Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1997 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC.
(exact name of registrant as specified in charter)
Delaware 95-3392054
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
5125 Lankershim Blvd.
North Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818/753-1990
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO ___
As of February 12, 1998 the Registrant had 3,338,950 shares of its Common Stock,
$.01 par value, issued and outstanding.
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
FORM 10-Q
December 31, 1997
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited) NUMBER
------
Consolidated Balance Sheet as of December 31, 1997 3
Consolidated Statement of Operations for the three-month
and six-month periods ended December 31, 1997 and
December 31, 1996. 4
Consolidated Statements of Cash Flows for the six-month
periods ended December 31, 1997 and December 31, 1996. 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11-12
Signatures 12
Page 2 of 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
1997
------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,212,322
Accounts receivable, net of allowances of $23,481 1,602,838
Due from officer 155,897
Inventory 1,455,553
Production costs, net 261,673
Other 206,464
--------------
TOTAL CURRENT ASSETS 4,894,747
EQUIPMENT, net 1,977,048
GOODWILL, net 1,990,590
DEPOSITS AND OTHER ASSETS 254,430
--------------
$ 9,116,815
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and production fee advances $ 2,096,652
Accrued expenses 328,694
Deferred revenue 281,136
Short term notes payable 465,811
Current portion of long-term debt 99,752
Current portion of capital lease obligations 262,027
--------------
TOTAL CURRENT LIABILITIES 3,534,072
CAPITAL LEASE OBLIGATIONS 501,734
MINORITY INTEREST 500
--------------
STOCKHOLDERS' EQUITY :
Preferred stock, $.001 par value, 2,000,000 shares
authorized; 49,502 shares issued and outstanding 283,150
Common stock, $.01 par value, 6,000,000 shares
authorized; 3,338,950 shares issued and outstanding 33,390
Additional paid-in capital 4,726,125
Retained Earnings 37,844
--------------
TOTAL STOCKHOLDERS EQUITY 5,080,509
--------------
$ 9,116,815
==============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 12
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, Six Months Ended Dec. 31,
--------------------------- --------------------------
1997 1996 1997 1996
--------------------------- ---------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Production $ 7,672,044 $ 6,307,436 $ 13,516,381 $ 9,421,612
Sales 963,306 - 1,892,839 -
------------ ------------ ------------ -----------
TOTAL REVENUES 8,635,350 6,307,436 15,409,220 9,421,612
------------ ------------ ------------ -----------
EXPENSES:
Production 6,939,861 5,645,634 12,054,250 8,489,350
Cost of goods sold 470,114 - 928,851 -
General and administrative 1,137,194 519,592 2,243,986 1,031,623
Amortization of goodwill 26,078 - 52,156 -
------------ ------------ ------------ -----------
TOTAL EXPENSES 8,573,247 6,165,226 15,279,243 9,520,973
------------ ------------ ------------ -----------
OPERATING INCOME (LOSS) 62,103 142,210 129,977 (99,361)
------------ ------------ ------------ -----------
OTHER INCOME (EXPENSE):
Interest income 4,580 30,127 14,490 57,229
Interest (expense) (39,190) - (92,949) -
Other income/(expense) 727 - 8,753 -
------------ ------------ ------------ -----------
TOTAL OTHER INCOME (EXPENSE) (33,883) 30,127 (69,706) 57,229
------------ ------------ ------------ -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 28,220 172,337 60,271 (42,132)
PROVISION FOR INCOME TAXES 12,000 - 30,500 -
------------ ------------ ------------ -----------
NET INCOME (LOSS) $ 16,220 $ 172,337 $ 29,771 $ (42,132)
============ ============ ============ ============
Cumulative preferred stock dividend 10,608 - 21,219 -
Net Income to common shareholders $ 5,612 $ 172,337 $ 8,552 $ (42,132)
============ ============ ============ ============
Net Income (Loss) per common share,
basic and assuming dilution $ 0.00 $ 0.06 $ 0.00 $ (0.02)
============ ============ ============ ============
Weighted average common shares outstanding 3,338,950 2,795,000 3,333,346 2,795,000
============ ============ ============ ============
<FN>
<FN1>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
Page 4 of 12
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended December 31,
--------------------------------
1997 1996
--------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,771 $ (42,132)
-------------- --------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 225,790 115,679
Amortization 60,441 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (736,765) (311,862)
(Increase)/decrease in other current assets (88,351) 7,746
(Increase) in inventory (465,498) -
Decrease/(increase) in production costs 33,046 (78,881)
Decrease/(increase) in deposits and other assets 40,418 (115,748)
(Decrease)/increase in accounts payable (314,985) 468,437
Increase in accrued expenses 5,766 79,406
(Decrease) in deferred revenue (249,715) -
--------------- ------------
(1,489,853) 164,777
--------------- ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,460,082) 122,645
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (128,717) (525,568)
--------------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES (128,717) (525,568)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) in deferred acquisition costs - (311,591)
(Increase) in notes receivable - (275,000)
(Increase) in deferred registration costs - (102,722)
Increase in additional paid-in capital - 903
Proceeds from line of credit 405,259 -
Notes payable principal payments (32,252) -
Principal payments of capital lease obligations (146,408) -
--------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 226,599 (688,410)
--------------- -------------
NET (DECREASE) IN CASH (1,362,200) (1,091,333)
Cash, beginning of period 2,574,522 2,181,223
--------------- -------------
Cash, end of period $ 1,212,322 $ 1,089,890
=============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Cash paid for interest $ 92,989 $ -
Cash paid for income taxes $ 9,800 $ -
Noncash activity:
Stock issued for legal fee settlement $ 50,000 $ -
Stock dividend $ 21,219 $ -
Purchase of equipment through leases payable $ 647,807 $ -
<FN>
<FN1>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
Page 5 of 12
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes for the year ended June 30, 1997 included in
the Form 10-KSB for the year then ended.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of December 31, 1997, and the results of operations and cash flows
for the three-month and six-month periods ended December 31, 1997, and 1996 have
been included.
