SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB/A
(X) Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 1998 Commission File No. 0-26884
NETTER DIGITAL ENTERTAINMENT, INC.
(Exact name of Small Business Issuer in its Charter)
Delaware 95-3392054
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
5125 Lankershim Boulevard
North Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818-753-1990
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
- ------------------- Which Registered
----------------
Common Stock, $.01 Par Value NASDAQ
Common Stock Purchase Warrants NASDAQ
Securities registered under Section 12(g) of the Exchange Act:
None
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K-SB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for the most recent fiscal year were $ 32,312,551.
The aggregate market value of the voting stock held by non-affiliates of the
Company, based upon the closing price of the Common Stock on the NASDAQ
Automated Quotation System on September 23, 1998 was $2,711,000. Shares of
Common Stock held by each officer and director and by each person who owns
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates.
As of September 23, 1998, there were 3,334,405 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction E(3) to this form, the information required by
Items 9, 10, 11, 12 and 13 of Part III hereof is incorporated by reference from
the registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders scheduled to be held on November 16, 1998.
Transitional Small Business Disclosure Format:
Yes________________ No X
PART I.
ITEM 1. BUSINESS
Introduction
Netter Digital Entertainment, Inc. (the "Company") is engaged in three primary
business activities:
- - Entertainment Production. The Company is engaged in the acquisition,
development and production of television series, made-for-television movies,
documentaries, theatrical motion pictures, theme park attractions and multimedia
products (collectively and individually referred to as the "Productions" or
"Projects"). The Company specializes in combining live action film production
with computer graphics and other digital imaging in the creation of dramatic
series, documentaries, and children's programming, utilizing state-of-the-art
entertainment production technology. With its recent work on the children's
series, "Voltron:The Third Dimension" ("Voltron"), the Company is at the
forefront of the fully animated or animation intensive production market for
television. The Company's general practice has been to sell or license its
Productions under a production contract with a major entertainment studio or
distributor who is responsible for the production costs of the Production.
Since its November 1995 initial public offering, the Company has increased the
number of Projects it has in development for sale to the major studios and
distributors. The Company's unique, vertically integrated digital production
process which closely links live-action film production with computer graphics
production and digital post-production, is well suited to attract state-of-the-
art creative projects that can be produced efficiently while being digitally
pre-purposed for various multimedia software platforms.
- - Computer Animation and Visual Effects Production Services. As an outgrowth of
its traditional core business of developing and producing media Productions, the
Company has entered the business of providing digital media production services
to outside clients. In support of its own Productions, the Company has
developed significant expertise in computer graphics production, digital
post-production and various other digital imaging techniques. The quality and
popularity of the Company's productions has created industry-wide recognition of
its creative and technical skills in these areas. The Company believes that
an active market exists for projects requiring creative, high quality, cost
effective digital graphics and effects. In order to more fully exploit its
strengths in these areas, the Company formed the Netter Digital Technologies
division in the fourth quarter of fiscal 1997 to market computer graphics and
digital post-production services to outside clients.
- - Videssence(tm) Lighting Products. The Company's Videssence subsidiary
manufactures and distributes media lighting products which incorporate its
patented SRGB(tm) lighting technology. These products are used for the
illumination of studios, stages and other production environments in the
television, motion picture, theater and theme park industries as well as in the
video conferencing, distant learning, and pre-press digital photography markets.
The Company's high-tech fluorescent lights consume significantly less
electricity than traditional incandescent production lighting products.
Additionally, they generate light without the higher level of heat that
traditional incandescent production lighting products generate. As a result,
they are much more comfortable for the talent working under them. The Company
markets its lighting products in the USA and internationally through a network
of manufacturer's representatives, distributors, dealers, and direct sales
staff.
1
Background
The Company commenced operations as a television production company in 1979
doing business as Rattlesnake Productions, Inc. ("RPI"). In September 1995,
the Company was reincorporated under the laws of the State of Delaware and
changed its name to Netter Digital Entertainment, Inc. The Company's
first production was the network mini-series "Louis L'Amour's The Sacketts."
The Company has produced thirteen productions, most recently, the award winning
primetime television series "Babylon 5" and an all new computer animated
children's series, "Voltron." Throughout this period, the Company has employed
leading edge digital production techniques, such as three dimensional computer
graphics, digitally created virtual sets, surround stereo audio mixing, and
digital editing of both picture and sound. The Company's production methodology
employs standard desktop computer platforms that are relatively inexpensive and
easily upgradable. This creates substantial efficiencies, allowing projects to
be produced at lower costs.
The Company has demonstrated it can develop and deliver Projects at production
costs and quality levels consistent with market requirements. Historically, it
has contained operating overhead by supplementing its permanent staff with
freelance production staff as required for each Production. Further, over the
past year, the Company has expanded its in-house capacities with broader based
in-house computer graphics, animation and post production capabilities. These
expanded in-house facilities, combined with the Company's internally developed
production methodology and techniques, has yielded particularly competitive
production costs in its recent Projects.
The Company completed its initial public offering of securities in November
1995. The Company's Common Stock and Stock Purchase Warrants are listed on the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") and are traded in the NASDAQ Small Cap Market under the symbol
"NETT" and "NETTW," respectively.
In January 1997, the Company branched into manufacturing with its acquisition of
Videssence, Inc. ("Videssence"), a designer, manufacturer, and distributor of
lighting products which incorporate its patented SRGB(tm) light technology for
the illumination of studios, stages and other production environments in the
television, motion picture, theater and theme park industries. Videssence was
founded in 1989 and initially marketed products to the television studio market.
These products proved to be a viable alternative to traditional incandescent
lights which generate an abundance of "heat" for the relatively low amount of
usable light which they produce. Today, Videssence's lighting fixtures are
installed in over 500 studios throughout the world, covering forty countries,
including CNN, CBS, NBC ABC, and the BBC.
2
RELEASED PROJECTS
Title Principal Cast Members Programming Air Date
or Voices
- ----- ---------------------- ----------- --------
Voltron:The Third Tim Curry, Billy West Children's 1998
Dimension Television Series
Babylon 5 Bruce Boxleitner, Tracy Television Series * 1993 -
Scoggins** Present
Hypernauts Glenn Herman, Heidi Lucas, Children's 1996
Marc Daniel Television Series
The Gathering Michael O'Hare, Mira Furlan TV Movie/Pilot for 1993
"Babylon 5" series
Siringo Brad Johnsen, Chad Lowe, Television Movie 1995
Crystal Bernard
The Wild West Jack Lemmon, James Coburn, Documentary Series 1993
Helen Hunt, Bruce Boxleitner
Captain Power Tim Dunnigan, Peter MacNeill, Television Movie 1989
and The Soldiers Jessica Steen
of the Future;
The Legend Begins
Captain Power Tim Dunigan, Peter MacNeill, Children's Series 1987-1988
and the Soldiers Jessica Steen
of the Future
Five Mile Creek Louise Caire Clark, Cable 1983-1986
Rod Mullinar Television Series
Louis L'Amour's Cindy Pickett, Mary Larkin Network Pilot 1982
Cherokee Trail Timothy Scott
Wild Times Sam Elliot, Ben Johnson, Television 1980
Bruce Boxleitner Mini-Series
Roughnecks Ana Alicia, Vera Miles, Television 1980
Cathy Lee Crosby, Steve Mini-Series
Forrest, Harry Morgan
The Buffalo Stan Shaw, Richard Lawson, Network Pilot 1979
Soldiers John Beck, Hilly Hicks
Louis L'Amour's Sam Elliot, Tom Selleck Network 1979
The Sacketts Glenn Ford, Ben Johnson Mini-Series
* Five seasons of 22 one hour episodes were produced, one season per year, in
1993 through 1997. A spin-off of this series, called "Crusade," consisting of
22 one hour episodes is currently in production for delivery in the 1998-1999
television season. In addition, the Company has produced two made for
television movies which aired in 1998 and is currently producing two additional
movies for Turner Network Television which will air in 1999.
** Tracy Scoggins replaced Claudia Christian in the fifth season.
3
Business Strategy
Historically, the Company's strategy has been to develop and produce high
quality leading edge programming which is financed 100% by the major
entertainment studios, networks and television distributors, with the Company
avoiding the financial risk of funding its Projects. Because the Company
receives the full cost of the production, its profit potential is usually
limited to production margins, producer fees and a share of the distributors'
net profits, if any. The key elements of the Company's strategic growth plan
are:
- -Entertainment Production. The Company's increased in-house post production and
graphics/animation capacity has helped to streamline its production times and
increase its ability to handle more projects. This division's strategic plan is
to achieve a capacity to concurrently produce three major television or feature
film projects. These would be either joint venture productions in conjunction
with a major studio or distributor, or will be the Company's own Productions.
Discussions along these lines are on-going and will come to fruition if and when
projects that meet the Company's criteria for profitability and success are
successfully developed and placed. The Company has also established an
objective to retain greater equity participation in the projects it produces.
The retention of ancillary exploitation rights such as merchandising, and the
licensing of individual multimedia markets or entertainment platforms such as
the Internet, are areas of particular interest to the Company.
- - Computer Animation and Visual Effects Production Services. From experience
gained in producing its own projects, especially "Babylon 5," the Company has
developed significant expertise in computer graphics, digital post-production
and various other digital imaging techniques and has gained growing recognition
throughout the entertainment industry for producing highly creative visual
effects while maintaining tight budgetary control. In order to more fully
exploit these strengths, the Company formed the Netter Digital Technologies
division in the fourth quarter of fiscal 1997 to market computer graphics and
digital post-production services to outside clients. The Company has provided
visual effects and post-production work in the feature film, television
production, television promotion, industrial/corporate video and television
commercial segments. In the fourth quarter, the Division finalized deals which
started production on a 3-D animated children's series, "Voltron," and the
graphics for a new electronic video game, bringing it into two new segments.
The Company is increasing its efforts in this area and will continue to bid on
numerous outside projects on a larger scale, including feature films, television
mini-series and commercials.
- - Videssence Lighting Products. Videssence's strategic growth plan is to use its
SRGB(tm) technology and its association with the Company to create new products
for entry into new market segments that it feels will provide significant growth
potential. In the middle of the year, the Company introduced new products
which were developed for the film production markets which utilize film rather
than video cameras, as well as, a line of portable and kit oriented products
that are being marketed to the location and portable studio markets for both
film and video camera production applications. In regards to general lighting,
film and video media are formulated differently and require specific lighting
calibrations. The Company believes that a large market exists in film lighting
applications and that the same product advantages that prompted a wide
acceptance in video camera production applications will also be successful in
film production applications. The Company hopes that it will be able to
steadily increase its market share in the film lighting arena in the coming
year. In the latter part of fiscal 1998, Videssence also introduced the Zones,
a line of low price point lighting instruments aimed at non-studio applications
such as corporate video production, teleconferencing, schools
(distant learning), government council chambers, and many other areas. The
Company believes that this will also be a growing market for its lighting
products.
4
Entertainment Production
Current Production. Since 1993, the Company, through its 51%-owned subsidiary,
Babylonian Productions, Inc., has produced the award winning television series,
"Babylon 5," in association with its creator, J. Michael Straczynski, for Warner
Bros. Prime Time Entertainment Network ("PTEN"). By the end of fiscal 1998, the
"Babylon 5" series consisted of 110 original one-hour episodes. While
traditionally seen in syndication, the fifth season of "Babylon 5" premiered on
Turner Network Television ("TNT") in January 1998. At the end of fiscal 1998,
the Company began production on an all new, "spin-off" series to this popular
franchise entitled "Crusade," which will air on TNT in January 1999. The
Company is scheduled to produce 22 episodes throughout fiscal 1999. In addition,
work has commenced on two all new "Babylon 5" made for television movies, one of
which will serve as a transition from "Babylon 5" to "Crusade." TNT began airing
the fifth season of "Babylon 5" and re-runs of the first four seasons in January
1998, making TNT the exclusive "home" of the "Babylon 5" franchise in the United
States. Warner Bros. continues to directly market the series overseas. With
the new production of the series "Voltron" underway through its Netter Digital
Technologies division, the Company is now positioned to undertake additional
children's and prime-time series utilizing 100% computer animation.
Development. The development of new material or properties for television, film
and new multimedia productions is essential to the Company's future growth. It
is the Company's intention to begin to take greater equity ownership of certain
future Projects, thus creating the potential for greater ancillary
rights and profit participation. Typically, the Company either acquires an
option to purchase, or creates or co-creates its own, concept, outline,
treatment, script, or literary rights (a "Property") on which it will base
a television series or movie. When acquiring existing Properties by option, the
Company will usually pay a nominal fee for a six-month or longer option against
a more substantial price if the Company exercises the option and purchases the
Property. Such options enable the Company to develop and secure a production
commitment before actually acquiring the property. Terms of the options vary
significantly and are dependent upon the credibility of and prior success of the
writer/owner of the Property, the revenues the Company estimates can be received
from exploitation of the Property and the estimated cost of further development
and production. Certain agreements may provide for additional payments to
writers upon the sale, production, or distribution of a Project and may also
provide for participation in revenues or profits from these Projects.
On a continuing basis, the Company has numerous projects in various stages of
development. The Company allocates a significant portion of the time and energy
of its staff to search for potentially viable material and for the development
of concepts, treatments and screenplays. As of June 30, 1998, approximately
$250,000 had been spent or committed by the Company in connection with the
development of Projects that are currently active. Although a number of
projects which the Company develops are subsequently abandoned, the Company
believes that these expenditures are necessary if the Company is to develop
suitable Projects which have a chance of achieving commercial success. It is
not the practice of the Company, however, to expend substantial sums on a per
project basis, unless it believes that there is a strong likelihood of a
financing, production and/or distribution commitment from third parties.
Financing. Traditionally, the Company's practice has been to fund production
costs for particular Projects through production contracts with studios,
networks and distributors who cover 100% of the production funding. The Company
has been able to secure such production financing to date, and intends to
continue this general practice for financing its projects in the foreseeable
future. However, as discussed above, for certain future Projects, the Company's
strategic intent is to retain equity participation including, for example,
5
the retention of ancillary exploitation rights such as merchandising. While
this strategy may require additional overhead and equity investment by the
Company, as well as corresponding additional financial risk, it is expected to
provide a greater upside on successful projects through equity participation.
These projects will be considered by management on a case by case basis.
