<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-12163
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 95-4592204
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
6355 TOPANGA CANYON BOULEVARD, SUITE 513
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MARK DYNE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BRILLIANT DIGITAL ENTERTAINMENT, INC.
6355 TOPANGA CANYON BOULEVARD, SUITE 513
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPIES TO:
MURRAY MARKILES, ESQ. HENRY P. MASSEY, JR., ESQ.
JULIE M. KAUFER, ESQ. DAVID C. DRUMMOND, ESQ.
TROOP MEISINGER STEUBER & PASICH, LLP WILSON, SONSINI, GOODRICH & ROSATI
10940 WILSHIRE BOULEVARD 650 PAGE MILL ROAD
LOS ANGELES, CALIFORNIA 90024 PALO ALTO, CALIFORNIA 94304
(310) 824-7000 (415) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered in this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
-------------------------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus........ Facing Page; this Cross-Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus....... Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges......................... Prospectus Summary; Risk Factors;
Summary Historical and Pro Forma
Financial Information
4. Use of Proceeds.................. Use of Proceeds
5. Determination of Offering Price.. Underwriting
6. Dilution......................... Dilution
7. Selling Security Holders......... *
8. Plan of Distribution............. Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered...................... Description of Capital Stock; Management
10. Interests of Named Experts and *
Counsel.........................
11. Information with Respect to the
Registrant
(a)Description of Business....... Prospectus Summary; The Company; Risk
Factors; Use of Proceeds; Management's
Discussion and Analysis of Results of
Operations and Financial Condition;
Business
(b)Description of Property....... Business--Properties
(c)Legal Proceedings............. Business--Legal Proceedings
(d)Market Price, Dividends and
Related Stockholder Matters.. Outside Front Cover Page of Prospectus;
Risk Factors; Dividend Policy;
Description of Capital Stock
(e)Financial Statements.......... Financial Statements
(f)Selected Financial Data....... Selected Financial Data
(g)Supplementary Financial *
Information..................
(h)Management's Discussion and
Analysis of Financial
Condition and Results of Management's Discussion and Analysis of
Operations................... Financial Condition and Results of
Operations
(i)Changes in and Disagreements
with Accountants on
Accounting and Financial
Disclosures.................. *
(j)Directors and Executive Management
Officers.....................
(k)Executive Compensation........ Management
(l)Security Ownership of Certain
Beneficial Owners and
Management................... Principal Stockholders
(m)Certain Relationships and Certain Relationships and Related
Related Transactions......... Transactions
12. Disclosure of Commission Position
on Indemnification For
Securities Act Liabilities...... *
</TABLE>
- --------
* Omitted because the item is negative or inapplicable
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+ANY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1996
2,000,000 Shares
Brilliant Digital Entertainment, Inc. [LOGO]
Common Stock
($.001 par value)
--------
All of the shares of Common Stock, par value $.001 per share (the "Common
Stock"), of Brilliant Digital Entertainment, Inc. ("Brilliant" or the
"Company") offered hereby (the "Offering") are being sold by the Company.
Prior to the Offering, there has been no public market for the Common
Stock. It is anticipated that the initial public offering price will
be between $11.50 and $13.50 per share. For information relating to
the factors considered in determining the initial offering price
to the public, see "Underwriting."
The Common Stock has been approved for quotation and trading on the Nasdaq
Stock Market's National Market under the symbol "BRIL."
--------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 8 HEREIN.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company(1)
------------- -------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (2).................................. $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company, estimated at
$1,000,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 300,000
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ , and Proceeds to the Company will be
$ .
--------
The shares of Common Stock are offered by the several Underwriters, when, as
and if issued by the Company, delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that the shares of Common Stock will be ready for delivery on or about ,
1996, against payment in immediately available funds.
CS First Boston Cruttenden Roth
Incorporated
The date of this Prospectus is , 1996.
<PAGE>
BLOCKING/CAMERA/EDITING
[This shows the capabilities of the SCuD tool in action with a scene being
laid up, the camera positions being set and the sound file to be played being
inserted into its correct position.]
Brilliant uses its proprietary SCuD technology tool to film, layup, edit and
synchronize timing for each scene. This tool allows the director to create
movies and gives the director a high degree of flexibility, as any scene can
be altered without expensive movie reshoots. Multiple virtual cameras allow
unprecedented control and refinement throughout the production process.
SPECIAL EFFECTS ANIMATION
[The special effects animation graphic depicts Sarah and Cyberswine walking
away from a huge explosion.]
The animation process is unique for each output format. Highly detailed
effects are required to produce competitive products for the broadcast
television and cable markets, but less detailed effects are required to
produce CD-ROM and online products.
RENDERED OUTPUT
[The real time rendering graphic contains three images of Cyberswine walking
across a textured background illustrating the real time render capabilities of
the run time engine.]
The Company's proprietary DigitalProjector software tool is designed to play
the Multipath Movie on the end user's platform. DigitalProjector has been
developed for PCs and is being developed for the Sega Saturn game console.
2
<PAGE>
[PICTURES]
First Color Page:
[Enlarged strip of film with images of Cyberswine, a mummy with the caption
"The Mummy Who Wouldn't Die" below and the Yakadoos.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES
10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
Inside Two Page Color Fold Out:
EIGHT STEPS TO MAKING MULTIPATH MOVIES
SCRIPTING
[The scripting graphic is a montage of graphics illustrating how the
ScriptNav tool is used to develop the multipath script and "view" the
Multipath Movie in a narrative format.]
ScripNav, one of the Company's proprietary software tools, assists
scriptwriters in developing their Multipath Movie scripts. These scripts focus
on the moods and personalities of the central characters as in traditional
movies. Users interact with Multipath Movies by influencing these moods and
personalities which generate multiple branching plotlines.
CREATIVE DESIGN
[The creative design image depicts various sketches at different angles and
positions of Sara and Cyberswine superimposed on a background screen capture
of the SCuD tool.]
Talent, character design, set design, props, sound and music are all
elements of the creative design process. Hand illustrations, notes and
preliminary concepts form the foundation of the Multipath Movie's appeal.
VOICE/SOUND
[The sound image is made up of several screen captures from the LipSync
tool. It shows a dialogue wave file being processed in the LipSync tool and
the mouth shapes that are generated as the wave file is processed.]
Voice actors produce the dialogue tracks for each branch of the story. All
dialogue is then processed by the Company's proprietary LipSync software tool,
which accurately coordinates each character's lip movements with the dialogue
track. Music and sound effects are added.
MODEL/WORLD BUILDING
[The character modelling image is made up of a screen capture of a scene
being modelled in 3D Studio MAX with an image of Cyberswine superimposed on
the 3D Studio MAX background. The image of Cyberswine shows half of his body
texture mapped with the other half wire framed.]
Creating new characters, particularly those resembling human beings,
requires talented graphic artists and 3-D modelers. These characters are
created using software modeling packages like 3D MAX and SoftImage.
<PAGE>
TEXTURING/LIGHTING
[This graphic uses SCuD as a background image with a wire frame view of a
city scene and four texture mapped images added and montaged over the SCuD
screen. All textures and lighting effects have been created in Photoshop and
assembled in 3D Studio MAX.]
Texturing is the process of adding pattern, texture, finish and color to the
sets and characters to give them realistic features and make them life-like.
Lighting is also added during this process before capturing the motion on
camera.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information (including "Risk Factors" and the Consolidated Financial Statements
and notes thereto) appearing elsewhere in this Prospectus. Unless the context
otherwise requires, all references to Brilliant or the Company include its
wholly owned Australian subsidiary, "BII Australia."
THE COMPANY
Brilliant is a production and development studio introducing a new generation
of digital entertainment to be distributed over the Internet, on CD-ROM, as
television programming and for home video. Using its proprietary, state-of-the-
art software tools, the Company is developing Multipath Movies, which are
three-dimensional digitally animated stories each with hundreds of plot
alternatives, or paths, leading to multiple distinct conclusions that are
influenced by the user. The Company has the ability to produce Multipath Movies
with seamless interactivity where the plot and graphics are uninterrupted by
the user's decisions. Furthermore, the Company believes that its studio can
produce a Multipath Movie in multiple formats in a single cost-efficient
production process. The Company is developing a system that will permit real
time distribution of, and user interaction with, its Multipath Movies over the
Internet. Under a three-year marketing agreement, the Company intends to launch
Internet distribution of the Multipath Movie through Packard Bell NEC's Planet
Oasis World Wide Web site by bundling Internet-enabled CD-ROMs on up to six
million PCs shipped by Packard Bell NEC. Through additional strategic
relationships, the Company has secured quality content for its Multipath Movies
from a number of proven sources such as Morgan Creek Productions, Crawford
Productions and Bantam Doubleday Dell Books.
The Company's Multipath Movies are designed to combine the best qualities of
traditional filmed entertainment--story and plot, with the best of the
traditional computer game--its interactivity. The Company's Multipath Movies
are designed to appeal to the entire home PC and game console markets,
including both the core gamer and the much larger segment of PC users not
currently served by traditional game developers. The Company plans to produce a
variety of Multipath Movies tailored to various demographic groups, such as
comedies, adventures, romances, science fiction stories and children's stories.
In order to produce digital entertainment products with wide appeal, the
Company has developed a number of features that it believes represent
significant technical enhancements over existing digital entertainment. For
example, animated characters created using the Company's tools appear human-
like and have realistic features, facial expressions and mouth movements.
Multipath Movies also allow users to control characters' moods as opposed to
only their actions. In addition, a typical Multipath Movie will encourage
viewers to influence or interact with the story on average every 30 to 45
seconds, without interrupting the flow of the story or its graphical
presentation. The Company intends to release its first Multipath Movie,
Cyberswine, in the fall of 1997 through its distribution arrangement with
Packard Bell NEC. The Company also is developing the Storyteller Series of
Multipath Movies in which an animated Storyteller will narrate engaging
interactive stories targeted at children eight to twelve years of age. The
Storyteller Series will be based upon existing published children's fiction
books and original scripts, such as Bantam Doubleday Dell Books' popular Choose
Your Own Adventure series.
The Company plans to release certain of its Multipath Movies in non-
interactive format as television broadcast/cable programming and home video
features. The Company intends to segment such Multipath Movies into three 30-
minute episodes and, by packaging together thirteen episodes, can create a
season-length series for the broadcast market. Similarly, the Company intends
to produce 90- to 120-minute animated features for the home video market. The
Company believes that it can produce Multipath Movies for television
programming and home video features at costs substantially below typical
industry costs. The Company has entered into a production joint venture with
Crawford Productions, an Australian television production company, through
which the Company and Crawford Productions will jointly develop and distribute
broadcast and cable versions of two Multipath Movie scripts in the United
States and internationally.
The Company develops Multipath Movies in a single process utilizing its
proprietary software tools in conjunction with the Company's digital production
and layup skills. The Company has four proprietary software tools: (i)
ScripNav, a software tool that enables a script writer to write, review and
correct branching multipath scripts; (ii) LipSync, a
3
<PAGE>
software tool used to synchronize facial expressions and mouth movements to
voice soundtracks automatically; (iii) SCuD Engine, a software system which
collects and integrates the output from all of the component tools to produce
the Multipath Movie; and (iv) DigitalProjector, the tool that contains all the
necessary elements to load and play a Multipath Movie. Utilizing its
proprietary software tools, the Company can produce multiple formats from each
title in a single cost-efficient production process, enabling the Company to
amortize its production costs across the revenue streams from each format. In
addition, the Company's LipSync tool allows for low-cost modification of
Multipath Movies to other languages without the awkward appearance of dubbed
movies. The Company's proprietary software tools and production process are
designed to emulate traditional film writing and production techniques and
allow screenwriters, directors and producers to develop Multipath Movies
without any detailed knowledge of computer programming or significant
assistance from expensive programming teams. As an example, the Company has
entered into an agreement through which Morgan Creek Productions will provide
the Company certain creative, direction and film development assistance on two
motion picture scripts. The Company believes that the utilization of existing
entertainment resources will enable it to generate high-quality digital
entertainment at a low cost.
In addition to developing a new genre of multipath entertainment, the Company
produces and sells interactive CD-ROM titles primarily for children, including
the KidStory Series. Since shipment of its first CD-ROM title in January, 1995,
the Company has developed 16 traditional CD-ROM titles. Examples of its titles
include Flipper and The Yukadoos, which received a 1996 Newsweek Editor's
Choice Award. The Company has licensed the rights to over 40 additional titles
for development of KidStory Series products. In addition, the Company recently
acquired the interactive CD-ROM rights to the Popeye characters. The KidStory
Series is a profitable value-for-price product category that is not dependent
upon the production of hit titles.
ACQUISITION FROM RELATED PARTY OF SEGA AUSTRALIA NEW DEVELOPMENTS
The Company acquired Sega Australia New Developments ("SAND") on September
30, 1996 from Sega Ozisoft Pty. Limited ("Sega Ozisoft") in exchange for a
$1,500,000 promissory note convertible into 780,001 shares of the Common Stock
of the Company. SAND is a "skunk works" research and development operation for
leading edge software tools which had commenced development of the Multipath
Movie. Mark Dyne and Kevin Bermeister, the Chairman of the Board and Chief
Executive Officer, and the President of the Company, respectively, were
instrumental in the formation of SAND in their role as joint managing directors
and significant minority stockholders of Sega Ozisoft. See "Certain
Relationships and Related Transactions." The terms of the transaction,
including the purchase price, were determined through arms' length negotiations
conducted between the Board of Directors of Sega Ozisoft, with Messrs. Dyne and
Bermeister not participating, and Brilliant Interactive Ideas Pty. Ltd. See
"The Company."
The Company is a Delaware corporation, was formed in July 1996 and is the
parent of Brilliant Interactive Ideas Pty. Ltd., a corporation formed under the
laws of New South Wales, Australia in September 1993. Its executive offices are
located at 6355 Topanga Canyon Boulevard, Suite 513, Woodland Hills, California
91367, and its telephone number is (818) 346-3653.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered......................... 2,000,000 shares
Common Stock outstanding after the Offering.. 7,200,001 shares (1)
Use of Proceeds.............................. Production of Multipath Movies,
development of a new production
studio, software tool
enhancement and development,
acquisition of licenses,
repayment of related party
loans and other indebtedness
and for general corporate
purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... BRIL
</TABLE>
- -------
(1) Excludes 910,222 shares of Common Stock subject to outstanding options and
warrants as of October 23, 1996.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30, (1)
---------------------------------
PRO FORMA
1995 1996 1996 (2)
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 842,796 $2,053,877 $1,881,335
Gross profit................................ 186,857 1,315,035 1,142,493
Total operating expenses.................... 566,284 804,748 1,982,206
Income (loss) from operations............... (379,427) 510,287 (839,713)
Net income (loss)........................... (423,853) 553,412 (796,588)
Pro forma net income (loss) per share (3)... $ (0.08) $ 0.10 $ (0.15)
Common shares used in computing pro forma
net income (loss) per share (3)............ 5,288,538 5,337,158 5,337,158
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (2) AS ADJUSTED (4)
--------- ------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 53,061 $ 53,061 $ 21,570,072
Total current assets................. 717,474 717,474 22,234,485
Total assets......................... 915,746 1,065,746 22,582,757
Total current liabilities............ 1,045,179 1,045,179 312,190
Total stockholders' equity
(deficiency)........................ (129,433) 20,567 22,270,567
</TABLE>
- --------
(1) The Company intends to change its fiscal year end from June 30 to December
31, effective December 31, 1996.
(2) Reflects the acquisition by the Company of SAND, including $150,000 of the
purchase price allocated to certain assets, in exchange for the SAND Note
as if such transaction had occurred on July 1, 1995 and the conversion of
the SAND Note into 780,001 shares of Common Stock upon the closing of the
Offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Pro Forma Financial Data."
(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share. Also see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Financial Data."
(4) As adjusted to reflect (i) the transactions described in footnote (2)
above, (ii) the sale of 2,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $12.50 per
share after deducting underwriting discounts and commissions and estimated
offering expenses, and (iii) the repayment of $732,989 of short-term
obligations. See "Use of Proceeds."
Except as otherwise indicated, all information in this Prospectus (i) has
been adjusted, where applicable, to reflect the 4.42-for-1 stock split effected
by the Company on September 13, 1996; (ii) reflects the incorporation of the
Company and the subsequent exchange of 100,000 outstanding shares of Brilliant
Interactive Ideas, Pty. Ltd. ("BII Australia") for 1,000,000 shares of the
Company; (iii) reflects the acquisition on September 30, 1996 by the Company of
SAND in exchange for a $1,500,000 principal amount one-year 8% convertible
promissory note payable (the "SAND Note") to Sega Ozisoft; (iv) reflects the
conversion of the SAND Note into 780,001 shares of the Company's Common Stock
upon the closing of the Offering; (v) with respect to information subsequent to
June 30, 1996 set forth in this document, reflects the conversion rate at June
30, 1996 of Australian Dollars to United States Dollars of 1:0.789; and (vi)
assumes that the Underwriters' over-allotment option is not exercised.
5
<PAGE>
THE COMPANY
Brilliant is a production and development studio introducing a new
generation of digital entertainment to be distributed over the Internet, on
CD-ROM, as television programming and for home video. The Company,
headquartered in the United States, was incorporated during July 1996. The
Company has been formed through the combination of two businesses: Brilliant
Interactive Ideas, Pty. Ltd. ("BII Australia"), an entertainment software
developer and producer; and Sega Australia New Developments ("SAND"), a "skunk
works" research and development operation for leading edge software tools. BII
Australia became a wholly-owned subsidiary of the Company through the exchange
of all 100,000 outstanding shares of BII Australia for 1,000,000 shares of
Common Stock of the Company. In addition, on September 30, 1996 the Company
acquired SAND. SAND was established during the second quarter of 1994 by Sega
Ozisoft Pty., Limited ("Sega Ozisoft"), one of the largest publishers and
distributors of entertainment software products in Australia and New Zealand,
the predecessor of which was co-founded by Mark Dyne and Kevin Bermeister.
Since its founding in September 1993, BII Australia has developed and sold
interactive education and entertainment CD-ROM titles primarily for children.
As a result of his experience in the software industry, Mark Miller, Managing
Director of BII Australia, identified BII Australia as a promising software
developer and, during December 1994, Mark Miller, through Pacific Interactive
Education Pty. Limited ("PIE"), and Reefknot Limited ("Reefknot"), a passive
single purpose investment company, purchased a controlling interest in BII
Australia. Under the direction of Mr. Miller, BII Australia has pursued a
strategy of producing profitable value-for-price software entertainment
product that is not dependent upon the production of hit titles.
Sega Ozisoft, which was built by Messrs. Dyne and Bermeister and is
majority-owned by Sega Enterprises of Japan ("Sega"), has been an
entertainment CD-ROM publisher and distributor since 1982. As a leading
publisher and distributor of interactive software products for the Australian
market, Sega Ozisoft has operated as the local representative for leading
software developers and achieved expertise in product positioning, associated
marketing programs, customer service support and other related functions. Sega
Ozisoft has represented over 100 United States and European based software
publishers and successfully launched more than 4,000 products. Through Sega
Ozisoft Messrs. Dyne and Bermeister have had broad exposure to the types of
entertainment software introduced throughout the past decade, the distribution
and retail strategies followed by various industry participants, the
advantages and disadvantages of various multimedia business models and the
numerous participants within the multimedia software and various related
industries. As a result of this experience, Messrs. Dyne and Bermeister began
to identify certain opportunities within the entertainment software industry
that were not being addressed. Traditional software games are directed at a
demographic audience comprised primarily of young males, ages eight to 21, who
prefer high adventure, fast action games and who are willing to spend
substantial time on this activity. Other potential market segments, such as
females and adult males over 21, typically have not been targeted by
developers. Additionally, Messrs. Dyne and Bermeister recognized that
consumers were seeking additional entertainment applications for their
computers. Messrs. Dyne and Bermeister conceptualized a new genre of
entertainment, the Multipath Movie, that would address these underserved
market segments as well as the traditional games and could be offered at
acceptable price points.
Accordingly, Sega Ozisoft established SAND as a stand-alone research and
development division to develop leading edge digital entertainment technology.
SAND has been responsible for developing the suite of proprietary software
tools and low-cost production process that are the foundation for the
Company's new generation of animated digital entertainment.
Sega Ozisoft and BII Australia began working together during November of
1994 to jointly continue the development of SAND's software tools. BII
Australia's core capabilities in software product development and production
processes were recognized as valuable in developing commercial digital
entertainment product applications utilizing SAND's software tools. BII
Australia provided consulting advice regarding integration of individual tool
components, the required functionality of the tool suite and technical issues
impacting the use of text, sound, graphics and other special effects in the
development of an interactive digital entertainment product. BII Australia and
Sega Ozisoft formalized their relationship on January 17, 1996 with an
agreement through
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which BII Australia provided continued technical assistance for the
enhancement of SAND's software tools and in the development of the first
Multipath Movie product, which is based on the Australian comic strip
character "Cyberswine."
With the evolution of the SAND software tools and the realization of the
potential commercial application of associated digital entertainment products,
Sega Ozisoft began developing a business plan to successfully exploit the
commercial potential of products produced with the SAND software tools.
Accordingly, it was determined that the most effective way to accelerate
development of SAND's software tools was to form a separate entity that could
properly oversee and manage the ongoing software tool development and the
product launch of the various business lines generated with SAND's software
tools. Messrs. Dyne and Bermeister developed a plan to (i) acquire a
substantial interest in the Company and for BII Australia to serve as the
production development platform for the new entity, and (ii) acquire SAND. In
June, 1996, Messrs. Dyne and Bermeister reached agreement with Reefknot to
purchase stock of the Company from Reefknot. Pursuant to their agreement with
Reefknot, Messrs. Dyne and Bermeister have since each acquired 15.3% of the
outstanding shares of Common Stock of the Company from Reefknot for an
aggregate cash purchase price of $2,982,000. See "Principal Stockholders."
Pursuant to a Memorandum of Understanding dated June 12, 1996, and superseded
by an Asset Purchase Agreement dated September 12, 1996, the Company acquired
SAND on September 30, 1996 from Sega Ozisoft in exchange for a $1,500,000
promissory note convertible into 780,001 shares of the Common Stock of the
Company.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
or experience could differ significantly from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to those discussed in this section as well as
those discussed elsewhere in this Prospectus.
ACCEPTANCE OF MULTIPATH MOVIE CONCEPT; SUCCESSFUL DEVELOPMENT OF MULTIPATH
MOVIES WITH APPEALING CREATIVE CONTENT
The success of the Company's Multipath Movie products will depend to a
significant extent on acceptance by the market of the Multipath Movie concept.
The market for entertainment software is emerging and is dependent upon a
number of variables, including consumer preferences, the installed base of
personal computers and a sufficient number of entertainment software titles to
stimulate market development. Any competitive, technological or other factor
materially adversely affecting the introduction or sale of personal computers
or entertainment software would have a material adverse effect on the Company.
Because the market for entertainment software is relatively small in
comparison with the overall market for consumer software products, it is
impossible to predict with any degree of certainty the future rate of growth,
if any, and the size of the market for the Company's products.
Each Multipath Movie will be an individual artistic work, and its commercial
success primarily will be determined by user reaction, which is unpredictable.
The Company has not yet introduced its first Multipath Movie. The commercial
success of the Company's Multipath Movies will depend on its ability to
predict the type of content that will appeal to a broad audience and to
develop stories and characters that capture the attention and imagination of
the market. In addition, the success of the Company's Multipath Movies will
depend upon the Company's ability to develop popular characters and to license
recognized characters and properties from third parties for its software
titles. There can be no assurance that the Company will be able to develop or
license popular stories or characters. The success of a Multipath Movie also
depends upon the effectiveness of the Company's marketing and successful
introduction of the first Multipath Movie through the Company's bundling
relationship with Packard Bell NEC, as well as the quality and acceptance of
other competing programs released into the market at or near the same time,
critical reviews, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty. There can be no assurance that the Company will be able to
successfully introduce the Multipath Movie through its bundling relationship
with Packard Bell NEC or otherwise. Accordingly, there exists substantial risk
that some or all of the Company's Multipath Movies will not be commercially
successful, resulting in certain costs not being recouped or anticipated
profits not being realized. Further, the success of the Multipath Movie genre
will substantially depend on the market's reception of the first Multipath
Movie. The failure of the Company's initial Multipath Movie to achieve
commercial success would damage the ability of the Company to introduce
additional titles. Accordingly, the failure of any of the Company's Multipath
Movies, and especially its first Multipath Movie, to achieve commercial
success, could have a material adverse affect on the business, operating
results and financial condition of the Company.
FLUCTUATING OPERATING RESULTS
The Company intends to generate a substantial majority of its future revenue
from the development and production of Multipath Movies and other three-
dimensional digitally created entertainment. The first of its Multipath
Movies, Cyberswine, is expected to be released in the fall of 1997. The first
product in the Storyteller Series is not expected to be released until late
1997. The Company's annual and quarterly revenue will depend upon the
successful development, timing and market acceptance of its interactive
products and upon the costs to distribute and promote these products.
Specifically, the revenues derived from the production and distribution of the
Company's Multipath Movies will depend primarily on the acceptance by the
market of the Multipath Movie
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concept and the underlying content of the Multipath Movie, neither of which
can be predicted nor necessarily bear a direct correlation to the production
or distribution costs incurred. See "--Acceptance of Multipath Movie Concept;
Successful Development of Multipath Movies with Appealing Creative Content,"
and "--Dependence on Development of Additional Multipath Movies." The
commercial success of a film also depends upon promotion and marketing,
production costs, impact of competition and other factors. See "--
Competition." Accordingly, the Company's annual and quarterly revenues are and
will continue to be extremely difficult to forecast. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's expense levels are, to a large extent, fixed. The Company may
be unable to adjust spending in a timely manner to compensate for any revenue
shortfall. As a result, any significant shortfall in revenue from the
Company's Multipath Movies would have an immediate material adverse effect on
the Company's business, operating results and financial condition. The Company
plans to increase its operating expenses to fund greater levels of Multipath
Movie and traditional CD-ROM development, research and development, increased
marketing operations and expansion of its distribution channels. To the extent
that such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition
will be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Historically, the Company has experienced significant fluctuations in its
operating results from quarter to quarter and it expects these fluctuations to
continue in the future. Factors that may influence the Company's quarterly
operating results include customer demand for the Company's products,
introduction or enhancement of products by the Company and its competitors,
the timing of releases of new products or product enhancements by the Company
and its competitors, introduction or availability of new hardware, market
acceptance of the Multipath Movies and other new products, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, reviews in the industry press concerning
the products of the Company or its competitors, changes or anticipated changes
in pricing by the Company or its competitors, mix of distribution channels
through which products are sold, mix of products sold, product returns, the
timing of orders from major customers, order cancellations, delays in shipment
and other developments and decisions including the timing and extent of
development expenditures, management's evaluation and judgement regarding a
title's acceptance, other unanticipated operating expenses and general
economic conditions. Additionally, a majority of the unit sales for a product
typically occurs in the quarter in which the product is introduced. As a
result, the Company's revenues may increase significantly in a quarter in
which a major product introduction occurs and may decline in following
quarters. The Company's revenues both domestically and internationally have
varied significantly between monthly and quarterly periods. Therefore, in the
future, the operating results for any quarter should not be taken as
indicative of the results for any quarter in subsequent periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The entertainment software business is highly seasonal. Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest
in the second and third calendar quarters. This seasonal pattern is due
primarily to the increased demand for entertainment software products during
the year-end holiday buying season. As a result, a disproportionate share of
the Company's net revenues historically have been generated in the second
quarter of the Company's fiscal year. The Company expects its revenues and
operating results will continue to reflect these seasonal factors.
The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending
to decline during recessionary periods. There can be no assurance that the
Company will be able to adjust its anticipated product development
expenditures and other expenses in the event of an economic downturn during
such development. Accordingly, if a recessionary period occurs, tending to
result in decrease sales of the Company's products, product development
expenses likely will remain constant and the Company's business, operating
results and financial condition could be adversely affected. See "--Rapid
Technological Change; Changing Product Platforms and Formats."
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Due to all of the foregoing factors, it is also likely that in some future
periods the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Fluctuating Operating Results."
SOFTWARE TOOLS AND PRODUCT DEVELOPMENT
The suite of software tools that will enable the Company to create its
Multipath Movie has been developed over the past two years and additional
refinement of these tools may be necessary in order to create the Multipath
Movie. The Company believes that its future success depends in large part upon
the continuous enhancement of the software tools necessary to create the
Multipath Movie. If problems in the development of the Company's software
tools arise, no assurance can be given that the Company will be able
successfully to remedy these problems. Even if the Company can remedy these
potential problems, the creation, and consequently the distribution, of the
Multipath Movie may be significantly delayed or could become significantly
more expensive. Any such delay or increase in cost would have a material
adverse affect on the business, operating results and financial condition of
the Company.
For the foreseeable future, the Company expects to be significantly
dependent upon the success of the Multipath Movie. The Multipath Movie is
still in the development stage. The Company expects to release its first
product in the Multipath Movie product line in the fall of 1997. There can be
no assurance that these products will be successfully developed at all, or if
successfully developed, will be released during these periods. If the Company
is unable to timely produce and develop these products and subsequent digital
entertainment products that meet with broad market acceptance, the Company's
business, operating results and financial condition will be materially
adversely affected.
Also, entertainment products as complex as those offered by the Company may
contain undetected errors or defects when first introduced or as new versions
are released. The Company has in the past discovered software errors in
certain of its new products and enhancements after their introduction.
Although the Company has not experienced material adverse effects resulting
from any such errors to date, there can be no assurance that errors or defects
will not be found in new products or releases after commencement of commercial
shipments, resulting in adverse product reviews and a loss of or delay in
market acceptance, which would have a material adverse effect upon the
Company's business, operating results and financial condition.
DEPENDENCE ON DEVELOPMENT OF ADDITIONAL MULTIPATH MOVIES
The Company's success will depend largely upon its ability in the future to
continuously develop new, commercially-successful Multipath Movie titles and
to replace revenues from Multipath Movie titles in the later stages of their
life cycles. If revenues from new products or other activities fail to replace
declining revenues from existing products, the Company's business, operations
and financial condition could be materially adversely affected. In addition,
the Company's success will depend upon its ability to develop popular
characters and to license recognized characters and properties from third
parties for its digital entertainment products. If the Company is unable to
develop popular characters or if the cost of licensing characters and
properties from third parties becomes prohibitive, the Company's business,
operating results and financial condition could be adversely affected. Also,
pursuant to certain of its licensing arrangements, the Company historically
has, and may continue to, prepay royalties to third parties. There can be no
assurance that the sales of products associated with these royalties will
equal or exceed the amount of the prepayment. See "--Acceptance of Multipath
Movie Concept; Successful Development of Multipath Movies with Appealing
Creative Content," "--Recovery of Prepaid Royalties and Guarantees" and
"Business--Sales and Marketing."
LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY
The Company was founded in September 1993, and shipped its initial CD-ROM
product in November 1994. The Company has not introduced its first Multipath
Movie and has only recently acquired the software tools necessary to produce a
Multipath Movie. Accordingly, the Company has only a limited operating history
in the
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case of CD-ROM development and no operating history in the case of Multipath
Movies upon which an evaluation of the Company and its prospects can be based.
There can be no assurance that the revenues of the Company will continue at
their current level or will increase, or that the Company will be able to
achieve profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In the quarter ending September 30, 1996, the Company incurred certain
charges and non-recurring expenses. In connection with the Company's
acquisition of SAND consummated on September 30, 1996, the Company expensed
approximately $1,350,000 attributable to in-process research and development.
This charge for in-process research and development was determined based upon
an independent valuation study made of the various research and development
projects included in the assets acquired in the SAND acquisition. Also, the
Company has recently entered into strategic relationships with Morgan Creek
Interactive, Inc. ("Morgan Creek"), and Packard Bell NEC, Inc. ("Packard Bell
NEC"). The Company has issued to Packard Bell NEC and Morgan Creek warrants to
purchase 600,000 and 85,000 shares of Common Stock, respectively. See
"Business--Strategic Relationships." Issuance of the warrants to Packard Bell
NEC and Morgan Creek resulted in a $2,055,000 operating expense and a
corresponding credit to equity, based on the value of the warrants issued.
As a result of the foregoing, the Company incurred a significant loss in the
quarter ended September 30, 1996. In addition, the Company expects to incur
significant operating expenses and development costs as it completes
development, and commences marketing, of its Multipath Movies and expands in
anticipation of growth. The Company expects that these expenses and
development costs will result in losses in the quarters ended December 31,
1996, March 31, 1997 and June 30, 1997, and that the Company could incur
quarterly losses thereafter.
SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES
The Company depends substantially upon third parties for several critical
elements of its business including the development and licensing of content
and the distribution of its products.
Dependence Upon Strategic Relationships
The Company has entered into strategic relationships with Packard Bell NEC,
Crawford Productions Pty., Ltd. ("Crawfords") and Morgan Creek, as well as
licensing arrangements with numerous additional companies that own the stories
underlying and/or characters in many of the Company's products. The Company's
business strategy is based largely on its strategic relationships with these
and other companies. In each of these relationships, mutual agreement of the
parties is required for significant matters, or approval of the strategic
partner or both parties is required to release products or to commence
distribution of products. For example, the Company will rely on Packard Bell
NEC to distribute CD-ROMs to purchasers of certain Packard Bell NEC computers
as a significant element of the Company's launch of the Multipath Movie genre.
Packard Bell NEC's obligation to distribute such CD-ROMs will depend upon
Packard Bell NEC's acceptance of master CD-ROMs complying with the Company's
specifications. Consequently, Packard Bell NEC may, in the exercise of its
approval rights, delay the introduction of the Company's first Multipath
Movie. Also, Morgan Creek and Crawfords have various creative controls and
approval rights pursuant to their joint venture agreements with the Company.
These creative controls and approval rights allow Morgan Creek or Crawfords to
reject or delay the Multipath Movie productions of the respective joint
ventures. There can be no assurance that the Company will not be subject to
delays resulting from disagreements with or an inability to obtain approvals
from its strategic partners or that the Company will achieve its objectives in
respect of any or all of its strategic relationships or continue to maintain
and develop these or other strategic relationships, or that licenses between
the Company and any such third party will be renewed or extended at their
expiration dates. Any such delays or the Company's failure to renew or extend
a key license or maintain any of its strategic relationships could materially
and adversely affect the Company's business, operating results and financial
condition. In addition, under certain key license agreements, the Company must
obtain approval on a timely basis from the licensor in order to ship products
it develops under the license. There can be no assurance that the Company will
obtain such approval
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and failure to do so could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Strategic
Relationships."
Use of Independent Software Developers and Content Providers
In addition to internally developing software and creating content, the
Company uses entertainment software created by independent software developers
as well as content developed by third parties. The Company has less control
over the scheduling and the quality of the software generated by independent
contractors than over that developed by its own employees. Additionally, the
Company may not be able to secure the services of talented content developers.
The Company's business and future operating results will depend in part on the
Company's continued ability to maintain relationships with skilled independent
software developers and content providers, and to enter into and renew product
development agreements with such developers. There can be no assurance that
the Company will be able to maintain such relationships or enter into and
renew such agreements.
RISKS ASSOCIATED WITH INTERNET DELIVERY
The Company intends to distribute its Multipath Movies via an Internet site
to be established by the Company. The Company also intends to distribute
certain of its Multipath Movies through a link connecting Packard Bell NEC's
"Planet Oasis" Web site to the Company's Internet site. Accordingly, any
system failure that causes interruption or an increase in response time on the
Company's Internet site or the Planet Oasis Web site could result in less
traffic to and distribution of Multipath Movies via the Company's Internet
site and, if sustained or repeated, could reduce the attractiveness of the
Company's products. The Company is also dependent upon Web browsers and
Internet and online service providers to ensure user access to its products.
User acceptance with respect to payment methods over the Internet may also
create barriers to distribution of the Company's products through the
Internet. Any disruption in the Internet access provided to the Company's
Internet site provided by Planet Oasis, Internet and online service providers
or Web browsers or any failure by the Company's Internet site to handle higher
volumes of transactions could have a material adverse effect on the Company's
business, operating results and financial condition.
The seamless appearance of Multipath Movies delivered via the Internet
requires that while a scene is being viewed, succeeding scenes must be
downloaded. This requires the use of 28.8 kilobits per second or faster
modems, computers equipped with high-speed Pentium (or equivalent)
microprocessors, 24 megabytes of random access memory and appropriately
configured operating systems. These requirements generally are not satisfied
by the majority of the base of currently installed PCs. There can be no
assurance that adequately equipped and configured computers will become
widespread prior to release of the Company's Multipath Movies. Users of
computers with less sophisticated PCs may experience noticeable latencies or
"lag times" between scene changes. Additionally, the performance
characteristics of Multipath Movies delivered via the Internet may not equal
those of Multipath Movies delivered solely on CD-ROMs, particularly with
respect to perceived seamlessness and sound quality. Moreover, communications
between the user and an Internet site delivering Multipath Movies may require
routing of Multipath Movie instructions through several servers and may result
in brief but noticeable lag times. Noticeable lag times or negative
comparisons to Multipath Movies distributed on CD-ROM may reduce the
attractiveness of online versions of the Multipath Movies.
COMPETITION
The markets for the Company's digital entertainment products are intensely
competitive, subject to rapid change and characterized by constant demand for
new product features at reduced prices and pressure to accelerate the release
of new products and product enhancements. The primary competitive areas for
the Company are identified below.
Computer Graphics Special Effect Firms. The Company expects to compete with
computer graphics special effects firms, including Pixar, Industrial Light &
Magic Inc. ("ILM"), an affiliate of Lucasfilm Ltd. ("Lucasfilm"), Digital
Domain, Sony ImageWorks, Pacific Data Images, Rhythm & Hues and Boss Film
Studios, Inc. These computer graphics special effects firms are capable of
creating their own three-dimensional computer animated feature films and may
produce three-dimensional computer animated feature films for movie studios
that compete with the Company. Pixar already has produced and successfully
released an animated
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feature film, Toy Story, and ILM has created and produced three-dimensional
character animation used for the ghosts in the live action film Casper. These
firms, each of which have greater financial and marketing resources than the
Company, are expected to compete intensely with the Company in the production
of animated digital products.
CD-ROM Publishers. The CD-ROM industry is intensely competitive and consumer
demand for particular software products may be adversely affected by the
proliferation of competitive products. The Company believes that the primary
competitive factors in the market for CD-ROM products include creative
content, product quality, technological capabilities, pricing, breadth of
features, marketing and distribution resources and customer service and
support. The Company will compete primarily against companies offering
entertainment software and related products. The Company's competitors in this
area will include several large companies with substantially greater name
recognition, financial, technical, marketing and other resources, including
Broderbund Software, Inc. ("Broderbund"), 7th Level, Inc. ("7th Level"), GT
Interactive Software, Inc. ("GT Interactive"), Electronic Arts, Softkey
International, Inc. ("Softkey"), Sierra On-Line, Inc. ("Sierra On-Line") and
Davidson & Associates Inc. ("Davidson"). Moreover, large corporations, such as
the Walt Disney Company ("Disney") and Microsoft, with substantial bases of
intellectual property content and substantial financial resources, have
entered or announced their intention to enter the market for CD-ROM
entertainment products.
Movie Studios and Production Companies. The Company's Multipath Movies will
compete with traditional feature films and television programming produced by
major movie studios, including Disney, Warner Bros. Inc. ("Warner Bros."),
Twentieth Century Fox Film Corporation ("Twentieth Century Fox"), Paramount
Pictures ("Paramount"), Sony Pictures, Inc. ("Sony"), Lucasfilm, Universal
City Studios, Inc. ("MCA Universal") and MGM/UA, as well as numerous other
independent motion picture and television production companies. Several movie
studios already have developed and released animated feature films and the
Company expects additional competition in the animated feature film market
from these and other movie studios. Other movie studios have announced their
intention to enter the animated feature film market, including DreamWorks SKG,
a studio formed in 1994 which is expressly targeting the animated film market.
The Company's broadcast and home video products will compete with the films of
these movie studios for audience acceptance and exhibition over
broadcast/cable and home video channels. In addition, the Company will compete
with movie studios for the acquisition of literary properties, production
financing, the services of performing artists, and the services of other
creative and technical personnel, particularly in the fields of animation and
technical direction. Most of the movie studios with which the Company will
compete have significantly greater name recognition and significantly greater
financial, technical, creative, marketing, and other resources than does the
Company. Due to their substantially greater resources, these movie studios
likely will be able to enter into more favorable distribution arrangements and
to promote their films and television programming more successfully than the
Company.
Several movie studios, including Disney and Lucasfilm (through its affiliate
ILM), have developed their own internal computer animation capability and have
created computer animation for special effects in animated films. Other movie
studios may internally develop, license or sub-contract three-dimensional
animation capability. Further, the Company believes that continuing
enhancements in computer hardware and software technology will lower barriers
to entry for studios or special effects companies which intend to produce
computer animated feature films or other products.
In response to all of these competitive forces, the Company will be required
to make a high level of investment in content and tool development, marketing
and customer service and support. There can be no assurance that the Company
will have sufficient resources to make such investments or, even if they are
made, that the Company's products will be competitive. Additionally, present
or future competitors may be able to develop products comparable or superior
to those offered by the Company or adapt more quickly than the Company to new
technologies or evolving customer requirements. The Company's competitors also
may increase their efforts to gain and retain market share through competitive
pricing or product giveaways. These competitive pressures may necessitate
price reductions by the Company, thus reducing the Company's profit margins.
In addition, as the number of competitors increases and competition for scarce
consumer time available
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to be devoted to the products such as those of the Company and equally scarce
retail shelf space becomes more intense, the Company may need to increase
marketing expenditures to maintain sales and product differentiation. Also, as
competition for popular titles and themes that may be used in entertainment
software increases, the cost of acquiring such titles and properties is likely
to increase, resulting in reduced margins. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS
The entertainment software market and the personal computer industry in
general are characterized by rapid and significant technological developments
and frequent changes in computer operating environments. To compete
successfully in these markets, the Company must continually improve and
enhance its existing products and technologies and develop new products and
technologies that incorporate technological advances while remaining
competitive in terms of performance and price. The Company's success also will
depend substantially upon its ability to anticipate the emergence of, and to
adapt its products to, popular platforms for consumer software.
The Company has designed its Multipath Movies for use with the IBM-
compatible PC and the Sega Saturn game console. The Company intends to design
future products for use with new platforms which will require substantial
investments in research and development. Generally, such research and
development efforts must occur one to two years in advance of the widespread
release or use of the platforms in order to introduce products on a timely
basis following the release of such platforms. The research and development
efforts in connection with games for certain advanced and emerging platforms
may require greater financial and technical resources than currently possessed
by the Company. In addition, there can be no assurance that the new platforms
for which the Company develops products will achieve market acceptance and, as
a result, there can be no assurance that the Company's development efforts
with respect to such new platforms will lead to marketable products or
products that generate sufficient revenues to offset the research and
development costs incurred in connection with their development. Failure to
develop products for new platforms that achieve significant market acceptance
would have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that technological
developments will not render certain of the Company's existing products
obsolete, that the Company will be able to adapt its products or technologies
to emerging hardware platforms, that the Company has chosen to support
platforms that ultimately will be successful or that the Company will be able
successfully to create software titles for such platforms in a timely manner,
or at all. See "--Software Tools and Product Development."
DEPENDENCE ON KEY PERSONNEL
The Company's success has and will continue to depend to a significant
extent upon certain key management, product development and technical
personnel, many of whom would be difficult to replace, particularly Mark Dyne,
its Chairman and Chief Executive Officer and Kevin Bermeister, its President.
Although the Company has entered into employment agreements with certain
officers, such agreements are terminable upon 30 days notice by either party.
Accordingly, there can be no assurance that such employees will continue to be
available to the Company. The loss of the services of one or more of these key
employees could have a material adverse effect on the Company and the
Company's future success will depend in large part upon its ability to
attract, retain and motivate personnel with a variety of technical and
managerial skills, including software development and programming expertise.
Significant competition exists for such personnel and the companies with which
the Company competes are often larger and more established than the Company.
Additionally, there is currently an industry-wide shortage of technical
personnel which makes it more difficult to attract and retain such personnel.
There can be no assurance that the Company will be able to retain and motivate
its managerial and technical personnel or attract additional qualified members
to management or technical staff. The inability to attract and retain
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Employees" and "Management."
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SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF EXECUTIVE
OFFICER AND PRESIDENT
The Company's Chief Executive Officer and Chairman, Mark Dyne and its
President, Kevin Bermeister, also serve as joint managing directors of Sega
Ozisoft, Sega Enterprises (Australia) Pty., Ltd. ("Sega Enterprises") and
other businesses. Although Messrs. Dyne and Bermeister are active in the
management of the Company, they are not required to spend a certain amount of
time at the Company nor are they able to devote their full time and resources
to the Company. Further, the Company does not have employment agreements with
either of Messrs. Dyne or Bermeister. There can be no assurance that the
inability of Messrs. Dyne and Bermeister to devote their full time and
resources to the Company will not adversely affect the Company's business,
operating results or financial condition. See "Management."
CONFLICTS OF INTEREST
Certain of the Company's directors and officers are directors or officers of
potential competitors and/or strategic partners of the Company. These
relationships may give rise to conflicts of interest between the Company, on
the one hand, and one or more of the directors, or officers and/or their
affiliates, on the other hand. The Company's Certificate of Incorporation
provides that Mark Dyne and Kevin Bermeister are required to present to the
Company any corporate opportunities for the development of any type of digital
entertainment with the exception of opportunities for (i) minority
participation in the development of digital entertainment and
(ii) participation in the development by others of digital entertainment where
publishing and distribution rights for the product to be developed are offered
to Messrs. Dyne and/or Bermeister solely for Australia, New Zealand and/or
Southern Africa. See "Certain Relationships and Related Transactions." The
Company's Certificate of Incorporation provides that Messrs. Dyne and
Bermeister are not required to present to the Company any other opportunities
which potentially may be of benefit to the Company.
NEW PRODUCTION STUDIO
The Company's current production facility located in Manly, Australia, does
not provide adequate space to house the necessary equipment and personnel to
develop the quantity of Multipath Movies intended to be produced by the
Company in the next several years. The Company intends to use approximately
$4.5 million of the net proceeds from the Offering to equip a production
studio in Australia. It is expected that the creation of this studio will
require a substantial time commitment of certain members of management in
order to facilitate an uninterrupted and efficient transition of current
operations to the new facility and could result in delays in production. There
can be no assurance that the Company will be able to equip the production
studio at the budgeted price. Additionally, there can be no assurance that the
facility will be available on time or that the Company will be successful in
timely hiring and training new content developers and software programmers
necessary to conduct the additional operations in which event the development,
and consequently the release, of the Company's products may be delayed. See
"--Software Tools and Product Development." Any such delay would have a
material adverse effect upon the Company's business, operating results and
financial condition.
MANAGEMENT OF BUSINESS CHANGES; POTENTIAL GROWTH; POTENTIAL ACQUISITIONS
Implementation of the Company's business plan, including introduction of the
Company's Multipath Movies, management of the Company's joint ventures with
Morgan Creek and Crawfords, management of the Company's strategic relationship
with Packard Bell NEC, the establishment of a new production studio in
Australia, and the general strains of the Company's new role of a public
company will require that the Company significantly expand its operations in
all areas. This growth in the Company's operations and activities will place a
significant strain on the Company's management, operational, financial and
accounting resources. Successful management of the Company's operations will
require the Company to continue to implement and improve its financial and
management information systems. In addition, the restructuring of the Company
and resulting management and reporting of Australian operations and financial
results from the United States, as well as other aspects of the process of
preparing the Company for the Offering have placed and will continue to place
an additional strain on the Company's accounting and information systems
resources. The Company's ability to manage its future growth, if any, will
also require it to hire and train new employees, including management and
15
<PAGE>
technical personnel, and motivate and manage its new employees and integrate
them into its overall operations and culture. The Company recently has made
additions to its management team and is in the process of expanding its
accounting staff and modifying its internal procedures to adapt to its new
role as a public company, a process which is expected to continue following
the Offering. The Company's failure to manage implementation of its business
plan and the changes made to structure and prepare for the Offering would have
a material adverse effect on the Company's business, operating results and
financial condition.