The results of operations for the three-month and six-month periods ended
December 31, 1997, are not necessarily indicative of the results to be expected
for the full fiscal year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Form 10-KSB as filed with the Securities and Exchange Commission for the year
ended June 30, 1997.
The Company has adopted Statement of Financial Accounting Standard Number 128
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 share because they are either
antidilutive, or their effect is not material. Comparative earnings per share
information for prior periods have been restated to reflect the requirements of
this Standard.
DUE FROM OFFICER/RECEIVABLE FROM RELATED PARTY
On November 20, 1995, the Company's Chief Executive Officer entered into a
promissory note with the Company in the amount of $194,876, bearing interest at
7.25% per annum. The remaining unpaid principal balance of $155,897 and accrued
interest of $6,890 is due on May 20, 1998.
VIDESSENCE, INC.
On January 10, 1997, the Company completed its acquisition of Videssence, Inc.
("Videssence") through the merger of Videssence into NDEI. The following
schedule combines the pro-forma results of operations of the Company and
Videssence, Inc. as if the acquisition had occurred on July 1, 1996 and includes
such adjustments which are directly attributable to the acquisitions. It should
Page 6 of 12
not be considered indicative of the results that would have been achieved had
the acquisition not occurred or the results that would have been obtained had
the acquisition actually occurred on July 1, 1996.
Three months ended Six months ended
December 31, 1996 December 31, 1996
------------------ -----------------
Revenue $7,395,866 $11,808,064
Net loss ($100,843) ($344,037)
Net loss per share, basic and diluted ($0.03) ($0.10)
Shares used in computation 3,317,221 3,317,221
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Historically, the Company's primary operations have been to develop and produce
media entertainment projects ("Productions" or "Projects") under agreements with
studios, networks and distributors such as Warner Bros., The Walt Disney
Company, ABC and NBC. While entertainment production remains the Company's
principal activity, (1) in January 1997 it entered the business of designing,
manufacturing and distributing lighting products in various entertainment
industries, through its acquisition of Videssence, and (2) in the fourth quarter
of fiscal 1997, it began marketing its computer animation and visual effects
services to outside clients. Its business activities now are:
Entertainment Production. It has been the Company's practice to arrange for
the studio, network or distributor to fund 100% of the production costs of
its Projects, while retaining a back-end producer's profit participation.
Employing this strategy, the Company avoids the financial risk of funding
such production costs, but limits its ongoing revenue participation since
the studio, network or distributor retains a significant portion of the
rights to the main and ancillary markets for the Projects. Under these
arrangements, revenues are recognized when earned (typically upon receipt)
and associated costs are recognized when incurred. These revenues are
primarily dependent on the number of Projects being produced by the Company
and the agreements relating to such Projects. Accordingly, year to year
comparisons of production revenues from these sources are not necessarily
indicative of future revenues.
To increase production margins, the Company has invested in in-house post
production and computer graphics/animation facilities. These leading-edge
production technologies are used intensively to create the visual effects
for "Babylon 5" and the Company's other production activities and have
enabled the Company to significantly reduce the need for contracting out to
third party vendors, thus allowing it to realize higher margins on its
Projects.
Computer Animation and Visual Effects Production Services. As an outgrowth
of its traditional core business of developing and producing media
Productions, the Company has recently entered the business of providing
Page 7 of 12
digital media production services to outside clients. From experience
gained in producing its own Projects, especially "Babylon 5," the Company
has developed significant expertise in computer graphics, digital
post-production and various other digital imaging techniques which it can
utilize to service outside clients. The Company believes that an active
market exists for projects requiring creative, high quality, cost
effective digital graphics and effects. These activities have generated
relatively minor revenues to date and there can be no assurance that the
Company will successfully market these new services.