Competition. The Company's entertainment production activities are subject to
intense competition. The Company's competitors include major entertainment
studios, television and cable networks and numerous independent production
companies, many of which have significantly greater experience and financial
resources than the Company. All of these studios and production companies
compete for available literary properties, writers and other creative talent,
production financing, and distribution. In recent years, an increase in the
international market and the number of both production companies and television
and motion picture products has intensified this competition.
The entertainment business in general, and the television, multimedia and motion
picture businesses in particular, are undergoing significant changes, primarily
due to technological developments. These developments have resulted in the
availability of alternative forms of leisure time entertainment, expanded pay
television services, the Internet and more readily available multimedia home
entertainment equipment. The number of episodes of a television series and the
ability to retain ancillary rights remains a critical factor in generating
revenues in other media. Given the nature of technological development and
shifting consumer tastes, it is impossible to predict what effect technological
and other changes will have on the potential overall revenue from television and
motion pictures.
Computer Animation and Visual Effects Production Services
Current Outside Client Productions. The Company, under its Netter Digital
Technologies division, began to solicit work for its digital media production
services business in the fourth quarter of fiscal 1997. As the process for
orchestrating the integration of outside service work with the Company's own
current in-house productions was new, the Company started with a small number of
jobs in different segments of the market. Since then, the Company has provided
visual effects and post-production work in the feature film, television
production, television promotion, industrial/corporate video and television
commercial segments. In the fourth quarter of fiscal 1998, the Division
finalized deals and started production on a 3-D animated children's series
entitled "Voltron:The Third Dimension" and the graphics for a new electronic
video game with a major entertainment company, bringing it into two new
segments. "Voltron" is the biggest undertaking to date of the division and
represents the first time a U.S. company has created a television series
entirely in 3-D animation. This children's series consists of 22 episodes and
will begin airing in September 1998. The Company is continuously bidding on
numerous outside projects on a larger scale, including feature films,
television mini-series and commercials.
Growth Strategy. Through its work on "Babylon 5," the Company has pioneered
many aspects of visual effects creation utilizing desktop computers. The
Company's strategy is to combine its technical expertise with the cost
efficiencies resulting from its production methodology, to penetrate what the
Company believes is an active market for projects requiring creative, high
quality digital graphics and effects produced in a cost effective manner.
Further, the Company is one of the few companies which offer the ability to
perform visual effects and post-production work under the same roof.
In July 1997, the Company moved into a new state-of-the-art facility in North
Hollywood, a center of the entertainment and communications media industry.
Within this facility, the Company designed an infrastructure that would allow
the animation, compositing and post-production division to be on the cutting
6
edge of network and rendering technology. As the entertainment industry
continues to advance through technology, the Company hopes to be at the
forefront of the service providers.
The Company now offers a multitude of services such as: digital visual effects,
3D modeling and animation, compositing, matte painting, roto, online editing,
offline editing, art direction, and on-set supervision. The Company also has a
state-of-the-art motion capture facility which enables it to efficiently
animate 3-D character movements. All of these services run on multiple hardware
platforms and utilize many different software programs such as: Alias, Discreet
Logic, SoftImage, Lightwave 3D, Illusion, After Effects, Electric Image, and
Matador Paint. The Company employs these platforms on numerous hardware
platforms including SGI, Windows NT, and Macintosh computers. All of these
different platforms give the Company the luxury of flexibility that most other
facilities do not enjoy.
Competition. The Production Services business faces significant competition
from numerous independent visual effects and post-production houses. The
entertainment industry, especially in Southern California, is filled with
companies, large and small, which offer these services. With the advancements
of technology, the costs of the computer systems used to create special effects,
along with the associated software, have fallen dramatically opening up the
market to many start-up companies. As the Company expands in this market, it
will face competition from larger entities with greater experience and financial
resources such as Industrial Light and Magic, Digital Domain and Digital Magic.
Videssence Lighting Products
Current Products. Videssence has successfully manufactured and marketed a broad
line of lighting products utilizing its patented SRGB(tm) lighting technology
since 1989. This patented technology has stabilized the fluorescent light source
by eliminating the "flicker" or "strobe effect" thus rendering it effective for
media production lighting. SRGB(tm) lighting fixtures utilize tri-color content
(red, blue and green color values) lamps enclosed in proper reflectors and
fixtures. Since 1989, Videssence has successfully developed the first energy
efficient, technically color correct alternative to the incandescent lighting
used in television, motion picture production and photography. Videssence's
high-tech fluorescent lights consume far less energy and generate light with a
lower level of heat than incandescent lights. Historically, Videssence's
products have been marketed to customers who operate video production facilities
or television news studios, both of which utilize video cameras in production.
The end-users in these markets have accepted Videssence's Studio 2000 product
line which has generated the majority of the company's sales to date. These
products are now installed in over 500 news studios around the world including
CNN, ABC World News Tonight With Peter Jennings, CBS and affiliates, NBC and
affiliates, the BBC, China Central Television (CCTV) and numerous other
prominent news broadcasters. Videssence's products have also been introduced
into the video conference/distant learning market and the digital photography
market.
Since July 1995, Videssence has been adapting technology from the Studio 2000
product line and has been developing new product components to work in
conjunction with film (vs. video) applications and productions. The new
Vid-Strip power distribution and Vista dimming control products have been tested
and proven on the Company's "Babylon 5" sound stage and have been well received.
With the development of the custom phosphor SRGB(tm) Cinelamps and the custom
remote ballast, the ET-250 SRGB(tm) E-Drive which are compatible with the
existing Studio 2000 products, Videssence has prepared itself for entry into all
production markets, whether in operations using film or video technology.
In the beginning of calendar year 1998, Videssence completed a new line of
products to be marketed to the location and portable studio markets for all
media production lighting applications. Its Koolite and Koolhead line are a
7
range of lightweight metal fixtures and folding plastic fixtures, respectively,
suitable for sale to the rental or production lighting industries. The new
Koolkits represent prepackaged Koolite products for media production
professionals needing studio quality lighting when they are in the field.
Product Development. At the end of fiscal 1998, Videssence completed
development on the Zones product line which represent a nine fixture family of
SRGB(tm) lighting capable of replacing 500 to 5000 watt incandescent fixtures.
Each fixture is sold with accessories that convert a fixture's pattern from very
large to small zones of lighting. The concept of this line was to be a simple,
low-cost "solution" to any lighting professional who desired an inexpensive,
easy to adopt and use lighting system. The Company will market the Zones
products for non-studio applications such as corporate video production,
teleconferencing, schools (distant learning), government council chambers, and
many other areas.
Manufacturing and Supplies. The principal materials used by Videssence in the
manufacture of its products are metal work, electronic components and
fluorescent lamps, most of which (other than as described below) are readily
available from alternative suppliers. Videssence purchases specific electronic
components and tri-chrome fluorescent lamps from the largest lighting companies,
including General Electric, Philips and Siemens. Videssence produces certain
electronic components for use in its products (including high speed ballasts)
and requires advanced integrated circuit components to produce such electronic
components. These items are available but sometimes require long lead times for
delivery. While in the past Videssence has been able to obtain an adequate
supply of such circuit components on a timely basis, there can be no assurance
that the company will not experience delays or problems in the future in
procuring needed materials.
Marketing. Videssence markets its products in the USA and internationally
through a network of manufacturer's representatives, dealers, distributors and
direct sales staff. The company utilizes direct marketing with trade promotions,
advertising, attendance at recognized industry trade shows and a detailed
internet web site to reach its customer base and support its sales/distribution
network. With its new product offerings and new target markets, Videssence
restructured and expanded its sales and distribution network in fiscal 1998
signing on a significantly increased number of professional selling
organizations compared to a year ago. Furthermore, with the advent of its new
Zones line, Videssence has entered an agreement with a major New York based
international mass marketer to feature the Zones in their upcoming direct mail
catalog.
Competition. The media production lighting business is highly competitive.
Videssence competes with manufacturers of traditional incandescent lighting
products as well as other manufactures of fluorescent lighting products. To the
extent the end user selects high speed fluorescence as the lighting method, the
company has four primary competitors: Strand, Kinoflo, Balcar and LightTech.
Strand, Balcar and LightTech are manufacturing product (or will) using
technology licensed from Videssence, although these companies have not generated
significant revenues for Videssence. The company will meet new competitors as
it releases its new film and portable/kit products. Some of these competitors
are significantly larger than the company and have significantly greater capital
and management resources. As such, there can be no assurance that Videssence
will be successful in marketing its new products.
Employees
At June 30, 1998, the Company employed 69 persons full-time in its principal
executive offices and post-production/animation facilities. Of such persons,
four are officers. The balance are production, clerical and administrative
personnel. The Company is currently staffed to handle its current workload and
a specific amount of incoming outside production services business. The Company
8
anticipates increasing its technology, computer graphics animation and post
production facilities as well as its staffing requirements in the upcoming
fiscal year as new projects are undertaken. The Company is continuing to review
its staffing requirements and additions or reductions in staff may be made if
appropriate in the opinion of management.
When the Company is in production, as many as 120 additional people may be
engaged by the Company at its production studio for periods of nine months or
longer. The Company has granted, and will grant, to actors, directors,
screenwriters, and other important creative and financial elements, rights to
participate in the net profits or gross revenues of particular projects.
Similar participation is required pursuant to the terms of certain collective
bargaining agreements.
Some of the Company's or subsidiary's employees are represented by labor unions
and the Company believes that it has good relationships with its employees. The
Company or certain of its subsidiaries are signatories to various agreements
with unions and guilds that operate in the entertainment industry. Although the
Company considers its employee relations to be satisfactory at present, the
renewal of these union contracts does not depend on the Company's activities or
decisions alone. If, prior to the expiration of an existing union contract, the
representatives of the employers were unable to negotiate a new contract
with the union, any resulting work stoppage could adversely affect the Company.
At June 30, 1998, Videssence employed 22 persons full-time at its principal
executive offices, manufacturing/distribution facility, and satellite sales
offices in Pennsylvania and Illinois. Of such persons, one is an officer, 6 are
engaged in sales and sales support, 6 were engaged in manufacturing and the
remainder were engaged in management, marketing, engineering or administration.
Videssence believes its relations with its employees are satisfactory.
ITEM 2. REAL PROPERTY
The Company leases its principal executive offices and post-production and
animation facilities in a new, state-of-the-art building with 22,000 square feet
located at 5125 Lankershim Blvd., North Hollywood, California 91601. The lease,
which started in July 1997, is for seven years with annual minimum rent of
$277,000. The Company has an option to extend the lease for two additional five
year terms. The Company leases approximately 80,000 square feet of studio
facilities located at 8615 Tamarack Avenue, Sun Valley, California 91352 on an
annual basis under two leases which expire in June 1999. The aggregate annual
minimum rent for these facilities is $385,000, and one of the two leases for the
studio facilities, representing approximately 20,000 square feet, has three
options to renew for one year each. The Company also leases two spaces for
Videssence's manufacturing facilities, warehousing, and administrative offices
which are located at 341 and 360 Beach Rd., Burlingame, California 94010. The
lease for the former facility is for 4,500 square feet and expires in December
1998 while the second is for 8,000 square feet and expires in November 2000
with an annual minimum rent of $77,000. The Company is currently evaluating its
overall space requirements for its Videssence subsidiary. Rent expense for the
year ended June 30, 1998 was approximately $790,000.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is from time to time party to
various actions which in the aggregate are not believed by management to be
material to its financial condition
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal 1998.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ Small Cap Market under the
symbol "NETT" since November 20, 1995. In addition, warrants to purchase up to
494,500 of the Company's Common Stock are listed on the NASDAQ Small Cap Market
under the symbol "NETTW." The terms of the warrants provide the holder the right
to purchase any time prior to November 21, 1998 one share of Common Stock at a
price of $6.50. The Company's Common Stock is also traded on the Pacific
Exchange.
The following table sets forth the high and low sales price per share of the
Common Stock as reported by NASDAQ for each quarter within the last two fiscal
years.
Quarter Ended High sales Low sales
------------- ---------- ---------
September 30, 1996 $5.75 $3.50
December 31, 1996 $4.38 $1.75
March 31, 1997 $4.69 $2.50
June 30, 1997 $4.44 $3.50
September 30, 1997 $3.88 $2.13
December 31, 1997 $3.25 $1.75
March 31, 1998 $2.75 $1.50
June 30, 1998 $6.00 $1.63
On September 23, 1998, the closing prices of the Common Stock as reported by
NASDAQ were $1.63 bid and $1.94 ask. On such date there were 34 holders of
record of the Common Stock. The number of shareholders does not take into
account shareholders for whom shares are being held in the name of brokerage
firms or clearing agencies.
The Company has never paid any dividends on the Common Stock. The Company
intends to retain earnings and capital for use in its business, and no cash
dividends are expected to be paid on the Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
ADDRESSED IN THIS ITEM 6 CONSTITUTE "FORWARD LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO A VARIETY
OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER THE
HEADING "RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-3 (Registration No.333-56963) FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JUNE 16, 1998, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED BY THE COMPANY'S MANAGEMENT.
10
General
Historically, the Company's primary operations have been to develop and produce
media entertainment Projects under agreements with studios, networks and
distributors who fund 100% of production costs of the Project. Employing this
strategy, the Company avoids the financial risk of funding such production
costs, but limits its ongoing revenue participation since the studio, network
or distributor retains a significant portion of the rights to the main and
ancillary markets for the Projects. Under these arrangements, revenues are
recognized when earned (typically upon receipt) and associated costs are
recognized when incurred.
These revenues are primarily dependent on the number of Projects being produced
by the Company and the agreement relating to such Projects. Accordingly, year
to year comparisons of production revenues from these sources are not
necessarily indicative of future revenues. During fiscal 1998 and fiscal 1997,
the Company derived approximately 93% and 99%, respectively, of its
entertainment production revenues from Warner Bros. for the "Babylon 5"
television series. In fiscal year 1999, the Company is contracted to produce a
spin-off to its popular "Babylon 5" entitled "Crusade" which will be in
production through May 1999. As discussed above in "PART I. ITEM 1. BUSINESS,"
the Company's business strategy is to expand its entertainment production
business as well as to broaden its business base through Videssence's
manufacture and sale of lighting products and through the Company's marketing of
its computer animation and visual effects production services to outside
clients. Of course, there can be no assurance that this strategy will be
successful, and, if the "Crusade" series is not renewed after the first season
or replaced by a series generating comparable revenues, the Company's
financial condition and operations could be materially adversely affected.
