As filed with the Securities and Exchange Commission on June 16, 1998
Registration No. 333
SECURITIES AND EXCHANGE COMMISSION
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NETTER DIGITAL ENTERTAINMENT, INC
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-3392054
(I.R.S. Employer Identification No.)
5125 Lankershim Boulevard
North Hollywood, California 91601
(818) 753-1990
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Douglas Netter, President and Chief Executive Officer
Netter Digital Entertainment, Inc.
5125 Lankershim Boulevard
North Hollywood, California 91601
(818) 753-1990
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copy to:
Kenneth A. Luer, Esq.
Ervin, Cohen & Jessup LLP
9401 Wilshire Boulevard, 9th Floor
Beverly Hills, California 90212
(310) 273-6333
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class Proposed maximum Proposed maximum
of securities Amount to be offering aggregate Amount of
to be registered registered price per unit offering price registration fee
------------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Common stock (1) 2,223,221 shares $3.50 (2) $7,781,274 (2) $2,296
Common Stock (3) 129,000 shares $6.00 (8) $774,000 (8) $228
Common Stock (4) 14,145 shares $10.80 (8) $152,766 (8) $45
Common Stock (5) 155,577 shares $3.50 (2) $544,520 (2) $161
Common Stock (6) 365,000 shares $7.50 (7) $1,877,500 (7) $554
------------ ---------- ------
Total 2,886,943 shares $11,130,060 $3,284
</TABLE>
(1) Common Stock to be sold by certain selling stockholders.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c). Represents the closing sales price on
June 9, 1998.
(3) Common Stock issuable upon the exercise of certain outstanding warrants.
(4) Common Stock issuable upon conversion of shares of convertible preferred
stock underlying certain outstanding warrants.
(5) Common Stock issuable upon conversion of certain outstanding shares of
convertible preferred stock.
(6) Common Stock issuable upon the exercise of certain outstanding options to
purchase Common Stock.
(7) Outstanding options exercisable at the following prices: 90,000 shares at
$3.00 per share; 65,000 shares at $3.50 per share; 15,000 shares at $4.50
per share; 75,000 shares at $5.50 per share; and 120,000 shares at $7.50
per share.
(8) Calculated pursuant to Rule 457(g)(1).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
A registration statement relating to these securities has been filed with
the Securities and Exchange Commission but has not yet become effective.
Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
SUBJECT TO COMPLETION DATED JUNE 16, 1998
2,886,943 Shares
NETTER DIGITAL ENTERTAINMENT, INC.
Common Stock
($.01 par value)
This Prospectus relates to a shelf registration of an aggregate of
2,886,943 shares (the "Shares") of Common Stock of Netter Digital
Entertainment, Inc. (the "Company") which are being offered for sale by
certain selling stockholders (the "Selling Stockholders"). The Shares offered
hereby include (i) up to 129,000 Shares issuable upon exercise, at an exercise
price of $6.00 per share, of certain warrants ("Warrants") granted to the lead
underwriter in the Company's November 1995 initial public offering (the
"Representative's Warrants"); (ii) 522,221 presently outstanding Shares
issued to former shareholders of Videssence, Inc. in connection with its
merger with a wholly-owned subsidiary of the Company (the "Videssence
Merger"); (iii) up to 14,145 Shares issuable upon conversion of 4,715 shares of
the Company's Series A Cumulative Convertible Preferred Stock, par value $0.001
per share (the "Preferred Stock"), underlying certain Warrants granted to the
placement agent in the Company's October 1996 private placement (the
"Placement Agent's Warrants"); (iv) up to 155,577 Shares issuable upon
conversion of 51,859 shares of Preferred Stock issued in the Company's October
1996 private placement; (v) up to 10,000 Shares issued in consideration of
legal services provided by the Company's former counsel; (vi) 110,000
presently outstanding Shares issued to a former director and acting Chief
Financial Officer of the Company; (vii) 1,581,000 presently outstanding
Shares held by the President and CEO of the Company; and (viii) 225,000, 90,000
and 50,000 Shares, respectively, issuable upon exercise of options to purchase
Common Stock ("Options") issued to two consultants and to the President of
Videssence as part of his employment contract. The exercises prices of, and the
number of shares of Common Stock subject to, the Warrants, the Options, and the
shares of Preferred Stock are subject to adjustment in certain circumstances.
See "Selling Stockholders" and "Plan of Distribution". The Company will not
receive any proceeds from the sale of the Shares.
This Prospectus relates only to resales by the Selling Stockholders of
shares of Common Stock presently outstanding or issuable upon the exercise
of certain Warrants or Options or the conversion of shares of Preferred
Stock and does not cover sales or transfers of the Warrants, Options, or the
shares of Preferred Stock, which may be transferred only in transactions which
are registered under, or exempt from the registration provisions of, the
Securities Act of 1933, as amended (the "Securities Act"). The Company's
Common Stock is listed in the NASDAQ Small Cap Market under the symbol "NETT".
On June 9, 1998, the last sale price of the Common Stock as reported by
NASDAQ was $3.50 per share.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 4.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
_______________
The Shares generally may be offered for sale from time to time by the
Selling Stockholders on the NASDAQ Small Cap Market, in ordinary brokerage
transactions at market prices prevailing at the time of sale or in negotiated
transactions at prices related to prevailing market prices. Brokers or
dealers will receive commissions or discounts from the Selling Stockholders in
amounts to be negotiated prior to the sale. Any brokers or dealers
participating in the offering of any such shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and the compensation
received by them may be deemed to be underwriting commissions or discounts.
Substantially all of the expenses of this offering, estimated at
approximately $10,000, will be paid by the Company. See "Selling Stockholders"
and "Plan of Distribution".
The date of this Prospectus is , 1998.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices at 7 World Trade Center, 13th Floor, New York, NY 10048 and
500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies of such
material can be obtained from the Public Reference section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates, and on the World Wide Web at the Commission's Web site
located at "http://www.sec.gov". The Company's Common Stock is traded on
the NASDAQ Small Cap Market, and such reports and other information also can
be inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement under
the Securities Act, with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the registration
statement and the exhibits thereto, to which reference is hereby made.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect
to each such contract, agreement or other document filed as an exhibit to the
registration statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement is qualified in
its entirety by such reference. Any interested parties may inspect the
registration statement, without charge, at the public reference facilities of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and any
interested parties may obtain copies of all or any part of the registration
statement from the Commission at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company with
the Commission are incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997.
2. All other reports filed by the Company pursuant to Sections 13(a) or
15(d) of the Exchange Act since June 30, 1997, including the Company's
Quarterly Reports on Form 10-QSB for the quarters ended September 30,
1997, December 31, 1997, and March 31, 1998.
3. The description of the Company's Common Stock contained in its
Registration Statement pursuant to Section 12 of the Exchange Act, as
amended from time to time.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and made a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified, to constitute a part
of this Prospectus.
2
The Company will provide without charge to each person to whom a copy
of this Prospectus is delivered, upon written or oral request, a copy of any
and all documents incorporated by reference in this Prospectus, other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference in such documents. Requests should be directed to Corporate
Secretary, Netter Digital Entertainment, Inc., 5125 Lankershim Boulevard,
North Hollywood, California 91601, or made by telephone at (818) 753-1990.
THE COMPANY
The Company is engaged in three primary business activities: (i) 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"), (ii) providing digital media
production services to outside clients, and (iii) manufacturing and
distributing media lighting products which incorporate its patented SRGB(tm)
lighting technology.
Entertainment Production. 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. 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 "IPO"), 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.
Since 1993, the Company, through its 51%-owned subsidiary, Babylonian
Productions, Inc., has been producing the award winning television series,
"Babylon 5," in association with its creator, J. Michael Straczynski, for
Warner Bros. Prime Time Entertainment Network ("PTEN"). The Company has
recently finished producing the fifth season of 22 one-hour episodes of
"Babylon 5", which is currently airing on Turner Network Television ("TNT").
In addition, the Company and Mr. Straczynski have already produced two full-
length "Babylon 5" television movies and recently started production on two
additional such movies. The Company also recently announced the production
of a new television series, "Crusade," through Babylonian Productions, Inc..
TNT has purchased twenty-two episodes of the series, which will begin in
January 1999.
Computer Animation and Visual Effects Production Services. As an outgrowth
of its traditional core business of developing and producing media Productions,
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. 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, and the
Company's Netter Digital Technologies division attempts to market the
Company's expertise to outside clients. As the mechanism 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. During this phase, the Company provided
visual effects and post-production work in the feature film,
industrial/corporate video, and television commercial segments. The Company
is currently providing visual effects services on three film projects for two
3
major film studios. Furthermore, the Company is in final contract negotiations
on two new major projects to span fiscal 1999.
Videssence Lighting Products. In January, 1997, the Company acquired
Videssence, Inc. through the Videssence Merger. The Company's Videssence
subsidiary manufactures and distributes media lighting products which are
used for the illumination of studios, stages and other production environments,
including on-location shooting, 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. 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 distributors, dealers, and direct
sales staff, which staff it reorganized after the Videssence Merger. The
Company's Studio 2000 product line has generated the majority of the Company's
sales to date and was designed primarily for television studio news rooms. To
date, the products have been installed in over 400 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 has recently introduced
new products which have been developed for the film production markets and has
begun actively marketing these products.
The Company, formerly "Rattlesnake Productions, Inc.," was organized in
1979 as a California corporation. In September 1995, the Company changed its
state of incorporation to Delaware and, as part of the reincorporation,
changed its name to "Netter Digital Entertainment, Inc." The Company's
principal executive offices are located at 5125 Lankershim Boulevard, North
Hollywood, California 91601, and its telephone number is (818) 753-1990.
RISK FACTORS
In addition to the other information contained in or incorporated by
reference into this Prospectus, prospective investors should carefully consider
the following factors relating to the business of the Company in evaluating an
investment in the Common Stock.
Dependence on Revenues from Limited Sources
For the fiscal years ended June 30, 1997, 1996, and 1995, the "Babylon 5"
television series generated approximately 91%, 82%, and 98%, respectively, of
the revenues of the Company. Although commitments for full financing of the
"Babylon 5" series through the end of the fifth season of production have
been received and TNT has purchased twenty-two episodes of the new "Crusade"
series which will span fiscal year 1999, it is not unusual in the television
industry that a television series not be renewed for an additional season.
Accordingly, there can be no assurances that "Crusade" will be renewed for any
additional seasons. The Company will continue to be dependent upon revenues
from this source in the immediate future. The Company anticipates revenue from
both its computer animation and visual effects production services and its
Videssence subsidiary will supplement the revenue of its production activities.
If "Crusade" is not renewed for a second season and the Company is unable to
obtain production contracts for new Properties, the Company's financial
condition and operations could be materially adversely affected.
4
Dependence on New Production Contracts and Distribution or Syndication
Arrangements
The Company has a contract with Warner Bros./PTEN to produce a fifth season
of "Babylon 5." The Company also recently announced the production of a new
television series, "Crusade," for which TNT has purchased twenty-two episodes.
The Company is in final contract negotiations on two new projects which will
span fiscal 1999. The Company is currently developing numerous other
Properties and intends to identify, acquire the rights to and develop
additional Properties for which it intends to seek production contracts and
distribution rights in the future. The Company does not presently have
financing, production or distribution commitments for any other Properties in
development. Since there can be no assurances that "Crusade" will be renewed
for additional seasons, the Company's future revenues and growth depend on the
Company's ability to enter into new production contracts or favorable
distribution or syndication arrangements for its future projects. There can
be no assurances that the Company will be able to enter into production
contracts or arrange for favorable syndication arrangements for any of its
future projects. Moreover, there can be no assurances that, even if the
Company does enter into a production contract or favorable distribution or
syndication arrangement for any of its future projects, such produced projects
will generate any significant revenue for the Company.
Dependence on New Properties and Broader Rights
The Company's future growth will be dependent on its ability to identify,
acquire the rights to, and develop quality Properties which can be produced and
sold at acceptable profit margins. It will also be dependent on the Company's
ability to negotiate producers fees and production contracts with margins that
cover overhead and generate a profit. There can be no assurance that the
Company will be successful in identifying, acquiring the rights to, and
developing quality Properties that will be successfully produced and
distributed. A failure to develop new Properties would have an adverse impact
on the Company's future performance.
Possible Loss of Project Development Costs
Although the Company has previously participated in creating and producing
many Projects, the Company has had to forego retaining equity and control of
distribution rights in return for the total funding of its productions. To
increase equity positions in projects, the Company, prior to production, may be
required to make larger financial commitments for development and have the risk
of loss of the development costs if a Property is not sold or produced. To
date, the Company has not been required to make a material financial
commitment for the development of any one project, however, it is possible the
Company could make a material financial commitment to purchase the exploitation
rights to the development of future projects. There can be no assurances,
however, that the Company will be able to recover all development costs or
maintain significant equity positions or distribution rights in these
productions.
Labor Considerations in the Entertainment Industry
The cost of producing and distributing entertainment programming has
increased substantially in recent years due to, among other things, the
increasing demands of creative talent and industry-wide collective bargaining
agreements. Most scriptwriters, performers, directors and technical personnel
who will be involved in the Company's productions are members of guilds or
unions that bargain collectively on an industry-wide basis from time to time.
In August 1995, members of the Company's production crew conducted a strike
in conjunction with the International Alliance of Theatrical Stage Employees and
Moving Picture Technicians, Artists and Allied Crafts of the United States and
5
Canada, disrupting production of "Babylon 5" for approximately three working
days. While this strike was settled quickly and with little financial impact
to the Company, action by these guilds or other unions can significantly
disrupt production and have a material adverse effect on the Company.
Recent Videssence Operating Results
For the nine months ended March 31, 1998, the Company recorded an operating
loss of approximately $178,000 from its Videssence activities, primarily due to
lower than expected sales of Videssence products. For the quarter ended
March 31, 1998, the Company recorded operating income of $24,000 from its
Videssence operation, which improvement can be attributed to the Company's
recently implemented cost-cutting measures and the sales of items from
Videssence's newly completed product line.
Market Acceptance of New Videssence Products
The Company's Videssence subsidiary has introduced a product line for sale
in the film production and location lighting market. It has also begun to sell
new products in the video conference/distant learning market. The success and
growth of the Videssence subsidiary will depend, in part, upon the acceptance
of these products by customers in these markets. There can be no assurance that
the Company will achieve market acceptance for one or more of its products in
these various markets and the failure to achieve such acceptance could have a
material adverse effect on the plans for growth of the Videssence subsidiary.
Dependence on Key Personnel
The Company is dependent upon the services of its President and CEO,
Douglas Netter; its Executive Vice President, John Copeland; its Chief Operating
Officer, Thomas L. Jorgenson; and Videssence's President, Paul Costa. While
the Company has entered into employment agreements with Mr. Netter and
Mr. Copeland for five years commencing in September 1995, the loss of the
services of Mr. Netter or Mr. Copeland, particularly due to their production
expertise and the importance of personal contacts in the entertainment
industry, would have a material adverse effect upon the Company's business.
The Company has obtained $1,000,000 in key man life insurance for each of Mr.
Netter and Mr. Copeland. Similarly, the loss of services of Mr. Jorgenson, who
manages the business operations of the Company, would have a material adverse
effect upon the Company's business. While the Company has entered into a
five year employment agreement with Mr. Costa commencing December 1996, the
loss of the services of' Mr. Costa, particularly given his technical knowledge
and intimate knowledge of and contacts within the studio and sound stage market,
would have a material adverse effect upon the Company's business.
Percentage of Producer Fees And Profits Allocated to a Key Individual
Effective from November 1995, the Company has paid to certain key
individuals percentages of the producer fees earned by the Company. Currently,
Mr. Copeland receives 25% of the producer fees earned by the Company for his
services rendered in that capacity for each production up to a maximum cap,
including his base salary, of $200,000. In addition, Mr. Copeland is
entitled to a bonus equal to 2% of the Company's pre-tax earnings in each year
of his contract. The compensation package for Mr. Copeland may be revised from
time to time in the reasonable discretion of the Compensation Committee.
Payment of this producer fee and bonus will reduce the Company's earnings per
share and could adversely affect the prevailing market price for the Common
Stock.
