Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Commission File No. 0-26884
Ended December 31, 1998
NETTER DIGITAL ENTERTAINMENT, INC.
(exact name of registrant as specified in charter)
Delaware 95-3392054
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
5125 Lankershim Blvd.
North Hollywood, California 91601
(Address of principal executive office)
Registrant's telephone number, including area code: 818/753-1990
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
As of February 12, 1999 the Registrant had 3,334,405 shares of its Common Stock,
$.01 par value, issued and outstanding.
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
FORM 10-Q
December 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited) NUMBER
------
Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1998. 3
Consolidated Statements of Operations for
the three-month and six-month periods ended
December 31, 1998 and December 31, 1997. 4
Consolidated Statements of Cash Flows for the
six-month periods ended December 31, 1998
and December 31, 1997. 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Page 2 of 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, JUNE 30,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 423,593 $ 1,634,809
Accounts receivable 1,641,903 781,374
Due from officer 155,897 155,897
Inventory 236,409 153,529
Production costs, net 288,196 251,632
Other Current Assets 144,399 81,180
Net Current Assets, Discontinued Operations 3,435,956 3,728,998
-------------- -------------
TOTAL CURRENT ASSETS 6,326,353 6,787,419
EQUIPMENT, net 3,114,396 2,954,601
DEPOSITS AND OTHER ASSETS 222,572 184,666
-------------- -------------
$ 9,663,321 $ 9,926,686
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and production fee advances $ 1,694,284 $ 1,434,947
Accrued expenses 144,183 138,899
Deferred revenue 893,453 1,106,957
Current portion of capital lease obligations 902,132 696,558
Provision for discontinued operations 1,880,956 -
-------------- -------------
TOTAL CURRENT LIABILITIES 5,515,008 3,377,361
CAPITAL LEASE OBLIGATIONS 1,274,773 1,337,186
MINORITY INTEREST 500 500
-------------- -------------
STOCKHOLDERS' EQUITY :
Preferred stock, $.001 par value, 2,000,000 shares
authorized; 54,550 shares issued and outstanding 328,585 304,366
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,334,405 shares issued and outstanding 33,344 33,344
Additional paid-in capital 4,726,171 4,726,171
Retained (Deficit) Earnings (2,215,060) 147,758
-------------- -------------
TOTAL STOCKHOLDERS EQUITY 2,873,040 5,211,639
-------------- -------------
$ 9,663,321 $ 9,926,686
============== =============
<FN>
<FN1>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
Page 3 of 14
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, Six Months Ended Dec. 31,
--------------------------- --------------------------
1998 1997 1998 1997
--------------------------- ---------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES: $ 6,614,148 $ 7,672,044 $ 13,501,769 $ 13,516,381
EXPENSES:
Production 5,806,899 6,939,861 11,796,353 12,054,250
General and administrative 680,541 590,979 1,328,510 1,129,919
------------ ------------ ------------ ------------
TOTAL EXPENSES 6,487,440 7,530,840 13,124,863 13,184,169
------------ ------------ ------------ ------------
OPERATING INCOME 126,708 141,204 376,906 332,212
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 2,987 4,580 6,007 14,466
Other income/(expense) - - - 9,243
Interest (expense) (47,939) (18,480) (87,596) (29,270)
------------ ------------ ------------ ------------
TOTAL OTHER (EXPENSE) (44,952) (13,900) (81,589) (5,561)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 81,756 127,304 295,317 326,651
PROVISION FOR INCOME TAXES 4,400 46,000 80,000 121,500
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS $ 77,356 $ 81,304 $ 215,317 $ 205,151
DISCONTINUED OPERATIONS
Loss from operation of Videssence, Inc.