Results of Operations
Net Revenues. Net revenues increased to approximately $32.3 million for the
fiscal year ended June 30, 1998, an increase of 25.7%, as compared to
approximately $25.7 million for the fiscal year ended June 30, 1997. This
increase resulted from several factors. First, revenues from entertainment
production increased $3.2 million as the production on two new television movies
provided $4.5 million of additional revenues to offset a $1.3 million decrease
in the "Babylon 5" Season 5 revenue compared to Season 4. The latter difference
stemmed from production timing. Second, the first full year of Netter Digital
Technologies generated $1.4 million of new revenue. Third, as Videssence was
acquired in January 1997, fiscal 1998 benefited from a full year of revenue
compared to only six months in fiscal 1997 which contributed additional revenues
of $1.5 million to the Company. Other areas of the Company, from the
"Babylon 5" Fan Club with its expanding merchandise sales and fan base to
computer graphics work on promotional activities to other production contracts,
also contributed an increase of $500,000 of revenues.
Gross Margin. The Company's gross profit for fiscal 1998 was approximately
$5.0 million, or 15.4% of revenues, as compared to approximately $3.3 million,
or 12.8% of revenues, for fiscal 1997. The Company's entertainment production
business generated approximately $3.1 million (approximately 11.0% of revenues
from entertainment production activities) in fiscal 1998, up from approximately
$2.0 million (approximately 8.8% of revenues from entertainment production) in
fiscal 1997, because the Company has continued to improve its operating
methodologies and the business generated from Netter Digital Technologies has
been able to generate higher margins than the traditional core entertainment
production business. Videssence generated approximately $1.88 million of gross
profit (approximately 47.9% of net revenues) in fiscal 1998 as compared to $1.25
million of gross profit (approximately 52.0% of net revenues) in the second half
of fiscal 1997 (Videssence was acquired in January 1997.) This decrease
resulted from the expansion of the dealer network during the sales restructuring
and a change in the product mix of sales to incorporate the new products which
have somewhat lower gross margins in the second half of fiscal 1998.
11
General and Administrative Expenses. General and administrative expenses
increased to approximately $4.5 million, or approximately 13.9% of the Company's
net revenues, as compared to approximately $3.1 million, or approximately 12% of
revenues, in fiscal 1997. The increase was primarily attributable to the
addition of Videssence's operations which added an additional $1.1 million to
expenses during its first full year within the Company. To a lesser degree,
rent and other facility expenses increased as the Company moved to its new,
larger building. Also, travel and consulting costs increased as management
worked to restructure Videssence and increase communication with the investment
community.
Operating Income (Loss). The Company achieved operating incomes of
approximately $376,000 and $157,000 for the years ended June 30, 1998 and
June 30, 1997, respectively. In fiscal 1998, operating income of approximately
$776,000 from its entertainment production and production services activities
(as compared to $48,000 in fiscal 1997) offset an operating loss of
approximately $400,000 from its Videssence operations (as compared to operating
income of approximately $109,000 in fiscal 1997.) The increase in operating
income from the entertainment production and production services activities was
primarily due to revenues from the additional made-for-television movies for TNT
and the additional series, "Voltron." The operating loss of Videssence can be
attributed to lower than expected sales, especially from the international
markets during the fourth quarter of fiscal 1998.
Other Income and Expenses. Interest income decreased to approximately
$22,000 for fiscal 1998, as compared to approximately $83,000 for fiscal 1997,
as proceeds from the Company's November 1995 initial public offering were fully
drawn from short term investments and used for expansion of its in-house
post-production and graphics/animation facilities and working capital for
Videssence. Interest expense increased to approximately $206,000 in fiscal
1998, from approximately $59,000 in fiscal 1997, due to the acquisition of
Videssence which had more long term debt and credit facilities and the use in
fiscal 1998 of lease lines to finance capital expansion in its
graphics/animation facilities.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash flows from
operations, the initial public offering of Common Stock and Warrants completed
in November 1995, which generated net proceeds of approximately $3.2 million
and, a February 1997 preferred stock placement which raised $424,000 in gross
proceeds. With respect to production costs for particular entertainment
Projects, production contracts are entered into with studios, networks and
distributors which cover 100% of the production funding. Such production funds
are received by the Company during the production stage of a Project. To date,
the Company has been able to secure production financing from a major studio,
network or distributor for all its Projects. While the Company believes that
similar financing arrangements can be made for future productions, there can be
no assurance that the Company will be successful in obtaining such production
financing. In that event, the Company would have to secure alternative sources
for financing Projects. Moreover, as the Company continues to develop new forms
of high technology production activities and projects for new entertainment
ancillary markets, it may elect to make additional overhead and equity
commitments for these new projects.These potential, new financial commitments,
if pursued, could create additional risk for the Company as to whether it will
recover the costs of its investment and generate a profit.
During fiscal 1998 and fiscal 1997, the Company derived approximately 93% and
99%, respectively, of its entertainment production revenues from its agreements
with Warner Bros. relating to the production of the "Babylon 5" series and the
associated made for television movies. During fiscal 1998, the Company was
contracted to produce a spin-off of "Babylon 5" entitled "Crusade" which will
be in production from July 1998 through approximately May 1999. The Company has
12
also begun production on two new made for television movies. If the "Crusade"
series is not renewed through an additional agreement extension after the first
season and the Company is unable to replace the series with one generating
comparable revenues, the Company's financial condition and operations could
be materially adversely affected.
Cash used in operating activities was approximately $878,000 for the fiscal year
ended June 30, 1998. The biggest uses of cash were a build-up of inventory at
Videssence due to the development of a new line of lighting products for the
film industry, and an increase in accounts receivable both at Videssence and
Netter Digital Entertainment. The accounts receivable increases resulted from
the termination of a factoring agreement at Videssence and an increase in sales
from both companies. Partially offsetting these uses was an increase in
deferred revenue as the Company began to start its new production season for
"Crusade."
Cash used for capital equipment investment was approximately $139,000 for fiscal
1998. The use of cash was primarily for additions of computer and post
production equipment to expand its post-production and graphics/animation
facilities as well as additional office equipment at Videssence.
Since January 1, 1997, the Company has advanced approximately $2 million of
additional working capital to its Videssence subsidiary.
Effective July 1997, the Company's subsidiary Videssence obtained a $750,000
line of credit with a bank, guaranteed by the Company, which required monthly
payments of interest on outstanding principal amounts at 2% above the bank's
reference rate. The loan documents also require the Company to comply with
certain restrictive covenants, including maintaining a minimum working capital
and specific financial ratios. As of September 20, 1998, the Company owes an
outstanding principal amount of $607,000 on such line, which was borrowed to
repay monies advanced by the Company's factor in conjunction with terminating
the Company's factoring agreement.
Management believes that its present cash position and overall liquidity will
enable the Company to meet its operating commitments for the next twelve months.
Year 2000
The Year 2000 issue results from the development of computer programs and
computer chips using two digits rather than four digits to define the applicable
year. Computer programs and/or equipment with time-sensitive software or
computer chips may recognize the date using "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations and
cause disruptions to business operations.
The Company's entertainment production and computer animation and visual effects
production operations rely heavily on computers in the development and
production of projects and in the provision of digital media production
services, but do not rely heavily on computers for operating activities such as
the processing of payroll. In contrast, the Company's Videssence subsidiary
relies heavily on computers for the processing of payroll, accounts receivable
and accounts payable, but does not rely heavily on computers in manufacturing
and distributing its products. The Company also makes use of computers for
efficient communications with employees and customers, including extensive use
of e-mail systems and the Internet. Finally, embedded technology such as
microcontrollers are commonly found in computers used throughout the Company's
operations. The complete failure of these systems could have a material
negative impact on the operations of the Company. In addition, most of the
Company's major suppliers and customers rely heavily on computer systems and
failures in such systems could disrupt their operations.
The Company has substantially completed the process of identifying and
addressing potential Year 2000 difficulties in its technological operations,
including information technology ("IT") applications, IT technology and support,
desktop hardware and software, non-IT systems and important third party
operations. Based on its assessment of these efforts, the Company believes that
Year 2000 issues will not have a material adverse effect on the Company's
business, operations or financial condition. Further, management expects that
costs which have been or will be incurred to assure Year 2000 capability will
not have a material adverse effect on the Company's financial position or
results of operations. The Company has undertaken continuing efforts to update,
modify or replace, and test systems in the ordinary course of business. Based
on such efforts, the Company does not believe that it will be required to
otherwise modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter.
The Company estimates its cost to assess and achieve Year 2000 compliance will
be less than $10,000, of which less than $5,000 has been incurred through
June 30, 1998. These amounts do not include costs incurred in the Company's
replacement or upgrading of existing computer systems in the ordinary course
of business. These estimates are subject to revisions based on future
assessments and responses from vendors and customers. The Company expects to
continue to fund its Year 2000 costs through its cash flows from operations and
to expense modification costs as incurred.
Management believes the primary Year 2000 risks to the Company's business are
external to the Company and relate to the Year 2000 readiness of the Company's
third party suppliers and customers. Consequently, the Company's Year 2000
effort also includes communication with significant suppliers of products and
services to determine that the suppliers operations and the products and
services they provide are Year 2000 capable. Based on responses it has
received to date, the Company does not believe that the impact of Year 2000
issues on such suppliers will be material to the Company's business, operations
or financial condition. However, there can be no assurance that another
company's failure to ensure Year 2000 capability will not have an adverse
effect on the Company.
Overall, the Company believes that it will complete its Year 2000 effort and
that there will not be a significant disruption to its business caused by the
failure of its own computer systems. In addition, the Company believes that,
to the extent that its entertainment production and computer animation and
visual effects production operations rely on suppliers for specialty services,
there are a variety of alternative suppliers available in the event the
Company's existing suppliers of parts for its lighting products. Although there
are alternative sources for these items, the Videssence subsidiary may
experience a disruption in its receipt of these parts if it is forced to replace
existing suppliers who experience Year 2000 problems. Consequently, the
Company's Videssence subsidiary could experience disruptions in its operations
as a result of failures in the computer systems of its major vendors.
Accordingly, the Company will develop contingency plans to help mitigate the
effects of such failures, if any.
Forward-Looking Statements
The foregoing discussion contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended. There are risks and
uncertainties that could cause future events and results to differ materially
from those anticipated by management in the forward-looking statements included
in this report. Among these risks and uncertainties are the effect of the Year
2000 computer problem on the Company's internal systems and the effect on the
Company's business of any failures in the computer systems of the Company's
major vendors or customers.
13
ITEM 7. FINANCIAL STATEMENTS
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEET - June 30, 1998 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS-
for the years ended June 30, 1998 and 1997 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
for years ended June 30, 1998 and 1997 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS -
for years ended June 30, 1998 and 1997 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Netter Digital Entertainment, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Netter Digital
Entertainment, Inc. and Subsidiaries as of June 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Netter Digital Entertainment,
Inc. and Subsidiaries as of June 30, 1998 and the results of its operations and
its cash flows for the years ended June 30, 1998 and 1997 in conformity with
generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
-------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
New York, New York
August 22, 1998
F-2
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,634,809
Accounts receivable, net of allowances of $46,000 2,285,011
Inventories 1,631,025
Due from officer 155,897
Production costs 251,632
Other 134,537
--------------
TOTAL CURRENT ASSETS 6,092,911
EQUIPMENT, net 3,157,394
GOODWILL, net 1,938,434
DEPOSITS AND OTHER ASSETS 333,760
--------------
$ 11,522,499
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and production fee advances $ 2,304,092
Accrued expenses 265,582
Deferred revenue 1,106,957
Due to stockholder 36,497
Credit facilities 525,717
Current portion of capital lease obligations 734,329
--------------
TOTAL CURRENT LIABILITIES 4,973,174
--------------
CAPITAL LEASE OBLIGATIONS 1,337,186
MINORITY INTEREST 500
--------------
STOCKHOLDERS' EQUITY :
Preferred stock, $.001 par value, 2,000,000 shares
authorized; 51,859 shares issued and outstanding 304,366
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,334,405 shares issued and outstanding 33,344
Additional paid-in capital 4,726,171
Retained Earnings 147,758
--------------
TOTAL STOCKHOLDERS EQUITY 5,211,639
--------------
$ 11,522,499
=============
See notes to financial statements.
F-3
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended June 30,
---------------------------
1998 1997
---------------------------
REVENUES:
Production $ 28,396,765 $ 23,300,891
Sales 3,915,786 2,410,987
------------ ------------
TOTAL REVENUES 32,312,551 25,711,878
------------ ------------
EXPENSES:
Production 25,288,142 21,258,498
Cost of goods sold 2,039,390 1,155,937
General and administrative 4,504,742 3,097,249
Amortization of goodwill 104,311 43,463
------------ ------------
TOTAL EXPENSES 31,936,585 25,555,147
------------ ------------
OPERATING INCOME 375,966 156,731
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 21,785 83,414
Interest (expense) (206,090) (59,054)
Other income 10,337 33,285
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (173,968) 57,645
------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 201,998 214,376
PROVISION FOR INCOME TAXES 41,000 24,000
------------ ------------
NET INCOME (LOSS) $ 160,998 $ 190,376
============ ============
Cumulative preferred stock dividend 42,530 14,354
------------ ------------
Net Income to common shareholders $ 118,468 $ 176,022
============ ============
Net Income per common share,
basic and assuming dilution $ 0.04 $ 0.06
============ ============
Weighted average common shares outstanding 3,334,552 3,056,944
============ ============
See notes to financial statements.