6
Competition
Competition in the entertainment industry is intense since there are
numerous suppliers of product. In the television production business, the
Company will compete for the acquisition of artistic properties and the
services of creative and technical personnel with major entertainment
companies that are engaged in the production of television programming, movies
and multimedia products, as well as a large number of independent production
companies. The Company will also be competing for available production
financing and favorable distribution and/or syndication arrangements, and for
the public's interest in, and acceptance of, its creative products. The
Company believes that it has established a niche as a producer and provider
of television content and programming which combines live action with
computer graphics, primarily in the science fiction, documentary and family
entertainment areas. However, as the Company attempts to expand its product
base, it expects to face greater competition from larger, better financed and
more experienced entities. In addition, if the Company begins to compete in
ancillary markets, including merchandising, home video, electronic game, book,
multimedia, and other entertainment-based software markets, as it intends, it
will face greater and more intense competition with other entertainment
companies already established in these markets. There can be no assurance that
the Company will be able to compete successfully in these markets.
The media lighting industry is also highly competitive. The Company's
Videssence subsidiary competes with manufacturers of traditional incandescent
lighting and with other manufacturers of high-speed fluorescent lighting.
There is a well established incandescent end-user community that is unfamiliar
with the Company's technology and relies primarily on incandescent lighting
product suppliers, including: Mole Richardson, Desisti, Aniflex, LTM and Strand.
Of these five companies, Desisti has entered into SRGB trademark licensing
arrangement with Videssence, neither of which have generated significant
revenues for the Company. To the extent the end-user selects high-speed
fluorescence as a lighting method, the Company has three primary competitors:
Kinoflo, Balcar and LightTech. Balcar and LightTech are manufacturing
products using technology licensed from the Company, none of which have
produced significant revenues for Videssence. Kinoflo does not presently
license the Company's technology and in our core market of television, does
not infringe on patent or intellectual properties. Kinoflo has built a
substantial market position in the film/location lighting market and has
begun marketing studio lighting with luminescent technology to compete with the
Company in the media lighting market. The Company also competes directly with
Kinoflo in the film/location lighting industry; Kinoflo is the industry
leader in supplying high frequency fluorescent lighting products to this
market. There can be no assurances that Videssence will compete successfully
with Kinoflo. The Company also expects competition for its products in the
video conference and digital photography lighting markets. The Company's
management expects the major lighting companies which have not yet entered into
the luminescent lighting market to enter into the competition as the market
share for luminescent lighting increases and incandescent sales begin to
falter from the increasing cost of electrical energy.
Unpredictability of Entertainment Industry
The entertainment industry is highly speculative and historically has
involved a substantial degree of risk. Audience appeal and profitability depend
upon factors which cannot be ascertained reliably in advance and over which
the Company may have no or very limited control, including, among other things,
unpredictable critical reviews and changeable public tastes. Furthermore, even
a production involving highly experienced and respected talent may not,
necessarily, be successful. The ultimate profitability to the Company of
Properties and ventures in which it has or may acquire an interest will
depend upon many factors including those over which the Company will have little
or no control.
7
Variability of Quarterly Results
The Company typically arranges for a studio, network or distributor to fund
the production costs of its Projects, while retaining a back-end producer's
profit participation. Under these arrangements, revenues are recognized when
earned (typically upon receipt) and associated costs are recognized when
incurred. Therefore, the Company's operating results may fluctuate
significantly from quarter to quarter depending on the timing of such costs and
revenues. Accordingly, year-to-year comparisons of quarterly results may not
be meaningful and quarterly results during the course of a year may not be
indicative of the results that may be expected for the entire year.
Dependence on Continuing Relationship with Mr. Straczynski
The Company relies on a continuing working relationship with Mr. Straczynski,
the creator of "Babylon 5" and the 49% owner of Babylonian Productions, Inc.,
for the production of "Babylon 5" and "Crusade." The Company also has
collaborated with Mr. Straczynski on five other projects, including four
"Babylon 5" made-for-television movies, two of which are currently being
produced. The Company is dependent, in part, on sustaining its working
relationship with Mr. Straczynski both through the continued production of
"Babylon 5" and "Crusade" and the further development of those new projects
presently in development or production.
Protection of Proprietary Rights
Although the Company plans to take what management believes are appropriate
and reasonable measures to secure, protect and maintain or obtain agreements to
secure, protect and maintain copyright and other protections for all of its
Properties and proprietary technologies under the laws of certain selected
jurisdictions, no assurance can be given that it will be successful in
implementing these actions or that others will not infringe upon the
Company's proprietary rights, in which event the Company may not have
sufficient resources to enforce or defend these rights. Consequently, investors
should not rely on the value of the patents or trademarks in making an
investment decision in the Company. The Company owns four United States
patents pertaining to SRGB(tm) technology or fixture design used in Videssence's
products. One of these, Patent Number 5,012,396 (the "396 Patent"), issued in
1993 and expiring in 2010, identifies the relationship between SRGB(tm) light
and a video camera. The 396 patent has twice been the subject of litigation
between Videssence and its competitors, both resulting in settlements in which
Videssence issued licenses to the other party. The Company has several patent
applications and patents pending on a number of new inventions. There can be
no assurances patents will be granted for any of these inventions, however.
Although the Company sells its media lighting products internationally, the
Company has no patents or patent applications pending outside the United States
and is unlikely to obtain international patent protection on its existing
patents.
Control by Management
Douglas Netter, the Company's President, and Paul Costa, a director of the
Company and president of its Videssence subsidiary, currently own approximately
47.66% and 10.86%, respectively, of the outstanding shares of the Company's
Common Stock assuming (a) the Outstanding Warrants and Options (defined below)
are not exercised and (b) the outstanding shares of Preferred Stock are not
converted to Common Stock. Accordingly, the Company's President and one of its
directors together are and will be able to control the Company, elect a majority
of the Company's directors, increase the authorized capital, dissolve, merge or
sell the assets of the Company and generally direct the affairs of the Company.
8
Stock Issuable Pursuant to Outstanding Warrants, Options, and Preferred Stock
Certain affiliates and employees of W. J. Gallagher & Company, Inc. ("W.J.
Gallagher") currently hold the Placement Agent's Warrants, which may be
exercised to purchase up to 4,715 shares of Preferred Stock at a price of
$10.80 per share. The Company also has reserved Options to purchase up to
500,000 shares of Common Stock pursuant to the 1995 Stock Option Plan (the
"Option Plan"). To date, the Company has granted 463,000 Options to its
directors, employees and consultants under the Option Plan. Under the 1997
Incentive Stock Option Plan and the 1997 Directors' Stock Option Plan, the
Company has reserved for Options to purchase up to 600,000 and 350,000 shares of
Common Stock, respectively, none of which have been granted. There are issued
and outstanding Warrants to purchase up to 50,000 shares of Common
Stock at $4.00 per share granted to a bridge lender of the Company prior to
the IPO in November 1995. There are issued and outstanding warrants to purchase
up to 494,500 shares of Common Stock, exercisable at $6.50 per share, which were
sold in the IPO (the "IPO Warrants"). Also issued in the IPO and presently
outstanding are 129,000 Representative's Warrants to purchase either shares
of Common Stock at $6.00 per share or IPO Warrants at $0.012 per IPO Warrant
which are now held by W.B. McKee Securities, Inc. ("W.B. McKee Securities") and
certain of its affiliates and employees. In addition, 51,859 shares of
Preferred Stock are convertible at any time by their holders into shares of
Common Stock, at a conversion ratio of three shares of Common Stock for each
share of Preferred Stock. The Company has also issued 365,000 options to
purchase shares of Common Stock to two consultants and the President of its
Videssence subsidiary. The number of shares issuable upon the exercise or
conversion, respectively, of the foregoing Warrants and Options and Preferred
Stock are subject to customary antidilution adjustments.
Under the terms of the Placement Agent's Warrants, the IPO Warrants, and
the Representative's Warrants (collectively the "Outstanding Warrants"), and
the Options, the holders are given the opportunity to profit from a rise in
the market price of the Common Stock, and their exercise may dilute the book
value per share of the Common Stock. In addition, because the shares of
Preferred Stock are convertible into Common Stock, the holders of such shares
are given the opportunity to profit from a rise in the market price of the
Common Stock, and the conversion of the shares may dilute the book value per
share of the Common Stock. The existence of the Outstanding Warrants, the
Options, and the outstanding shares of Preferred Stock may adversely affect
the terms on which the Company may obtain additional equity financing.
Moreover, the holders are likely to exercise their Outstanding Warrants and
Options at a time when the Company would otherwise be able to obtain capital on
terms more favorable than would be obtained through the exercise of such
Outstanding Warrants and Options.
Shares Eligible for Future Sale
There are presently 3,334,405 shares of Common Stock outstanding (assuming
no exercise of the Outstanding Warrants and Options). Of the 3,334,405 shares
outstanding, 1,099,455 shares of Common Stock are registered and traded in the
public market. The remaining 2,234,950 shares of Common Stock currently
outstanding are "restricted securities" as that term is defined in Rule 144
under the Securities Act, and under certain circumstances may be sold without
registration pursuant to that rule; 2,223,221 of such shares are included within
the Registration Statement on Form S-3 accompanying this Prospectus (the
"Registration Statement") and, accordingly, upon effectiveness of the
Registration Statement will be freely tradeable. Further, the shares of Common
Stock issuable upon exercise of various Options and Warrants and upon conversion
of the shares of Preferred Stock (as described above under "Stock Issuable
Pursuant to Outstanding Warrants, Options and Preferred Stock") have been
registered under the Securities Act or are being registered under the Act
pursuant to the Registration Statement and, accordingly, are or, upon
effectiveness of the Registration Statement will be, freely tradeable.
No prediction can be made as to the effect if any, that sales of shares of
9
Common Stock or the availability of such shares for sale will have on the market
prices prevailing at that time. Nevertheless, the possibility that a substantial
number of shares of Common Stock may be offered or sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the stockholders' ability to sell the Company's Common Stock, or the Company's
ability to raise capital through the sale of its equity securities.
Limitations on Liability of Directors
The Company's Certificate of Incorporation substantially limits the
liability of the Company's directors to the Company and its stockholders for
breach of fiduciary or other duties to the Company.
Absence of Dividends on Common Stock
The Company has never paid any cash dividend on its Common Stock and does
not anticipate that it will pay cash dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the expansion and
development of its business.
USE OF PROCEEDS
As the Shares offered by this Prospectus are being sold for the account of
selling stockholders other than the Company, the Company will not receive any of
the net proceeds from the sale of such Shares.
SELLING STOCKHOLDERS
The 2,886,943 Shares offered by this Prospectus are being sold for the
account of the Selling Stockholders as follows: (i) certain affiliates and
employees of W.B. McKee Securities may sell up to 129,000 shares of the
Company's Common Stock which they may obtain upon exercise of the
Representative's Warrants, (ii) certain affiliates and employees of W.J.
Gallagher may sell up to 14,145 shares of the Company's Common Stock which they
may obtain upon conversion of the 4,715 shares of Preferred Stock underlying the
Placement Agent's Warrants, (iii) Luce, Forward, Hamilton & Scripps LLP, the
Company's former outside legal counsel, may sell up to 10,000 shares of the
Company's Common Stock, (iv) certain former shareholders of Videssence, Inc.
may sell up to 522,221 shares of the Company's Common Stock which they
obtained in connection with the Videssence Merger, (v) certain holders of
shares of Preferred Stock may sell up to 155,577 shares of the Company's Common
Stock which they may obtain upon conversion of the 51,859 shares of Preferred
Stock held by them, (vi) Mr. Talbot may sell up to 110,000 shares of the
Company's Common Stock; (vii) Mr. Netter may sell up to 1,581,000 shares of
the Company's Common Stock; and (viii) H.D. Brous, Mr. Costa, and Martin E.
Janis may sell up to 225,000, 90,000, and 50,000 shares, respectively, of the
Company's Common Stock which they may obtain upon the exercise of Options held
by such persons.
The shares of Common Stock being sold by Luce, Forward, Hamilton & Scripps
LLP were issued in June 1997 as partial compensation for legal services provided
by such firm to the Company. The shares of Common Stock being sold by certain
former shareholders of Videssence, Inc. were issued in connection with the
Videssence Merger in January 1997. The Representative's Warrants were issued
as part of the commissions payable by the Company to certain affiliates and
employees of W.B. McKee Securities in connection with the IPO. The Placement
Agent's Warrants were issued to certain affiliates and employees of
W.J. Gallagher as part of the commissions and finder's fees payable by the
Company in connection with the October 1996 placement of shares of Preferred
Stock (the "Preferred Stock Placement"). The holders of Preferred Stock
obtained such shares in connection with the Preferred Stock Placement in
10
October 1996. The shares of Common Stock held by Mr. Netter were issued in
connection with the initial organization of the Company and in all cases prior
to the Company's IPO in November 1995. The shares of
Common Stock being sold by Mr. Talbot were issued in connection with the
exercise of an option agreement relating to an employment agreement.
Mr. Costa obtained the respective Options held by him by the terms of a stock
option agreement. Martin E. Janis and H.D. Brous obtained the options held by
them by the terms of letter agreements with the Company regarding consulting
services.
The following table sets forth certain information, as of June 9,1998, with
respect to each of the Selling Stockholders. Other than Mr. Netter , the
President and CEO of the Company, Mr. Costa, a director of the Company and the
President of its Videssence subsidiary, and Geoffrey Talbot, formerly a
Director and acting Chief Financial Officer of the Company, none of the Selling
Stockholders is, or within the past three years has been, a director or officer
of the Company. W. B. McKee Securities acted as the underwriter in the IPO.
W.J. Gallagher acted as the Company's placement agent in the Preferred Stock
Placement. Luce, Forward, Hamilton & Scripps, LLP, the Company's former outside
general counsel, is also a Selling Stockholder.
Beneficial ownership Beneficial ownership
prior to offering (1) after offering (1)
--------------------- --------------------
Number
Number Percent of shares Number Percent
Name of shares of class to be sold of shares of class
- -------------------------- --------- -------- ---------- --------- --------
Jack Chow (2) 3,300 * 3,300 - *
Evelyn Barnes (2) 6,600 * 6,600 - *
John & Evelyn Burton (2) 3,300 * 3,300 - *
Oran Laymon and Myrtle
Laymon TTEES FBO Laymon
Family Trust DTD 9/26/86(2) 3,300 * 3,300 - *
Jonathon Pollock (2) 3,300 * 3,300 - *
Jessie Wolf TTEE Jessie
Wolf Revocable Living
Trust DTD 8/29/89 (2) 3,300 * 3,300 - *
Alta E. Callender (2) 3,300 * 3,300 - *
Gloria Jansse (2) 3,300 * 3,300 - *
NTA Partners Attn:
Ben Schulman (2) 3,300 * 3,300 - *
Pamela McCarthy The
Washburn Irrevocable
Trust DTD 7/22/94 (2) 3,300 * 3,300 - *
Pamela McCarthy The
Washburn Irrevocable
Trust DTD 7/22/94 (2) 3,300 * 3,300 - *
Rob R. Pope & Patricia
M. Pope TTES UTD 9/27/90
FBO The Pope Trust (2) 3,300 * 3,300 - *
Lucille A. Long & Suzanne
M. Hall TTEES UTD 2/20/74
FBO Leonard C. & Lucille
Long Fam. Tr.(2) 3,300 * 3,300 - *
Terry A. Zimmerman Trustee,
UTA Dated 9/4/90 (2) 3,300 * 3,300 - *
Weasoo Radnoti (2) 3,300 * 3,300 - *
Norbert Blank (2) 1,650 * 1,650 - *
Graham Rael-Brook (2) 3,300 * 3,300 - *
Jennie Sacco (2) 3,300 * 3,300 - *
Joseph J. Pratt (2) 1,650 * 1,650 - *
Resources Trust Company
for the Account of Theodore
Crichton IRA
Acct # 1-222125281 (2) 5,610 * 5,610 - *
11
Killian Family Trust
Arthur E. Killian TTEE/
Sandra Killian TTEE (2) 3,300 * 3,300 - *
David L. Simon, Shirley D.