In the future, the Company may acquire complementary companies, products or
technologies, although no specific acquisitions currently are pending or under
negotiation. Acquisitions involve numerous risks, including adverse short-term
effects on the combined business' reported operating results, impairments of
goodwill and other intangible assets, the diversion of management's attention,
the dependence on retention, hiring and training of key personnel, the
amortization of intangible assets and risks associated with unanticipated
problems or legal liabilities.
LIMITED PROPRIETARY PROTECTION
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company currently intends to file United States
patent applications relating to certain components of its proprietary
technology. The Company also relies on trademark, trade secret and copyright
laws to protect its technology, with the source code for the Company's
proprietary software being protected both as a trade secret and as a
copyrighted work. Also, it is the Company's policy that all employees and
third-party developers sign nondisclosure agreements. However, there can be no
assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or
superior technology independently. Also, the Company has no license agreements
with the end users of its products and does not copy-protect its software, so
it may be possible for unauthorized third parties to copy the Company's
products or to reverse engineer or otherwise obtain and use information that
the Company regards as proprietary. Although the Company is not aware of
unauthorized copying of its products, if a significant amount of unauthorized
copying of the Company's products were to occur, the Company's business,
operating results and financial condition could be adversely affected.
Furthermore, policing unauthorized use of the Company's products is difficult
and costly, and software piracy can be expected to be a persistent problem. If
litigation is necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others, such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results and
financial condition. Ultimately, the Company may be unable, for financial or
other reasons, to enforce its rights under intellectual property laws and the
laws of certain countries in which the Company's products are or may be
distributed may not protect the Company's products and intellectual rights to
the same extent as the laws of the United States.
The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third parties.
Since the software tools used to create the Multipath Movies were developed by
SAND, a division of Sega Ozisoft, the Company relies entirely on the
representations of Sega Ozisoft contained in the SAND Acquisition Agreement
between BII Australia and Sega Ozisoft that, to Sega Ozisoft's best knowledge,
the SAND technology and software acquired by the Company does not infringe the
proprietary rights of others. Additionally, although the Company has received
no communication from third parties alleging the infringement of proprietary
rights of such parties, there can be no assurance that third parties will not
assert infringement claims in the future. Any such third party claims, whether
or not meritorious, could result in costly litigation or require the Company
to enter into royalty or licensing agreements. There can be no assurance that
the Company would prevail in any such litigation or that any such licenses
would be available on acceptable terms, if at all. If the Company were found
to have infringed upon the proprietary rights of third parties, it could be
required to pay damages, cease sales of the infringing products and redesign
or discontinue such products, any of which alternatives, individually or
collectively could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Proprietary Rights."
16
<PAGE>
RECOVERY OF PREPAID ROYALTIES AND GUARANTEES
The Company may from time to time, enter into agreements with licensors of
intellectual property that involve advance payments of royalties and
guaranteed minimum royalty payments. If the sales volumes of products subject
to such arrangements are not sufficient to recover such advances and
guarantees, the Company will be required to write off unrecovered portions of
such payments. If the Company is required to write off a material portion of
any advances, or ultimately accrue for the guarantees, its business, operating
results and financial condition could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INTERNATIONAL BUSINESS
In fiscal 1995 and 1996, international sales, principally in Australia,
accounted for approximately 20%, and 40%, respectively, of the Company's
revenues. The Company expects that international sales will continue to
account for a significant portion of the Company's total revenue. The
Company's international business is subject to numerous risks, including the
need to comply with a wide variety of foreign and U.S. export and import laws,
changes in export or import controls, tariffs and other regulatory
requirements, the imposition of governmental controls, political and economic
instability, trade restrictions, the greater difficulty of administering
business overseas and general economic conditions. Although the Company's
international sales are denominated principally in United States dollars,
sales to international customers may also be affected by changes in demand
resulting from fluctuations in interest and currency exchange rates. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States.
There can be no assurance that these factors will not have a material adverse
effect on the Company's business and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONTROL BY EXISTING STOCKHOLDERS
Immediately following the Offering, the Company's officers and directors and
Sega Ozisoft, of which Messrs. Dyne and Bermeister are directors and
stockholders, will own approximately 40.2% of the Company's outstanding shares
(approximately 38.5% assuming the full exercise of the Underwriters' over
allotment option). As a result, these stockholders will be able to control the
Company and its operations, including the election of at least a majority of
the Company's Board of Directors and thus, the policies of the Company. The
voting power of these stockholders could also serve to discourage potential
acquirors from seeking to acquire control of the Company through the purchase
of the Common Stock, which might have a depressive effect on the price of the
Common Stock. See "Management," "Principal Stockholders" and "Description of
Capital Stock."
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered hereby
are estimated to be approximately $22.5 million. The Company expects to use
approximately $4.5 million of such proceeds to fund the establishment of a
production studio in New South Wales, Australia, approximately $1.0 million
for ongoing software tool development, approximately $1.0 million to acquire
content licenses and $883,000 to repay the principal and interest accrued on
related party and other indebtedness. However, the Company may change the
allocation of these proceeds in response to developments in the entertainment
and information technology industries and changes in the Company. Accordingly,
Company management will have broad discretion as to the application of the net
proceeds of the Offering. See "Use of Proceeds."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's future capital requirements will depend on many factors,
including but not limited to, the quantity of Multipath Movies developed, the
cost of content development, marketing and distribution, the size and timing
of future acquisitions, if any, and the availability of additional financing.
To the extent that existing resources and future earnings are insufficient to
fund the Company's activities, the Company may need to raise
17
<PAGE>
additional funds through debt or equity financings. No assurance can be given
that such additional financing will be available or that, if available, it can
be obtained on terms favorable to the Company and its stockholders. In
addition, any equity financing could result in dilution to the Company's
stockholders. The Company's inability to obtain adequate funds would adversely
affect the Company's operations and ability to implement its strategy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
IMMEDIATE AND SUBSTANTIAL DILUTION
The proposed initial public offering price is substantially higher than the
book value per outstanding share of Common Stock. Specifically, investors will
sustain immediate dilution of $9.41 per share based on the pro forma net
tangible book value of the Company at June 30, 1996 of $20,567. Investors in
the Offering therefore will bear a disproportionate part of the financial risk
associated with the Company's business while effective control will remain
with existing stockholders and management. Additional dilution may occur upon
the exercise of outstanding stock options and warrants. See "Dilution" and
"Principal Stockholders."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY
DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied for approval for inclusion of the Common
Stock on the Nasdaq Stock Market's National Market, there can be no assurance
that an active trading market for the Common Stock will develop as a result of
the Offering or, if a trading market does develop, that it will continue. In
the absence of such a market, investors may be unable readily to liquidate
their investment in the Common Stock. The trading price of the Common Stock
could be subject to wide fluctuations in response to quarter to quarter
variations in operating results, news announcements relating to the Company's
business (including technological innovations or new product introductions by
the Company or its competitors), changes in financial estimates by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to the Company as well as other developments
affecting the Company or its competitors. In addition, the market for equity
securities in general has been volatile and the trading price of the Common
Stock could be subject to wide fluctuations in response to general market
trends, changes in general conditions in the economy, the financial markets or
the technology industry and other factors which may be unrelated to the
Company's performance. The public offering price of the shares of Common Stock
has been determined by negotiations between the Company and the Underwriter
and does not necessarily bear any relationship to the Company's book value,
assets, past operating results, financial condition or any other established
criteria of value. There can be no assurance that the shares offered hereby
will trade at market prices in excess of the initial public offering price.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders could adversely affect
the prevailing market price of the Company's Common Stock and the Company's
ability to raise capital in the equity markets. Upon completion of the
Offering, the Company will have 7,200,001 shares of Common Stock outstanding.
Of those shares, the 2,000,000 shares of Common Stock offered hereby
(2,300,000 if the Underwriter's over-allotment option is exercised in full)
will be freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act ("Rule 144"). The remaining
5,200,001 shares of Common Stock outstanding are "restricted securities," as
that term is defined by Rule 144, or otherwise subject to volume limitations
of Rule 144 because they are held by affiliates of the Company. Upon
expiration of lock-up provisions, 2,322,131 shares of Common Stock will become
eligible for sale 180 days following the date of this Prospectus, subject to
compliance volume limitations of Rule 144. Under the lock-up provisions, the
officers, directors and securityholders of the Company will have agreed that
they will not, directly or indirectly, sell, assign or otherwise transfer any
shares of Common Stock
18
<PAGE>
owned by them for a period of 180 days, and in the case of Mr. Dyne and
Mr. Bermeister, one year, after the effective date of this Prospectus, without
the prior written consent of the Representatives of the Underwriters. See
"Shares Eligible for Future Sale" and "Underwriting."
The Company intends to file a registration statement under the Securities
Act to register the shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Stock Option Plan (the "1996 Plan"). See "Management--Stock
Option Plan." This registration statement will become effective immediately
upon filing. As of October 23, 1996, options to purchase 185,000 shares of
Common Stock had been granted under the 1996 Plan. The availability for sale,
as well as actual sales, of currently outstanding shares of Common Stock, and
shares of Common Stock issuable upon the exercise of options and warrants, may
depress the prevailing market price for the Common Stock and could adversely
affect the terms upon which the Company would be able to obtain additional
equity financing.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those
of the Common Stock. Following the Offering, no shares of Preferred Stock of
the Company will be outstanding, and the Company has no present intention to
issue any shares of Preferred Stock. However, the rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. Further, certain provisions of
the Company's Certificate of Incorporation and Bylaws and of Delaware law
could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. See "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Anti-Takeover Provisions."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock being offered by the Company hereby at an assumed initial public
offering price of $12.50 per share, after deducting the estimated underwriting
discounts and offering expenses, are estimated to be approximately $22.5
million ($25.89 million if the over-allotment option is exercised in full).
The principal purposes of the Offering are to increase the Company's working
capital and equity base and to create a public market for the Company's Common
Stock. The Company intends to use approximately $4.5 million of the net
proceeds to fund the establishment of a production studio in New South Wales,
Australia, approximately $1.0 million for ongoing software tool development,
approximately $1.0 million to acquire content licenses, $670,000 and $150,000
to repay the principal and interest accrued on indebtedness to PIE (the "PIE
Loan") and Reefknot (the "Reefknot Loan"), respectively, both shareholders of
the Company and an additional $63,000 of indebtedness due to Andwhen Pty.
Limited (the "Andwhen Indebtedness"). See "Certain Relationships and Related
Transactions" and "Principal Stockholders." The PIE Loan, which was incurred
to fund product development, is due on the earlier of the closing of the
Offering or December 31, 1996 and bears interest at the rate of 12.5% per
annum. The Reefknot Loan, which was incurred to pay certain costs relating to
the Offering, is due on the earlier of the closing of the Offering or
September 10, 1997 and bears interest at the rate of 10% per annum. The
Andwhen Indebtedness, $31,500 of which currently is due with the balance due
in 14 equal monthly installments, was incurred in connection with the
repurchase of certain equipment and bears no interest. In addition, the
Company will use a portion of the proceeds of the Offering to repay to Sega
Ozisoft non-interest bearing advances of operating expenses for the period
subsequent to June 30, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The balance of the net proceeds of the Offering will be used to
fund development of digital entertainment products, for working capital and
general corporate purposes.
The Company intends to maintain flexibility with respect to the use of these
funds and the amounts actually expended for each such use, if any, are at the
discretion of the Company and may vary significantly depending upon a number
of factors, including the progress of the Company's research and development
and marketing programs, technological advances, determinations as to the
commercial potential of the Company's products and the status of competitive
products. Accordingly, management reserves the right to reallocate the
proceeds of the Offering as it deems appropriate. The Company may also use a
portion of the net proceeds to acquire businesses, products or technologies;
however, it currently has no commitments or agreements with respect to any
such transactions. Pending such uses, the Company intends to invest the net
proceeds from the Offering in short-term, investment grade, interest bearing
securities.
DIVIDEND POLICY
The Company has never paid, and has no current intention to pay dividends on
its Common Stock and intends to follow a policy of retaining earnings to
finance the growth of its business. Any future determination to pay dividends
will be at the discretion of the Board of Directors of the Company and will be
dependent on the Company's results of operations, financial condition,
contractual and legal restrictions and other factors deemed relevant by the
Board of Directors at that time.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
June 30, 1996, was $20,567 or $0.00 per share. Pro forma net tangible book
value per share is equal to the total tangible assets of the Company less
total liabilities divided by the number of shares of Common Stock outstanding
after giving effect to the acquisition by the Company of SAND in exchange for
the SAND Note and the conversion of the SAND Note into 780,001 shares of
Common Stock. After giving effect to the sale of 2,000,000 shares of Common
Stock offered by the Company hereby (at an assumed initial public offering
price of $12.50 per share, after deducting underwriting discounts and
commissions and estimated offering expenses) and the repayment of $732,989 of
short-term debt obligations, the pro forma net tangible book value for the
Company as of June 30, 1996 would have been $22,270,567 or $3.09 per share.
This represents an immediate increase in net tangible book value of $3.09 per
share to existing stockholders and an immediate dilution of $9.41 per share to
new investors purchasing shares in the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $12.50
Pro forma net tangible book value per share as of June 30,
1996....................................................... $0.00
Increase attributable to new investors...................... 3.09
-----
Pro forma net tangible book value per share after the
Offering..................................................... 3.09
------
Dilution to new investors..................................... $ 9.41
======
</TABLE>
The following table summarizes, with respect to existing holders of Common
Stock and new investors, a comparison of the number of shares of Common Stock
acquired from the Company, the percentage ownership of such shares, the total
consideration, the percentage of total consideration and the average price per
share.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ACQUIRED TOTAL CONSIDERATION AVERAGE
---------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT (1) PERCENT PER SHARE
------------- ----------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
All existing
stockholders........... 5,200,001 72.2% $ 1,515,810 5.7% $ 0.29
New investors........... 2,000,000 27.8 25,000,000 94.3 12.50
------------- --------- ------------ -----
7,200,001 100.0% $ 26,515,810 100.0%
============= ========= ============ =====
</TABLE>
- --------
(1) Includes, with respect to the total consideration paid by all existing
stockholders, $15,810 paid by the original stockholders and $1,500,000
additional value resulting from the conversion of the SAND Note upon the
closing of the Offering.
The foregoing tables and calculations assume no exercise of outstanding
options or warrants. At October 23, 1996, 725,222 shares of Common Stock were
subject to outstanding warrants at a weighted average exercise price of $11.72
per share and 185,000 shares of Common Stock were subject to outstanding
options at a weighted average exercise price of $10.00 per share. To the
extent options and warrants are exercised, there will be further dilution to
new investors. See "Description of Capital Stock."
21
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual short-term debt and
capitalization of the Company as of June 30, 1996, (ii) the pro forma short-
term debt and capitalization of the Company, giving effect to the acquisition
by the Company of SAND in exchange for the SAND Note and the conversion of the
SAND Note into 780,001 shares of Common Stock and (iii) the pro forma short-
term debt and capitalization of the Company as adjusted to give effect to the
sale of the 2,000,000 shares of Common Stock offered by the Company hereby (at
an assumed initial public offering price of $12.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses) and
the repayment of $732,989 of debt. See "Use of Proceeds." This table should be
read in conjunction with the Consolidated Financial Statements and related
notes contained therein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- ------------
<S> <C> <C> <C>
Short-term debt........................... $ 732,989 $ 732,989 $ --
========= =========== ===========
Stockholders' equity (deficiency) (1):
Preferred Stock, $0.001 par value;
1,000,000 shares authorized;
no shares issued or outstanding......... $ -- $ -- $ --
Common Stock, $0.001 par value;
30,000,000 shares authorized; 4,420,000
shares issued and outstanding actual;
5,200,001 shares issued and outstanding
pro forma; 7,200,001 shares issued and
outstanding pro forma as adjusted....... 4,420 5,200 7,200
Additional paid-in capital............... 10,163 1,509,383 23,757,383
Accumulated deficit...................... (119,921) (1,469,921) (1,469,921)
Translation adjustments.................. (24,095) (24,095) (24,095)
--------- ----------- -----------
Total stockholders' equity (deficiency)... (129,433) 20,567 22,270,567
--------- ----------- -----------
Total capitalization.................... $(129,433) $ 20,567 $22,270,567
========= =========== ===========
</TABLE>
- --------
(1) Excludes 1,080,000 shares of Common Stock available for issuance pursuant
to the 1996 Plan, of which 185,000 shares were subject to outstanding
options as of October 23, 1996 at a weighted average exercise price of
$10.00 per share. Also excludes 725,222 shares of Common Stock issuable
upon exercise of outstanding warrants issued subsequent to June 30 at a
weighted average exercise price of $11.72 per share. See "Management--
Stock Option Plan."
22
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected historical and unaudited pro forma financial data
have been derived from the Company's consolidated financial statements. The
data should be read in conjunction with the Consolidated Financial Statements
and related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM FISCAL YEARS ENDED JUNE 30, (1)
SEPTEMBER 2, 1993 ----------------------------------
(INCEPTION) TO PRO FORMA
JUNE 30, 1994 1995 1996 1996 (2)
----------------- --------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
Royalties from licensing
arrangements............ $ 10,977 $ 752,108 $1,291,015 $1,118,473
Development fees......... -- 88,800 585,743 585,743
Software sales........... -- 1,888 177,119 177,119
--------- --------- ---------- ----------
Total revenues........... 10,977 842,796 2,053,877 1,881,335
Cost of revenues.......... 211,712 655,939 738,842 738,842
--------- --------- ---------- ----------
Gross profit (loss)...... (200,735) 186,857 1,315,035 1,142,493
--------- --------- ---------- ----------
Operating expenses:
Sales and marketing...... 2,100 116,435 163,038 163,038
General and
administrative.......... 19,458 223,470 365,491 505,664
Research and
development............. 14,594 183,000 174,395 1,211,680
Depreciation............. 9,816 43,379 101,824 101,824
--------- --------- ---------- ----------
Total operating
expenses................ 45,968 566,284 804,748 1,982,206
--------- --------- ---------- ----------
Income (loss) from
operations............. (246,703) (379,427) 510,287 (839,713)
Other income (expense),
net...................... (2,777) (44,426) 43,125 43,125
--------- --------- ---------- ----------
Income (loss) before
income taxes........... (249,480) (423,853) 553,412 (796,588)
Provision for income
taxes.................... -- -- -- --
--------- --------- ---------- ----------
Net income (loss)....... $(249,480) $(423,853) $ 553,412 $ (796,588)
========= ========= ========== ==========
Pro forma net income
(loss) per share (3)..... $ (0.05) $ (0.08) $ 0.10 $ (0.15)
========= ========= ========== ==========
Common shares used in
computing pro forma net
income (loss) per share
(3)...................... 5,284,118 5,288,538 5,337,158 5,337,158
========= ========= ========== ==========
<CAPTION>
JUNE 30,
----------------------------------------------------
PRO FORMA
1994 1995 1996 1996 (2)
----------------- --------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 17,471 $ 49,283 $ 53,061 $ 53,061
Total current assets...... 17,471 55,669 717,474 717,474
Total assets.............. 68,509 227,567 915,746 1,065,746
Total current
liabilities.............. 306,200 874,519 1,045,179 1,045,179
Total stockholders' equity
(deficiency)............. (237,691) (646,952) (129,433) 20,567
</TABLE>
- -------
(1) The Company intends to change its fiscal year end from June 30 to December
31, effective December 31, 1996.
(2) Reflects the acquisition by the Company of SAND, including $150,000 of the
purchase price allocated to certain assets, in exchange for the SAND Note
as if such transaction had occurred on July 1, 1995 and the conversion of
the SAND Note into 780,001 shares of Common Stock upon the closing of the
Offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Pro Forma Financial Data."
(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share. Also see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Pro Forma Financial Data.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Brilliant is a production and development studio introducing a new
generation of digital entertainment to be distributed over the Internet, on
CD-ROM, as television programming and for home video. The Company,
headquartered in the United States, was incorporated during July 1996. The
Company has been formed through the combination of two businesses: Brilliant
Interactive Ideas, Pty. Ltd. ("BII Australia"), an entertainment software
developer and producer; and Sega Australia New Developments ("SAND"), a "skunk
works" research and development operation for leading edge software tools. BII
Australia became a wholly-owned subsidiary of the Company through the exchange
of all 100,000 outstanding shares of BII Australia for 1,000,000 shares of
Common Stock of the Company. In addition the Company acquired SAND on
September 30, 1996. SAND was established during the second quarter of 1994 by
Sega Ozisoft Pty., Limited ("Sega Ozisoft"), one of the largest publishers and
distributors of entertainment software products in Australia and New Zealand,
the predecessor of which was co-founded by Mark Dyne and Kevin Bermeister.
The Company's historical operations discussed in this section reflect only
the operations of BII Australia. Since its founding in September 1993, BII
Australia has developed and sold interactive education and entertainment CD-
ROM titles primarily for children. With the completion of the acquisition of
SAND, the nature of the Company's business will change significantly. SAND was
responsible for developing the Multipath Movie suite of proprietary software
tools, production process and first Multipath Movie product. While the Company
will continue to produce traditional interactive CD-ROM titles, the Company
also plans to continue development of the Multipath Movie tools and production
process, as well as the commercialization of the Multipath Movie genre. As a
result of this change in the Company's business, the following discussion may
not be representative of its future operations. See "--Accounting Treatment
for Development Costs and Research Expenditures." The Company intends to
change its fiscal year end from June 30 to December 31, effective December 31,
1996.
The Company intends to generate a substantial majority of its future revenue
from the development and production of Multipath Movies and other three-
dimensional digitally created entertainment. The first of its Multipath
Movies, Cyberswine, is expected to be released in the fall of 1997. The first
product in the Storyteller Series is not expected to be released until late
1997. The Company's annual and quarterly revenue will depend upon the
successful development, timing and market acceptance of its interactive
products and upon the costs to distribute and promote these products.
Specifically the revenues derived from the production and distribution of the
Company's Multipath Movies will depend primarily on the acceptance by the
market of the Multipath Movie concept and the underlying content of the
Multipath Movie, neither of which can be predicted nor necessarily bear a
direct correlation to the production or distribution costs incurred. See "Risk
Factors--Acceptance of Multipath Movie Concept; Successful Development of
Multipath Movies with Appealing Creative Content," and "Risk Factors--
Dependence on Development of Additional Multipath Movies." The commercial
success of a film also depends upon promotion and marketing, production costs,
impact of competition and other factors. See "Risk Factors--Competition--Movie
Studios and Production Companies." Accordingly, the Company's annual and
quarterly revenues are and will be extremely difficult to forecast.
In the quarter ending September 30, 1996, the Company incurred certain
charges and non-recurring expenses. In connection with the Company's
acquisition of SAND, consummated on September 30, 1996, the Company expensed
approximately $1,350,000 attributable to in-process research and development.
Also, the Company recently has entered into strategic relationships with
Packard Bell NEC and Morgan Creek. The Company has issued to Packard Bell NEC
and Morgan Creek warrants to purchase 600,000 and 85,000 shares of Common
Stock, respectively. See "Business--Strategic Relationships." Issuance of the
warrants to Packard Bell NEC and Morgan Creek resulted in a $2,055,000
operating expense and a corresponding credit to equity, based on the value of
the warrants issued.
24
<PAGE>
RESULTS OF OPERATIONS
Fiscal Year Ended June 30, 1996 as Compared to Fiscal Year Ended June 30,
1995
The Company experienced significant growth in fiscal year 1996. Contracts
with Packard Bell NEC and Ocean of America Inc. provided substantial revenues
in 1996, and the Company also entered into new agreements in 1996 to develop
software for other companies. In addition, the Company entered into new
marketing agreements for wider domestic and international sales of its
products. The Company's growth in 1996 resulted in increases in operating
expenses, although with the increased level of activity, the Company realized
certain operating efficiencies and economies of scale.
Revenues. The Company historically has derived its revenues from royalties,
development fees and software sales. Brilliant licenses its CD-ROM software
products to publishers and distributors in exchange for non-refundable
advances, and royalties based on product sales. Royalties based on product
sales are due only to the extent revenues exceed any associated non-refundable
royalty advance. Royalties related to non-refundable advances are recognized
when the CD-ROM master is delivered to the licensees. Royalty revenues in
excess of non-refundable advances are recognized upon notification by the
distributor that a royalty has been earned by the Company. Development fees
are paid by customers in exchange for the Company's development of software
packages in accordance with customer specifications. The software development
agreements generally specify certain "milestones" which must be achieved
throughout the development process. As these milestones are achieved, the
Company recognizes the portion of the development fee allocated to each
milestone. Software sales revenues are recognized upon shipment of product.
See Note 2 of Notes to Consolidated Financial Statements. Revenues increased
from $843,000 for the year ended June 30, 1995 to $2,054,000 for the year
ended June 30, 1996. This represents an increase of $1,211,000 or 144%.
Royalties increased by $539,000, attributable to a greater number of completed
software titles. Development fees increased by $497,000 as a result of more
software products being developed. Software sales revenues increased by
$175,000, also as a result of the greater number of completed titles.
Cost of Revenues. Cost of revenues related to royalties consists primarily
of royalty obligations to third parties. Cost of revenues related to
development fees consists primarily of salaries, benefits and overhead
associated with the development of specific software products to customer
specifications, as well as costs of outside contractors engaged from time to
time in creating aspects of software products such as animation, voice
recording and music. Cost of revenues related to software sales consists
primarily of royalties to third parties and the direct costs and manufacturing
overhead required to reproduce and package software products. Cost of revenues
increased from $656,000 for the year ended June 30, 1995 to $739,000 for the
year ended June 30, 1996. This represents an increase of $83,000 or 13%,
mainly attributable to a greater number of titles in development. Although
revenues almost doubled, costs of revenues increased only slightly. The
Company's gross profit margin increased from 22% in 1995 to 64% in 1996,
attributable to economies of scale and increased operating efficiencies.
Sales and marketing. Sales and marketing expenses include primarily costs
for advertising, promotions, brochures, travel and trade shows. Sales expenses
also include costs for marketing consultants hired primarily to support and
assist the Company's sales efforts. Sales and marketing expenses increased
from $116,000 for the year ended June 30, 1995 to $163,000 for the year ended
June 30, 1996. This represents an increase of $47,000 or 41%, attributable
primarily to increases in the Company's sales and marketing efforts.
General and administrative. General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
rent, insurance costs and professional fees. General and administrative
expenses increased from $223,000 from the year ended June 30, 1995 to $365,000
for the year ended June 30, 1996. This represents an increase of $142,000 or
64%, attributable primarily to increased staff and overhead to support the
higher level of production and sales activity.
25
<PAGE>
Research and development. Research and development expenses include
primarily salaries and benefits of personnel conducting research and
development for licensed software products. Research and development costs
also include costs associated with creating the Company's traditional CD-ROM
software tools. Research and development expenses decreased slightly from
$183,000 for the year ended June 30, 1995 to $174,000 for the year ended June
30, 1996. This represents a decrease of $9,000 or 5%. The decrease is due to
the fact that the Company incurred lower development expenses in 1996 to
enhance software tools that were developed in 1995.
Depreciation. Depreciation expense relates to depreciation of fixed assets
such as computer equipment and cabling, furniture and fixtures. These fixed
assets are depreciated over their estimated useful lives (up to three years)
using the straight-line method. Depreciation expense increased from $43,000
for the year ended June 30, 1995 to $102,000 for the year ended June 30, 1996.
This is due to increased computer equipment in place during 1996.
Other income and expense. Other income includes interest income and gains on
foreign exchange transactions. In fiscal year 1996, other income also includes
$122,000 which represents an export market development grant paid to BII
Australia by the Australian Trade Commission for BII Australia's participation
in certain export activities. Interest expense relates mainly to interest on
the Company's loan from PIE, a significant shareholder. Interest expense
increased from $45,000 for the year ended June 30, 1995 to $95,000 for the
year ended June 30, 1996. This represents an increase of $50,000 or 111%,
resulting from higher average outstanding borrowings from PIE in 1996 as
compared to 1995.
Pro Forma Financial Data
The pro forma financial data as of June 30, 1996 and for the fiscal year
then ended reflects the acquisition by the Company of SAND in exchange for a
$1,500,000 convertible promissory note. The purchase price has been allocated
between in-process research and development ($1,350,000) and other assets
($150,000). The costs determined to be in-process research and development
have been charged to research and development expenses for the period
presented. Transactions between the Company and SAND have been eliminated,
resulting in a reduction in revenues and research and development expenses of
$172,542. Upon consummation of the Offering, the note will be converted into
780,001 shares of Common Stock of the Company. As a result, the pro forma
financial data reflects an increase in stockholders' equity of $1,500,000. The
unaudited consolidated pro forma financial data may not represent the results
of operations or financial position which actually would have been obtained if
those transactions had been completed as of the date indicated or which may be
obtained in the future.
As of the date of the Company's acquisition of SAND, technological
feasibility of the acquired technology had not been established. In addition,
the Company has identified no future alternative uses for the acquired
technology. Therefore, in accordance with Statement of Financial Accounting
Standards No. 86 ("SFAS No. 86"), the pro forma financial data includes in
research and development expenses the software development costs incurred by
SAND. See "--Accounting Treatment for Development Costs and Research
Expenditures." This resulted in an additional charge to research and
development expenses of approximately $1,350,000 in the quarter ending
September 30, 1996. The Company estimates that it will spend approximately
$750,000 in order to reach technological feasibility of its software
development tools by completing its first Multipath Movie. These funds will be
spent over the next four months primarily for software tool development,
production and direction of the Multipath Movie, scripting, voice production
and music.
The pro forma net loss per share is computed using the weighted average
number of shares of Common Stock outstanding including common equivalent
shares from stock options and warrants. Common equivalent shares issued during
the twelve-month period prior to the Offering at prices below the Offering
price have been included in the calculation as if they were outstanding for
the entire period.
Fiscal Year Ended June 30, 1995 as Compared to the Period from September 2,
1993 (inception) through June 30, 1994
The Company experienced significant growth in fiscal year 1995. The Company
completed development of six titles and commenced development of ten
additional titles in fiscal year 1995. The sales and marketing efforts of the
Company also increased in 1995 with the release of new products.
26
<PAGE>
Revenues. Revenues increased from $11,000 for the period from September 2,
1993 through June 30, 1994 to $843,000 for the year ended June 30, 1995. The
Company's operations did not begin until March 1994, therefore no significant
revenues were recognized during the period from September 2, 1993 through June
30, 1994.
Cost of Revenues. Cost of revenues increased from $212,000 for the period
from September 2, 1993 through June 30, 1994 to $656,000 for the year ended
June 30, 1995, primarily attributable to increased production activity. Any
gross profit comparison between the ten months ended June 30, 1994 and fiscal
year 1995 is not relevant due to partial year activity during 1994.
Sales and Marketing. Sales and marketing expenses increased from $2,000 for
the period from September 2, 1993 through June 30, 1994 to $116,000 for the
year ended June 30, 1995, attributable primarily to the general growth of the
Company and an increased sales and marketing effort.
General and Administrative. General and administrative expenses increased
from $19,000 from the period from September 2, 1993 through June 30, 1994 to
$223,000 for the year ended June 30, 1995, attributable primarily to increased
staff and overhead to support the increased production and sales activity of
the Company.
Research and Development. Research and development expenses increased from
$15,000 for the period from September 2, 1993 through June 30, 1994 to
$183,000 for the year ended June 30, 1995, primarily attributable to the
Company's increased research and development efforts relating to its
traditional CD-ROM software tools in 1995.
Depreciation. Depreciation expense increased from $10,000 for the period
from September 2, 1993 through June 30, 1994 to $43,000 for the year ended
June 30, 1995. This increase is due to significant purchases of computer
equipment in 1995.
Other Income and Expense. Interest expense increased from $3,000 for the
period from September 2, 1993 through June 30, 1994 to $45,000 for the year
ended June 30, 1995, attributable primarily to higher average outstanding
borrowings from PIE in 1995 as compared to 1994.
27
<PAGE>
RECENT OPERATING RESULTS
Set forth below are selected consolidated statement of operations data for
the three month periods ended September 30, 1995 and 1996. While this
information is derived from unaudited financial statements, in the opinion of
the Company, all adjustments necessary for a fair presentation of results for
such periods have been included. The results of operations for the three
months ended September 30, 1995 and 1996 are not necessarily indicative of the
results to be expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
1995 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Royalties from licensing arrangements.......... $ 47,286 $ 35,255
Development fees............................... 94,069 181,708
Software sales................................. -- 1,884
--------- -----------
Total revenues............................... 141,355 218,847
Costs of revenues................................ 235,352 139,871
--------- -----------
Gross profit (loss).............................. (93,997) 78,976
--------- -----------
Operating expenses:
Sales and marketing............................ 11,396 1,808,755
General and administrative..................... 86,227 139,861
Research and development....................... 61,163 1,575,014
Depreciation................................... 22,769 30,714
--------- -----------
Total operating expenses..................... 181,555 3,554,344
========= ===========
Loss from operations............................. (275,552) (3,475,367)
Other income (expense):
Gain on foreign exchange transactions.......... 16,846 --
Interest income................................ 92 411
Interest expense............................... (23,417) (20,881)
--------- -----------
Total other expense.......................... (6,479) (20,470)
--------- -----------
Loss before income taxes......................... (282,031) (3,495,838)
Provision for income taxes....................... -- --
--------- -----------
Net loss......................................... $(282,031) $(3,495,838)
========= ===========
Net loss per share............................... $ (0.05) $ (0.66)
========= ===========
Common shares used in computing net income (loss)
per share....................................... 5,337,158 5,284,118
========= ===========
</TABLE>
Revenues increased from $141,355 for the quarter ended September 30, 1995 to
$218,847 for the quarter ended September 30, 1996. Cost of revenues decreased
from $235,352 for the quarter ended September 30, 1995 to $139,871 for the
quarter ended September 30, 1996. In 1995, the Company developed many of its
own titles and incurred certain costs associated with these titles. In 1996,
the Company developed more titles for third parties under agreements providing
for the payment of certain costs directly by the third party.
The data for the quarter ended September 30, 1996 reflects the acquisition
of SAND and the issuance of warrants to Morgan Creek and Packard Bell NEC. The
acquisition of SAND resulted in a charge to research and development expense
of $1,350,000. See "The Company." The agreements with Morgan Creek and Packard
Bell NEC provide for Morgan Creek and Packard Bell NEC to provide creative
material and certain promotional services. Accordingly, $255,000 of the value
of the warrants has been charged to research and development expenses and
$1,800,000 has been charged to sales and marketing expenses. See "Description
of Capital Stock--Warrants."
28
<PAGE>
FLUCTUATING OPERATING RESULTS
The Company's expense levels are, to a large extent, fixed. The Company may
be unable to adjust spending in a timely manner to compensate for any revenue
shortfall. As a result, any significant shortfall in revenue from the
Company's Multipath Movies would have an immediate material adverse effect on
the Company's business, operating results and financial condition. The Company
plans to increase its operating expenses to fund greater levels of Multipath
Movie and traditional CD-ROM development, research and development, increased
marketing operations and expansion of its distribution channels. To the extent
that such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition
will be materially adversely affected.
Historically, the Company has experienced significant fluctuations in its
operating results from quarter to quarter and it expects these fluctuations to
continue in the future. Factors that may influence the Company's quarterly
operating results include customer demand for the Company's products,
introduction or enhancement of products by the Company and its competitors,
the timing of releases of new products or product enhancements by the Company
and its competitors, introduction or availability of new hardware, market
acceptance of the Multipath Movies and other new products, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, reviews in the industry press concerning
the products of the Company or its competitors, changes or anticipated changes
in pricing by the Company or its competitors, mix of distribution channels
through which products are sold, mix of products sold, product returns, the
timing of orders from major customers, order cancellations, delays in shipment
and other developments and decisions including the timing and extent of
development expenditures, management's evaluation and judgement regarding a
title's acceptance, other unanticipated operating expenses and general
economic conditions. Additionally, a majority of the unit sales for a product
typically occurs in the quarter in which the product is introduced. As a
result, the Company's revenues may increase significantly in a quarter in
which a major product introduction occurs and may decline in following
quarters. The Company's revenues both domestically and internationally have
varied significantly between monthly and quarterly periods. Therefore, in the
future, the operating results for any quarter should not be taken as
indicative of the results for any quarter in subsequent periods.
The entertainment software business is highly seasonal. Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest
in the second and third calendar quarters. This seasonal pattern is due
primarily to the increased demand for entertainment software products during
the year-end holiday buying season. As a result, a disproportionate share of
the Company's net revenues historically have been generated in the second
quarter of the Company's fiscal year. The Company expects its revenues and
operating results will continue to reflect these seasonal factors.
The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending
to decline during recessionary periods. There can be no assurance that the
Company will be able to adjust its anticipated product development
expenditures and other expenses in the event of an economic downturn during
such development. Accordingly, if a recessionary period occurs, tending to
result in decreased sales of the Company's products, product development
expenses likely will remain constant and the Company's business, operating
results and financial condition could be adversely affected. See "Risk
Factors--Rapid Technological Change; Changing Product Platforms and Formats."
ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES
The Company's current accounting policy follows SFAS No. 86, which provides
for the capitalization of certain software development costs once
technological feasibility is established. The capitalized costs are then
amortized on a straight-line basis over the estimated product life or on a
ratio of current revenues to total projected product revenues, whichever
results in the greater amortization amount. Prior to the establishment of
technological feasibility, these costs are expensed as incurred. In the
future, if the Company incurs costs to develop digital entertainment products
for distribution as home video features or television programming, such
discrete costs may be capitalized and amortized in the proportion that gross
revenues realized bear to management's estimate of the total gross revenues
expected to be received, in accordance with Statement of
29
<PAGE>
Financial Accounting Standards No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films."
Equipment and other assets purchased exclusively for use in the Company's
research and development efforts are charged directly to research and
development expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed a substantial part of its operations through loans
from a significant shareholder, PIE. PIE has provided loans to the Company of
approximately $126,000, $1,021,000 and $744,000 during 1994, 1995 and 1996,
respectively. In 1995 and 1996, the Company repaid $541,000 and $680,000,
respectively. As of June 30, 1996, $670,000 remains due and payable, including
accrued interest.
Net cash used in operating activities during each of 1994 and 1995 was
primarily attributable to a net loss. Net cash provided by operating
activities in the year ended June 30, 1996 was primarily attributable to net
income resulting from development fees of $586,000 and royalties of
$1,291,000. Net cash used in investing activities in each of 1994, 1995 and
1996 was due primarily to the purchase of computer equipment. Cash flows
provided by financing activities in each of 1994, 1995 and 1996 were primarily
attributable to the cash infusions from PIE pursuant to a loan agreement dated
October 24, 1994.
The Company expects to incur capital expenditures of approximately
$4,500,000 to fund the establishment of a production studio in New South
Wales, Australia, including approximately $2,300,000 for Multipath Movie
production equipment, and approximately $900,000 for digital video equipment.
The remaining funds will be used for additional KidStory production and other
equipment, and to furnish the facility.
As of June 30, 1996, the Company's material commitments consisted of the
$670,000 payable to PIE and an advance from a customer for software
development of $213,000. The note payable to PIE bears interest at a rate of
12.5% per annum. The due date of the note is the earlier of the closing of the
Offering or December 31, 1996. The Company expects to use a portion of the net
proceeds from the Offering to repay the note in full. The customer advance
will be repaid from proceeds from the sales of the completed software. See
Note 5 of the Notes to Consolidated Financial Statements.
In September 1996, the Company executed a promissory note in favor of
Reefknot in the principal amount of $150,000 to fund certain costs in
connection with the Offering. The note bears interest at the rate of 10% per
annum and is due and payable on the earlier of the closing of the Offering or
September 10, 1997.
Pursuant to the SAND Acquisition Agreement, Sega Ozisoft has agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company has agreed to reimburse Sega Ozisoft from the
proceeds of the Offering for all expenses advanced by Sega Ozisoft for any
period after October 31, 1996, and all expenses in excess of $59,175 per month
advanced by Sega Ozisoft for August, September and October of 1996. See
"Certain Relationships and Related Transactions."
Under its agreement with Crawford Productions, the Company is obligated to
contribute up to one half of the costs incurred to develop and produce each
project selected by the parties, if any, for development into Multipath
Movies, which total cost per title is anticipated to be approximately
$789,000. Under its agreement with Morgan Creek, the Company is obligated to
fund entirely the development of two Multipath Movies.
The Company believes that the net proceeds from the Offering combined with
the Company's current resources will be sufficient to enable the Company to
meet its operating and capital needs as required by its present business plan
for approximately 18 months. In the event the Offering is not consummated, the
Company will be unable to complete its research and development programs,
commercialize its technologies, or finance the planned growth of the Company's
business.
30
<PAGE>
BUSINESS
GENERAL
Brilliant is a production and development studio introducing a new
generation of digital entertainment to be distributed over the Internet, on
CD-ROM, as television programming and for home video. Using its proprietary,
state-of-the-art software tools, the Company is developing Multipath Movies
which are three-dimensional digitally animated stories, each with hundreds of
plot alternatives, or paths, leading to multiple distinct conclusions that are
influenced by the user. The Company has the ability to produce Multipath
Movies with seamless interactivity where the plot and graphics are
uninterrupted by the user's decisions. Furthermore, the Company believes that
its studio can produce a Multipath Movie in multiple formats in a single cost-
efficient production process. The Company is developing a system that will
permit real time distribution of, and user interaction with, its Multipath
Movies over the Internet. Under a three-year marketing agreement, the Company
intends to launch Internet distribution of the Multipath Movie through Packard
Bell NEC's Planet Oasis World Wide Web site by bundling Internet-enabled CD-
ROMs on up to six million PCs shipped by Packard Bell NEC. Through additional
strategic relationships, the Company has secured quality content for its
Multipath Movies from a number of proven sources such as Morgan Creek
Productions, Crawford Productions and Bantam Doubleday Dell Books.
The Company's Multipath Movies are designed to combine the best qualities of
traditional filmed entertainment--story and plot, with the best of the
traditional computer game--its interactivity. The Company's Multipath Movies
are designed to appeal to the entire home PC and game console markets,
including both the core gamer and the much larger segment of PC users not
currently served by traditional game developers. The Company plans to produce
a variety of Multipath Movies tailored to various demographic groups, such as
comedies, adventures, romances, science fiction stories and children's
stories. In order to produce digital entertainment products with wide appeal,
the Company has developed a number of features that it believes represent
significant technical enhancements over existing digital entertainment. For
example, animated characters created using the Company's tools appear human-
like and have realistic features, facial expressions and mouth movements.
Multipath Movies also allow users to control characters' moods as opposed to
only their actions. In addition, a typical Multipath Movie will encourage
viewers to influence or interact with the story on average every 30 to 45
seconds, without interrupting the flow of the story or its graphical
presentation. The Company intends to release its first Multipath Movie,
Cyberswine, in the fall of 1997 through its distribution arrangement with
Packard Bell NEC. The Company also is developing the Storyteller Series of
Multipath Movies in which an animated Storyteller will narrate engaging
interactive stories targeted at children eight to twelve years of age. The
Storyteller Series will be based upon existing published children's fiction
books and original scripts, such as Bantam Doubleday Dell Books' popular
Choose Your Own Adventure series.
The Company plans to release certain of its Multipath Movies in non-
interactive format as television broadcast/cable programming and home video
features. The Company intends to segment such Multipath Movies into three 30-
minute episodes and, by packaging together thirteen episodes, can create a
season-length series for the broadcast market. Similarly, the Company intends
to produce 90- to 120-minute animated features for the home video market. The
Company believes that it can produce Multipath Movies for television
programming and home video features at costs substantially below typical
industry costs. The Company has entered into a production joint venture with
Crawford Productions, an Australian television production company, through
which the Company and Crawford Productions will jointly develop and distribute
broadcast and cable versions of two Multipath Movie scripts in the United
States and internationally.
The Company develops Multipath Movies in a single process utilizing its
proprietary software tools in conjunction with the Company's digital
production and layup skills. The Company has four proprietary software tools:
(i) ScripNav, a software tool that enables a script writer to write, review
and correct branching multipath scripts; (ii) LipSync, a software tool used to
synchronize facial expressions and mouth movements to voice soundtracks
automatically; (iii) SCuD Engine, a software system which collects and
integrates the output from all of the component tools to produce the Multipath
Movie; and (iv) DigitalProjector, the tool that contains all
31
<PAGE>
the necessary elements to load and play a Multipath Movie. Utilizing its
proprietary software tools, the Company can produce multiple formats from each
title in a single cost-efficient production process, enabling the Company to
amortize its production costs across the revenue streams from each format. In
addition, the Company's LipSync tool allows for low-cost modification of
Multipath Movies to other languages without the awkward appearance of dubbed
movies. The Company's proprietary software tools and production process are
designed to emulate traditional film writing and production techniques and
allow screenwriters, directors and producers to develop Multipath Movies
without any detailed knowledge of computer programming or significant
assistance from expensive programming teams. As an example, the Company has
entered into an agreement through which Morgan Creek Productions will provide
the Company with certain creative, direction and film development assistance
on two motion picture scripts. The Company believes that the utilization of
existing entertainment resources will enable it to generate high-quality
digital entertainment at a low cost.
In addition to developing a new genre of multipath entertainment, the
Company produces and sells interactive CD-ROM titles primarily for children,
including the KidStory Series. Since shipment of its first CD-ROM title in
January, 1995, the Company has developed 16 traditional CD-ROM titles.
Examples of its titles include Flipper and The Yukadoos, which received a 1996
Newsweek Editor's Choice Award. The Company has licensed the rights to over 40
additional titles for development of KidStory Series products. In addition,
the Company recently acquired the interactive CD-ROM rights to the Popeye
characters. The KidStory Series is a profitable value-for-price product
category that is not dependent upon the production of hit titles.
THE DIGITAL ENTERTAINMENT MARKET
Digital entertainment combines the best elements of filmed entertainment,
creative artistry and engaging plotlines, in a multimedia format complete with
high-quality stereo sound, graphics and animation to produce a realistic
experience. Digital entertainment is created, stored and can be distributed
electronically. Examples of current digital entertainment products include
high-end computer games, virtual reality attractions, and computer-animated
television programs and feature films. Traditionally, digital entertainment
has been distributed on CD-ROM and game console cartridges. Leading edge
digital entertainment products are now also being released online to
capitalize on the tremendous current interest in the Internet and the World
Wide Web. In addition, digital entertainment products have recently been
released as broadcast television and cable programming, home videos, and even
full length feature movies, although on a limited basis.
TECHNOLOGY AND DIGITAL ENTERTAINMENT
The market for digital entertainment evolved and has grown dramatically with
the increasing proliferation and sophistication of personal computers and game
playing consoles, and with the widespread use of the Internet. Sales of
personal computers to home users have increased in recent years as a result of
declining prices and increased functionality of PCs. The number of multimedia
PCs used in homes worldwide is expected to grow from 40 million in 1996 to 67
million in 2000. These enhanced processing, graphics, sound, storage and
transmission capabilities have enabled PC users to more easily operate
multimedia software and digital entertainment products. A large market has
also developed for interactive digital entertainment on a new generation of
32- and 64-bit game consoles, including the Sega Saturn and Sony Playstation,
with advanced technical capabilities previously available only on PCs. In
addition, technological advances have enabled millions of consumers and
businesses to utilize the Internet, particularly the World Wide Web. Dataquest
estimates that the worldwide Internet population of individual consumers will
grow from approximately 10 million subscribers in 1995 to approximately 170
million in 1999. Widespread use of the Internet has become possible with
technological improvements in data transmission, such as the development of
more powerful data servers and faster modems.