F-4
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Additional Earnings Total
Number of Number of Paid in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
--------- -------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 - $ - 2,795,000 $ 27,950 $ 3,533,331 $ (146,732) $ 3,414,549
Stock issued in connection
with acquisition - - 522,221 5,222 1,107,109 - 1,112,331
Stock issued in connection
with settlement - - 10,000 100 35,803 - 35,903
Sale of preferred stock 47,145 261,939 - - - - 261,939
Stock dividend 1,595 14,354 - - - (14,354) -
Net income - - - - - 190,376 190,376
--------- -------- ---------- --------- -------- ----------- ------------
Balance, June 30, 1997 48,740 $ 276,293 3,327,221 $ 33,272 $4,676,243 $ 29,290 $ 5,015,098
Stock issued in connection
with settlement - - 11,729 117 49,883 - 50,000
Retirement of common stock - - (4,545) (45) 45 - -
Stock dividend 3,119 28,073 - - - (28,073) -
Accrual of stock dividend
payable - - - - - (14,457) (14,457)
Net income - - - - - 160,998 160,998
--------- --------- ---------- --------- --------- ----------- -----------
Balance, June 30, 1998 51,859 $ 304,366 3,334,405 $ 33,344 $4,726,171 $ 147,758 5,211,639
========= ========= ========== ========= ========= =========== ============
<FN>
<FN1>
See notes to financial statements
</FN>
</TABLE>
F-5
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 160,998 $ 190,376
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 520,307 238,087
Amortization 104,311 43,463
Gain on disposal of equipment (10,621) -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,418,930) (371,372)
(Increase) in inventories (640,970) (62,973)
Decrease (increase) in production costs 43,087 (229,510)
(Increase) decrease in other current assets (16,424) 13,945
(Increase) decrease in deposits and other assets (38,912) (211,330)
(Decrease) increase in accounts payable (107,550) 1,426,240
(Decrease) in accrued expenses (50,493) (117,201)
Increase in deferred revenue 576,755 530,202
--------------- ---------------
(1,653,437) 978,001
--------------- ---------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (878,442) 1,449,927
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (138,770) (647,120)
Proceeds from sale of equipment 22,866 -
Advances to subsidiary prior to acquisition - (275,000)
--------------- ---------------
NET CASH (USED IN) INVESTING ACTIVITIES (115,904) (922,120)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquistion costs net of cash required - (342,989)
Issuance of preferred stock - 261,939
Decrease in due from officer - 38,979
Proceed from line of credit 458,606 -
Notes payable principal payments (127,820) (75,675)
Principal payments of capital lease obligations (276,153) (16,762)
--------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 54,633 (134,508)
--------------- -------------
NET (DECREASE) IN CASH (939,713) 393,299
Cash, beginning of year 2,574,522 2,181,223
--------------- -------------
Cash, end of year $ 1,634,809 $ 2,574,522
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 206,090 $ 78,918
Income taxes $ 10,791 $ 1,630
Noncash activity:
Issuance of common stock in connection with
acquisition of Videssence $ - $ 1,112,330
Stock issued for legal fee settlement $ 50,000 $ 35,903
Stock dividend $ 28,073 $ 14,354 -
Purchase of equipment through leases payable $ 2,119,407 $ 202,589
<FN>
<FN1>
See notes to financial statements.
</FN>
</TABLE>
F-6
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1997
1. ORGANIZATION:
Netter Digital Entertainment, Inc. was incorporated in September 1995 under the
laws of the State of Delaware. Babylonian Productions, Inc., a majority owned
subsidiary (51%), was incorporated in June 1993 under the laws of the State of
California. Netter Digital Entertainment, Inc. and Babylonian Productions, Inc.
are collectively referred to as "NDEI". NDEI is engaged in the development,
acquisition and production of television series, made for television movies,
documentaries, theatrical motion pictures and multimedia products.
On January 10, 1997, NDEI purchased all the outstanding shares of Videssence,
Inc. ("Videssence") in exchange for 522,221 shares of NDEI's Common Stock. This
transaction was completed pursuant to an Agreement and Plan of Merger (the
"Plan") dated April 26, 1996 between Videssence and NDEI. Under the Plan the
Videssence shareholders can earn up to an additional maximum of 788,000 shares
of NDEI's common stock upon Videssence achieving certain performance based
criteria over the next five years. Acquisition costs amounted to $495,998. This
merger was accounted for as a purchase. Videssence designs, manufactures and
distributes media lighting products which incorporate the patented SRGB(tm)
light technology for the illumination of studios, stages and other production
environments in the sound stage, media picture, theater and other theme park
industries. Hereafter, NDEI and Videssence are collectively referred to as
(the "Company").
The following unaudited pro-forma information reflects the results of operations
of the Company as though the merger had been consummated as of July 1, 1996:
Year ended June
30, 1997
-----------------
Revenue $ 28,096,332
=================
Net loss $ (111,589)
=================
Net loss to common shareholders $ (125,943)
=================
Net loss per share $ (0.04)
=================
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Principles of consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. The accounts of Videssence
have been included for the year ended June 30, 1998 and the six months ended
June 30, 1997 All material intercompany transactions have been eliminated.
B. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reporting amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
C. Cash and cash equivalents - The Company considers all highly liquid temporary
cash investments with an original maturity of three months or less when
purchased, to be cash equivalents.
D. Revenue recognition:
Production revenues - The Company derives revenues primarily from providing
contract production services to distributors including producers-profit
participation. Revenues are recognized as earned. Amounts advanced under
production contracts are deferred and not recognized as revenues until
obligations under such contracts are performed. Conversely, amounts expended
under production contracts not yet reimbursed are recorded as a receivable. To
date, the Company has not recognized any material revenues from
producers-profit participation.
E. Inventories - Inventories are recorded at the lower of cost or market. Cost
is determined using the average cost method.
F. Equipment - Equipment is recorded at cost. Depreciation is calculated using
the straight line method based on the estimated useful lives of the related
assets, which range from three to seven years. When assets are retired or
otherwise disposed of, the costs and related accumulated depreciation or
amortization are removed from the accounts and any gain or loss on disposal is
recognized currently.
Repairs and maintenance are expensed as incurred. Expenditures which
significantly increase values, change capacities, or extend useful lives are
capitalized.
G. Product warranty - The Company accrues for an estimate of expenses relating
to the one-year warranty covering all parts and labor relating to the sale of
its products.
H. Net income per common share - The Company has adopted Statement of Financial
Accounting Standard No. 128, "Earnings per Share;" specifying the computation,
presentation, and disclosure requirements of earnings per share information.
Basic earnings per share has been calculated based upon the weighted average
number of common shares outstanding. Stock options and convertible preferred
stock have been excluded as common stock equivalents in the diluted earnings per
F-8
share because they are either antidilutive, or their effect is not material.
There is no effect on earnings per share information for the year ended June 30,
1997 related to the adoption of this Standard.
I. Income taxes - The Company recognizes deferred tax assets and liabilities
based on the difference between the financial statements carrying amount and the
tax basis of assets and liabilities, using the effective tax rates in the years
in which the differences are expected to reverse. A valuation allowance related
to deferred tax assets is also recorded when it is probable that some or all of
the deferred tax asset will not be realized.
J. Concentration of credit risk - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consisting of cash and
trade receivables. At times the cash in any one bank may exceed the FDIC
$100,000 limit. The Company places its cash with high credit quality financial
institutions. In regards to trade receivables, the risk is relatively limited
due to the customers being national and foreign distributors.
K. Minority interest - Minority interest represents the minority shareholders'
proportionate share of the equity of the Company's subsidiary, Babylonian
Productions, Inc. which was 49% at June 30, 1998 and 1997. The minority interest
is adjusted for the minority's share of the earnings or loss of Babylonian
Productions, Inc.
L. Stock based compensation - The Company accounts for stock transactions in
accordance with APB Opinion No.25, "Accounting for Stock Issued to Employees."
In accordance with Statement of Financial Accounting Standards No.123,
"Accounting for Stock based Compensation," and has adopted the pro forma
disclosure requirements of Statement No.123.
M. Fair value of financial instruments - The carrying amounts reported in the
balance sheet for cash, receivables, accounts payable, and accrued expenses
approximate fair value based on the short-term maturity of these instruments.
N. Goodwill - Goodwill resulting from the acquisition of Videssence represents
the remaining unamortized value of the excess of the purchase price over the
fair value of the net assets of Videssence. Goodwill is amortized on a
straight line basis over a period of 20 years.
O. Impairment of long - lived assets - The Company reviews long-lived assets for
impairment whenever circumstances and situations change such that there is an
indication that the carrying amounts may not be recovered. At June 30, 1998,
the Company believes that there has been no impairment of its long-lived assets.
F-9
3. BUSINESS SEGMENTS
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In 1997
the Company, with the acquisition of Videssence, operates in two business
segments, entertainment and manufacturing.
Summarized financial information of the business segments are as follows:
<TABLE>
For the year ended June 30, 1998 Entertainment Manufacturing Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenue $ 28,396,765 $ 3,915,786 $ 32,312,551
=============== =============== ===============
Operating profit (loss) $ 775,748 $ (399,782) $ 375,966
=============== =============== ===============
Net income (loss) $ 694,328 $ (533,330) $ 160,998
=============== =============== ===============
Identifiable assets $ 6,222,688 $ 5,299,811 $ 11,522,499
=============== =============== ===============
Depreciation and amortization $ 432,075 $ 192,543 $ 624,618
=============== =============== ===============
Capital expenditures $ 2,217,115 $ 41,062 $ 2,258,177
=============== =============== ===============
For the year ended June 30, 1997 Entertainment Manufacturing Total
--------------- --------------- ---------------
Revenue $ 23,300,891 $ 2,410,987 $ 25,711,878
=============== =============== ===============
Operating profit $ 48,036 $ 108,695 $ 156,731
=============== =============== ===============
Net income $ 145,115 $ 45,261 $ 190,376
=============== =============== ===============
Identifiable assets $ 4,753,204 $ 4,030,037 $ 8,783,241
=============== =============== ===============
Depreciation and amortization $ 198,487 $ 83,063 $ 281,550
=============== =============== ===============
Capital expenditures $ 817,055 $ 32,654 $ 849,709
=============== =============== ===============
</TABLE>
4. INVENTORIES:
Inventories consist of the following:
Raw Material $ 943,472
Work in Process 183,657
Finished Goods 503,896
-------------
$ 1,631,025
=============
F-10
5. DUE FROM OFFICER:
Represents a promissory note due from the Company's Chief Executive Officer,
bearing interest at 7.25% per annum. The unpaid principal balance and accrued
interest was due on May 20, 1998 and extended to May 20, 1999 with the approval
of the Company's Board of Directors. All unpaid accrued interest through June
30, 1998 was paid subsequent to that date. The Board has agreed to allow the
note to be repaid in shares of the Company's stock. The stock repayment
required is 110% of the outstanding loan amount which will be priced at the fair
market value on the date of repayment.
6. RELATED PARTY TRANSACTION:
During the years ended June 30, 1998 and 1997, the Company rented trailers, in
connection with one of its productions, for approximately $119,000 per annum,
from a company which is 50% owned by an officer of the Company and his spouse.
During fiscal year ended June 30, 1997, the Company leased some of its recording
equipment for approximately $55,000. The supplier is a company owned by an
officer of the Company's son and administered by the officer's wife.
In March 1996, the Company entered into a consulting agreement which expired in
February 1997, with an individual who through March 1997 was also a member of
the Company's Board of Directors. In March 1997, the Company entered into a new
six month consulting agreement with the same individual for monthly fee of
$3,000.
In March 1998, the Company entered into a one year consulting agreement, with a
former member of the Company's Board of Directors. The agreement has a minimum
annual guarantee of $50,000 and incentives based on additional projects
initiated by the consultant.
7. PRODUCTION COSTS:
Production costs consist of the following:
Story rights and scenarios $ 251,632
==========
Production costs are deferred and will be amortized under the Individual Film
Forecast Method. Production costs will be amortized in relation to the revenue
recognized from each production, and amortization will be calculated based on
management's latest estimate of the production's gross profit margin over its
remaining life, which requires the Company to use estimates of the future
revenue generating potential of each production. Such estimates are subject to a
variety of cost factors. These estimates will be re-evaluated periodically and,
when necessary, production costs will be written down to net realizable value.
F-11
8. EQUIPMENT:
Equipment consists of the following at June 30, 1998:
Machinery and equipment $ 114,711
Leasehold improvement 108,916
Furniture and office equipment 243,235
Computer equipment 370,524
Post-production, animation and
compositing equipment 3,032,181
Rental lights and grips 72,007
------------
3,941,574
Less: accumulated depreciation 784,180
------------
$ 3,157,394
============
At June 30, 1998 the Company has $2,378,071 in equipment under capital leases
as follows:
Furniture and office equipment $ 212,830
Computer equipment 150,148
Post-production, animation and
compositing equipment 2,015,093
------------
$ 2,378,071
============
9. GOODWILL:
Goodwill, which relates to the acquisition of Videssence consists of the
following:
Purchase price, including acquisition costs $ 1,608,329
Net fair value of liabilities assumed 477,880
------------
Cost in excess of net book value of assets
acquired 2,086,209
Less: accumulated amortization 147,775
------------
$ 1,938,434
============
F-12
10. DEBT:
Debt consists of the following:
Line of credit from bank for up to $750,000,
monthly payments of interest at 2% above the $ 458,606
banks reference rate(10.50% at June 30, 1998)
Note payable to bank, payable in monthly principal
payments of $6,667, plus interest at the bank's 67,111
reference rate plus 2.50%(11.00% at June 30, 1998)
The note matures on June 30, 1999.
Notes payable on demand to stockholder, bearing
interest at 10% per annum. Notes are subordinate to 36,497
the bank borrowings. -----------
$ 562,214
===========
The estimated fair value of the Company's debt approximates its carrying amount.
11. CAPITAL LEASE OBLIGATIONS
Current Long-term
portion portion Total
----------- ----------- -----------
Total minimum lease payments $ 893,995 $ 1,456,266 $ 2,350,261
Less: amounts representing 159,666 119,080 278,746
interest
----------- ----------- -----------
Amounts representing principal $ 734,329 $ 1,337,186 $ 2,071,515
=========== =========== ===========
12. COMMITMENT AND CONTINGENCIES:
The Company leased its principal executive television production offices on a
month to month basis through June 1997. In July 1997 the Company entered into a
new seven year lease agreement for its principal offices expiring in June 2004
at an annual rental of $277,000 with the option to extend the lease for two
additional five years terms. The leases for the two studio facilities with
an annual minimum rental of $307,000, and $78,000 both expire in June 1999. The
Company also leases space for its manufacturing facilities under a
noncancellable three year operating lease requiring annual rent of $77,000
expiring November 2000. Rent expense under all operating leases for the years
ended June 30, 1998 and 1997 including its manufacturing facilities were
approximately $785,000 and $509,000, respectively.
F-13
The future minimum rental payments as of June 30, 1998 are as follows:
Year ended June 30,
1999 $ 758,949
2000 $ 359,034
2001 $ 311,770
2002 $ 276,200
2003 $ 276,200
13. STOCKHOLDERS' EQUITY:
In September 1995, the Company issued an aggregate of 125,000 three year
warrants in connection with a bridge financing. Each warrant is exercisable for
one share of common stock at a price of $4.00 per share. Through June 30, 1998,
75,000 of these warrants were exercised for proceeds of $300,000.
