive Officer,
bearing interest at 7.25% per annum. The unpaid principal balance and accrued
interest was due on May 20, 1998 and extended to May 20, 1999 with the approval
of the Company's Board of Directors. All unpaid accrued interest through June
30, 1998 was paid subsequent to that date. The Board has agreed to allow the
note to be repaid in shares of the Company's stock. The stock repayment
required is 110% of the outstanding loan amount which will be priced at the fair
market value on the date of repayment.
6. RELATED PARTY TRANSACTION:
During the years ended June 30, 1998 and 1997, the Company rented trailers, in
connection with one of its productions, for approximately $119,000 per annum,
from a company which is 50% owned by an officer of the Company and his spouse.
During fiscal year ended June 30, 1997, the Company leased some of its recording
equipment for approximately $55,000. The supplier is a company owned by an
officer of the Company's son and administered by the officer's wife.
In March 1996, the Company entered into a consulting agreement which expired in
February 1997, with an individual who through March 1997 was also a member of
the Company's Board of Directors. In March 1997, the Company entered into a new
six month consulting agreement with the same individual for monthly fee of
$3,000.
In March 1998, the Company entered into a one year consulting agreement, with a
former member of the Company's Board of Directors. The agreement has a minimum
annual guarantee of $50,000 and incentives based on additional projects
initiated by the consultant.
7. PRODUCTION COSTS:
Production costs consist of the following:
Story rights and scenarios $ 251,632
==========
Production costs are deferred and will be amortized under the Individual Film
Forecast Method. Production costs will be amortized in relation to the revenue
recognized from each production, and amortization will be calculated based on
management's latest estimate of the production's gross profit margin over its
remaining life, which requires the Company to use estimates of the future
revenue generating potential of each production. Such estimates are subject to a
variety of cost factors. These estimates will be re-evaluated periodically and,
when necessary, production costs will be written down to net realizable value.
F-11
8. EQUIPMENT:
Equipment consists of the following at June 30, 1998:
Machinery and equipment $ 114,711
Leasehold improvement 108,916
Furniture and office equipment 243,235
Computer equipment 370,524
Post-production, animation and
compositing equipment 3,032,181
Rental lights and grips 72,007
------------
3,941,574
Less: accumulated depreciation 784,180
------------
$ 3,157,394
============
At June 30, 1998 the Company has $2,378,071 in equipment under capital leases
as follows:
Furniture and office equipment $ 212,830
Computer equipment 150,148
Post-production, animation and
compositing equipment 2,015,093
------------
$ 2,378,071
============
9. GOODWILL:
Goodwill, which relates to the acquisition of Videssence consists of the
following:
Purchase price, including acquisition costs $ 1,608,329
Net fair value of liabilities assumed 477,880
------------
Cost in excess of net book value of assets
acquired 2,086,209
Less: accumulated amortization 147,775
------------
$ 1,938,434
============
F-12
10. DEBT:
Debt consists of the following:
Line of credit from bank for up to $750,000,
monthly payments of interest at 2% above the $ 458,606
banks reference rate(10.50% at June 30, 1998)
Note payable to bank, payable in monthly principal
payments of $6,667, plus interest at the bank's 67,111
reference rate plus 2.50%(11.00% at June 30, 1998)
The note matures on June 30, 1999.
Notes payable on demand to stockholder, bearing
interest at 10% per annum. Notes are subordinate to 36,497
the bank borrowings. -----------
$ 562,214
===========
The estimated fair value of the Company's debt approximates its carrying amount.
11. CAPITAL LEASE OBLIGATIONS
Current Long-term
portion portion Total
----------- ----------- -----------
Total minimum lease payments $ 893,995 $ 1,456,266 $ 2,350,261
Less: amounts representing 159,666 119,080 278,746
interest
----------- ----------- -----------
Amounts representing principal $ 734,329 $ 1,337,186 $ 2,071,515
=========== =========== ===========
12. COMMITMENT AND CONTINGENCIES:
The Company leased its principal executive television production offices on a
month to month basis through June 1997. In July 1997 the Company entered into a
new seven year lease agreement for its principal offices expiring in June 2004
at an annual rental of $277,000 with the option to extend the lease for two
additional five years terms. The leases for the two studio facilities with
an annual minimum rental of $307,000, and $78,000 both expire in June 1999. The
Company also leases space for its manufacturing facilities under a
noncancellable three year operating lease requiring annual rent of $77,000
expiring November 2000. Rent expense under all operating leases for the years
ended June 30, 1998 and 1997 including its manufacturing facilities were
approximately $785,000 and $509,000, respectively.