The Company believes that the demand for digital entertainment will continue
to grow given the increasing multimedia capability of today's PCs and game
consoles, the growing popularity of the Internet and the expected improvements
in accessing the Internet. Despite the technological advances that have been
made in producing, processing and delivering digital entertainment, the
Company believes that the consumer will expect digital entertainment products
to have increasingly sophisticated features, including more realistic graphics
and special effects, user control of more complicated or subtle character
movements and real time interactivity.
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Brilliant's Technological Advantages. The Company believes that its
technological capabilities will position the Company as a leader in producing
digital entertainment that appeals to the growing expectations of consumers.
Utilizing proprietary software tools, the Company is developing Multipath
Movies with features that it believes represent significant technical
enhancements over existing digital entertainment. For example, animated
characters created using the Company's tools appear human-like and have
realistic features, facial expressions and mouth movements. Multipath Movies
will also allow users to control characters' moods and actions. In addition,
the Company is developing a system that will enable users to interact in real
time with its digital entertainment products over the Internet.
THE COST OF DIGITAL ENTERTAINMENT
Advances in technology have dramatically improved the ability to produce
digital entertainment, but have also driven up the overall cost of producing
interactive games and other forms of digital entertainment. Competitive
pressures to produce differentiated product has increased due to the
proliferation of game cartridges and CD-ROM entertainment titles. The demand
for continuing product enhancements and differentiation has caused digital
entertainment producers to rely heavily upon scarce and expensive teams of
talented programmers. To produce interactive plot-driven digital entertainment
using currently available techniques, a programming team is critical
throughout the development process to integrate plot, graphic and sound
elements and to control the flow of the action. Although the costs of
programming are less significant in the development of products with simple
plots and a few pages of script, such as arcade style games, programming costs
can become prohibitively expensive for the complex, script-intensive products
that are increasingly demanded by consumers.
Brilliant's Cost Advantages. The Company believes that its proprietary
software tools and object-oriented production process will enable the Company
to avoid much of the high programming cost associated with the development of
complex, interactive scripts. The Company intends to utilize existing
entertainment industry resources rather than expensive programmers to generate
high-quality digital entertainment at a low cost. The Company believes that
its proprietary software tools and processes will allow screenwriters,
directors and producers to develop Multipath Movies without any detailed
knowledge of computer programming or significant assistance from expensive
programming teams. The Company also intends to utilize the entertainment
industry as a primary resource for scripts. As an example, the Company has
entered into an agreement through which Morgan Creek Productions will provide
the Company with certain creative, direction and film development assistance
on two Multipath Movie scripts to be released in CD-ROM and via the Internet.
In addition, the Company believes that it will be able to utilize a single
script and one production process to produce digital interactive entertainment
that can be delivered in multiple formats, such as CD-ROM, the Internet,
television broadcast/cable programming and home video features. Consequently,
the Company will be able to amortize its production costs across a number of
revenue streams. The Company believes that its ability to manage production
budgets is in part due to its lower operating costs in Australia as compared
to the United States.
THE UNDERSERVED PC MARKET FOR DIGITAL ENTERTAINMENT
The Company believes that there is a significant segment of the home PC user
population that currently does not use interactive PC-based entertainment
products. Much of PC-based and game console digital entertainment to date has
been developed for the dedicated computer game player, typically an eight to
21 year-old male with substantial free time and spending money. Traditional
developers of computer games have continually enhanced and improved the game
playing experience by adding complexity, graphics and other features to their
games in order to keep the core gamer interested. The typical PC user,
however, is frustrated by the difficulty of many computer games and the amount
of scarce leisure time that is required to complete the experience. A well
conceived game has also been expensive to produce, causing retail price points
to be high relative to competing entertainment products. As a result of the
industry focus on the limited core gamer segment, the fundamentals of
interactive multimedia have remained relatively static over the past decade
and have been centered on game design characterized by arcade, adventure, role
playing, strategy and simulation themes. Although the installed base of game
consoles and multimedia PCs is growing, the penetration rate of a typical game
product remains relatively low.
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Brilliant's Broad Target Market. The Company's digital entertainment
products are designed to appeal to the entire home PC and game console
markets, including both the core gamer and the much larger segment of PC users
not currently served by traditional game developers. The Company's Multipath
Movie represents a new genre of interactive digital entertainment that can be
experienced in less than two hours and will utilize content intended to appeal
to a wider audience than the traditional gamer. The Company plans to produce a
variety of Multipath Movie titles tailored to various demographic groups, such
as comedies, adventures, science fiction stories and children's stories.
DIGITAL ENTERTAINMENT FOR TELEVISION BROADCAST/CABLE AND HOME VIDEO
The television and cable programming industries generally are highly
speculative and involve a substantial degree of development risk. The success
of an individual television or cable series depends upon unpredictable and
changing factors, such as public tastes, viewer preferences and the
availability of other activities competing for consumers' leisure time, all of
which create substantial risks that development costs for any particular
program may not be recouped. Additionally, while the risks associated with
television and cable programming are high, the costs to develop any individual
series are also high. Due to the industry's continuing dependence upon large
production crews and high-cost, on-screen talent, production costs continue to
rise rapidly. At the same time, however, demand for well-priced broadcast,
cable television and home video content remains strong as a result of the
increasing number of available broadcast and cable channels, the strong
international interest in American-based content and delivery of television
and cable into emerging markets. In addition, recently enacted federal
legislation requires broadcasters to offer children's programming for at least
three hours per week. Although an increasing number of digitally animated
broadcast programs have achieved commercial acceptance and success, the
Company believes that a lack of technical capability has prevented the motion
picture industry from producing commercially viable plot-based interactive
digital entertainment on a broader scale.
Brilliant's Products for the Television Broadcast/Cable and Home Video
Markets. The Company believes that the strong demand for television
programming and home video features will provide a ready market for the low-
cost, animated digital entertainment that the Company plans to produce.
Utilizing its proprietary tools, the Company is able to produce digital
entertainment suitable for television and home video, as well as distribution
on CD-ROM and over the Internet, in one integrated production process. This
enables the Company to amortize its production costs across a number of
revenue streams. Accordingly, the incremental costs allocated to the
production of television programming and home video features will be
substantially below typical industry costs. The Company has entered into a
production joint venture with Crawford Productions, an Australian television
and motion picture production company, through which the Company and Crawford
Productions will jointly develop two Multipath Movies for distribution as
broadcast and cable programming scripts.
BUSINESS STRATEGY
The Company's objective is to become a leading producer of animated digital
entertainment by utilizing its proprietary technology base, strategic
relationships and experienced management team. Specific elements of the
Company's strategy are to: (i) address market opportunities with a new genre
of digital entertainment; (ii) leverage the Company's proprietary software
development capabilities to produce low-cost, high-value, digital
entertainment products in multiple formats; (iii) utilize the existing
entertainment industry talent base for content development; (iv) maintain a
strong in-house research and development program; and (v) leverage
management's experience and continue building strategic relationships within
the entertainment and computer software industries.
ADDRESS MARKET OPPORTUNITIES WITH THE MULTIPATH MOVIE--A NEW GENRE OF
DIGITAL ENTERTAINMENT
The Company believes that its Multipath Movies will have wide appeal to the
PC user and also serve as television broadcast/cable programming and home
video features. The Company is designing its Multipath Movies to capitalize on
underserved segments of the home PC market with stories that can be
experienced in less than two hours and utilize content intended to appeal to a
wider audience than the traditional gamer. The
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Company plans to produce a variety of Multipath Movies tailored for various
demographic groups, including comedies, adventures, romances, science fiction
stories and children's stories. Through its integrated production process for
Multipath Movies, the Company has the ability to produce three 30-minute
episodes for the broadcast/cable television market and a 90- to 120-minute
animated feature for the home video market. The Company believes that its low-
cost integrated production process will enable the Company to offer
broadcast/cable television programming and home video features at attractive
prices.
LEVERAGE PROPRIETARY SOFTWARE TOOLS AND PRODUCTION CAPABILITIES TO DEVELOP
LOW-COST, HIGH-VALUE, DIGITAL ENTERTAINMENT PRODUCTS IN MULTIPLE FORMATS
The Company intends to maximize the product output of each Multipath Movie.
Utilizing its proprietary software tools and object-oriented production
process, the Company believes that it can produce Multipath Movies in multiple
delivery formats, including CD-ROM, the Internet, television broadcast/cable
programming and home video. By managing the specific sound, graphics, layup
and other production elements associated with each format on an integrated
basis from the beginning, the Company can produce multiple formats from each
title during one production process. This enables the Company to amortize its
production costs across the revenue stream associated with each format.
Consequently, the Company believes that it will be able to offer high-quality
digital entertainment at competitive prices. In addition, the Company's
proprietary lip synchronization software tool allows for low-cost modificaton
of the Multipath Movies to any language without the awkward appearance of
dubbed movies. The Company also believes that its proprietary software tools
and object-oriented production process enable it to inexpensively develop
digital entertainment content that is readily adaptable for a variety of
different hardware platforms, such as the PC and Sega Saturn game console.
Accordingly, the Company expects to have greater flexibility in
commercializing its products without being constrained by consumer platform
choices.
UTILIZE THE EXISTING ENTERTAINMENT INDUSTRY TALENT BASE FOR CONTENT
DEVELOPMENT
The Company has designed its proprietary software tools and object-oriented
production process with the objective of emulating traditional film writing
and production techniques. In addition to being in greater supply, and
therefore, often available at lower cost than typical game programmers,
entertainment industry professionals possess the creativity, maturity and
experience needed to produce plot-based interactive entertainment. The Company
believes that its technology will allow screenwriters, directors and producers
retained by the Company to develop Multipath Movies without any detailed
knowledge of computer programming or significant assistance from expensive
programming teams.
MAINTAIN A STRONG IN-HOUSE RESEARCH AND DEVELOPMENT PROGRAM
The Company intends to maintain its strong in-house technology development
programs in order to be on the leading edge of technologies for the production
and delivery of digital entertainment. The Company has a core group of
software tool developers in Australia exclusively dedicated to continually
enhancing existing and developing additional software tools and their
applications, and intends to build upon this base with a continued investment
in research and development. The Company anticipates that online distribution
will become increasingly important in the digital entertainment industry as
faster modems and other new technologies improve online access and decrease
latency or "lag time." An important element of the Company's strategy is to
continue to adjust to changing technological conditions to stay at the
forefront of content delivery.
LEVERAGE MANAGEMENT'S EXPERIENCE AND CONTINUE BUILDING STRATEGIC
RELATIONSHIPS WITHIN THE ENTERTAINMENT AND COMPUTER SOFTWARE INDUSTRIES
The Company's management team has built and operated a number of successful
businesses in industries that are strategically related to developing digital
entertainment, including PC sales, CD-ROM publishing, and entertainment
software development. Over the past 14 years, the Company's management team
has developed a broad range of relationships with content developers, game
console manufacturers, motion picture production
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companies, film and television distributors and software distributors.
Management has capitalized upon these relationships by forming strategic
arrangements with Packard Bell NEC, Morgan Creek Productions and Crawford
Productions. See "--Strategic Relationships." The Company believes that these
arrangements will provide the Company with significant content development and
distribution advantages.
PRODUCTS
Utilizing its proprietary, state-of-the-art software development tools, the
Company is developing a new genre of digital entertainment, the Multipath
Movie. In addition to developing Multipath Movies, the Company produces and
sells traditional interactive CD-ROM titles primarily for children.
ANIMATED DIGITAL MULTIPATH MOVIES
The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment--story and plot, with the best of the traditional
computer game--its interactivity. The Multipath Movie is a three-dimensional,
digitally animated story with many plot alternatives, or paths, that are
influenced by user interaction throughout the story. The Company is targeting
a larger market than users of traditional computer games for its Multipath
Movie products; Multipath Movies will be less than two hours long so that
users can enjoy them within a single sitting and will utilize content that is
designed to appeal to a wide variety of audiences.
The Multipath Movie is unlike any other entertainment product known to the
Company. In contrast to existing compressed video interactive movies, the
action of a Multipath Movie does not stop while a user makes decisions. A
user's decisions are implemented seamlessly because the Company's proprietary
DigitalProjector that plays the movie on the screen has the technical ability
to form and manipulate streams of complex three-dimensional animated images in
real time sequentially for the duration of the movie. A Multipath Movie
provides the user with hundreds of plot branches leading to a number of
different conclusions. Users interact with Multipath Movies by responding with
a mouse, joystick, keyboard or remote control device to prompts that
manipulate the moods and personality profiles of the main characters, which in
turn produce new plot directions and story lines. A typical Multipath Movie
will prompt users for a decision approximately every 30 to 45 seconds. The
opening scenes of each Multipath Movie, however, will require limited
interaction, which is intended to introduce users to the story in a manner
that builds user empathy with the lead characters and teaches the user how to
interact with the Multipath Movie. Further into the Multipath Movie, the level
of prompted interactivity will increase and prompts are designed to become
less direct and more intuitive. Users' responses to prompts determine a
character's actions and affect the character's "mood," thereby influencing its
future decisions. If the user elects not to respond at any given prompt, the
collective impact of the user's previous responses on the character's mood
will drive subsequent branching decisions. For instance, if a user elects
aggressive options in response to prompts, subsequent branching decisions will
be made automatically as if an aggressive response was given by the user.
The Multipath Movie will allow the user to jump forward or reverse to
previously viewed scenes and will allow the user, if desired, to select a
different decision path. The user can view the Multipath Movie from the
perspective chosen by the director or elect an almost infinite number of
alternative camera angles. The user can also control camera angles to search
for information or clues that might prove valuable in later scenes. In
addition, users or their parents can select an appropriate age rating (such as
"G," "PG," or "R") and thereby limit certain camera angles or scenes.
Multipath Movies can also include a feature enabling more than one user to
interact with its characters of the Multipath Movie.
The Company's first Multipath Movie in development is called "Cyberswine,"
which is based on an Australian science fiction comic strip series. The
Company currently intends to release Cyberswine in the fall of 1997 through a
bundling relationship with Packard Bell NEC. Packard Bell NEC has agreed to
"bundle" Multipath Movies on up to a total of six million of its multimedia
equipped computers shipped over a three-year period. See "--Strategic
Relationships." By releasing Cyberswine through Packard Bell NEC, the Company
believes it will generate broad market exposure to the Multipath Movie format.
The Company has certain royalty obligations on revenues derived from
Cyberswine. See "Certain Transactions."
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Although the Company's first Multipath Movie is an action-oriented science
fiction drama, the Company plans to produce additional Multipath Movies, such
as comedies, adventures, romances, science fiction stories and children's
stories, in order to appeal to a wide variety of audiences. The Company
intends to release additional titles during late 1997 following the bundled
introduction of the Company's first Multipath Movie title through Packard Bell
NEC. The Company is considering various scripts to be used as the basis of its
late 1997 product introduction and marketing campaign. The Company has content
agreements with Morgan Creek Productions and Crawford Productions of Australia
to provide the Company with scripts for additional Multipath Movies. See "--
Strategic Relationships."
The Company is also developing the Storyteller Series, which is a series of
Multipath Movies targeting children eight to twelve years of age. The
Storyteller Series will feature an animated Storyteller that will "morph" and
undergo voice changes appropriate to the story line and script of each
Storyteller title. The Storyteller Series will be based upon published
children's books and original stories. The Company has secured from Bantam
options to acquire exclusive rights to develop interactive products based upon
Bantam's popular children's series, Choose Your Own Adventure, currently
comprised of over 150 titles, and Choose Your Own Nightmare, currently
comprised of 15 titles. See "--Strategic Relationships." Each of these book
series is written in a branching format, in which the reader will skip to
different pages or chapters of the book depending upon responses to questions
posed in the story. Because of the branching nature of the Choose Your Own
Adventure and Choose Your Own Nightmare series, the Company believes that
these stories are ideally suited to the multipath format of the Storyteller
Series. The Company anticipates introducing the Storyteller Series in late
1997. The Company believes that it will be able to obtain additional high-
quality, suitably-priced children's fiction for the continued development of
Storyteller Series titles.
The Company plans to release Multipath Movies in the following formats:
CD-ROM Titles. The Company intends to produce each Multipath Movie in
traditional CD-ROM format for use on personal computers and game consoles.
CD-ROM Titles with Online Capability. The Company is developing a system
that will enable users to interact in real time with Multipath Movies over the
Internet through various online delivery systems. To date, low data
transmission rates have precluded real-time video viewing of digital
entertainment over the Internet. The Company's system involves producing a CD-
ROM, which consumers would buy at retail locations or receive bundled with
hardware as in the Packard Bell NEC arrangement, containing a preview or first
episode of a Multipath Movie series. The CD-ROM would also contain the
architecture necessary for accessing the Internet and future episodes of the
series would be purchased and downloaded over the Internet. The CD-ROM will
also contain most of the data necessary for viewing the Multipath Movie and
future online sequels, including a library of characters, scenes, graphics,
sound and other components. Accordingly, a low-bit rate data stream can be
delivered via the Internet to provide the animation and storyline for future
episodes.
Television Broadcast/Cable Programming and Home Video. The Company also
plans to release certain of its Multipath Movie titles, in non-interactive
format, as television broadcast/cable programming and as home videos. The
Company intends to segment such Multipath Movies into three episodes for sale
into the 30-minute broadcast and cable series market. By packaging together
thirteen episodes, the Company can create a season-length series. Similarly,
the Company plans to produce features from certain Multipath Movies by
selecting a predetermined plot ending and to market these 90- to 120-minute
features to home video publishers.
TRADITIONAL CD-ROM PRODUCTS
In addition to developing Multipath Movies, the Company currently develops
and sells interactive CD-ROM titles primarily for children, including the
KidStory Series, and a number of other titles based on licensed characters or
content.
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KidStory Series titles are aimed at young learners between the ages of three
and seven. These interactive stories are designed to help children develop
good motor and coordination skills, cognitive skills and reading and spelling
skills. Children can either have a Kidstory Series title read to them or move
through the story at their own pace. Each title also features a series of
games and activities, such as spelling bee; print, color and create pages;
annotation pages providing factual and educational information; "spot the
difference" puzzles in which the child must differentiate images; jigsaws;
memory games; and hidden word games. This series includes The Yukadoos, which
received a 1996 Newsweek Editor's Choice Award. The Company has licensed the
rights to over 40 additional books for development of KidStory Series
products.
In addition to the KidStory Series, the Company has produced a number of CD-
ROM titles on a contract basis, including Flipper, based on the MCA Universal
film and 1960s television show; Dream Machines and Designers, based on the
award winning Beyond 2000 television series; 101 Ways to Save the Planet, also
based on the Beyond 2000 Series; and the Craftpax Series. The Flipper CD-ROM
title includes various interactive games and activities. The Beyond 2000
Series is based upon the Beyond 2000 weekly television infotainment program
made in Australia and viewed worldwide, including on the Discovery Channel in
the United States. The Craftpax Series is a unique and informative collection
providing children with simple but detailed instructions for a wide range of
craft activities. In addition, the Company recently acquired the interactive
CD-ROM rights to Popeye.
The Company's traditional CD-ROM products are developed on a value-for-price
model, which does not rely upon the production of hit titles. The Company's
strategy is to provide distributors and retailers with products that deliver
high value relative to cost and sell well at the retail level. The Company
believes that its profitability on traditional CD-ROM products is a result of
this value-for-price strategy.
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THE PRODUCTION OF MULTIPATH MOVIES
THE MULTIPATH MOVIE PRODUCTION PROCESS
The production process for Multipath Movies consists of eight phases:
scripting, creative design, voice and sound, model and world building,
texturing and lighting, blocking/camera editing, special effects animation and
the generation of rendered output.
[ARTWORK APPEARS HERE]
Scripting Scripting is the process in which the story and
its characters are created and developed. The
scripting process includes generating the story
concept, completing its treatment and outline
and final delivery.
Creative Design Creative Design includes conceptualizing and
designing the look, feel and style of the
title; also includes sketching characters,
wardrobes, props and sets.
Voice and Sound The Voice and Sound phase includes recording
voices for the characters and developing and
recording the musical score and sound effects.
Model and World Building Model Building involves creating digitized
models of each character by defining their
shapes in three dimensions (height, width and
depth) and by adding animation control points
through various techniques that allow the model
to be moved or animated. World Building is
similar to model building except that it
involves environments and sets rather than
characters.
Texturing and Lighting Texturing is the process of adding
characteristics such as pattern, texture,
finish and color to the "world" and its models.
Lighting is also added during this process.
Blocking, Camera and In Blocking, the models are animated, or
Editing "brought to life," in three dimensions to
create a motion sequence. Blocking is performed
by defining the points in a "world" around
which a particular character will move. Once
the character's movements are blocked, cameras
are positioned in virtual space and the action
is captured using traditional camera
techniques. The director can view each scene
immediately following this process and edit by
adjusting the cameras and action.
Special Effects In this phase, any necessary special effects
Animation are added, which may include special sound or
visual effects.
Rendered Output All of the data for script, sound, graphics and
special instructions generated by ScripNav,
LipSync and SCuD Engine are gathered by
DigitalProjector and played in sequential order
to output the Multipath Movie in either real
time or frame by frame depending upon the
output format required.
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The production of a Multipath Movie is very similar to the production of a
traditional film. Just as the traditional film director identifies locations,
builds sets and chooses actors, the digital Multipath Movie developer builds
"worlds" and "models". In the same way that traditional filmed entertainment
directors give actors wardrobes and props, the Multipath Movie developer
"textures" the models.
The Multipath Movie production process, however, differs from the
traditional movie process in three important ways. First, the traditional
process is substantially more labor intensive, requiring large crews, artisans
and technicians to produce a final product. Once scenes are filmed and edited,
any reshoots require the re-assembling of actors and crews, which is not only
costly but often not feasible. Second, filming and editing in the traditional
film process are two separate functions that cannot be performed
simultaneously. Through digital production, a scene, or group of scenes, can
be blocked, animated and edited at the same time. As a result, the producer
can immediately view the scene and make any necessary changes while avoiding
substantial costs and logistical problems. Finally, the digital Multipath
Movie process allows the producer to easily substitute models and worlds,
alter texturing and lighting, alter the blocking and editing process and alter
special effects. By clicking the mouse, the director/scriptwriter can preview
entire scenes, add/delete characters and plots, and automatically change the
appearance of a character or object. Because the characters and sets are all
digitally produced and then animated by the Company's tools, set components
(such as language on storefronts and vehicles) and personal features such as
skin tone and hair color only need to be changed once to effect the desired
change throughout the Multipath Movie.
TECHNOLOGY; BRILLIANT'S SOFTWARE TOOLS AND PRODUCTION CAPABILITIES
The Company has developed four proprietary software tools that enable it to
produce high-quality Multipath Movies: (i) ScripNav, which enables
scriptwriters to write complex multipath scripts; (ii) LipSync, which
synchronizes a character's lip movements with the dialogue track; (iii) SCuD
Engine, which collects and integrates source files from the ScripNav,
graphics, sound and LipSync tools and then prepares them for layup and editing
and the DigitalProjector; and (iv) DigitalProjector, the tool that contains
all the necessary elements to load and play the final product.
ScripNav. ScripNav was developed specifically for the writing of complex
Multipath Movie scripts. A scriptwriter will use ScripNav to compose, edit and
finalize a script using a commercially available word processing package.
Then, the scriptwriter will insert various subplots into scenes in order to
adapt the script to the Multipath Movie format; the alternative subplots, or
paths, are based upon different temperaments of the lead character. For
example, if the character is angry, the character will approach the other
characters and the events in the scene in a much more aggressive and hostile
manner, which will, in turn, send the plot in the appropriate direction. By
inserting directional guides throughout the script, the scriptwriter is able
to create a script with multiple paths and endings based on a character's
moods and his or her interactions with the other characters. Once the script
has been developed in the Multipath Movie style, ScripNav enables the
scriptwriter to read, review and correct the script. ScripNav then corrects
for syntax and branching errors and allows the scriptwriter to review the
multiple plots produced. Lastly, ScripNav produces statistics that allow the
scriptwriter to identify scenes that either cannot or are unlikely to be
reached through the plot's development and, therefore, should be excluded from
the final Multipath Movie product.
LipSync. LipSync automatically synchronizes a character's lip movements with
corresponding dialogue tracks by examining wave files and generating output
files that contain references to the appropriate mouth shapes. The Company
believes that LipSync is a more efficient and cost effective way to
incorporate voice into Multipath Movies than other existing sound tools. In
addition, LipSync allows for low cost modification of the Multipath Movies to
any language without the awkward appearance of dubbed movies.
SCuD Engine. SCuD Engine is the centerpiece of the Multipath Movie
development and production process. SCuD Engine is an object-oriented database
environment that collects and integrates source files from ScripNav, graphics,
sound and LipSync tools and makes them available for layup and editing. SCuD
Engine provides a multi-window editing environment in which the developer can
preview, analyze and edit the final
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product. When a previously unedited scene is opened, SCuD Engine retrieves the
text for the scene from the script text file of ScripNav and places the text
in on-screen blocks or slots. The layup artist can then view the descriptive
or dialogue text while attaching imported graphics, sound and other source
material to that line of script.
DigitalProjector. DigitalProjector contains all the necessary components to
load and play the final Multipath Movie product. DigitalProjector is the
software engine for any system that is being used to play the Multipath Movie
and is generally the only software tool that the Company must modify to permit
the Multipath Movie to be adapted to new platforms. The Company has developed
DigitalProjector for IBM-compatible PCs, is developing DigitalProjector for
the Sega Saturn game console, and may develop DigitalProjector for the Sony
PlayStation, the Macintosh, and other platforms.
In addition to its proprietary software tools and engines, the Company uses
certain commercially available sound and graphics tools in the Multipath Movie
production process:
Sound Tools. The Company utilizes other non-proprietary sound tools that
enable producers to incorporate wave files from standard sound files generated
by almost any sound-editing package. Because wave files are generally not
compressed, the Company then uses other non-proprietary tools to compress and
prepare these files for use in DigitalProjector.
Graphics Tools. Graphics tools enable producers to convert the graphics
created by existing commercially available packages into a format that is
compatible with SCuD Engine and DigitalProjector. In addition, producers of
digital animation use graphics tools in the model and world building phase.
Producers create digitized models by defining their shapes in three dimensions
(height, width and depth) and by adding control points. The number of control
points is determined by the number of polygons that are used to create the
model. "Polygons" are multi-sided objects that can be colored or textured and
moved as single entities in computer graphics, allowing for three-dimensional
digital animation.
The Company's proprietary tools used in conjunction with commercially
available tools allow the developer to produce a high quality Multipath Movie
from the initial scripting stage to the generation of title output. The chart
below depicts the digital Multipath Movie production process discussed
previously and the phases of the process enabled by each tool.
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[ARTWORK APPEARS HERE]
COMPARISON OF MULTIPATH MOVIE FORMATS
The specifications of the formats for video, the PC and online differ
substantially. While each format will run for a total of 90 to 120 minutes, the
length of any individual scene will vary depending upon the extent of its
interactivity. While content produced for the PC will be user interactive,
video will not. The most significant difference between formats is the number
of polygons per character and per scene required to create the models and
worlds. Due to processing capacity constraints of current PCs, the Company's
Multipath Movie for CD-ROM and the Internet will use a limited number of
polygons. Because polygon counts are scaleable, the Company creates its models
and worlds with high polygon counts suitable for broadcast/cable or video
markets, and then reduces the number of polygons in order to adapt the
Multipath Movie for the PC and online markets. To date, digital entertainment
for home video and the PC have been produced separately. As a result, the
models and worlds developed for one format would not be used in other format
types. By combining the development of multiple products into one process, the
Company can cost effectively build models and worlds that can be utilized over
multiple product formats.
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BROADCAST/
HOME VIDEO CABLE PC/ INTERNET/
CRITERIA FEATURE SERIES GAME CONSOLE ONLINE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Movie duration 90-120 mins Three 22-min episodes 90-120 mins 90-120 mins
Polygons per character Unlimited Unlimited 500 500
Polygons per scene Unlimited Unlimited 3,000 3,000
Special effects All All Limited Limited
Interactivity None None Plot branching Plot branching
Camera angle Camera angle
Real time moods Real time moods
Output method Pre-rendered Pre-rendered Real time Real time
video video 3D graphics 3D graphics
Distribution media D1 tape D1 tape CD-ROM Internet
</TABLE>
- -------------------------------------------------------------------------------
SALES AND MARKETING
The Company's sales and marketing efforts will be designed to broaden
product distribution, increase the number of first-time and repeat customers,
promote ongoing recognition of its products and properly position, package and
merchandise its products. The Company will focus on three primary channels in
attempting to build broad distribution of its product formats: (i) traditional
software publishers and distributors for CD-ROM titles, (ii) the Internet and
online services, and (iii) for television broadcast/cable programming buyers
and home video publishers. To support sales through these channels, the
Company plans to utilize various sales and marketing techniques designed to
promote product awareness and maximize exposure, including cooperative
advertising, incentives, selective bundling arrangements, trade show
representation and other customary practices. The Company believes that its
ability to produce quality digital entertainment products at low costs will
allow it to negotiate favorable deals with publishers, distributors and
buyers, create strong demand for its online products, and establish and
maintain a strong market position. In addition, the Company believes that its
management's direct experience in related industries provides the Company with
a working knowledge of sales and distribution strategies and strong
relationships with key software publishing executives.
CD-ROM Titles. The Company will follow one of two distribution models with
respect to the Company's traditional CD-ROM products and Multipath Movie
products it produces on CD-ROM. In the first model, which is primarily used
for the licensing of the Company's traditional CD-ROM products, the Company
contracts to develop and produce titles for third parties on a fixed rate
basis without retaining any rights to the products. In such situations, any
future royalty streams to which the Company may be entitled would be minimal.
In the second model, the Company negotiates an affiliated publishing
arrangement for a designated title. Under this arrangement, the Company covers
all production costs and costs of goods sold and then retains a certain
percentage of the gross revenues generated according to a predetermined
pricing formula. The publisher retains a portion of gross revenues to cover
downstream marketing costs and distributor profit. In both contract and
affiliate publishing arrangements, the publisher will broadly distribute the
CD-ROM titles through retail outlets such as software, computer and book
stores.
Multipath Movie CD-ROM Titles with Online Capability. The Company
anticipates that online users of its Multipath Movies distributed over the
Internet will either be billed a fee for each online Multipath Movie
downloaded or will be charged a fee based on online user time. In the case of
the Company's first Multipath Movie launch through a bundling arrangement with
Packard Bell NEC, it is anticipated that the user will be charged a per use
fee by the Company through Packard Bell NEC's Planet Oasis Web Site. When a
user views the opening window on the Packard Bell NEC computer screen, an icon
will appear directing the user to the Multipath Movie. By inserting the CD-ROM
and clicking on the icon, the user will be presented a free preview
43
<PAGE>
of the Multipath Movie title that has been bundled. Following the free
preview, a screen prompt will encourage the user to purchase a "ticket" for
further viewing of the Multipath Movie. If the user selects this option, the
user will be connected by modem to the Multipath Movie location within the
Planet Oasis site and charged for a movie ticket either through a major credit
card account or an "E-Cash" account. If the Multipath Movie is being
distributed through an online service or an independent Internet service
provider, the Company will negotiate individual billing arrangements with each
such entity. The Company is exploring the possibility of establishing a
proprietary web site through which Multipath Movies can be promoted. As part
of its arrangement with the Company, Packard Bell NEC has agreed to provide
marketing for the Multipath Movies on Packard Bell NEC's computer packaging,
point-of-sale materials and screen displays.
One of the Company's principal sales and marketing initiatives will be the
formal launch of the Multipath Movie format, which will follow the bundled
introduction of the Company's first Multipath Movie through Packard Bell NEC.
In order to introduce the new genre and generate the consumer awareness
necessary to promote sustained interest, the Company is developing a sales and
marketing campaign to begin during late 1997. The Company anticipates that
this campaign will culminate in the commercial introduction of selected
Multipath Movies, which will be supported by various trade and consumer
promotional programs. The Company expects that launch costs will be covered
through direct spending by the Company, promotional funds provided by software
publishers marketing the product and/or other sponsor-related sales programs.
See "Strategic Relationships."
Television Broadcast/Cable Programming and Home Video. The Company currently
anticipates that it will begin to market its Multipath Movies as television
programming and home video features in 1998. Following the launch of the
Multipath Movie genre during late 1997, and assuming that the Company has
acquired the necessary television or video rights for any of its underlying
content, the Company anticipates preparing certain Multipath Movie content for
these markets. In the television broadcast/cable market, the Company will work
to prepare series product primarily for direct placement in the syndicated
television market or with one of the various cable channels. In order to be
competitive in this market it is necessary to be prepared to place at least 13
episodes. Cable and syndicated programming is typically marketed to domestic
and international buyers during January of each year at the National
Association of Television Program Executives trade show. With respect to the
home video market, the Company anticipates that it will market home video
features through established distribution channels.
INTERNATIONAL SALES AND MARKETING
The Company's international sales and marketing strategy will be managed
from the United States and will be executed through a combination of domestic
and offshore efforts. The majority of the Company's sales of traditional CD-
ROM products are currently in the United States but management anticipates
increased penetration in various international markets. In addition to U.S.
sales, the KidStory Series product line is currently sold through various
arrangements in Australia, New Zealand and parts of Asia and Europe. Recently,
the Company entered into an agreement with Fujitsu pursuant to which titles
within the KidStory Series are being adapted for output in Japanese.
With respect to both traditional and Multipath Movie CD-ROM products, the
Company's strategy for international distribution is to utilize exclusive
arrangements for specific countries or dedicated territories with
distributors, which in management's opinion, are best suited to direct the
commercial launch and ongoing marketing support of products in that country or
territory. The Company believes that it will be able to continue to capitalize
on management's extensive network of international relationships and
background in the international distribution of CD-ROM products. The Company
does not currently foresee establishing operations in foreign territories to
oversee or manage international sales and marketing efforts.
Given the global nature of the World Wide Web, the Company believes that
international markets represent a significant opportunity for its Multipath
Movies delivered over the Internet. Utilizing its proprietary LipSync
technology, the Company believes it can deliver Multipath Movies in foreign
languages without significant
44
<PAGE>
logistical or cost issues. Because the lip movements of the characters are
automatically synchronized to the dialogue track of the Multipath Movie, the
Company has the ability to downstream foreign-language versions to
international online users of Multipath Movies.
RESEARCH AND DEVELOPMENT
The Company's research and development program is focused on: (i) enhancing
the Company's software tools, (ii) developing enhanced Internet delivery
capabilities for Multipath Movies, (iii) improving the Company's proprietary
object-oriented database to enhance facial expressions and mouth movements of
Multipath Movie characters, and (iv) increasing the efficiency of its object-
oriented production process. The Company's research and development program
includes development of a proprietary object-oriented database, known as
"Rodeo," intended to give Multipath Movie producers ready access to the
Company's database of objects, such as sets, props and characters, and thereby
increase production efficiencies. The Company is expending substantial
resources in its "skunk works" research and development program in Australia,
where it maintains a staff in a separate facility devoted exclusively to
advancing the Company's technology and software tools. Because the Company
anticipates that online distribution will become increasingly important in the
digital entertainment industry, the Company intends to prepare the Company to
take advantage of changing Internet delivery technologies.
The Company intends to continue to improve the look and feel of the
Multipath Movies with the objective of achieving the look and feel of motion
pictures. The realization of this objective will be dependent upon the
development of narrowband and broadband technologies as well as increases in
microprocessor speed. The Company will work to continuously enhance its
software tools to take advantage of these new technologies.
The Company incurred research and development costs in connection with the
development and improvement of the Company's traditional CD-ROM software tools
of $14,594, $183,000 and $174,395 for the period from September 2, 1993 to
June 30, 1994 and the fiscal years ended June 30, 1995 and 1996, respectively.
SAND incurred research and development costs in connection with the
development of the Multipath Movie software tools of $460,026 and $693,974 for
the fiscal years ended June 30, 1995 and 1996, respectively.
STRATEGIC RELATIONSHIPS
The Company has entered various strategic relationships to assist in the
development, production and distribution of Multipath Movies. It is
anticipated that strategic relationships will be an integral element in the
execution of the Company's business strategy.
Packard Bell NEC. The Company has entered into an agreement with Packard
Bell NEC for Packard Bell NEC to bundle CD-ROM software for a Multipath Movie
title with 80% of the first 7.4 million multimedia equipped personal computers
shipped by Packard Bell NEC in the United States, the United Kingdom,
Australia, New Zealand and South Africa over a three-year period (the
"Shipping Period") beginning when the Company ships and Packard Bell NEC
accepts a master CD-ROM for a Multipath Movie. The master CD-ROM is a disk to
be used by Packard Bell NEC to duplicate enabling CD-ROMs for distribution
with Packard Bell NEC computers. The disk will allow the user to download
Multipath Movies from an Internet site to be established by the Company. The
disk will contain a brief preview of a Multipath Movie title, which is
initially anticipated to be the Cyberswine title and will also contain a
library of characters, scenes, graphics, sound and other components for
viewing of future episodes of the title. The Company has the ability to
periodically substitute other Multipath Movie titles for the title initially
bundled by Packard Bell NEC. For a period ending two years following the
expiration of the Shipping Period, Packard Bell NEC has agreed to provide
point of sale retail advertising for the Multipath Movies distributed through
Packard Bell NEC, and to create a prominently displayed icon on the Packard
Bell NEC screen display which, when clicked, will enable the user to view a
preview of the Multipath Movie and purchase the entire Multipath Movie through
a link to Packard Bell NEC's Web site. Packard Bell NEC's Web site, Planet
Oasis, is formatted as a 3-D Internet city providing users with a simple, user
friendly tool through which a user can explore the World Wide Web. When the
site is accessed, a
45
<PAGE>
3-D version of the city appears containing skyscrapers, enchanted forests,
parks and museums. Users cruise through the virtual city using the computer's
mouse to click on different images, representing different topics and
information sites. One of the destinations within the virtual city will be a
theater in which Multipath Movies can be purchased through a link to the
Company's Internet site. Under the terms of the agreement, the Company will be
entitled to all revenues that are derived from Multipath Movies distributed
pursuant to the Agreement. Packard Bell NEC will receive warrants to purchase
600,000 shares of the Company's Common Stock. See "Description of Capital
Stock--Warrants."
Morgan Creek Productions. The Company has entered into an agreement to form a
joint venture with Morgan Creek Interactive, a subsidiary of Morgan Creek
Productions. Morgan Creek is a principal developer and distributor of feature
films; past features include "Ace Ventura: Pet Detective," and "Ace Ventura:
When Nature Calls." The agreement provides that Morgan Creek will contribute to
the joint venture a nonexclusive license to two motion picture scripts for use
in the development of Multipath Movies to be distributed on CD-ROM for the IBM-
compatible, Macintosh and game console platforms and over the Internet. The
rights granted by Morgan Creek under the agreement do not extend to
broadcast/cable television programming. Morgan Creek will also provide certain
creative, direction and film development assistance to the Company. The Company
will be responsible for all development costs of the Multipath Movies but will
be entitled to recover such costs before Morgan Creek will participate in any
revenues generated from the Multipath Movies created by the joint venture. The
Company will also contribute to the joint venture a nonexclusive license to the
Company's DigitalProjector software tool solely for use in connection with two
Multipath Movies to be produced by the joint venture. In exchange for the
contribution of development content, Morgan Creek will receive, following the
Company's recovery of production costs and the Company's recovery of its
investment in the joint venture, a designated percentage of the joint venture's
revenues as well as warrants to purchase 85,000 shares of the Company's Common
Stock. See "Description of Capital Stock--Warrants." The agreement provides
that Morgan Creek will own all intellectual property related to the content
used in the Multipath Movies created by the joint venture and will have the
right to exploit such content for other uses without any royalty obligation to
the joint venture or the Company, although the Company will retain all rights
to the licensed software tool.
Crawford Productions. The Company has entered into a production joint venture
with Crawford Productions Pty., Ltd. ("Crawfords") an Australian television and
production company to develop two Multipath Movies. The Company anticipates
that each of the two Multipath Movies will have production budgets of up to $1
million. Pursuant to the joint venture, Crawfords and the Company will each
fund one-half of the development budget of the joint venture. Crawfords will be
responsible for distributing broadcast and cable versions of the two Multipath
Movies and the Company will distribute the Multipath Movies in interactive
computer-based formats. Crawfords and the Company will equally divide all
proceeds from exploitation of the two Multipath Movies created by the joint
venture.
Bantam Doubleday Dell Books for Young Readers. The Company has entered into
an agreement (the "Bantam Agreement") with Bantam providing the Company with an
option to acquire exclusive worldwide interactive rights to Bantam's "Choose
Your Own Nightmare" and "Choose Your Own Adventure" series of interactive
books. The Company's option covers over 170 titles, plus any additional titles
in each series published by Bantam. The Company's rights include rights to
adapt the licensed titles to interactive format only and to deliver the
products on CD-ROMs and via the Internet. By exercising its option, the Company
will be required to acquire no less than 18 titles during the seven-year term
of the Bantam Agreement. Bantam will be entitled to receive a portion of the
net proceeds from sales of the licensed titles. Upon the Company's election of
each of the first 16 titles, in batches of 4 titles, the Company is required to
pay Bantam a non-refundable advance against which royalties will be applied.
46
<PAGE>
COMPETITION
The markets for the Company's digital entertainment products are intensely
competitive, subject to rapid change and characterized by constant demand for
new product features at reduced prices and pressure to accelerate the release
of new products and product enhancements. The primary competitive areas for
the Company are identified below.
Computer Graphics Special Effect Firms. The Company expects to compete with
computer graphics special effects firms, including Pixar, ILM, Digital Domain,
Sony ImageWorks, Pacific Data Images, Rhythm & Hues and Boss Film Studios,
Inc. These computer graphics special effects firms are capable of creating
their own three-dimensional computer animated feature films or may produce
three-dimensional computer animated feature films for movie studios that
compete with the Company. Pixar has already produced and successfully released
an animated feature film, Toy Story, and ILM has created and produced three-
dimensional character animation used for the ghosts in the live action film
Casper. These firms, each of which have greater financial and marketing
resources than the Company, are expected to compete intensely with the Company
in the production of animated digital products.
CD-ROM Publishers. The CD-ROM industry is intensely competitive and consumer
demand for particular software products may be adversely affected by the
proliferation of competitive products. The Company believes that the primary
competitive factors in the market for CD-ROM products include creative
content, product quality, technological capabilities, pricing, breadth of
features, marketing and distribution resources and customer service and
support. The Company will compete primarily against companies offering
entertainment software and related products. The Company's competitors in this
area will include several large companies with substantially greater name
recognition, financial, technical, marketing and other resources, including
Broderbund, 7th Level, GT Interactive, Electronic Arts, Softkey, Sierra On-
Line and Davidson. Moreover, large corporations, such as Disney and Microsoft,
with substantial bases of intellectual property content and substantial
financial resources, have entered or announced their intention to enter the
market for CD-ROM entertainment products.
Movie Studios and Production Companies. The Company's Multipath Movies will
compete with traditional feature films and television programming produced by
major movie studios, including Disney, Warner Bros., Twentieth Century Fox,
Paramount, Sony, Lucasfilm, MCA Universal and MGM/UA, as well as numerous
other independent motion picture and television production companies. Several
movie studios already have developed and released animated feature films and
the Company expects additional competition in the animated feature film market
from these and other movie studios. Other movie studios have announced their
intention to enter the animated feature film market, including DreamWorks SKG,
a studio formed in 1994 which is expressly targeting the animated film market.
The Company's broadcast and home video products will compete with the films of
these movie studios for audience acceptance and exhibition over
broadcast/cable and home video channels. In addition, the Company will compete
with movie studios for the acquisition of literary properties, production
financing, the services of performing artists, and the services of other
creative and technical personnel, particularly in the fields of animation and
technical direction. Most of the movie studios with which the Company will
competes have significantly greater name recognition and significantly greater
financial, technical, creative, marketing, and other resources than does the
Company. Due to their substantially greater resources, these movie studios
likely will be able to enter into more favorable distribution arrangements and
to promote their films and television programming more successfully than the
Company.
Several movie studios, including Disney and Lucasfilm (through its affiliate
ILM), have developed their own internal computer animation capability and have
created computer animation for special effects in animated films. Other movie
studios may internally develop, license or sub-contract three-dimensional
animation capability. Further, the Company believes that continuing
enhancements in computer hardware and software technology will lower barriers
to entry for studios or special effects companies which intend to produce
computer animated feature films or other products.
47
<PAGE>
In response to all of these competitive forces, the Company will be required
to make a high level of investment in content and tool development, marketing
and customer service and support. There can be no assurance that the Company
will have sufficient resources to make such investments or, even if they are
made, that the Company's products will be competitive. Additionally, present
or future competitors may be able to develop products comparable or superior
to those offered by the Company or adapt more quickly than the Company to new
technologies or evolving customer requirements. The Company's competitors also
may increase their efforts to gain and retain market share through competitive
pricing or product giveaways. These competitive pressures may necessitate
price reductions by the Company, thus reducing the Company's profit margins.
In addition, as the number of competitors increases and competition for scarce
consumer time available to be devoted to the products such as those of the
Company and equally scarce retail shelf space becomes more intense, the
Company may need to increase marketing expenditures to maintain sales and
product differentiation. Also, as competition for popular titles and themes
that may be used in entertainment software increases, the cost of acquiring
such titles and properties is likely to increase, resulting in reduced
margins. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, operating results and financial condition.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company currently intends to file United States
patent applications relating to certain components of its proprietary
technology. The Company also relies on trademark, trade secret and copyright
laws to protect its technology, with the source code for the Company's
proprietary software being protected both as a trade secret and as a
copyrighted work. Also, it is the Company's policy that all employees and
third-party developers sign nondisclosure agreements. However, there can be no
assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or
superior technology independently. Also, the Company has no license agreements
with the end users of its products and does not copy-protect its software, so
it may be possible for unauthorized third parties to copy the Company's
products or to reverse engineer or otherwise obtain and use information that
the Company regards as proprietary. Although the Company is not aware of
unauthorized copying of its products, if a significant amount of unauthorized
copying of the Company's products were to occur, the Company's business,
operating results and financial condition could be adversely affected.
Furthermore, policing unauthorized use of the Company's products is difficult
and costly, and software piracy can be expected to be a persistent problem. If
litigation is necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others, such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results and
financial condition. Ultimately, the Company may be unable, for financial or
other reasons, to enforce its rights under intellectual property laws and the
laws of certain countries in which the Company's products are or may be
distributed may not protect the Company's products and intellectual rights to
the same extent as the laws of the United States.
The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third parties.
Since the software tools used to create the Multipath Movies were developed by
SAND, a division of Sega Ozisoft, the Company relies entirely on the
representations of Sega Ozisoft contained in the SAND Acquisition Agreement
between BII-Australia and Sega Ozisoft that, to Sega Ozisoft's best knowledge,
the SAND technology and software acquired by the Company does not infringe the
proprietary rights of others. Additionally, although the Company has received
no communication from third parties alleging the infringement of proprietary
rights of such parties, there can be no assurance that third parties will not
assert infringement claims in the future. Any such third party claims, whether
or not meritorious, could result in costly litigation or require the Company
to enter into royalty or licensing agreements. There can be no assurance that
any such licenses would be available on acceptable terms, if at all, or that
the Company would prevail in any such litigation. If the Company were found to
have infringed upon the proprietary rights of third
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parties, it could be required to pay damages, cease sales of the infringing
products and redesign or discontinue such products, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
BACKLOG
The Company generally ships products upon receipt of orders from
distributors. Accordingly, the Company operates with little backlog.