In November 1995, the Company completed a public offering of its securities,
selling 860,000 shares of common stock and 430,000 warrants for net proceeds of
approximately $3,200,000. The warrants are exercisable to purchase one share of
common stock at a price of $6.50 per share. The warrants are exercisable at any
time after issuance and expire in November 1998. The underwriters of the public
offering received a warrant to purchase up to 129,000 shares or warrants, or any
combination thereof. The warrant is exercisable for a period of four years
commencing November 20, 1996 at an exercise price of $6.00 per share and $.012
per warrant.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, $.001
par value, the terms of which (including, without limitation, dividend rate,
conversion rates, voting rights, terms of redemption and liquidation
preferences) may be fixed by the Board of Directors at their sole discretion.
During the year ended June 30, 1997 the Company sold 47,145 shares of Series A
Cumulative, Convertible Preferred Stock ("Series A Preferred Stock") at a price
of $9.00 per share. Dividends will be paid in nonassessable shares of Series A
Preferred Stock in an amount per share equal to 10% per annum. Each share of
Series A Preferred Stock is convertible at any time at the option of the holder
into three shares of common stock. The Series A Preferred Stock is redeemable,
in whole or in part, at the option of the Company, for cash at a redemption
price of $9.00 per share.
Stock Options and Warrants
The Company adopted a Stock Option Plan ("Plan") in September 1995. The Plan is
administered by a committee of two ("Committee") appointed by the Board of
Directors and provides that the Committee has sole discretion to select options
and to establish terms and conditions of each option, subject to provisions of
the Plan. If options granted are "incentive stock options", the exercise price
of the options may not be less than 100% of the fair market value of the
F-14
Company's common stock on the date of grant (110% of the fair market value if
the grant is to an employee who owns more than 10% of the outstanding common
stock). Nonstatutory options may be granted under the Plan at an exercise price
of not less than 85% of fair market value of the common stock at the date of
grant. The maximum grant term is 10 years. The Plan is designed for officers,
directors, and other key employees and is authorized to grant up to 500,000
options. As of June 30, 1998, 422,000 options have been granted at price
ranging from $1.81 to $10.25 per share and no options have been exercised.
In December 1997 the Company adopted the 1997 Incentive Stock Option Plan
("1997 Plan"). The 1997 Plan is administered by the Board of Directors (the
"Board") and provides that the Board has sole discretion to grant options and to
establish terms and conditions of each option, subject to provisions of the
Plan. If options granted are "incentive stock options", the exercise price of
the options may not be less than 100% of the fair market value of the Company's
common stock on the date of grant (110% of the fair market value if the grant is
to an employee who owns more than 10% of the outstanding common stock). The
maximum grant term is 10 years. The Plan is designed for officers, employee
directors, and other key employees and is authorized to grant up to 600,000
options. As of June 30, 1998, 100,000 options have been granted at prices of
$2.25 - $2.48 per share and no options have been exercised.
Additionally in December 1997 the Company adopted the 1997 Directors' Stock
Option Plan ("1997 Directors' Plan") The 1997 Directors' Plan is administered by
a committee of the Board of Directors and provides that the committee shall
adopt all rules and regulations and make other determinations that are
desirable for the administration of the 1997 Directors' Plan. Each Non-
Employee Director shall be automatically granted 30,000 options to purchase
shares of common stock upon initial election to the Board and will be granted
10,000 additional options upon each subsequent reelection to the Board. The
purchase price of these options shall be the fair market value on the date of
the grant. The 1997 Directors' Plan is designed for Non-Employee Directors
and is authorized to grant up to 350,000 options. As of June 30, 1998, 50,000
options have been granted at a price of $2.88 per share and no options have been
exercised.
For disclosure purposes the fair value of each stock option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for stock options granted during the
years ended June 30, 1998 and 1997, respectively: annual dividends of $0.00 for
both years, expected volatility of 50%, risk-free interest rate of 6.0% and
expected life from two to five years for all grants. The weighted- average fair
values of the stock options granted during the years ended June 30, 1998 and
1997 were $1.32 and $1.89.
If the Company recognized compensation cost for the employee stock option plan
in accordance with SFAS No. 123, the Company's pro forma net loss and loss per
share would have been $(221,000) and $(0.07) in 1998 and $(382,000) and $(0.13)
in 1997.
F-15
The following table summarizes the changes in options and warrants outstanding
and the related price ranges for shares of the Company's common stock:
<TABLE>
Options Warrants
------------------------------------- -------------------------------------
Number Price Number of Number Price Number of
of Shares Per Share Shares of Shares Per Share Shares
Range Exercisable Range Exercisable
---------- ------------ ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
June 30, 1996 402,000 $5.00-$10.25 120,400 683,500 $4.00-$6.50 50,000
=========== ===========
Granted 220,000 $3.00-$4.38 - - -
Exercised - - - (10,000) -
Canceled (100,000) - - - -
----------- -----------
Outstanding at
June 30, 1997 522,000 $3.00-$10.25 206,800 673,500 $4.00-$6.50 673,500
=========== ===========
Granted 539,500 $1.81-$7.50 - 64,145 $3.50-$7.50
Exercised - - - - -
Canceled (139,300) - - - -
----------- -----------
Outstanding at
June 30, 1998 922,200 $1.81-$10.25 556,750 737,645 $3.50-$7.50 737,645
=========== =========== =========== ===========
14. EMPLOYMENT AGREEMENTS:
The Company has agreements for the services of certain of its officers. Such
agreements expire in September 2000 and provide for a base compensation of
approximately $700,000. These agreements also provide for additional
compensation based on certain revenue or other operating results and for
payments by the Company in the event of death, disability, or termination.
The aggregate amounts paid pursuant to such agreements was $709,000 and $673,000
for the years ended June 30, 1998 and June 30, 1997, respectively.
15. INCOME TAXES:
The provision for income taxes consists of the following:
June 30,
---------------------------
1998 1997
----------- -----------
Current federal and state income taxes $ 41,000 $ 24,000
=========== ===========
F-16
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes is
as follows:
June 30,
---------------------------
1998 1997
----------- -----------
Income tax provision (benefit)
computed at the statutory rate $ 69,000 $ 73,000
Income tax benefit recognized (72,020) (41,000)
Tax rate differences - (14,000)
Provision for state income taxes 44,020 6,000
----------- -----------
Income tax provision $ 41,000 $ 24,000
=========== ===========
The Company has a net operating loss carryforward for tax purposes totaling
approximately $360,000 at June 30, 1998 expiring in the years 2010 to 2013.
Listed below are the tax effects of the items related to the net Company's tax
asset:
Tax benefit of net operating loss carryforward $ 146,000
Tax credits carryforward 16,000
Section 263A inventory capitalization 112,000
Expenses not currently deductible for income tax purposes (204,000)
-----------
Total 70,000
Valuation allowance (38,000)
-----------
Net deferred tax asset recorded $ 32,000
===========
16. SIGNIFICANT CONCENTRATIONS:
During the year ended June 30, 1998 and 1997, the Company derived approximately
93% and 99%, respectively, of its entertainment revenue from one distributor. In
July 1998, the distributor granted a new contract for a spin-off of the
Company's previous production through approximately May 1999. The distributor
has options for an additional two years of this production with the Company. If
the distributor's options are not renewed the Company's financial condition and
operations could be adversely affected. Included in cash and cash equivalents
is approximately $600,000 of advances from such distributor.
F-17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on November 16, 1998.
14
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of regulation S-B).
Exhibit Description
Number
- ------- ------------
2.1 Agreement and Plan of Merger and Reorganization, as amended. (5)
2.2 Amendment No. 2 to the Agreement of Merger and Reorganization. (6)
2.3 Amendment No. 3 to the Agreement of Merger and Reorganization. (7)
2.4 Amendment No. 4 to the Agreement of Merger and Reorganization. (7)
2.5 Amendment No. 5 to the Agreement of Merger and Reorganization. (7)
3.1 Certificate of Incorporation. (1)
3.2 Bylaws. (1)
4.1 Certificate of Designation. (8)
10.1 Mr. Netter's Employment Agreement. (1)
10.2 Mr. Copeland's Employment Agreement. (1)
10.3 "Babylon 5" Production Agreement. (1)
10.4 1995 Stock Option Plan. (1)
10.5 Talbot Consulting/Completion Fee Agreement. (6)
10.6 Warrant, dated September 4, 1997, issued to W.J. Gallagher & Company.
(9)
10.7 Letter Agreement, dated September 1, 1997, between the Company and
H.D. Brous & Co., Inc. (9)
10.8 Stock Option Agreement, dated September 1, 1997, between the Company
and H.D. Brous & Co., Inc. (9)
10.9 Lease for premises at 5125 Lankershim Blvd., North Hollywood, CA. (9)
10.10 Equipment and furniture lease with Lyon Credit Corporation. (9)
10.11 Equipment lease with Terminal Marketing Company. (9)
10.12 Installment note and Loan and Security Agreement with Comerica Bank.
(9)
10.13 Mr. Costa's Employment Agreement. (9)
10.14 Mr. Francis's Employment Agreement. (9)
10.15 Mr. Cercone's Employment Agreement. (9)
10.16 Letter agreement, dated October 20, 1997, between the Company and
Martin E. Janis & Company, Inc. (10)
10.17 Consulting Agreement, dated October 1, 1997, by and between Netter
Digital Entertainment, Inc and Geoffrey Talbot. (11)
10.18 Stock Option Agreement, dated October 1, 1997, by and between Netter
Digital Entertainment, Inc. and Geoffrey Talbot. (11)
10.19 Equipment lease with Comerica Leasing Corporation. (12)
10.20 Equipment lease with Digital Financial Services. (12)
10.21 Amendment to Employment Agreement, Douglas Netter. (13)
10.22 Amendment to Employment Agreement, John Copeland. (13)
10.23 Equipment lease with Comerica Leasing, Schedules No. 2 and 3.(14)(15)
10.24 GE Capital Corporation Master lease, Schedules No. 1 and 2.
(14)(15)
21 List of Subsidiaries. (9)
27 Financial Data Schedule. (13)
15
- ---------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration Number is 33-97402-LA) declared effective November
20, 1995.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A dated November 20, 1995.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
December 31, 1995.
(4) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
March 31, 1996.
(5) Incorporated by reference to the Company's Proxy Statement , dated June 26,
1996 for the approval/disapproval of the proposed merger between the Company
and Videssence, Inc.
(6) Incorporated by reference to the Company's Form 10-KSB for the year ended
June 30, 1996.
(7) Incorporated by reference to the Company's Form 8-K dated January 10, 1997.
(8) Incorporated by reference to the Company's Form 10-QSB for the quarter ended
September 30, 1996.
(9) Incorporated by refernce to the Company's Form 10-KSB for the year ended
June 30, 1997.
(10)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
(11)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
December 31, 1997.
(12)Incorporated by reference to the Company's Form 10-QSB for the quarter ended
March 31, 1998.
(13)Incorporated by reference to the Company's Form 10-KSB for the year ended
June 30, 1998, filed on September 25, 1998.
(14)Certain portions of this exhibit have been redacted and are subject to a
request for confidential treatment. The entirety of this exhibit has been
filed separately with the Commission.
(15)Filed herewith.
16
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Dated: January 20, 1999 By: /s/Chad Kalebic
-------------------
Chad Kalebic, Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Douglas Netter Chairman of the Board of January 20, 1999
Douglas Netter Directors, Chief Executive
Officer, and President
/s/John Copeland Executive Vice President and January 20, 1999
John Copeland Secretary/Director
/s/Thomas L. Jorgenson Executive Vice President and January 20, 1999
Thomas L. Jorgenson Chief Operating Officer
/s/Chad Kalebic Chief Financial Officer January 20, 1999
Chad Kalebic (Chief Accounting Officer)
/s/Paul Costa President, Videssence and January 20, 1999
Paul Costa Director
/s/Dr. Leonard Silverman Director January 20, 1999
Dr. Leonard Silverman
/s/Kate Netter Forte Director January 20, 1999
Kate Netter Forte
/s/Lennart Ringquist Director January 20, 1999
Lennart Ringquist
17
EXHIBIT INDEX
Exhibit Description
Number
10.23 Equipment lease with Comerica Leasing, Schedules No. 2 and 3.*
10.24 GE Capital Corporation Master lease, Schedules No. 1 and
2.*
- ----------------------
* Certain portions of this exhibit have been redacted and are subject to a
request for confidential treatment. The entirety of this exhibit has been
filed separately with the Commission.
</TABLE>
Dated: May 15, 1998 Lease Agreement
Schedule No. 002
COMERICA LEASING, A DIVISION OF COMERICA BANK
LEASE SCHEDULE
1. DESCRIPTION OF LEASE: Lease Agreement dated April 8, 1998, by and between
COMERICA LEASING, A DIVISION OF COMERICA BANK (herein "CLCB") as Lessor, and
NETTER DIGITAL ENTERTAINMENT, INC. as Lessee (herein called "Lease Agreement").
2. DESCRIPTION OF EQUIPMENT: Equipment Cost $225,782.53
"As further described on attached Exhibit A".
3. LOCATION: The equipment described above shall be located at 5125
Lankershim Blvd., North Hollywood, CA 91601.
4. TERM; RENTAL: The Term of the Lease Agreement for the Equipment described
in this Schedule shall be in accordance with the provisions of the Lease
Agreement and shall continue until all rental payments are fully paid. Lessee
agrees to pay CLCB as rental payments aggregating * plus any applicable
sales and/or use taxes thereon payable in 36 monthly payments of * each,
plus any applicable sales and/or use taxes commencing June 15, 1998, and on
the same calendar day of each succeeding like period until fully paid.
THE RENTAL PAYMENTS SHALL BE REMITTED TO CLCB AT P.O. DRAWER 67-042, DETROIT,
MICHIGAN 48267, unless CLCB specifies otherwise in writing.
5. INSURANCE: Lessee agrees to maintain adequate property damage insurance in
accordance with the terms of the Lease Agreement, but in any event not less
than the sum of the payments due, protecting CLCB as a loss payee. The
minimum amount indicated above shall not be construed to imply such amount
will be or is adequate, but rather as a minimum amount.