Videssence Lighting Products. The Company's Videssence subsidiary
manufactures and distributes media lighting products which incorporate
its patented SRGB(tm) lighting technology. These products are used for
the illumination of studios, stages and other production environments in
the sound stage, motion picture, theater and theme park industries, as
well as in the video conferencing, distant learning, and pre-press digital
photography markets. The Company's high-tech fluorescent lights
consume significantly less electricity than traditional incandescent
production lighting products while generating greatly reduced amounts of
heat. Thus, these lights are more comfortable for talent to work under
and can generate significant electricity and air-conditioning related
savings. The Company markets its lighting products in the USA and
internationally through a network of distributors, dealers, and direct sales
staff. To date, Videssence sales have been primarily to television studio
and video production operations. The Company has recently introduced
new products which have been developed for the film production
markets. Of course, there can be no assurance that the Company will
successfully enter these markets.
Results of Operations
Net Revenues. The Company's net revenues for the second quarter and six-month
periods ended December 31, 1997 increased 36.9% and 63.6%, respectively, when
compared to the same periods in the prior year. This increase primarily
resulted from three factors. First, the Company realized approximately $1.1
million and $1.5 million of additional revenue from its "Babylon 5" television
series for the quarter and six-month periods ended December 31, 1997,
respectively. This represents increased production activity for these periods
which will even out over the duration of fiscal 1998 as budgets for the
consecutive broadcast seasons are relatively similar. Second, the Company
continued production on two all new made for television movies for Turner
Network Television, which contributed approximately $109,000 in revenues to the
quarter and $2.3 million in revenues for the six-month period. Third,
Videssence contributed approximately $963,000 and $1.9 million, respectively, in
revenues from sales of its lighting products in the quarter and six-month period
ended December 31, 1997, although Videssence's sales during these periods were
lower than expected.
Gross Margin. The Company's gross margin increased 3.7 and 5.8 percentage
points to 14.2% and 15.7% for the three-month and six-month periods ended
December 31, 1997, respectively, over the same prior year periods. This
increase resulted from two factors: First, the gross profit from the Company's
entertainment production business increased to approximately $1.4 million
(approximately 10.8% of revenues from entertainment production activities) for
the six-month period ended December 31, 1997, up from approximately $932,000
Page 8 of 12
(approximately 9.9%) from the same period the previous year. This increase was
the result of the Company bringing in-house a significant amount of
post-production and graphics/animation work, greatly reducing its need for
outside production services. Second, sales of the Videssence lighting products
generated gross profits of approximately $493,000 (with gross margin of
approximately 51.2%) and approximately $964,000 (with approximately 50.9% gross
margin), respectively, for the quarter and six-month period ended December
31, 1997.
General and Administrative Expenses. General and administrative expenses were
approximately 13.2% and 14.6%, respectively, as a percentage of net revenues for
the three-month and six-month periods ended December 31, 1997 as compared to
8.2% and 11.0% for the same prior year periods. These increases were primarily
attributable to the addition of Videssence's operations which added
approximately $546,000 and $1.1 million to such expenses over the three-month
and six-month periods, respectively.
Operating Income (Loss). The Company achieved operating incomes of
approximately $62,000 and $130,000 for the quarter and six months ended
December 31, 1997, respectively, as operating incomes of approximately
$141,000 and $332,000 from its Entertainment Production activities during these
periods outweighed respective operating losses of approximately $79,000 and
$202,000 from its Videssence activities. These Videssence losses resulted
primarily from lower than expected sales.
Other Income and Expenses. Interest income decreased to $4,580 and $14,490 for
the quarter and six-month periods ended December 31, 1997, respectively,
compared to $30,127 and $57,229 for the same prior year periods, as proceeds
from the Company's November 1995 initial public offering were drawn from short
term investments and used for expansion of its in-house post-production and
graphics/animation facilities during fiscal 1997 and working capital for
Videssence. Interest expense increased to $39,190 and $92,949 for the three
months and six months ended December 31, 1997, respectively, from $0 in the same
periods of the previous year due to the acquisition of Videssence which has
long-term debt and the Company's new utilization of capital lease lines for
continued expansion of its computer animation and visual effects facilities.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash from
operations, its initial public offering of Common Stock and Warrants completed
in November 1995 which generated net proceeds of approximately $3.2 million and,
with respect to production costs for particular entertainment Projects, through
production contracts with studios, networks and distributors who cover 100% of
the production funding. Such production funds are received by the Company
during the production stage of a Project. To date, the Company has been able to
secure production financing from a major studio, network or distributor for all
of 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 funding commitments for these new projects and to
Page 9 of 12
cover the resulting increased overhead with its cash flow or other financing
methods, as necessary. These potential, new financial commitments, if pursued,
could create additional risk for the Company as to whether it will recover the
costs of its investment and generate a profit.
During the three months and six months ended December 31, 1997, the Company
derived approximately 97% 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. If the "Babylon 5"
series is not renewed through an additional agreement extension after the
current fifth season of production ending approximately May 1998, and the
Company is unable to replace the series with one generating comparable revenues,
the Company's financial condition and operations could be materially adversely
affected.