EMPLOYEES
At September 12, 1996 the Company had 27 full-time employees (including six
employees of SAND): ten engaged in research and development, 14 in production
and three in general administration and finance. None of the employees of the
Company is covered by a collective bargaining agreement. The Company considers
its relationship with its employees to be good. The Company currently utilizes
the services of three independent software developers pursuant to contractual
relationships.
The Company intends to hire additional key personnel in the near future. The
Company's expansion may significantly strain the Company's management,
financial and other resources. Any failure to expand these areas in an
efficient manner could have a material adverse effect on the Company's
operating results.
The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, particularly
those highly skilled design, process and test engineers involved in the
manufacture of existing systems and the development of new systems and
processes. The competition for such personnel is intense. There can be no
assurances that the Company will be successful in retaining or recruiting key
personnel. Three of the Company's employees, the Chairman and CEO, the CFO and
the Director of Licensing, are based in Los Angeles, California. All other
employees operate out of facilities located in Mascot and Woollahra, both
suburbs of Sydney, Australia.
PROPERTIES
The Company's production facilities, consisting of approximately 1,800
square feet, are located in Manly, Australia and the research and development
facilities occupied by SAND consisting of approximately 900 square feet are
located in Woollahra, Australia. The leases for these facilities are month-to-
month. The current annual rental under the Manly lease is $24,617 and under
the Woollahra lease is $12,308. The Company also leases an office in Woodland
Hills, California for rent of approximately $36,591 per annum.
The Company anticipates using up to $4.5 million of the proceeds raised in
the Offering to equip a new digital production studio ("New Studio") to be
located in or near Sydney, Australia. It is contemplated that the current
production offices located in Manly, Australia will be closed and all of those
operations will be integrated into the new facilities. The software tool
development facilities occupied by SAND located in Woollahra, Australia will
be kept at their current location. The Company intends to equip the New Studio
to meet all of the Company's production needs for both the KidStory Series
product line as well as the Multipath Movie product line. Certain production
capabilities will remain external, including voice recording, scripting, music
recording and certain director and producer services. The Company believes
that such services can be provided on a more cost effective basis, thereby
focusing the Company's internal production efforts on the digital production
components. It is anticipated that the New Studio will have the internal
capabilities to provide all other production requirements such as three-
dimensional modeling, digital animation and rendering, camera direction and
editing, sound production, texture animation, digital video services and
overall title production control. The Company intends to lease additional
space in or near Sydney, Australia, as the site of its new production
facilities. The Company has not reached an agreement in principle with respect
to the lease of any space for the New Studio.
LEGAL PROCEEDINGS
The Company is not involved in any litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the directors and executive officers as of
October 23, 1996 is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Dyne............... 35 Chairman of the Board of Directors and
Chief Executive Officer
Kevin Bermeister........ 36 President and Director
Mark Miller............. 37 Vice President, Production and Operations and Director
Anthony Rose............ 32 Vice President, Technology
Diana Maranon (1)....... 38 Secretary and Director
Michael Ozen............ 42 Chief Financial Officer
Gary Barber (2)......... 39 Director
Ray Musci (1)........... 36 Director
Garth Saloner (2)....... 41 Director
Jeff Scheinrock (1)(2).. 45 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
MARK DYNE. Mr. Dyne has served as the Chairman of the Board of Directors and
as Chief Executive Officer of the Company since October 1996. Mr. Dyne has
served as a joint managing director of Sega Ozisoft since its founding in 1982
by Mr. Dyne and Kevin Bermeister. Sega Ozisoft is now a majority owned
subsidiary of Sega operating under the name of Sega Ozisoft. Mr. Dyne
continues to own an equity interest in Sega Ozisoft. Sega Ozisoft is a
distributor for many leading publishers including, among others, Virgin
Interactive, Accolade, Microprose, Viacom, Interplay, Access, and Starwave.
Mr. Dyne currently is Co-Chief Executive Officer with Kevin Bermeister of Sega
Enterprises, a position he has held since June 1995, a director of Monto
Holdings Pty. Ltd. ("Monto") and Consumer Electronics Pty. Ltd. ("Consumer
Electronics"), and a co-owner of Packard Bell Pty. Ltd. ("Packard Bell
Australia"). Sega Enterprises is a theme park developer which recently has
launched the development of a $70 million interactive indoor theme park in
Darling Harbor in Sydney, Australia. Sega Enterprises is owned jointly by
Mr. Dyne, Mr. Bermeister, Sega Enterprises Japan ("Sega Japan"), Mitsubishi
Corp. and Mitsui Corp. Monto is a private investment holding company. Consumer
Electronics is a South African based distributor of multi-media software
products. Packard Bell Australia is one of the leading manufacturers and
distributors of personal computers through the Australian mass merchant
channel.
KEVIN BERMEISTER. Mr. Bermeister has served as President of the Company
since October 1996 and as a Director since August 1996. Mr. Bermeister is a
joint managing director of Sega Ozisoft, a position he has held since 1982,
and continues to own an equity interest in Sega Ozisoft. Mr. Bermeister
currently is Co-Chief Executive Officer with Mr. Dyne of Sega Enterprises, a
position he has held since June 1995, a director of Consumer Electronics and
Jacfun Pty., Ltd. ("Jacfun"), and a co-owner and director of Packard Bell
Australia. Mr. Bermeister also serves as a director of Jewish House of Sydney,
Australia, a charitable organization. Sega Enterprises is a theme park
developer which recently has launched the development of a $70 million
interactive indoor theme park in Darling Harbor in Sydney, Australia. Sega
Enterprises is owned jointly by Mr. Dyne, Mr. Bermeister, Sega Japan,
Mitsubishi Corp. and Mitsui Corp. Consumer Electronics is a South African
based distributor of multi-media software products. Jacfun is the owner of the
Darling Harbor property occupied by the Sega Enterprises indoor theme park.
Packard Bell Australia is one of the leading manufacturers and distributors of
personal computers through the Australian mass merchant channel.
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MARK MILLER. Mr. Miller has served as Vice President, Production and
Operations since October 1996 and as a Director of the Company since August
1996. Mr. Miller served as President and Chief Financial Officer of the
Company from August 1996 through September 1996. Mr. Miller also is Managing
Director of BII Australia, a position he has held since March, 1994. From
February 1993 through December 1994, Mr. Miller was Managing Director of PIE,
where he was primarily engaged in the development and maintenance of
educational and multimedia software for use by schools and other educational
institutions. Mr. Miller currently is a director of PIE. From 1989 through
1992, Mr. Miller was Director of Sales and Marketing of Dealing Information
Systems Pty. Ltd., a developer of proprietary modular software treasury
systems for managing financial transactions.
ANTHONY ROSE. Anthony Rose has served as a consultant to SAND since April
1994 and currently serves as Vice President, Technology of the Company. Mr.
Rose also is the owner and director of and, prior to April 1994 was employed
by, A.R. Technology Pty. Ltd., an Australian company founded by Mr. Rose in
1988 which is involved in the design and manufacture of digital electronics
hardware and software. A.R. Technology has completed design assignments for
Apple, Epson, Panasonic and other corporations and government institutions.
Mr. Rose holds several international patents relating to anti-virus hardware
circuits for personal computers.
DIANA MARANON. Ms. Maranon has served as Secretary of the Company since
August 1996 and as a Director of the Company since October 1996. Ms. Maranon
is the President and Managing Director of Averil Associates, Inc. ("Averil
Associates"), a financial advisory firm. Prior to founding Averil Associates
in 1994, Ms. Maranon was a Vice President with Wasserstein Perella & Co., Inc.
("Wasserstein"), an investment banking firm, with whom she started in 1988. At
Wasserstein, Ms. Maranon was responsible for covering companies headquartered
in the Western United States. From 1985 to 1988, Ms. Maranon practiced
securities law with Skadden Arps Slate Meagher & Flom. Ms. Maranon is a member
of the California Bar.
MICHAEL OZEN. Mr. Ozen has served as Chief Financial Officer of the Company
since October 1996. From May 1991 through June 1996, Mr. Ozen served as
Manager--International Taxes at Coopers & Lybrand, LLP. In July 1996, Mr. Ozen
became Director--International Taxes at Coopers & Lybrand, LLP, a position he
held until October 1996.
GARY BARBER. Mr. Barber has served as a Director of the Company since
October 1996. Since May 1989, Mr. Barber has been Vice Chairman and Chief
Operating Officer of Morgan Creek Productions, Inc. While at Morgan Creek, Mr.
Barber has executive produced numerous feature films including Ace Ventura:
Pet Detective, Ace Ventura: When Nature Calls, Robin Hood: Prince of Thieves
and currently is executive producer of the Ace Ventura animated television
series that airs on CBS.
RAY MUSCI. Mr. Musci has served as a Director of the Company since October
1996. From May 1990 to the present, Mr. Musci has served as the President,
Chief Operating Officer and as a Director of Ocean of America, Inc., a company
that develops, publishes and distributes software products. From September
1994 to July 1996, Mr. Musci served as a director of Ocean International,
Ltd., the holding company of Ocean of America, Inc. From August 1985 to March
1990, Mr. Musci was Executive Vice President/General Manager of Data East USA,
Inc., a subsidiary of Data East Corp., a Japanese company, where he
established a consumer division to develop, manufacture, market and distribute
consumer video games, entertainment software and coin-operated video arcade
games and pinball machines.
GARTH SALONER. Mr. Saloner has served as a Director of the Company since
October 1996. From 1990 to the present, Mr. Saloner has served as the Robert
A. Magowan Professor of Strategic Management and Economics at the Graduate
School of Business at Stanford University. He also has served as Associate
Dean for Academic Affairs and Director of Research and Course Development at
Stanford Graduate School of Business. From 1982 to 1990, Mr. Saloner taught as
a professor in the Economics Department of the Massachusetts Institute of
Technology. Mr. Saloner also is a director and a member of the audit committee
of Quick Response Services, Inc., a corporation that provides electronic data
interchange services in the retail market.
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JEFFREY SCHEINROCK. Mr. Scheinrock has served as a Director of the Company
since October 1996. Since July 1, 1996, Mr. Scheinrock has been Vice Chairman,
Chief Financial Officer and Assistant Secretary of Kistler Aerospace
Corporation, a company involved in the development, marketing and manufacture
of reusable satellite launch vehicles. From March 1, 1989 to July 1, 1996, Mr.
Scheinrock was the Vice Chairman of Finance and Strategic Planning of Packard
Bell NEC. Mr. Scheinrock is a director of SRS Labs, Inc., a corporation listed
on the Nasdaq Stock Market's National Market. Mr. Scheinrock also is a
director of various other private companies including MicroNet Technology,
Inc., which is a California-based high technology company.
The Company's Chief Executive Officer and Chairman, Mark I. Dyne, and its
President, Kevin Bermeister, also are Joint Managing Directors of Sega
Ozisoft. Messrs. Dyne and Bermeister are not required to spend a specific
amount of time at the Company nor are they able to devote their full time and
resources to the Company. There can be no assurance that the inability of
Messrs. Dyne and Bermeister to devote their full time and resources to the
Company will not adversely affect the Company's business, operating results or
financial condition.
Pursuant to the SAND Acquisition Agreement, the Company and Sega Ozisoft
agreed that so long as Sega Ozisoft maintains ownership of at least 7% of the
outstanding equity securities of the Company, the Company has agreed to use
its best efforts to cause a nominee of Sega Ozisoft reasonably acceptable to
the Company to be nominated by the Board of Directors of the Company for
election as a director of the Company so that Sega Ozisoft either has one
representative on the Board of Directors of the Company or one representative
nominated for election at the succeeding annual stockholders meeting.
Currently, Kevin Bermeister has been designated by Sega Ozisoft as its nominee
on the Board of Directors.
The Board of Directors is divided into three classes, designated Class I,
Class II and Class III. Gary Barber and Garth Saloner currently are the Class
I directors. This class will stand for election at the 1997 annual
stockholders meeting. Mark Miller, Ray Musci and Jeff Scheinrock currently are
the Class II directors. This class will stand for election at the 1998 annual
meeting. Mark Dyne, Kevin Bermeister and Diana Maranon currently are the Class
III directors. This class will stand for election at the 1999 annual meeting.
At each annual meeting of stockholders, successors of the class of directors
whose term expires at that annual meeting are elected for a three-year term or
until their successors have been elected and qualified. If the number of
directors is changed, any increase or decrease is to be apportioned among the
classes so as to maintain the number of directors in each class as nearly
equal as possible. The authorized number of members of the Board of Directors
currently is eight. Directors may be removed from office only for cause by the
affirmative vote of a majority of the outstanding shares of Common Stock.
Vacancies on the Board of Directors may be filled only by a majority of the
directors then in office.
BOARD COMMITTEES
The Company's Board of Directors maintains an Audit Committee and a
Compensation Committee. The Audit Committee's functions include recommending
to the Board of Directors the engagement of the Company's independent
certified public accountants, reviewing with those accountants the plan and
results of their audit of the financial statements and determining the
independence of the accountants. The Compensation Committee reviews and makes
recommendations with respect to compensation of officers and key employees,
and is responsible for the grant of options and other awards under the
Company's 1996 Plan. See "--Stock Option Plan."
DIRECTOR COMPENSATION
Nonemployee directors of the Company currently are paid $1,500 for their
personal attendance at any meeting of the Board and $500 for attendance at any
telephonic meeting of the Board or at any meeting of a committee of the Board.
Directors also are reimbursed for their reasonable travel expenses incurred in
attending Board or committee meetings. In September 1996, the Company granted
to each of Ms. Maranon and Messrs. Barber, Musci, Scheinrock and Garth Saloner
effective upon commencement of service as a director, options to purchase
25,000 shares of Common Stock at an exercise price of $10.00 per share.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee for the fiscal year ended
June 30, 1996. For the year ended June 30, 1996, all decisions regarding
executive compensation were made by Mr. Miller. No interlocking relationship
exists between any member of the Company's Compensation Committee and any
member of any other company's board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth both cash and noncash compensation paid or to
be paid by the Company to, Mark I. Dyne, Chief Executive Officer, Kevin
Bermeister, and Mark Miller, President and Chief Financial Officer (the "Named
Executive Officers"). No other officer received compensation in excess of
$100,000 for the fiscal year ended June 30, 1996:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
LONG TERM
FISCAL YEAR COMPENSATION
NAME AND PRINCIPAL ENDED NUMBER OF SECURITIES ALL OTHER
POSITION JUNE 30, SALARY BONUS UNDERLYING OPTIONS(1) COMPENSATION
------------------ ----------- ---------- ------------------------------ ------------
<S> <C> <C> <C> <C> <C>
Mark Dyne (2) 1996 $ -- $ -- -- $ --
Chief Executive Officer
Kevin Bermeister, 1996 -- -- -- --
President (2)
Mark Miller, Vice 1996 69,263 -- -- 21,224(4)
President Production
and Operations (3)
</TABLE>
SUMMARY COMPENSATION TABLE
- --------
(1) See "--Stock Option Plan."
(2) Messrs. Dyne and Bermeister will receive annual salaries of $225,000 and
$225,000, respectively.
(3) During the Company's last fiscal year, Mr. Miller served as the Managing
Director. Compensation amounts shown consist of consulting fees paid by
BII Australia to PIE or Mr. Miller. See "--Employment Agreements with
Executive Officers."
(4) Includes auto allowances, contributions to retirement benefits and profit
included in payments to PIE for purchases of computer equipment.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Effective October 1, 1996, the Company entered into an employment agreement
with Mr. Ozen pursuant to which Mr. Ozen serves as the Company's Chief
Financial Officer and the Company will pay Mr. Ozen a base salary equal to
$150,000 per year. Mr. Ozen received options to purchase an aggregate of
30,000 shares of Common Stock of the Company which vest in four equal annual
installments commencing on the date of grant. Mr. Ozen's employment is
terminable by the Company at will. In the event the Company terminates Mr.
Ozen's employment without cause, Mr. Ozen is entitled to three months
severance payment (the "Initial Payment") if termination occurs during the
first or second year of employment (the "Initial Period"), and in addition to
the Initial Payment, one month severance payment for each year served after
the Initial Period, not to exceed an aggregate of 12 months severance payment,
if termination occurs after the Initial Period. For purposes of the agreement,
"cause" means the willful disregard of, or failure to perform, duties where
such willful disregard or failure is not discontinued within a reasonable
period of time from receipt of written notice relating thereto.
A.R. Technology Limited, an Australian corporation of which Anthony Rose is
the sole stockholder, will provide the services of Anthony Rose to BII
Australia in exchange for $134,130 per year. The arrangement is terminable at
will by either party upon 30 days prior written notice.
PIE provides the services of Mark Miller to BII Australia. PIE was paid $0,
$36,985, $90,487 and $13,342 during the period from September 2, 1993 to June
30, 1994, the years ended June 30, 1995 and 1996, and the
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period from July 1, 1996 to September 1, 1996, respectively. These amounts
include auto allowances, contributions to retirement benefits and profit
included in payments to PIE for purchases of computer equipment. This
arrangement is terminable at will by either party upon 30 days prior written
notice.
STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "1996 Plan") in September 1996.
Each director, officer, employee or consultant of the Company or any of its
subsidiaries is eligible to be considered for the grant of awards under the
1996 Plan. The maximum number of shares of Common Stock that may be issued
pursuant to awards granted under the 1996 Plan is 1,080,000, subject to
certain adjustments to prevent dilution. Any shares of Common Stock subject to
an award which for any reason expires or terminates unexercised are again
available for issuance under the 1996 Plan.
The 1996 Plan will be administered by the Board of Directors or another
committee of two or more non-employee directors appointed by the Board of
Directors (the "Committee"), each of whom shall be an "outside director" for
purposes of 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). Subject to the provisions of the 1996 Plan, the Committee will have
full and final authority to select the executives and other employees to whom
awards will be granted thereunder, to grant the awards and to determine the
terms and conditions of the awards and the number of shares to be issued
pursuant thereto.
Awards. The 1996 Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of (1) shares of Common Stock, (2) an option, warrant,
convertible security, stock appreciation right or similar right with an
exercise or conversion privilege at a price related to the Common Stock, or
(3) any other security or benefit with a value derived from the value of the
Common Stock. The maximum number of shares of Common Stock with respect to
which options or rights may be granted under the 1996 Plan to any executive or
other employee during any fiscal year is 100,000, subject to certain
adjustments to prevent dilution.
Awards under the 1996 Plan are not restricted to any specified form or
structure and may include arrangements such as sales, bonuses and other
transfers of stock, restricted stock, stock options, reload stock options,
stock purchase warrants, other rights to acquire stock or securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares. An award
may consist of one such arrangement or two or more such arrangements in tandem
or in the alternative. An award may provide for the issuance of Common Stock
for any lawful consideration, including services rendered or, to the extent
permitted by applicable state law, to be rendered. Currently, Delaware law
does not permit the issuance of common stock for services to be rendered.
An award granted under the 1996 Plan may include a provision conditioning or
accelerating the receipt of benefits, either automatically or in the
discretion of the Committee, upon the occurrence of specified events,
including a change of control of the Company, an acquisition of a specified
percentage of the voting power of the Company or a dissolution, liquidation,
merger, reclassification, sale of substantially all of the property and assets
of the Company or other significant corporate transaction. Any stock option
granted may be an incentive stock option within the meaning of Section 422 of
the Code or a nonqualified stock option.
An award under the 1996 Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award, and/or to pay all or part of the recipient's tax withholding
obligations with respect to such issuance, by delivering previously owned
shares of capital stock of the Company or other property, or by reducing the
amount of shares or other property otherwise issuable pursuant to the award.
If an option granted under the 1996 Plan permitted the recipient to pay for
the shares issuable pursuant thereto with previously owned shares, the option
may grant the recipient the right to "pyramid" his or her previously owned
shares, i.e., to exercise the option in successive transactions, starting with
a relatively small number of shares and, by a series of exercises using shares
acquired from each transaction to pay the purchase price of the shares
acquired in the following transaction, to exercise the option for a larger
number of shares with no more investment than the original share or shares
delivered.
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Plan Duration. The 1996 Plan became effective upon its adoption by the Board
of Directors on September 13, 1996, and was approved by the Company's
stockholders on September 13, 1996. As of the date hereof, the Board has
granted options covering an aggregate of 185,000 shares of Common Stock to
certain directors of the Company and to Messrs. Ozen and Rose, with an
exercise price of $10.00 per share. The directors' options were granted
effective at such time as each director joins the Board of Directors and will
be immediately fully vested. The options granted to Mr. Ozen vest in four
equal annual installments commencing on the date of grant. Mr. Rose's options
vest in 48 equal monthly installments commencing on the date of grant.
Although any award that was duly granted on or prior to such date may
thereafter be exercised or settled in accordance with its terms, no shares of
Common Stock may be issued pursuant to any award made after September 13,
2006. See "Principal Stockholders."
Amendments. The Committee may amend or terminate the 1996 Plan at any time
and in any manner, subject to the following: (1) no recipient of any award
may, without his or her consent, be deprived thereof or of any of his or her
rights thereunder or with respect thereto as a result of such amendment or
termination; and (2) if any rule or regulation promulgated by the Securities
and Exchange Commission (the "Commission"), the Internal Revenue Service or
any national securities exchange or quotation system upon which any of the
Company's securities are listed requires that any such amendment be approved
by the Company's stockholders, then such amendment will not be effective until
it has been approved by the Company's stockholders.
Form S-8 Registration. The Company intends to file a registration statement
under the Securities Act to register the 1,080,000 shares of Common Stock
reserved for issuance under the 1996 Plan. Such registration statement is
expected to be filed shortly following the date of this Prospectus and will
become effective immediately upon filing with the Commission. Shares issued
under the 1996 Plan after the effective date of such registration statement
generally will be available for sale to the public without restriction, except
for the 180-day lock-up provisions and except for shares issued to affiliates
of the Company, which will remain subject to the volume and manner of sale
limitations of Rule 144. See "Shares Eligible For Future Sale."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation and its Bylaws provide for the
indemnification by the Company of each director, officer and employee of the
Company to the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended. Section 145 of the
Delaware General Corporation Law provides in relevant part that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such
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action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court shall deem proper.
Delaware law further provides that nothing in the above-described provisions
shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may otherwise be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
The Company's Certificate of Incorporation also provides that a director of
the Company shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(b)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the
liability of a director for, among other things: breach of the duty of
loyalty; acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; unlawful payment of dividends;
and transactions from which the director derived an improper personal benefit.
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Company and certain of
its officers (the "Indemnitees"). Pursuant to the terms and conditions of the
Indemnity Agreements, the Company has agreed to indemnify each Indemnitee
against any amounts which he or she becomes legally obligated to pay in
connection with any claim against him or her based upon any action or inaction
which he or she may commit, omit or suffer while acting in his or her capacity
as a director and/or officer of the Company or its subsidiaries, provided,
however, that Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action, had no reasonable cause to
believe Indemnitee's conduct was unlawful.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PIE and Mark Miller:
Since March 1994, PIE has made periodic cash advances to BII Australia for
working capital purposes. On October 24, 1994, PIE and BII Australia entered
into a loan agreement to reflect the parties' lending relationship. The
maximum principal amount BII Australia may borrow from PIE pursuant to the
loan agreement is $631,125. The note bears interest at the rate of 12.5% per
annum and was due and payable on December 31, 1994. By written agreement (the
"Note Extension") dated September 13, 1996, the maturity date of the note was
extended until the earlier to occur of the closing of the Offering or December
31, 1996. As of June 30, 1995 and 1996, BII Australia owed PIE $606,152
(including accrued interest in the amount of $46,427), and $670,488 (including
accrued interest of $149,389), respectively. As of September 13, 1996, the
amount outstanding was $684,495, including accrued interest of $163,396.
Pursuant to the Note Extension, PIE and BII Australia increased the maximum
amount BII Australia may borrow pursuant to the loan agreement to $710,000.
The Company intends to apply a portion of the proceeds of the Offering to
repay all amounts owed to PIE. See "Use of Proceeds."
BII Australia periodically purchases certain computer equipment from PIE.
For the period from September 2, 1993 (inception) to June 30, 1994 and the
fiscal years ended June 30, 1995 and 1996, BII Australia's purchases totaled
$0, $15,356 and $15,792, respectively.
Mark Miller is a director and shareholder of Multimedia Connexion Pty. Ltd.
BII Australia periodically purchases hardware and software from Multimedia
Connexion Pty. Ltd. For the period from September 2, 1993 (inception) and the
fiscal years ended June 30, 1995 and 1996, BII Australia purchased computer
equipment totaling $0, $12,304 and $15,724, respectively.
Sega Ozisoft, Mark Dyne and Kevin Bermeister:
In December 1994, BII Australia entered into a Software License Agreement
(the "Sega Agreement") with Sega Ozisoft. Mark Dyne and Kevin Bermeister are
directors and shareholders of Sega Ozisoft and of the
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Company. Pursuant to the terms of the Sega Agreement, Sega Ozisoft became the
exclusive distributor in Australia and New Zealand of certain CD-ROM software
products developed by BII Australia. Pursuant to the terms of the Sega
Agreement, BII Australia received non-refundable advances totaling $71,040
from Sega Ozisoft in the fiscal year ended June 30, 1995. In addition, BII
Australia is entitled to receive royalty payments of $6.31 per net unit sold,
after Sega Ozisoft recoups the advance. Such royalty is reducible to $4.73 per
net unit sold after 2000 units have been sold for each title. The non-
refundable advances are recoupable from the royalties earned by BII Australia
under the Sega Agreement. As of September 12, 1996, other than its non-
refundable advance, BII Australia had received no royalty payments relating to
the Sega Agreement. The Sega Agreement expires on December 15, 1996.
Since February 1994, BII Australia has purchased an aggregate of
approximately $38,124 in goods from Packard Bell Australia. Kevin Bermeister
is a director and each of Kevin Bermeister and Mark Dyne is a shareholder of
Packard Bell Australia.
In January 1996, BII Australia entered into a Multimedia Software
Development and Production Agreement (the "Development Agreement") with Sega
Ozisoft for Cyberswine. Pursuant to the terms of the Development Agreement,
BII Australia is entitled to receive $165,690 for certain assistant production
services. Amounts are payable by Sega Ozisoft upon attainment of mutually
determined milestones. In addition, BII Australia is entitled to 2.5% in
royalties on net revenues, as defined by the agreement. As of June 30, 1996,
Brilliant had received $120,396 and had recorded a receivable of $52,146,
which was received in July and August 1996.
On September 13, 1996 the Company and Sega Ozisoft entered into the SAND
Acquisition Agreement. Mark Dyne and Kevin Bermeister both currently serve as
directors of Sega Ozisoft and are significant shareholders of Sega Ozisoft.
Pursuant to the SAND Acquisition Agreement, the Company acquired all of the
assets of SAND and in consideration therefor will issue a one year $1,500,000
mandatorily convertible note to Sega Ozisoft. The SAND Note bears interest at
a rate of 8% per annum. Concurrent with the closing of the Offering, the SAND
Note automatically will be converted into 780,001 shares of Common Stock. The
terms of the SAND Acquisition were determined by arms length negotiations
between Messrs. Dyne and Bermeister and Averil Associates, Inc. on behalf of
the Company and by the Board of Directors of Sega Ozisoft, with Messrs. Dyne
and Bermeister abstaining, on behalf of Sega Ozisoft. See "The Company."
The Sand Acquisition Agreement also provides that the Company shall pay to
Sega Ozisoft a royalty of 12.5% of "Adjusted Gross Receipts" on the Cyberswine
multipath movie. "Adjusted Gross Receipts" is defined as the gross receipts
received by the Company on the Cyberswine multipath movie after deducting any
royalties and fees payable to Cyberswine licensors. Pursuant to an agreement
between Sega Ozisoft and the licensor of the characters and content of
Cyberswine, the Company will be required to pay to the Cyberswine licensor a
royalty of 2% of gross revenues less cost of goods on all sales of Cyberswine
products. In addition, so long as Sega Ozisoft maintains ownership of at least
7% of the outstanding equity securities of the Company, the Company has agreed
to use its best efforts to cause a nominee of Sega Ozisoft reasonably
acceptable to the Company to be nominated by the Board of Directors of the
Company for election as a director of the Company so that Sega Ozisoft either
has one representative on the Board of Directors of the Company or one
representative nominated for election at the succeeding annual stockholders
meeting. Kevin Bermeister has been nominated by Sega Ozisoft to serve on the
Board of Directors.
Pursuant to the SAND Acquisition Agreement, Sega Ozisoft has agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company has agreed to reimburse Sega Ozisoft from the
proceeds of the Offering for all expenses advanced by Sega Ozisoft for any
period after October 31, 1996, and all expenses in excess of $59,175 per month
advanced by Sega Ozisoft for August, September and October 1996.
Monto, an investment holding company in which Messrs. Dyne and Bermeister
hold significant equity interests, has entered into a multimedia production
agreement with BII Australia dated March 14, 1995 whereby Monto paid BII
Australia $180,000 to be used to develop a series of two CD-ROM interactive
magazine
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programs based on the Beyond 2000 television series. BII Australia will secure
publication and distribution of the completed software packages and is
obligated to pay to Monto 50% of the net receipts from the commercialization
of the Beyond 2000 product. As of June 30, 1996, net receipts totaled
approximately $24,624 and payments to Monto totaled $12,312. In addition, a
liability to Monto for $7,425 was recorded at June 30, 1996.
In November 1995, BII Australia entered into a Distribution Agreement (the
"Consumer Electronics Agreement") with Consumer Electronics. Each of Mark Dyne
and Kevin Bermeister is a director and significant shareholder of Consumer
Electronics. BII Australia developed, pursuant to the Consumer Electronics
Agreement, several CD-ROM software entertainment products to be distributed by
Consumer Electronics in South Africa and neighboring territories. In addition,
BII Australia granted to Consumer Electronics certain bundling rights to the
software products in the same territories. Pursuant to the Consumer
Electronics Agreement, BII Australia is entitled to a non-refundable advance
of $84,700, of which $21,175 was paid in fiscal year ended June 30, 1996. In
addition, BII Australia is entitled to receive royalty payments for each unit
sold pursuant to the distribution rights and the bundling of the software
products, after Consumer Electronics recoups the advance. Net Revenues are
defined in the Consumer Electronics Agreement as gross receipts less
applicable sales and VAT taxes. Royalties have not yet been accrued pursuant
to the Consumer Electronics Agreement. The Consumer Electronics Agreement
expires on December 6, 1996.
Other:
In September 1995, BII Australia entered into a Distribution Agreement (the
"Ocean Agreement") with Ocean of America, Inc. ("Ocean"). Ray Musci, a
director of the Company, is currently a director and significant shareholder
of Ocean. BII Australia granted to Ocean certain retail distribution and
bundling rights in North America and Europe to the software products developed
by BII Australia. Pursuant to the terms of the Ocean Agreement, BII Australia
was entitled to receive a non-refundable advance from Ocean of approximately
$825,000 in 1996. In addition, BII Australia is entitled to receive royalty
payments in exchange for a percentage of Net Revenues generated from
distribution sales of the CD-ROM entertainment software products and a
percentage of Net Revenues received by Ocean from bundling of the software
products, after Ocean recoups the advance. "Net Revenues" are defined as gross
receipts less returns and certain other expenses. Through October 23, 1996,
Ocean had paid approximately $575,000 against the non-refundable advance.
Royalties have not yet been accrued in connection with this distribution
arrangement. The Ocean Agreement expires on September 29, 1997, subject to a
two year extension under certain circumstances.
In August 1996, the Company issued an aggregate of 1,000,000 shares of its
Common Stock to the two stockholders of BII Australia, PIE and Reefknot, in
exchange (the "Exchange") for all of the capital stock of BII Australia held
by each of PIE and Reefknot. As a result of the Exchange, the Company acquired
all of the outstanding capital stock of BII Australia, PIE was issued 117,650
shares of Common Stock and Reefknot was issued 882,350 shares of Common Stock.
In September 1996, the Company executed a promissory note in favor of
Reefknot in the principal amount of $150,000. The note bears interest at the
rate of 10% per annum and is due and payable on the earlier to occur of the
closing of the Offering and September 10, 1997.
Averil Associates, Inc. ("Averil Associates"), a financial advisory firm
founded and controlled by Diana Maranon, has, since November 1995, performed
various services for the Company including investigation of strategic
alternatives and assistance with the Offering. As consideration for such
services, the Company has paid to Averil Associates the aggregate amount of
$25,000, plus out of pocket expenses. The Company has granted to Chloe
Holdings, Inc. ("Chloe"), an affiliate of Averil Associates, currently
exercisable warrants to purchase 40,222 shares of Common Stock with an
exercise price of $.0326 per share and has committed to a cash payment of
$200,000 payable upon consummation of the Offering. The Company has entered
into an indemnification agreement with Averil Associates pursuant to which the
Company will indemnify Averil Associates, Chloe, and Ms. Maranon against any
amounts these parties may become obligated to pay in connection with Ms.
Maranon's
58
<PAGE>
service as Secretary and as a Director of and consultant to the Company. The
Company plans to continue to engage Averil Associates; however, the Company is
unable to currently estimate the extent to which it will use Averil Associates
in the future.
Certain of the Company's directors and officers, including Mark Dyne and
Kevin Bermeister who are also directors or officers of potential competitors
and/or strategic partners of the Company. These relationships may give rise to
conflicts of interest between the Company, on the one hand, and one or more of
the directors, officers, and/or their affiliates, on the other hand. The
Company's Certificate of Incorporation provides that Mark Dyne and Kevin
Bermeister are required to present to the Company any corporate opportunities
for the development of any type of interactive digital entertainment with the
exception of opportunities for participation in the development by others of
interactive digital entertainment where publishing and/or distribution rights
for the product to be developed are offered to Messrs. Dyne and/or Bermeister
solely for Australia, New Zealand and/or Southern Africa. See "Risk Factors--
Conflicts of Interest."
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of October 23, 1996 and as adjusted
to reflect the sale of 2,000,000 shares of Common Stock offered hereby, for
(i) each person who is known to the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, and (iv) all directors and
executive officers of the Company as a group. The address of each person
listed is in care of the Company, 6355 Topanga Canyon Boulevard, Suite 513,
Woodland Hills, California 91367, unless otherwise set forth below such
person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING (1) AFTER THE OFFERING (1)
---------------------------- ----------------------------
NUMBER PERCENT NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS OF SHARES OF CLASS
- ---------------- --------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Insinger Group, as man- 1,822,118 35.0% 1,822,118 25.3%
ager of the Reefknot
Limited (2)............
One Stokes Place
St. Stephens Green
Dublin 2
Republic of Ireland
Mark Dyne............... 795,600 15.3 795,600 11.0
Kevin Bermeister........ 795,600 15.3 795,600 11.0
Sega Ozisoft Pty. Ltd... 780,001 15.0 780,001 10.8
Bldg. A, Southern
Industrial Estates,
200 Coward Street,
Mascot, NSW
2020 Australia
Packard Bell NEC (3).... 600,000 10.3 600,000 7.7
One Packard Bell Way
Sacramento, California
95828
PIE (4)................. 500,013 9.6 500,013 6.9
17 the Corso
Manly, NSW, Australia
2095
Safcor, Inc. ........... 486,669 9.4 486,669 6.8
8474 Commerce Ave.
Suite B
San Diego, CA 92121
Morgan Creek (5)........ 85,000 1.6 85,000 1.2
4000 Warner Boulevard
Building 76
Burbank, California
91522
Diana Maranon (6)....... 65,222 1.2 65,222 *
Gary Barber (7)......... 25,000 * 25,000 *
Ray Musci (7)........... 25,000 * 25,000 *
Garth Saloner (7)....... 25,000 * 25,000 *
Jeff Scheinrock (7)..... 25,000 * 25,000 *
Anthony Rose............ 20,000 * 20,000 *
All of the directors and
executive officers as a
group (10 persons) (8). 2,283,935 42.5 2,283,935 31.0
</TABLE>
(footnotes on following page)
60
<PAGE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated, the persons named in
this table have sole voting and sole investment power with respect to all
shares shown as beneficially owned, subject to community property laws
where applicable. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of Common
Stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days of September 16, 1996
are deemed outstanding. Such shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of each other
person.
(2) Insinger Group is the manager of Reefknot Limited, and as such, controls
the disposition and voting of the shares of Common Stock held by Reefknot.
(3) Consists of 600,000 shares of Common Stock underlying warrants which are
or will become exercisable on or prior to December 23, 1996. See
"Description of Capital Stock--Warrants."
(4) Mark Miller and his wife, are the sole stockholders of PIE.
(5) Consists of 85,000 shares of Common Stock underlying warrants which are or
will become exercisable on or prior to December 23, 1996. See "Description
of Capital Stock--Warrants."
(6) Consists of (i) 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are or will become
exercisable on or prior to December 23, 1996; and (ii) 40,222 shares of
Common Stock underlying warrants which are or will become exercisable on
or prior to December 23, 1996. See "Description of Capital Stock--
Warrants."
(7) Consists of 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are or will become
exercisable on or prior to December 23, 1996.
(8) Includes (i) 132,500 shares of Common stock of the Company reserved for
issuance upon exercise of stock options which are or will become
exercisable on or prior to December 23, 1996; and (ii) 40,222 shares of
Common Stock underlying warrants which are or will become exercisable on
or prior to December 23, 1996. See "Description of Capital Stock--
Warrants."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The total number of shares that the Company is authorized to issue is
31,000,000, consisting of 30,000,000 shares of Common Stock, par value $0.001
per share, and 1,000,000 shares of Preferred Stock, par value $0.001 per
share. The following statements are brief summaries of certain provisions
relating to the Company's capital stock.
COMMON STOCK
At October 23, 1996, the Company had 5,200,001 shares of Common Stock
outstanding held by approximately six holders of record of the Company's
Common Stock. After the Offering there will be 7,200,001 shares of Common
Stock outstanding. The holders of Common Stock are entitled to one vote for
each share held of record on all matters on which the holders of Common Stock
are entitled to vote. The holders of Common Stock are entitled to receive
ratably dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled subject to
the rights of holders of Preferred Stock issued by the Company, if any, to
share ratably in all assets remaining available for distribution to them after
payment of liabilities and after provision is made for each class of stock, if
any, having preference over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the Common Stock issuable pursuant
to this Prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one or more series with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights which adversely affect the voting power or
other rights of the holders of the Company's Common Stock. In the event of
issuance, the Preferred Stock could be utilized, under certain circumstances,
as a way of discouraging, delaying or preventing an acquisition or change in
control of the Company. The Company does not currently intend to issue any
shares of its Preferred Stock.
WARRANTS
In connection with its strategic relationships with Packard Bell NEC and
Morgan Creek (See "Business--Strategic Relationships"), on September 14, 1996
the Company issued to each of Packard Bell NEC and Morgan Creek warrants to
purchase 600,000 shares and 85,000 shares of the Common Stock of the Company,
respectively.
The warrant issued to Packard Bell NEC was purchased for $100.00 and is
exercisable in full upon the closing of the Offering at 100% of the initial
public offering price of the Common Stock per share and expires three years
from the date of grant. The warrant provides for piggyback registration
rights. See "--Registration Rights."
On or after the first anniversary of the closing of the Offering, the
Company has the right to redeem all, but not less than all, of the warrant
issued to Packard Bell NEC at a price of $0.001 per share by written notice
mailed 30 days prior to the redemption date. Such notice may be given within
20 days following any period of 15 consecutive trading days during which the
shares to be issued to Packard Bell NEC are publicly tradeable and the high
closing bid of the shares of Common Stock on the Nasdaq Stock Market's
National Market exceeds a per share price equal to 120% of the exercise price.
The warrants issued to Morgan Creek were purchased in the aggregate for
$100.00. Warrants to purchase 35,000 shares of Common Stock issued to Morgan
Creek are immediately exercisable at $10.00 per share and
62
<PAGE>
warrants to purchase the additional 50,000 shares of Common Stock are
immediately exercisable at $13.00 per share. Each of these warrants expire
three years from the date of grant. Each warrant provides for piggyback
registration rights. See "--Registration Rights." The Company has the right to
redeem all, but not less than all, of the warrants at a price of $0.001 per
share by written notice mailed 30 days prior to the redemption date. Such
notice may be given within 20 days following any period of 15 consecutive
trading days during which the shares to be issued to Morgan Creek are publicly
tradable and the high closing bid of the shares of Common Stock on the Nasdaq
Stock Market's National Market exceeds a per share price equal to 125% of the
respective warrant exercise prices.
Pursuant to its agreement with Averil Associates, the Company issued to
Chloe warrants to purchase 40,222 shares of Common Stock with an exercise
price of $0.0326 per share. In the event the shares of Common Stock underlying
the warrants are not freely tradeable pursuant to an exemption from
registration under the Securities Act, the Company has agreed to register
these shares on Form S-8. Additionally, these warrants provide for piggyback
registration rights. See "--Registration Rights." These warrants expire on
September 14, 1999.
All of the warrants granted to Packard Bell NEC, Morgan Creek and Chloe are
entitled to equitable adjustments in the purchase price and in the number of
shares of Common Stock and/or other securities deliverable upon exercise
thereof in the event of a stock dividend, stock split, reclassification,
reorganization, consolidation or merger.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation provides that the Company's Board
of Directors is classified into three classes of directors. The Certificate of
Incorporation also provides that all stockholder action must be effected at a
duly called meeting of stockholders and not by a consent in writing. In
addition, the Company's Certificate of Incorporation and Bylaws provide that
only the Company's Chief Executive Officer, President or a majority of the
members of the Company's Board of Directors may call a special meeting of
stockholders. In addition, directors may not be removed without cause. The
Company also has the authority to issue one or more series of "blank check"
preferred stock. See "Preferred Stock." These provisions of the Certificate of
Incorporation and Bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such provisions
also may have the effect of preventing changes in the management of the
Company. See "Risk Factors--Effect of Certain Charter Provisions; Antitakeover
Effects of Certificate of Incorporation, Bylaws and Delaware Law."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that
a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is
an "interested stockholder" for a period of three years from the date that
such person became an interested stockholder unless: (i) the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before
the person becomes an interested stockholder; (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes it an interested stockholder (excluding shares
owned by persons who are both officers and directors of the corporation, and
shares held by certain employee stock ownership plans); or (iii) on or after
the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
63
<PAGE>
REGISTRATION RIGHTS
After the Offering, the holders of 780,001 shares of Common Stock and the
holders of warrants to purchase 725,222 shares of Common Stock will be
entitled to certain rights with respect to registration of such shares under
the Securities Act. If the Company proposes to register any of its securities
under the Securities Act at least 180 days subsequent to the Offering, Sega
Ozisoft, with respect to the shares of Common Stock issuable upon exercise of
the SAND Note and Common Stock issuable to Packard Bell NEC, Morgan Creek and
Chloe, are entitled to notice of such registration and are entitled to include
the shares received upon conversion of the SAND Note and underlying the
warrants, respectively, in such registration, provided among other conditions,
that the underwriters of any offering have the right to limit the number of
shares included in such registration.In the event the shares of Common Stock
underlying the warrant issued to Chloe are not freely tradeable pursuant to an
exemption from registration under the Securities Act, the Company has agreed
to register these shares on Form S-8.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is U.S.
Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-
2991.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Upon completion of the Offering, based on the number of shares outstanding
as of October 23, 1996, the Company will have outstanding an aggregate of
7,200,001 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 2,000,000 shares sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 5,200,001 shares of Common Stock held by
existing shareholders are "restricted" securities within the meaning of Rule
144 under the Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below.
All holders of the Company's securities outstanding prior to the Offering
will, prior to the Offering, be subject to "lock-up" provisions providing that
such holders will not offer to sell, contract to sell or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to, any shares of
Common Stock, or any options or warrants to purchase Common Stock, or any
securities convertible into or exercisable for Common Stock, of the Company
for 180 days, and in the case of Mr. Dyne and Mr. Bermeister, one year, after
the effective date of the Offering without the prior written consent of the
representatives of the underwriters. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, no shares will be eligible for
immediate sale on the effective date of the Offering and, unless earlier
released from the lock-up provisions, 2,322,131 currently outstanding shares
of Common Stock will be eligible for sale 180 days after the effective date of
the Offering, subject in all cases to the volume limitations of Rules 144 and
701 summarized below.
Additionally, pursuant to Rules 144 and 701, beginning 180 days after the
effective date of the Offering, upon the expiration of contractual lock-up
provisions with the Company, an aggregate of approximately 132,500 shares will
be vested and eligible for sale upon the exercise of outstanding stock
options.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least two years but less than
three years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (approximately 72,000 shares immediately after the
Offering) or (ii) the average weekly trading volume during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales pursuant to
64
<PAGE>
Rule 144 are subject to certain requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or person whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at
least three years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations described above. In general, under Rule 701
under the Securities Act as currently in effect, any employee, consultant or
advisor of the Company who purchases shares from the Company in connection
with a compensatory stock or option plan or other written agreement related to
compensation is eligible to resell such shares 90 days after the effective
date of the Offering in reliance on Rule 144, but without compliance with
certain restrictions contained in Rule 144.
At October 23, 1996, the Company had reserved an aggregate of 1,080,000
shares of Common Stock for issuance pursuant to the 1996 Plan, and options to
purchase 185,000 shares were outstanding under the 1996 Plan. The Company
intends to file a registration statement under the Securities Act to register
the 1,080,000 shares of Common Stock reserved for issuance under the 1996
Plan. Such registration statement is expected to be filed shortly following
the date of this Prospectus and will become effective immediately upon filing
with the Securities and Exchange Commission. Shares issued under the 1996 Plan
after the effective date of such registration statement generally will be
available for sale to the public without restriction, except for shares issued
to affiliates of the Company, which will remain subject to the volume and
manner of sale limitations of Rule 144 and the 180 day lock-up provisions. See
"Underwriting." Additionally, after the Offering, the holders of 780,001
shares of Common Stock and the holders of warrants to purchase 685,000 shares
of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act.
65
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters"), for whom CS First Boston Corporation and
Cruttenden Roth Incorporated are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
CS First Boston Corporation.......................................
Cruttenden Roth Incorporated......................................
---
Total.............................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of the Common Stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased. The underwriting agreement provides that, in the event
of a default by an Underwriter, in certain circumstances the purchase
commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the close
of business on the 30th day after the date of this Prospectus, to purchase up
to 300,000 additional shares at the initial public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is
exercised, each Underwriter will be obligated, subject to certain conditions,
to purchase approximately the same percentage of such additional shares of
Common Stock as it was obligated to purchase pursuant to the Underwriting
Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a
concession of $ per share, and the Underwriters and such dealers may allow
a discount of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price and concession and discount
to dealers may be changed by the Representatives.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares being
offered hereby.
The Company has agreed that it will not offer, sell, contract to sell,
announce its intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 (the "Securities Act") relating to,
any shares of its Common Stock or securities convertible into or exchangeable
or exercisable for any shares of the Company's Common Stock without the prior
written consent of CS First Boston Corporation for a period of 180 days after
the date of this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
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<PAGE>
The Common Stock has been approved for quotation and trading on the Nasdaq
Stock Market's National Market under the symbol "BRIL."
Prior to the Offering, there has been no public trading market for the
Common Stock. The initial public offering price for the Common Stock will be
determined by negotiation between the Company and the Representatives. Among
the factors to be considered in determining the initial public offering price
will be the market valuation of comparable companies; market conditions for
initial public offerings; the history of, and the prospects for, the Company's
business; the Company's past and present operations; the Company's current
financial position; an assessment of the Company's management; and the general
condition of the securities markets. The estimated initial public offering
price range set forth on the cover page of this Preliminary Prospectus is
subject to change as a result of market conditions and other factors.