(net of income tax benefit) (610,417) (65,084) (670,806) (175,380)
Loss on the divestiture of Videssence (1,880,956) - (1,880,956) -
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (2,414,017) $ 16,220 $ (2,336,445) $ 29,771
Cumulative preferred stock dividend 12,276 10,608 26,373 21,219
------------ ------------ ------------ ------------
Net Income (Loss) to common shareholders $ (2,426,293) $ 5,612 $ (2,362,818) $ 8,552
============ ============ ============ ============
Basic and diluted earnings (loss) per share:
Continuing operations, including
preferred dividends 0.02 0.02 0.06 0.05
Discontinued operations $ (0.75) $ (0.02) $ (0.77) $ (0.05)
------------ ------------ ------------ ------------
Net earnings (loss), per share $ (0.73) 0.00 (0.71) 0.00
============ ============ ============ ============
Weighted average common shares outstanding 3,334,405 3,338,950 3,334,405 3,333,346
============ ============ ============ ============
<FN>
<FN1>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
Page 4 of 14
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended December 31,
--------------------------------
1998 1997
--------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (2,336,445) $ 29,771
-------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 420,103 225,788
Amortization 52,156 60,441
Provision for loss of discontinued operations 1,880,956 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (860,529) (178,053)
(Increase) in other current assets (63,219) (36,399)
(Increase) in inventory (82,880) (40,953)
(Increase) in production costs (36,564) 33,046
(Increase) in deposits and other assets (37,906) (501)
Increase/(decrease) in accounts payable 259,337 (422,065)
Increase/(decrease) in accrued expenses 5,284 (30,871)
(Decrease) in deferred revenue (213,504) (249,066)
Decrease/(increase) in net assets from
discontinued operations 215,009 (494,465)
--------------- ------------
1,538,243 (1,133,098)
--------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (798,202) (1,103,327)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (55,241) (128,717)
--------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (55,241) (128,717)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of capital lease obligations (357,773) (130,156)
--------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (357,773) (130,156)
--------------- -------------
NET DECREASE IN CASH (1,211,216) (1,362,200)
Cash, beginning of period 1,634,809 2,574,522
--------------- -------------
Cash, end of period $ 423,593 $ 1,212,322
=============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Cash paid for interest $ 92,228 $ 92,989
Cash paid for income taxes $ 36,200 $ 9,800
Noncash activity:
Stock issued for legal fee settlement $ - $ 50,000
Stock dividend $ 14,097 $ 21,219
Purchase of equipment through leases payable $ 250,212 $ 647,807
<FN>
<FN1>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
Page 5 of 14
NETTER DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes for the year ended June 30, 1998 included in
the Form 10-KSB for the year then ended.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of December 31, 1998 and June 30, 1998, and the results of
operations and cash flows for the three-month and six-month periods ended
December 31, 1998 and 1997 have been included.
The results of operations for the three-month and six-month periods ended
December 31, 1998, are not necessarily indicative of the results to be expected
for the full fiscal year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Form 10-KSB as filed with the Securities and Exchange Commission for the year
ended June 30, 1998.
DISCONTINUED OPERATIONS
Effective the quarter ended December 31,1998, the Board of Directors voted to
classify and operate the Company's Videssence subsidiary as a discontinued
operation. The Company's Board of Directors and financial advisors have
determined that at this time the Company's best strategy for growth is to focus
directly on its core entertainment business and to divest its non-entertainment
business activities. Accordingly, the Board has instructed management to divest
the Videssence subsidiary, which manufactures and distributes media lighting
products, by the end of 1999. The Company is reviewing how to best capitalize
on its recent investment in Videssence and has initiated steps to locate a buyer
for the Videssence operation. Of course, there can be no assurance that the
Company will locate a buyer and consummate a sale of the Videssence operation on
terms acceptable to the Company. In the quarter ended December 31, 1998, the
Company accrued a provision for the estimated loss on divestiture of the
Videssence operation of approximately $1.9 million which includes $750,000 for
pretax operating losses during the phase-out period. Actual results could
differ from this estimate. The results of operations for this business have
been reclassified to discontinued operations for all periods in the accompanying
unaudited consolidated financial statements.
Page 6 of 14
The assets of the discontinued operation are as follows:
December 31, June 30,
1998 1998
---- ----
Accounts Receivable, net $ 539,864 $ 1,503,637
Inventory 2,035,322 1,477,496
Other Current Assets 58,574 53,357
------------ ------------
Total Current Assets 2,633,760 3,034,490
Property, Plant and Equipment,
net of accumulated depreciation 176,915 202,793
Other Assets 217,228 149,094
Intangibles 1,886,279 1,938,434
------------ ------------
Total Assets $ 4,914,182 $ 5,324,811
Total Liabilities 1,478,226 1,595,813
------------ ------------
Total Net Assets $ 3,435,956 $ 3,728,998
============ ============
Summarized results of the discontinued operation are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Net Sales $ 400,512 $ 963,306 $ 1,400,018 $ 1,892,839
Cost and expenses 1,015,329 1,062,390 2,127,824 2,159,219
---------- ---------- ----------- -----------
(Loss) before inc. taxes ($614,817) ($99,084) ($727,806) ($266,380)
Income tax (benefit) (4,400) (34,000) (57,000) (91,000)
---------- ---------- ----------- -----------
(Loss) from discontinued
operations ($610,417) ($65,084) ($670,806) ($175,380)
========== =========== =========== ===========
DUE FROM OFFICER/RECEIVABLE FROM RELATED PARTY
On November 20, 1995, the Company's Chief Executive Officer entered into a
promissory note with the Company in the amount of $194,876, bearing interest at
7.25% per annum of which $38,979 was repaid. Subsequent to the quarter ended
December 31, 1998, Mr. Netter repaid an additional $50,000 of outstanding
principal. The remaining unpaid principal balance of $105,897 and accrued
interest of $5,651 is due on May 20, 1999. The Board of Directors has agreed to
allow the note to be repaid in shares of the Company's Common 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.