Cash used in operating activities was approximately $1.5 million for the six
months ended December 31, 1997. The biggest uses of cash were a build up of
inventory at Videssence due to lower sales and the development of a new line of
lighting products for the film industry, and an increase in accounts receivable,
also at Videssence, due to the termination of the Company's factoring agreement
in July. Accounts receivable in the Company's entertainment production
activities also increased due to production timing. Further, this period saw a
large decrease in accounts payable as pre-billed items for the Company's
"Babylon 5" series and its movies of the week were used for production.
Effective July 1997, the Company's Videssence subsidiary obtained a $750,000
line of credit with a bank, guaranteed by the Company, which required monthly
payments of interest on outstanding principal amounts at 2% above the bank's
reference rate. The loan documents also require the Company to comply with
certain restrictive covenants, including maintaining a minimum working capital
and specific financial ratios. As of December 31, 1997, the Company owed an
outstanding principal amount of approximately $405,259 on such line.
Management believes that its present cash position and overall liquidity will
enable the Company to meet its operating commitments for the next twelve months.
As of December 31, 1997, the Company's sources of liquidity included cash and
cash equivalents totaling approximately $1.2 million, of which approximately
$550,000 is contractually committed to fund specific Projects. The Company has
approximately $566,000 of outstanding debt and approximately $764,000 of
outstanding capital leases as of December 31, 1997. Of the latter,
approximately $110,000 and $576,000 was added during the three months and six
months ended December 31, 1997, respectively, for equipment additions to its
in-house post-production and graphics/animation facilities.
Page 10 of 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1997 Annual Meeting of Shareholders was held on November 14, 1997.
The matters brought before the shareholders and the respective final tallies of
the votes were as follows:
1. Election of a Board of Directors.
Abstain or Broker
Directors For Against Withheld Non-votes
--------- --- ------- ---------- ---------
Douglas Netter 3,022,206 0 8,710 0
John Copeland 3,022,106 0 8,810 0
Kate Netter Forte 3,022,506 0 8,410 0
Leonard Silverman 3,022,106 0 8,810 0
Paul Costa 3,022,506 0 8,410 0
Lennart Ringquist 3,021,806 0 9,110 0
2. Proposal to amend Netter Digital Entertainment's Certificate of
Incorporation to increase the number of authorized shares of Common
Stock, par value $.01, from 6,000,000 to 20,000,000.
Abstain or Broker
For Against Withheld Non-votes
--- ------- ---------- ---------
Proposal Approved 2,999,466 27,740 3,700 10
3. Proposal to adopt the 1997 Incentive Stock Option Plan.
Abstain or Broker
For Against Withheld Non-votes
--- ------- ---------- ---------
Proposal Approved 2,218,201 50,325 5,500 756,890
4. Proposal to adopt the 1997 Director's Stock Option Plan.
Abstain or Broker
For Against Withheld Non-votes
--- ------- ---------- ---------
Proposal Approved 2,213,661 53,615 6,750 756,890
Page 11 of 12
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Exhibit Description
------- -----------
10.1 Consulting Agreement, dated October 1, 1997, by and
between Netter Digital Entertainment, Inc. and Geoffrey
Talbot. (1)
10.2 Stock Option Agreement, dated October 1, 1997, by and
between Netter Digital Entertainment, Inc. and Geoffrey
Talbot. (1)
27 Financial Data Schedule. (1)
----------------------
(1) Filed herewith.
(b.) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Registrant
Dated: February 12, 1998 By: /s/Chad Kalebic
---------------------------
Chad Kalebic
Chief Financial Officer
Page 12 of 12
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is entered into as of
December 10, 1997, by and between Netter Digital Entertainment, Inc.,
a Delaware corporation ("Company") and Geoffrey Talbot ("Consultant")
with reference to the following facts:
A. Company is in the business of digital entertainment
production and services and the manufacture and distribution of
lighting
products (collectively, the "Business").
B. Consultant has expertise in managing companies engaged in
the Business, in developing business plans for companies engaged in the
Business, in identifying and analyzing other companies which might be
acquired by or merged into the Company to augment and enhance the
Business, and in advising the Company concerning its operations and
financial growth.
C. Consultant was formerly Acting Chief Financial Officer and
a member of the Board of Directors of the Company.
D. Company now wishes to engage Consultant, and Consultant
wishes to provide services to Company, in the capacity of an
independent
consultant on the terms and conditions set forth below.
E. Company acknowledges that Consultant is the Chief
Executive Officer and a full-time employee of J. C. Williamson
Entertainment Inc. ("JCW") and that JCW may at times be in a
competitive position with the Company in the marketplace.