Pursuant to the terms of lock-up provisions, all officers, directors and all
securityholders of the Company will have agreed that, until 180 days, and in
the case of Mr. Dyne and Mr. Bermeister, one year, after the effective date of
the Registration Statement of which this Prospectus is a part (the "lock-up
period"), they will not offer, sell, contract to sell or otherwise dispose of
or grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock now owned or hereafter acquired
directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of the Representatives of the
Underwriters. Approximately 2,322,131 shares of Common Stock subject to the
lock-up provisions will become eligible for immediate public sale following
expiration of the lock-up period, subject to the provisions of Rule 144. The
Representatives of the Underwriters may, in their sole discretion, and at any
time without notice, release all or a portion of the securities subject to the
lock-up provisions. See "Shares Eligible for Future Sale." In addition, the
Company has agreed that until the expiration of the lock-up period, the
Company will not offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, any options or warrants to purchase Common Stock or
any securities convertible into or exchangeable for shares of Common Stock,
other than the Company's sales of shares in this Offering, the issuance of
shares of Common Stock upon the exercise of outstanding options, the grant of
options to purchase shares or the issuance of shares of Common Stock without
the prior written consent of the Representatives of the Underwriters.
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<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of the Common Stock are effected. Accordingly, any
resale of the Common Stock in Canada must be made in accordance with
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Common
Stock without the benefit of a prospectus qualified under such securities
laws, (ii) where required by law, that such purchaser is purchasing as
principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions".
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Ontario purchasers to effect service of process within Canada
upon the Company or such persons. All or a substantial portion of the assets
of the Company and such persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the Company or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such Company or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of the Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Common Stock acquired by such purchaser pursuant to the Offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company.
Only one such report must be filed in respect of the Common Stock acquired on
the same date and under the same prospectus exemption.
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<PAGE>
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, have rendered an opinion to the effect that the Common Stock
offered by the Company upon sale will be duly and validly issued, fully paid
and non-assessable. Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, Palo Alto, California, has acted as counsel to the Underwriters
in connection with certain legal matters relating to the Offering.
EXPERTS
The consolidated financial statements of Brilliant Digital Entertainment,
Inc. at June 30, 1996 and 1995, and for each of the two years in the period
ended June 30, 1996 and for the period from September 2, 1993 (inception) to
June 30, 1994, as well as the financial statement of Sega Australia New
Developments (a development stage business unit of Sega Ozisoft Pty. Ltd.) as
of June 30, 1996 and 1995 and for each of the two years in the period ended
June 30, 1996 and the period from March 1, 1996 through June 30, 1994,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditor, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement under the Securities Act with
respect to the shares offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and
with respect to any contract or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement is qualified in
its entirety by such reference. For further information with respect to the
Company and the shares offered hereby, reference is hereby made to the
Registration Statement and exhibits thereto. A copy of the Registration
Statement, including the exhibits thereto, may be inspected without charge at
the Securities and Exchange Commission's principal office in Washington, D.C.,
and copies of all or any part thereof may be obtained from the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed
rates.
Upon consummation of the Offering, the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Securities and Exchange
Commission in accordance with its rules. Such reports and other information
concerning the Company may be inspected and copied at the public reference
facilities referred to above as well as certain regional offices of the
Securities and Exchange Commission.
69
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL
ENTERTAINMENT, INC.
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996................. F-3
Consolidated Statements of Operations for the period from September 2,
1993 (inception) to June 30, 1994 and the years ended June 30, 1995 and
1996.................................................................... F-4
Consolidated Statements of Stockholders' Deficiency for the period from
September 2, 1993 (inception) to June 30, 1994 and the years ended June
30, 1995 and 1996....................................................... F-5
Consolidated Statements of Cash Flows for the period from September 2,
1993 (inception) to June 30, 1994 and the years ended June 30, 1995 and
1996.................................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
AUDITED FINANCIAL STATEMENTS OF SEGA AUSTRALIA NEW DEVELOPMENTS
Report of Independent Auditors........................................... F-17
Balance Sheets at June 30, 1995 and 1996................................. F-18
Statements of Operations and Business Unit Deficit for the period from
March 1, 1994 (inception) to June 30, 1994 and the years ended June 30,
1995 and 1996........................................................... F-19
Statements of Cash Flows for the period from March 1, 1994 (inception) to
June 30, 1994 and the years ended June 30, 1995 and 1996................ F-20
Notes to Financial Statements............................................ F-21
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Financial Information................ F-23
Unaudited Pro Forma Balance Sheet as of June 30, 1996.................... F-24
Unaudited Pro Forma Statement of Operations for the year ended June 30,
1996.................................................................... F-25
Notes to Pro Forma Financial Statements.................................. F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Brilliant Digital Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Brilliant
Digital Entertainment, Inc. as of June 30, 1996 and 1995, and the related
statements of operations, stockholders' deficiency, and cash flows for the
period from September 2, 1993 (inception) to June 30, 1994 and for each of the
two years in the period ended June 30, 1996. 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 the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Brilliant
Digital Entertainment, Inc. at June 30, 1996 and 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
June 30, 1996 and for the period from September 2, 1993 to June 30, 1994, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Brilliant Digital Entertainment, Inc. will continue as a going
concern. As more fully described in Note 1, Brilliant Digital Entertainment,
Inc. has a working capital deficiency and an accumulated stockholders'
deficit. These conditions raise substantial doubt about Brilliant Digital
Entertainment, Inc.'s ability to continue as a going concern. Management's
plans in regards to these matters are also described in Notes 1 and 10. These
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
Ernst & Young LLP
September 13, 1996
Los Angeles, California
F-2
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 49,283 $ 53,061
Accounts receivable................................... -- 657,550
Other assets.......................................... 6,386 6,863
--------- ----------
Total current assets.................................... 55,669 717,474
Property, plant and equipment, net...................... 171,898 198,272
--------- ----------
Total assets............................................ $ 227,567 $ 915,746
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses................. $ 45,012 $ 88,389
Deferred revenue...................................... 193,725 213,003
Notes payable, related party.......................... 628,986 732,989
Other................................................. 6,796 10,798
--------- ----------
Total current liabilities............................... 874,519 1,045,179
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, ($0.001 par value; 1,000,000 shares
authorized; no shares issued or outstanding)......... -- --
Common Stock ($0.001 par value; 30,000,000 shares
authorized, 4,473,040 shares issued and outstanding
in 1995; and 4,420,000 shares issued and outstanding
in 1996)............................................. 4,473 4,420
Additional paid-in capital............................ 10,262 10,163
Accumulated deficit................................... (673,333) (119,921)
Translation adjustments............................... 11,646 (24,095)
--------- ----------
Total stockholders' deficiency.......................... (646,952) (129,433)
--------- ----------
Total liabilities and stockholders' deficiency.......... $ 227,567 $ 915,746
========= ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 2,
1993
(INCEPTION) TO YEAR ENDED JUNE 30,
JUNE 30, ----------------------
1994 1995 1996
-------------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Royalties from licensing
arrangements........................ $ 10,977 $ 752,108 $1,291,015
Development fees..................... -- 88,800 585,743
Software sales....................... -- 1,888 177,119
---------- ---------- ----------
Total revenues..................... 10,977 842,796 2,053,877
Costs of revenues:
Royalties from licensing
arrangements........................ 211,712 594,719 254,510
Development fees..................... -- 60,234 455,414
Software sales....................... -- 986 28,918
---------- ---------- ----------
Total costs of revenue............. 211,712 655,939 738,842
---------- ---------- ----------
Gross profit........................... (200,735) 186,857 1,315,035
Operating expenses:
Sales and marketing.................. 2,100 116,435 163,038
General and administrative........... 19,458 223,470 365,491
Research and development............. 14,594 183,000 174,395
Depreciation......................... 9,816 43,379 101,824
---------- ---------- ----------
Total operating expenses........... 45,968 566,284 804,748
---------- ---------- ----------
Income (loss) from operations.......... (246,703) (379,427) 510,287
Other income (expense):
Export market development grant...... -- -- 122,488
Gain on foreign exchange transac-
tions............................... -- -- 13,382
Interest income...................... -- 707 2,017
Interest expense..................... (2,777) (45,133) (94,762)
---------- ---------- ----------
Total other income (expense)....... (2,777) (44,426) 43,125
---------- ---------- ----------
Income (loss) before income taxes...... (249,480) (423,853) 553,412
Provision for income taxes............. -- -- --
---------- ---------- ----------
Net income (loss)...................... $ (249,480) $ (423,853) $ 553,412
========== ========== ==========
Pro forma net income (loss) per share.. $ (0.05) $ (0.08) $ 0.10
========== ========== ==========
Common shares used in computing pro
forma net income (loss) per share..... 5,284,118 5,288,538 5,337,158
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------- ADDITIONAL EARNINGS
NUMBER OF PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
--------- ------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 2,
1993 (Inception)....... -- $ -- $ -- $ -- $ -- $ --
Proceeds from issuance
of shares............ 4,420,000 4,420 10,140 -- -- 14,560
Foreign exchange
translation.......... -- -- -- -- (2,771) (2,771)
Net loss.............. -- -- -- (249,480) -- (249,480)
--------- ------ ------- --------- -------- ---------
Balance at June 30,
1994................... 4,420,000 4,420 10,140 (249,480) (2,771) (237,691)
Proceeds from sale of
shares to employees.. 53,040 53 122 -- -- 175
Foreign exchange
translation.......... -- -- -- -- 14,417 14,417
Net loss.............. -- -- -- (423,853) -- (423,853)
--------- ------ ------- --------- -------- ---------
Balance at June 30,
1995................... 4,473,040 4,473 10,262 (673,333) 11,646 (646,952)
Repurchase of shares.. (44,200) (44) (108) -- -- (152)
Cancellation of
shares............... (8,840) (9) 9 -- -- --
Foreign exchange
translation.......... -- -- -- -- (35,741) (35,741)
Net income............ -- -- -- 553,412 -- 553,412
--------- ------ ------- --------- -------- ---------
Balance at June 30,
1996................... 4,420,000 $4,420 $10,163 $(119,921) $(24,095) $(129,433)
========= ====== ======= ========= ======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 2,
1993
(INCEPTION) TO YEAR ENDED JUNE 30,
JUNE 30, ---------------------
1994 1995 1996
-------------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................... $(249,480) $ (423,853) $ 553,412
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization......... 9,816 43,379 101,824
Changes in operating assets and lia-
bilities:
Accounts receivable................. -- -- (633,461)
Accounts payable and accruals....... 48,806 (3,181) 37,471
Other assets........................ -- (6,577) (152)
Deferred revenue.................... 131,040 66,510 --
Other liabilities................... -- 7,000 3,203
--------- ---------- ---------
Net cash provided by (used in) operating
activities............................. (59,818) (316,722) 62,297
INVESTING ACTIVITIES
Purchases of equipment.................. (60,854) (168,619) (110,753)
--------- ---------- ---------
Net cash used in investing activities... (60,854) (168,619) (110,753)
FINANCING ACTIVITIES
Proceeds from issuance of shares........ 14,560 175 --
Repurchase of shares.................... -- -- (152)
Increase in note payable, related par-
ty..................................... 126,354 1,075,660 711,686
Repayments of note payable, related par-
ty..................................... -- (555,870) (672,018)
--------- ---------- ---------
Net cash provided by financing activi-
ties................................... 140,914 519,965 39,516
--------- ---------- ---------
NET INCREASE IN CASH AND CASH EQUIVA-
LENTS.................................. 20,242 34,624 (8,940)
Translation adjustments................. (2,771) (2,812) 12,718
Cash and cash equivalents at beginning
of period.............................. -- 17,471 49,283
--------- ---------- ---------
Cash and cash equivalents at end of pe-
riod................................... $ 17,471 $ 49,283 $ 53,061
========= ========== =========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest............................ $ -- $ -- $ --
========= ========== =========
Income taxes........................ $ -- $ -- $ --
========= ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND GOING CONCERN ISSUES
In August 1996, a newly formed holding company, Brilliant Digital
Entertainment, Inc. (the "Company"), issued an aggregate of 1,000,000 shares
of its Common Stock in exchange for all of the capital stock of Brilliant
Interactive Ideas, Pty. Ltd., a company incorporated in the State of New South
Wales, Australia ("BII Australia") (the "Exchange"). BII Australia develops,
produces and markets interactive multimedia titles for the education and
entertainment markets. BII Australia operates principally in the computer
software industry, predominantly in Australia with significant exports to the
United States.
On September 13, 1996, the Company effected a 4.42 to 1 stock split (the
"Stock Split") resulting in a 3,420,000 increase in the number of shares of
Common Stock outstanding.
These financial statements have been restated to give retroactive effect to
the Exchange, the subsequent consolidation of the Company and BII Australia,
and the Stock Split.
The Company has entered into, and continues to negotiate, strategic
agreements intended to secure quality content for its digital entertainment
products. The Company has contracted to acquire the rights to proprietary
software tools which are designed to allow it to both develop a new genre of
digital entertainment products, and to produce ancillary products cost
effectively. These issues are discussed more fully under the heading
"Business" elsewhere in this Prospectus.
The Company is dependent upon continued financing to complete its research
and development programs, commercialize its technologies, and to finance the
planned growth of the Company's business. Management intends to raise
additional equity through an initial public offering of its common stock as
contemplated by this Prospectus (the "Offering"). To the extent the Company is
not able to raise the amounts of funds anticipated by the Offering, management
will investigate other financing alternatives such as privately placed third
party capital or other capital infusions. Reference is made to "Risk Factors"
appearing elsewhere in this Prospectus, which contains a detailed discussion
of certain risks associated with the Company's business.
2. SIGNIFICANT ACCOUNTING POLICIES
Foreign Currency Translation
The functional currency of BII Australia is its local currency, Australian
dollars. Assets and liabilities of BII Australia are translated into U.S.
dollars (the reporting currency) using current exchange rates ($0.718 at June
30, 1995 and $0.789 at June 30, 1996), and revenues and expenses are
translated into U.S. dollars using average exchange rates ($0.72 for the
period from September 2, 1993 to June 30, 1994, $0.739 for the year ended June
30, 1995 and $0.760 for the year ended June 30, 1996). The effects of foreign
currency translation adjustments are deferred and included as a component of
stockholders' equity.
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Foreign currency transaction gains (losses) are included
in the statements of operations.
Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding. Common equivalent shares from
stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission Staff
F-7
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
Accounting Bulletins, all common and common equivalent shares issued by the
Company at an exercise price below the assumed public offering price during
the twelve-month period prior to the offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method at an initial public offering price of $12.50 per share
for stock options and warrants).
Historical net income (loss) per share has been calculated using the number
of common shares outstanding at the end of each period shown, after giving
retroactive effect to the Exchange and the Stock Split (see Note 1).
Historical net income (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) per share .............. $ (0.06) $ (0.10) $ 0.12
========= ========= =========
Shares used in computing net income (loss)
per share................................ 4,420,000 4,424,420 4,473,040
========= ========= =========
</TABLE>
Income Taxes
The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rules and laws that will be in effect when the differences are expected to
reverse.
Research and Development Costs
The Company incurs research and development costs relating to the
development of traditional CD-ROM software tools which provide the technical
infrastructure for production of CD-ROM titles produced by the Company. The
Company incurred research and development costs of $14,594, $183,000 and
$174,395 for the period from September 2, 1993 to June 30, 1994 and the fiscal
years ended June 30, 1995 and 1996, respectively.
The Company's accounting policy follows Statement of Financial Accounting
Standards No. 86 ("SFAS No. 86"), which provides for the capitalization of
certain software development costs once technological feasibility is
established. The Company also evaluates the estimated net realizable value of
new and unproven products and the evidence of the extent of any established
market for the products. Capitalized costs are amortized on a straight-line
basis over the estimated product life or on a ratio of current revenues to
total projected product revenues, whichever is greater. As of June 30, 1996,
technological feasibility of the Company's software had not been established.
Therefore, in accordance with SFAS No. 86, software development costs have
been included in Research and Development Expenses. No software development
costs were capitalized in the period from September 2, 1993 to June 30, 1994
or the fiscal years ended June 30, 1995 and 1996.
Revenue Recognition
Royalties: The Company grants distribution rights to its CD-ROM products to
distributors in exchange for a non-refundable recoupable advance and a
percentage of sales of the products. Revenue related to the non-refundable
advance is recognized when the CD-ROM master is delivered to the customer.
Revenue related to a percentage of sales is recognized upon notification by
the distributor that a royalty has been earned by the Company.
F-8
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
Development Fees: In exchange for the development of CD-ROM products
pursuant to an agreement with a software customer, the Company receives
development fees. The software development agreements generally specify
certain "milestones" which must be achieved throughout the development
process. As these milestones are achieved, the Company recognizes the portion
of the development fee allocated to each milestone.
Software Sales: Software sales result from the Company selling to customers
completed software products developed by the Company. Software sales revenues
are recognized upon shipment of product.
It is the Company's policy to provide for estimated returns at the time
software sales revenue is recognized. For the years ended June 30, 1995 and
1996 the Company had experienced no returns on software sales.
Cost of Revenues
Cost of revenues related to royalties consists primarily of royalty
obligations to third parties. Cost of revenues related to development fees
consists primarily of salaries, benefits and overhead associated with the
development of specific software products to customer specifications, as well
as costs of outside contractors engaged from time to time in creating aspects
of software products such as animation, voice recording and music. Cost of
revenues related to software sales consists primarily of royalties to third
parties and the direct costs and manufacturing overhead required to reproduce
and package software products.
Deferred Revenues
Cash advances are received by the Company to develop software for third
parties. If such advances are refundable, they are included in Deferred
Revenue until the software is completed and delivered to the customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
BII Australia considers all highly liquid investments with a maturity of
three months or less when acquired to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, short-term
investments and accounts receivable. The Company has investment policies that
limit investments to short-term investment grade securities. Accounts
receivable are principally from distributors and retailers of the Company's
products.
The Company analyzes customer receivables to determine the necessity of an
allowance for doubtful accounts. For the period from September 2, 1993 through
June 30, 1994 and the years ended June 30, 1995 and 1996, no such allowance
was considered necessary.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated useful
lives ranging up to three years.
F-9
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
3. RELATED PARTY TRANSACTIONS
Pacific Interactive Education Pty. Ltd. ("PIE") entered into an oral
agreement with BII Australia whereby Mark Miller, a shareholder and director
of PIE and a director of BII Australia, provides consulting services to BII
Australia. Pursuant to the oral agreement, PIE was paid $0, $23,209 and
$69,263 for the period from September 2, 1993 to June 30, 1994 and years ended
June 30, 1995 and 1996, respectively, for such services.
Since March 1994, PIE has made periodic cash advances to BII Australia for
working capital purposes. On October 24, 1994, PIE and BII Australia entered
into a formal loan agreement to reflect the parties' lending relationship. The
maximum amount BII Australia may borrow from PIE pursuant to the loan
agreement is $631,125. The note bears interest at an annual rate of 12.5% and
was due and payable on December 31, 1994. By written agreement (the "Note
Extension") dated September 13, 1996, the maturity of the note was extended
until the earlier to occur of the closing of the Offering or December 31,
1996. As of June 30, 1995, BII Australia owed PIE $606,152, including accrued
interest of $46,427. As of June 30, 1996, BII Australia owed PIE $670,488,
including accrued interest in the amount of $149,389. Pursuant to the Note
Extension, PIE and BII Australia increased the maximum amount BII Australia
may borrow under the note to $710,000.
BII Australia periodically purchases certain computer equipment from PIE.
For the period from September 2, 1993 (inception) to June 30, 1994, and the
fiscal years ended June 30, 1995 and 1996, BII Australia's purchases totaled
$0, $15,356 and $15,792, respectively.
Mark Miller is a shareholder of Multimedia Connexion Pty. Ltd. BII Australia
periodically purchases hardware and software from Multimedia Connexion Pty.
Ltd. For the period from September 2, 1993 (inception) through June 30, 1994
and the fiscal years ended June 30, 1995 and 1996, BII Australia purchased
computer equipment totaling $0, $12,304 and $15,724, respectively.
Peter Dodds was a shareholder of BII Australia from inception to May 10,
1996. Mr. Dodds is also a shareholder of Andwhen Pty. Limited ("Andwhen"). Mr.
Dodds provided consulting services to BII Australia in 1995 and 1996. In
exchange for such services, fees of $0, $70,849 and $50,663 were paid to
Andwhen for the period from September 2, 1993 through June 30, 1994 and the
years ended June 30, 1995 and 1996, respectively.
Certain equipment owned by Andwhen was leased to BII Australia pursuant to
an agreement dated March 1, 1994. Under the lease arrangements, BII Australia
made lease payments to Andwhen in the amount of $4,200, $3,997 and $0 for the
four month period ended June 30, 1994 and the years ended June 30, 1995 and
1996, respectively. At June 30, 1995, BII Australia owed Andwhen $22,834
pursuant to the lease. On May 10, 1996, the agreement was terminated. As a
result, the equipment was transferred to BII Australia and BII Australia
agreed to pay to Andwhen a total amount of $86,790 for the purchase of such
equipment. Of this amount, $19,818 was paid upon termination of the agreement.
As of June 30, 1996, $62,501 is payable under the terms of the agreement. One
half of the outstanding amount becomes due upon a change of ownership. The
balance is due in equal monthly installments of $4,471 each.
In December 1994, BII Australia entered into a Software License Agreement
(the "Sega Agreement") with Sega Ozisoft Pty. Ltd. ("Sega Ozisoft"). Mark Dyne
and Kevin Bermeister are directors and shareholders of Sega Ozisoft and
nominees for director and stockholders of the Company. Pursuant to the terms
of the Sega Agreement, Sega Ozisoft became the exclusive distributor in
Australia and New Zealand of certain CD-ROM products developed by BII
Australia. Pursuant to the terms of the Sega Agreement, BII Australia received
non-refundable advances totaling $71,040 from Sega Ozisoft in the fiscal year
ended June 30, 1995. In addition, BII Australia is entitled to receive royalty
payments of $6.31 per net unit sold. Such royalty is reducible to $4.73 per
net unit sold after 2000 units have been sold for each title. The non-
refundable advances are recoupable from the
F-10
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
royalties earned by BII Australia under the Sega Agreement. As of June 30,
1996, BII Australia has received no royalty payments relating to the Sega
Agreement. The Sega Agreement expires on December 15, 1996. See Note 10
regarding a subsequent agreement between Sega Ozisoft and the Company.
In November 1995, BII Australia entered into a Distribution Agreement (the
"Consumer Electronics Agreement") with Consumer Electronics Pty. Ltd.
("Consumer Electronics"). Mark Dyne and Kevin Bermeister are each a director
and shareholder of Consumer Electronics. BII Australia developed, pursuant to
the Consumer Electronics Agreement, several CD-ROM products to be distributed
by Consumer Electronics in South Africa and neighboring territories. In
addition, BII Australia granted to Consumer Electronics certain bundling
rights to the CD-ROM products in the same territories. Pursuant to the
Consumer Electronics Agreement, BII Australia is entitled to receive a non-
refundable advance of $84,700, of which $21,175 was paid in the fiscal year
ended June 30, 1996. In addition, BII Australia is entitled to receive royalty
payments for each unit sold pursuant to the distribution rights and bundling
of the CD-ROM products, after Consumer Electronics recoups the advance. Net
Revenues are defined in the Consumer Electronics Agreement as gross receipts
less applicable sales and VAT taxes. Royalty payments have not yet been earned
by BII Australia in connection with this distribution arrangement. The
Consumer Electronics Agreement expires on December 6, 1996.
Since February 1994, BII Australia has purchased an aggregate of
approximately $38,124 in goods from Packard Bell Pty. Ltd. Kevin Bermeister
and Mark Dyne are directors and shareholders of Packard Bell Pty. Ltd.
In January 1996, BII Australia entered into a Multimedia Software
Development and Production agreement (the "Development Agreement") with Sega
Ozisoft for Cyberswine. Pursuant to the terms of the Development Agreement,
BII Australia is entitled to receive $165,690 for certain assistant production
services. Amounts are payable by Sega Ozisoft upon attainment of mutually
determined milestones. Subsequent to June 30, 1996, the Company entered into
the SAND Acquisition Agreement (see Note 10) which provided for additional
payments for production services. In addition, BII Australia is entitled to
2.5% in royalties on net revenues as defined by the agreement. As of June 30,
1996, the Company had received $120,396 and had recorded a receivable of
$52,146, which was received in July and August 1996.
Mark Dyne is a director of Monto Holdings Pty. Ltd. ("Monto"). Monto entered
into a multimedia production agreement with BII Australia dated March 14, 1995
whereby Monto paid BII Australia $180,000 to be used to develop a series of
two CD-ROM interactive magazine programs based on a television series. BII
Australia has arranged for publication and distribution of the completed
software packages and is obligated to pay to Monto 50% of the net receipts
from the sale of the software packages. As of June 30, 1996, net receipts
totaled approximately $24,624 and payments to Monto totaled $12,312. In
addition, a liability to Monto for $7,425 was recorded at June 30, 1996.
Diana Maranon is the Secretary of the Company. Averil Associates, Inc.
("Averil Associates"), a financial advisory firm founded and controlled by Ms.
Maranon, has, since November 1995, performed services for the Company
including investigation of strategic alternatives and assistance with the
Offering. As consideration for such services, the Company has paid to Averil
Associates the aggregate amount of $25,000, plus out of pocket expenses. The
Company has granted to Chloe Holding, Inc. ("Chloe"), an affiliate of Averil
Associates, currently exercisable warrants to purchase 40,222 shares of Common
Stock with an exercise price of $0.0326 per share and has committed to a cash
payment of $200,000 payable upon consummation of the Offering.
F-11
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
In September 1995, BII Australia entered into a Distribution Agreement (the
"Ocean Agreement") with Ocean of America, Inc. ("Ocean"). Ray Musci became a
director of the Company on October 1, 1996, and is currently a director and
significant shareholder of Ocean. BII Australia granted to Ocean certain
retail distribution and bundling rights in North America and Europe to the
software products developed by BII Australia. Pursuant to the terms of the
Ocean Agreement, BII Australia was entitled to receive a non-refundable
advance from Ocean of approximately $825,000 in 1996. In addition, BII
Australia is entitled to receive royalty payments in exchange for a percentage
of Net Revenues generated from distribution sales of the CD-ROM entertainment
software products and a percentage of Net Revenues received by Ocean from
bundling of the software products, after Ocean recoups the advance. "Net
Revenues" are defined as gross receipts less returns and certain other
expenses. Through September 1996, Ocean had paid approximately $492,000
against the non-refundable advance. Royalties have not yet been accrued in
connection with this distribution arrangement. The Ocean Agreement expires on
September 29, 1997, subject to a two year extension under certain
circumstances.
4. STOCKHOLDERS' DEFICIENCY
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $0.001 per share. In August 1996, the Company issued an aggregate of
1,000,000 shares of its Common Stock in exchange for all of the capital stock
of BII Australia. As a result of the Exchange, the Company acquired all of the
outstanding common stock of BII Australia. Simultaneously with the Exchange,
BII Australia canceled 200 shares of Common Stock of BII Australia held by an
employee of BII Australia.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to
vote. The holders of Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled subject to the rights of
holders of Preferred Stock issued by the Company, if any, to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision is made for each class of stock, if any,
having preference over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the Common Stock issuable pursuant
to this Prospectus will be, when issued, fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value $0.001 per share. As of June 30, 1995 and 1996, no shares were issued or
outstanding. The Board of Directors has the authority to issue the authorized
and unissued Preferred Stock in one or more series with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights which adversely affect the voting power or
other rights of the holders of the Company's Common Stock.
F-12
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
5. CONTINGENCIES
In March 1995, BII Australia entered into an agreement with Monto whereby
Monto paid BII Australia a nonrefundable fee of approximately $180,000 to
develop a series of two CD-ROM interactive magazine programs based on a
television series. BII Australia will distribute the completed software
packages and is obligated to pay to Monto 50% of the net receipts from the
sale of the software packages. As of June 30, 1996, net receipts totaled
$24,624 and payments to Monto totaled $12,312. In addition, a liability to
Monto of $7,425 was recorded at June 30, 1996.
In 1995, Pick Two Limited ("Pick Two"), advanced $193,725 to BII Australia
to develop certain software. In 1996, Pick Two advanced an additional $19,278
to BII Australia. These advances are non-interest bearing and will be repaid
from proceeds from the sales of the completed software. As of June 30, 1996,
the software development has not been completed and no sales have been made.
As of June 30, 1995 and 1996, the total advances have been included in
deferred revenues.
6. INCOME TAXES
The Company has adopted the liability method of accounting for income taxes.
Income tax expense shown in the income statements is calculated on the
operating profit before tax, adjusted for items which, due to treatment under
income tax legislation, create permanent differences between accounting profit
and taxable income. Deferred income taxes under FAS No. 109 reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
The Company's net losses in the period from September 2, 1993 to June 30,
1994 and the fiscal year ended June 30, 1995, and net income for fiscal year
ended June 30, 1996 are related to the Australian operations of BII Australia.
As a result, no provision has been made for United States federal income
taxes. Due to BII Australia's net losses for 1994 and 1995, net operating loss
carryforwards ("NOL's") were generated for Australian tax purposes. A portion
of these Australian NOL's were offset against BII Australia's taxable income
for fiscal year ended June 30, 1996. At June 30, 1996 BII Australia had NOL's
remaining of $3,000, which can be offset against Australian taxable income in
the future and which expire in 2010. No tax benefit has been recorded for
these Australian NOL's.
In the future, a portion of the Company's taxable income will be subject to
federal and state income tax in the United States and may be subject to higher
tax rates than those used to calculate any taxes due in Australia. Some of the
Company's taxable income will remain subject to Australian taxation.
Significant components of the Company's deferred tax benefits as of June 30,
1996 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Development costs............................................. $ 36,240
Valuation allowance for deferred tax assets................... (36,240)
--------
Net deferred tax assets......................................... $ 0
========
</TABLE>
F-13
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1996
-------- ---------
<S> <C> <C>
Computers and equipment.............................. $216,395 $ 350,162
Furniture and fixtures............................... 8,698 12,295
-------- ---------
225,093 362,457
Less accumulated depreciation........................ (53,195) (164,185)
-------- ---------
$171,898 $ 198,272
======== =========
</TABLE>
8. OTHER INCOME AND EXPENSE
Other income for the fiscal year ended June 30, 1996, includes an export
market development grant of $122,000 from the Australian Trade Commission for
participating in certain export activities. Interest expense for the period
from September 2, 1993 to June 30, 1994 and for each of the years ended June
30, 1995 and 1996 related to the note payable to PIE (see Note 3).
9. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company's operations for the period from September 2, 1993 to June 30,
1994 and the years ended June 30, 1995 and 1996 consisted solely of the
operations of BII Australia. The operations of BII Australia are in Australia,
with significant exports to the United States. The following schedule sets
forth the revenues and accounts receivable of BII Australia by geographic
area:
<TABLE>
<CAPTION>
UNITED
STATES AUSTRALIA OTHER
---------- --------- --------
<S> <C> <C> <C>
Period September 2, 1993 through June 30, 1994:
Revenues from unaffiliated customers........... $ -- $ 10,977 $ --
Revenues from affiliated customers............. -- -- --
---------- -------- --------
Total revenues................................. $ -- $ 10,977 $ --
========== ======== ========
Year ended June 30, 1995:
Revenues from unaffiliated customers........... $ 46,240 $ 1,888 $ --
Revenues from affiliated customers............. 634,828 159,840 --
---------- -------- --------
Total revenues................................. $ 681,068 $161,728 $ --
========== ======== ========
Year ended June 30, 1996:
Revenues from unaffiliated customers........... $ 931,797 $257,993 $234,679
Revenues from affiliated customers............. 316,167 263,742 49,499
---------- -------- --------
Total revenues................................. $1,247,964 $521,735 $284,178
========== ======== ========
Accounts receivable as of:
June 30, 1994.................................. $ -- $ -- $ --
========== ======== ========
June 30, 1995.................................. $ -- $ -- $ --
========== ======== ========
June 30, 1996.................................. $ 413,333 $223,042 $ 21,175
========== ======== ========
</TABLE>
F-14
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
For each of the periods shown above, all of the operating expenses of the
Company were incurred and paid in Australia. The identifiable assets of the
Company, other than accounts receivable, are predominantly related to the
operations in Australia.
In the period from September 2, 1993 to June 30, 1994, no single customer
accounted for more than 10% of total revenues. In the fiscal year ended June
30, 1995, two customers accounted for more than 10% of total revenues (Packard
Bell Electronics, Inc., 75% or $635,000 and Monto, a related party, 11% or
$89,000). In the fiscal year ended June 30, 1996, three customers accounted
for more than 10% of total revenues (Packard Bell Electronics, Inc., 15% or
$316,000; Shortland Publications, 11% or $226,000; and Ocean of America, Inc.,
40% or $813,000).
10. SUBSEQUENT EVENTS
In June 1996, the Company entered into a Memorandum of Understanding with
Sega Ozisoft to acquire Sega Australia New Developments ("SAND"), a division
of Sega Ozisoft. In September 1996, the Company and Sega Ozisoft entered into
an Asset Purchase Agreement (the "SAND Acquisition Agreement") which
superseded the Memorandum of Understanding. Pursuant to the SAND Acquisition
Agreement, the Company acquired SAND and in consideration therefor issued a
one-year $1,500,000 convertible promissory note (the "SAND Note") to Sega
Ozisoft. The SAND Note bears interest at a rate of 8% per annum. Upon the
completion of the Offering, the SAND Note will be automatically converted into
780,001 shares of Common Stock of the Company.
The SAND Acquisition Agreement also provides that the Company shall pay to
Sega Ozisoft a royalty of 12.5% of "Adjusted Gross Receipts" on the Cyberswine
Multipath Movie. Adjusted Gross Receipts is gross receipts received by the
Company on the Cyberswine Multipath Movie after deducting any royalties and
fees payable to Cyberswine licensors.
Pursuant to the SAND Acquisition Agreement, Sega Ozisoft has agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company has agreed to reimburse Sega Ozisoft from the
proceeds of the Offering for all expenses advanced by Sega Ozisoft for any
period after October 31, 1996, and all expenses in excess of $59,175 per month
advanced by Sega Ozisoft for August, September and October 1996. As of
September 13, 1996, the Company had incurred a total obligation of $36,605
pursuant to this agreement.
In September 1996, the Company executed a promissory note in favor of
Reefknot in the principal amount of $150,000. The note bears interest at the
rate of 10% per annum and is due and payable on the earlier to occur of the
closing of the Offering or September 10, 1997.
In September 1996, the Company entered into strategic relationships with
Crawford Productions Pty., Ltd. ("Crawford") and Morgan Creek Interactive,
Inc. ("Morgan Creek") to provide creative product for the Company's Multipath
Movies. Pursuant to the agreement between the Company and Crawford, the
Company is obligated to contribute up to one half of the costs incurred to
develop and produce each project selected by the parties, if any, for
development into Multipath Movie titles, which total cost per film is
anticipated to be approximately $789,000. Pursuant to the agreement between
the Company and Morgan Creek, the Company is obligated to fund entirely the
development of two Multipath Movies.
During September 1996 the Company entered into two strategic agreements with
terms that provided for the issuance of warrants to purchase a total of
685,000 shares of the Company's Common Stock. Warrants to purchase 600,000
shares of Common Stock are exercisable at $10.00 per share or the initial
public offering price of the Company's Common Stock. Additionally, 35,000 and
50,000 of the warrants are exercisable at $10.00 and $13.00, respectively. The
warrants expire in September 1999. The value of the warrants is calculated to
be approximately $2,055,000 and this value represents an expense charge to
operations with a corresponding credit to stockholders' deficiency.
F-15
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
The Company adopted a Stock Option Plan (the "1996 Plan") which became
effective on September 13, 1996. Each director, officer, employee or
consultant of the Company or any of its subsidiaries is eligible to be
considered for the grant of awards under the 1996 Plan. The maximum number of
shares of Common Stock that may be issued pursuant to awards granted under the
1996 Plan is 1,080,000, subject to certain adjustments to prevent dilution.
Any shares of Common Stock subject to an award which for any reason expires or
terminates unexercised are again available for issuance under the 1996 Plan.
The maximum number of shares of Common Stock with respect to which options or
rights may be granted under the 1996 Plan to any executive or other employee
during any fiscal year is 100,000, subject to certain adjustments to prevent
dilution.
As of September 13, 1996, the Board has granted options covering an
aggregate of 185,000 shares of Common Stock to certain directors and employees
of the Company, with an exercise price of $10.00 per share. The directors
options were granted effective as each director joins the Board of Directors
and will be immediately fully vested. The options granted to employees vest
over a four year period. Although any award that was duly granted on or prior
to such date may thereafter be exercised or settled in accordance with its
terms, no shares of Common Stock may be issued pursuant to any award made
after September 13, 2006.
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Brilliant Digital Entertainment, Inc.
We have audited the accompanying balance sheets of Sega Australia New
Developments (a development stage business unit of Sega Ozisoft Pty. Ltd.) as
of June 30, 1996 and 1995, and the related statements of operations and
business unit deficit, and cash flows for each of the two years in the period
ended June 30, 1996 and the period from March 1, 1994 (inception) through June
30, 1994. These financial statements are the responsibility of the business
unit'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 the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. 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 Sega Australia New
Developments at June 30, 1996 and 1995, and the results of its operations and
its cash flows for each of the two years in the period ended June 30, 1996 and
the period from March 1, 1994 (inception) through June 30, 1994, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Sega
Australia New Developments will continue as a going concern. As more fully
described in Note 1, the business unit has a working capital deficiency and an
accumulated deficit. These conditions raise substantial doubt about the
business unit's ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 1. These financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Ernst & Young LLP
September 13, 1996
Los Angeles, California
F-17
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
BALANCE SHEETS
(ALL AMOUNTS ARE IN U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
ASSETS
Total assets.................................. $ -- $ --
========= ===========
LIABILITIES AND DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE
Due to parent company........................... $ 519,023 $ 1,306,331
--------- -----------
Total liabilities............................. 519,023 1,306,331
Deficit accumulated during the development
stage.......................................... (519,023) (1,306,331)
--------- -----------
Total liabilities and deficit accumulated during
the development stage.......................... $ -- $ --
========= ===========
</TABLE>
See accompanying notes.
F-18
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
STATEMENTS OF OPERATIONS AND BUSINESS UNIT DEFICIT
(ALL AMOUNTS ARE IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, CUMULATIVE
1994 MARCH 1, 1994
(INCEPTION) (INCEPTION)
THROUGH YEAR ENDED JUNE 30, THROUGH
JUNE 30, ------------------- JUNE 30,
1994 1995 1996 1996
----------- -------- ---------- -------------
<S> <C> <C> <C> <C>
General and administrative ex-
penses......................... $ -- $ 46,839 $ 93,334 $ 140,173
Research and development ex-
penses......................... 12,158 460,026 693,974 1,166,158
------- -------- ---------- ----------
Total expenses.................. 12,158 506,865 787,308 1,306,331
Beginning deficit accumulated
during the development stage... -- 12,158 519,023 --
------- -------- ---------- ----------
Ending deficit accumulated
during the development stage... $12,158 $519,023 $1,306,331 $1,306,331
======= ======== ========== ==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS ARE IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, CUMULATIVE
1994 MARCH 1, 1994
(INCEPTION) (INCEPTION)
THROUGH YEAR ENDED JUNE 30, THROUGH
JUNE 30, -------------------- JUNE 30,
1994 1995 1996 1996
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................... $(12,158) $(506,865) $(787,308) $(1,306,331)
-------- --------- --------- -----------
Net cash used in operating ac-
tivities..................... (12,158) (506,865) (787,308) (1,306,331)
FINANCING ACTIVITIES
Increase in amounts due to
parent company............... 12,158 506,865 787,308 1,306,331
-------- --------- --------- -----------
Net cash provided by financing
activities................... 12,158 506,865 787,308 1,306,331
-------- --------- --------- -----------
INCREASE IN CASH.............. -- -- -- --
Cash at beginning of period... -- -- -- --
-------- --------- --------- -----------
Cash at end of period......... $ -- $ -- $ -- $ --
======== ========= ========= ===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the assets, liabilities, revenues and
expenses of Sega Australia New Developments ("SAND"), a business unit of Sega
Ozisoft Pty. Ltd. ("Sega Ozisoft"). SAND was created to develop state-of-the-
art technology for interactive, digital, Multipath Movies. In June 1996, Sega
Ozisoft and Brilliant Digital Entertainment, Inc. (the "Company") entered into
a Memorandum of Understanding and in September 1996, Sega Ozisoft and the
Company entered into an asset purchase agreement, whereby the Company agreed
to purchase certain assets of SAND. See Note 3 for a discussion of these
transactions.
The accompanying financial statements reflect the "carved-out" financial
position and results of operations of SAND as if SAND had been operating as a
company separate from Sega Ozisoft. Certain corporate, general and
administrative expenses of Sega Ozisoft have been allocated to SAND on various
bases which, in the opinion of management, are reasonable. However, such
expenses are not necessarily indicative of, and it is not practicable for
management to estimate, the level of expenses which might have been incurred
had SAND been operating as a separate company.
SAND is in the development stage devoting substantially all of its efforts
to research and development. During its development stage, SAND has incurred
cumulative net losses of approximately $1,300,000 through June 30, 1996, and
expects to incur substantial and increasing additional development costs. SAND
will require substantial additional funds in order to complete the research
and development activities currently contemplated and to commercialize its
proposed products. Without additional funding, SAND may be required to delay,
reduce the scope of or eliminate one or more of its research or development
programs, or obtain funds through arrangements with collaborative partners or
others which may require SAND to relinquish rights to certain of its
technologies, product candidates or products that SAND would otherwise seek to
develop or commercialize on its own.
Research and Development Costs
SAND has incurred significant costs to develop proprietary software tools to
be used in the creation and development of a new genre of interactive digital
entertainment called "Multipath Movies". SAND recorded research and
development expenses of $12,158, $460,026 and $693,974 for the four month
period ended June 30, 1994 and the fiscal years ended June 30, 1995 and 1996,
respectively.
SAND's accounting policy follows Statement of Financial Accounting Standards
No. 86 (SFAS No. 86), which provides for the capitalization of certain
software development costs once technological feasibility is established. The
capitalized costs are then amortized on a straight-line basis over the
estimated product life or on a ratio of current revenues to total projected
product revenues, whichever is greater. No software development costs were
capitalized in the four month period ended June 30, 1994 or the fiscal years
1995 and 1996.
Foreign Currency Translation
The functional currency of SAND is its local currency, Australian dollars.
Assets and liabilities and expenses since inception of this development stage
business unit were translated into U.S. dollars (the reporting currency) using
current exchange rates ($0.789 at June 30, 1996).
F-21
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA-OZISOFT PTY. LTD.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996
2. RELATIONSHIP AND TRANSACTIONS WITH SEGA OZISOFT
The financial statements include allocations to SAND of certain
administrative costs incurred by Sega Ozisoft related to accounting, human
resources and certain other corporate expenses. These expenditures were $0,
$31,080 and $45,600 for the four month period ended June 30, 1994 and years
ended June 30, 1995 and 1996, respectively.
In the opinion of management, these allocations were made on a reasonable
basis. However, they are not necessarily indicative of the level of
expenditures which may have been experienced on a standalone basis. The
amounts that would have or will be incurred on a separate company basis could
differ significantly from the allocated amounts due to economies of scale,
differences in management and/or operational practices or other factors.
3. SUBSEQUENT EVENTS
In June 1996, the Company entered into a Memorandum of Understanding with
Sega Ozisoft to acquire SAND, a division of Sega Ozisoft. In September 1996,
the Company and Sega Ozisoft entered into an Asset Purchase Agreement (the
"SAND Acquisition Agreement") which superseded the Memorandum of
Understanding. Pursuant to the SAND Acquisition Agreement, the Company
acquired SAND and in consideration therefor issued a one-year $1,500,000
convertible promissory note (the "SAND Note") to Sega Ozisoft. The SAND Note
bears interest at a rate of 8% per annum. Upon the completion of the Offering,
the SAND Note will be automatically converted into 780,001 shares of Common
Stock of the Company.
The SAND Acquisition Agreement also provides that the Company shall pay to
Sega Ozisoft a royalty of 12.5% of "Adjusted Gross Receipts" on the Cyberswine
Multipath Movie. Adjusted Gross Receipts is gross receipts received by the
Company on the Cyberswine Multipath Movie after deducting any royalties and
fees payable to Cyberswine licensors.
Pursuant to the SAND Acquisition Agreement, Sega Ozisoft has agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company has agreed to reimburse Sega Ozisoft from the
proceeds of the Offering for all expenses advanced by Sega Ozisoft for any
period after October 31, 1996, and all expenses in excess of $59,175 per month
advanced by Sega Ozisoft for August, September and October 1996.
F-22
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information (the
"Unaudited Pro Forma Financial Information") of the Company has been derived
by the application of pro forma adjustments to the historical financial
statements of the Company and SAND for the period indicated. The adjustments
are described in the accompanying notes. The pro forma adjustments are based
upon available information and upon certain assumptions that management
believes are reasonable.
The Unaudited Pro Forma Financial Information gives effect to (i) the
acquisition by the Company of SAND in exchange for the SAND Note and the
conversion of the SAND Note into 780,001 shares of Common Stock, (ii) the sale
of 2,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $12.50 per share after deducting
underwriting discounts and commissions and estimated offering expenses and
(iii) the repayment of $732,989 of short-term obligations as if these
transactions had occurred as of June 30, 1996, for purposes of the balance
sheet data, and as of the beginning of the period presented, for purposes of
the statement of operations data. The Unaudited Pro Forma Financial
Information does not give effect to any transactions other than those
discussed above and in the accompanying notes. The Unaudited Pro Forma
Financial Information is provided for informational purposes only and does not
purport to represent the results of operations or financial position of the
Company had the transactions in fact occurred on such dates, nor does it
purport to be indicative of the financial position or results of operations as
of any future date or for any future period.
The Unaudited Pro Forma Financial Information and accompanying notes should
be read in conjunction with the financial statements and accompanying notes
thereto and the other financial information included elsewhere in this
Prospectus.
F-23
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
BRILLIANT SAND PRO FORMA PRO FORMA PRO FORMA OFFERING AS ADJUSTED
AS REPORTED AS REPORTED ADJUSTMENTS ADJUSTMENTS CONSOLIDATED ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ ----------- ------------
ASSETS (NOTE 1) (NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 53,061 $ -- $ -- $ -- $ 53,061 $21,517,011 $21,570,072
Accounts receivable............. 657,550 -- -- -- 657,550 -- 657,550
Other current assets............ 6,863 -- -- -- 6,863 -- 6,863
---------- ----------- -------- ----------- ----------- ----------- -----------
Total current assets............ 717,474 -- -- -- 717,474 21,517,011 $22,234,485
Capitalized software costs....... -- -- 150,000 -- 150,000 -- 150,000
Property, plant and equipment,
net............................. 198,272 -- -- -- 198,272 -- 198,272
---------- ----------- -------- ----------- ----------- ----------- -----------
Total assets.................... $ 915,746 $ -- $150,000 $ -- $ 1,065,746 $21,517,011 $22,582,757
========== =========== ======== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable and accrued
expenses....................... $ 88,389 $ -- $ -- $ -- $ 88,389 $ -- $ 88,389
Deferred revenue................ 213,003 -- -- -- 213,003 -- 213,003
Notes payable, related party.... 732,989 -- -- -- 732,989 (732,989) --
Other current liabilities....... 10,798 -- -- -- 10,798 -- 10,798
---------- ----------- -------- ----------- ----------- ----------- -----------
Total current liabilities....... 1,045,179 -- -- -- 1,045,179 (732,989) 312,190
Due to Sega Ozisoft Pty. Ltd..... -- 1,306,331 193,669 (1,500,000) -- -- --
---------- ----------- -------- ----------- ----------- ----------- -----------
Total liabilities............... 1,045,179 1,306,331 193,669 (1,500,000) 1,045,179 (732,989) 312,190
Stockholders' equity
(deficiency):
Common Stock (.001 par value)... 4,420 -- -- 780 5,200 2,000 7,200
Additional paid-in capital...... 10,163 -- -- 1,499,220 1,509,383 22,248,000 23,757,383
Accumulated deficit............. (119,921) (1,306,331) (43,669) -- (1,469,921) -- (1,469,921)
Translation adjustments......... (24,095) -- -- -- (24,095) -- (24,095)
---------- ----------- -------- ----------- ----------- ----------- -----------
Total stockholders' equity
(deficiency)................... (129,433) (1,306,331) (43,669) 1,500,000 20,567 22,250,000 22,270,567
---------- ----------- -------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity (deficiency)............ $ 915,746 $ -- $150,000 $ -- $ 1,065,746 $21,517,011 $22,582,757
========== =========== ======== =========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Financial Information.