F-13
The future minimum rental payments as of June 30, 1998 are as follows:
Year ended June 30,
1999 $ 758,949
2000 $ 359,034
2001 $ 311,770
2002 $ 276,200
2003 $ 276,200
13. STOCKHOLDERS' EQUITY:
In September 1995, the Company issued an aggregate of 125,000 three year
warrants in connection with a bridge financing. Each warrant is exercisable for
one share of common stock at a price of $4.00 per share. Through June 30, 1998,
75,000 of these warrants were exercised for proceeds of $300,000.
In November 1995, the Company completed a public offering of its securities,
selling 860,000 shares of common stock and 430,000 warrants for net proceeds of
approximately $3,200,000. The warrants are exercisable to purchase one share of
common stock at a price of $6.50 per share. The warrants are exercisable at any
time after issuance and expire in November 1998. The underwriters of the public
offering received a warrant to purchase up to 129,000 shares or warrants, or any
combination thereof. The warrant is exercisable for a period of four years
commencing November 20, 1996 at an exercise price of $6.00 per share and $.012
per warrant.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, $.001
par value, the terms of which (including, without limitation, dividend rate,
conversion rates, voting rights, terms of redemption and liquidation
preferences) may be fixed by the Board of Directors at their sole discretion.
During the year ended June 30, 1997 the Company sold 47,145 shares of Series A
Cumulative, Convertible Preferred Stock ("Series A Preferred Stock") at a price
of $9.00 per share. Dividends will be paid in nonassessable shares of Series A
Preferred Stock in an amount per share equal to 10% per annum. Each share of
Series A Preferred Stock is convertible at any time at the option of the holder
into three shares of common stock. The Series A Preferred Stock is redeemable,
in whole or in part, at the option of the Company, for cash at a redemption
price of $9.00 per share.
Stock Options and Warrants
The Company adopted a Stock Option Plan ("Plan") in September 1995. The Plan is
administered by a committee of two ("Committee") appointed by the Board of
Directors and provides that the Committee has sole discretion to select options
and to establish terms and conditions of each option, subject to provisions of
the Plan. If options granted are "incentive stock options", the exercise price
of the options may not be less than 100% of the fair market value of the
F-14
Company's common stock on the date of grant (110% of the fair market value if
the grant is to an employee who owns more than 10% of the outstanding common
stock). Nonstatutory options may be granted under the Plan at an exercise price
of not less than 85% of fair market value of the common stock at the date of
grant. The maximum grant term is 10 years. The Plan is designed for officers,
directors, and other key employees and is authorized to grant up to 500,000
options. As of June 30, 1998, 422,000 options have been granted at price
ranging from $1.81 to $10.25 per share and no options have been exercised.
In December 1997 the Company adopted the 1997 Incentive Stock Option Plan
("1997 Plan"). The 1997 Plan is administered by the Board of Directors (the
"Board") and provides that the Board has sole discretion to grant options and to
establish terms and conditions of each option, subject to provisions of the
Plan. If options granted are "incentive stock options", the exercise price of
the options may not be less than 100% of the fair market value of the Company's
common stock on the date of grant (110% of the fair market value if the grant is
to an employee who owns more than 10% of the outstanding common stock). The
maximum grant term is 10 years. The Plan is designed for officers, employee
directors, and other key employees and is authorized to grant up to 600,000
options. As of June 30, 1998, 100,000 options have been granted at prices of
$2.25 - $2.48 per share and no options have been exercised.