NOW, THEREFORE, the parties agree as follows:
1. Engagement. Commencing effective as of the date of this
Agreement, and continuing thereafter for a period of three (3) months,
Company engages Consultant, and Consultant hereby accepts such
engagement with Company, to render independent consulting services
regarding Company's operations and, in particular, the organization,
implementation and operation of the Business, including, but not
limited
to, reviewing business plans for the Company, advising the Company
concerning its operations and financial growth (but not including
identifying and/or analyzing other companies which might be acquired
by or merged into the Company, which services, if requested by
Company, shall be the subject of a separate mutual agreement).
Consistent with his primary duty to JCW, Consultant shall use
reasonable efforts and judgment to promote the business of the Company
during the term of this Agreement. Consultant shall render service as
and when requested by the Company; provided (i) the Company shall give
Consultant not less than one day's notice of the Company's intention to
utilize the services of Consultant and (ii) Consultant shall not be
required
to reschedule any business appointments or travel arrangements he
otherwise may have. Further, notwithstanding any other provision of
this
Agreement, Consultant shall not be required to render services outside
the greater Los Angeles area or for a period exceeding ten (10) hours
per
month.
2. Compensation. In consideration for the services to be
performed by Consultant, the Company shall grant to Consultant (i) a
base consulting fee at the rate of $500.00 per month (payable monthly
commencing with the date hereof) and (ii) an option to acquire 150,000
shares of the common stock of the Company upon the terms and
conditions set forth in a Stock Option Agreement, which Stock Option
Agreement shall be in the form attached hereto as Exhibit "A". In
addition, Company shall reimburse Consultant for his reasonable out-of-
pocket expenses incurred at Company's request, provided such expenses
are pre-approved by the Company and are supported by vouchers or
receipts detailing the expenses for which reimbursement is being
claimed.
3. Registration of Shares. The Company agrees to use
reasonable efforts to cause the shares subject to the Stock Option
Agreement to be registered pursuant to a Form S-8 on or before
December 20, 1997.
4. Independent Contractor. In the performance of its duties
and obligations hereunder, Consultant shall at all times act and
perform
in the capacity of an independent contractor. Company shall neither
have nor exercise any control or direction over the methods by which
Consultant shall perform its services, it being the sole interest of
Company to assure that the services shall be performed and the results
achieved in a competent, efficient and satisfactory manner. Company
shall have no responsibility to Consultant for income tax withholding,
payroll taxes, worker's compensation, unemployment or disability
insurance, group medical insurance, pension or profit sharing
contributions, or other benefits extended to employees of Company.
5. No Contracting Authority. Unless expressly authorized in
writing in advance by Company, Consultant shall not have any power or
authority to bind Company by any contract or engagement or pledge its
credit, or render it liable for any purpose or in any amount.
6. Termination. This Agreement may be terminated at any time
(i) by mutual agreement, or (ii) by the Company "for cause" if
Consultant
dies or is permanently disabled, or materially breaches any of his
obligations or agreements hereunder (the cure of which breach is not
commenced within thirty (30) days after written notice thereof and
thereafter diligently prosecuted to completion by Consultant), or (iii)
by
Consultant "for cause" if the Company materially breaches any of its
obligations or agreements hereunder (the cure of which breach is not
commenced within thirty (30) days after written notice thereof and
thereafter diligently prosecuted to completion by the Company).
2
7. General Provisions.
a. Subject to Paragraph 7.e below, the rights and
obligations of Company under this Agreement shall inure to the benefit
of and shall be binding upon the successors and assigns of Company.
b. Any notice to be given to Company under the terms of
this Agreement shall be addressed to Company at the address of its
principal place of business, and any notice to be given to Consultant
shall be addressed to him at his home address last shown on the records
of Company, or at such other address as either party may hereafter
designate in writing to the other. Any such notice shall be deemed
duly
given when deposited in the United States mail, certified or registered
mail, postage prepaid, addressed as aforesaid or when served
personally.
c. Either party's failure to enforce any provision or
provisions of this Agreement shall not in any way be construed as a
waiver of any such provision or provisions, nor prevent that party
thereafter from enforcing each and every other provision of this
Agreement. The rights granted both parties herein are cumulative and
shall not constitute a waiver of either party's right to assert all
other legal
remedies available to it under the circumstances.
d. This Agreement contains the entire agreement between
the parties hereto with respect to the subject matter hereof,
supersedes
all prior agreements and understandings between the parties and may
not be modified or terminated orally. No modification, termination or
attempted waiver shall be valid unless in writing and signed by the
party
against whom the same is sought to be enforced.
e. The rights under this Agreement shall not be
assignable nor the duties delegable by either party without the prior
written consent of the other, except that Company may assign its rights
hereunder in connection with the sale of all or substantially all of
its
assets or business. Nothing contained in this Agreement, express or
implied, is intended to confer upon any person or entity, other than
the
parties hereto and their successors in interest and permitted
assignees,
any rights or remedies under or by reason of this Agreement unless so
stated to the contrary.
/ / /
/ / /
/ / /
3
f. This Agreement shall be construed, interpreted and
enforced
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
"COMPANY" "CONSULTANT"
Netter Digital Entertainment, Inc.