F-24
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
BRILLIANT SAND PRO FORMA PRO FORMA PRO FORMA OFFERING CONSOLIDATED
AS REPORTED AS REPORTED ADJUSTMENTS ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AS ADJUSTED
----------- ------------ ----------- ----------- ------------ ----------- ------------
(NOTE 1) (NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Development fees....... $ 585,743 $ -- $ -- $ -- $ 585,743 $-- $ 585,743
Royalties.............. 1,291,015 -- -- (172,542) 1,118,473 -- 1,118,473
Software sales......... 177,119 -- -- -- 177,119 -- 177,119
----------- ------------ ---------- ---------- ----------- ---- -----------
Total revenues......... 2,053,877 -- -- (172,542) 1,881,335 -- 1,881,335
Cost of revenues........ 738,842 -- -- -- 738,842 -- 738,842
----------- ------------ ---------- ---------- ----------- ---- -----------
1,315,035 -- -- (172,542) 1,142,493 -- 1,142,493
Operating expenses:
Sales and marketing.... 163,038 -- -- -- 163,038 -- 163,038
General and
administrative........ 365,491 140,173 -- -- 505,664 -- 505,664
Research and
development........... 174,395 1,166,158 43,669 (172,542) 1,211,680 -- 1,211,680
Depreciation and
amortization.......... 101,824 -- -- -- 101,824 -- 101,824
----------- ------------ ---------- ---------- ----------- ---- -----------
804,748 1,306,331 43,669 (172,542) 1,982,206 -- 1,982,206
Income (loss) from
operations............. 510,287 (1,306,331) (43,669) -- (839,713) -- (839,713)
Other:
Gain on foreign
exchange
transactions.......... 13,382 -- -- -- 13,382 -- 13,382
Export market
development grant..... 122,488 -- -- -- 122,488 -- 122,488
Interest income........ 2,017 -- -- -- 2,017 -- 2,017
Interest expense....... (94,762) -- -- -- (94,762) -- (94,762)
----------- ------------ ---------- ---------- ----------- ---- -----------
43,125 -- -- -- 43,125 -- 43,125
Income (loss) before
income taxes........... 553,412 (1,306,331) (43,669) -- (796,588) -- (796,588)
Provision for income
taxes.................. -- -- -- -- -- -- --
----------- ------------ ---------- ---------- ----------- ---- -----------
Net income (loss)....... $ 553,412 $ (1,306,331) $ (43,669) $ -- $ (796,588) $-- $ (796,588)
=========== ============ ========== ========== =========== ==== ===========
</TABLE>
See Notes to Unaudited Pro Forma Financial Information.
F-25
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
NOTE 1:
Reflects the issuance by the Company of a $1,500,000 note to Sega Ozisoft in
exchange for certain assets of SAND. The note bears interest at 8% per year;
however, due to the conversion described in Note 2 below, no accrual of
interest has been included. Also reflects the allocation of $1,350,000 of the
purchase price to in-process research and development costs and $150,000 of
the purchase price to other assets. As a result of such allocation, non-
current assets increased by $150,000 and the amounts due to Sega Ozisoft
increased by $193,669.
NOTE 2:
Reflects the immediate conversion of the SAND Note into 780,001 shares of
$.001 par value common stock. As a result, the SAND Note will be reduced to
$0. Common Stock will be increased by $780 and additional paid in capital will
increase by $1,499,220.
NOTE 3:
Reflects the Offering contemplated in this Prospectus assuming the
following:
<TABLE>
<S> <C>
Number of shares to be issued.................................... 2,000,000
Issue price per share............................................ $ 12.50
Par value of shares issued....................................... 0.001
Costs related to the Offering.................................... 2,750,000
</TABLE>
It is also assumed that the note to related parties of $732,989 will be
repaid from the proceeds of the Offering.
Based on the above assumptions, at the closing of the Offering:
<TABLE>
<S> <C>
Cash will increase by........................................... $21,517,011
Notes payable to related parties will decrease by............... 732,989
Common Stock will increase by................................... 2,000
Additional paid in capital will increase by..................... 22,248,000
</TABLE>
NOTE 4:
This entry eliminates the revenues recorded by the Company relating to
development fees paid to the Company by SAND.
SAND recorded research and development expenses when the payment was made to
the Company. Therefore, development fee revenues will be reduced and research
and development costs will be reduced by $172,542.
F-26
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
The Company.............................................................. 6
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Dilution................................................................. 21
Capitalization........................................................... 22
Selected Historical and Pro Forma Consolidated Financial Data............ 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 50
Certain Relationships and Related Transactions........................... 56
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Shares Eligible For Future Sale.......................................... 64
Underwriting............................................................. 66
Notice to Canadian Residents............................................. 68
Legal Matters............................................................ 69
Experts.................................................................. 69
Additional Information................................................... 69
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
2,000,000 Shares
Common Stock
PROSPECTUS
CS First Boston
Cruttenden Roth
Incorporated
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the costs incurred by the Registrant in
connection with the issuance and distribution of the Securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.
<TABLE>
<S> <C>
Registration fee--Securities and Exchange Commission............. $ 9,914
NASD filing fee.................................................. 3,375
Nasdaq National Market fee....................................... 38,350
Accounting fees and expenses..................................... 250,000
Legal fees and expenses (other than blue sky).................... 280,000
Blue sky fees and expenses, including legal fees................. 10,000
Printing; stock certificates..................................... 80,000
Transfer agent and registrar fees................................ 7,500
Consulting fees.................................................. 210,000
Miscellaneous.................................................... 110,861
----------
Total.......................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation and its Bylaws provide for the
indemnification by the Registrant of each director, officer and employee of
the Registrant to the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended. Section 145
of the Delaware General Corporation Law provides in relevant part that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the
Delaware Court of Chancery or such other court shall deem proper. Delaware law
further provides that nothing in the above-described provisions shall be
deemed exclusive of any other rights to indemnification or advancement of
expenses to which any person may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise.
II-1
<PAGE>
The Registrant's Certificate of Incorporation provides that a director of
the Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(b)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the
liability of a director for, among other things: breach of the duty of
loyalty; acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; unlawful payment of dividends;
and transactions from which the director derived an improper personal benefit.
The Registrant has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Registrant and certain
officers of the Registrant (the "Indemnitees"). Pursuant to the terms and
conditions of the Indemnity Agreements, the Registrant indemnified each
Indemnitee against any amounts which he or she becomes legally obligated to
pay in connection with any claim against him or her based upon any action or
inaction which he or she may commit, omit or suffer while acting in his or her
capacity as a director and/or officer of the Registrant or its subsidiaries,
provided, however, that Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests
of the Registrant and, with respect to any criminal action, had no reasonable
cause to believe Indemnitee's Conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In September 1996, the Company issued 1,000,000 shares (the "Shares") of
Common Stock in exchange for the 100,000 outstanding shares of Common Stock of
BII Australia owned by Reefknot and PIE. Pursuant to the Exchange Agreement,
Reefknot and PIE each covenanted that (i) it was acquiring the Shares for its
own account with the present intention of holding such securities for
investment purposes only and not with a view to, or for sale in connection
with, any distribution of such securities (other than a distribution in
compliance with all applicable federal and state securities laws); (ii) it is
an experienced and sophisticated investor and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the relative merits and the risks of an investment in the Shares and of
protecting its own interests in connection with this transaction; (iii) it is
willing to bear and is capable of bearing the economic risk of an investment
in the Shares; and (iv) it is an "accredited investor" as that term is defined
under Rule 501(a)(8) of Regulation D promulgated by the Commission under the
Securities Act. No brokers, underwriters or finders were involved in the
Exchange. The issuance and sale of these securities was made in reliance on
Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.
In connection with the Packard Bell NEC Agreement and the Morgan Creek
Agreement executed in September 1996, the Company issued warrants (the
"Warrants") to purchase 600,000 and 85,000 shares of Common Stock to Packard
Bell NEC and to Morgan Creek, respectively, each for $100.00. Each of Packard
Bell NEC and Morgan Creek covenanted that (i) it acquired the Warrants for its
own account with the present intention of holding such Warrants for investment
purposes only and not with a view to, or for sale in connection with, any
distribution of such Warrants (other than a distribution in compliance with
all applicable federal and state securities laws); (ii) it is an experienced
and sophisticated investor and has such knowledge and experience in financial
and business matters that it is capable of evaluating the relative merits and
the risks of an investment in the Warrants and of protecting its own interests
in connection with the transaction at issue; (iii) it is willing to bear and
is capable of bearing the economic risk of an investment in the Warrants; and
(iv) the Company made available, prior to the date of the Warrant Agreement,
to it the opportunity to ask questions of the Company and its officers, and to
receive from the Company and its officers information concerning the terms and
conditions of the Warrant and the Warrant Agreement and to obtain any
additional information with respect to the Company, its business, operations
and prospects, as reasonably requested by it; and (v) it is an "accredited
investor" as that term is defined under Rule 501(a)(8) of Regulation D
promulgated by the Commission under the Securities Act. The issuance and sale
of these securities was made in reliance on Section 4(2) of the Securities Act
(in accordance with Rule 506 of Regulation D) as a transaction not involving
any public offering.
II-2
<PAGE>
In September 1996, the Company issued warrants to purchase 40,222 shares of
Common Stock at an exercise price of $.0326 per share to Chloe Holdings, Inc.
("Chloe"), an affiliate of Averil Associates, Inc., as partial compensation
for services rendered. Chloe covenanted that (i) it acquired the warrants for
its own account with the present intention of holding such warrants for
investment purposes only and not with a view to, or for sale in connection
with, any distribution of such warrants (other than a distribution in
compliance with all applicable federal and state securities laws); (ii) it is
an experienced and sophisticated investor and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the relative merits and the risks of an investment in the warrants and of
protecting its own interests in connection with the transaction at issue;
(iii) it is willing to bear and is capable of bearing the economic risk of an
investment in the warrants; and (iv) the Company made available, prior to the
date of the Warrant Agreement, to it the opportunity to ask questions of the
Company and its officers, and to receive from the Company and its officers
information concerning the terms and conditions of the warrant and the Warrant
Agreement and to obtain any additional information with respect to the
Company, its business, operations and prospects, as reasonably requested by
it; and (v) it is an "accredited investor" as that term is defined under Rule
501(a)(4) of Regulation D promulgated by the Commission under the Securities
Act. The issuance and sale of these securities was made in reliance on Section
4(2) of the Securities Act (in accordance with Rule 506 of Regulation D) as a
transaction not involving any public offering and in reliance on Rule 701
because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.
In September 1996, the Company issued pursuant to its 1996 Stock Option Plan
(the "1996 Plan") non-statutory stock options to purchase an aggregate of
185,000 shares of Common Stock at $10.00 per share to the non-employee
directors and an executive officer. The issuance and sale of these securities
is exempt from the registration requirements of the Securities Act pursuant to
Rule 701 because the offer and sale of the securities was pursuant to a
compensatory benefit plan relating to compensation. Reference is made to the
description of the 1996 Plan set forth under the caption "Management--Stock
Option Plan."
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Exchange Agreement, dated August 20, 1996, by and among the
Registrant, Brilliant Interactive Ideas Pty. Ltd. ("BII Australia"),
Reefknot Limited and Pacific Interactive Education Pty. Limited.*
2.2 Asset Purchase Agreement, dated September 12, 1996, by and between the
Registrant and Sega Ozisoft Pty. Ltd.
3.1 Amended and Restated Certificate of Incorporation of Registrant.
3.2 Amended and Restated Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP
10.1 Registrant's 1996 Stock Option Plan.*
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock
Option).*
10.3 Form of Registrants's Stock Option Agreement (Incentive Stock
Option).*
10.4 Distribution Agreement, dated November 22, 1995, by and between BII
Australia and Consumer Electronics Pty. Ltd.+*
10.5 CD-ROM Distribution Agreement, dated September 14, 1996 by and between
the Registrant and Packard Bell NEC.+*
10.6 Distribution Agreement, dated August 22, 1995, by and between BII
Australia and Packard Bell Electronics Inc.+*
10.7 Software License Agreement, dated May 2, 1995, by and between BII
Australia and Packard Bell Electronics Inc.+*
10.8 Agreement, dated February 18, 1996, by and between Golden Dolphin
Productions Pty. Ltd. and BII Australia.+*
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.9 Memorandum of Agreement, dated September 5, 1996, by and between the
Registrant and Bantam Doubleday Dell Books For Young Readers.+*
10.10 Production Agreement, dated March 18, 1994, by and between Pick Two Ltd.
and BII Australia.+*
10.11 Assistant Multimedia Software Development & Production Agreement, dated
January 17, 1996, by and between Sega Ozisoft Pty. Limited and BII
Australia.+*
10.12 Licensing Agreement for "Cyberswine" Story Concept & Characters, dated
July 19, 1995, by and between Eat Cyberfist Pty. Limited and Sega
Ozisoft Pty Limited.+*
10.13 Distribution Agreement, dated November 2, 1995, by and between BII
Australia and Roadshow Entertainment Pty. Ltd.+*
10.14 Publishing Agreement, dated March 9, 1994, by and between Shortland
Publications Limited and BII Australia.+*
10.15 Settlement Agreements and Mutual General Releases, by and among BII
Australia, Ray Musci, Ocean of America, Inc., and Ocean Software, Ltd.
and Ocean International, Ltd.+*
10.16 Publishing Agreement, dated December 1, 1994, by and between Shortland
Publications Limited and BII Australia.+*
10.17 Distribution Agreement, dated July 1, 1996, by and between BII Australia
and Fujitsu Basic Software Corporation.+*
10.18 License Agreement--Domestic, dated July 31, 1996, between the Hearst
Corporation, King Features Syndicate Division and the Registrant.+*
10.19 Distribution Agreement, dated September 29, 1995, by and between BII
Australia and Ocean of America, Inc.+*
10.20 Distribution Agreement, dated February 22, 1996, by and between BII
Australia and Shortland Publications Limited.+*
10.21 Heads of Agreement, dated November 25, 1994, by and between SAND and Eat
Cyberfist Pty. Limited.+*
10.22 Software License Agreement, dated December 15, 1994, by and between BII
Australia and Sega Ozisoft.+*
10.23 Memorandum of Understanding, dated September 14, 1996, by and between
the Registrant and Morgan Creek Interactive, Inc.+*
10.24 Multimedia Production Agreement, dated March 14, 1995, by and between
BII Australia and Monto Holdings Pty. Ltd.+
10.25 Nontransferable Redeemable Warrant Agreement, dated September 14, 1996,
by and between the Registrant and Packard Bell NEC.*
10.26 License Agreement by and between Beyond Properties Pty. Ltd. and BII
Australia.+*
10.27 Registrant's Promissory Note, dated September 10, 1996.*
10.28 Form of Registrant's Indemnification Agreement.*
10.29 Form of Registrant's Employee Confidential Information and Non-
Solicitation Agreement.*
10.30 Commercial Lease by and among Hilrok Properties Pty. Limited, Peter
Dodds and Simon Van Wyk.*
10.31 Loan Agreement, dated October 10, 1994, by and between BII Australia and
PIE.*
10.32 Commercial Lease, dated August 8, 1994, by and between PW Securities
Pty. Ltd. and Sega Ozisoft.*
10.33 PIE Loan Extension, dated September 13, 1996, by and among PIE, BII
Australia and the Registrant.*
10.34 Agreement, dated September 12, 1996, by and between the Registrant and
Crawford Productions Pty. Limited.*
10.35 Engagement Letter, dated May 1, 1996, by and between Averil Associates,
Inc. and the Registrant.
10.36 Warrant Agreement by and between Chloe Holdings, Inc. and the
Registrant.
10.37 Product Agreement, dated January 12, 1996, by and between Interplay
Productions and BII Australia.+
11.1 Earnings (Loss) per share.
21.1 List of Subsidiaries.*
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its opinion filed as Exhibit 5.1
hereto).
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included in signature page).
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
+ Confidential treatment requested.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on
October 23, 1996.
Brilliant Digital Entertainment,
Inc.
By: /s/ Mark Dyne
_________________________________
MARK DYNE, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE
BOARD OF DIRECTORS
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mark Dyne
and Diana Maranon, and each of them, as his true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution, for him and his
name, place and stead, in any and all capacities, to sign any or all
amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of
the Securities Act of 1933 and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in
the capacities and on the dates stated.
SIGNATURE TITLE DATE
* President and October 23,
- ------------------------------------- Director 1996
KEVIN BERMEISTER
/s/ Michael Ozen Chief Financial October 23,
- ------------------------------------- Officer (Principal 1996
MICHAEL OZEN Financial and
Accounting Officer)
/s/ Diana Maranon Secretary and October 23,
- ------------------------------------- Director 1996
DIANA MARANON
* Vice President, October 23,
- ------------------------------------- Operations and 1996
MARK MILLER Production and
Director
/s/ Gary Barber Director October 23,
- ------------------------------------- 1996
GARY BARBER
II-6
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ray Musci Director October 23,
- ------------------------------------- 1996
RAY MUSCI
/s/ Garth Saloner Director October 23,
- ------------------------------------- 1996
GARTH SALONER
/s/ Jeff Scheinrock Director October 23,
- ------------------------------------- 1996
JEFF SCHEINROCK
*By: /s/ Mark Dyne
___________________________
MARK DYNE
HIS ATTORNEY-IN-FACT
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Exchange Agreement, dated August 20, 1996, by and among the
Registrant, Brilliant Interactive Ideas Pty. Ltd. ("BII Australia"),
Reefknot Limited and Pacific Interactive Education Pty. Limited.*
2.2 Asset Purchase Agreement, dated September 12, 1996, by and between the
Registrant and Sega Ozisoft Pty. Ltd.
3.1 Amended and Restated Certificate of Incorporation of Registrant.
3.2 Amended and Restated Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP
10.1 Registrant's 1996 Stock Option Plan.*
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock
Option).*
10.3 Form of Registrants's Stock Option Agreement (Incentive Stock
Option).*
10.4 Distribution Agreement, dated November 22, 1995, by and between BII
Australia and Consumer Electronics Pty. Ltd.+*
10.5 CD-ROM Distribution Agreement, dated September 14, 1996 by and between
the Registrant and Packard Bell NEC.+*
10.6 Distribution Agreement, dated August 22, 1995, by and between BII
Australia and Packard Bell Electronics Inc.+*
10.7 Software License Agreement, dated May 2, 1995, by and between BII
Australia and Packard Bell Electronics Inc.+*
10.8 Agreement, dated February 18, 1996, by and between Golden Dolphin
Productions Pty. Ltd. and BII Australia.+*
10.9 Memorandum of Agreement, dated September 5, 1996, by and between the
Registrant and Bantam Doubleday Dell Books For Young Readers.+*
10.10 Production Agreement, dated March 18, 1994, by and between Pick Two
Ltd. and BII Australia.+*
10.11 Assistant Multimedia Software Development & Production Agreement,
dated January 17, 1996, by and between Sega Ozisoft Pty. Limited and
BII Australia.+*
10.12 Licensing Agreement for "Cyberswine" Story Concept & Characters, dated
July 19, 1995, by and between Eat Cyberfist Pty. Limited and Sega
Ozisoft Pty Limited.+*
10.13 Distribution Agreement, dated November 2, 1995, by and between BII
Australia and Roadshow Entertainment Pty. Ltd.+*
10.14 Publishing Agreement, dated March 9, 1994, by and between Shortland
Publications Limited and BII Australia.+*
10.15 Settlement Agreements and Mutual General Releases, by and among BII
Australia, Ray Musci, Ocean of America, Inc., and Ocean Software,
Ltd. and Ocean International, Ltd.+*
10.16 Publishing Agreement, dated December 1, 1994, by and between Shortland
Publications Limited and BII Australia.+*
10.17 Distribution Agreement, dated July 1, 1996, by and between BII
Australia and Fujitsu Basic Software Corporation.+*
</TABLE>
<PAGE>
EXHIBIT INDEX, CONTINUED
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.18 License Agreement--Domestic, dated July 31, 1996, between the Hearst
Corporation, King Features Syndicate Division and the Registrant.+*
10.19 Distribution Agreement, dated September 29, 1995, by and between BII
Australia and Ocean of America, Inc.+*
10.20 Distribution Agreement, dated February 22, 1996, by and between BII
Australia and Shortland Publications Limited.+*
10.21 Heads of Agreement, dated November 25, 1994, by and between SAND and
Eat Cyberfist Pty. Limited.+*
10.22 Software License Agreement, dated December 15, 1994, by and between
BII Australia and Sega Ozisoft.+*
10.23 Memorandum of Understanding, dated September 14, 1996, by and between
the Registrant and Morgan Creek Interactive, Inc.+*
10.24 Multimedia Production Agreement, dated March 14, 1995, by and between
BII Australia and Monto Holdings Pty. Ltd.+
10.25 Nontransferable Redeemable Warrant Agreement, dated September 14,
1996, by and between the Registrant and Packard Bell NEC.*
10.26 License Agreement by and between Beyond Properties Pty. Ltd. and BII
Australia.+*
10.27 Registrant's Promissory Note, dated September 10, 1996.*
10.28 Form of Registrant's Indemnification Agreement.*
10.29 Form of Registrant's Employee Confidential Information and Non-
Solicitation Agreement.*
10.30 Commercial Lease by and among Hilrok Properties Pty. Limited, Peter
Dodds and Simon Van Wyk.*
10.31 Loan Agreement, dated October 10, 1994, by and between BII Australia
and PIE.*
10.32 Commercial Lease, dated August 8, 1994, by and between PW Securities
Pty. Ltd. and Sega Ozisoft.*
10.33 PIE Loan Extension, dated September 13, 1996, by and among PIE, BII
Australia and the Registrant.*
10.34 Agreement, dated September 12, 1996, by and between the Registrant and
Crawford Productions Pty. Limited.*
10.35 Engagement Letter, dated May 1, 1996, by and between Averil
Associates, Inc. and the Registrant.
10.36 Warrant Agreement by and between Chloe Holdings, Inc. and the
Registrant.
10.37 Product Agreement, dated January 12, 1996, by and between Interplay
Productions and BII Australia.+
11.1 Earnings (Loss) per share.
21.1 List of Subsidiaries.*
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in its
opinion filed as Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
+ Confidential treatment requested.
<PAGE>
EXHIBIT 1.1
2,000,000 SHARES
BRILLIANT DIGITAL ENTERTAINMENT, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
November ____, 1996
CS First Boston Corporation, and
Cruttenden Roth Incorporated
As Representatives of the Several Underwriters,
c/o CS First Boston Corporation,
Park Avenue Plaza,
New York, N.Y. 10055
Dear Sirs:
1. Introductory. Brilliant Digital Entertainment, Inc., a Delaware
corporation ("Company"), proposes to issue and sell 2,000,000 shares ("Firm
Securities") of its Common Stock, par value $.001 ("Securities") and also
proposes to issue and sell to the Underwriters, at the option of the
Underwriters, an aggregate of not more than 300,000 additional shares ("Optional
Securities") of its Securities as set forth below. The Firm Securities and the
Optional Securities are herein collectively called the "Offered Securities." The
Company and Brilliant Interactive Ideas, Pty. Ltd. ("BII Australia"), a company
incorporated in the State of New South Wales, Australia, and a wholly-owned
subsidiary of the Company, hereby agree with the several Underwriters named in
Schedule A hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and BII Australia. The
Company and BII Australia represent and warrant to, and agree with, the several
Underwriters that:
(a) A registration statement (No. 333-_________) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 ("Act") and is not proposed
to be amended or (ii) is proposed to be amended by amendment or post-effective
amendment. If such registration statement ("initial registration statement") has
been declared effective, either (i) an additional registration statement
("additional registration statement") relating to the Offered Securities may
have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)")
under the Act and, if so filed, has become effective upon filing pursuant to
such Rule and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional registration
statement is proposed to be filed with the Commission pursuant to Rule 462(b)
and will become effective upon filing
<PAGE>
pursuant to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company does not
propose to amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose to amend
it, and if any post-effective amendment to either such registration statement
has been filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become effective
upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the
case of the additional registration statement, Rule 462(b). For purposes of this
Agreement, "Effective Time" with respect to the initial registration statement
or, if filed prior to the execution and delivery of this Agreement, the
additional registration statement means (i) if the Company has advised the
Representatives that it does not propose to amend such registration statement,
the date and time as of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the execution and
delivery of this Agreement, was declared effective by the Commission or has
become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has
advised the Representatives that it proposes to file an amendment or post-
effective amendment to such registration statement, the date and time as of
which such registration statement, as amended by such amendment or post-
effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed prior to
the execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect to
such additional registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule 462(b).
"Effective Date" with respect to the initial registration statement or the
additional registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its Effective Time,
including all information contained in the additional registration statement (if
any) and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement." The additional
registration statement, as amended at its Effective Time, including the contents
of the initial registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "Additional Registration Statement." The Initial
Registration Statement and the Additional Registration Statement are herein
referred to collectively as the "Registration Statements" and individually as a
"Registration Statement." The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "Prospectus." No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement (i) on the Effective Date
of the Initial Registration Statement, the Initial Registration Statement
conformed in all respects to the requirements of the Act and the rules and
regulations of the Commission ("Rules and Regulations") and did not include any
untrue statement of
2
<PAGE>
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the Act and
the Rules and Regulations and did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional Registration
Statement is prior to the execution and delivery of this Agreement, the
Additional Registration Statement each conforms, and at the time of filing of
the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the
Effective Date of the Additional Registration Statement in which the Prospectus
is included, each Registration Statement and the Prospectus will conform, in all
respects to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Effective Time
of the Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will conform in
all respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a material fact
or will omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and no Additional Registration Statement
has been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the Prospectus based
upon written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business requires
such qualification.
(d) Other than BII Australia, the Company has no subsidiaries. All of
the capital stock of BII Australia is owned by the Company. BII Australia has
been duly incorporated and is an existing corporation in good standing under the
laws of the jurisdiction of its incorporation, with power and authority
(corporate and other) to own its properties and conduct its business as
described in the Prospectus; BII Australia is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires such
qualification; all of the issued and outstanding capital stock of BII Australia
has been duly authorized and validly issued and is fully paid and nonassessable;
and the capital stock of BII Australia is owned free from liens, encumbrances
and defects.
(e) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized; all outstanding shares of
capital stock of the Company are, and,
3
<PAGE>
when the Offered Securities have been delivered and paid for in accordance
with this Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive or similar rights with respect to
the Offered Securities.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company or BII Australia and any person
that would give rise to a valid claim against the Company or BII Australia or
any Underwriter for a brokerage commission, finder's fee or other like payment.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company or BII Australia and any person
granting such person the right to require the Company or BII Australia to file a
registration statement under the Act (or comparable Australian law) with respect
to any securities of the Company or BII Australia owned or to be owned by such
person or to require the Company or BII Australia to include such securities in
the securities registered pursuant to a Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company or BII Australia under the Act (or comparable Australian law).
(h) The Offered Securities have been approved for listing on the
Nasdaq Stock Market's National Market subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the consummation of
the transactions contemplated by this Agreement in connection with the issuance
and sale of the Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required under state
securities laws.
(j) The execution, delivery and performance of this Agreement, and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any statute, any rule, regulation or order of any governmental agency or body or
any court, domestic or foreign, having jurisdiction over the Company or BII
Australia or any of their properties, or any agreement or instrument to which
the Company or BII Australia is a party or by which the Company or BII Australia
is bound or to which any of the properties of the Company or BII Australia is
subject, or the charter or by-laws of the Company or BII Australia, and the
Company has full power and authority to authorize, issue and sell the Offered
Securities as contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered by
the Company.
(l) The transfer of assets contemplated by the SAND Acquisition (as
defined in the Prospectus) from Sega Ozisoft Pty., Limited ("Sega Ozisoft") to
the Company has been fully completed under all applicable laws, including the
laws of the United States and Australia. The documents giving
4
<PAGE>
legal effect to the SAND Acquisition were duly authorized by all necessary
action of the board of directors and stockholders of the Company and were duly
executed and delivered by all of the parties thereto, and constitute valid and
binding legal obligations of the parties thereto. The consummation of the SAND
Acquisition and the execution, delivery and performance of the documents giving
it legal effect did not result in a breach or violation of any of the terms or
provisions of, or constitute a default under, (i) any statute, rule, regulation
or order of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or BII Australia or any of their
properties, (ii) any agreement or instrument to which the Company or BII
Australia is or was at such time a party or by which the Company or BII
Australia is or was at such time bound or to which any of the properties of the
Company or BII Australia is or was at such time subject, or (iii) the charter or
by-laws of the Company or BII Australia. The Company had full power and
authority to enter into and perform the SAND Acquisition and the documents
giving it legal effect. No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court was required for the
consummation of the SAND Acquisition, except such as were obtained prior to the
SAND Acquisition.
(m) The Exchange (as defined in the Prospectus) has been fully
completed under all applicable laws, including the laws of the United States and
Australia. The documents giving legal effect to the Exchange were duly
authorized by all necessary board of directors and stockholder action and were
duly executed and delivered by all of the parties thereto, and constitute valid
and binding legal obligations of the parties thereto. The consummation of the
Exchange and the execution, delivery and performance of the documents giving it
legal effect did not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (i) any statute, rule, regulation
or order of any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or BII Australia or any of their
properties, (ii) any agreement or instrument to which the Company or BII
Australia is or was at such time a party or by which the Company or BII
Australia is or was at such time bound or to which any of the properties of the
Company or BII Australia is or was at such time subject, or (iii) the charter or
by-laws of the Company or BII Australia. The Company had full power and
authority to enter into and perform the Exchange and the documents giving it
legal effect. No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court was required for the consummation
of the Exchange, except such as were obtained prior to the Exchange.
(n) Except as disclosed in the Prospectus, the Company and BII
Australia have good and marketable title to all real properties and all other
properties and assets owned by them, including the assets purchased in the SAND
Acquisition, in each case free from liens, encumbrances and defects that would
materially affect the value thereof or materially interfere with the use made or
to be made thereof by them; and except as disclosed in the Prospectus, the
Company and BII Australia hold any leased real or personal property under valid
and enforceable leases with no exceptions that would materially interfere with
the use made or to be made thereof by them.
(o) The Company and BII Australia possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or bodies
necessary to conduct the business now operated by them and have not received any
notice of proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the Company
5
<PAGE>
or BII Australia, would individually or in the aggregate have a material adverse
effect on, or on the prospects of, the Company and BII Australia taken as a
whole.
(p) No labor dispute with the employees of the Company or BII
Australia exists or, to the knowledge of the Company, is imminent that might
have a material adverse effect on, or on the prospects of, the Company and BII
Australia taken as a whole.
(q) The Company and BII Australia own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "intellectual property rights") necessary
to conduct the business in substantially the manner now operated by them, or
presently employed by them, and have not received any notice of infringement of
or conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company or BII Australia,
would individually or in the aggregate have a material adverse effect on, or on
the prospects of, the Company and BII Australia taken as a whole. Except as
described in the Prospectus, the discoveries, inventions, products or processes
of the Company and BII Australia referred to in the Prospectus do not, to the
best knowledge of the Company and BII Australia, infringe or conflict with any
intellectual property right of any third party, where such infringement or
conflict could have a material adverse effect on the Company and BII Australia,
taken as a whole.
(r) Except as disclosed in the Prospectus, neither the Company nor BII
Australia is in violation of any statute, rule, regulation, decision or order of
any governmental agency or body or any court domestic or foreign, relating to
the use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "environmental laws"), owns or operates any real
property which, to the knowledge of the Company, is contaminated with any
substance that is subject to any environmental laws, nor is the Company to its
knowledge liable for any off-site disposal or contamination pursuant to any
environmental laws or subject to any claim relating to any environmental laws,
which violation, contamination, liability or claim would individually or in the
aggregate have a material adverse effect on, or on the prospects of, the Company
and BII Australia taken as a whole; and neither the Company nor BII Australia is
aware of any pending investigation which might lead to such a claim.
(s) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, BII Australia or
any of their respective properties that, if determined adversely to the Company
or BII Australia, would individually or in the aggregate have a material adverse
effect on the condition (financial or other), business, properties or results of
operations, or on the prospects of any of the foregoing, of the Company and BII
Australia taken as a whole, or would materially and adversely affect the ability
of the Company to perform its obligations under this Agreement, or which are
otherwise material in the context of the sale of the Offered Securities; and to
the Company's or BII Australia's knowledge, no such actions, suits or
proceedings are threatened or contemplated.
(t) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and BII
Australia on a consolidated basis
6
<PAGE>
as of the dates shown and their results of operations and cash flows for the
periods shown, and such financial statements have been prepared in conformity
with the generally accepted accounting principles in the United States applied
on a consistent basis; the schedules, if any, included in each Registration
Statement present fairly the information required to be stated therein; and the
assumptions used in preparing the pro forma financial information included in
each Registration Statement and the Prospectus provide a reasonable basis for
presenting the significant effects directly attributable to the transactions or
events described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding historical
financial statement amounts.
(u) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has been no
material adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
prospects, properties or results of operations of the Company and BII Australia
taken as a whole, and, except as disclosed in or contemplated by the Prospectus,
there has been no dividend or distribution of any kind declared, paid or made by
the Company or BII Australia on any class of their respective capital stock.
(v) Neither the Company nor BII Australia is and, after giving effect
to the offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, neither will be an "investment
company" as defined in the Investment Company Act of 1940.
(w) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba within
the meaning of Section 517.075, Florida Statutes and the Company and BII
Australia agree to comply with such Section if prior to the completion of the
distribution of the Offered Securities the Company or any of its affiliates
commences doing such business.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $__________ per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, at the office of CS First Boston Corporation ("CS
First Boston"), Park Avenue Plaza, New York, New York, against payment of the
purchase price by official bank check or checks in Federal Reserve (same day)
funds drawn to the order of the Company at the office of Troop Meisinger
Steuber& Pasich, LLP, 10940 Wilshire Boulevard, Los Angeles, California, or by
wire transfer to a bank acceptable to CS First Boston, at 10 A.M., New York
time, on November ____, 1996, or at such other time not later than seven full
business days thereafter as CS First Boston and the Company determine, such time
being herein referred to as the "First Closing Date". For purposes of Rule 15c6-
1 under the Securities Exchange Act of 1934, the First Closing Date (if later
than the otherwise applicable settlement date) shall be the settlement date for
payment of funds and delivery of securities for all the Offered
7
<PAGE>
Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CS First Boston requests and will be made
available for checking and packaging at the above office of CS First Boston in
New York at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CS First Boston given to the Company
from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriters may purchase all or less than all of the Optional
Securities at the purchase price per Security to be paid for the Firm
Securities. The Company agrees to sell to the Underwriters the number of shares
of Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by CS First Boston to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CS First Boston to the Company.
The delivery of and payment for the Optional Securities, being herein
referred to as the "Optional Closing Date," which may be the First Closing Date
(the First Closing Date and the Optional Closing Date, if any, being sometimes
referred to as a "Closing Date"), shall be determined by CS First Boston but
shall be not later than five full business days after written notice of election
to purchase Optional Securities is given. The Company will deliver the Optional
Securities being purchased on the Optional Closing Date to the Representatives
for the accounts of the several Underwriters, at the above office of CS First
Boston in New York against payment of the purchase price therefor by official
bank check or checks in Federal Reserve (same day) funds drawn to the order of
the Company, at the above office of Troop Meisinger Steuber & Pasich, LLP in Los
Angeles, or by wire transfer to a bank acceptable to CS First Boston. The
certificates for the Optional Securities being purchased on the Optional Closing
Date will be in definitive form, in such denominations and registered in such
names as CS First Boston requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the above
office of CS First Boston in New York at a reasonable time in advance of such
Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if consented to by CS First Boston,
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subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second
business day following the execution and delivery of this Agreement or (B) the
fifteenth business day after the Effective Date of the Initial Registration
Statement.
The Company will advise CS First Boston promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of the
Offered Securities under the Act but the Effective Time thereof has not occurred
as of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b) on or
prior to 10:00 P.M., New York time, on the date of this Agreement or, if
earlier, on or prior to the time the Prospectus is printed and distributed to
any Underwriter, or will make such filing at such later date as shall have been
consented to by CS First Boston.
(b) The Company will advise CS First Boston promptly of any proposal
to amend or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without CS First Boston's consent; and the
Company will also advise CS First Boston promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the execution and
delivery of this Agreement) and of any amendment or supplementation of a
Registration Statement or the Prospectus and of the institution by the
Commission of any stop order proceedings in respect of a Registration Statement
and will use its best efforts to prevent the issuance of any such stop order and
to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CS First Boston of such event and
will promptly prepare and file with the Commission, at its own expense, an
amendment or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CS First Boston's consent
to, nor the Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
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(e) The Company will furnish to the Representatives copies of each
Registration Statement (three of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as delivery of a
prospectus relating to the Offered Securities is required to be delivered under
the Act in connection with sales by any Underwriter or dealer, the Prospectus
and all amendments and supplements to such documents, in each case in such
quantities as CS First Boston requests. The Prospectus shall be so furnished on
or prior to 3:00 P.M., New York time, on the business day following the later of
the execution and delivery of this Agreement or the Effective Time of the
Initial Registration Statement. All other documents shall be so furnished as
soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CS First Boston
designates and will continue such qualifications in effect so long as required
for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as CS First Boston may
reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement and will reimburse the Underwriters (if and
to the extent incurred by them) for any filing fees and other expenses
(including fees and disbursements of counsel) incurred by them in connection
with qualification of the Offered Securities for sale under the laws of such
jurisdictions as CS First Boston designates and the printing of memoranda
relating thereto, for the filing fee of the National Association of Securities
Dealers, Inc. relating to the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers of the
Offered Securities and for expenses incurred in distributing preliminary
prospectuses and the Prospectus (including any amendments and supplements
thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, neither the Company nor BII Australia will
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the Act
relating to, any additional shares of its Securities or securities convertible
into or exchangeable or exercisable for any shares of its Securities, or any
securities of BII Australia or securities convertible into or exchangeable or
exercisable for any securities of BII Australia, or publicly disclose the
intention to make any such offer, sale, pledge, disposal or filing, without the
prior written consent of CS First Boston, except issuances of Securities
pursuant to the conversion or exchange of convertible or exchangeable securities
or the exercise of warrants or options, in each case outstanding on the date
hereof, grants of employee stock options pursuant to the terms of a plan in
effect on the date hereof, and issuances of Securities pursuant to the exercise
of such options.
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6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and BII Australia herein, to the accuracy
of the statements of Company and BII Australia officers made pursuant to the
provisions hereof, to the performance by the Company and BII Australia of their
obligations hereunder and to the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), of Ernst & Young LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules and
summary of earnings examined by them and included in the Registration Statements
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in Statement of Auditing Standards No. 71, Interim
Financial Information, on the unaudited financial statements, if any, included
in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements, if any, of the
Company, inquiries of officials of the Company who have responsibility for
financial and accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that:
(A) such unaudited financial statements and summary of earnings
included in the Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations or any material modifications should be made to
such unaudited financial statements and summary of earnings for them to be in
conformity with generally accepted accounting principles;
(B) such unaudited consolidated net sales, net operating income, net
income and net income per share amounts for the ________-month periods ended
________________________ included in the Prospectus do not agree with the
amounts set forth in the unaudited consolidated financial statements for those
same periods or were not determined on a basis substantially consistent with
that of the corresponding amounts in the audited statements of income;
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(C) at the date of the latest available balance sheet read by such
accountants, or at a subsequent specified date not more than three days prior to
the date of this Agreement, there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the latest available balance sheet
read by such accountants, there was any decrease in consolidated net current
assets or net assets, as compared with amounts shown on the latest balance sheet
included in the Prospectus; or
(D) for the period from the closing date of the latest income
statement included in the Prospectus to the closing date of the latest available
income statement read by such accountants there were any decreases, as compared
with the corresponding period of the previous year and with the period of
corresponding length ended the date of the latest income statement included in
the Prospectus, in consolidated net sales, net operating income, or in the total
or per share amounts of consolidated income before extraordinary items or net
income,
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information contained in
the Registration Statements (in each case to the extent that such dollar
amounts, percentages and other financial information are derived from the
general accounting records of the Company and its subsidiaries subject to the
internal controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts, percentages and
other financial information to be in agreement with such results, except as
otherwise specified in such letter.
(v) they have read the unaudited pro forma, if any, financial
statements and schedules and summary of earnings included in the Registration
Statements, have inquired of certain officials of the Company who have
responsibility for financial and accounting matters about the basis for their
determination of the pro forma adjustments and whether such unaudited pro forma
financial statements, schedules and summary of earnings comply as to form in all
material respects with the applicable accounting requirements of rule 11-02 of
Regulation S-X, and have proved the arithmetic accuracy of the application of
the pro forma adjustments to the historical amounts in such unaudited pro forma
financial statements, schedules and summary of earnings; and, as a result of the
procedures specified in this subsection, nothing came to their attention that
caused them to believe that such unaudited pro forma financial statements,
schedules and summary of earnings do not comply as to form in all material
respects with the applicable accounting requirements of rule 11-02 of Regulation
S-X or that the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery of
this Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment
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or post-effective amendment to be filed shortly prior to its Effective Time,
(ii) if the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and the
additional registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to its
Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the
Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or such later date as shall have been consented to by CS First Boston.
If the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CS First Boston. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement,
the Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, prospects,
properties or results of operations of the Company or BII Australia which, in
the judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or inadvisable
to proceed with completion of the public offering or the sale of and payment for
the Offered Securities; (ii) any suspension or limitation of trading in
securities generally on the New York Stock Exchange or the Nasdaq Stock Market,
or any setting of minimum prices for trading on such exchange or stock market;
(iii) any banking moratorium declared by U.S. Federal, New York or Australian
authorities; or (iv) any outbreak or escalation of major hostilities in which
the United States or Australia is involved, any declaration of war by Congress
or the Australian parliament, or any other substantial national (U.S. or
Australian) or international calamity or emergency if, in the judgment of a
majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Troop Meisinger Steuber & Pasich, LLP, counsel for the Company,
to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its business as
described in the Prospectus; and the Company is duly qualified
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<PAGE>
to do business as a foreign corporation in good standing in all other
jurisdictions in which the Company owns or leases real property, maintains
offices or has employees, except where the failure to be so qualified would not
have a material adverse effect on the Company and BII Australia, taken as a
whole.
(ii) The Offered Securities delivered on such Closing Date, and all
other outstanding shares of the Common Stock of the Company, and any other
outstanding securities of the Company, have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the description thereof
contained in the Prospectus; and the stockholders of the Company have no
preemptive rights under the Delware General Corporation Law with respect to the
Securities;
(iii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings known to such counsel between the Company or BII
Australia and any person granting such person the right to require the Company
or BII Australia to file a registration statement under the Act with respect to
any securities of the Company or BII Australia owned or to be owned by such
person or to require the Company or BII Australia to include such securities in
the securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company or BII Australia under the Act;
(iv) The Company is not, and after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940;
(v) No consent, approval, authorization or order of, or filing with,
any United States governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the issuance or sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be required under
state securities laws;
(vi) The execution, delivery and performance of this Agreement and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any statute, rule, regulation or to such counsel's knowledge, order of any
governmental agency or body or any court having jurisdiction over the Company or
any of its properties, or any agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the properties of the
Company is subject, or the charter or by-laws of the Company, and the Company
has full power and authority to authorize, issue and sell the Offered Securities
as contemplated by this Agreement;
(vii) The documents giving legal effect to the SAND Acquisition were
duly authorized by all necessary action of the board of directors and
stockholders of the Company. The execution and delivery of the documents giving
legal effect to the SAND Acquisition did not result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any statute,
rule, regulation or to such counsel's knowledge, order of any United States
governmental agency or body or any court having jurisdiction over the Company or
any of its properties, or any material agreement or instrument to which the
Company is or was at such time a party or by which the Company
14
<PAGE>
is or was at such time bound or to which any of the properties of the Company is
or was at such time subject, or the charter or by-laws of the Company, and the
Company had full power and authority to enter into and perform the SAND
Acquisition and the documents giving it legal effect. No consent, approval,
authorization, or order of, or filing with, any United States governmental
agency or body or any court was required for the consummation of the SAND
Acquisition, except such as were obtained prior to the SAND Acquisition;
(viii) The documents giving legal effect to the Exchange were duly
authorized by all necessary corporate action on the part of the Company. The
execution and delivery of the documents giving legal effect to the Exchange did
not result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, rule, regulation or to such counsel's
knowledge, order of any governmental agency or body or any court having
jurisdiction over the Company or any of its properties, or any material
agreement or instrument to which the Company is or was at such time a party or
by which the Company is or was at such time bound or to which any of the
properties of the Company is or was at such time subject, or the charter or by-
laws of the Company, and the Company had full power and authority to enter into
and perform the Exchange and the documents giving it legal effect. No consent,
approval, authorization, or order of, or filing with, any United States
governmental agency or body or any court was required for the consummation of
the Exchange, except such as were obtained prior to the Exchange;
(ix) The Initial Registration Statement was declared effective under
the Act as of the date and time specified in such opinion, the Additional
Registration Statement (if any) was filed and became effective under the Act as
of the date and time (if determinable) specified in such opinion, the Prospectus
either was filed with the Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration Statement (as the
case may be), and, to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement or any part thereof has
been issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their respective
effective or issue dates, complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations; the descriptions in the
Registration Statements and Prospectus of United States statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; and such counsel do not
know of any legal or governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not described as required or
of any contracts or documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as exhibits to a
Registration Statement which are not described and filed as required; it being
understood that such counsel need express no opinion as to the financial
statements or other financial data contained in the Registration Statements or
the Prospectus; and
(x) This Agreement has been duly authorized, executed and delivered by
the Company.