Simon & Adam F. Simon(2) 3,300 * 3,300 - *
Chizuko Suda (2) 3,300 * 3,300 - *
Salvatore Cracchiolo (2) 1,650 * 1,650 - *
Gail Gitelson, TTEE FBO
Gail Gitelson Trust (2) 3,300 * 3,300 - *
Salvatore Russo (2) 1,650 * 1,650 - *
Norman Sapoznik (2) 3,300 * 3,300 - *
Maxine Dieu (2) 3,300 * 3,300 - *
Doris E. Turpin (2) 3,300 * 3,300 - *
Rosemary Haffner (2) 3,300 * 3,300 - *
Robert & Jean M.
Hatfield (2) 3,300 * 3,300 - *
Perfectdata Corp.(2) 3,300 * 3,300 - *
Michael N. Nordahl (2) 3,300 * 3,300 - *
Arif M. Siddiq &
Zarina M. Arif (2) 9,900 * 9,900 - *
Einer Thuesen (2) 3,300 * 3,300 - *
Howard Vanen (2) 1,650 * 1,650 - *
Wedbush Morgan Securities
SEP IRA Account of
Donna Walburg (2) 1,650 * 1,650 - *
Edward Kastelanch (2) 3,300 * 3,300 - *
Herbert F. Woods and
Joan E. Woods (2) 3,300 * 3,300 - *
Gustaaf A. Rooze (2) 16,500 * 16,500 - *
Elmer H. Naugle (2) 8,067 * 8,067 - *
Paul Costa (3)(10) 452,134 11.81% 452,134 - *
Steve Michaelson (3) 60,779 1.82% 60,779 - *
Bruce Jaffe (3) 8,162 * 8,162 - *
Karen Costa (3) 4,080 * 4,080 - *
Joseph Costa (3) 10,883 * 10,883 - *
Del Francis (3) 8,926 * 8,926 - *
Barbara Francis (3) 4,080 * 4,080 - *
Sam Cercone (3) 41,455 1.24% 41,455 - *
Kathy Katz (3) 4,307 * 4,307 - *
Gary Tomsic (3) 1,360 * 1,360 - *
Anthony Costa (3) 7,757 * 7,757 - *
Chris and Angela Carstens (3) 2,721 * 2,721 - *
Carl and Camela Kube (3) 1,360 * 1,360 - *
Dave Mjoen (3) 4,217 * 4,217 - *
Wheat First Securities
Cust. Penne N. McKee
IRA U/A DTD 05/15/97 (4) 51,969 1.54% 33,669 18,300 *
Gary Sherman (4) 12,900 * 12,900 - *
Jeff Janda (4) 22,059 * 22,059 - *
Julie Cincera (4) 2,322 * 2,322 - *
W. B. McKee
Securities, Inc. (4) 55,728 1.64% 55,728 - *
Christopher Nicholson (4) 2,322 * 2,322 - *
W.J. Gallagher &Co. (5) 14,145 * 14,145 - *
12
Luce, Forward, Hamilton
& Scripps LLP (6) 10,000 * 10,000 - *
Martin E. Janis &Co. (7) 50,000 1.48% 50,000 - *
H.D. Brous & Co. (7) 225,000 6.32% 225,000 - *
Douglas Netter (8) 1,581,000 47.42% 1,581,000 - *
Geoffrey Talbot (9) 110,000 3.30% 110,000 - *
_________________
* Indicates ownership of less than one percent
(1) Based on an aggregate of 3,334,405 shares of Common Stock outstanding as
of June 9, 1998 and, with respect to particular persons, shares underlying
Options and Warrants currently exercisable or exercisable within 60 days
and shares underlying convertible Preferred Stock. Information set forth
under the heading "Beneficial ownership prior to offering" assumes that all
of the Options and Warrants have been exercised. Information set forth
under the heading "Beneficial ownership after offering" assumes that all
shares registered hereby on behalf of the Selling Stockholders are sold by
the Selling Stockholders, including all of the shares issuable upon the
exercise of the Warrants or Options or the conversion of the shares of
Preferred Stock.
(2) Consists of Common Stock issuable upon conversion of shares of Preferred
Stock issued in connection with the Preferred Stock Placement.
(3) Consists of shares issued in connection with the Videssence Merger.
(4) Consists of shares issuable upon the exercise of the Representative's
Warrants.
(5) Consists of shares issuable upon conversion of the shares of Preferred
Stock underlying the Placement Agent's Warrants.
(6) Consists of shares issued to the former legal counsel to the Company.
(7) Consists of shares issuable upon the exercise of Options held by such
persons.
(8) Consists of shares issued to the Company's President and CEO.
(9) Consists of shares issued to the Company's former director and acting Chief
Financial Officer.
(10) Consists of 362,134 shares issued in connection with the Videssence Merger
and 90,000 shares issuable upon the exercise of Options held by Mr. Costa
(of which 36,000 are vested as of June 9, 1998.)
The Company granted to the Selling Stockholders certain rights with respect
to the registration under the Securities Act of the shares of Common Stock which
are currently held or may held by such persons, and the Shares offered hereby
are being so registered pursuant to the exercise of such registration rights.
In accordance with the terms of such registration rights, the Company will pay
substantially all of the expenses of this offering.
Each of the transactions in which (i) the Shares, (ii) the shares of
Preferred Stock convertible into certain of the Shares, (iii) the Warrants
which are exercisable into certain of the Shares or into the shares of
Preferred Stock convertible into certain of the Shares, or (iv) the Options
were issued were negotiated at arms' length, and the Company believes that the
terms of such transactions were commercially reasonable in the circumstances.
PLAN OF DISTRIBUTION
The Shares may be sold from time to time by the Selling Stockholders or by
pledgees, donees, transferees or other successors-in-interest of the Selling
Stockholders. Such sales may be made on the NASDAQ Small Cap Market or
otherwise, at prices and at terms then prevailing, at prices related to the
then current market price or in negotiated transactions. The Shares may be
sold by any one or more of the following methods: (a) ordinary brokerage
transactions and transactions in which the broker solicits purchasers;
(b) purchases by a broker or dealer as principal and resales by such broker
13
or dealer for its account pursuant to this Prospectus; and (c) block trades or
exchange distributions in accordance with the rules of such exchange. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the Selling Stockholders in amounts to be
negotiated prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, and the compensation received by them may be
deemed to be underwriting commissions or discounts.
Upon the Company being notified by a Selling Stockholder that any material
arrangement has been entered into with a broker or dealer for the sale of any
Shares covered by this Prospectus, a prospectus supplement, if required, will
be distributed which will set forth the name of the participating brokers or
dealers, the number of Shares involved, the price at which such Shares were
sold and the commissions paid or discounts or concessions allowed to such
brokers or dealers. In certain jurisdictions, the Shares may be offered or
sold in such jurisdictions only through registered or licensed brokers or
dealers.
Under the Exchange Act, any person engaged in a distribution of shares of
Common Stock offered by this Prospectus may not simultaneously engage in market
making activities with respect to the Common Stock during the applicable
"cooling off" period prior to the commencement of such distribution. In
addition, and without limiting the foregoing, each Selling Stockholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation Rules 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of Common Stock
by the Selling Stockholders. The Company will inform each Selling Stockholder
in writing that he or she is subject to the applicable provisions of the
Exchange Act and the rules and regulations thereunder. The Company will inform
NASDAQ and each of the Selling Stockholders when the distribution of shares in
this offering is completed.
INDEMNIFICATION
The Company's bylaws require that it indemnify any person who is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director or officer of another corporation, against any liability,
judgment, fine, amount paid in settlement, cost and expense (including
attorneys' fees) asserted or threatened against and incurred by such person
(other than in an action by or in right of the Company) in his capacity as or
arising out of his status as a director or officer of the Company or, if serving
at the request of the Company, as a director or officer of another corporation,
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
The Company's bylaws also provide that it shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the Company to
procure a judgment in its favor by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director or officer of another corporation, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company. However, in such an action by or on behalf
of a corporation, no indemnification may be made in respect of any claim, issue
or matter as to which the person is adjudged liable for negligence or misconduct
in the performance of his duty to the corporation unless, and only to the
extent that the court determines that, despite the adjudication of liability
but in view of all the circumstances, the person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
14
The Company's bylaws also provide that the Company may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Company, or is serving at the request of the Company as a director or
officer of another corporation, against any liability incurred by such person
in any such capacity, or arising out of his status as such, regardless of
whether the Company is empowered to indemnify such person under the provisions
of the bylaws. The Company currently maintains such insurance.
The Company's Certificate of Incorporation (the "Certificate") provides
that the Company shall indemnify, to the fullest extent permitted by law, each
of its officers, directors, employees and agents.
Each of the foregoing may include indemnification for liabilities under
the Securities Act. Insofar as indemnification for liabilities under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
EXPERTS
The financial statements incorporated in this Prospectus by reference from
the Company's Annual Report on Form 10-KSB for the year ended June 30, 1997
have been audited by, and have been so incorporated in reliance upon the
report of, Feldman Sherb Ehrlich & Co., P.C. (formerly Feldman Radin & Co.,
P.C.), independent accountants, given upon the authority of that firm as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Ervin, Cohen
& Jessup, Beverly Hills, California.
15
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or the Selling Stockholder. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Company since such date.
NETTER DIGITAL ENTERTAINMENT, INC.
2,886,943 Shares
Common Stock
($.01 par value)
PROSPECTUS
, 1998
TABLE OF CONTENTS
Page
Available Information..... 2
Incorporation of Certain Documents
by Reference..... 2
The Company..... 3
Risk Factors..... 4
Use of Proceeds..... 10
Selling Stockholders..... 10
Plan of Distribution..... 13
Indemnification..... 14
Experts..... 15
Legal Matter ..... 15
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses payable by the
registrant in connection with the filing of this Form S-3 Registration
Statement:
Securities and Exchange Commission registration fee...... $3,284.00
Printing costs........................................... -
Legal fees............................................... 5,000.00
Accounting fees and expenses............................. 1,000.00
Miscellaneous expenses................................... 1,500.00
---------
Total.................................................... $10,784.00
Item 15. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware (the
"GCL") permits a corporation to, and the registrant's bylaws require that it,
indemnify any person who is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director or officer
of another corporation, against any liability, judgment, fine, amount paid in
settlement, cost and expense (including attorneys' fees) asserted or threatened
against and incurred by such person (other than in an action by or in right of
the corporation) in his capacity as or arising out of his status as a director
or officer of the corporation or, if serving at the request of the corporation,
as a director or officer of another corporation, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
As permitted under Section 145 of the GCL, the registrant's bylaws also
provide that it shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation. However, in such an action by or on behalf of a corporation,
no indemnification may be made in respect of any claim, issue or matter as to
which the person is adjudged liable for negligence or misconduct in the
performance of his duty to the corporation unless, and only to the extent
that the court determines that, despite the adjudication of liability but in
view of all the circumstances, the person is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.
In addition, the indemnification provided by section 145 shall not be
deemed exclusive of any other rights to which a person seeking indemnification
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
The bylaws also provide that the registrant may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
registrant, or is serving at the request of the registrant as a director or
officer of another corporation, against any liability incurred by such person
II-1
in any such capacity, or arising out of his status as such, regardless of
whether the registrant is empowered to indemnify such person under the
provisions of the bylaws. The Company currently maintains such insurance.
The Company's Certificate of Incorporation (the "Certificate") provides
that the Company shall indemnify, to the fullest extent permitted by law, each
of its officers, directors, employees and agents.
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
3.1 Certificate of Incorporation of Netter Digital Entertainment, Inc. (1)
3.2 Bylaws of Netter Digital Entertainment, Inc. (1)
4.1 Form of Representative's Warrants, issued to M.B. McKee Securities,
Inc. (1)
4.2 Registration Rights Agreement, dated October 15, 1996, between Netter
Digital Entertainment, Inc. and W.J. Gallagher & Company, Inc. for
and on behalf of the purchasers of the Company's Series A Preferred
Stock as third party beneficiaries. (2)
4.3 Registration Rights Agreement, dated December 30, 1996, between
Netter Digital Entertainment, Inc. and certain former shareholders
of Videssence, Inc. (2)
4.4 Registration Rights Agreement, dated December 30, 1996, between
Netter Digital Entertainment, Inc. and certain former shareholders
of Videssence, Inc. (2)
4.5 Registration Rights Agreement, dated May 2, 1997, between Netter
Digital Entertainment, Inc. and Luce, Forward, Hamilton & Scripps. (2)
4.6 Stock Option Agreement, dated September 1, 1997, by and between
Netter Digital Entertainment, Inc. and H.D. Brous & Co, Inc. (3)
4.7 Warrant, dated September 4, 1997, issued to W.J. Gallagher &
Company. (3)
4.8 Letter Agreement, dated October 20, 1997, between Netter Digital
Entertainment, Inc. and Martin E. Janis & Company, Inc. (4)
4.9 Employment Agreement, dated December 31, 1996, by and between Netter
Digital Entertainment, Inc. and Paul Costa. (3)
5.1 Opinion of Ervin, Cohen & Jessup LLP. (2)
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly Feldman Radin
& Co., P.C.) (2)
23.2 Consent of Ervin, Cohen & Jessup LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (set forth on Page II-5).
__________
(1) Incorporated by reference from the registrant's Registration Statement on
Form SB-2 (File No. 33-97402-LA) declared effective November 20, 1995.
(2) Filed herewith.
(3) Incorporated by reference from the registrant's Form 10-KSB for the year
ended June 30, 1997.
(4) Incorporated by reference from the registrant's Form 10-QSB for the quarter
ended September 30, 1997.
ITEM 17. Undertakings
A. The registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-2
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
that a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective Registration Statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply
if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
B. The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
C. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
D. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
II-3
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of North Hollywood, State of California, on
June 16, 1998.
NETTER DIGITAL ENTERTAINMENT, INC.
By:/s/ Douglas Netter
---------------------------------
Douglas Netter, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas Jorgenson and Chad Kalebic, and each of
them, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any or all post-effective amendments to
this Registration Statement, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
/s/ Douglas Netter Chairman of the
- --------------------- Board, President
Douglas Netter and Chief Executive Officer June 16, 1998
/s/ John Copeland Executive Vice President,
- --------------------- Secretary, Director
John Copeland June 16, 1998
/s/ Thomas Jorgenson Chief Operating Officer
- ---------------------
Thomas L. Jorgenson June 16, 1998
/s/ Chad Kalebic Chief Financial Officer and
- --------------------- Controller (Principal Financial
Chad Kalebic and Accounting Officer) June 16, 1998
/s/ Kate Netter Forte Director
- --------------------- June 16, 1998
Kate Netter Forte
II-5
/s/ Leonard Silverman Director
- --------------------- June 16, 1998
Leonard Silverman
/s/ Paul Costa Director
- --------------------- June 16, 1998
Paul Costa
/s/ Lennart Ringquist Director
- --------------------- June 16, 1998
Lennart Ringquist
II-6
Exhibit Index
Exhibit
Number Description
------ ------------------------------------------------------
4.2 Registration Rights Agreement, dated October 15, 1996,
between Netter Digital Entertainment, Inc. and
W.J. Gallagher & Company, Inc. for and on behalf of the
purchasers of the Company's Series A Preferred Stock as third
party beneficiaries.
4.3 Registration Rights Agreement, dated December 30, 1996,
between Netter Digital Entertainment, Inc. and certain
former shareholders of Videssence, Inc.
4.4 Registration Rights Agreement, dated December 30, 1996,
between Netter Digital Entertainment, Inc. and certain
former shareholders of Videssence, Inc.
4.5 Registration Rights Agreement, dated May 2, 1997, between
Netter Digital Entertainment, Inc. and Luce, Forward,
Hamilton & Scripps.
5.1 Opinion of Ervin, Cohen & Jessup LLP.
23.1 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly
Feldman Radin & Co., P.C.)
REGISTRATION RIGHTS AGREEMENT
Netter Digital Entertainment Inc., a Delaware corporation ("Company"),
and W.J. Gallagher & Company, Inc., for and on behalf of the purchasers
("Purchasers") of the Company's Series A Preferred Stock as third party
beneficiaries.
A. The Company is a digital production studio combining high technology
with entertainment to create television series, movies, documentary and
multi-media productions. The Company specializes in creating science-fiction
programming which combines live action with computer graphics, as well as
family and children's entertainment.