Additionally in December 1997 the Company adopted the 1997 Directors' Stock
Option Plan ("1997 Directors' Plan") The 1997 Directors' Plan is administered by
a committee of the Board of Directors and provides that the committee shall
adopt all rules and regulations and make other determinations that are
desirable for the administration of the 1997 Directors' Plan. Each Non-
Employee Director shall be automatically granted 30,000 options to purchase
shares of common stock upon initial election to the Board and will be granted
10,000 additional options upon each subsequent reelection to the Board. The
purchase price of these options shall be the fair market value on the date of
the grant. The 1997 Directors' Plan is designed for Non-Employee Directors
and is authorized to grant up to 350,000 options. As of June 30, 1998, 50,000
options have been granted at a price of $2.88 per share and no options have been
exercised.
For disclosure purposes the fair value of each stock option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for stock options granted during the
years ended June 30, 1998 and 1997, respectively: annual dividends of $0.00 for
both years, expected volatility of 50%, risk-free interest rate of 6.0% and
expected life from two to five years for all grants. The weighted- average fair
values of the stock options granted during the years ended June 30, 1998 and
1997 were $1.32 and $1.89.
If the Company recognized compensation cost for the employee stock option plan
in accordance with SFAS No. 123, the Company's pro forma net loss and loss per
share would have been $(221,000) and $(0.07) in 1998 and $(382,000) and $(0.13)
in 1997.
F-15
The following table summarizes the changes in options and warrants outstanding
and the related price ranges for shares of the Company's common stock:
<TABLE>
Options Warrants
------------------------------------- -------------------------------------
Number Price Number of Number Price Number of
of Shares Per Share Shares of Shares Per Share Shares
Range Exercisable Range Exercisable
---------- ------------ ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
June 30, 1996 402,000 $5.00-$10.25 120,400 683,500 $4.00-$6.50 50,000
=========== ===========
Granted 220,000 $3.00-$4.38 - - -
Exercised - - - (10,000) -
Canceled (100,000) - - - -
----------- -----------
Outstanding at
June 30, 1997 522,000 $3.00-$10.25 206,800 673,500 $4.00-$6.50 673,500
=========== ===========
Granted 539,500 $1.81-$7.50 - 64,145 $3.50-$7.50
Exercised - - - - -
Canceled (139,300) - - - -
----------- -----------
Outstanding at
June 30, 1998 922,200 $1.81-$10.25 556,750 737,645 $3.50-$7.50 737,645
=========== =========== =========== ===========
14. EMPLOYMENT AGREEMENTS:
The Company has agreements for the services of certain of its officers. Such
agreements expire in September 2000 and provide for a base compensation of
approximately $700,000. These agreements also provide for additional
compensation based on certain revenue or other operating results and for
payments by the Company in the event of death, disability, or termination.
The aggregate amounts paid pursuant to such agreements was $709,000 and $673,000
for the years ended June 30, 1998 and June 30, 1997, respectively.
15. INCOME TAXES:
The provision for income taxes consists of the following:
June 30,
---------------------------
1998 1997
----------- -----------
Current federal and state income taxes $ 41,000 $ 24,000
=========== ===========
F-16
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes is
as follows:
June 30,
---------------------------
1998 1997
----------- -----------
Income tax provision (benefit)
computed at the statutory rate $ 69,000 $ 73,000
Income tax benefit recognized (72,020) (41,000)
Tax rate differences - (14,000)
Provision for state income taxes 44,020 6,000
----------- -----------
Income tax provision $ 41,000 $ 24,000
=========== ===========
The Company has a net operating loss carryforward for tax purposes totaling
approximately $360,000 at June 30, 1998 expiring in the years 2010 to 2013.
Listed below are the tax effects of the items related to the net Company's tax
asset:
Tax benefit of net operating loss carryforward $ 146,000
Tax credits carryforward 16,000
Section 263A inventory capitalization 112,000
Expenses not currently deductible for income tax purposes (204,000)
-----------
Total 70,000
Valuation allowance (38,000)
-----------
Net deferred tax asset recorded $ 32,000
===========
16. SIGNIFICANT CONCENTRATIONS:
During the year ended June 30, 1998 and 1997, the Company derived approximately
93% and 99%, respectively, of its entertainment revenue from one distributor. In
July 1998, the distributor granted a new contract for a spin-off of the
Company's previous production through approximately May 1999. The distributor
has options for an additional two years of this production with the Company. If
the distributor's options are not renewed the Company's financial condition and
operations could be adversely affected. Included in cash and cash equivalents
is approximately $600,000 of advances from such distributor.