By: /s/ Douglas Netter /s/ Geoffrey
Talbot
-------------------------- -------------------------
Douglas Netter, Chairman Geoffrey Talbot
4
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE
SECURITIES UNDER THE SECURITIES ACT AND QUALIFICATION
UNDER APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") is made and
entered into as of the 10th day of December, 1997, by and between
Netter Digital Entertainment, Inc., a Delaware corporation ("Optionor"), and
Geoffrey Talbot ("Optionee") with reference to the following facts:
A. Optionor and Optionee have entered into a Consulting
Agreement of even date herewith (the "Consulting Agreement") pursuant
to which Optionor has engaged Optionee to act as a financial advisor
and consultant for a period of three (3) months commencing October 10,
1997.
B. In partial consideration of Optionee's services to be
performed under the Consulting Agreement, Optionor has agreed to grant
to Optionee an option to purchase up to 150,000 authorized and
unissued shares of Optionor's Common Stock ("Common Stock").
C. The Board of Directors of Optionor has approved Optionor's
execution, delivery and performance of the Consulting Agreement,
including the grant by Optionor to Optionee of an option to purchase
up to 150,000 shares of Common Stock, upon the terms and subject to the
conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties agree as follows:
1. GRANT OF OPTION; TERM AND CONSIDERATION.
1.1 Grant of Option. Optionor hereby grants to Optionee
an irrevocable option (the "Option") to purchase up to an aggregate of
150,000 shares of Common Stock (the "Option Shares") at the price of
$2.75 per Option Share (the "Exercise Price"), all on the terms,
covenants and conditions set forth in this Agreement.
1.2 Term. The term of the Option (the "Term") shall
commence as of the date hereof and shall expire at 5:00 p.m. Pacific
Standard Time on March 10, 1998.
2. EXERCISE OF OPTION. Optionee may exercise the Option,
if at all, at any time during the Term by delivering written notice of
exercise to Optionor specifying the number of Option Shares to be
purchased and accompanied by payment of the Option Shares to be
purchased, which payment shall be either (a) in the form of a certified
or bank cashier's check, payable to the order of Optionor, or (b) by
delivery to Optionor of shares of Common Stock having an aggregate "Fair Market
Value" (as defined below) equal to the "Aggregate Exercise Price" (as
defined below) of the Option Shares to be purchased. As used herein,
the term "Aggregate Exercise Price" shall mean the amount of the Exercise
Price times the number of Option Shares to be purchased. As used
herein, the term "Fair Market Value" shall mean the fair market value
of the Common Stock on the date such shares are delivered in payment of
the Exercise Price, which fair market value shall be equal to the
closing sales or closing bid price of one share of the Common Stock according
to the NASDAQ quotations for the business day immediately preceding the
day such shares are delivered to the Company. As soon as practicable
after any exercise of this Option in accordance with the foregoing
provisions, Optionor shall deliver to Optionee at the main office of
Optionor, or at such other place as shall be mutually acceptable, a
certificate or certificates representing the Option Shares as to which
the Option has been exercised.
3. RESTRICTION ON ISSUANCE OF OPTION SHARES AND
DELIVERY. If authorization of any regulatory commission or agency is
required for the lawful delivery of any certificate representing Option
Shares, Optionor may withhold delivery of such certificate until such
authorization has been granted. Optionor will make reasonable efforts
to obtain such authorizations, but if Optionor is unable to obtain such
authorizations from such regulatory commission or agency, which
counsel for Optionor deems necessary for the lawful delivery of such
certificate, Optionor shall be relieved from any liability for failure
to deliver such certificate until such time that such authorization is
obtained or is obtainable.
4. RIGHTS AS SHAREHOLDER. Optionee shall have no rights
as a shareholder with respect to any Option Shares covered by the
Option until the date of issuance of a stock certificate to Optionee for such
Option Shares. No adjustment shall be made for dividends or other
rights for which the record date is prior to the date such stock
certificate is issued.
5. CHANGES IN CAPITAL STRUCTURE. The Exercise Price and
the number of Option Shares issuable upon the exercise of the Option
shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 5. Upon each adjustment of
the Exercise Price, Optionee shall thereafter be entitled to purchase, at
the Exercise Price resulting from such adjustment, the number of shares of
Common Stock obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of Option Shares
issuable pursuant hereto immediately prior to such adjustment, and
dividing the product thereof by the Exercise Price resulting from such
adjustment.
5.1 Subdivision or Combination of Stock. In case
Optionor shall at any time subdivide its outstanding shares of Common
Stock into a greater number of shares, the Exercise Price in effect
2
immediately prior to such subdivision shall be proportionately reduced,
and conversely, in case the outstanding shares of Common Stock of
Optionor shall be combined into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased.