Page 7 of 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company is engaged in two 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 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. The Company has produced the award winning series "Babylon 5" and
is currently producing a follow-on series entitled "Crusade." 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. The Company has also established an objective to retain
greater equity participation in the projects it produces by increasing its
overhead and equity commitments for future projects (see "Liquidity and Capital
Resources" below).
- -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, especially "Babylon 5"
and "Crusade," 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 (or "production services") to market
computer graphics and digital post-production services to outside clients. 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.
Results of Operations
Revenues. The Company's revenues for the second quarter and six-month periods
ended December 31, 1998 were approximately $6.6 million and $13.5 million,
respectively, for a decrease of 13.8% as compared to the second quarter ended
December 31, 1997 and no change in the respective six-month periods. The
decrease in the second quarter resulted primarily from a shortfall of
approximately $2.4 million in revenues generated from the "Babylon5"/"Crusade"
productions this year as compared to last year. This difference is timing
related, as total production budgets are similar, and was caused by delays in
the production schedule beyond our control. This decrease was partially offset
by a $1.2 million increase in revenues from the Company's Netter Digital
Technologies Division and a $100,000 increase in revenues from the Company's
"Babylon 5" Fan Club as compared to the same period of the prior year resulting
primarily from the Company's work on "Voltron" and other contracts as well as
the Division's growth over the last year.
Page 8 of 14
Gross Margin. The Company's gross margin for the quarter ended December 31,
1998 increased from 9.5% to 12.2% of revenues, as compared to the prior year.
For the six-month period ended December 31, 1998, gross margin increased from
10.8% to 12.6% of revenues, as compared to the prior year. These increases in
gross margin resulted primarily from the larger percentage of total revenue
coming from the Company's Netter Digital Technologies Division which realizes
higher gross margins than the entertainment production business.
General and Administrative Expenses. General and administrative expenses were
approximately 10.3% and 9.8% as a percentage of net revenues for the three-month
and six-month periods ended December 31, 1998, respectively, as compared to 7.7%
and 8.4% for the same prior year periods. This increase resulted primarily from
the increase in overhead to accommodate the additional work from its Netter
Digital Technologies Division as well as a decrease in revenues for the second
quarter ended December 31, 1998 as compared to the comparable prior period.
Other Income and Expenses. Interest income decreased to $2,987 and $6,007 for
the quarter and six-month period ended December 31, 1998, respectively, compared
to $4,580 and $14,466 for the same prior year periods, as proceeds from the
Company's November 1995 initial public offering were fully drawn from short term
investments and used for working capital for Videssence by the end of the
Company's fiscal year ended June 30, 1998. Interest expense increased to
$47,939 and $87,596 for the quarter and six-month period ended December 31,
1998, respectively, from $18,480 and $29,270 in the same period of the previous
year due to the Company's further utilization of capital lease lines for
continued expansion of its computer animation and visual effects facilities.
Discontinued Operations. Effective the quarter ended December 31,1998, the
Board of Directors voted to classify and operate the Company's Videssence
subsidiary as a discontinued operation. The Company's Board of Directors and
financial advisors have determined that at this time the Company's best strategy
for growth is to focus directly on its core entertainment business and to
divest its non-entertainment business activities. Accordingly, the Board has
instructed management to divest the Videssence subsidiary, which manufactures
and distributes media lighting products, by the end of 1999. The Company is
reviewing how to best capitalize on its recent investment in Videssence and
has initiated steps to locate a buyer for the Videssence operation. Of course,
there can be no assurance that the Company will locate a buyer and consummate a
sale of the Videssence operation on terms acceptable to the Company. In the
quarter ended December 31, 1998, the Company accrued a provision for an
estimated anticipated loss on the divestiture of the Videssence operation of
approximately $1.9 million which includes $750,000 for pretax operating losses
during the phase-out period. Actual results could differ from this estimate.