F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
14
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of regulation S-B).
Exhibit Description
Number
- ------- ------------
2.1 Agreement and Plan of Merger and Reorganization, as amended. (5)
2.2 Amendment No. 2 to the Agreement of Merger and Reorganization. (6)
2.3 Amendment No. 3 to the Agreement of Merger and Reorganization. (7)
2.4 Amendment No. 4 to the Agreement of Merger and Reorganization. (7)
2.5 Amendment No. 5 to the Agreement of Merger and Reorganization. (7)
3.1 Certificate of Incorporation. (1)
3.2 Bylaws. (1)
4.1 Certificate of Designation. (8)
10.1 Mr. Netter's Employment Agreement. (1)
10.2 Mr. Copeland's Employment Agreement. (1)
10.3 "Babylon 5" Production Agreement. (1)
10.4 1995 Stock Option Plan. (1)
10.5 Talbot Consulting/Completion Fee Agreement. (6)
10.6 Warrant, dated September 4, 1997, issued to W.J. Gallagher & Company.
(9)
10.7 Letter Agreement, dated September 1, 1997, between the Company and
H.D. Brous & Co., Inc. (9)
10.8 Stock Option Agreement, dated September 1, 1997, between the Company
and H.D. Brous & Co., Inc. (9)
10.9 Lease for premises at 5125 Lankershim Blvd., North Hollywood, CA. (9)
10.10 Equipment and furniture lease with Lyon Credit Corporation. (9)
10.11 Equipment lease with Terminal Marketing Company. (9)
10.12 Installment note and Loan and Security Agreement with Comerica Bank.
(9)
10.13 Mr. Costa's Employment Agreement. (9)
10.14 Mr. Francis's Employment Agreement. (9)
10.15 Mr. Cercone's Employment Agreement. (9)
10.16 Letter agreement, dated October 20, 1997, between the Company and
Martin E. Janis & Company, Inc. (10)
10.17 Consulting Agreement, dated October 1, 1997, by and between Netter
Digital Entertainment, Inc and Geoffrey Talbot. (11)
10.18 Stock Option Agreement, dated October 1, 1997, by and between Netter
Digital Entertainment, Inc. and Geoffrey Talbot. (11)
10.19 Equipment lease with Comerica Leasing Corporation. (12)
10.20 Equipment lease with Digital Financial Services. (12)
10.21 Amendment to Employment Agreement, Douglas Netter. (13)
10.22 Amendment to Employment Agreement, John Copeland. (13)
21 List of Subsidiaries. (9)
27 Financial Data Schedule. (13)
15
- ---------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration Number is 33-97402-LA) declared effective November
20, 1995.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A dated November 20, 1995.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
December 31, 1995.
(4) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
March 31, 1996.
(5) Incorporated by reference to the Company's Proxy Statement , dated June 26,
1996 for the approval/disapproval of the proposed merger between the Company
and Videssence, Inc.
(6) Incorporated by reference to the Company's Form 10-KSB for the year ended
June 30, 1996.
(7) Incorporated by reference to the Company's Form 8-K dated January 10, 1997.
(8) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
September 30, 1996.
(9) Incorporated by refeernce to the Company's Form 10-KSB for the year ended
June 30, 1997.
(10)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
(11)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
December 31, 1997.
(12)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
March 31, 1998.
(13)Filed herewith.
16
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Dated: September 25, 1998 By: /s/Chad Kalebic
-------------------
Chad Kalebic, Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Douglas Netter Chairman of the Board of September 25, 1998
Douglas Netter Directors, Chief Executive
Officer, and President
/s/John Copeland Executive Vice President and September 25, 1998
John Copeland Secretary/Director
/s/Thomas L. Jorgenson Executive Vice President and September 25, 1998
Thomas L. Jorgenson Chief Operating Officer
/s/Chad Kalebic Chief Financial Officer September 25, 1998
Chad Kalebic (Chief Accounting Officer)
/s/Paul Costa President, Videssence and September 25, 1998
Paul Costa Director
/s/Dr. Leonard Silverman Director September 25, 1998
Dr. Leonard Silverman
/s/Kate Netter Forte Director September 25, 1998
Kate Netter Forte
/s/Lennart Ringquist Director September 25, 1998
Lennart Ringquist
17
</TABLE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made and entered by and between
Douglas Netter ("Employee") and Netter Digital Entertainment, Inc., a Delaware
corporation ("Employer"), as of the 11th day of September, 1998, with
reference to the following facts:
A. Employee is employed by Employer as its President and Chief Executive
Officer pursuant to that certain Employment Agreement dated as of
September 15, 1995 as amended to date (the "Employment Agreement").