B. The Company is offering shares of Series A Convertible Preferred
Stock (the "Securities") pursuant to that certain Offering Memorandum dated
October 15, 1996.
The Company and the Purchasers agree as follows:
1. Definitions. As used in this Agreement:
a. The terms "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement
in compliance with the Act and the declaration or ordering of the effectiveness
of such registration statement.
b. The term "Registrable Securities" means (i) the Common Stock
issued or issuable pursuant to the conversion of the Securities and (ii) any
Common Stock of the Company issued or issuable in respect of such Common Stock
or other securities issued or issuable pursuant to the conversion of the
Securities upon any stock split, stock dividend, recapitalization, or similar
event, or any Common Stock otherwise issued or issuable with respect to the
Securities. Notwithstanding anything set forth above, the above-described
securities shall not be treated as Registrable Securities if and so long as
they (A) have been sold to or through a broker or dealer or underwriter in a
public distribution or a public securities transaction, or (B) have been sold
(or are available for sale in the opinion of counsel to the Company and market
conditions would permit the sale of such shares within a 90 day period)
pursuant to Rule 144(K) in a transaction exempt from the registration and
prospectus delivery requirements of the Act so that all transfer restrictions
and restrictive legends with respect thereto are removed upon the consummation
of such sale.
c. The term "Holder" means any holder holding Registrable
Securities (and any person holding Registrable Securities to whom the
registration rights have been transferred pursuant to paragraph 10 hereof).
1
d. The term "SEC" or "Commission" means the Securities and Exchange
Commission or any successor agency thereto.
e. The term "Act" means the Securities Act of 1933, as amended.
f. The term "1934 Act" means the Securities Exchange Act of 1934,
as amended.
g. The term "Common Stock" means the common stock of the Company.
h. The term "Securities" means shares of Series A Convertible
Preferred Stock purchased by the Purchasers.
i. The term "Founders" means Douglas Netter, John Copeland,
Geoffrey Talbot, and current officers and directors of the Company.
2. Company Registration.
a. If at any time, or from time to time, the Company shall
determine to register any of its securities, either for its own account or
for the account of a security holder or holders, other than a registration
relating solely to employee benefit plans, or a registration on Form S-4
relating solely to an SEC Rule 145 transaction, or a registration on any
other form (other than Form S-1, S-3, SB-1 or SB-2) which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities, the
Company will:
i. promptly give to each Holder written notice thereof, and
ii. include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in
any written request or requests by any Holder or Holders received by the
Company within twenty (20) days after such written notice is given on the
same terms and conditions as the Common Stock, if any, otherwise being sold
through the underwriter in such registration.
b. If the registration of which the Company gives notice is for
a registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to
paragraph 2(a). In such event the right of any Holder to registration
pursuant to this paragraph 2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting, if any, (together with the Company and the other holders
2
distributing their securities through such underwriting) shall enter into
an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company.
c. Notwithstanding any other provision of this paragraph 2, if
the underwriter determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may limit the Registrable
Securities or other securities to be included in the registration. Any
reduction by the underwriter of the number of Registrable Securities or other
securities to be included in such registration shall be made in the following
manner: the Company shall advise all Holders and other holders distributing
their securities through such underwriting of the reduction and the number of
shares of Registrable Securities and other securities that may be included
in the registration and underwriting shall be allocated among the holders
thereof in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities and other securities requesting registration for the
offering held by such Holders and other holders at the time of filing of the
Registration Statement. To facilitate the allocation of shares in accordance
with the above provisions, the Company may round the number of shares
allocated to any Holder or holder to the nearest 100 shares. The Company
shall advise all Holders of Registrable Securities which would otherwise be
registered and underwritten pursuant hereto of any such limitations, and the
number of shares of Registrable Securities that may be included in the
registration. If any Holder or holder disapproves of the terms of any such
underwriting, such Holder or holder may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any securities excluded
or withdrawn from such underwriting shall not be transferred in a public
distribution prior to ninety (90) days after the effective date of the
registration statement relating thereto, or such shorter period of time as
the underwriters may require.
d. The Company shall have the right to terminate or withdraw any
registration initiated by it under this paragraph 2 prior to the effectiveness
of such registration whether or not any Holder has elected to register
securities in such registration.
3. Demand Registration on Form S-3. After the expiration of one year
from the date of this Agreement, if the Company has neither filed a
registration statement under paragraph 2 consistent with the terms of
this Agreement nor filed a registraton statement under paragraph 2 in which
limitations were imposed by the underwriter as to the amount of of Securities
any Holder may sell, then if any Holder or Holders request that the Company
file a registration statement on Form S-3 (or any successor form to Form S-3)
for a public offering of shares of the Registrable Securities the reasonably
anticipated aggregate price to the public of which, net of underwriting
discounts and commissions, would exceed $500,000, and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities
for such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form and
to cause such Registrable Securities to be qualified in such jurisdictions
as the Holder or Holders may reasonably request; provided, however, that the
Company shall not be required to effect more than one registration pursuant
to this paragraph 3 in any twelve (12) month period. The substantive
provisions of paragraph 2(b) shall be applicable to each registration
3
initiated under this paragraph 3. Notwithstanding the above, the Company
shall not be obligated to conduct a registration pursuant to this paragraph 3
within 120 days of the commencement of any other registered offering conducted
by the Company pursuant to paragraph 2.
4. Expenses of Registration. All expenses incurred in connection with
any registration, qualification or compliance pursuant to this Agreement,
including, without limitation, all registration, filing and qualification
fees, printing expenses, escrow fees, fees and disbursements of counsel for
the Company, accounting fees and expenses, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided, however, that the Company shall not be required to pay stock
transfer taxes or underwriters' fees, discounts or commissions relating to
registrable Securities, or fees of counsel for the selling Stockholders.
5. Registration Procedures. If and whenever the Company is required by
the provisions of this Agreement to use its best efforts to effect the
registration of any of the Registrable Securities under the Act, the Company
will, as expeditiously as possible:
a. Prepare and file with the SEC a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for such period as may be necessary
to permit the successful marketing of such securities but not exceeding one
hundred twenty (120) days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto,
whichever first occurs.
b. Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to comply with the provisions of the Act; and to keep such
registration statement effective for that period of time specified in
paragraph 5(a).
c. Furnish to each Holder participating in the registration such
number of prospectuses and preliminary prospectuses in conformity with the
requirements of the Act, and such other documents as such seller may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Securities being sold by such Holder;
d. Use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as each such selling Holder of
Registrable Securities shall reasonably request and do any and all other
acts and things which may be necessary or desirable to enable such Holder to
consummate the public sale or other disposition in such jurisdictions provided
that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or file a general consent to
service of process in any such jurisdictions.
e. Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a
4
result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
6. Indemnification.
a. The Company agrees to indemnify and hold harmless each Holder of
Registrable Securities with respect to which a registration statement has been
filed under the Act pursuant to this Agreement, each of such Holder's partners,
officers and directors, each underwriter of any of the Registrable Securities
included in such registration statement, and each person, if any, who controls
any such Holder or underwriter within the meaning of the Act (hereinafter
collectively referred to as the "Holder-Underwriters"), as follows:
i. against any and all loss, liability, claim, damage and
expense whatsoever arising out of any untrue statement or alleged untrue
statement of a material fact contained in such registration statement (or
any amendment thereto), or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or arising out of any untrue statement
or alleged untrue statement of a material fact contained in any preliminary
prospectus or prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, unless such untrue statement or omission or
such alleged untrue statement or omission was made in reliance upon and in
conformity with written information fumished to the Company by any Holder-
Underwriter expressly for use in such registration statement (or any amendment
thereto) or such preliminary prospectus or prospectus (or any amendment or
supplement thereto);
ii. against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in settlement
of any litigation, commenced or threatened, or of any claim whatsoever based
upon any such untrue statement or omission or any such alleged untrue
statement or omission, if such settlement is effected with the written
consent of the Company (which consent shall not be unreasonably withheld);
and
iii. against any and all expense (including attorneys fees)
whatsoever reasonably incurred in investigating, preparing, settling (with the
consent of the Company, which consent shall not be unreasonably withheld) or
defending against any litigation, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense is
not paid under (i) or (ii) above; provided, however, that the foregoing
indemnity agreement in paragraphs (i), (ii) and (iii) of this paragraph
7(a) is subject to the condition that, insofar as it relates to any such
untrue statement, alleged untrue statement, omission or alleged omission
made in a preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration statement becomes
5
effective, or in the amended prospectus filed with the SEC pursuant to
Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure
to the benefit of any underwriter, or any Holder, if there is no underwriter,
or if a copy of the Final Prospectus was not furnished to the person or
entity asserting the loss, liability, claim or damage at or prior to the time
such action is required by the Act.
In no case shall the Company be liable under this indemnity agreement
with respect to any loss, liability, claim, damage or expense with respect to
any claim made against any Holder-Underwriter unless the Company shall be
notified in writing of the nature of the claim within a reasonable time after
the assertion thereof, but the failure to so notify the Company shall not
relieve the Company from any, liability which it may have otherwise than on
account of this indemnity agreement. In case of any such notice, the Company
shall be entitled to participate at its expense in the defense, or if it so
elects within a reasonable time after receipt of such notice, to assume the
defense of any suit brought to enforce any such claim; but if it so elects to
assume the defense, such defense shall be conducted by counsel chosen by it
and approved by the Holder-Underwriter(s) and other defendant or defendants,
if any, in any suit so brought, which approval shall not be unreasonably
withheld. In the event that the Company elects to assume the defense of any
such suit and retain such counsel, the Holder-Underwriter(s) and other
defendant or defendants, if any, in the suit, shall bear the fees and
expenses of any additional counsel thereafter retained by them; provided,
however, that the Company shall bear the expense of independent counsel for
the Holder-Underwriter(s) if the Holder-Underwriter(s) reasonably determines
that representation of it and the Company by the same counsel would be
inappropriate due to actual or potential conflicts of interest.
b. Each Holder severally, and not jointly, agrees that it will
indemnify and hold harmless the Company, each officer and director of the
Company, each person, if any, who controls the Company within the meaning of
the Act, each underwriter of Registrable Securities included in any
registration statement which has been filed under the Act pursuant to this
Agreement, each person, if any, who controls such underwriter within the
meaning of the Act, each other Holder, each of such other Holder's partners,
officers and directors, and each person controlling such other holder within
the meaning of the Act against any and all loss, liability, claim, damage and
expense described in clauses (a)(i) through (a)(iii), inclusive, of this
paragraph 6, but only with respect to statements or omissions, or alleged
statements or omissions made in such registration statement (or any amendment
thereto) or any preliminary prospectus or prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written
information fumished to the Company by such Holder expressly for use in such
registration statement (or any amendment thereto) or such preliminary
prospectus or prospectus (or any amendment or supplement thereto). In case
any action shall be brought against the Company or any person so indemnified
pursuant to the provisions of this subparagraph (b) and in respect of which
indemnity may be sought against any Holder, the Holders from whom indemnity
is sought shall have the rights and duties given to the Company, and the
Company and the other persons so indemnified shall have the rights and duties
given to the persons entitled to indemnification by the provisions of
subparagraph (a) of this paragraph 6.
6
The obligations of the Company and Holders under this paragraph 6 shall
survive the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
7. Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, and the distribution proposed
by such Holder or Holders, as the Company may request in writing and as shall
be required in connection with any registration, qualification or compliance
referred to in this Agreement.
8. Sale Without Registration. If at the time of any transfer of any
Registrable Securities, such Registrable Securities shall not be registered
under the Act, the Company may require, as a condition of allowing such
transfer, that the Holder or transferee furnish to the Company (a) such
information as is necessary in order to establish that such transfer may be
made without registration under the Act, and (b) (if the transfer is not made
in compliance with Rule 144 other than a transfer not involving a change in
beneficial ownership or a pro rata distribution by a partnership to its
partners) at the expense of the Holder or transferee, an opinion of counsel
satisfactory to the Company in form and substance to the effect that such
transfer may be made without registration under the Act; provided that nothing
contained in this paragraph 8 shall relieve the Company from complying with
any request for registration, qualification, or compliance made pursuant to
the other provisions of this Agreement.
9. Rule 144 Reporting. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
a. At all times, make and keep public information available, as
those terms are understood and defined in SEC Rule 144;
b. File with the SEC in a timely manner all reports and other
documents required of the Company under the Exchange Act; and
c. Furnish the Holders forthwith upon request (i) a written
statement by the Company as to its compliance with the public information
requirements of said Rule 144, (ii) a copy of the most recent annual or
quarterly report of the Company, and (iii) such other reports and documents
as may be reasonably requested in availing the Holders of any rule or
regulation of the SEC permitting the sale of any such securities without
registration.
10. Transfer of Reigistration Rights. The rights to cause the Company to
register securities granted by the Company under paragraphs 1, 2 and 3 may be
assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by a Holder provided that: (i) such
assignee or transferee acquires at least one hundred (100) shares of the
7
Registrable Securities (as appropriately adjusted from time to time for stock
splits and the like), (ii) such transfer may otherwise be effected in
accordance with applicable securities laws, (iii) the Company is given
written notice by such holder of Securities or Registrable Securities at the
time of or within a reasonable time after said transfer, stating the name and
address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned, (iv)
immediately following such transfer, the further disposition of such
securities by such transferee or assignee is restricted under the Act and
(v) such assignee or transferee agrees in writing to be bound by the
provisions of this Agreement.
11. Market Stand-off Agreement. The Holders, if requested by the Company
and an underwriter of Common Stock (or other securities) of the Company,
shall agree not to sell or otherwise transfer or dispose of any Securities
held by the Holders during the ninety (90) day period following the effective
date of a registration statement of the Company filed under the Act provided
that:
such agreement shall only apply to the first such registration statement
of the Company filed after the date of this Agreement including shares of
Common Stock (or other securities) to be sold on its behalf to the public in
an underwritten offering; and
all Holders holding more than one percent of the outstanding Common Stock,
all officers and directors of the Company and all other holders of
registration rights of the Company (whether or not pursuant to this
agreement) enter into similar agreements. Such agreement shall be in writing
in the form satisfactory to the Company and such underwriter. The Company
may impose stop-transfer instructions with respect to the Securities subject
to the foregoing restriction until the end of the foregoing period.
12. Amendment of Registration Rights. With the written consent of the
Holders of a majority of the then outstanding Registrable Securities
(including securities exercisable for or convertible into Registrable
Securities), the Company may amend this Agreement, or enter into an agreement
with any holder or prospective holder of any securities of the Company which
would allow such holder or prospective holder to include such securities as
Registrable Securities under this Agreement.
13. Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any
securities of the Company that would allow such holder or prospective holder
(a) to make a demand registration which could result in such registration
statement being declared effective prior to the earlier of either the date
the Holders could first exercise their demand registration rights as set
forth in paragraph 3 or within one hundred twenty (120) days of the effective
date of any registration effected pursuant to paragraph 2 or (b) to include
such securities in any registration under paragraph 2 hereof (unless the
terms of such agreement gives such holder or prospective holder equal or
8
lesser rights than that granted to the Holders in the event of any cutback
by the underwriter).
In witness whereof, the Company and W.J. Gallagher & Company Inc. on
behalf of the Purchasers have executed this Agreement as of October 15, 1996.
W.J. GALLAGBER & C- ONTANY, INC.
By/s/William J. Gallagher
-----------------------
William J. Gallagher, President
NETTER DIGITAL ENTERTAINMENT INC.
By/s/Douglas Netter
-----------------------
Douglas Netter, President
9
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of
December 30,1996 is entered into by and among NETTER DIGITAL ENTERTAINMENT,
INC., a Delaware corporation ("NDEI"), and each of the individuals whose name
appears on the signature page of this Agreement (collectively, the
"Shareholders").