5.2 Dividends In Common Stock, Other Stock Property,
Reclassification. If at any time or from time to time the holders of
Common Stock (or any shares of stock or other securities at the time
receivable upon exercise of the Option) shall have received or become
entitled to receive, without payment thereof,
(a) any shares of Common Stock or any shares of
stock or other securities which are at any time directly or indirectly
convertible into or exchangeable for Common Stock, or any rights or
options to subscribe for, purchase or otherwise acquire any of the
foregoing by way of dividend or other distribution;
(b) any cash paid or payable otherwise than as a
regular periodic cash dividend at a rate which is substantially
consistent with Optionor's Certificate of Incorporation or past practice (or, in
the case of an initial dividend, at a rate which is substantially
consistent with industry practice); or
(c) any Common Stock or other securities or
property (including cash) by way of a spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement,
(other than shares of Common Stock issued as a stock split, adjustments in
respect of which shall be covered by the terms of Section 5.1 above),
then and in each such case, Optionee shall, upon the exercise of the
Option, be entitled to receive, in addition to the number of shares of
Common Stock receivable thereupon, and without payment of any
additional consideration thereof, the amount of stock and other
securities and property (including cash in the cases referred to in clauses (b)
and (c) above) which Optionee would hold on the date of such exercise had
it been the holder of record of such Common Stock as of the date on which
holders of Common Stock received or became entitled to receive such
shares and/or all other additional stock and other securities and
property.
5.3 Reorganization, Reclassification, Consolidation,
Merger or Sale. If any reorganization of the capital stock of Optionor, or
any consolidation or merger of Optionor with another corporation, or the
sale of all or substantially all of its assets to another corporation shall
be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate
provisions shall be made whereby the Optionee shall thereafter have the
right to purchase and receive (in lieu of the shares of Common Stock
immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby) such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of Common Stock equal to the number of shares
3
of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby. In any such case,
appropriate provision shall be made with respect to the rights and
interests of Optionee to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Exercise Price
and of the number of Option Shares issuable and receivable upon the
exercise of the Option) shall thereafter be applicable, as nearly as may be
practical, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of the Option. Optionor will not
effect any such consolidation, merger or sale unless, prior to the consummation
thereof, the successor corporation (if other than Optionor) resulting
from such consolidation or the corporation purchasing such assets shall
assume by written instrument, executed and mailed or delivered to
Optionee at the last address of Optionee appearing on the books of
Optionor, the obligation to deliver to Optionee such shares of stock,
securities or assets as, in accordance with the foregoing provisions,
Optionee may be entitled to purchase.
6. REPRESENTATIONS AND WARRANTIES OF OPTIONEE.
Optionee represents and warrants to Optionor that this Agreement has
been duly authorized and approved by all necessary corporate action on
the part of Optionee, has been duly executed and delivery by Optionee
and constitutes a valid and legally binding obligation of Optionee
enforceable in accordance with its terms.
7. REPRESENTATIONS AND WARRANTIES OF OPTIONOR.
Optionor represents, warrants and covenants to Optionee that:
(a) this Agreement has been duly authorized and
approved by all necessary corporate action on the part of Optionor, has
been duly executed and delivered by Optionor and constitutes a valid
and legally binding obligation of Optionor enforceable in accordance with
its terms;
(b) Optionor is not subject to or obligated under any
provision of (i) its Certificate of Incorporation or Bylaws, (ii) any
contract, (iii) any license, franchise or permit, or (iv) any law, regulation,
order, judgment or decree that would be breached or violated by its execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby;
(c) no authorization, consent or approval of, or any
filing with, any public body or authority is necessary for consummation by it
of the transactions contemplated by this Agreement;
(d) Optionor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power and authority to enter into and
perform this Agreement; and
4
(e) Optionor has taken all necessary corporate action to
authorize and reserve for issuance upon exercise of the Option the
Option Shares, and the Option Shares, when issued and delivered by Optionor
to Optionee upon exercise of the Option, will be duly authorized,
validly issued, fully paid and nonassessable, and will be free and clear of any
claims, liens, encumbrances, security interest and charges of any
nature whatsoever incurred by Optionor.
8. RESTRICTIONS ON TRANSFERABILITY; COMPLIANCE WITH
SECURITIES ACT.
8.1 Restrictions on Transferability. The Option is not
transferable. The Option Shares shall not be transferable except upon
the conditions specified in the legend set forth at the beginning of this
Agreement, which conditions are intended to insure compliance with the
provisions of the Securities Act. Optionee will cause any proposed
transferee of the Option Shares to agree to take and hold such
securities subject to the provisions and upon the conditions specified in such
legend.
8.2 Restrictive Legend. Each certificate representing
(a) the Option, (b) the Option Shares, and (c) any other securities
issued in respect of the Option Shares shall be stamped or otherwise imprinted
with the legend materially similar to the legend set forth at the
beginning of this Agreement; provided that no legend shall be affixed to any
certificate representing any Option Shares, or other securities issued
in respect of the Option Shares, issued following the registration of
such shares.
9. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF
OPTION. The rights and obligations of Optionor and of Optionee
contained in Section 8 shall survive the exercise of the Option.