B. Employer and Employee mutually desire to modify the terms of the
Employment Agreement as further set forth herein.
NOW, THEREFORE, in consideration of the mutual promises of the
parties and the mutual benefits they will gain by their performances therof, all
in accordance with the provisions hereinafter set forth, it is agreed:
1. Amendment to Employment Agreement. The last sentence of Paragraph
3(a) of the Employment Agreement is hereby amended to read in full as
follows:
"However, the total amount of base salary and Executive Producer fees
paid to Employee shall be subject to an annual cap of Three Hundred
Thousand Dollars ($300,000) ("Annual Cap")."
1. Effect of Amendment. Except as set forth in Paragraph 1 hereof, the
Employment Agreement shall continue in full force and effect, in
accordance with its terms in effect immediately prior to the effective date
of this Amendment.
The parties have duly executed this Agreement effective as of the day and year
set forth above.
EMPLOYER:
NETTER DIGITAL ENTERTAINMENT, INC.
By:/s/Thomas Jorenson
An Authorized Representative
EMPLOYEE:
DOUGLAS NETTER
By:/s/Douglas Netter
Douglas Netter
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made and entered by and between
John Copeland ("Employee") and Netter Digital Entertainment, Inc., a Delaware
corporation ("Employer"), as of the 11th day of September, 1998, with
reference to the following facts:
A. Employee is employed by Employer as its Executive Vice President and
Secretary pursuant to that certain Employment Agreement dated as of
September 15, 1995 as amended to date (the "Employment Agreement").
B. Employer and Employee mutually desire to modify the terms of the
Employment Agreement as further set forth herein.
NOW, THEREFORE, in consideration of the mutual promises of the
parties and the mutual benefits they will gain by their performances therof, all
in accordance with the provisions hereinafter set forth, it is agreed:
1. Amendment to Employment Agreement. The last sentence of Paragraph
3(a) of the Employment Agreement is hereby amended to read in full as
follows:
"However, the total amount of base salary and Executive Producer fees
paid to Employee shall be subject to an annual cap of Two Hundred Ten
Thousand Dollars ($210,000) ("Annual Cap")."
1. Effect of Amendment. Except as set forth in Paragraph 1 hereof, the
Employment Agreement shall continue in full force and effect, in
accordance with its terms in effect immediately prior to the effective date
of this Amendment.
The parties have duly executed this Agreement effective as of the day and year
set forth above.
EMPLOYER:
NETTER DIGITAL ENTERTAINMENT, INC.
By:/s/Thomas Jorgenson
An Authorized Representative
EMPLOYEE:
J0HN COPELAND
By:/s/John Copeland
John Copeland
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,634,809
<SECURITIES> 0
<RECEIVABLES> 2,331,011
<ALLOWANCES> (46,000)
<INVENTORY> 1,631,025
<CURRENT-ASSETS> 6,092,911
<PP&E> 3,941,574
<DEPRECIATION> (784,180)
<TOTAL-ASSETS> 11,522,499
<CURRENT-LIABILITIES> 4,973,174
<BONDS> 0
0
304,366
<COMMON> 33,344
<OTHER-SE> 4,726,171
<TOTAL-LIABILITY-AND-EQUITY> 5,211,639
<SALES> 3,915,786
<TOTAL-REVENUES> 32,312,551
<CGS> 2,039,390
<TOTAL-COSTS> 27,327,532
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206,090
<INCOME-PRETAX> 201,998
<INCOME-TAX> 41,000
<INCOME-CONTINUING> 160,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 160,998
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