6. UCC 2A: In accordance with Section 2A of the Michigan Uniform Commercial
Code (MCLA Section 440.3101 et seq.) ("UCC") Lessee acknowledges either (a)
that Lessee has reviewed and approved any written Supply Contract (as defined
by UCC Section 2A-103(i)(y)) covering the Equipment purchased from the
"Supplier" (as defined by UCC Section 2A- thereof for lease to Lessee or (b)
that Lessor has informed or advised Lessee, in writing, either previously or
by this Lease Schedule of the following: (i) the identity of the supplier;
(ii) that the Lessee may have rights under the Supply Contract; and (iii)
that the Lessee may contact the Supplier for a description of any such rights
lessee may have under the Supply Contract.
Lessee acknowledges that Lessee has reviewed and approved the Purchase Order,
Supply Contract or Purchase Agreement covering the Equipment purchased from
the seller or supplier thereof for lease to Lessee.
Lessee's Initials: /s/CK
7. ADDITIONAL CONDITIONS: At the end of the Lease term, Lessee may purchase
the equipment for $1.00 provided no event of default shall have occurred and
been left unremedied.
LESSEE ACKNOWLEDGES THAT LESSOR IS A DIVISION OF COMERICA BANK AND NOT A
SEPARATE BODY CORPORATE.
The foregoing is hereby approved and agreed to by the undersigned as a
Schedule to and a part of the Lease Agreement, the provisions of which are
hereby incorporated herein by reference and which shall govern,
notwithstanding anything contrary or inconsistent herein.
COMERICA LEASING, A DIVISION OF COMERICA BANK
(Lessor)
By: /s/ Mark H. Freund
Name: Mark H. Freund
Its: Vice President
NETTER DIGITAL ENTERTAINMENT, INC.
(Lessee)
Address: 5125 Lankershim. Blvd.,
North Hollywood, CA 91601
By: /s/ Chad Kalebic
Name: Chad Kalebic
Its: Chief Financial Officer
Dated: June 22, 1998 Lease Agreement No. 9818
Schedule No. 003
COMERICA LEASING, A DIVISION OF COMERICA BANK
LEASE SCHEDULE
1. DESCRIPTION OF LEASE: Lease Agreement dated April 8, 1998 , by and between
COMERICA LEASING, A DIVISION OF COMERICA BANK (herein "CLCB") as Lessor,
and NETTER DIGITAL ENTERTAINMENT, INC. as Lessee (herein called "Lease
Agreement").
2. DESCRIPTION OF EQUIPMENT: $214,187.25
"As further described on attached Exhibit A".
3. LOCATION: The equipment described above shall be located at 5125 Lankershim
Blvd., North Hollywood, CA 91601.
4. TERM; RENTAL: The Term of the Lease Agreement for the Equipment described in
this Schedule shall be in accordance with the provisions of the Lease
Agreement and shall continue until all rental payments are fully paid.
Lessee agrees to pay CLCB as rental payments aggregating * plus
any applicable sales and/or use taxes thereon payable in monthly payments
of * each, plus any applicable sales and/or use taxes commencing
July 15, 1998, and on the same calendar day of each succeeding like period
until fully paid. THE RENTAL PAYMENTS SHALL BE REMITTED TO CLCB AT P.O.
DRAWER 67-042, DETROIT, MICHIGAN 48267, unless CLCB specifies otherwise in
writing.
5. INSURANCE: Lessee agrees to maintain adequate property damage insurance in
accordance with the terms of the Lease Agreement, but in any event not less
than the sum of the payments due, protecting CLCB as a loss payee. The
minimum amount indicated above shall not be construed to imply such amount
will be or is adequate, but rather as a minimum amount.
6. UCC 2A: In accordance with Section 2A of the Michigan Uniform Commercial
Code (MCLA Section 440.3101 et seq.) ("UCC") Lessee acknowledges either (a)
that Lessee has reviewed and approved any written Supply Contract (as
defined by UCC Section 2A-103(i)(y)) covering the Equipment purchased from
the "Supplier" (as defined by UCC Section 2A-103(i)(x)) thereof for lease
to Lessee or (b) that Lessor has informed or advised Lessee, in writing,
either previously or by this Lease Schedule of the following: (i) the
identity of the supplier; (ii) that the Lessee may have rights under the
Supply Contract; and (iii) that the Lessee may contact the Supplier for a
description of any such rights lessee may have under the Supply Contract.
Lessee acknowledges that Lessee has reviewed and approved the Purchase
Order, Supply Contract or Purchase Agreement, covering the Equipment
purchased from the seller or supplier thereof for lease to Lessee.
Lessee's Initials: /s/CK
7. ADDITIONAL CONDITIONS: At the end of the Lease term, Lessee may purchase
the equipment for $1.00 provided no event of default shall have occurred
and been left unremedied.
LESSEE ACKNOWLEDGES THAT LESSOR IS A DIVISION OF COMERICA BANK AND NOT A
SEPARATE BODY CORPORATE.
The foregoing is hereby approved and agreed to by the undersigned as a
Schedule to and a part of the Lease Agreement, the provisions of which are
hereby incorporated herein by reference and which shall govern,
notwithstanding anything contrary or inconsistent herein.
COMERICA LEASING, A DIVISION OF COMERICA BANK
(Lessor)
By: /s/ Mark H. Freund
Name: Mark H. Freund
Its: Vice President
NETTER DIGITAL ENTERTAINMENT,
INC.
(Lessee)
Address: 5125 Lankershim Blvd., North
Hollywood, CA 91601
By: /s/ Chad Kalebic
Name: Chad Kalebic
Its: Chief Financial Officer
Quasi-M/L2800 (9/94)
MASTER LEASE AGREEMENT
(Quasi)
THIS MASTER LEASE AGREEMENT, dated as of 6/18/98 ("Agreement"), between
General Electric Capital Corporation, with an office at 44 Old Ridgebury
Road, Danbury, CT 06810 (hereinafter called, together with its successors and
assigns, if any,"Lessor"), and Netter Digital Entertainment, Inc., a
corporation organized and existing under the laws of the State of Delaware
with its mailing address and chief place of business at 5125 Lankershim Blvd.,
North Hollywood, CA 91601 (hereinafter called "Lessee").
WITNESSETH:
I. LEASING:
(a) Subject to the terms and conditions set forth below, Lessor agrees to
lease to Lessee, and Lessee agrees to lease from Lessor, the equipment
("Equipment") described in Annex A to any schedule hereto ("Schedule") Terms
defined in a Schedule and not otherwise defined herein shall have the
meanings ascribed to them in such Schedule. (b) The obligation of Lessor to
purchase Equipment from the manufacturer or supplier thereof ("Supplier") and
to lease the same to Lessee under any Schedule shall be subject to receipt by
Lessor, prior to the Lease Commencement Date (with respect to such Equipment),
of each of the following documents in form and substance satisfactory to
Lessor: (i) a Schedule relating to the Equipment then to be leased hereunder,
(ii) paid in full invoice or other evidence of ownership of the Equipment,
(iii) evidence of insurance which complies with the requirements of Section
IX, and (iv) such other documents as Lessor may reasonably request. As a
further condition to such obligations of Lessor, Lessee shall, upon delivery
of such Equipment (but not later than the Last Delivery Date specified in the
applicable Schedule) execute and deliver to Lessor a Certificate of
Acceptance (in the form of Annex C to the applicable Schedule) covering such
Equipment. Lessor hereby appoints Lessee its agent for inspection and
acceptance of the Equipment from the Supplier. Upon execution by Lessee of
any Certificate of Acceptance, the Equipment described thereon shall be
deemed to have been delivered to, and irrevocably accepted by, Lessee for
lease hereunder.
II. TERM, RENT AND PAYMENT:
(a) The rent payable hereunder and Lessee's fight to use the Equipment shall
commence on the date of execution by Lessee of the Certificate of Acceptance
for such Equipment ("Lease Commencement Date"). The term of this Agreement
shall be the period specified in the applicable Schedule. If any term is
extended, the word "term" shall be deemed to refer to all extended terms,
and all provisions of this Agreement shall apply during any extended terms,
except as may be otherwise specifically provided in writing. (b) Rent shall
be paid to Lessor at its address stated above, except as otherwise directed
by Lessor. Payments of rent shall be in the amount set forth in, and due in
accordance with, the provisions of the applicable Schedule. If one or more
Advance Rentals are payable, such Advance Rental shall be (i) set forth on
the applicable Schedule, (ii) due upon acceptance by Lessor of such Schedule,
and (iii) when received by Lessor, applied to the first rent payment and
the balance, if any, to the final rental payment(s) under such Schedule. In
no event shall any Advance Rental or any other rent payments be refunded to
Lessee. If rent is not paid within ten days of its due date, Lessee agrees to
pay a late charge of five cents ($0.05) per dollar on, and in addition to,
the amount of such rent but not exceeding the lawful maximum, if any.
III. TAXES:
Lessee shall have no liability for taxes imposed by the United States of
America or any State or political subdivision thereof which are on or
measured by the net income of Lessor. Lessee shall report (to the extent that
it is legally permissible) and pay promptly all other taxes, fees and
assessments due, imposed, assessed or levied against any Equipment (or the
purchase, ownership, delivery, leasing, possession, use or operation thereof),
this Agreement (or any rentals or receipts hereunder), any Schedule, Lessor
or Lessee by any foreign, federal, state or local government or taxing
authority during or related to the term of this Agreement, including, without
limitation, all license and registration fees, and all sales, use, personal
property, excise, gross receipts, franchise, stamp or other taxes, imposts,
duties and charges, together with any penalties, fines or interest thereon
(all hereinafter called "Taxes"). Lessee shall (i) reimburse Lessor upon
receipt of written request for reimbursement for any Taxes charged to or
assessed against Lessor, (ii) on request of Lessor, submit to Lessor written
evidence of Lessee's payment of Taxes, (iii) send a copy thereof to Lessor.
IV. REPORTS:
(a) Lessee will notify Lessor in writing, within ten days after any tax or
other lien shall attach to any Equipment, of the full particulars thereof and
of the location of such Equipment on the date of such notification. (b)
Lessee will within 90 days of the close of each fiscal year of Lessee,
deliver to Lessor. Lessee's balance sheet and profit and loss statement,
certified by a recognized firm of certified public accountants. Upon request
Lessee will deliver to Lessor quarterly, within 90 days of the close
of each fiscal quarter of Lessee, in reasonable detail, copies of Lessee's
quarterly financial report certified by the chief financial officer of Lessee.
(c) Lessee will permit Lessor to inspect any Equipment during normal business
hours. (d) Lessee will keep the Equipment at the Equipment Location
(specified in the applicable Schedule) and will promptly notify Lessor of any
relocation of Equipment. Upon the written request of Lessor, Lessee will
notify Lessor forthwith in writing of the location of any Equipment as of the
date of such notification. (e) Lessee will promptly and fully report to
Lessor in writing if any Equipment is lost or damaged (where the estimated
repair costs would exceed 10% of its then fair market value), or is otherwise
involved in an accident causing personal injury or property damage. (f)
Within 60 days after any request by Lessor, Lessee will furnish a certificate
of an authorized officer of Lessee stating that he has reviewed the activities
of Lessee and that, to the best of his knowledge, there exists no default (as
described in Section XI) or event A hich with notice or lapse of time (or both)
would become such a default.
V. DELIVERY, USE AND OPERATION:
(a) All Equipment shall be shipped directly from the Supplier to Lessee. (b)
Lessee agrees that the Equipment will be used by Lessee solely in the conduct
of its business and in a manner complying with all applicable federal, state,
and local laws and regulations. (c) LESSEE SHALL NOT ASSIGN, MORTGAGE. SUBLET
OR HYPOTHECATE ANY EQUIPMENT, OR THE INTEREST OF LESSEE HEREUNDER, NOR SHALL
LESSEE REMOVE ANY EQUIPMENT FROM THE CONTINENTAL UNITED STATES, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE LESSOR. (d) Lessee will keep the Equipment free
and clear of all liens and encumbrances other than those which are granted in
favor of or result from acts of Lessor.
VI. SERVICE:
(a) Lessee will, at its sole expense, maintain each unit of Equipment in good
operating order, repair, condition and appearance in accordance with
manufacturer's recommendations, normal wear and tear excepted. Lessee shall,
if at any time requested by Lessor, affix in a prominent position on each unit
of Equipment plates, tags or other identifying labels showing ownership
thereof by Lessee and Lessor's security interest therein. (b) Lessee will not,
without the prior consent of Lessor, affix or install any accessory, equipment
or device on any Equipment if such addition will impair the originally
intended function or use of such Equipment. All additions, repairs, parts,
supplies, accessories, equipment, and devices furnished, attached or affixed
to any Equipment which are not readily removable shall be made only in
compliance with applicable law; and shall become subject to the lien of
Lessor. Lessee will not, without the prior written consent of Lessor and
subject to such conditions as Lessor may impose for its protection, affix or
install any Equipment to or in any other personal or real property. (c) Any
alterations or modifications to the Equipment that may, at any time during the
term of this Agreement, be required to comply with any applicable law, rule or
regulation shall be made at the expense of Lessee.
VII. STIPULATED LOSS VALUE:
Lessee shall promptly and fully notify Lessor in writing if any unit of
Equipment shall be or become worn out, lost, stolen, destroyed, irreparably
damaged in the reasonable determination of Lessee, or permanently rendered
unfit for use from any cause whatsoever (such occurrences being hereinafter
called "Casualty Occurrences"). On the rental payment date next succeeding a
Casualty Occurrence (the "Payment Date"), Lessee shall pay Lessor the sum of
(x) the Stipulated Loss Value of such unit calculated as of the rental payment
date next preceding such Casualty Occurrence ("Calculation Date"); and (y) all
rental and other amounts which are due hereunder as of the Payment Date. Upon
payment of all sums due hereunder, the term of this lease as to such unit
shall terminate and (except in the case of the loss, theft or complete
destruction of such unit) Lessor shall be entitled to recover possession of
such unit.
VIII. LOSS OR DAMAGE:
Lessee hereby assumes and shall bear the entire risk of any loss, theft,
damage to, or destruction of, any unit of Equipment from any cause whatsoever
from the time the Equipment is shipped to Lessee.