RECITALS
A. NDEI, NETTER ACQUISITION, INC., a wholly-owned subsidiary of NDEI
("Merger Subsidiary"), and VIDESSENCE, INC. ("Videssence") have entered into
an Agreement and Plan of Merger and Reorganization, dated as of April 26, 1996
(the "Merger Agreement"), pursuant to which Merger Subsidiary will be merged
with and into Videssence (the "Merger") upon the terms and subject to the
conditions set forth in the Merger Agreement;
B. At the effective time of the Merger, pursuant to Section 3.4.2 of the
Merger Agreement, all of the outstanding shares of common stock, no par value
per share, of Videssence, shall be converted into 522,222 shares (the "Initial
Shares') of common stock, par value $0.01 per share, of NDEI (the "Common
Stock"). The Shareholders shall have the right to earn up to an additional
788,000 shares of Common Stock of NDEI upon Videssence achieving certain
performance criteria (the "Additional Shares" and, together with the Initial
Shares, collectively, the "Merger Shares"). For purposes of this Agreement,
the term "Registrable Stock" shall mean: (i) the Merger Shares; (ii) any Co
Stock issued as (or issuable upon the conversion or exercise of any warrant,
right, option or other convertible security which is issued as) a dividend or
other distribution with respect to, or in exchange for, or in replacement of,
the Merger Shares and (iii) any Common Stock issued by way of a stock split of
the Common Stock refeffed to in clauses (i) or (ii) above. For purposes of
this Agreement, any Registrable Stock shall cease to be Registrable Stock when
(x) a registration statement covering such Registrable Stock has been declared
effective and such Registrable Stock has been disposed of pursuant to such
effective registration statement or (y) such Registrable Stock is sold or
distributed pursuant to Rule 144 (or any similar or successor provision (but
not Rule 144A)) under the Securities Act (as defined below).
C. The liquidity of the Registrable Stock, and hence its registration
pursuant to this Agreement, is a material part of the consideration being paid
to the Shareholders of Videssence under the Merger Agreement;
D. As set forth in Section 8.8 of the Merger Agreement, the obligations
of Videssence to effect the Merger are subject among other things, to the
execution, delivery, and performance of this Agreement;
NOW, THEREFORE, in consideration of the respective covenants and
obligations of the parties set forth herein and in the Merger Agreement and for
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree
as follows:
1. Demand Registration Rights.
1.1 Request for Registration. If NDEI shall receive at any time after
October 1, 1996, a written request from the holders of a majority of the
Registrable Stock (the "Initiating Shareholders") then outstanding that NDEI
file a registration statement ("Registration Statement") under the Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder
(collectively, the 'Securities Act") covering the registration of at least
fifty percent (50%) of the Registrable Stock then outstanding, then NDEI shall,
1.1.1 within thirty (30) days of the receipt thereof, give written
notice of such request to all Shareholders,
1.1.2 effect as soon as practicable, and in any event within ninety
(90) days of the receipt of such request, the registration under the
Securities Act of all Registrable Stock which the Shareholders request
to be registered, subject to the limitations of subsection 1.3.
1.1.3 use its best efforts to cause the Registration Statement to be
declared effective as soon as possible after filing. If the Securities
and Exchange Commission ("SEC") has notified NDEI that it Will respond
favorably to any request for acceleration of the Registration Statement,
then, NDEI will provide notice of such fact to the holders participating
in the registration, and as soon as practicable file a request with the
SEC for acceleration of the Registration Statement. Except as set forth
below, NDEI will use its best efforts to cause the Registration Statement
to remain effective under the Securities Act, and will prepare and file
with the SEC any amendments or post-effective amendments as may be
necessary to keep the Registration Statement effective under the
Securities Act. NDEI will promptly notify the Shareholders in writing of
the date on which the Registration Statement is declared effective.
Notwithstanding the foregoing, NDEI shall not be required to keep the
Registration Statement effective for purposes of the sale of Registrable
Stock thereunder at any time after the earlier of the date: (i) on which
all shares of Registrable Stock have been sold or are no longer
outstanding, or (ii) 60 days (exclusive of any period during which use of
the Registration Statement is suspended or prohibited by NDEI or
applicable law) after the date the Registration Statement is first
declared effective (the "Effectiveness Period").
1.2 Each Shareholder who receives a written notice from the Company (the
"Company Notice") pursuant to Section 1. 1. I shall provide a written request
to the Company to participate in such registration within thirty (30) days of
2
receipt of the Company Notice. Shareholders who fail to provide such written
request within the designated time period shall not be permitted to participate
in such registration.
1.3 Deferral/Suspension. Notwithstanding the foregoing, if NDEI shall
furnish to Shareholders requesting a registration statement pursuant to
Section 1, a copy of a resolution of NDEI's Board of Directors certified by the
Chairman of such Board reflecting the Board's determination that it would be
materially detrimental to NDEI and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement or if already effective, it is essential to suspend the
registration statement, NDEI shall have the right to defer taking action with
respect to such filing or suspend the registration statement, as the case may
be, for a period of not more than one hundred twenty (120) days after receipt
of the request of the Initiating Shareholders or after suspension of the
registration statement, as the case may be; provided, however, that NDEI may
not utilize this right more than once in any twelve-month period. In the event
that NDEI exercises its right under this Section 1.3 after the registration
statement in question has been declared effective and less than all of the
Registrable Stock included in such registration statement is sold within the
60-day period included in Section 1.1, then the Shareholders shall be entitled
to an additional registration pursuant to Section 1.
1.4 Exceptions to Obligation. In addition, NDEI shall not be obligated
to effect, or to take any action to effect, any registration pursuant to
Section 1:
1.4.1 after NDEI has effected two registrations (subject to
Section 1.3) pursuant to Section 1 and such registrations have been
declared or ordered effective and such effectiveness is maintained by NDEI
as required by Section 1.1.3; or
1.4.2 during any twelve (12) month period following the initial
effective date of a registration statement filed pursuant to this
Section 1.
1.5 Continigent Obligations. If NDEI is required by this Section I to
effect the registration of Registrable Stock, then NDEI, in addition,
1.5.1 furnish to each Shareholder such number of copies of the
required registration statement, the prospectus, if any, which is a part
of the registration statement (the "Prospectus") and any amendments and
supplements thereto and any exhibits to, or documents incorporated by
reference in, the registration statement as each such Shareholder shall
reasonably request;
1.5.2 register or qualify or cooperate with the Shareholders in
connection with the notification, coordination, registration or
qualification of (or obtain exemption from the registration or
qualification of) the Registrable Stock under the securities or blue sky
3
laws of such other jurisdictions in the United States as the Shareholders
reasonably shall request and do any and all other acts and things which
may be reasonably necessary to enable the Shareholders to consummate the
disposition of the Registrable Stock'by them under the Registration
Statement in such jurisdictions; provided, however that in no event shall
NDEI be required to qualify to do business as a foreign corporation in
any jurisdiction where it is not so quafified, to subject itself to
taxation in any jurisdiction where it has not theretofore done so or to
take any action which would subject it to general service of process in
any such jurisdiction where it is not then so subject;
1.5.3 cause all of the shares of Registrable Stock covered by the
registration statement to be listed on each securities exchange, if any,
on which similar securities issued by NDEI are then listed;
1.5.4 upon request from any Shareholder, deliver promptly to such
Shareholder copies of all correspondence between the SEC and NDEI, its
counsel or auditors; and
1.5.5 cooperate with the Shareholders to Facilitate the timely
preparation and delivery of certificates representing Registrable Stock
sold under the registration statement, which certificates shall not have
any restrictive legends.
1.6 Notification. During the Effectiveness Period, NDEI shall notify the
Shareholders promptly, and (if requested by any Shareholder) confirm such
notice in writing,
1.6.1 of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional information
relating thereto,
1.6.2 of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose,
1.6.3 of the receipt by NDEI of any notification with respect to the
suspension of the registration, qualification or exemption from
registration or qualification of any of the shares of Registrable Stock
covered by the Registration Statement for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, and
1.6.4 of the happening of any event which makes any statement made in
such Registration Statement or in the Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in
4
any material respect or which requires the making of any changes in such
Registration Statement or Prospectus so that such documents will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
1.7 Supplements and Post-Effective Amendments. During the Effectiveness
Period, upon the occurrence of any event contemplated by Sections 1.5.1
or 1.5.4 above, NDEI will promptly prepare and file a supplement or
post-effective amendment to the Registration Statement or a supplement
to the Prospectus or any document incorporated therein by reference or
file any other document (i) required by the SEC to entitle such supplement
or amendment to be declared effective and (ii) necessary so that, as
thereafter delivered to the purchasers of the Registrable Stock being
sold thereunder, the Prospectus will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
2. Additional Rights.
2.1 Piggyback Registration Rights. If at any time after
December 31, 1996, NDEI shall determine to register any of its securities, for
its own account or the account of any of its shareholders (other than a
registration relating to employee stock option or purchase plans, or a
registration on SEC Form S4 relating to an SEC Rule 145 transaction, NDEI will:
(i) promptly give to each Shareholder written notice thereof, and (H) include
in such registration (and any related qualification under state securities or
Blue Sky laws or other compliances, and in any underwriting involved therein,
all the Registrable Stock specified in a written request or requests, made
within fifteen (15) days after receipt of such written notice from NDEI, by any
Shareholder or Shareholders.
2.2 Underwriting. If the registration of which NDEI gives notice
pursuant to Section 2.1 is for a registered public offering involving an
underwriting, NDEI shall so advise the Shareholders as a part of the written
notice. In such event, the right of any Shareholder to registration pursuant
to Section 2 shall be conditioned upon such Shareholder's participation in
such underwriting and the inclusion of such Shareholder's Registrable Stock in
the underwriting to the extent provided herein and the payment by the
Shareholder of a pro rata portion of the fees incurred in connection with the
registration.
All Shareholders proposing to distribute their securities through such
underwriting shall (together with NDEI and the other Shareholders distributing
their securities through such underwriting) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by NDEI. Notwithstanding any other provision of this
Section 2, the underwriter may limit the number of shares of Registrable
5
Stock to be included in the registration and underwriting, or may exclude
Registrable Stock entirely from such registration and underwriting. NDEI shall
so advise all Shareholders of Registrable Stock which would otherwise be
registered and underwritten pursuant hereto, and the number of shares of
Registrable Stock that may be included in the registration and underwriting
shall be allocated among Shareholders requesting registration in proportion,
as nearly as practicable, to the amount of Registrable Stock held by each of
such Shareholders as of the date of the notice pursuant to Section 2.1. If
any Shareholder disapproves of the terms of any such underwriting, he may elect
to withdraw therefrom by written notice to NDEI and the underwriter. Any
Registrable Stock excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
2.3 Rule 144 Reporting. With a view to making available to Shareholders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the shares of Registrable Stock to the public without registration,
NDEI agrees that, at all times after April 26, 1998, it will make its best
efforts to: (i) keep available adequate current public information available,
as those terms are understood and defined in SEC Rule 144; (ii) to file with
the SEC in a timely manner all reports and other documents required of NDEI
under the Securities Act and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); and (iii) so long as a Shareholder owns any Registrable
Stock,to furnish to such Shareholder forthwith upon request a written statement
by NDEI as to its compliance with the reporting requirements of said Rule 144,
and of the Securities Act and the Exchange Act, a copy of the most recent
annual or quarterly report of NDEI and such other reports and documents so
filed by NDEI as the Shareholder may reasonably request in complying with any
rule or regulation of the SEC allowing the Shareholder to sell any such
securities without registration.
3. Obligations of Shareholders. Following the filing of the Registration
Statement and during any period that the Registration Statement is effective,
each Shareholder shall:
3.1 not effect any stabilization transactions or engage in any
stabilization activity in connection with NDEI's common shares in contravention
of Rule lOb-7 under the Exchange Act;
3.2 cooperate with NDEI as NDEI fulfills its obligations under
Section 1.6 hereof,
3.3 furnish such information concerning the Shareholder as is necessary
for NDEI to prepare a registration statement under the Securities Act or to
comply with the reporting requirements of the Exchange Act;
3.4 not sell under the Registration Statement during any period after
NDEI has provided notice to the Shareholder pursuant to Section 1.5.4 above and
6
until NDEI provides to the Shareholder notice that the Registration Statement
no longer fails to state a material fact required to be stated therein,
misstates a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements made not misleading (in
such event, the delay caused shall be aggregated with any periods in which the
Registration Statement is not effective for purposes of Section 1.3 of this
Agreement); and
3.5 not sell Registrable Stock during any period beginning seven (7) days
before the anticipated effective date of any registration statement (other than
a registration statement relating to employee stock option or purchase plans,
or a registration statement on Form S-3 or S-4 or any successor forms)
registering the sale of equity securities for NDEI's account (as NDEI advises)
and ending ninety (90) days thereafter without NDEI's consent (provided that
this restriction shall not apply with respect to more than one such
registration statement during any calendar year).
4. Expenses.
4.1 Demand Rights. Except as set forth in Section 4.1.1, 4.1.2 and
4.1.3, NDEI shall pay all expenses in connection with a registration pursuant
to Section 1. 1:
4.1.1 each Shareholder and NDEI shall be responsible for the payment
of its pro rata portion of all underwriting discounts and commissions and
fees paid to brokers in connection with the sale of any of the Registrable
Stock pursuant to Section 1.1.
4.1.2 the Shareholders shall be responsible for the payment of fees
and disbursements of counsel to the Shareholders in connection with the
preparation of such registration statement and the prospectus, if any.
4.2 Piggy-back Rights. In connection with any registration statement
filed in connection with a registration subject to Section 2.1, each
Shareholder shall pay its pro rata portion of the fees and disbursements of
counsel to the Shareholders in connection with the preparation of such
registration statement and the prospectus, if any, underwriting discounts, if
any, and fees paid to brokers in connection with the sale of any of the
Registrable Stock pursuant to Section 2.1.
For purposes of this Section 4, a
Shareholder's pro rata share shall be based on the number of shares of the
Shareholder included in the offering compared to the total number of shares
included in the offering.
7
5. Indemnification.
5.1 Indemnify by NDEI. NDEI shall
5.1.1 indemnify and hold harmless each Shareholder and its directors
and officers, if any, each person who participates in the offering of such
Registrable Stock, including underwriters (as defined in the Securities
Act) and each person, if any, who controls such Shareholder or
participating person (as defined in the Securities Act) (collectively
the "Shareholder Indemnitees") against any losses, claims, damages or
liabilities, joint or several ("Losses"), as incurred, to which each such
Shareholder Indemnitees may become subject, under the Securities Act or
otherwise, insofar as such Losses (or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement or
Prospectus, as amended or supplemented if NDEI has furnished any
supplements or amendments thereto, or any other document filed or
delivered in connection therewith under a state securities or blue sky law
(collectively, "Registration Documents") or insofar as any Losses (or
proceedings in respect thereof) arise out of or are based upon the
omission or alleged omission to state in any Registration Document a
material fact required to be stated therein or necessary to make the
statements made therein (in the case of a prospectus, in the light of the
circumstances under which they were made), not misleading, or (ii) any
violation of any securities law by NDEI, its officers or employees in
connection with the Registration Documents, and
5.1.2 reimburse each Shareholder Indemnitee party for all legal or
other expenses as reasonably incurred by it in connection with
investigating or defending any Loss, including any amounts paid in
settlement of any litigation, commenced or threatened, if such settlement
is effected with the prior written consent of NDEI, which shall not be
unreasonably withheld or delayed; provided, however that NDEI shall not be
liable for any Losses to the extent such Losses arise out of or are based
upon any untrue statement or omission made in any Registration Document in
reliance upon and in conformity with written information furnished to NDEI
by or on behalf of any Shareholder expressly for use in the preparation of
the Registration Document; and provided, further that NDEI shall not be
liable to a particular Shareholder Indemnitee under the indemnity
agreement in this Section 5.1 with respect to the Prospectus, as amended
or supplemented, to the extent that the Loss arises from the sale of any
shares of Registrable Stock by such Shareholder Indemnitee to the person
asserting Loss and to which there was not sent or given, within the time
required by the Securities Act, a copy of the Prospectus as then amended
or supplemented, if NDEI has previously and timely furnished copies
thereof to such indemnified party and such Prospectus as then amended or
supplemented has coffected the misstatement or omission at issue.