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In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' counsel and the independent public accountants of
the Company, at which conferences the contents of the Registration Statement and
the Prospectus and related matters were discussed, and although they have not
independently checked or verified the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, nothing
has come to the attention of such counsel that caused them to believe that, at
the time the Registration Statement became effective, the Registration Statement
(except as to financial statements, pro forma financial data, financial data and
supporting schedules contained therein, as to which such counsel need express no
opinion) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or any later date on which the
Option Securities are to be purchased, as the case may be, the Prospectus
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of fact
upon representations or certificates of officers of the Company, and of
government officials, in which case their opinion is explicitly to state that
they are so relying thereon and that they have no knowledge of any material
misstatement or inaccuracy in such opinions, representations or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel;
(e) The Representatives shall have received an opinion, dated such
Closing Date, of ___________________________, counsel for BII Australia, to the
effect that:
(i) BII Australia has been duly incorporated and is an existing
corporation in good standing under the laws of Australia, with corporate power
and authority to own its properties and conduct its business as described in the
Prospectus; and BII Australia is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its ownership
or lease of property or the conduct of its business requires such qualification;
(ii) All outstanding securities of BII Australia have been duly
authorized and validly issued, are fully paid and nonassessable and conform to
the description thereof contained in the Prospectus;
(iii) There are no contracts, agreements or understandings known to
such counsel between BII Australia and any person granting such person the right
to require BII Australia to file a registration statement under the Act (or
comparable Australian law) with respect to any securities of BII Australia owned
or to be owned by such person or to require BII Australia to include such
securities in the securities registered pursuant to the Registration Statement
or in any securities being registered pursuant to any other registration
statement filed by BII Australia under the Act (or comparable Australian law);
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(iv) No consent, approval, authorization or order of, or filing with,
any Australian governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the issuance or sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be required under
United States state securities laws;
(v) The execution, delivery and performance of this Agreement and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any statute, any rule, regulation or order of any governmental agency or body or
any court having jurisdiction over BII Australia or any of its properties, or
any agreement or instrument to which BII Australia is a party or by which BII
Australia is bound or to which any of the properties of BII Australia is
subject, or the charter or by-laws of BII Australia;
(vi) Such counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective date or as
of such Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of such Closing
Date, contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; the descriptions
in the Registration Statements and Prospectus of statutes, legal and
governmental proceedings and contracts and other documents are, to the knowledge
of such counsel, accurate and fairly present the information required to be
shown; and such counsel do not know of any legal or governmental proceedings
required to be described in a Registration Statement or the Prospectus which are
not described as required or of any contracts or documents of a character
required to be described in a Registration Statement or the Prospectus or to be
filed as exhibits to a Registration Statement which are not described and filed
as required; it being understood that such counsel need express no opinion as to
the financial statements or other financial data contained in the Registration
Statements or the Prospectus; and
(vii) Except as disclosed in the Prospectus, no stamp or other issue
taxes or duties are payable to Australia or any political subdivision or taxing
authority thereof or therein in connection with the issuance of the Offered
Securities by the Company or the delivery by or on behalf of the Company of the
Offered Securities to or for the respective accounts of the Underwriters or the
sale and delivery by the Underwriters of the Offered Securities to the initial
purchasers thereof.
(viii) BII Australia has the power, and has taken all necessary
corporate action, to submit to the jurisdiction of any state or U.S. Federal
court in the borough of Manhattan in the State of New York and to appoint
_______________ as the authorized agent of BII Australia as agent for service of
process by any such court. On the assumption that the consent-to-jurisdiction
clause at the end of this Agreement is valid and binding under the laws of the
State of New York, by which this Agreement is expressly governed, Australian
courts would normally give effect to BII Australia's consent to jurisdiction in
New York in connection with disputes arising under this Agreement.
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(ix) Under Australian law, the choice of laws of the State of New York
is a valid choice of the governing law of this Agreement, and the validity and
binding nature of the obligations contained in this Agreement are governed by
the law of the State of New York.
(x) A final and conclusive judgment against BII Australia for a
definitive sum of money entered by any state or U.S. Federal court in the
borough of Manhattan in the State of New York in any action arising out of or in
connection with or with respect to any transaction contemplated by this
Agreement would be enforced by Australian courts without reexamination or
relitigation of the matters adjudicated upon.
(xi) This Agreement has been duly authorized, executed and delivered
by BII Australia.
(f) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, P.C., counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the Registration Statements, the
Prospectus and other related matters as the Representatives may require, and the
Company and BII Australia shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters. In
rendering such opinion, Wilson Sonsini Goodrich & Rosati, P.C. may rely as to
the incorporation of the Company and BII Australia and all other matters
governed by Delaware or Australian law upon the opinions of Troop Meisinger
Steuber & Pasich, LLP and ___________________________ referred to above.
(g) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice-President and a principal financial
or accounting officer of both the Company and BII Australia in which such
officers, to the best of their knowledge after reasonable investigation, shall
state that: the representations and warranties of the Company and BII Australia
in this Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no proceedings
for that purpose have been instituted or are contemplated by the Commission; the
Additional Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b),
including payment of the applicable filing fee in accordance with Rule 111(a) or
(b) under the Act, prior to the time the Prospectus was printed and distributed
to any Underwriter; and, subsequent to the date(s) of the most recent financial
statements in the Prospectus, there has been no material adverse change, nor any
development or event involving a prospective material adverse change, in the
condition (financial or other), business, prospects, properties or results of
operations of the Company and BII Australia taken as a whole except as set forth
in or contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of subsection
(a) of this Section, except that the specified date referred to in such
subsection will be a date not more than three days prior to such Closing Date
for the purposes of this subsection.
18
<PAGE>
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CS First Boston may in its sole discretion waive on behalf of the
Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company and BII Australia
will jointly and severally indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company and BII
Australia will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives specifically for
use therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such in
subsection (b) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company against any losses, claims, damages or liabilities to which
the Company may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein, and will reimburse any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are incurred,
it being understood and agreed that the only such information furnished by any
Underwriter consists of (i) the following information in the Prospectus
furnished on behalf of each Underwriter: the last paragraph at the bottom of the
cover page concerning the terms of the offering by the Underwriters, the legend
concerning over-allotments and stabilizing on the inside front cover page, and
the first, fourth and fifth full paragraphs under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the
19
<PAGE>
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action.
(d) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and BII Australia on the one hand and the Underwriters on the other
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or BII Australia or by the Underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (d). Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
20
<PAGE>
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company or BII Australia may otherwise have
and shall extend, upon the same terms and conditions, to each person, if any,
who controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each director of the Company, to each officer of
the Company who has signed a Registration Statement and to each person, if any,
who controls the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CS First
Boston may make arrangements satisfactory to the Company for the purchase of
such Offered Securities by other persons, including any of the Underwriters, but
if no such arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CS First Boston and the Company for the purchase of such Offered Securities by
other persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter
or the Company, except as provided in Section 9 (provided that if such default
occurs with respect to Optional Securities after the First Closing Date, this
Agreement will not terminate as to the Firm Securities or any Optional
Securities purchased prior to such termination). As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company and BII Australia or their respective officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, the Company or any of
their respective representatives, officers or directors or any controlling
person, and will survive delivery of and payment for the Offered Securities. If
this Agreement is terminated pursuant to Section 8 or if for any reason the
purchase of the Offered Securities by the Underwriters is not consummated, the
Company shall remain responsible for the expenses to be paid or reimbursed by it
pursuant to Section 5 and the respective obligations of the Company, BII
Australia and the Underwriters pursuant to Section 7 shall remain in effect, and
if any Offered Securities have been purchased hereunder the representations and
warranties in Section 2 and all obligations under Section 5 shall also remain in
effect. If the purchase of the Offered Securities by the Underwriters is not
consummated for any reason other than solely because of the termination of this
Agreement pursuant to Section 8 or the occurrence of any event specified in
clause (ii), (iii), or (iv) of Section 6(c), the Company or BII Australia will
reimburse the Underwriters for all out-of-pocket
21
<PAGE>
expenses (including fees and disbursements of counsel) reasonably incurred by
them in connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o CS First Boston Corporation, Park Avenue Plaza, New
York, New York 10055, Attention: Investment Banking Department-Transactions
Advisory Group, or, if sent to the Company, will be mailed, delivered or
telegraphed and confirmed to it at Brilliant Digital Entertainment, Inc., 6355
Topanga Canyon Boulevard, Suite 503, Woodland Hills, California 91367,
Attention: Mark Dyne; provided, however, that any notice to an Underwriter
pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to
such Underwriter. Notice to the Company shall constitute notice to BII
Australia for all purposes under this Agreement.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CS First Boston will
be binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
The Company and BII Australia hereby submit to the non-exclusive
jurisdiction of the Federal and state courts in the Borough of Manhattan in The
City of New York in any suit or proceeding arising out of or relating to this
Agreement or the transactions contemplated hereby.
22
<PAGE>
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
Brilliant Digital Entertainment, Inc.
By: ________________________________
Mark Dyne,
Chairman of the Board and
Chief Executive Officer
Brilliant Interactive Ideas, Pty. Ltd.
By: ________________________________
Name: ________________________________
Title: ________________________________
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first
above written.
CS First Boston Corporation, and
Cruttenden Roth Incorporated
By: CS First Boston Corporation
By: ________________________________
Name: ________________________________
Title: ________________________________
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SECURITIES
----------- ---------------
<S> <C>
CS First Boston Corporation............................... $
Cruttenden Roth Incorporated.............................. $
----------------
Total......................................... $
================
</TABLE>
<PAGE>
EXHIBIT 2.2
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Purchase Agreement") is made and
entered into as of the 12th day of September, 1996, by and between Brilliant
Interactive, Inc., a corporation incorporated in the State of Delaware, United
States of America ("BII") and Sega Ozisoft Pty. Limited, a company incorporated
in the State of New South Wales, Australia ("Sega Ozisoft").
RECITALS
--------
A. BII, through its wholly owned subsidiary, Brilliant Interactive Ideas,
Pty. Ltd., a company incorporated in the State of New South Wales, Australia
("BII-Australia") based in Manly, Australia develops, produces and markets
interactive, multimedia titles for the education and entertainment markets.
BII-Australia is also working in conjunction with Sega Australia New
Developments ("SAND"), a division of Sega Ozisoft, to produce a multipath movie
under the title "Cyberswine." All rights, title and interest in and to the
Cyberswine project, including patents, patent applications, copyrights,
trademarks, service marks, characters, mask works, trade secrets and
confidential information are hereinafter referred to as the "Cyberswine
Property."
B. SAND is in the process of developing a suite of software tools to
enable the creation of multipath movies for distribution over various platforms
(including all code, proprietary rights, patents, patent applications,
copyrights, trademarks and other intellectual property rights related thereto,
the "SAND Engine"). Sega Ozisoft has funded SAND since its inception. The
assets used by SAND (the "SAND Assets") include without limitation (i) all
assets utilized by such division in the development of the SAND Engine including
all software (in object and source code form) included in the SAND Engine or any
iteration or release thereof, documentation and hardware, software tools, all
office furniture and supplies and any other equipment, (ii) any and all
intellectual, proprietary or other rights to the SAND Engine (including patents,
patent applications, copyrights, trademarks, service marks, characters, mask
works, trade secrets and confidential information, the "SAND IP") and any future
amendments, modifications or upgrades to the SAND IP, (iii) all rights to any
and all revenue arising from the SAND Engine and the SAND IP, (iv) all contract
rights of SAND (or of Sega Ozisoft which are directly related to the business of
SAND) necessary to conduct the business of SAND, and (iv) any and all content
produced by SAND or the SAND Engine relating to any and all current and future
Cyberswine Property and other multipath movies developed by SAND ("Content").
C. Sega Ozisoft desires to sell to BII, and BII desires to acquire from
Sega Ozisoft, the Sand Assets on the terms and subject to the conditions set
forth in this Purchase Agreement.
<PAGE>
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing, and the mutual covenants
set forth herein, the parties agree as follows:
1. SALE AND TRANSFER OF SAND ASSETS
1.1 Sale and Purchase; Purchased Assets. On the Closing Date (as
-----------------------------------
hereinafter defined) and on the terms and subject to the conditions set forth in
this Purchase Agreement, Sega Ozisoft hereby sells, conveys, assigns, transfers
and delivers to BII, free and clear of any and all liabilities, liens, claims,
charges, encumbrances, mortgages, security interests, pledges, rights of offset,
adverse claims, and restrictions of any type, kind or nature (collectively,
"Liens"), good and marketable title to the SAND Assets and BII hereby purchases
and acquires the SAND Assets from Sega Ozisoft by delivery of a convertible
promissory note in the form of Attachment "C" hereto (the "Note") in the
principal amount of $1,500,000 and which is mandatorily convertible upon the
effectiveness of the proposed Offering (as defined in Section 6.2 below) into
176,471 newly issued shares (the "Conversion Shares"), subject to adjustment to
reflect any stock splits, reverse stock splits or recapitalization, of the
Common Stock of BII, receipt of which is hereby acknowledged by Sega Ozisoft.
1.2 Further Actions. Sega Ozisoft shall, at its sole cost and expense,
---------------
execute and deliver to, or obtain for, BII such other instruments of conveyance,
transfer and assignment as shall be necessary or appropriate to vest in BII,
good and marketable title in and to all of the SAND Assets, free and clear of
any and all Liens, including without limitation, any governmental or third party
consents, approvals, permits, assurances, releases or terminations of Liens or
other security interests necessary for the consummation of the transactions
contemplated by this Purchase Agreement.
2. NO ASSUMPTION OF LIABILITIES
2.1 Liabilities Not Assumed. Except as otherwise expressly provided in
-----------------------
this Agreement, BII shall not and does not assume any liabilities, obligations
or commitments of Sega Ozisoft of any kind, known or unknown, contingent or
otherwise, of whatsoever kind or nature, and the same shall remain the sole
responsibility of Sega Ozisoft and Sega Ozisoft will indemnify and hold BII, its
officers, directors and stockholders, and each of them, harmless from and
against any and all such liabilities, expenses or obligations, including, but
not limited to, (a) deferred expenses, trade account liabilities and capitalized
leases; (b) product liability claims; (c) liabilities in respect of salaries,
employee benefit plans, including obligations to employees for bonus and/or
severance payments upon the sale of the Purchased Assets; (d) income, sales,
transfer or other taxes, including taxes arising out of the transactions
contemplated by this Purchase Agreement; or (e) legal expenses or other
transaction costs associated with the transactions contemplated by this Purchase
Agreement. BII will offer to hire or retain, on its customary basis, any or all
of the employees or consultants of
2
<PAGE>
SAND, but BII shall not assume or be bound by any of Sega Ozisoft's employment
or consulting contracts or other obligations with respect to such employees and
consultants.
2.2 BII acknowledges the following:
(a.) that it may not be possible by this Agreement to assign the contract
rights included in the SAND Assets, including without limitations
contracts for personal services and a lease of premises; and
(b.) that it is the intention of the parties that BII shall take over the
responsibilities of performance of the contracts included in the SAND
Assets where it receives the benefit thereof.
Where the consent of any party to any such contract is required for the
purposes of the assignment of any of the SAND Assets, Sega Ozisoft and BII
will each use its best efforts to secure such consent, including the entry
into any novation of such contract, whereby Sega Ozisoft will be released
from any further performance of such contract and BII will undertake such
performance, effective prior to the Closing Date. Where such novation is
not possible, BII will undertake the performance of such contract after the
Closing Date on Sega Ozisoft's behalf, and indemnify Sega Ozisoft from any
liability under such contract or arising incidental to its performance as a
consequence of any act or omission on the part of BII on or after the
Closing Date. This provision operates with respect to, but is not limited
to, the contract(s) between Sega Ozisoft and BII with respect to the
exploitation of the Cyberswine Property.
3. THE CLOSING
The Closing shall occur on that date (the "Closing Date") which is set
forth in a written notice delivered to Sega Ozisoft from BII. The Closing Date
may be selected by BII in its sole discretion but shall be no later than
December 20, 1996.
4. REPRESENTATIONS AND WARRANTIES OF SEGA OZISOFT
As a material inducement to BII to enter into this Purchase Agreement and
to perform its obligations hereunder, Sega Ozisoft represents and warrants to,
and agrees with, BII as set forth below. The representations and warranties set
forth below shall be effective as of the date of this Purchase Agreement and as
of the Closing Date.
4.1 Organization and Standing. Sega Ozisoft is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of Australia.
Sega Ozisoft has all requisite power and
3
<PAGE>
authority and all requisite permits necessary to own, lease and operate its
properties and assets and to carry on its business in the manner and in the
locations as presently conducted.
4.2 Authorization. Sega Ozisoft has the full power and authority
-------------
(corporate and other) to enter into, execute and deliver this Purchase Agreement
and to perform all of the transactions contemplated hereby and all of its
obligations hereunder. All corporate proceedings have been taken and all
corporate authorizations have been obtained which are necessary to authorize the
execution, delivery and performance by Sega Ozisoft of this Purchase Agreement.
This Purchase Agreement has been duly and validly executed and delivered by Sega
Ozisoft and constitutes a valid and binding obligation of Sega Ozisoft,
enforceable against Sega Ozisoft in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally from time to time in effect.
4.3 Title to Assets. Sega Ozisoft is the sole owner of, and holds, all
---------------
rights, title and interest in and to the SAND Assets free and clear of any
Liens. Upon delivery to BII of the SAND Assets, BII shall have good and
marketable title to the SAND Assets, free and clear of any Liens. The SAND
Assets are in good operating condition, normal wear and tear excepted. The SAND
Assets are not subject to any right of first refusal of any third party relating
to the sale of any of the SAND Assets.
4.4 No Infringement. To the best of Sega Ozisoft's knowledge and belief,
---------------
as of the date hereof, the SAND IP and the Content does not infringe,
contravene, or otherwise conflict with any patent, copyright, trademark, service
mark or other intellectual property or proprietary rights of others.
4.5 Investment Representations. Sega Ozisoft has been advised that the
--------------------------
Note and the Conversion Shares have not been registered under the Securities Act
of 1933, as amended (the "Securities Act"), nor qualified under any state blue
sky law, on the ground that no distribution or public offering of the Note or
Conversion Shares is to be effected, and that in this connection BII is relying
in part on the representations of Sega Ozisoft set forth in this Section 4.5.
Sega Ozisoft represents and warrants to BII that:
(a) Investment Intent. The Note to be issued to Sega Ozisoft pursuant
-----------------
to this Purchase Agreement is being acquired, and the Conversion Shares if
issued to Sega Ozisoft upon conversion of the Note will be acquired by Sega
Ozisoft solely for its own account, for investment purposes only, and with no
present intention of distributing, selling or otherwise disposing of them.
(b) Sophistication. Sega Ozisoft is an experienced and sophisticated
---------------
investor, and has such knowledge and experience in financial and business
matters that it is capable of evaluating the risks and merits of acquiring the
Note and Conversion Shares. Sega Ozisoft has had, during the course of this
transaction and prior to Sega Ozisoft's acquisition of the Note, the opportunity
to ask questions of, and receive answers from, BII, BII-Australia and their
respective management
4
<PAGE>
concerning BII, BII-Australia and the terms and conditions of this Purchase
Agreement. Sega Ozisoft hereby acknowledges that Sega Ozisoft or Sega Ozisoft's
representatives have received all such information as Sega Ozisoft considers
necessary for evaluating the risks and merits of acquiring the Note and the
Conversion Shares and for verifying the accuracy of any information furnished to
Sega Ozisoft or to which Sega Ozisoft had access.
(c) Accredited Investor. Sega Ozisoft is an "accredited investor" for
-------------------
purposes of Regulation D promulgated by the Commission under the Securities Act.
(d) Addresses. Sega Ozisoft represents that Sega Ozisoft's address set
---------
forth in Section 8.1 is its true and correct address, and, if not its principal
place of business, is the address from which the Sega Ozisoft negotiated the
investment in the Note and Conversion Shares.
(e) Transfer Restrictions. Sega Ozisoft understands the restrictions
---------------------
on resale and transfer of the Note and Conversion Shares imposed upon the
holders thereof pursuant the Securities Act and this Purchase Agreement, and
will abide by such resale and transfer restrictions.
(f) Legend. Sega Ozisoft understands and agrees that a legend will be
------
placed on the Note and the certificates representing the Conversion Shares which
will state that such securities have not been registered under the Securities
Act, and that any transfer or attempt to transfer such securities, except in a
transaction exempt from the federal and applicable state securities laws or in a
registered or qualified offering under federal and state securities laws, will
be void and of no effect and will not be recognized by BII.
4.6 Accuracy of Other Information. None of the information contained in
-----------------------------
this Purchase Agreement with respect to Sega Ozisoft or the SAND Assets,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were or will be made, not materially misleading.
Sega Ozisoft has disclosed to BII all information known to Sega Ozisoft which
Sega Ozisoft reasonably believes to be material to a decision by BII to enter
into this Purchase Agreement.
5. REPRESENTATIONS AND WARRANTIES OF BII
As a material inducement to Sega Ozisoft to enter into this Purchase
Agreement and to perform its obligations hereunder, BII represents and warrants
to and agrees with Sega Ozisoft as set forth below. The representations and
warranties set forth below shall be effective as of the date of this Purchase
Agreement and as of the Closing Date.
5.1 Organization and Standing. BII is a corporation duly organized,
-------------------------
validly existing and in good standing under the laws of the State of Delaware.
BII has all requisite power and authority necessary to own, lease and operate
its properties and assets and to carry on its business in the manner and in the
locations as presently conducted. Copies of the Restated Certificate of
5
<PAGE>
Incorporation of BII (as certified by the Secretary of State of the State of
Delaware, the "Restated Certificate") and Bylaws of BII have been delivered to
Sega Ozisoft and are accurate and complete as of the date hereof.
5.2 Authorization. BII has the full power and authority (corporate and
-------------
other) to enter into, execute and deliver this Purchase Agreement and to perform
all of the transactions contemplated hereby and all of its obligations
hereunder. All corporate proceedings have been taken and all corporate
authorizations have been obtained which are necessary to authorize the
execution, delivery and performance by BII of this Purchase Agreement. This
Purchase Agreement has been duly and validly executed and delivered by BII and
constitutes a valid and binding obligation of BII, enforceable against BII in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally from time to time in effect.
5.3 BII Australia. BII owns all of the outstanding capital stock of BII-
-------------
Australia. There are no outstanding options, contracts, commitments, warrants,
preemptive rights agreements or other rights of any character affecting or
relating in any manner to the issuance of any equity securities of BII-
Australia, or entitling any person or entity to acquire any equity securities of
BII-Australia, including options granted under any stock option or incentive
plan.
5.4 Capitalization. BII is authorized by its Restated Certificate to
--------------
issue up to 10,000,000 shares of Common Stock and up to 1,000,000 shares of
Preferred Stock which may be issued in one or more series. Immediately prior to
the Closing, 1,000,000 shares of Common Stock will be issued and outstanding and
no shares of Preferred Stock will be issued and outstanding. All of the issued
and outstanding shares of Common Stock have been duly authorized and validly
issued and are fully-paid and non-assessable. Except as set forth on Schedule
--------
"A", there are no outstanding options, contracts, commitments, warrants,
- ---
preemptive rights agreements or other rights of any character affecting or
relating in any manner to the issuance of the Common Stock, Preferred Stock or
other equity securities of BII, or entitling any person or entity to acquire any
of the Common Stock or other equity securities of BII, including options granted
under any stock option or incentive plan.
5.5 Issuance Conversion Shares. The Conversion Shares to be issued to
--------------------------
Sega Ozisoft upon conversion of the Note have been duly and validly authorized,
and if and when delivered, will be duly and validly issued, fully paid and non-
assessable, and will be free of any Liens or restrictions (other than those
imposed pursuant to this Purchase Agreement and under the Securities Act or
applicable state securities or blue sky laws).
5.6 Offering. Assuming the truth, accuracy and completeness of the
--------
representations and warranties of Sega Ozisoft set forth in Section 4 of this
Purchase Agreement, the offer, sale and issuance to Sega Ozisoft of the
Conversion Shares, constitute, and will constitute, transactions exempt from the
registration and prospectus delivery requirements of Section 5 of the Securities
Act and BII has obtained (or is exempt from the requirement to obtain) all
qualifications, permits and
6
<PAGE>
other consents required by all applicable state laws governing the offer, sale
and issuance of securities.
6. FURTHER AGREEMENTS OF THE PARTIES
6.1 Confidentiality. BII and Sega Ozisoft hereby acknowledge to and agree
---------------
with the other that any and all information which has been disclosed by one to
the other, its employees, consultants, agents and stockholders during the
discussions and negotiations leading to the execution of this Purchase
Agreement, and all information to be disclosed by one to the other, its
employees, consultants and agents and stockholders, during the period commencing
on the date of execution of this Purchase Agreement through the Closing or
termination of this Purchase Agreement, shall constitute confidential
information and trade secrets of the disclosing party, and as such are secret,
confidential and unique and constitute the exclusive trade secrets and property
of such party. Such information has been made known and available to the other
party and its respective employees, consultants and agents strictly in
connection with the negotiation and execution of this Purchase Agreement and the
consummation of the transactions provided for herein. Each party hereby
acknowledges and agrees that any use or disclosure of any such confidential
information or trade secrets, other than pursuant to or as allowed by this
Purchase Agreement, would be wrongful and could cause irreparable injury to the
other. Accordingly, each party hereby expressly agrees, for itself and on
behalf of its stockholders and directors, if any, and its principal officers,
managers, employees, agents, consultants and representatives, that it and they
will not at any time prior to the Closing or at any time thereafter, use or
disclose, other than in accordance with the terms and provisions of this
Purchase Agreement, any of such confidential information or trade secrets;
provided, that BII or Sega Ozisoft may use or disclose such confidential
- --------
information or secrets of the other without restriction if such information or
secrets (i) were or are available to such party on a non-confidential basis from
a source other than the other party; or (ii) were or become generally available
to the public; and provided, further, that if BII or Sega Ozisoft are requested
-------- -------
or required (by interrogatories, requests for information or documents, subpoena
or similar process) to disclose any of such information or secrets of the other,
such disclosure, may be made without liability hereunder. Notwithstanding the
foregoing, no provision of this Section 6.1 shall in any manner whatsoever
prevent or inhibit BII from using or disclosing any such confidential
information relating to the Purchased Assets in any manner BII shall deem fit
from and after the Closing; provided further, Sega Ozisoft hereby agrees, for
-------- -------
Sega Ozisoft, Sega Ozisoft's affiliates, officers, managers, employees, agents,
consultants and representatives, that they will not at any time from and after
the Closing Date use or disclose any such confidential information which either
(i) concerns BII, or its business or operations or (ii) relates to the SAND
Assets. Each party acknowledges that, in the event of a violation by the other
of the terms and provisions of this Section 6.1, the remedies at law would not
be adequate; and accordingly, in such event such party may proceed to protect
and enforce its rights under this Section 6.1 by a suit in equity for specific
performance hereof, or for an injunction against the violation hereof. This
confidentiality provision supersedes all other confidentiality agreements or
provisions, contained in any document or agreement, entered into between BII and
Sega Ozisoft.
7
<PAGE>
6.2 Employment
----------
(a.) BII may prior to the Closing Date deliver a letter to chosen
employees of SAND ("Employee") incorporating an offer to transfer with the SAND
Assets and offering employment on the same terms and conditions within BII-
Australia as those on which the Employee is then employed and carrying across
the then current on-going Employee benefits provided by Sega Ozisoft together
with any additional statutory requirements so that a SAND employee who accepts
the offer of employment under this clause ("Transferring Employee") would be
deemed a 'transferred employee' under Division 6 of the New South Wales
Industrial Relations Act 1991, Australia.
(b.) On or before the last business day prior to the Closing Date Sega
Ozisoft shall pay to BII in respect of each Transferring Employee an amount
equal to the sum of all amounts due to those Employees as at the Closing Date in
respect of accrued wages, salaries, allowances, annual leave inclusive of any
leave loading and other emoluments accrued by the Transferring Employees as at
the Closing Date.
(c.) On and from the Closing Date BII must in relation to each
Transferring Employee be responsible for and keep Sega Ozisoft indemnified
against claims made against Sega Ozisoft by the relevant Transferring Employee
for wages, salary, annual leave entitlement, holiday pay, sick leave, long
service leave and other allowances accumulated by the Transferring Employee
during his or her employment with Sega Ozisoft and treat that Transferring
Employee and deal with every such entitlement as if the entitlement had been
accrued by the Transferring Employee while in the employment of BII.
6.3 Public Offering. BII shall keep Sega Ozisoft informed with respect to
---------------
the process of selection of a managing underwriter for the Offering and cause
BII to allow Sega Ozisoft to participate in any road show. While participating
in any road show relating to the Offering, Mark Dyne, Kevin Bermeister and
Anthony Rose shall act as representatives of BII and not as representatives of
Sega Ozisoft or Sega Enterprises Japan. Sega Ozisoft shall cooperate and take
such actions, provide such financial statements of SAND and other information
and assistance, and execute all such further instruments and documents as BII
may reasonably request to permit BII prepare all registration statements and
other filings necessary or desirable to register the proposed underwritten
initial public offering of Common Stock of BII (the "Offering") under the laws
of the United States. Sega Ozisoft will assist BII in the conduct of any road
shows. Sega Ozisoft has reviewed the letter discussing pre-offering publicity
(a copy of which is attached as Schedule "B" hereto), and agrees to conduct
------------
itself, and cause its employees, consultants, agents and stockholders to conduct
themselves, in a manner consistent with such letter. Specifically, Sega Ozisoft
agrees not to make any statements regarding the proposed public offering and to
refer all inquiries concerning BII or relating to the proposed public offering
to BII. Sega Ozisoft agrees to enter into a lock-up agreement with the
underwriters of the proposed public offering whereby it agrees not to sell the
Conversion Shares for such period of time from and after the effective date of
such public offering as may be requested by such underwriters, which shall not
be longer than 12 months.
8
<PAGE>
6.4 Sega Ozisoft shall fund the operations of SAND through the closing of
the initial public offering of shares of Common Stock of BII (the "IPO
Closing"). BII shall reimburse Sega Ozisoft for expenses incurred to fund the
operations of SAND for the period commencing August 1, 1996 and terminating on
the October 31, 1996, in excess of A$75,000 per month (the "Initial Excess
Amount"). BII shall reimburse Sega Ozisoft for all expenses incurred to fund
the operations of SAND for the period commencing November 1, 1996 through the
IPO Closing (collectively with the Initial Excess Amount, the "Excess"). BII
shall pay the Excess to Sega Ozisoft promptly after the IPO Closing upon receipt
from Sega Ozisoft of documentation setting forth in reasonable detail the amount
and nature of each expense in the Excess.
6.5 Cyberswine Royalty. BII shall pay to Sega Ozisoft a royalty of 12.5%
------------------
of Adjusted Gross Receipts on the Cyberswine multipath movie, exclusive of any
sequels thereto, any merchandising thereof and any adaption to linear video
product. The royalty shall be paid with respect to each calendar quarter on the
45th day following the last day of that calendar quarter. "Adjusted Gross
Receipts" is gross receipts received by BII or any affiliate of BII on the
Cyberswine multipath movie, exclusive of any sequels thereto, any merchandising
thereof and any adaption to linear video product, and after deducting any
royalties and fees payable to Cyberswine licensors.
6.6 Further Cooperation. Sega Ozisoft shall cooperate with any efforts by
-------------------
BII to employ the employees and retain the services of consultants of SAND;
provided that Sega Ozisoft will have no liability if the employees or
consultants elect not to accept employment with BII.
6.7 Board Representation. So long as Sega Ozisoft maintains ownership of
--------------------
at least 7% of the outstanding equity securities of BII, BII will use its best
efforts to cause a nominee of Sega Ozisoft reasonably acceptable to be nominated
by the Board of Directors of BII for election as a director of BII so that Sega
Ozisoft has either one representative on the Board of Directors of BII or one
representative nominated for election at the succeeding annual stockholders
meeting so long as Sega Ozisoft maintains ownership of at least 7% of the
outstanding equity securities of BII.
6.8 Nature and Survival of Representations and Warranties. All
-----------------------------------------------------
representations and warranties of the Sega Ozisoft and BII shall survive the
Closing of this Purchase Agreement.
7. REGISTRATION RIGHTS
7.1 Piggyback Registration. If, at any time during the period commencing
----------------------
on the date that is 180 days from the IPO Closing, BII shall propose to register
any shares of Common Stock (but excluding any shares or securities being
registered pursuant to Form S-8 or Form S-4 or any successor form thereto), BII
shall (i) give Sega Ozisoft written notice, or telegraphic, telecopy or
telephonic notice followed as soon as practicable by written confirmation
thereof, of such proposed registration at least 20 business days prior to the
filing of such registration statement and, (ii) upon written notice, or
telegraphic or telephonic notice followed as soon as practicable by written
confirmation thereof, given to BII by Sega Ozisoft within 15 days after the
giving of such written
9
<PAGE>
confirmation or written notice by BII, BII shall include or cause to be included
in any such regis tration statement all or such portion of the Conversion Shares
as Sega Ozisoft may request; provided, however, that BII may at any time
-------- -------
withdraw or cease proceeding with any such registration if it shall at the same
time withdraw or cease proceeding with the registration of the Common Stock
originally proposed to be registered; and provided further, that in connection
----------------
with any registered public offering involving an underwriting, the managing
underwriter may (if in its reasonable opinion marketing factors so require)
limit the number of securities (including any Conversion Shares) included in
such offering (other than securities of BII). In the event of any such
limitation, the total number of Conversion Shares to be offered for the account
of Sega Ozisoft in the registration shall be reduced in proportion to the
respective number of shares requested to be included therein by all holders of
BII's Common Stock (other than BII) entitled to include shares of Common Stock
in the registration to the extent necessary to reduce the total number of shares
proposed to be registered to the number of shares recommended by the managing
underwriter.
7.2 BII's Obligations in Piggyback Registration. The following provisions
-------------------------------------------
shall also be applicable at the sole cost and expense of BII in the case of
registrations under Section 7.1:
(a.) Following the effective date of such registration statement, BII
shall, upon the request of Sega Ozisoft, forthwith supply such number of
prospectuses meeting the requirements of the Securities Act as shall be
requested by Sega Ozisoft to permit it to make a public distribution of all of
its Conversion Shares, provided that Sega Ozisoft shall from time to time
furnish BII with such appropriate information (relating to the intentions of
Sega Ozisoft) in connection therewith as BII shall request in writing.
(b.) BII shall bear the entire cost and expense of the registration of
securities provided for in this Section (but not the selling expenses of Sega
Ozisoft).
(c.) BII shall indemnify and hold harmless Sega Ozisoft from and
against any and all losses, claims, damages and liabilities (including
reasonable fees and expenses of counsel) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or any prospectus included therein required to be filed
or furnished by reason of this Section or otherwise or in any application or
other filing under, the Securities Act or any other applicable Federal or state
securities law, or arising out of or based upon any omission or alleged omission
to state therein a material fact required to be stated therein (i.e., in any
such registration statement, prospectus, application or other filing) or
necessary to make the statements therein not misleading, to which such person
may become subject, or any violation or alleged violation by BII to which such
Person may become subject, under the Securities Act, the Exchange Act, or other
Federal or state laws or regulations, at common law or otherwise, except to the
extent that such losses, claims, damages or liabilities are caused by any such
untrue statement or alleged untrue statement or omission or alleged omission
based upon and in strict conformity with written information furnished to BII by
such person expressly for use therein; provided however, that Sega Ozisoft shall
-------- -------
at the same time indemnify BII, its directors, each officer signing the related
10
<PAGE>
registration statement, and each person, if any, who controls BII within the
meaning of the Securities Act, from and against any and all losses, claims,
damages and liabilities (including reasonable fees and expenses of counsel)
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any registration statement or any prospectus
included therein required to be filed or furnished by reason of this Section, or
otherwise or in any application or other filing under, the Securities Act or any
other applicable Federal or state securities law, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein (i.e., in any such registration statement, prospectus,
application or other filing) or necessary to make the statements therein not
misleading, to which such person may become subject, or any violation or alleged
violation by Sega Ozisoft to which BII, its directors, each officer signing the
related registration statement, and each person, if any, who controls BII within
the meaning of the Securities Act, may become subject, under the Securities Act,
the Exchange Act, or other Federal or state laws or regulations, at common law
or otherwise, to the extent that such losses, claims, damages or liabilities are
caused by any such untrue statement or alleged untrue statement or omission or
alleged omission based upon and in strict conformity with written information
furnished to BII by Sega Ozisoft expressly for use therein.
(d.) In the event any person entitled to indemnification hereunder
receives in writing a complaint, claim or other written notice of any loss,
claim, damage, liability or action giving rise to a claim for indemnification
under Section 7.2(c), the person claiming indemnification under Section 7.2(c)
shall promptly notify the person or persons against whom indemnification is
sought (the "Indemnitor") of such complaint, notice, claim or action, and the
Indemnitor shall have the right to investigate and defend any such loss, claim,
damage, liability or action. The person claiming indemnification shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof but the fees and expenses of such counsel shall not be at the
expense of the Indemnitor. In no event shall the Indemnitor be obligated to
indemnify any person for any settlement of any claim or action effected without
the Indemnitor's consent, which consent shall not be unreasonably withheld.
8. TAXES
8.1 Payment of Taxes, Filing of Returns. Sega Ozisoft shall remain
-----------------------------------
liable for the filing of all tax returns and reports and for the payment of all
federal, state and local taxes of Sega Ozisoft relating to the operation of the
Purchased Assets on or prior to the Closing Date and Sega Ozisoft shall remain
so liable for the payment of all of its taxes attributable to or relating to the
consummation of the transactions contemplated herein, and shall indemnify and
hold BII and it affiliates harmless from and against all liability in connection
therewith.
8.2 Sales Taxes. Sega Ozisoft shall bear all responsibility for stamp,
-----------
sales, use, value added or other similar taxes, if any, arising out of the
consummation of the transactions herein pro-
11
<PAGE>
vided for and shall be liable for the filing of all necessary tax returns and
reports with respect to such taxes.
9. MISCELLANEOUS
9.1 Notices. All notices, requests, demands and other communications
-------
(collectively referred to in this Section 8.1 as "Notices") given or made
pursuant to this Purchase Agreement shall be in writing and shall be deemed to
have been duly given if sent by registered or certified mail, return receipt
requested, postage and fees prepaid, by facsimile transmission, or otherwise
actually delivered to the following addresses:
(a) if to BII, to:
Brilliant Interactive, Inc.
c/o Murray Markiles, Esq
Troop Meisinger, Steuber & Pasich, LLP
10940 Wilshire Blvd.
Los Angeles CA 90024
USA
(b) if to Sega Ozisoft, to:
Sega Ozisoft Pty. Ltd.
Building A
Southern Industrial Estates
200 Coward Street
Mascot, NSW 2020
Australia
Any Notice shall be deemed duly given when received by the addressee thereof,
provided that any Notice sent by registered or certified mail shall be deemed to
have been duly given two days from the date of deposit in the United States
mails, unless sooner received. Any of the parties to this Purchase Agreement
may from time to time change its address for receiving notices by giving written
notice thereof in the manner set forth above.
9.2 Specific Performance. Sega Ozisoft acknowledges that the SAND Assets
--------------------
are unique to the requirements of the BII and that BII will have no adequate
remedy at law if Sega Ozisoft shall fail to perform its obligation to deliver to
BII the SAND Assets hereunder. In such event, BII shall have the right, in
addition to any other rights it may have, to specific performance of this
Purchase Agreement.
12
<PAGE>
9.3 MOU Superseded. This Purchase Agreement replaces and supersedes that
--------------
certain Memorandum of Understanding, dated as of June 12, 1996, by and between
Sega Ozisoft and BII-Australia which, upon execution of this Purchase Agreement
shall be terminated in its entirety.
9.4 Successors and Assigns. This Purchase Agreement shall be binding upon
----------------------
and inure to the benefit of the parties hereto and their respective successors
and assigns.
9.5 Waiver and Amendment. No provision of this Purchase Agreement may be
--------------------
waived unless in writing signed by all the parties to this Purchase Agreement,
and waiver of any one provision of this Purchase Agreement shall not be deemed
to be a waiver of any other provision. This Purchase Agreement may be amended
only by a written agreement executed by the parties to this Purchase Agreement.
9.6 GOVERNING LAW. THIS PURCHASE AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED BOTH AS TO VALIDITY AND PERFORMANCE AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW
PRINCIPLES THEREOF.
9.7 Captions; Certain Terms; Presumptions Regarding Drafting Party. The
--------------------------------------------------------------
various captions and headings contained in this Purchase Agreement are for
reference only and shall not be considered or referred to in resolving questions
of interpretation of this Purchase Agreement. As used in this Purchase
Agreement, the terms "Section," "Schedule" or "Exhibit" shall be interpreted as
referring to the Sections, Schedules and Exhibits contained in or attached to
this Purchase Agreement, unless otherwise specified. As used in this Purchase
Agreement, the term "including" means "including but not limited to" unless
otherwise specified; the word "or" means "and/or." Any rule or provision of law
which provides that a contract or agreement is to be construed against the
author of the contract or agreement shall not apply to this Purchase Agreement.
9.8 Counterparts. This Purchase Agreement may be executed in any number
------------
of counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
9.9 Costs and Attorneys' Fees. If any action, suit or other proceeding is
-------------------------
instituted to remedy, prevent or obtain relief from a default in the performance
by any party of its obligations under this Purchase Agreement, the prevailing
party shall recover all of such party's costs and reasonable attorneys' fees
incurred in each and every such action, suit or other proceeding, including any
and all appeals or petitions therefrom.
9.10 Third Party Beneficiaries. The provisions of this Purchase Agreement
-------------------------
are for the benefit of the BII and Sega Ozisoft and their respective affiliates
specifically referenced herein, and are not for the benefit of any other person
or entity.
13
<PAGE>
9.11 Expenses. Except as otherwise provided in this Purchase Agreement
--------
each of the parties shall pay its own expenses incurred in connection with the
preparation of this Purchase Agreement and the consummation of the transactions
contemplated hereby and all documents reasonably necessary to effectuate the
terms and intent of this Purchase Agreement.
9.12 Severability. Whenever possible, each provision of this Purchase
------------
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Purchase Agreement shall be
or become prohibited or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without invalidating
the remainder of such provision or the remaining provisions of this Purchase
Agreement.
9.13 Rights Cumulative. No right granted to the parties under this
-----------------
Purchase Agreement on default or breach is intended to be in full or complete
satisfaction of any damages arising out of such default or breach, and each and
every right under this Purchase Agreement, or under any other document or
instrument delivered hereunder, or allowed by law or equity, shall be cumulative
and may be exercised from time to time.
9.14 Entire Agreement. This Purchase Agreement and the Schedules,
----------------
Exhibits and other writings and agreements specifically identified herein
contain the entire agreement between BII and Sega Ozisoft with respect to the
transactions contemplated hereby and supersede and shall be interpreted
independently of any previous agreements, commitments, understandings and
negotiations between the parties, written or oral, relating to the subject
matter hereof.
14
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed or caused this
Purchase Agreement to be executed on its behalf all as of the day and year first
above written.
EXECUTED by the parties at Los Angeles, California as an agreement as of
the date first above written:
SIGNED FOR BY SEGA OZISOFT PTY LIMITED
by the representative in the presence of:
/s/ Yasushi Okue /s/ Tsuneo Naibo
- ---------------------------------------- ------------------------------------
Witness Representative
Yasushi Okue Tsuneo Naibo
- ---------------------------------------- ------------------------------------
Name (please print) Name (please print)
SIGNED FOR BY BRILLIANT INTERACTIVE, INC.
by the representative in the presence of:
/s/ Diana Maranon
- ---------------------------------------- ------------------------------------
Witness Representative
Diana Maranon
- ---------------------------------------- ------------------------------------
Name (please print) Name (please print)
FOR PURPOSES OF SECTION 8.3 ONLY:
SIGNED FOR BY BRILLIANT INTERACTIVE PTY LIMITED
by the representative in the presence of:
/s/ Mark Miller
- ---------------------------------------- ------------------------------------
Witness Representative
Mark Miller
- ---------------------------------------- ------------------------------------
Name (please print) Name (please print)
15
<PAGE>
SCHEDULE "B" -- LETTER RE PUBLICITY
-----------------------------------
16
<PAGE>
SCHEDULE "C" -- NOTE
--------------------
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
ONLY PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE OF THE UNITED STATES WITHIN
THE MEANING OF REGULATION S UNDER THE ACT. THESE SECURITIES MAY NOT BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
8% MANDATORY CONVERTIBLE NOTE
U.S. $1,500,000 September 30, 1996
Subject to the terms and conditions of this 8% Convertible Note (the
"Note"), Brilliant Digital Entertainment, Inc., a Delaware corporation (the
"Company"), for value received, promises to pay to the order of Sega Ozisoft,
Pty. Ltd., a corporation formed under the laws of New South Wales, Australia, or
its registered assigns (the "Noteholder"), whose address is set forth in Section
8.3 below, the principal amount of U.S. $1,500,000, plus simple interest on the
unpaid principal balance from the date hereof at the rate of eight percent (8%)
per annum. Such principal amount plus all accrued but previously unpaid
interest will be due and payable on the first anniversary of the Note Date.
Principal and interest payable hereunder shall be paid to the Noteholder in
lawful money of the United States of America by wire transfer to such bank
account or at such other address or location as shall be specified by the
Noteholder. Overdue interest shall bear interest at the rate of eight percent
(8%) per annum from the date on which it is due until paid.
This Note is issued pursuant to that certain Asset Purchase Agreement dated
of even date herewith between the Company and the Noteholder (the "Agreement").
The following is a statement of the rights of the Noteholder and the terms
and conditions to which this Note is subject, and to which the Company and the
Noteholder, by the acceptance of this Note, agree.
1. Definitions. As used in this Note, the following terms, unless the
-----------
context otherwise requires, shall have the following meanings:
17
<PAGE>
1.1 "Company" shall mean the Company and shall include any
-------
corporation that shall succeed to or assume the obligations of the Company under
this Note.
1.2 "Common Stock" shall mean the Common Stock, par value $0.001 per
------------
share, of the Company.
1.3 "Note Date" shall mean the date on which this Note was originally
---------
issued, which is set forth on the first page of this Note in the heading.
1.4 Any capitalized terms not otherwise defined herein shall have
the meaning set forth in the Agreement.
2. Mandatory Conversion.
--------------------
2.1 Conversion. On the terms and subject to the conditions set forth
----------
in this Note, effective at such time (the "Conversion Time") as the Securities
and Exchange Commission declares effective the Company's initial underwritten
public offering of Common Stock (the "Offering") the entire unpaid principal
amount of this Note shall be automatically and without notice or any other
action by the Company convert into 780,001 shares of Common Stock (the
"Conversion Shares").
2.2 Conversion Time. Conversion of this Note pursuant to this
---------------
Section 2 shall be deemed effective upon the Conversion Time.
2.3 Mechanics and Effect of Conversion. At its expense, the Company
----------------------------------
shall, as soon as practicable after the conversion of this Note, issue and
deliver to the Noteholder a certificate or certificates for the number of
Conversion Shares to which the Noteholder shall be entitled upon such
conversion. Upon conversion of this Note, the Company shall be forever released
from its obligation to pay any and all of the principal amount of this Note, and
from its obligation to pay all accrued but previously unpaid interest on such
principal amount.
2.3.1 Regulatory Compliance. If any of the Conversion Shares
---------------------
require registration or listing with, or approval of, any governmental
authority, stock exchange or other regulatory body under any federal or state
law or regulation or otherwise, before such shares may be validly issued or
delivered to the registered holder thereof upon conversion, the Company will, as
expeditiously as possible and at its expense, endeavor to secure such
registration, listing or approval.
2.3.2 Charges, Taxes and Expenses. Issuance of a certificate
---------------------------
for Conversion Shares upon the conversion of this Note shall be made without
charge to the Noteholder for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificate shall be issued in
the name of the Noteholder or, subject to satisfaction of the
18
<PAGE>
provisions of Section 3.5 of the Agreement, in such name or names as may be
directed by the Noteholder.
2.4 Adjustment to Conversion Price. If the Company should at any
------------------------------
time or from time to time after the Note Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock, then,
following such record date (or the date of such dividend, distribution, split or
subdivision if no record date is fixed), and provided that such stock split,
dividend or other distribution is actually effected, the number of Conversion
Shares issuable upon conversion of this Note shall be appropriately increased in
proportion to such increase in the number of outstanding shares of Common Stock.