IX. INSURANCE:
Lessee agrees, at its own expense, to keep all Equipment insured for such
amounts and against such hazards as Lessor may require, including, but not
limited to, insurance for damage to or loss of such Equipment and liability
coverage for personal injuries, death or property damage, with Lessor named as
additional insured and with a loss payable clause in favor of Lessor, as its
interest may appear, irrespective of any breach of warranty or other act or
omission of Lessee. The insurance shall provide (i) liability coverage in an
amount equal to at least ONE MILLION U.S. DOLLARS ($1,000,000.00) total
liability per occurrence, and (ii) casual ty/property damage coverage in an
amount equal to the higher of the Stipulated Loss value or the full
replacement cost of the Equipment; or at such other amounts as may be
required by Lessor. All such policies shall be with companies, and on terms,
satisfactory to Lessor. Lessee agrees to deliver to Lessor evidence of
insurance satisfactory to Lessor. No insurance shall be subject to any
co-insurance clause. Lessee hereby appoints Lessor as Lessee's attorney-in-
fact to make proof of loss and claim for insurance, and to make adjustments
with insurers and to receive payment of and execute or endorse all documents,
checks or drafts in connection with payments made as a result of such
insurance policies. Any expense of Lessor in adjusting or collecting
insurance shall be borne by Lessee. Lessee will not make adjustments with
insurers except (i) with respect to claims for damage to any unit of
Equipment where the repair costs do not exceed 10% of such unit's fair market
value, or (ii) with Lessor's written consent. Said policies shall provide
that the insurance may not be altered or canceled by the insurer until after
thirty (30) days written notice to Lessor. Lessor may, at its option, apply
proceeds of insurance, in whole or in part, to (i) repair or replace
Equipment or any portion thereof, or (ii) satisfy any obligation of Lessee to
Lessor hereunder.
X. RETURN OF EQUIPMENT:
(a) Upon any expiration or termination of this Agreement or any Schedule,
Lessee shall promptly, at its own cost and expense: (i) perform any testing
and repairs required to place the affected units of Equipment in the same
condition and appearance as when received by Lessee (reasonable wear and tear
excepted) and in good working order for their originally intended purpose;
(ii) if deinstallation disassembly or crating is required, cause such units to
be deinstalled disassembled and crated by an authorized manufacturer's
representative or such other service person as is satisfactory to Lessor; and
(iii) return such units to a location within the continental United States as
Lessor shall direct. (b) Until Lessee has fully complied with the requirements
of Section X(a) above, Lessee's rent payment obligation and all other
obligations under this Agreement shall continue from month to month
notwithstanding any expiration or termination of the lease term. Lessor may
terminate such continued leasehold interest upon ten (10) days notice to
Lessee.
XI. DEFAULT:
(a) Lessor may in writing declare this Agreement in default if Lessee breaches
its obligation to pay rent or any other sum when due and fails to cure the
breach within ten (10) days; Lessee breaches any of its insurance obligations
under Section IX; Lessee breaches any of its other obligations to Lessor
hereunder or under any instrument, document or agreement between Lessor and
Lessee and fails to cure that breach within thirty (30) days after written
notice thereof-, any representation or warranty made by Lessee in connection
with this Agreement shall be false or misleading in any material respect;
Lessee becomes insolvent or ceases to do business as a going concern; any
Equipment is illegally used; or a petition is filed by or against Lessee
under any bankruptcy or insolvency laws. Such declaration shall apply to all
Schedules except as specifically excepted by Lessor. (b) After default at the
request of Lessor, Lessee shall comply with the provisions of Section X(a).
Lessee hereby authorizes Lessor to enter, with or without legal process, any
premises where any Equipment is believed to be and take possession thereof
Lessee shall, without further demand, forthwith pay to Lessor (i) as
liquidated damages for loss of a bargain and not as a penalty, the Stipulated
Loss Value of the Equipment (calculated as of the rental next preceding the
declaration of default), and (ii) all rentals and other sums then due
hereunder. Lessor may, but shall not be required to, sell Equipment at private
or public sale, in bulk or in parcels, with or without notice, and without
having the Equipment present at the place of sale; or Lessor may, but shall
not be required to, lease, otherwise dispose of or keep idle all or part of the
Equipment; and Lessor may use Lessee's premises for any or all of the
foregoing without liability for rent, costs, damages or otherwise. The
proceeds of sale, lease or other disposition, if any, shall be applied in the
following order of priorities: (1) to pay all of Lessor's costs, charges and
expenses incurred in taking, removing, holding, repairing and selling, leasing
or otherwise disposing of Equipment; then, (2) to the extent not previously
paid by Lessee, to pay Lessor all sums due from Lessee hereunder; then (3) to
reimburse to Lessee any sums previously paid by Lessee as liquidated damages;
and (4) any surplus shall be retained by Lessor. Lessee shall pay any
deficiency in (1) and (2) forthwith. (c) The foregoing remedies are
cumulative, and any or all thereof may be exercised in lieu of or in addition
to each other or any remedies at law, in equity, or under statute. Lessee
waives notice of sale or other disposition (and the time and place thereof),
and the manner and place of any advertising. Lessee shall pay Lessor's actual
attorney's fees incurred in connection with the enforcement, assertion,
defense or preservation of Lessor's rights and remedies hereunder, or if
prohibited by law, such lesser sum as may be permitted. Waiver of any default
shall not be a waiver of any other or subsequent default. (d) Any default
under the terms of this or any other agreement between Lessor and Lessee may
be declared by Lessor a default under this and any such other agreement.
XII. ASSIGNMENT:
Lessor may, without the consent of Lessee, assign this Agreement or any
Schedule. Lessee agrees that if Lessee receives written notice of an
assignment from Lessor, Lessee will pay an rent and other amounts payable
under any assigned Equipment Schedule to such assignee or as instructed by
Lessor. Lessee further agrees to confirm in writing receipt of a notice of
assignment as may be reasonable requested by assignee. Lessee hereby waives
and agrees not to assert against any such assignee any defense, set-off,
recoupment claim or counterclaim which Lessee has or may at any time have
against Lessor for any reason whatsoever.
XIII. NET LEASE; NO SET-OFF, ETC:
This Agreement is a net lease. Lessee's obligation to pay rent and other
amounts due hereunder shall be absolute and unconditional. Lessee shall not be
entitled to any abatement or reductions of, or set-offs against, said rent or
other amounts, including, without limitation, those arising or allegedly
arising out of claims (present or future, alleged or actual, and including
claims arising out of strict tort or negligence of Lessor) of Lessee against
Lessor under this Agreement or otherwise. Nor shall this Agreement terminate
or the obligations of Lessee be affected by reason of any defect in or damage
to, or loss of possession, use or destruction of, any Equipment from
whatsoever cause. It is the intention of the parties that rents and other
amounts due hereunder shall continue to be payable in all events in the
manner and at the times set forth herein unless the obligation to do so shall
have been terminated pursuant to the express terms hereof.
XIV. INDEMNIFICATION:
(a) Lessee hereby agrees to indemnify, save and keep harmless Lessor, its
agents, employees, successors and assigns from and against any and all losses,
damages, penalties, injuries, claims, actions and suits, including legal
expenses, of whatsoever kind and nature, in contract or tort, whether caused
by the active or passive negligence of Lessor or otherwise, and including, but
not limited to, Lessor's strict liability in tort, arising out of (i) the
selection, manufacture, purchase, acceptance or rejection of Equipment, the
ownership of Equipment during the term of this Agreement, and the delivery,
lease, possession, maintenance, uses, condition, return or operation of
Equipment (including, without limitation, latent and other defects, whether
or not discoverable by Lessor or Lessee and any claim for patent, trademark or
copyright infringement or environmental damage) or (ii) the condition of
Equipment sold or disposed of after use by Lessee, any sublessee or employees
of Lessee. Lessee shall, upon request, defend any actions based on, or
arising out of, any of the foregoing. (b) All of Lessor's rights, privileges
and indemnities contained in this Section XIV shall survive the expiration or
other termination of this Agreement and the rights, privileges and indemnities
contained herein are expressly made for the benefit of, and shall be
enforceable by Lessor, its successors and assigns.
XV. DISCLAIMER:
LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT ANY ASSISTANCE
FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE, HAS NOT MADE, NOR
SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER
EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE EQUIPMENT LEASED
HEREUNDER OR ANY COMPONENT THEREOF, INCLUDING, WITHOUT LIMITATION, ANY
WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR
WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION,
SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All such risks,
as between Lessor and Lessee, are to be borne by Lessee. Without limiting the
foregoing, Lessor shall have no responsibility or liability to Lessee or any
other person with respect to any of the following, regardless of any
negligence of Lessor (i) any liability, loss or damage caused or alleged to be
caused directly or indirectly by any Equipment, any inadequacy thereof, any
deficiency or defect (latent or otherwise) therein, or any other circumstance
in connection therewith; (ii) the use, operation or performance of any
Equipment or any risks relating thereto; (iii) any interruption of service,
loss of business or anticipated profits or consequential damages; or (iv) the
delivery, operation, servicing, maintenance, repair, improvement or
replacement of any Equipment. If, and so long as, no default exists under this
Lease, Lessee shall be, and hereby is, authorized during the term of this
Lease to assert and enforce, at Lessee's sole cost and expense, from time to
time, in the name of and for the account of Lessor and/or Lessee, as their
interests may appear, whatever claims and rights Lessor may have against any
Supplier of the Equipment.
XVI. REPRESENTATIONS AND WARRANTIES OF LESSEE:
Lessee hereby represents and warrants to Lessor that on the date hereof and
on the date of execution of each Schedule: (a) Lessee has adequate power and
capacity to enter into, and perform under, this Agreement and all related
documents (together, the "Documents") and is duly qualified to do business
wherever necessary to carry on its present business and operations, including
the jurisdiction(s) where the Equipment is or is to be located. (b) The
Documents have been duly authorized, executed and delivered by Lessee and
constitute valid, legal and binding agreements, enforceable in accordance
with their terms, except to the extent that the enforcement of remedies
therein provided may be limited under applicable bankruptcy and insolvency
laws. (c) No approval, consent or withholding of objections is required from
any governmental authority or instrumentality with respect to the entry into
or performance by Lessee of the Documents except such as have already been
obtained. (d) The entry into and performance by Lessee of the Documents will
not: (i) violate any judgment, order, law or regulation applicable to Lessee
or any provision of Lessee's Certificate of Incorporation or By-Laws; or (ii)
result in any breach of, constitute a default under or result in the creation
of any lien, charge, security interest or other encumbrance upon any Equipment
pursuant to any indenture, mortgage, deed of trust, bank loan or credit
agreement or other instrument (other than this Agreement) to which Lessee is a
party. (e) There are no suits or proceedings pending or threatened in court or
before any commission, board or other administrative agency against or
affecting Lessee, which will have a material adverse effect on the ability of
Lessee to fulfill its obligations under this Agreement. (f) The Equipment
accepted under any Certificate of Acceptance is and will remain tangible
personal property. (g) Each Balance Sheet and Statement of Income delivered
to Lessor has been prepared in accordance with generally accepted accounting
principles, and since the date of the most recent such Balance Sheet and
Statement of Income, there has been no material adverse change. (h) Lessee is
and will be at all times validly existing and in good standing under the laws
of the State of its incorporation (specified in the first sentence of this
Agreement). (i) The Equipment will at all times be used for commercial or
business purposes.
XVII. OWNERSHIP FOR TAX PURPOSES, GRANT OF SECURITY INTEREST; USURY SAVINGS:
(a) For income tax purposes, the parties hereto agree that it is their mutual
intention that Lessee shall be considered the owner of the Equipment.
Accordingly, Lessor agrees (i) to treat Lessee as the owner of the Equipment
on its federal income tax return, (ii) not to take actions or positions
inconsistent with such treatment on or with respect to its federal income tax
return, and (iii) not to claim any tax benefits available to an owner of the
Equipment on or with respect to its federal income tax return. The foregoing
undertakings by Lessor shall not be violated by Lessor's taking a tax position
inconsistent with the forgoing sentence to the extent such a position is
required by law or is taken through inadvertence so long as such inadvertent
tax position is reversed by Lessor promptly upon its discovery. Lessor shall
in no event be liable to Lessee if Lessee fails to secure any of the tax
benefits available to the owner of the Equipment. (b) Lessee hereby grants to
Lessor a first security interest in the Equipment, together with all
additions, attachments, accessions, accessories and accessions thereto whether
or not furnished by the Supplier of the Equipment and any and all
substitutions, replacements or exchanges therefore, and any and all insurance
and/or other proceeds of the property in and against which a security interest
is granted hereunder. Notwithstanding anything to the contrary contained
elsewhere in this Agreement, to the extent that Lessor asserts a purchase
money security interest in any items of Equipment ("PMSI Equipment"): (i) the
PMSI Equipment shall secure only those sums which have been advanced by Lessor
for the purchase of the PMSI Equipment, or the acquisition of rights therein,
or the use thereof (the "PMSI Indebted ness "), and (ii) no other Equipment
shall secure the PMSI Indebtedness. (c) It is the intention of the parties
hereto to comply with any applicable usury laws to the extent that any
Schedule is determined to be subject to such laws; accordingly, it is agreed
that, notwithstanding any provision to the contrary in any Schedule or the
Lease, in no event shall any Schedule require the payment or permit the
collection of interest in excess of the maximum amount permitted by applicable
law. If any such excess interest is contracted for, charged or received under
any Schedule or the Lease, or in the event that all of the principal balance
shall be prepaid, so that under any of such circumstances the amount of
interest contracted for, charged or received under any Schedule or the Lease
shall exceed the maximum amount of interest permitted by applicable law, then
in such event (a) the provisions of this paragraph shall govern and control,
(b) neither Lessee nor any other person or entity now or hereafter liable for
the payment hereof shall be obligated to pay the amount of such interest to
the extent that it is in excess of the maximum amount of interest permitted by
applicable law, (c) any such excess which may have been collected shall be
either applied as a credit against the then unpaid principal balance or
refunded to Lessee, at the option of the Lessor, and (d) the effective rate of
interest shall be automatically reduced to the maximum lawful contract rate
allowed under applicable law as now or hereafter construed by the courts
having jurisdiction thereof. It is further agreed that without limitation of
the foregoing, all calculations of the rate of interest contracted for,
charged or received under any Schedule or the Lease which are made for the
purpose of determining whether such rate exceeds the maximum lawful contract
rate, shall be made, to the extent permitted by applicable law, by amortizing,
prorating, allocating and spreading in equal parts during the period of the
full stated term of the indebtedness evidenced hereby, all interest at any
time contracted for, charged or received from Lessee or otherwise by Lessor
in connection with such indebtedness; provided, however, that if any
applicable state law is amended or the law of the United States of America
preempts any applicable state law, so that it becomes lawful for Lessor to
receive a greater interest per annum rate than is presently allowed, the
Lessee agrees that, on the effective date of such amendment or preemption, as
the case may be, the lawful maximum hereunder shall be increased to the
maximum interest per annum rate allowed by the amended state law or the law of
the United States of America.