8
5.2 Indemnity by Shareholders. Each Shareholder joining in a
registration shall, severally and not jointly,
5.2.1 indemnify and hold harmless NDEI, any officer, director,
employee or agent of NDEI, and each other person, if any, who controls
NDEI within the meaning of Section 15 of the Securities Act (collectively,
the NDEI Indemnitees) against any Losses to which each such indemnified
party may become subject under the Securities Act or otherwise, insofar as
such Losses (or proceedings in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material
fact contained in any Registration Document, or arise out of or are based
upon the omission or alleged omission to state in any Registration
Document a material fact required to be stated therein or necessary to
make the statements made therein (in the case of a prospectus, in the
light of the circumstances under which they were made,) not misleading, in
each case, to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or admission or alleged omission was
made in reliance upon and in conformity with written information fumished
to NDEI by or on behalf of a Shareholder expressly for use in the
preparation of the Registration Statement, or (ii) any violation of any
securities law by Shareholder in connection with the sale or transfer of
any shares included in the Registration Statement, and
5.2.2 reimburse each NDEI Indemnitee for all legal or other expenses
reasonably incurred by it in connection with investigating or defending
any such Losses or action, including any amounts paid in settlement of any
litigation, commenced or threatened, if such settlement is effected with
the prior written consent of such Shareholder; provided, however, that
such reimbursement shall be payable only if, and to the extent that, any
Losses arise out of or are based upon an untrue statement or omission made
in any Registration Document in reliance upon and in conformity with
written information fumished to NDEI by such Shareholder expressly for
use in the preparation thereof.
5.3 Procedure for Indemnification. Promptly after receipt by an
indemnified party, under Section 4.1 or 4.2, of notice of the commencement of
any action, the indemnified party shall notify the indemnifying party in
writing of the commencement thereof, if a claim in respect thereof is to be
made against an indemnifying party under any of these Sections; but the
omission of such notice shall not relieve the indemnifying party from liability
which it may have to the indemnified party under this Section 4, except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice, and shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under this
Section 4. In case any action is brought against the indemnified party, it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and to the extent
9
that it chooses, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party, and after notice from the indemnifying
party to the indemnified party that it chooses to assume the defense, the
indemnifying party shall not be liable for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof; provided, however that if the indemnifying party fails to take
reasonable steps necessary to defend diligently the claim within twenty
(20) days after receiving notice from the indemnified party that the
indemnified party believes the indemnifying party has failed to take such
reasonable steps, or
5.3.1 if the indemnified party who is a defendant in any action or
proceeding which is also brought against the indemnifying party reasonably
shall have concluded that there are legal defenses available to the
indemnified party which are not available to the indemnifying party, or
5.3.2 if representation of both parties by the same counsel is
otherwise inappropriate under applicable standards of professional
conduct, then the indemnified party shall have the right to assume or
continue its own defense as set forth above at the indemnifying party's
expense. In no event shall the indemnifying party be responsible for
more than one firm of counsel for all indemnified parties unless it is
inappropriate under applicable standards of professional conduct for one
firm or counsel to represent all indemnified parties.
5.4 Non-Exclusive Indemnity. Any indemnity agreements contained herein
shall be in addition to any other rights to indemnification or contribution
which any indemnified party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless of any investigation
made or omitted by or on behalf of any indemnified party.
5.5 Contribution. If for any reason the foregoing indemnity is
unavailable, or is insufficient to hold harmless an indemnified party, then
the indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities or
expenses
5.5.1 in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and the indemnified party
on the other (determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission), or
5.5.2 if the allocation provided by Section 5.5.1 above is not
permitted by applicable law or provides a lesser sum to the indemnified
10
party than the amount hereinafter calculated, in such proportion as is
appropriate to reflect not only the relative fault of the indemnifying
party and the indemnified party, but also the relative benefits received
by the indemnifying party on the one hand (taking into consideration the
fact that the provision of the registration rights hereunder served as an
inducement to the Shareholders to enter into the Merger Agreement) and the
indemnified party on the other, as well as any other relevant equitable
considerations. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
6. Miscellaneous.
6.1 Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by, and construed and interpreted in
accordance with, the laws of the State of California without giving effect to
the choice of law principles thereof
6.2 Entire Agreement: Amendment: Waiver. This Agreement:
6.2.1 contains the entire agreement among the parties hereto with
respect to the subject matter hereof,
6.2.2 supersedes all prior written agreements and negotiations and
oral understandings, if any, with respect thereto, and
6.2.3 may not be amended or supplemented except by an instrument or
counterparts thereof in writing signed by NDEI and each of the
Shareholders. No waiver of any term or provision of this Agreement shall
be effective unless in writing signed by the party to be charged. The
waiver by any party of a breach of any term or provision of this Agreement
shall not be construed as a waiver of any subsequent breach.
6.3 Binding Effect. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective legal representatives,
successors and assigns; provided, however, that no party hereto may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of the other parties hereto, except
as provided in Section 6.3. 1.
6.3.1 Transfer of Registration Rights. A Shareholder may transfer
its rights and obligations under this Agreement so long as NDEI is given
written notice by such Shareholder at the time of or within a reasonable
time after said transfer, stating the name and address of said transferee
or assignee and identifying the securities with respect to which such
registration rights and obligations are being assigned, and such
11
transferee has agreed to be bound by the obligations of the Shareholders
set forth in this Agreement.
6.4 Invalidity of Provision. The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or
the validity or enforceability of this Agreement (including such provision),
in any other jurisdiction.
6.5 Notices. All notices, requests, consents and other communications to
any party hereunder shall be in writing and shall be given either by personal
service, certified mail, return receipt requested, overnight courier or
telecopy, addressed as follows:
if to NDEI, to:
NETTER DIGITAL ENTERTAINMENT, INC.
5200 Lankershim Boulevard, Suite 280
North Hollywood, California 91691
Attn: Douglas Netter
with a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, CA 92101
Attn: Robert Copeland
if to the Shareholders, to:
Paul Costa
189 Airport Boulevard
Burlingame, CA 94010
and to:
Steven Michelson
280 Utah Street
San Francisco, CA 94103
or to such other address as any party may hereafter specify to the other
parties hereto by notice sent in accordance with this Section 6.5. Each such
notice, request or other communication shall be effective when delivered at
the address specified in this Section 6.5.
12
6.6 Headings: Execution in Counterparts. The headings and captions
contained herein are for convenience of reference only and shall not control or
affect the meaning or construction of any provision hereof This Agreement may
be executed in any number of counterparts, each of which shall be deemed to be
an original and all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of
each of the parties hereto as of the date first above written.
NETTER DIGITAL ENTERTAINMENT INC.
By:_____________________________
Douglas Netter, President
SHAREHOLDERS:
________________________________
Paul Costa
________________________________
Steve Michelson
________________________________
Delwin Francis
________________________________
Sam Cercone
13
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of
December 30,1996 is entered into by and among NETTER DIGITAL ENTERTAINMENT,
INC., a Delaware corporation ("NDEI"), and each of the individuals whose name
appears on the signature page of this Agreement (collectively, the
"Shareholders").
RECITALS
A. NDEI, NETTER ACQUISITION, INC., a wholly-owned subsidiary of NDEI
("Merger Subsidiary"), and VIDESSENCE, INC. ("Videssence") have entered into
an Agreement and Plan of Merger and Reorganization, dated as of April 26, 1996
(the "Merger Agreement"), pursuant to which Merger Subsidiary will be merged
with and into Videssence (the "Merger") upon the terms and subject to the
conditions set forth in the Merger Agreement;
B. At the effective time of the Merger, pursuant to Section 3.4.2 of the
Merger Agreement, all of the outstanding shares of common stock, no par value
per share, of Videssence, shall be converted into 522,222 shares of common
stock, par value $0.01 per share, of NDEI. The Shareholders shall have the
right to earn up to an additional 788,000 shares of Common Stock of NDEI upon
Videssence achieving certain performance criteria. The shares of Common Stock
of NDEI received at the effective time of the Merger plus any shares earned by
the Shareholders upon Videssence satisfying the performance criteria shall
hereinafter be referred to as the "Registrable Stock."
C. The liquidity of the Registrable Stock, and hence its registration
pursuant to this Agreement, is a material part of the consideration being paid
to the Shareholders of Videssence under the Merger Agreement;
D. As set forth in Section 8.8 of the Merger Agreement, the obligations
of Videssence to effect the Merger are subject among other things, to the
execution, delivery, and performance of this Agreement;
NOW, THEREFORE, in consideration of the respective covenants and
obligations of the parties set forth herein and in the Merger Agreement and for
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree
as follows:
1. Demand Registration Rights.
1.1 Request for Registration. If NDEI shall receive at any time after
April 26, 1997, a written request from the holders of a majority of the
Registrable Stock then outstanding that NDEI file a registration statement
("Registration Statement") under the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder (collectively, the
"Securities Act") covering the registration of at least fifty percent (50%)
of the Registrable Stock then outstanding, then NDEI shall,
1
1.1.1 within thirty (30) days of the receipt thereof, give written
notice of such request to all Shareholders,
1.1.2 effect as soon as practicable, and in any event within ninety
(90) days of the receipt of such request, the registration under the
Securities Act of all Registrable Stock which the Shareholders request
to be registered, subject to the limitations of subsection 1.2.
1.1.3 use its best efforts to cause the Registration Statement to be
declared effective as soon as possible after filing. If the Securities
and Exchange Commission ("SEC") has notified NDEI that it Will respond
favorably to any request for acceleration of the Registration Statement,
then, NDEI will, and as soon as practicable file a request with the
SEC for acceleration of the Registration Statement. Except as set forth
below, NDEI will use its best efforts to cause the Registration Statement
to remain effective under the Securities Act, and will prepare and file
with the SEC any amendments or post-effective amendments as may be
necessary to keep the Registration Statement effective under the
Securities Act. NDEI will promptly notify the Shareholders in writing of
the date on which the Registration Statement is declared effective.
Notwithstanding the foregoing, NDEI shall not be required to keep the
Registration Statement effective for purposes of the sale of Registrable
Stock thereunder at any time after the earlier of the date: (i) on which
all shares of Registrable Stock have been sold or are no longer
outstanding, or (ii) 60 days after the date the Registration Statement is
first declared effective (the "Effectiveness Period").
1.2 Deferral/Suspension. Notwithstanding the foregoing, if NDEI shall
furnish to Shareholders requesting a registration statement pursuant to
Section 1, a certificate signed by the Chief Executive Officer of NDEI stating
that in good faith judgment of the Board of Directors of NDEI, it would be
seriously detrimental to NDEI and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of
such registration statement or if already effective, it is essential to
suspend the registration statement, NDEI shall have the right to defer taking
action with respect to such filing or suspend the registration statement, as
the case may be, for a period of not more than one hundred twenty (120) days
after receipt of the request of the Initiating Shareholders or after
suspension of the registration statement, as the case may be; provided,
however, that NDEI may not utilize this right more than once in any
twelve-month period.
1.3 Exceptions to Obligation. In addition, NDEI shall not be obligated
to effect, or to take any action to effect, any registration pursuant to
Section 1:
2
1.3.1 after NDEI has effected two registrations pursuant to Section 1
and such registrations have been declared or ordered effective;or
1.3.2 during any twelve (12) month period following the effective
date of a registration statement filed pursuant to this Section 1.
1.4 Continigent Obligations. If NDEI is required by this Section 1 to
effect the registration of Registrable Stock, then NDEI, in addition, shall:
1.4.1 furnish to each Shareholder such number of copies of the
required registration statement, the prospectus, if any, which is a part
of the registration statement (the "Prospectus") and any amendments and
supplements thereto and any exhibits to, or documents incorporated by
reference in, the registration statement as the Shareholder shall
reasonably request;
1.4.2 register or qualify or cooperate with the Shareholders in
connection with the notification, coordination, registration or
qualification of (or obtain exemption from the registration or
qualification of) the Registrable Stock under the securities or blue sky
laws of such other jurisdictions in the United States as the Shareholders
reasonably shall request and do any and all other acts and things which
may be reasonably necessary to enable the Shareholders to consummate the
disposition of the Registrable Stock by them under the Registration
Statement in such jurisdictions; provided, however that in no event shall
NDEI be required to qualify to do business as a foreign corporation in
any jurisdiction where it is not so quafified, to subject itself to
taxation in any jurisdiction where it has not theretofore done so or to
take any action which would subject it to general service of process in
any such jurisdiction where it is not then so subject;
1.4.3 cause all of its shares covered covered by the registration
statement to be listed on each securities exchange, if any, on which
similar securities issued by NDEI are then listed;
1.4.4 upon request from any Shareholder, deliver promptly to such
Shareholder copies of all correspondence between the SEC and NDEI, its
counsel or auditors; and
1.4.5 cooperate with the Shareholders to Facilitate the timely
preparation and delivery of certificates representing Registrable Stock
sold under the registration statement, which certificates shall not have
any restrictive legends.
1.5 Notification. During the Effectiveness Period, NDEI shall notify the
Shareholders promptly, and (if requested by any Shareholder) confirm such
notice in writing,
3
1.5.1 of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional information
relating thereto,
1.5.2 of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose,
1.5.3 of the receipt by NDEI of any notification with respect to the
suspension of the registration, qualification or exemption from
registration or qualification of any of the shares of Registrable Stock
covered by the Registration Statement for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, and
1.5.4 of the happening of any event which makes any statement made in
such Registration Statement or in the Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in
any material respect or which requires the making of any changes in such
Registration Statement or Prospectus so that such documents will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
1.6 Settlements and Post-Effective Amendments. During the Effectiveness
Period, upon the occurrence of any event contemplated by Sections 1.5.1
or 1.5.4 above, NDEI will promptly prepare and file a supplement or
post-effective amendment to the Registration Statement or a supplement
to the Prospectus or any document incorporated therein by reference or
file any other document (i) required by the SEC to entitle such supplement
or amendment to be declared effective and (ii) necessary so that, as
thereafter delivered to the purchasers of the Registrable Stock being
sold thereunder, the Prospectus will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
2. Additional Rights.
2.1 Piggyback Registration Rights. If at any time NDEI shall determine
to register any of its securities, for its own account or the account of any
of its shareholders (other than a registration relating to employee stock
option or purchase plans, or a registration on SEC Form S4 relating to an
SEC Rule 145 transaction, or a registration on any form other than SEC Forms
S-1, S-2, S-3, SB-1 or SB-2, or their successor forms) NDEI will:
(i) promptly give to each Shareholder written notice thereof, and (ii) include
4
in such registration (and any related qualification under state securities or
Blue Sky laws or other compliance), and in any underwriting involved therein,
all the Registrable Stock specified in a written request or requests, made
within fifteen (15) days after receipt of such written notice from NDEI, by any
Shareholder or Shareholders.
2.2 Underwriting. If the registration of which NDEI gives notice
pursuant to Section 2.1 is for a registered public offering involving an
underwriting, NDEI shall so advise the Shareholders as a part of the written
notice. In such event, the right of any Shareholder to registration pursuant
to Section 2 shall be conditioned upon such Shareholder's participation in
such underwriting and the inclusion of such Shareholder's Registrable Stock in
the underwriting to the extent provided herein and the payment by the
Shareholder of a pro rata portion of the fees incurred in connection with the
registration.
All Shareholders proposing to distribute their securities through such
underwriting shall (together with NDEI and the other Shareholders distributing
their securities through such underwriting) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by NDEI. Notwithstanding any other provision of this
Section 2, the underwriter may limit the number of shares of Registrable
Stock to be included in the registration and underwriting, or may exclude
Registrable Stock entirely from such registration and underwriting. NDEI shall
so advise all Shareholders of Registrable Stock which would otherwise be
registered and underwritten pursuant hereto, and the number of shares of
Registrable Stock that may be included in the registration and underwriting
shall be allocated among Shareholders requesting registration in proportion,
as nearly as practicable, to the amount of Registrable Stock held by each of
such Shareholders as of the date of the notice pursuant to Section 2.1. If
any Shareholder disapproves of the terms of any such underwriting, he may elect
to withdraw therefrom by written notice to NDEI and the underwriter. Any
Registrable Stock excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
2.3 Rule 144 Reporting. With a view to making available to Shareholders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the shares of Registrable Stock to the public without registration,
NDEI agrees that, at all times after April 26, 1998, it will make its best
efforts to: (i) keep available adequate current public information available,
as those terms are understood and defined in SEC Rule 144; (ii) to file with
the SEC in a timely manner all reports and other documents required of NDEI
under the Securities Act and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); and (iii) so long as a Shareholder owns any Registrable
Stock,to furnish to such Shareholder forthwith upon request a written statement
by NDEI as to its compliance with the reporting requirements of said Rule 144,
and of the Securities Act and the Exchange Act, a copy of the most recent
annual or quarterly report of NDEI and such other reports and documents so
5
filed by NDEI as the Shareholder may reasonably request in complying with any
rule or regulation of the SEC allowing the Shareholder to sell any such
securities without registration.