10. FRACTIONAL SHARES. No fractional shares shall be issued
upon exercise of the Option. Optionor shall, in lieu of issuing any
fractional share, pay Optionee a sum in cash equal to such fraction
multiplied by the then effective Exercise Price.
11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally
or sent by facsimile (and promptly confirmed by mail) to the parties as
follows (or at such other address as either party may have furnished to
the other in writing in accordance herewith, except that notices of
changes of address shall only be effective upon receipt):
5
If to Optionor to:
Netter Digital Entertainment, Inc.
5125 Lankershim Boulevard
North Hollywood, California 91601
Fax: (818) 753-7655
with a copy to:
Ervin, Cohen & Jessup LLP
9401 Wilshire Boulevard
Suite 900
Beverly Hills, California 90212
Attn: Kenneth A. Luer, Esq.
Fax: (310) 859-2325
If to Optionee to:
Geoffrey Talbot
425 Maple Drive, Suite 202
Beverly Hills, CA 90210
Fax: (310) 273-2589
with a copy to:
Resch Polster Alpert & Berger LLP
10390 Santa Monica Boulevard, Fourth Floor
Los Angeles, California 90025-5053
Attn: Aaron Grunfeld, Esq.
Fax: (310) 552-3209
12. NUMBER AND GENDER. Terms used herein in any number
or gender include other numbers or genders, as the context may require.
13. COUNTERPARTS. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
14. GOVERNING LAW. This Agreement and performance under
it, shall be construed in accordance with and under the laws of the
State of California. Should a court or other body of competent jurisdiction
determine that any term or provision of this Agreement is excessive in
scope, such term or provision shall be adjusted rather than voided and
6
interpreted so as to be enforceable to the fullest extent possible, and
all other terms and provisions of this Agreement shall be deemed valid and
enforceable to the fullest extent possible.
15. BINDING EFFECT; PARTIES IN INTEREST. This Agreement
shall be binding upon, inure to the benefit of, and be enforceable by
the successor and assigns of the parties hereto. Nothing expressed or
referred to in this Agreement is intended or shall be construed to give
any person other than the parties to this Agreement, or their respective
successors or assigns, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
16. ENTIRE AGREEMENT; MODIFICATIONS, AMENDMENTS
AND WAIVERS. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof.
No amendment, change or modification of this Agreement shall be valid
unless it is in writing, is signed by all of the parties hereto, and
expressly states that an amendment, change or modification of this Agreement is
being made. No claim of waiver, consent or acquiescence with respect
to any provision of this Agreement shall be made against any party hereto
except on the basis of a written instrument executed by or on behalf of
such party. The party hereto for whose benefit a condition is herein
inserted shall have the unilateral right to waive such condition.
17. TAXES. All taxes resulting from the issuance or exercise
of the Option are the responsibility of the Optionee. Optionor assumes no
responsibility for any taxes resulting from such issuance or exercise.
18. FURTHER ASSURANCES. Each of the parties hereto shall
execute and deliver any and all additional papers and documents, and
shall do any and all further acts and thing, as may be reasonably
necessary in connection with the performance of their obligations
hereunder and to carry out the intent of this Agreement.
19. ATTORNEYS FEES. In the event that any party hereto
brings an action or proceeding for a declaration of the rights of the
parties under this Agreement, for injunctive relief, for an alleged
breach or default, or any other action arising out of this Agreement or the
transactions contemplated hereby, or in the event that any party is in
default of its obligations pursuant hereto, whether or not suit is
filed or prosecuted to final judgement, the prevailing party shall be entitled
to reasonable attorneys' fees, in addition to any other court costs
incurred and any other damages or relief awarded.
7
IN WITNESS WHEREOF, Optionor and Optionee have executed this
Agreement as of the date first above written.
"OPTIONOR"
NETTER DIGITAL ENTERTAINMENT, INC.
a Delaware corporation
By: /s/ Douglas Netter
----------------------------
Name: Douglas Netter
Its: Chairman
"OPTIONEE"
/s/ Geoffrey Talbot
---------------------------
Geoffrey Talbot
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,212,322
<SECURITIES> 0
<RECEIVABLES> 1,626,319
<ALLOWANCES> (23,481)
<INVENTORY> 1,455,553
<CURRENT-ASSETS> 4,894,747
<PP&E> 2,474,022
<DEPRECIATION> (496,974)
<TOTAL-ASSETS> 9,116,815
<CURRENT-LIABILITIES> 3,534,072
<BONDS> 0
0
283,150
<COMMON> 33,390
<OTHER-SE> 4,726,125
<TOTAL-LIABILITY-AND-EQUITY> 9,116,815
<SALES> 1,892,839
<TOTAL-REVENUES> 15,409,220
<CGS> 928,851
<TOTAL-COSTS> 12,983,101
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,949
<INCOME-PRETAX> 60,271
<INCOME-TAX> 30,500
<INCOME-CONTINUING> 29,771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,771
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