XVIII. EARLY TERMINATION:
(a) On or after the First Termination Date (specified in the applicable
Schedule), Lessee may, so long as no default exists hereunder, terminate this
Agreement as to all (but not less than all) of the Equipment on such Schedule
as of a Rent Payment Date ("Termination Date") upon at least 90 days prior
written notice to Lessor. (b) Lessee shall, and Lessor may, solicit cash bids
for the Equipment on an AS IS, WHERE IS BASIS without recourse to or warranty
from Lessor, express or implied ("AS IS BASIS"). Prior to the Termination Date,
Lessee shall (i) certify to Lessor any bids received by Lessee and (ii) pay to
Lessor (A) the Termination Value (calculated as of the rental due on the
Termination Date) for the Equipment, and (B) all rent and other sums due and
unpaid as of the Termination Date. (c) Provided that all amounts due hereunder
have been paid on the Termination Date, Lessor shall (i) sell the Equipment
on an AS IS BASIS for cash to the highest bidder and (ii) refund the proceeds
of such sale (net of any related expenses) to Lessee up to the amount of the
Termination Value. If such sale is not consummated, no termination shall occur
and Lessor shall refund the Termination Value (less any expenses incurred by
Lessor) to Lessee. (d) Notwithstanding the foregoing, Lessor may elect by
written notice, at any time prior to the Termination Date, not to sell the
Equipment. In that event, on the Termination Date Lessee shall (i) return the
Equipment (in accordance with Section X) and (ii) pay to Lessor all amounts
required under Section XVIII(b) less the amount of the highest bid certified
by Lessee to Lessor.
XIX. EARLY PURCHASE OPTION:
(a) Provided that the Lease has not been earlier terminated and provided
further that Lessee is not in default under the Lease or any other agreement
between Lessor and Lessee, Lessee may, UPON AT LEAST 30 DAYS BUT NO MORE THAN
270 DAYS PRIOR WRITTEN NOTICE TO LESSOR OF LESSEE'S IRREVOCABLE ELECTION TO
EXERCISE SUCH OPTION, purchase all (but not less than all) of the Equipment
listed and described in this schedule on any Rent Payment Date following the
First Termination Date as set forth in this Schedule, and prior to the date
which is the scheduled expiration of this Lease (the "Early Purchase Date"),
for a price equal to (i) the Termination Value (calculated as of the Early
Purchase Date) for the Equipment, and (ii) all rent and other sums due and
unpaid as of the Purchase Date (the "Early Option Price"), plus all applicable
sales taxes on an AS IS BASIS. (The purchase option granted by this subsection
shall be referred to herein as the "Early Purchase Option"). (b) If Lessee
exercises its Early Purchase Option with respect to the Equipment leased
hereunder, then on the Early Purchase Date, Lessee shall pay to Lessor any
rent and other sums due and unpaid on the Early Purchase Date and Lessee shall
pay the Early Option Price, plus all applicable sales taxes, to Lessor in
cash.
XX. PURCHASE OPTION:
(a) So long as no default exists hereunder and the lease has not been earlier
terminated, Lessee may at lease expiration purchase all (but not less than
all) of the Equipment in any Schedule on an AS IS, WHERE IS BASIS for cash
equal to the amount indicated in such Schedule (the "Option Payment"). The
Option Payment shall be due and payable in immediately available funds on the
Expiration Date. (b) Lessee shall be deemed to have waived this option unless
it provides Lessor with written notice of its irrevocable election to exercise
the same not less than 90 days prior to the Expiration Date.
XXI. MISCELLANEOUS:
(a) LESSEE HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY,
THIS LEASE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND
LESSOR RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED
TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE
AND LESSOR. The scope of this waiver is intended to be all encompassing of any
and all disputes that may be filed in any court (including, without
limitation, contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims). THIS WAIVER IS IRREVOCABLE MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO
ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
LEASE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING
TO THIS TRANSACTION OR ANY RELATED TRANSACTION. In the event of litigation,
this Lease may be filed as a written consent to a trial by the court. (b)
Unless and until Lessee exercises its rights under Section XIX above, nothing
herein contained shall give or convey to Lessee any right, title or interest
in and to any Equipment except as a lessee. Any cancellation or termination by
Lessor, pursuant to the provision of this Agreement, any Schedule supplement
or amendment hereto, or the lease of any Equipment hereunder, shall not
release Lessee from any then outstanding obligations to Lessor hereunder. All
Equipment shall at all times remain personal property of Lessor regardless of
the degree of its annexation to any real property and shall not by reason of
any installation in, or annexation to, real or personal property become a part
thereof. (c) Time is of the essence of this Agreement. Lessor's failure at
any time to require strict performance by Lessee of any of the provisions
hereof shall not waive or diminish Lessor's right thereafter to demand strict
compliance therewith. Lessee agrees, upon Lessor's request, to execute any
instrument necessary or expedient for filing, recording or perfecting the
interest of Lessor. All notices required to be given hereunder shall be deemed
adequately given if sent by registered or certified mail to the addressee at
its address stated herein, or at such other place as such addressee may have
designated in writing. This Agreement and any Schedule and Annexes thereto
constitute the entire agreement of the parties with respect to the subject
matter hereof. NO VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER
OF ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND
SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO.
(d) in case of a failure of Lessee to comply with any provision of this
Agreement, Lessor shall have the right, but shall not be obligated to, effect
such compliance, in whole or in part; and all moneys spent and expenses and
obligations incurred or assumed by Lessor in effecting such compliance shall
constitute additional rent due to Lessor within five days after the date
Lessor sends notice to Lessee requesting payment. Lessor's effecting such
compliance shall not be a waiver of Lessee's default- (e) Any rent or other
amount not paid to Lessor when due hereunder shall bear interest, both before
and after any judgment or termination hereof, at the lesser of eighteen
percent per annum or the maximum rate allowed by law. Any provisions in this
Agreement and any Schedule which are in conflict with any statute, law or
applicable rule shall be deemed omitted, modified or altered to conform
thereto.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
General Electric Capital Corporation Netter Digital Entertainment, Inc.
By: /s/ Richard Lamy By: /s/ Chad Kalebic
Name: Richard Lamy Name: Chad Kalebic
Title: Risk Analyst Title: CFO
2803 Quasi FXD E.S.
EQUIPMENT SCHEDULE
(Quasi Lease - Fixed Rate)
SCHEDULE NO. 001
DATED THIS 6/18/98
TO MASTER LEASE AGREEMENT
DATED AS OF 6/18/98
Lessor & Mailing Address: Lessee & Mailing Address:
General Electric Capital Corporation Netter Digital Entertainment, Inc.
44 Old Ridgebury Road 5125 Lankershim Blvd.
Danbury, CT 06810 North Hollywood, CA 91601
Capitalized terms not defined herein shall have the meanings assigned to them
in the Master Lease Agreement identified above ("Agreement", said Agreement
and this Schedule being collectively referred to as "Lease").
A. Equipment
Pursuant to the terms of the Lease, Lessor agrees to acquire and lease to
Lessee the Equipment listed on Annex A attached hereto and made a part Hereof.
B. Financial Terms
1. Advance Rent (if any): *
2. Capitalized Lessor's Cost: $373,810.98.
3. Basic Term Lease Rate Factor: *
4. Daily Lease Rate Factor: *
5. Basic Term (No. of Months): 36.
6. Basic Term Commencement Date: 6/18/98
7. Equipment Location: 5125 Lankershim Blvd., North Hollywood, CA, 91601.
8. Lessee Federal Tax ID No: 953392054.
9. Supplier: Computer Network & Communication, New Tek, Band Pro Film Video.
10. Last Delivery Date: _____________
11 First Termination or Purchase Date: Thirty-six (36) months after the
Basic Term Commencement Date.
12 Interest Rate: *
13. Lessee agrees and acknowledges that the Capitalized Lessor's Cost of the
Equipment as stated on the Schedule is equal to the fair market value of
the Equipment on the date hereof.
14 Option Payment: $101.00
C. Term and Rent
1. Interim Rent. For the period from and including the Lease Commencement
Date to the Basic Term Commencement Date ("Interim Period"),Lessee shall pay
as rent ("Interim Rent") for each unit of Equipment, die product of the Daily
Lease Rate Factor times the Capitalized Lessor's Cost of such unit times the
number of days in the Interim Period. Interim Rent shall be due on Not
Applicable.
2. Basic Term Rent. Commencing on 8/1/98 and on the same day of each month
thereafter (each, a "Rent Payment Date") during the Basic Term, Lessee shall
pay as rent(" Basic Term Rent") the product of the Basic Term Lease Rate
Factor times the Capitalized Lessor's cost of all Equipment on this Schedule.
3. Adjustment to Capitalized Lessor's Cost. Lessee hereby irrevocably
authorizes Lessor to adjust the Capitalized Lessor's Cost up or down by no
more than 10% to account for equipment change orders, equipment returns,
invoicing errors, and similar matters. Lessee acknowledges and agrees that the
Rent shall be adjusted as a result of such change in the Capitalized Lessor's
Cost (pursuant to paragraphs I and 2 above). Lessor shall send Lessee a
written notice stating the final Capitalized Lessor's Cost, if different from
that disclosed on this Schedule.
D. Insurance
1. Public Liability: $1,000,000 total liability per occurrence.
2. Casualty and Property Damage: An amount equal to the higher of the
Stipulated Loss Value or the full replacement cost of the Equipment.
E. Interest Rate: Interest shall accrue from the Lease Commencement Date
through and including the date of termination of the Lease.
Except as expressly modified hereby, all terms and provisions of the
Agreement shall remain in full force and effect. This Schedule is not binding
or effective with respect to the Agreement or Equipment until executed on
behalf of Lessor and Lessee by authorized representatives of Lessor and
Lessee, respectively.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be executed
by their duly authorized representatives as of the date first
above written.
LESSOR: LESSEE:
General Electric Capital Corporation Netter Digital Entertainment, Inc.
By: /s/ Richard Lamy By: /s/ Chad Kalebic
Name: Richard Lamy Name: Chad Kalebic
Title: Risk Analyst Title: Chief Financial Officer
2803 Quasi FXD E.S.
EQUIPMENT SCHEDULE
(Quasi Lease - Fixed Rate)
SCHEDULE NO. 002
DATED THIS 7/1/98
TO MASTER LEASE AGREEMENT
DATED AS OF June 18,1998
Lessor & Mailing Address: Lessee & Mailing Address:
General Electric Capital Corporation Netter Digital Entertainment, Inc.
44 Old Ridgebury Road 5125 Lankershim Blvd.
Danbury, CT 06810 North Hollywood, CA 91601
Capitalized terms not defined herein shall have the meanings assigned to them
in the Master Lease Agreement identified above ("Agreement"; said Agreement
and this Schedule being collectively referred to as "Lease").
A. Equipment
Pursuant to the terms of the Lease, Lessor agrees to acquire and lease to
Lessee the Equipment listed on Annex A attached hereto and made a part hereof.
B. Financial Terms
1. Advance Rent (if any): *
2. Capitalized Lessor's cost: $451,671.37.
3. Basic Term Lease Rate Factor: *
4. Daily Lease Rate Factor: *
5. Basic Term (No. of Months): 36
6. Basic Term Commencement Date: 7/1/98
7. Equipment Location: 5125 Lankershim Blvd., North Hollywood, CA 91601.
8. Lessee Federal Tax ID No: 953392054.
9. Supplier: RFX, Band Pro Field Video, Reflections in Video, NewTek
Partners, Computer Network & Communications, Westfall Interior Systems 3
Point Digital.
10. Last Delivery Date: 7/1/98
11. First Termination or Purchase Date: Thirty-six (36) months after the
Basic Term Commencement Date.
12. Interest Rate: *
13. Lessee agrees and acknowledges that the Capitalized Lessor's Cost of the
Equipment as stated on the Schedule is equal to the fair market value of
the Equipment on the date hereof.
14. Option Payment: $1.00
C. Term and Rent
1. Interim Rent. For the period from and including the Lease Commencement
Date to the Basic Term Commencement Date ("Interim Period"),
Lessee shall pay as rent ("Interim Rent") for each unit of Equipment,
the product of the Daily Lease Rate Factor times the Capitalized
Lessor's Cost of such unit times the number of days in the Interim
Period. Interim Rent shall be due on Not Applicable.
2. Basic Term Rent. Commencing on 7/1/98 and on the same day of each month
thereafter (each, a "Rent Payment Date") during the Basic Term, Lessee
shall pay as rent ("Basic Term Rent") the product of the Basic Term
Lease Rate Factor times the Capitalized Lessor's Cost of all Equipment
on this Schedule.
3. Adjustment to Capitalized Lessor's Cost. Lessee hereby irrevocably
authorizes Lessor to adjust the Capitalized Lessor's Cost up or down by
no more than 10% to account for equipment change orders, equipment
returns, invoicing errors, and similar matters. Lessee acknowledges and
agrees that the Rent shall be adjusted as a result of such change in the
Capitalized Lessor's Cost (pursuant to paragraphs 1 and 2 above). Lessor
shall send Lessee a written notice stating final Capitalized Lessor's
Cost if different from that disclosed on this Schedule.
D. Insurance
1. Public Liability: $1,000,000 total liability per occurrence.
2. Casualty and Property Damage: An amount equal to the higher of the
Stipulated Loss Value or the full replacement cost of the Equipment.
E. Interest Rate: Interest shall accrue from the Lease Commencement Date
through and including the date of termination of the Lease.
Except as expressly modified hereby, all terms and provisions of the Agreement
shall remain in full force and effect. This Schedule is not binding or
effective with respect to the Agreement or Equipment until executed on behalf
of Lessor and Lessee by authorized representatives of Lessor and Lessee,
respectively.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be executed
by their duty authorized representatives as of the date first above written.
LESSOR:
General Electric Capital Corporation
By: /s/ Richard Lamy
Name: Richard Lamy
Title: Risk Analyst
LESSEE: Netter Digital Entertainment, Inc.
By: /s/ Chad Kalebic
Name: Chad Kalebic
Title: Chief Financial Officer