3. Obligations of Shareholders. Following the filing of the Registration
Statement and during any period that the Registration Statement is effective,
each Shareholder shall:
3.1 not effect any stabilization transactions or engage in any
stabilization activity in connection with NDEI's common shares in contravention
of Rule lOb-7 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act");
3.2 furnish each broker through whom any Shareholder offers Registrable
Stock such number of copies of the Prospectus as the broker may require and
otherwise comply with prospectus delivery requirements under the securities
Act;
3.3 Report to NDEI each month all sales, pledges and other dispositions
of Registrable Stock made by the Shareholder;
3.4 not (and shall not permit any Affiliated Purchaser (as defined in
Rule 10b-6 under the Exchange Act) to) bid for or purchase for any account in
which any Shareholder has a beneficial interest, or attempt to induce any other
person to purchase any NDEI common shares in contravention of Rule 10b-6 under
the Exchange Act;
3.5 cooperate with NDEI as NDEI fulfills its obligations under Section 1.5
hereof;
3.6 furnish such information concerning the Shareholder as NDEI may from
time to time reasonably request.
3.7 not sell under the Registration Statement during any period after
NDEI has provided notice to the Shareholder pursuant to Section 1.6.4 above and
until NDEI provides to the Shareholder notice that the Registration Statement
no longer fails to state a material fact required to be stated therein,
misstates a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements made not misleading (in
such event, the delay caused shall be aggregated with any periods in which the
Registration Statement is not effective for purposes of Section 1.3 of this
Agreement);and
3.8 not sell Registrable Stock during any period beginning seven (7) days
before the anticipated effective date of any registration statement (other than
a registration statement on Form S-3 or S-4 or any successor forms) registering
the sale of equity securities for NDEI's account (as NDEI advises) and ending
ninety (90) days thereafter without NDEI's consent (provided that this
restriction shall not apply with respect to more than one such registration
statement during any calendar year).
6
4. Expenses.
4.1 Demand Rights. In connection with any registration statement filed
in connection with a registration pursuant to Section 1.1:
4.1.1 each Shareholder and NDEI shall be responsible for the payment
of its pro rata portion of
4.1.1.1 all underwriting registration and filing fees relating
to such registration statement;
4.1.1.2 with respect to filings required to be made with the
SEC or the NASD in connection with such registration statement;
4.1.1.3 with respect to registrations and filings made under
state securities or blue sky laws in connection with such
registration statement; and
4.1.1.4 any expenses incurred by NDEI in connection with the
preparation of such registration statement and any Prospectus
prepared in connection therewith.
4.1.2 the Shareholders shall be responsible for the payment of fees
and disbursements of counsel to the Shareholders in connection with the
preparation of such registration statement and the prospectus, if any.
and fees paid to underwriters and/or brokers in connection with the
sale of any of the Registrable Stock.
4.2 Piggy-back Rights. In connection with any registration statement
filed in connection with a registration subject to Section 2.1, each
Shareholder and NDEI shall pay its pro rata portion of the fees incurred
in connection with such registration statement. For purposes of this
Section 4.2, the term "fees" means all underwriting, filing and all audit,
accounting, and legal fees attributable to the offering. In addition, the
Shareholders shall be responsible for the payment of fees and disbursements
of counsel to the Shareholders in connection with the preparation of such
registration statement and the prospectus, if any, and fees paid to brokers
in connection with the sale of any of the Registrable Stock pursuant to
Section 2.1.
For purposes of this Section 4, a Shareholder's pro rata share shall be
based on the number of shares of the Shareholder included in the offering
compared to the total number of shares included in the offering.
7
5. Indemnification.
5.1 Indemnify by NDEI. NDEI shall
5.1.1 indemnify and hold harmless each Shareholder against any
losses, claims, damages or liabilities ("Losses"), to which each such
indemnified party may become subject, under the Securities Act or
otherwise, insofar as such Losses(or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any registration statement filed in
connection with a registration subject to or pursuant to this Agreement
(the "Registration Statement") or Prospectus, as amended or supplemented
if NDEI ha furnished any supplements or amendments thereto, or any other
document filed or delivered in connection therewith under a state
securities or blue sky law (collectively, "Registration Documents") or
insofar as any Losses (or actions in respect thereof) arise out of or
are based upon the ommission or alleged omission to state in any
Registration Document, as amended or supplemented if NDEI has furnished
any supplements or amendments thereto a material fact required to be
stated therein or necessary to make the statements made therein (in the
case of a prospectus, in the light of the circumstances under which they
were made), not misleading, or any violation of any securities law by
NDEI, its officers or employees in connection with the Registration
Documents, and
5.1.2 reimburse each indemnified party for all legal or other
expenses reasonably incurred by it in connection with investigating
or defending any Loss, including any amounts paid in settlement of any
litigation, commenced or threatened, if such settlement is effected with
the prior written consent of NDEI, which shall not be unreasonably
withheld or delayed; provided, however that NDEI shall not be liable for
any Losses arising out of or based upon any untrue statement or omission
made in any Registration Document in reliance upon and in conformity with
written information furnished to NDEI by or on behalf of any Shareholder
for use in the preparation of the Registration Document; and provided,
further that NDEI shall not be liable to a particular Indemnified party
under the indemnity agreement in this Section 4.1 with respect to the
Prospectus, as amended or supplemented, to the extent that the Loss
arises from the sale of any shares of Registrable Stock by such
indemnified party to the person asserting Loss and to which there was
not sent or given, within the time required by the Securities Act, a
copy of the Prospectus as then amended or supplemented, if NDEI has
previously and timely furnished copies thereof to such indemnified
party and such Prospectus as then amended or supplemented has corrected
the misstatement or omission at issue.
8
5.2 Indemnity by Shareholders. Each Shareholder shall, severally and
not jointly,
5.2.1 indemnify and hold harmless NDEI, any officer, director,
employee or agent of NDEI, and each other person, if any, who controls
NDEI within the meaning of Section 15 of the Securities Act against any
Losses to which each such indemnified party may become subject under the
Securities Act or otherwise, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any
Registration Document, or arise out of or are based upon the omission or
alleged omission to state in any Registration Document a material fact
required to be stated therein or necessary to make the statements made
therein (in the case of a prospectus, in the light of the circumstances
under which they were made,) not misleading, or any violation of any
securities law by Shareholder in connection with the sale or transfer of
any shares included in the Registration Statement, and
5.2.2 reimburse each Indemnified party for all legal or other
expenses reasonably incurred by it in connection with investigating
or defending any such Losses or action, including any amounts paid in
settlement of any litigation, commenced or threatened, if such settlement
is effected with the prior written consent of such Shareholder; provided,
however, that such indemnification or reimbursement shall be payable
only if, and to the extent that, any Losses arise out of or are based
upon an untrue statement or omission made in any Registration Document
in reliance upon and in conformity with written information fumished to
NDEI by such Shareholder for use in the preparation thereof.
5.3 Procedure for Indemnification. Promptly after receipt by an
indemnified party, under Section 4.1 or 4.2, of notice of the commencement of
any action, the indemnified party shall notify the indemnifying party in
writing of the commencement thereof, if a claim in respect thereof is to be
made against an indemnifying party under any of these Sections; but the
omission of such notice shall not relieve the indemnifying party from liability
which it may have to the indemnified party under this Section 4, except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice, and shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under this
Section 4. In case any action is brought against the indemnified party, it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and to the extent
that it chooses, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party, and after notice from the indemnifying
party to the indemnified party that it chooses to assume the defense, the
indemnifying party shall not be liable for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof; provided, however that if the indemnifying party fails to take
reasonable steps necessary to defend diligently the claim within twenty
9
(20) days after receiving notice from the indemnified party that the
indemnified party believes the indemnifying party has failed to take such
reasonable steps, or
5.3.1 if the indemnified party who is a defendant in any action or
proceeding which is also brought against the indemnifying party reasonably
shall have concluded that there are legal defenses available to the
indemnified party which are not available to the indemnifying party, or
5.3.2 if representation of both parties by the same counsel is
otherwise inappropriate under applicable standards of professional
conduct, then the indemnified party shall have the right to assume or
continue its own defense as set forth above. In no event shall the
indemnifying party be responsible for more than one firm of counsel for
all indemnified parties unless it is inappropriate under applicable
standards of professional conduct for one firm or counsel to represent
all indemnified parties.
5.4 Non-Exclusive Indemnity. Any indemnity agreements contained herein
shall be in addition to any other rights to indemnification or contribution
which any indemnified party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless of any investigation
made or omitted by or on behalf of any indemnified party.
5.5 Contribution. If for any reason the foregoing indemnity is
unavailable, or is insufficient to hold harmless an indemnified party, then
the indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities or
expenses
5.5.1 in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and the indemnified party
on the other (determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission), or
5.5.2 if the allocation provided by Section 4.5.1 above is not
permitted by applicable law or provides a lesser sum to the indemnified
party than the amount hereinafter calculated, in such proportion as is
appropriate to reflect not only the relative fault of the indemnifying
party and the indemnified party, but also the relative benefits received
by the indemnifying party on the one hand (taking into consideration the
fact that the provision of the registration rights hereunder served as an
inducement to the Shareholders to enter into the Purchase Agreement) and
the indemnified party on the other, as well as any other relevant
10
equitable considerations. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
6. Miscellaneous.
6.1 Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by, and construed and interpreted in
accordance with, the laws of the State of California without giving effect to
the choice of law principles thereof
6.2 Entire Agreement: Amendment: Waiver. This Agreement:
6.2.1 contains the entire agreement among the parties hereto with
respect to the subject matter hereof,
6.2.2 supersedes all prior written agreements and negotiations and
oral understandings, if any, with respect thereto, and 6.2.3 may not be
amended or supplemented except by an instrument or counterparts thereof in
writing signed by NDEI and each of the Shareholders. No waiver of any
term or provision of this Agreement shall be effective unless in writing
signed by the party to be charged. The waiver by any party of a breach
of any term or provision of this Agreement shall not be construed as a
waiver of any subsequent breach.
6.3 Binding Effect. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective legal representatives,
successors and assigns; provided, however, that no party hereto may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of the other parties hereto, except
as provided in Section 5.3.1.
6.3.1 Transfer of Registration Rights. Shareholder's rights to cause
NDEI to register their securities and keep information available, granted
to them by NDEI under this Agreement, may be assigned to a transferee or
assignee of shares of a Shareholder's Registrable Stock not sold to the
public, provided that NDEI is given written notice by such Shareholder
at the time of or within a reasonable time after said transfer, stating
the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being
assigned, and such transferee has agreed to be bound by the obligations
of the Shareholders set forth in this Agreement.
6.4 Invalidity of Provision. The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity
11
or enforceability of the remainder of this Agreement in that jurisdiction or
the validity or enforceability of this Agreement including that provision,
in any other jurisdiction.
6.5 Notices. All notices, requests, consents and other communications to
any party hereunder shall be in writing and shall be given either by personal
service, certified mail, return receipt requested, overnight courier or
telecopy, addressed as follows:
if to NDEI, to:
NETTER DIGITAL ENTERTAINMENT, INC.
5200 Lankershim Boulevard, Suite 280
North Hollywood, California 91691
Attn: Douglas Netter
with a copy to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, CA 92101
Attn: Robert Copeland
if to the Shareholders, to:
Paul Costa
189 Airport Boulevard
Burlingame, CA 94010
and to:
Steven Michelson
280 Utah Street
San Francisco, CA 94103
or to such other address as any party may hereafter specify to the other
parties hereto by notice sent in accordance with this Section 6.5. Each such
notice, request or other communication shall be effective when delivered at
the address specified in this Section 6.5.
6.6 Headings: Execution in Counterparts. The headings and captions
contained herein are for convenience of reference only and shall not control or
affect the meaning or construction of any provision hereof. This Agreement may
be executed in any number of counterparts, each of which shall be deemed to be
an original and all of which together shall constitute one and the same
instrument.
12
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of
each of the parties hereto as of the date first above written.
NETTER DIGITAL ENTERTAINMENT INC.
By:_____________________________
Douglas Netter, President
SHAREHOLDERS:
________________________________
Janet Costa
________________________________
Bruce Jaffe
________________________________
Joseph Costa
________________________________
Barbara Francis
________________________________
Karen Costa
________________________________
Kathy Katz
________________________________
Chris Carstens
________________________________
Angela Carstens
________________________________
Carl Kube
________________________________
Carmela Kube
________________________________
Gary Tomsic
13
________________________________
Anthony Costa
________________________________
Dave Mjoen
14
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of
May 2, 1997, is entered into by and among NETTER DIGITAL ENTERTAINMENT, INC.,
a Delaware corporation ("NDEI") , and LUCE, FORWARD, HAMILTON & SCRIPPS
("Luce, Forward").
RECITALS
This Agreement is made with reference to the following recital of
essential facts:
A. Luce, Forward previously served as attorneys for NDEI.
B. Luce, Forward claims that NDEI has failed to pay in full the fees
and costs incurred in the course of Luce, Forward's representation of NDEI.
C. The parties desire to resolve all disputes connected to or arising
out of their former attorney-client relationship.
D. As full consideration of any and all outstanding fees and costs,
and pursuant to that certain Settlement Agreement and Mutual Release, dated
as of May 2, 1997, by and between NDEI and Luce, Forward (the "Settlement
Agreement"), NDEI has agreed to pay to Luce, Forward $103,632.08 in cash plus
10,000 shares (the "Luce, Forward Shares") of the $0.01 par value common stock
of the Company (the "Common Stock") . The Luce, Forward Shares shall
hereinafter be referred to as the "Registrable Stock."
E. Concurrently with the payment described in Paragraph "D", Luce,
Forward agrees to submit to NDEI for cancellation warrants previously issued
to Luce, Forward with regard to ten thousand (10,000) shares of NDEI common
stock.
F. As set forth in the Settlement Agreement, the satisfaction of the
obligation owed to Luce, Forward is subject among other things, to the
execution, delivery, and performance of this Agreement;
NOW, THEREFORE, in consideration of the respective covenants and
obligations of the parties set forth herein and in the Settlement Agreement
and for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto, intending to be legally bound,
agree as follows:
1
1. Rights.
1.1 Piggyback Registration Rights. If at any time while Luce,
Forward is still the owner of Registrable Stock, NDEI shall determine to
register any of its securities under the Securities Act of 1933, as amended,
(the "Securities Act"), for its own account or the account of any of its
shareholders (other than a registration relating to employee stock option or
purchase plans, or a registration on Form S-4 relating to a Rule 145
transaction, or a registration on any form other than Forms S-1, S-2, S-3,
SB-1 or SB-2, or their successor forms) NDEI will: (i) promptly give to
Luce, Forward written notice thereof; and (ii) include in such registration
(and any related qualification under state securities or Blue Sky laws or
other compliance), and in any underwriting involved therein, all of the
Registrable Stock of Luce, Forward, if requested in writing by Luce, Forward
within fifteen (15) days of receipt of such written notice from NDEI.
1.2 Underwriter. If the registration of which NDEI gives notice
pursuant to Section 1.1 is for a registered public offering involving an
underwriting, NDEI shall so advise Luce, Forward as a part of the written
notice. In such event, the right of Luce, Forward to registration pursuant
to Section 1 shall be conditioned upon Luce, Forward's participation in such
underwriting and the inclusion of Luce, Forward's Registrable Stock in the
underwriting to the extent provided herein and the payment by Luce, Forward
of a pro rata portion of the fees incurred in connection with the
registration, as provided in Section 3 below.