The results of operations for this business have been reclassified to
discontinued operations for all periods in the accompanying unaudited
consolidated financial statements.
Pretax losses at the Videssence operation for the quarter and six months periods
ended December 31, 1998 were $614,817 and $727,806, respectively, as compared
to $99,084 and $266,380 for same respective periods of the prior year. The
primary factors leading to the degradation compared to last year were a sales
shortfall comprised of lower than anticipated demand for new products, higher
than anticipated sales returns, and delays in production which led to a larger
backlog than usual at December 31, 1998. For a further summary of the assets,
liabilities and operating results of Videssence, see the section entitled
"Discontinued Operations" in the "Notes to Consolidated Financial Statements."
Page 9 of 14
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash flows from
operations, its initial public offering of Common Stock and Warrants completed
in November 1995 which generated net proceeds of approximately $3.2 million, and
a February 1997 preferred stock placement which raised $424,000 in gross
proceeds. With respect to production costs for particular entertainment
Projects, the Company has customarily entered into production contracts with
studios, networks and distributors who cover 100% of the production funding.
Such production funds are received by the Company during the production stage of
a Project. To date, the Company has been able to secure production financing
from a major studio, network or distributor for all of its Projects. While the
Company believes that similar financing arrangements can be made for future
productions, there can be no assurance that the Company will be successful in
obtaining such production financing. In that event, the Company would have to
secure alternative sources for financing Projects. Moreover, as the Company
continues to develop new forms of high technology production activities and
projects for new entertainment ancillary markets, it may elect to make
additional 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 the quarter and six-month period ended December 31, 1998, the Company
derived approximately 77% and 77% of its entertainment production revenues,
respectively, from its agreements with Warner Bros. relating to the production
of the "Babylon 5" series, the follow-on "Crusade" series, and the associated
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 $798,000 for the six-months
ended December 31, 1998. The biggest contributors to this usage was the loss at
the Company's Videssence subsidiary as sales were lower than expected. An
increase in accounts receivable outpaced an increase in accounts payable as
additional billings were made by the entertainment production business.
Also, deferred revenues decreased as prepaid production costs were used for the
production services business.
The operating needs at the Company's Videssence subsidiary have required more of
the Company's cash flow over the last 12 months than originally anticipated. As
of December 31, 1998, the Company's sources of liquidity included cash and cash
equivalents totaling approximately $420,000. Currently, the Company is engaged
in advanced discussions to secure additional equity capital to fund the intended
growth in its core entertainment business and to maintain adequate levels of
working capital. Of course, there can be no assurance that these discussions
will be successfully consummated.
The Company has approximately $2,177,000 of outstanding capital leases as of
December 31, 1998. The Company uses capital leases primarily for equipment
additions to its in-house post-production and graphics/animation facilities.
Page 10 of 14
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
December 31, 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. No system replacements were made or accelerated to comply with Year
2000 issues. 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.
Page 11 of 14
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 third party suppliers and
customers to determine the extent to which the Company's systems are vulnerable
to those parties' failures to reach Year 2000 compliance. The Company is
currently contacting 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 face Year 2000 problems. The Company's Videssence
subsidiary relies heavily on 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.
Page 12 of 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Shareholders was held on November 16, 1998.
The purpose of the meeting was to elect the Board of Directors. The meeting was
adjourned and reconvened on November 30, 1998 with the final tally of votes
being as follows:
Abstain or Broker
Directors For Against Withheld Non-votes
--------- --- ------- ---------- ---------
Douglas Netter 3,246,027 0 7,750 0
John Copeland 3,246,027 0 7,750 0
Kate Netter Forte 3,246,027 0 7,750 0
Leonard Silverman 3,246,027 0 7,750 0
Paul Costa 3,246,027 0 7,750 0
Lennart Ringquist 3,246,027 0 7,750 0
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Exhibit Description
------- -----------
27 Financial Data Schedule. (1)
----------------------
(1) Filed herewith.
(b.) Reports on Form 8-K
None.
Page 13 of 14
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NETTER DIGITAL ENTERTAINMENT, INC.
Registrant
Dated: February 12, 1999 By: /s/Chad Kalebic
-------------------------
Chad Kalebic
Chief Financial Officer
Page 14 of 14
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