If Luce, Forward proposes to distribute its securities through
such underwriting, it shall (together with NDEI and any other shareholders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by NDEI. Notwithstanding any other provision
of this Section 1, the underwriter may limit the number of shares of
Registrable Stock to be included in the registration and underwriting, or may
exclude Registrable Stock entirely from such registration and underwriting.
NDEI shall advise Luce, Forward and any other shareholders of securities which
would otherwise be registered and underwritten pursuant hereto, and the
number of shares of Luce, Forward's Registrable Stock and the other
shareholders' securities that may be included in the registration and
underwriting shall be allocated among Luce, Forward and any other shareholders
requesting registration in proportion, as nearly as practicable, to the amount
of Registrable Stock and other securities held by each of Luce, Forward and
any other shareholders as of the date of the notice pursuant to Section 1.1.
If Luce, Forward or any shareholder disapproves of the terms of any such
underwriting, it may elect to withdraw therefrom by written notice of NDEI
and the underwriter. Any of Luce,Forward's Registrable Stock, or any
2
shareholders' securities, excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
1.3 Rule 144 Reporting. With a view to making available to Luce,
Forward the benefits of certain rules and regulations of the SEC which may
permit the sale of the shares of Registrable Stock to the public without
registration, NDEI agrees that, at all times after April 26, 1998, it will use
its best efforts to: (1) keep available adequate current public information,
as those terms are understood and defined in SEC Rule 144; (ii) to file with
the SEC in a timely manner all reports and other documents required of NDEI
under the Securities Act and the Securities Exchange Act of 1934 as amended
(the "Exchange Act") ; and (iii) so long as a Luce, Forward owns any
Registrable Stock, to furnish to Luce, Forward forthwith upon request a
written statement by NDEI as to its compliance with the reporting requirements
of said Rule 144, and of the Securities Act and the Exchange Act, a copy of
the most recent annual or quarterly report of NDEI and such other reports and
documents so filed by NDEI as such Luce, Forward may reasonably request in
complying with any rule or regulation of the SEC allowing such Luce, Forward
to sell any such securities without registration.
2. Obligations of Luce, Forward. Following the filing of the
Registration Statement and during any period that the Registration Statement
is effective, Luce, Forward shall:
2.1 not effect any stabilization transactions or engage in any
stabilization activity in connection with NDEI's common shares in
contravention of Rule lOb-7 under the Exchange Act;
2.2 furnish each broker through whom Luce, Forward offers
Registrable Stock such number of copies of the Prospectus as the broker may
require and otherwise comply with prospectus delivery requirements under the
Securities Act;
2.3 report to NDEI each month all sales, pledges and other
dispositions of Registrable Stock made by Luce, Forward;
2.4 not to bid for or purchase (and not permit any Affiliated
Purchaser, as defined in Rule lOb-6 under the Exchange Act, to bid for or
purchase) any account in which Luce, Forward has a beneficial interest, or
attempt to induce any other person to purchase any NDEI common shares in
contravention of Rule lOb-6 under the Exchange Act;
2.5 furnish such information concerning Luce, Forward as NDEI may
from time to time reasonably request;
3
2.6 not sell under the Registration Statement during any period
after NDEI has provided notice to Luce, Forward pursuant to Section 1.6.4
above and until NDEI provides to Luce, Forward notice that the Registration
Statement no longer fails to state a material fact required to be stated
therein, misstates a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements made not misleading;
and
2.7 not sell Registrable Stock during any period beginning seven
(7) days before the anticipated effective date of any registration statement
(other than a registration statement on Form S-3 or S-4 or any successor
forms) registering the sale of equity securities for NDEI's account (as NDEI
advises) and ending ninety (90) days thereafter without NDEI's consent
(provided that this restriction shall not apply with respect to more than one
such registration statement during any calendar year).
3. Expenses.
In connection with any Registration Statement filed in connection
with a registration subject to Section 1.1, Luce, Forward and NDEI each shall
pay its pro rata portion of the fees incurred in connection with such
Registration Statement. For purposes of this Section 3.1, the terms "fees"
means all underwriting, filing and all audit, accounting, and legal fees
attributable to the offering. In addition, Luce, Forward shall be
responsible for the payment of its fees and disbursements of counsel to Luce,
Forward in connection with the preparation of such Registration Statement and
the Prospectus, if any, and fees paid to brokers in connection with the sale
of any of the Registrable Stock pursuant to Section 1.1. For purposes of this
Section 3, Luce, Forward's pro rata portion shall be based on the number of
shares of Luce, Forward included in the offering compared to the total number
of shares included in the offering.
4. Indemnification.
4.1 Indemnity by NDEI. NDEI shall
4.1.1 indemnify and hold harmless Luce, Forward and its
directors and officers, if any, each person who participates in the
offer of such Registrable Stock, including underwriters (as defined
in the Securities Act) and each person, if any, who controls Luce,
Forward or participating person (as defined in the Securities Act)
(collectively, the "Shareholder Indemnitees") against any losses,
claims, damages or liabilities ("Losses"), to which such Shareholder
Indemnitees may become subject, under the Securities Act or
otherwise, insofar as such Losses (or actions in respect thereof)
4
arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration
Statement or Prospectus, as amended or supplemented if NDEI has
furnished any supplements or amendments thereto, or any other
document filed or delivered in connection therewith under a state
securities or blue sky law (collectively, "Registration Documents")
or insofar as any Losses (or actions in respect thereof) arise out
of or are based upon (i) the omission or alleged omission to state
in any Registration Document as amended or supplemented if NDEI has
furnished any supplements or amendments thereto, a material fact
required to be stated therein or necessary to make the statements
made therein (in the case of a prospectus, in the light of the
circumstances under which they were made), not misleading, or
(ii) any violation of any securities law by NDEI, its officers or
employees in connection with the Registration Documents, and
4.1.2 reimburse each Shareholder Indemnitee for all legal or
other expenses reasonably incurred by it in connection with
investigating or defending any Loss, including any amounts paid in
settlement of any litigation, commenced or threatened, if such
settlement is effected with the prior written consent of NDEI,
which shall not be unreasonably withheld or delayed; provided,
however, that NDEI shall not be liable for any Losses arising out
of or based upon any untrue statement or omission made in any
Registration Document in reliance upon and in conformity with
written information furnished to NDEI by or on behalf of Luce,
Forward for use in the preparation of the Registration Document;
and provided, further, that NDEI shall not be liable to a
particular Shareholder Indemnitee under the indemnity agreement in
this Section 4.1 with respect to the Prospectus, as amended or
supplemented, to the extent that the Loss arises from the sale of
any shares of Registrable Stock by such Shareholder Indemnitee to
the person asserting Loss and to which there was not sent or given,
within the time required by the Securities Act, a copy of the
Prospectus as then amended or supplemented, if NDEI has previously
and timely furnished copies thereof to such indemnified party and
such Prospectus as then amended or supplemented has corrected the
misstatement or omission at issue.
4.2 Indemnity by Luce, Forward. Luce, Forward shall,
4.2.1 indemnify and hold harmless NDEI, any officer, director,
employee or agent of NDEI, and each other person, if any, who
controls NDEI within the meaning of Section 15 of the Securities
5
Act (collectively, the "NDEI Indemnitees") against any Losses to
which each such NDEI Indemnitees may become subject under the
Securities Act or otherwise, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained
in any Registration Document, or arise out of or are based upon the
omission or alleged omission to state in any Registration Document
a material fact required to be stated therein or necessary to make
the statements made therein (in the case of a prospectus, in the
light of the circumstances under which they were made,) not
misleading, or (ii) any violation of any securities law by or on
behalf of Luce, Forward in connection with the sale or transfer of
any shares included in the Registration Statement, and
4.2.2 reimburse each NDEI Indemnitee for all legal or other
expenses reasonably incurred by it in connection with investigating
or defending any such Losses or action, including any amounts paid
in settlement of any litigation, commenced or threatened, if such
settlement is effected with the prior written consent of Luce,
Forward; Provided, however, that such indemnification or
reimbursement shall be payable only if, and to the extent that, any
Losses arise out of or are based upon an untrue statement or omission
made in any Registration Document in reliance upon and in conformity
with written information furnished to NDEI by Luce, Forward for use
in the preparation thereof.
4.3 Procedure for Indemnification. Promptly after receipt by an
indemnified party, under Section 4.1 or 4.2, of notice of the commencement of
any action, the indemnified party shall notify the indemnifying party in
writing of the commencement thereof, if a claim in respect thereof is to be
made against an indemnifying party under any of these Sections; but the
omission of such notice shall not relieve the indemnifying party from
liability which it may have to the indemnified party under this Section 4,
except to the extent that the indemnifying party is actually prejudiced by
such failure to give notice, and shall not relieve the indemnifying party from
any liability which it may have to any indemnified party otherwise than under
this Section 4. In case any action is brought against the indemnified party,
it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and to the extent
that it chooses, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party, and after notice from the indemnifying
party shall not be liable for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof;
Provided, however, that if the indemnifying party fails to take reasonable
steps necessary to defend diligently the claim within twenty (20) days after
receiving notice from the indemnified party that the indemnified party
6
believes the indemnifying party has failed to take such reasonable steps, or
4.3.1 if the indemnified party who is a defendant in any action
or proceeding which is also brought against the indemnifying party
reasonably shall have concluded that there are legal defenses
available to the indemnified party which are not available to the
indemnifying party, or
4.3.2 if representation of both parties by the same counsel is
otherwise inappropriate under applicable standards of professional
conduct, then the indemnified party shall have the right to assume
or continue its own defense as set forth above. In no event shall
the indemnifying party be responsible for more than one firm or
counsel for all indemnified parties unless it is inappropriate under
applicable standards of professional conduct for one firm or counsel
to represent all indemnified parties.
4.4 Non-Exclusive Indemnity. Any indemnity agreements contained herein
shall be in addition to any other rights to indemnification or contribution
which any indemnified party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless of any investigation
made or omitted by or on behalf of any indemnified party.
4.5 Contribution. If for any reason the foregoing indemnity is
unavailable, or is insufficient to hold harmless an indemnified party, then
the indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities
or expenses.
4.5.1 in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and the indemnified party
on the other (determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied
by the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission), or
4.5.2 if the allocation provided by Section 4.5.1 above is not
permitted by applicable law or provides a lesser sum to the indemnified
party than the amount hereinafter calculated, in such proportion as is
7
appropriate to reflect not only the relative fault of the indemnifying
party and the indemnified party, but also the relative benefits received
by the indemnifying party on the one hand (taking into consideration the
fact that the provision of the registration rights hereunder served as
an inducement to Luce, Forward to enter into the Settlement Agreement)
and the indemnified party on the other, as well as any other relevant
equitable considerations. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
5. Miscellaneous.
5.1 Governing Law. This Agreement and the rights and obligations of
the parties hereunder shall be governed by, and construed and interpreted in
accordance with, the laws of the State of California without giving effect to
the choice of law principles thereof.
5.2 Entire Agreement; Amendment Waiver. This Agreement:
5.2.1 contains the entire agreement among the parties hereto with
respect to the subject matter hereof,
5.2.2 supersedes all prior written agreements and negotiations and
oral understandings, if any, with respect thereto, and may not be amended
or supplemented except by an instrument or counterparts thereof in writing
signed by NDEI and each of Luce, Forward. No waiver of any term or
provision of this Agreement shall be effective unless in writing signed
by the party to be charged. The waiver by any party of a breach of any
term or provision of this Agreement shall not be construed as a waiver
of any subsequent breach.
5.3 Binding Effect. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective legal representatives,
successors and assigns; provided, however, that no party hereto may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of the other parties hereto.
5.4 Invalidity of Provision. The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or
8
the validity or enforceability of this Agreement including that provision, in
any other jurisdiction.
5.5 Notices. All notices, requests, consents and other communications
to any party hereunder shall be in writing and shall be given either by
personal service, certified mail, return receipt requested, overnight courier
or telecopy, addressed as follows:
if to NDEI, to:
NETTER DIGITAL ENTERTAINMENT, INC.
611 N. Brand Blvd., 3rd Floor
Glendale, CA 91203
Attn: Chad Kalebic
with a copy to:
Ervin, Cohen & Jessup LLP
9401 Wilshire Blvd., Suite 900
Beverly Hills, CA 90212
Attn: Kenneth A. Luer, Esq.
if to Luce, Forward, to:
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, CA 92101
Attn: R. William Bowen, Esq.
or to such other address as any party may hereafter specify to the other
parties hereto by notice sent in accordance with this Section 5.5. Each such
notice, request or other communication shall be effective when delivered at
the address specified in this Section 5.5.
5.6 Headings; Execution in Counterparts. The headings and captions
contained herein are for convenience of reference only and shall not control
or affect the meaning or construction of any provision hereof. This Agreement
may be executed in any number of counterparts, each of which shall be deemed
to be an original and all of which together shall constitute one and the same
instrument.
9
IN WITNESS WHEREOF, this Agreement has been executed by or on behalf of
each of the parties hereto as of the date first above written.
NETTER DIGITAL ENTERTAINMENT, INC.
By:/s/ Douglas Netter
__________________________________
Typed Name: Douglas Netter
Title: President
LUCE, FORWARD, HAMILTON & SCRIPPS LLP
By:/s/ R. William Bowen
___________________________________
Typed Name: R. William Bowen
Title: Partner
10
[Letterhead of Ervin, Cohen & Jessup LLP]
June 16, 1998
Netter Digital Entertainment, Inc.
5125 Lankershim Boulevard
North Hollywood, CA 91601
Gentlemen:
You have advised us that Netter Digital Entertainment, Inc., a Delaware
corporation (the "Company"), is filing with the Securities and Exchange
Commission a Registration Statement on Form S-3 (the "Registration Statement")
covering resales of up to an aggregate of 2,886,943 shares of the Company's
Common Stock, par value $0.01 per share, by certain selling stockholders. You
have asked us to provide our opinion concerning the legality of the securities
to be sold pursuant to the Registration Statement.
In giving this opinion, we have reviewed the Registration Statement, the
Certificate of Incorporation and Bylaws of the Company, the proceedings of the
Board of Directors of the Company and such other documents as we have considered
advisable. In such examination, we have assumed the genuineness of all
signatures, the conformity with originals of all documents submitted to us as
copies, the authenticity of the originals of such copies, the legal capacity of
all natural persons and that the documents submitted to us for our review have
not been and will not be altered, amended or repealed in any respect material to
our opinions as stated herein.
Based upon the foregoing, we are of the opinion that:
1. The 2,223,221 presently outstanding shares of the Company's Common
Stock to be sold pursuant to the Registration Statement have been duly
authorized and are legally issued, fully paid and non-assessable shares of the
Company's Common Stock.
2. The 508,145 shares of the Company's Common Stock to be sold pursuant
to the Registration Statement which are issuable upon exercise of the
Representative's Warrants, the Placement Agent's Warrants or certain Options
(as such terms are defined in the Registration Statement) have been duly
authorized and will be, when issued against payment of the consideration set
forth in, and in accordance with the provisions of, the written agreements or
instruments defining the rights of the holders of the Representative's Warrants,
the Placement Agent's Warrants, and such Options (and, in the case of the
Placement Agent's Warrants, in accordance with the proper exercise of the
conversion option by the holders of the Company's Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock") after exercise of the
Placement Agent's Warrants and issuance of the shares of Preferred Stock),
legally issued, fully paid and non-assessable shares of the Company's Common
Stock.
3. The 155,577 shares of the Company's Common Stock to be sold pursuant to
the Registration Statement which are issuable upon conversion of presently
outstanding shares of Preferred Stock have been duly authorized and will be,
when issued in accordance with the proper exercise of the conversion option by
the holders of such Preferred Stock, legally issued, fully paid and
non-assessable shares of the Company's Common Stock.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement to be filed by the Company with the Securities and
Exchange Commission and to the use of our name under the caption "Legal Matters"
in the Prospectus filed as part of such Registration Statement.
Very truly yours,
/s/ ERVIN, COHEN & JESSUP LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-3 of
our report dated August 15, 1997 relating to the financial statements of
Netter Digital Entertainment, Inc. as of June 30, 1997 and for each of
the years in the two year period then ended.
/s/ Feldman Sherb Ehrlich & Co., P.C.
-------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
June 16, 1998
New York, New York