If the number of shares of Common Stock outstanding at any time after the Note
Date is decreased by a combination of the outstanding shares of Common Stock,
then, following the record date of such combination, the number of Conversion
Shares issuable on conversion of this Note shall be decreased in proportion to
such decrease in the number of outstanding shares of Common Stock.
2.5 No Impairment. The Company will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer or assets, consolidation, merger, dissolution, issuance or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 2 in order to protect the conversion rights of
the Noteholder from impairment.
2.6 Miscellaneous Conversion Price Matters. The Company shall at all
--------------------------------------
times reserve and keep available out of its authorized but unissued Common Stock
the full number of shares of Common Stock deliverable upon conversion of this
Note and shall, at its own expense, take all such actions and obtain all such
permits and orders as may be necessary to enable the Company lawfully to issue
such Common Stock to the Noteholder upon the conversion of this Note. The
Company also hereby covenants that its issuance of this Note shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Common Stock upon conversion of this Note.
3. Treatment of Note. To the extent permitted by generally accepted
-----------------
accounting principles consistently applied, the Company shall treat, account and
report this Note as debt and not equity for accounting purposes and with respect
to any returns filed with federal, state or local tax authorities.
4. Events of Default. If any of the following events shall occur and be
-----------------
continuing (each individually referred to as an "Event of Default"), the
Noteholder may declare the entire unpaid principal and accrued interest on this
Note immediately due and payable, without any
19
<PAGE>
other presentment, demand, protest or other notice of any kind or character, all
of which are hereby expressly waived; provided, however, that with respect to
-------- -------
the Events of Default described in Sections 4.2 and 4.3 below, the unpaid
principal and accrued interest on this Note shall automatically become
immediately due and payable, without presentment, demand, protest or other
requirements of any kind, all of which are hereby expressly waived by the
Company:
4.1 Principal or Interest. (a) Any default in the payment of any
---------------------
part of the interest of this Note shall occur and such default shall be
continuing uncured or unwaived for 30 days after the Noteholder has given the
Company written notice thereof or (b) the Company's failure to observe any
covenant or other provision contained in this Note or the Agreement and such
failure of observation shall be continuing uncured or unwaived for 30 days after
the Noteholder has given the Company written notice thereof;
4.2 Involuntary Bankruptcy. Within 270 days after the commencement
----------------------
of an action against the Company seeking any bankruptcy, insolvency,
reorganization, liquidation, dissolution or similar relief under any statute,
law or regulation, such action shall not have been dismissed or all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or the stay of any such order or proceeding shall thereafter be set
aside, or within 270 days after the appointment without the consent or
acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated; or
4.3 Voluntary Bankruptcy. The Company shall have commenced a
--------------------
voluntary case under any applicable bankruptcy, insolvency or other similar law
now or hereafter in effect, or shall have consented to the entry of an order for
relief in an involuntary case under any such law, or shall have consented to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian or similar official, of the Company or for any substantial
part of its property, or shall have made any general assignment for the benefit
of creditors, or shall have failed generally to pay its debts as they become due
or shall have admitted in writing its inability to pay its debts generally as
they become due, or shall have taken any corporate action in furtherance of any
of the foregoing.
5. Remedies. If any Events of Default shall have occurred and be
--------
continuing, the Noteholder may proceed to protect and enforce its rights under
this Note by an action in law, suit in equity or other appropriate proceeding,
whether for specific performance of any agreement contained in this Note or in
the Agreement or for an injunction against a violation of any terms of this Note
or of the Agreement or in aid of the exercise of any power granted by this Note,
the Agreement or by law. In case any action is brought arising from a breach of
any provision of this Note, the non-prevailing party shall pay to the prevailing
party all of the prevailing party's fees and expenses, including without
limitation reasonable attorneys' fees, relating to such action. No course of
dealing and no delay on the part of the Noteholder in exercising any right shall
operate as a waiver thereof or otherwise prejudice the Noteholder's rights,
powers or remedies. No right, power or remedy conferred by this Note or by the
20
<PAGE>
Agreement upon the Noteholder shall be exclusive of any right, power or remedy
referred to in this Note or the Agreement, or now or hereafter available at law,
in equity, by statute or otherwise.
6. Unpaid Interest. In case any one or more Events of Default shall
---------------
occur and be continuing, any due but unpaid interest shall continue to remain
due and accrue interest thereon at the rate of eight percent (8%) per annum from
the date on which it is due until paid.
7. No Shareholder Rights. This Note shall not entitle the Noteholder to
---------------------
any voting rights or other rights as a shareholder of the Company, prior to
conversion hereof.
8. Miscellaneous.
-------------
8.1 Successors and Assigns. Subject to the foregoing terms and
----------------------
conditions, and to the restrictions on transfer described in the Agreement, the
rights and obligations of the Company and the Noteholder shall inure to the
benefit of and be binding upon the respective executors, administrators, heirs,
transferees, successors and assigns of the Company and the Noteholder.
8.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
AGREEMENTS BETWEEN CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED
ENTIRELY WITHIN CALIFORNIA.
8.3 Notices. Except as otherwise provided herein, all communications
-------
hereunder shall be in writing or by either telecopier or telegraph and, if to
the Company, shall be mailed, telecopied or telegraphed or delivered to
Brilliant Digital Entertainment, Inc., c/o Murray Markiles, Esq., Troop
Meisinger Steuber & Pasich, LLP, 10940 Wilshire Blvd., Los Angeles CA 90024
(telecopier: (310) 443-8601); and if to the Noteholder, shall be mailed,
telecopied, telegraphed or delivered to Sega Ozisoft Pty. Ltd., Building A,
Southern Industrial Estates, 200 Coward Street, Mascot, NSW 2020 Australia
(telecopier: 01161296693410) Attention: President. All notices given by
telecopy or telegraph shall be promptly confirmed by letter. Any party hereto
may by notice so given change its address for future notice hereunder.
8.4 Severability. In case any provision of this Note shall be
------------
invalid, illegal or unenforceable, it shall, to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable, the intent of the parties, and the validity, legality and
enforceability of the remaining provisions of this Note shall not in any way be
affected or impaired thereby.
21
<PAGE>
8.5 Waiver and Amendment. Any provision of this Note may be amended,
--------------------
waived or modified upon the written consent of the transferee, successor or
assign of the Noteholder.
8.6 Lost, Stolen, Mutilated or Destroyed Note. If this Note is lost,
-----------------------------------------
stolen, mutilated or destroyed, the Company shall, on such terms as to indemnity
or otherwise as it may reasonably impose (which shall, in the case of a
mutilated Note, include the surrender and cancellation thereof), issue a new
Note of like denomination and tenor as the Note so lost, stolen, mutilated or
destroyed.
8.7 Titles and Headings. The titles and headings contained in this
-------------------
Note are intended for reference and shall not by themselves determine the
construction or interpretation of this Note.
8.8 Entire Agreement. This Note, the Agreement and the other
----------------
documents delivered pursuant hereto and thereto, constitute the full and entire
understanding and agreement between the parties with respect to the subjects
hereof and thereof.
IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the
date first written above.
Brilliant Digital Entertainment, Inc.
/s/ Diana Maranon
--------------------------
By: Diana Maranon
Its: Secretary
22
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BRILLIANT DIGITAL ENTERTAINMENT, INC.
BRILLIANT DIGITAL ENTERTAINMENT, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
A. The name of the corporation is Brilliant Digital Entertainment, Inc.
The original Certificate of Incorporation of B.I.I. Holdings, Inc. was filed
with the Secretary of State of the State of Delaware on July 31, 1996. A
Certificate of Amendment of Certificate of Incorporation changing the name of
the Corporation to Brilliant Interactive, Inc. was filed with the Secretary of
State of the State of Delaware on August 6, 1996. An Amended and Restated
Certificate of Incorporation was filed with the Secretary of the State of
Delaware on September 13, 1996.
B. This Amended and Restated Certificate of Incorporation, which restates
and integrates and does further amend the provisions of the Certificate of
Incorporation of the Corporation, has been duly adopted in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware by unanimous written consent of the stockholders given in accordance
with Section 228 of the General Corporation Law of the State of Delaware.
C. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and further amended to read in its entirety as
follows:
I.
The name of the Corporation is Brilliant Digital Entertainment, Inc.
II.
The address of the registered office of the Corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, Delaware
l9901. The name of its registered agent at such address is National Corporate
Research, Ltd.
<PAGE>
III.
The purpose of this Corporation is to engage in any lawful act or activity
for which Corporations may be organized under the General Corporation Law of the
State of Delaware (the "Delaware Law").
IV.
This Corporation is authorized to issue two classes of shares, designated,
respectively, "Preferred Stock" and "Common Stock." Each class of stock shall
have a par value of $.001 per share. The number of shares of Preferred Stock
authorized to be issued is 1,000,000 and the number of shares of Common Stock
authorized to be issued is 30,000,000.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware Law, to fix or alter
from time to time the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions of any
wholly unissued series of Preferred Stock, and to establish from time to time
the number of shares constituting any such series or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be
decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
Effective September 13, 1996, each issued and outstanding share of Common
Stock, par value $0.001 per share, is reconstituted and converted into 4.42
shares of Common Stock, par value $0.001 per share.
V.
Except and to the extent designated with respect to the Preferred Stock,
all rights to vote and all voting power shall be vested in the Common Stock and
the holders thereof shall be entitled at all elections of directors to one (1)
vote per share. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called only by the Board of Directors, the Chairman
of the Board, the Chief Executive Officer or the President of the Corporation.
2
<PAGE>
VI.
The directors of the Corporation shall be divided into three classes,
designated Class I, Class II and Class III. The term of the initial Class I
directors shall terminate on the date of the 1997 annual meeting of
stockholders; the term of the Class II directors shall terminate on the date of
the 1998 annual meeting of stockholders and the term of the Class III directors
shall terminate on the date of the 1999 annual meeting of stockholders. At each
annual meeting of stockholders beginning in 1997, successors to the class of
directors whose term expires at that annual meeting shall be elected for a
three-year term. If the number of directors is changed, any increase or decease
shall be apportioned among the classes so as to maintain the number of directors
in each class as nearly equal as reasonably possible, and any additional
directors of any class elected to fill a vacancy resulting form an increase in
such class shall hold for a term that shall coincide with the remaining term of
that class, but in no case will a decrease in the number of directors shorten
the term of any incumbent directors. A director shall hold office until the
annual meeting for the year in which his term expires and until his successor
shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. Any vacancy
on the Board of Directors, however resulting, shall be filled only by a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director and not by the stockholders. Any director elected to fill a
vacancy shall hold office for a term that shall coincide with the terms of the
class to which such director shall have been elected.
Subject to the rights, if any, of the holders of shares of Preferred Stock
then outstanding, any or all of the directors of the Corporation may be removed
from office at any time, for cause only, by the affirmative vote of the holders
of a majority of the outstanding shares of the Corporation then entitled to vote
generally in the election of the directors, considered for purposes of this
Article VI. as one class.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Amended and Restated Certificate of Incorporation or the
resolution or resolutions adopted by the Board of Directors pursuant to the
second paragraph of Article IV applicable thereto, and such directors so elected
shall not be divided into classes pursuant to this Article VI. unless expressly
provided by such terms.
3
<PAGE>
VII.
Elections of directors at an annual or special meeting of stockholders need
not be by written ballot unless the Bylaws of the Corporation shall otherwise
provide.
Any action required or permitted to be taken at any annual or special
meeting of stockholders may be taken only upon the vote of the stockholders at
an annual or special meeting duly noticed and called, as provided in the Bylaws
of the Corporation, and may not be taken by written consent of the stockholders
pursuant to the Delaware Law; provided, however, if the Corporation has only one
-------- -------
stockholder, then any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken by the written consent of such
stockholder.
VIII.
The officers of the Corporation shall be chosen in such a manner, shall
hold their offices for such terms and shall carry out such duties as are
determined solely by the Board of Directors, subject to the right of the Board
of Directors to remove any officer or officers at any time with or without
cause.
IX.
The Corporation shall indemnify to the fullest extent authorized or
permitted by law (as now or hereafter in effect) any person made, or threatened
to be made, a defendant or witness to any action, suit or proceeding (whether
civil or criminal or otherwise) by reason of the fact that she or he, her or his
testator or intestate, is or was a director, officer, employee or agent of the
Corporation or by reason of the fact that any person is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
enterprise. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors and officers may be entitled by law. No
amendment or repeal of this paragraph of Article IX shall apply to or have any
effect on any right to indemnification provided hereunder with respect to any
acts or omissions occurring prior to such amendment or repeal.
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty by such a director as a director. Notwithstanding the foregoing sentence,
a director shall be liable to the extent provided by applicable law (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
Delaware Law, or (iv) for any transaction from which such director derived an
improper personal benefit. No amendment to or repeal of this paragraph of
Article IX shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or
4
<PAGE>
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
In furtherance and not in limitation of the powers conferred by statute:
(i) the Corporation may purchase and maintain insurance on behalf
of any person who is or was a director or officer, employee or agent of the
Corporation, or is serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any
liability asserted against him or her and incurred by him or her in any
such capacity, or arising out of his or her status as such, whether or not
the Corporation would have the power to indemnify against such liability
under the provisions of law; and
(ii) the Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter
into contract providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to
any or all of the foregoing to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein, or
elsewhere.
X.
In furtherance and not in limitation of the powers conferred by the laws of
the State of Delaware, the Board of Directors of the corporation shall have the
sole authority to adopt, repeal, alter, amend or rescind the Bylaws of the
Corporation.
XI.
The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation in the manner prescribed by the
laws of the State of Delaware and all rights conferred upon stockholders are
granted subject to this reservation; provided, however, that, notwithstanding
-------- -------
any other provision of this Certificate of Incorporation or any provision of law
which might otherwise permit a lesser vote, but in addition to any vote of the
holders of any class or series thereof of the stock of this Corporation required
by law or by this Certificate of Incorporation, the affirmative vote of the
holders of at least 66 2/3 percent of the combined voting power of the
outstanding shares of stock of all classes and series thereof of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with (i) the second sentence of Article V, (ii) Article VI, (iii)
the second paragraph of Article VII, (iv) Article X or (v) this Article XI.
5
<PAGE>
XII.
Mark Dyne and Kevin Bermeister, acting in their capacity as officers
and directors of the Corporation shall not be required to present to the
Corporation corporate opportunities which such director wishes to present to
another company with which such director is affiliated; provided, however, that
so long as Mark Dyne and Kevin Bermeister are directors and/or officers of the
Corporation each shall be required to present to the Corporation corporate
opportunities for the development of any type of digital entertainment (a
"Development Venture") with the exception of:
(i) Opportunities for the investment in a Development Venture where (A)
the investment made by Mr. Dyne and Mr. Bermeister, individually or as
a group, is (x) in the form of a bona fide loan to the Development
Venture, (y) a minority equity investment in the Development Venture,
or (z) acquisition of a participatory interest in less than 50% of the
revenues of the Development Venture, and (B) does not provide to Mr.
Dyne or Mr. Bermeister, individually or as a group, the power to elect
a majority of the board of directors or similar governing body of the
Development Venture; and
(ii) Opportunities where Messrs Dyne and/or Bermeister accept rights to
publish, republish and/or distribute or sell the digital entertainment
product(s) to be developed by the Development Venture limited solely
to the territories of Australia, New Zealand (and surrounding
territories), and/or Southern Africa.
6
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Amended and Restated
Certificate of Incorporation this 3rd day of October, 1996.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /s/ Diana Maranon
--------------------------------
Diana Maranon
Its: Secretary
7
<PAGE>
EXHIBIT 4.1
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NUMBER SHARES
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 109502 10 4
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
================ BRILLIANT DIGITAL ENTERTAINMENT, INC.================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate property
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Diana Maranon /s/ Mark Dyne
SECRETARY CHIEF EXECUTIVE OFFICER
[SEAL OF BRILLIANT DIGITAL ENTERTAINMENT, INC.]
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription of the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ...........Custodian...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of Under Uniform Gifts to Minors
survivorship and not as tenants Act................................
in common (State)
UNIF TRF MIN ACT -- ...........Custodian (until age....)
(Cust)
............under Uniform Transfers
(Minor)
to Minors Act......................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
------------------------------------
| |
------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
X __________________________________________
X __________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF TROOP MEISINGER STEUBER & PASICH, LLP]
October 23, 1996
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard, Suite 513
Woodland Hills, CA 91367
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
(the "Registration Statement") to which this letter is attached as Exhibit 5.1
filed by Brilliant Digital Entertainment, Inc., a Delaware corporation (the
"Company"), in order to register under the Securities Act of 1933, as amended
(the "Act"), 2,000,000 shares of Common Stock, par value $0.001 per share, of
the Company, and up to an additional 300,000 shares of Common Stock of the
Company subject to the underwriter's over-allotment option, and any additional
shares of Common Stock of the Company which may be registered pursuant to Rule
462(b) under the Act (the "Shares").
We are of the opinion that the Shares have been duly authorized and upon
issuance and sale of the Shares in conformity with and pursuant to the
Registration Statement, the Shares will be legally and validly issued, fully
paid and non-assessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to use of our name in the Prospectus constituting a part
thereof.
Respectfully submitted,
/s/ Troop Meisinger Steuber & Pasich, LLP
TROOP MEISINGER STEUBER & PASICH, LLP
<PAGE>
EXHIBIT 10.24
Multimedia Production Agreement
between
Brilliant Interactive Ideas Pty Ltd
("Producer")
and
Monto Holdings Pty Ltd
("The Investor")
<PAGE>
MULTIMEDIA PRODUCTION AGREEMENT
DETAILS OF THE AGREEMENT
DATE OF THE AGREEMENT:
This agreement is made on 14th March, 1995
PARTIES TO THE AGREEMENT:
1. Brilliant Interactive Ideas Pty Ltd
(ACN 021 288 668)
of 17 The Corso, Manly, New South Wales, 2095
(THE "PRODUCER")
and
2. Monto Holdings Pty Ltd
(ACN 002 440 502)
of Level 53, MLC Centre, Martin Place, Sydney
New South Wales, 2000
(THE "INVESTOR")
BACKGROUND TO THE AGREEMENT
A. The Producer intends to develop and produce a multimedia product for
Commercialisation.
B. The Investor will agree to provide or procure funds for the purpose of
development of the multimedia product or service.
C. The Producer will agree to pay certain amounts to the Investor from the
Commercialisation of the multimedia product, subject to the terms and
conditions of this Agreement.
2
<PAGE>
THE PARTIES AGREE AS FOLLOWS:
1. DEVELOPMENT OF MULTIMEDIA PRODUCT BY PRODUCER
1.1 OBLIGATION TO DEVELOP
The producer will Develop the Multimedia Product in accordance with:
(a) this Agreement (including without limitation, by fulfilling the
Milestones in accordance with Clause 1.2);
(b) The Product Development Budget; and
(c) all requests and directions of the Investor
1.2 MILESTONES
The producer will fulfill the Milestones:
(a) to a standard acceptable to the Investor in its absolute
discretion and
(b) on or before the dates set out in Item 2 of the Schedule.
1.3 DELIVERY OF PRODUCER'S MATERIAL:
Without limiting the operation of Clause 1.2, the Producer will deliver
to the Investor the Producer's Material, or copies of it in the form
required by the Investor, by the dates specified in the Item 2 of the
Schedule.
1.4 NATURE OF PRODUCER'S MATERIAL:
The Producer will ensure that nothing created for the purposes of this
Agreement by or at the direction of the Producer:
(a) is defamatory, obscene, false, misleading or deceptive;
(b) breaches any law or Statute, or
(c) infringes any Intellectual Property Rights of any other person
3
<PAGE>
1.5 TIME OF ESSENCE
Times for the fulfillment of obligations of the Producer under this
Agreement are essential terms of this Agreement.
1.6 MATERIAL CONTRACTS
(a) The Producer will comply with all provisions of any agreement that
is material to its business including, without limitation, any
agreement that relates to:
(i) use of the Third Party Rights; or
(ii) Commercialisation of the Multimedia Product.
(b) The Producer must give written notice to the Investor promptly
upon the occurrence of any of the following events:
(i) default under any of the agreements referred to in Clause
1.6(a).
(ii) notice of any litigation in respect of any of the agreement
referred to in Clause 1.6(a) involving a sum in excess of
$10,000; or
(iii) notice of a breach of any of the agreements referred to in
Clause 1.6(a).
2. PAYMENT OF INVESTMENT FUNDS BY THE INVESTOR
2.1 PAYMENTS IN ACCORDANCE WITH SCHEDULE
SUBJECT TO:
(a) Clauses 2.2 and 11; and
(b) the Producer performing its obligations in accordance with this
Agreement,
the Investor will pay the Investment Funds to the Funds to the Producer
in the instalments and on or before the dates referred to in Item 3 of
the Schedule.
2.2 NOTICE BY PRODUCER IF PAYMENTS DUE
4
<PAGE>
Where any instalment of the Investment Funds is stated in Item 3 of the
Schedule to be payable by the Investor on or within a certain period
after the fulfillment by the Producer of a Milestone, the Investor will
only be required to pay the instalment within CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
Business Days after:
(a) the Producer gives to the Investor a written notice advising of
the fulfillment of the relevant Milestone; and
(b) the Investor is satisfied that the Producer has fulfilled the
relevant Milestone;
(1) to a standard acceptable to the Investor in its absolute
discretion; and
(2) on or before the relevant date set out in Item 2 of the
Schedule.
2.3 DEFAULT BY INVESTOR
The investor defaults in its obligation to pay Investment Funds to the
Producer in accordance with the terms of this Agreement, the Producer may
serve a written notice to the relevant Investor requiring payment of the
relevant Investment Funds within CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION Business
Days. If that Investor fails to pay those Investment Funds within
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION Business Days:
(a) the Producer may terminate this Agreement with respect to the
Investor;
(b) the Investor will lose its rights in the Multimedia Product; and
(c) the Investor is entitled to recoup those Investment Funds it has
invested in the Multimedia Product up to the date of termination
only after the Producer has recovered the reasonable costs
incurred by the Producer in finding the replacement Investor.
The foregoing does not prejudice or in any way affect the Producer's
right to take any legal action against the defaulting Investor.
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3. PRODUCT DEVELOPMENT DOCUMENTS
3.1 DELAYS IN ACHIEVING MILESTONES
If the Producer becomes aware that there will or may be any delay
(including an indefinite delay) in achieving any of the Milestones on or
before the dates set out in Item 2 of schedule, the Producer will:
(a) immediately give written notice to the Investor advising of:
(1) the nature and period of the delay; and
(2) any steps the Producer proposes to take to rectify or
minimise the delay in achieving the relevant Milestone;
(b) consult with the Investor to determine the steps to be taken to
avoid or minimise the delay; and
(c) implement any steps required by the Investor to be taken to avoid
or minimise the delay.
3.2 AMENDMENTS
The producer may not amend the Product Development Budget without
obtaining the prior written consent of the Investor.
3.3 COPIES OF AMENDED DOCUMENTS
The Producer will provide to the Investor:
(a) 1 amended copy of the Product Development Budget marking clearly
all amendments; and
(b) I amended copy of the Product Development Budget without any
marking of amendments,
within 1 Business Day after making any amendments permitted under Clause
4.2.
3.4 EFFECT OF DELAY ON PAYMENTS
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For the avoidance of doubt, where the date for the fulfillment of a
Milestone is extended under this Clause 3, the Investor will not be
required to may any payment to the Producer under Clause 2.1 until both;
(a) the relevant Milestone (as extended) is fulfilled; and
(b) the provisions of Clause 2.1 are satisfied.
4. OWNERSHIP OF INTELLECTUAL PROPERTY
All product Intellectual Property Rights will be owned by the Producer.
5. COMMERCIALISATION
5.1 PRODUCER TO KEEP INVESTOR INFORMED
Without limiting the Producer's obligations under Clause 7, the Producer
will:
(a) advise the Investor in writing of the details of all agreements
the Producer proposed to conclude; and
(b) provide to the Investor, copies of all documents evidencing any
agreement concluded by the Producer.
5.2 FURTHER MULTIMEDIA PRODUCTS
The Producer will not nor will the Producer permit or assist any other
party to develop, produce or Commercialise the Multimedia Product or any
Further Multimedia Product without first:
(a) providing to the Investor the full details (including all
technical specifications) of the Further Multimedia Product,
(b) providing copies of all documents and agreements and draft
documents and agreements related to the proposed development,
production or Commercialisation of the Multimedia Product or the
Further Multimedia Product, including any proposed assignment,
licence or grant of any other rights with respect to any of the
Product Intellectual Property Rights;
(c) obtaining the prior written consent of the Investor to the
proposed development, production or Commercialisation, which
consent shall not be unreasonably withheld; and
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(d) observe all other terms of this Agreement relating to the
Multimedia Product,
6. INCOME AND COMMERCIALISATION
6.1 INVESTOR'S RIGHT TO INCOME
(a) The Producer will pay, or cause to be paid, to the Investor the
amounts set out in or calculated in accordance with Item 4 of the
Schedule in respect of the Commercialisation of the Multimedia
Product.
6.2 OTHER ARRANGEMENTS AFFECTING DIVISION OF INCOME
The Producer will not do any act or thing or enter into any agreement
regarding or contemplating the division, allocation or payment of any
amount out of the Gross Receipts, Net Profits or any other amounts
received from or in respect of the Commercialisation of the Multimedia
Product or any Further Multimedia Product without obtaining the
Investor's prior written consent.
7. REPORTING TO DEVELOPMENT
7.1 QUARTERLY PROGRESS REPORTS
During the Development of the Multimedia Product by the Producer under
this Agreement, the Producer will provide quarterly progress reports:
(a) to and in the form required by the Investor;
(b) on the last Business Day of each quarter.
7.2 CONTENT OF QUARTERLY PROGRESS REPORTS
The quarterly progress reports will include details of;
(a) the fulfillment during the past quarter of all Milestones required
to be fulfilled during the period in accordance with this
Agreement;
(b) all other issues or occurrences relevant to the performance of the
Producer's obligations under this Agreement which have arisen or
occurred during the past quarter; and
(c) such other information as the Investor requires from time to time.
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7.3 FURTHER REPORTS
After the Multimedia Product has been Developed to the Investor's
satisfaction and for so long as the Investor has any interest in the
Product Intellectual Property Rights, the Producer will provide progress
reports;
(a) every six (6) months for the first three (3) years of the project;
(b) annually for the next four years of the project
unless the Investor's interest in the project comes to an end at an
earlier stage.
8. WARRANTIES
8.1 GENERAL WARRANTIES
Each party warrants that:
(a) it has authority to enter and perform its obligations under this
Agreement;
(b) it has the ability to perform its obligations under this
Agreement; and
(c) it is authorised by all necessary government and other agencies
and authorities to perform its obligations under this Agreement
and will continue to be authorised to perform this Agreement
8.2 THE PRODUCER'S WARRANTIES
The Producer represents and warrants to the Investor that:
(a) the Producer owns, will own or has the exclusive right to acquire
all the Intellectual Property Rights in and to the Multimedia
Product other than the Third Party Rights;
(b) development and use of the Multimedia Product under this Agreement
and the grant of any rights by the Producer under this Agreement
will not infringe the rights, including the Intellectual Property
Rights, of any person,
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(c) before signing this Agreement, the Producer obtained all necessary
licences, permissions, approvals and consents required for the
purposes of this Agreement;
(d) the Producer has not entered into any licence, or Agreement, with
any person which conflicts with the rights granted to the Investor
under this Agreement;
(e) all of the information provided to the Investor in relation to the
subject matter of this Agreement before the Producer signed this
Agreement is true, correct and not misleading.
9. CONFIDENTIALITY
9.1 CONFIDENTIAL INFORMATION
Each party acknowledges that it or its employees or agents may be given
access to Confidential Information in the course of negotiating or
performing this Agreement,
9.2 NO DISCLOSURE
Each party will keep Confidential Information and will not disclose it to
any third party or use it otherwise than:
(a) for the purpose of this Agreement;
(b) as authorised in writing by the other party;
(c) as required by any law, stock exchange, judicial or parliamentary
body or governmental agency; or
(d) by way of disclosure to that party's professional advisors who
have agreed to keep confidential the Confidential Information.
9.3 NO UNAUTHORISED COPYING
No party will copy any document containing Confidential Information
except as necessary to perform this Agreement.
9.4 RETURN OF MATERIALS
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On termination of this Agreement, each party will return to each other
party all documents or copies of documents containing information which
is, at the date of termination, Confidential Information of that other
party.
9.5 RESPONSIBILITY FOR EMPLOYEES, AGENTS ETC
Each party will ensure that its employees, agents, contractors and other
persons comply with this Clause 9.
10. SCOPE OF LIABILITY
10.1 PRODUCER'S INDEMNITY
The Producer will at all times identify and keep indemnified the Investor
and the Investor's respective officers, employees and agents (in this
Clause 10 referred to as "those indemnified") from and against any loss
(including reasonable legal costs and expenses) or liability incurred by
any of those indemnified arising from any claim, demand, suit, action or
proceeding by any person against any of those indemnified where such loss
or liability arose out of, in connection with or in respect of:
(a) entry into or performance of this Agreement;
(b) any breach of this Agreement by the Producer; or
(c) any of the warranties given by the Producer under Clause 8 proving
to have been false, misleading or inaccurate when made.
10.2 LIABILITY LIMIT
The total liability for damages or other forms of monetary relief of the
Investor for matters related to, connected with or arising out of this
Agreement regardless of the cause of action, whether in contract, tort
(including, without limitation, negligence) or breach of any Statute or
any other legal or equitable obligation is limited to the amount of
liability to contribute to the Investment Funds under Clause 2.
10.3 IMPLIED TERMS
Where any Statute implies in this Agreement any term, and that Statute
avoids or prohibits provisions in a contract excluding, restoring or
modifying the application of or exercise of, or liability under such
term, such implied terms as are not excludable will be deemed to be
included in this Agreement.
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11. TERMINATION
11.1 REMEDYING TERMINATION EVENTS AND PERFORMANCE EVENTS
(a) If a Termination Event occurs in relation to any party, any other
party may, in its absolute discretion, remedy the Termination Event
and may recover the cost of remedying the Termination Event from
the party in relation to which the Termination Event occurred.
(b) If a Performance Event occurs, the Investor may, in its absolute
discretion, remedy the Performance Event and may recover the cost
of remedying the Performance Event from the Producer.
11.2 IMMEDIATE TERMINATION
This Agreement may be terminated immediately by notice:
(a) from the Investor to the Producer if a Termination Event occurs in
relation to the Producer;
(b) from the Producer to the Investor if a Termination Event occurs in
relation to any one of the parties which comprise the Investor; or
(c) from the Investor to the Producer if a Performance Event occurs.
11.3 DEBT DUE TO THE INVESTOR
If this agreement is terminated by the Investor under Clause 11.2, the
Producer will pay to the Investor on demand an amount equal to that part
of the Investment Funds which the Investor has paid to the Producer
under Clause 2 up to the date of termination.
12. FORCE MAJEURE
12.1 NO LIABILITY
Subject to Clause 11, a party is not liable for its inability to
perform, or for any delay in performing any of its obligations under
this Agreement if that inability or delay is caused by a Force Majeure
Event.
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12.2 EXTENSION OF TIME TO PERFORM
Subject to Clause 11.2, the time for performance of any obligation by
either party under this Agreement will be extended by a period equal to
the period of any Force Majeure Event which causes the inability to
perform, or delay in performing, the obligation.
13. RELATIONSHIP OF THE PARTIES
13.1 RELATIONSHIP
This Agreement does not create any partnership, joint venture or agency
relationship between the parties.
13.2 NO AUTHORITY
No party may enter into any agreements or incur any liabilities on behalf
of another party without that other party's prior written consent and may
not represent to any person that it has any authority to do so.
13.3 PRODUCER'S SPECIFIC OBLIGATION
Without limiting the operation of Clause 11.2 and not withstanding any
other provision of this Agreement to the contrary, the Producer will not
in any negotiations or dealings with any person advise, or represent to,
such person that the Producer is negotiating or dealing for or on behalf
of or at the request or direction of the Investor.
14. NOTICES
14.1 LEGIBILITY
A notice under this Agreement must be in legible writing and in English
addressed to the party concerned at that party's address.
14.2 ADDRESS
For the purpose of the notice under Clause 14.1, a party's address is the
address specified at the commencement of this Agreement or as notified to
each other party except that where the Investor is comprised of more than
one party the address of the Investor will be the address of the
Investor.
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14.3 HOW A NOTICE MAY BE SERVED
A notice may be served by giving it to another party personally, by
posting it by security post or by faxing it.
14.4 WHEN A NOTICE IS RECEIVED BY POST
If the notice is posted by security post it is deemed to be received by
the receiving party CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION Business Days after posting.
14.5 WHEN A NOTICE IS RECEIVED BY FAX
If the notice is faxed it is deemed to be received by the receiving party
when the completed transmission report is received, unless:
(a) the sending party's machine indicates a malfunction in
transmission, or the receiving party within a reasonable time (and
in any event no longer than CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
Business Days) informs the sending party of an incomplete
transmission; or
(b) the transmission is completed outside business hours at the
receiver's address in which case the notice is regarded as
received at the commencement of business of the following Business
Day in that place.
15. CUMULATIVE RIGHTS
The rights are arising out of this Agreement do not exclude any other
fights of any party.
16. ENFORCEABILITY
16.1 EFFECT OF INEFFECTIVENESS OF PART OF THE AGREEMENT
Any Clause or part of a Clause of this Agreement which is Ineffective in
any jurisdiction is Ineffective only to that extent in that jurisdiction.
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16.2 SEVERANCE OF INEFFECTIVE PARTS OF THE AGREEMENT
Where any clause or part of that clause is ineffective it may be severed
without affecting any other part of this Agreement.
17. WAIVER
17.1 NO WAIVER EXCEPT BY NOTICE IN WRITING
No right under this Agreement is waived or deemed to be waived except by
notice in writing signed by the party waiving the right.
17.2 NO WAIVER OF SUBSEQUENT BREACHES
A waiver by one party under Clause 17.1 does not prejudice its rights in
respect of any subsequent breach of this Agreement by the other party.
17.3 NO WAIVER BY EXTENSION OR FORBEARANCE
A party does not waive its rights under this Agreement because it grants
an extension or forbearance to the other party.
18. VARIATION
A variation of this Agreement must be in writing and signed by each of
the parties.
19. ASSIGNMENT
19.1 NO ASSIGNMENT EXCEPT BY CONSENT
Rights arising out of or under this Agreement are not assignable by any
party without prior written consent of each of the other parties.
19.2 CONSENT MUST NOT BE UNREASONABLY WITHHELD
A party will not unreasonably withhold its consent to assignment.
19.3 BREACH TERMINATES THE AGREEMENT
A breach of Clause 19.1 by one party entitles any other party to
terminate this Agreement.
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19.4 NO EFFECT ON REMAINED OF AGREEMENT
Clause 19.3 does not affect the construction of any other part of this
Agreement.
20. CURRENCY
20.1 REFERENCES TO THE AUSTRALIAN CURRENCY
Unless the contrary intention appears, all references to currency in this
Agreement shall be construed as being references to Australian currency.
20.2 PAYMENTS IN AUSTRALIAN CURRENCY
Unless the other party consents in writing any payments which are
required to be paid under this Agreement by a party to another party will
be paid in Australian currency.
21. FURTHER STEPS
Each party will do all things and execute all further documents necessary
to give full effect to this Agreement.
22. ENTIRE AGREEMENT
This Agreement supersedes all previous agreements in respect of its
subject matter and embodies the entire Agreement between the parties.
23. COUNTERPARTS
This Agreement may be executed in any number of counterparts.
24. SURVIVAL
The rights and obligations under Clauses 4 and 6 to 29 inclusive survive
termination of this Agreement.
25. LEGAL ADVICE
The Producer acknowledges that in relation to this Agreement it has
received legal advice or has had the opportunity of obtaining legal
advice.
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26. COSTS AND EXPENSES
Each party will bear its own cost and expenses in relation to the
negotiation, preparation, execution, delivery and completion of this
Agreement and any other related documentation.
27. GOVERNING LAW AND JURISDICTION
27.1 GOVERNING LAW
This Agreement is governed by the laws of New South Wales.
27.2 JURISDICTION
The parties irrevocably submit to the non-exclusive jurisdiction of the
courts of New South Wales.
28. DEFINITIONS
28.1 DEFINITIONS
In this Agreement, unless the context otherwise requires:
"BUSINESS DAY" means a day on which the Commonwealth Bank of Australia is
open for business in the capital city of the place named in Item 9 of the
Schedule;
"COMMERCIALISE" means to commercially exploit the Developed Multimedia
Product including by the production, manufacture, licensing, sub-
licensing, publication, promotion, marketing sale or hire of the
Multimedia Product or by inclusion in any product in any medium currently
existing or yet to yet invented throughout the Universe or service
supplied to any person incorporating the Multimedia Product and
"Commercialisation" will have a corresponding meaning;
"CONFIDENTIAL INFORMATION" means all trade secrets, ideas, know-how,
concepts and information whether in writing or otherwise relating (in any
way) to:
(1) a party's sub-licensees or employee;
(2) the Multimedia Product, the Producer's Material or any Further
Multimedia Products;
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(3) the affairs or businesses, sales, marketing or promotional
information of a party; or
(4) the terms of this Agreement or any amounts payable under this
Agreement,
which is not in the public domain and includes any such
information in the party's power, possession or control concerning
or belonging to any third party,
"DEDUCTIBLE EXPENSES" means all expenses incurred by or on behalf of the
Producer in connection with the Commercialisation of the Multimedia
Product by or on behalf of the Producer, including:
(a) residuals;
(b) the cost of protecting the Product Intellectual Property Rights
and any other rights in and to the Multimedia Product;
(c) the cost of prints and sound recordings;
(d) the cost of promotions, advertising and sales representatives; and
(e) duties, taxes, foreign language versions, insurance, royalties,
shipping charges and other expenses which distributors are
entitled to deduct or recoup under any distribution agreement,
and not otherwise deducted by any distributor from sums payable to the
Producer (or any agent or representative) under any distribution
agreement;
"DEDUCTIBLE FEES" means all commissions and fees deductible from the
Gross Receipts and payable in accordance with any and all agreements
properly entered into (with any approvals required from the Investor) in
respect of the Commercialisation of the Multimedia Product by or on
behalf of the Producer including all amounts payable to the Beyond
organisation for the licencing of the Beyond 2000 television series;
"DEFERMENT" means any fee in respect of the provision of any services,
rights, finance or facilities in connection with the exercise or
exploitation of the Rights by or on behalf of the Publisher payable out
of the Gross Receipts and which would be recognised as part of the costs
of production of the Multimedia Product;
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"DEVELOP" means to develop and produce the Multimedia Product for
Commercialisation in accordance with this Agreement to the Investor's
absolute satisfaction and "Development" will have a corresponding
meaning;
"FORCE MAJEURE EVENT" means any;
(a) act of God;
(b) outbreak or escalation of hostilities (whether or not war has been
declared) or any other unlawful act against order or authority;
(c) industrial dispute;
(d) other event which is not within the reasonable control of the
parties;
"FURTHER MULTIMEDIA PRODUCT" means any further multimedia product:
(a) based on or using any image, text, character, scene or event in or
any object or other codes, "look and feel" or format of the
Multimedia Product; and
(b) developed by, on behalf of or with the co-operation of the
Producer;
"GROSS RECEIPTS" means the total income received by or on behalf of the
Producer from the Commercialisation of the Multimedia Product by or on
behalf of the Producer; including:
(a) all relevant rebates, subsidies or grants;
(b) all sums received by the Producer (or any agent or representative)
by way of damages or compensation for any infringement of or
interference with any rights in and the Multimedia Product or for
breach
(c) any claim for insurance or any loss of moneys that would have been
included in Gross Receipts once recovered; and
(d) relating to the Commercialisation of the Multimedia Product by or
on behalf of the Producer;
"INEFFECTIVE" means void, illegal or unenforceable;
"INSOLVENCY EVENT" means, in relation to a party:
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(a) a receiver, receiver and manager, trustee, administrator, other
controller (as defined in the Corporations law) or similar
official is appointed over any of the assets or undertaking of the
other party;
(b) the party suspends payments of its debts generally;
(c) the party is or becomes unable to pay its debts when they are due
or is or becomes unable to pay its debts or is presumed to be
insolvent within the meaning of the Corporations Law;
(d) the party enters into or resolves to enter into any arrangement,
composition or compromise with, or assignment for the benefit of,
its creditors or any class of them;
(e) the party ceases to carry on business or threatens to cease to
carry on business;
(f) a resolution is passed or any steps are taken to appoint, or to
pass a resolution to appoint, an administrator; or
(g) an application or order is made for the winding up or dissolution
of the other party, or a resolution is passed or any steps are
taken to pass a resolution for the winding up or dissolution of
the party, otherwise than for the purpose of an amalgamation or
reconstruction that has the prior written consent of the first
party;
"INTELLECTUAL PROPERTY RIGHTS" means any and all intellectual and
industrial property rights throughout the world including rights in
respect of or in connection with:
(a) any Confidential Information;
(b) copyright (including future copyright and rights in the nature of
or analogous to copyright);
(c) performers protection;
(d) inventions (including patents);
(e) trade marks, service marks; and
(f) designs, circuit layouts,
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whether or not now existing and whether or not registered or registrable
and includes any right to apply for the registration of such rights and
includes all renewals and extensions;
"INVESTMENT FUNDS" means the total amount set out in Item 3 of the
Schedule payable by the Investor to the Producer in accordance with this
Agreement;
"MILESTONES" means the milestones to be fulfilled under the Product
Development Documents by the dates set out in Item 2 of the Schedule;
"MULTIMEDIA PRODUCT" means the multimedia product described in Item 1(a)
of the Schedule including any software, compact or other disc or other
version to the Multimedia Product and any revised, modified, amended,
altered, edited, re-edited or enhance version of the Multimedia Product;
"NET PROFITS" means the Gross Receipts after deduction of all:
(a) Deductible Expenses;
(b) Deductible Fees; and
(c) Deferments;
"PERFORMANCE EVENT" means:
(a) the Producer's failure to fulfill a Milestone:
(1) to a standard acceptable to the Investor or the Investor, or
(2) on or before the date set out in Item 2 of the Schedule for
achieving the Milestone; or
(b) a Force Majeure Event which inhibits or delays the performance of
the Producer's obligations under this Agreement and continues for
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION or more successive Business
Days or for a period in aggregate equal to, or in excess of,
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION business Days;
"PRODUCER'S MATERIAL" means any material in any form (whether written or
machine or eye readable or otherwise) with respect to the Development and
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Commercialisation of the Multimedia Product created, developed or
produced by or on behalf of the Producer in the course of Developing the
Multimedia Product;
"PRODUCT DEVELOPMENT BUDGET" means the budget, shown as Annexure A to
this Agreement together with any further budget which may he specified in
Item 2 of the Schedule to be developed by the Producer as a Milestone,
for the Development of the Multimedia Product, as amended only in
accordance with this Agreement;
"PRODUCT DEVELOPMENT DOCUMENTS" means:
(a) the Product Development Budget;
(b) the technical specification set out in Item 1(b) of the Schedule
together with any further technical specification which may be
specified in Item 2 of the Schedule to be developed by the
Producer as a Milestone; and
(c) any other documents required to be created or observed by the
Producer,
as amended in accordance with this Agreement from time to time;
"PRODUCT INTELLECTUAL PROPERTY RIGHTS" means the Intellectual Property
Rights in and to:
(a) the Multimedia Product; and
(b) the Producer's Material;
"PRODUCT MATERIAL" means all software, packaging and promotional,
marketing and other material in all media relating to the Multimedia
Product and the Commercialisation of the Multimedia Product;
"REPORTS" means reports delivered and if the context so admits, reports
to be delivered, by the Producer under Clause 7;
"STATUTE" means any act of parliament or other legislative body or any
regulations or other subordinate instruments made under or pursuant to
such an act;
"TERMINATION EVENT" means;
(a) an insolvency Event; or
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(b) a warranty in Clause 8 made by the other party proving to have
been false, incorrect or misleading when made; and
"THIRD PARTY RIGHTS" means all Intellectual Property Rights or embodied
or to be embodied in the Multimedia Product and the Product's Material
which are owned by or licensed to any other person other than the
Producer or the Investor.
28.2 "INTERPRETATION"
In this Agreement:
(1) heading and underlinings are for convenience only and do not
affect the interpretation of this Agreement;
(2) explanatory comments do not form part of this Agreement and are
not legally binding;
(3) a reference to this Agreement includes an annexure, exhibit or
schedule to this Agreement;
(4) a provision of this Agreement will not be interpreted against a
party just because that party prepared the provision;
(5) a word or expression in the singular include the plural, and the
other way around;
(6) words importing a gender include any gender;
(7) other parts of speech and grammatical forms of a word or phrase
defined in this Agreement have a corresponding meaning;
(8) a reference to a document includes an amendment or supplement to,
or replacement or novation of, that document;
(9) a reference to a party to this or any other Agreement includes
that party's successors and permitted assigns;
(10) a reference to an agreement other than this Agreement includes an
undertaking agreement or legally enforceable arrangement or
understanding whether or not in writing;
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(11) a reference to a Clause, a Schedule or an Annexure is a reference
to a clause, a schedule or an annexure to this Agreement;
(12) a reference to a Clause includes a reference to a sub-clause; and
(13) a reference to a person or words denoting a person includes a
company, statutory corporation, partnership, joint venture,
association, board, government or semi-government, agency or
authority and that person's successors and legal personal
representatives.
29. EXECUTION CLAUSES
Executed as an Agreement by the parties
Signed for and on behalf of Brilliant Interactive Ideas Pty Ltd
By _____________________(Name) /s/________________(Signature)
________________________(Title)
who warrants by his or her signing
that he or she has authority to sign
this Agreement.
in the presence of
Witness /s/____________________
Name of Witness ___________________________
please print
Signed for and on behalf of Monto Holdings Pty Limited
By_____________________(Name) /s/______________________(Signature)
_______________________(Title)
who warrants by his or her signing
that he or she has authority to sign
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this Agreement.
in the presence of
Witness /s/_____________________
Name of Witness ___________________________
please print
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SCHEDULE
to
MULTIMEDIA PRODUCTION AGREEMENT
<TABLE>
<C> <S> <C>
ITEM 1 Description and Specification
(a) Multimedia Product (Clause 1.1):
A series of two (2) interactive magazines based
on the Beyond 2000 television series.
(b) Technical Specification
The Multimedia Product must comply with the
representations made in the Product Development
Budget.
ITEM 2 Milestones (Clause 1.2):
The following Milestones in the Development of
the Multimedia Product under this Agreement are
to be fulfilled by the Producer on or before the
dates listed below:
No Milestone Date
1. Execution of agreement for the Project CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION
2. Completion of CONFIDENTIAL INFORMATION CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE OMITTED AND FILED SEPARATELY
SECURITIES AND EXCHANGE COMMISSION of WITH THE SECURITIES AND
research component of title 1 and CONFIDENTIAL EXCHANGE COMMISSION
INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE
COMMISSION research component of title 2
3. Delivery to the Investor of a working prototype CONFIDENTIAL INFORMATION
of the engine used for the two titles OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION
4. Delivery to the Investor of Gold Master of title 1 CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION
5. Delivery to The Investor of Gold Master of title 2 CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION
ITEM 3 Payment of Investment Funds (Clause 2.1):
</TABLE>
26
<PAGE>
The total amount of the Investment Funds payable
by the Investor to the Developer under this
Agreement is CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION payable
in the following manner:
Milestone No.
1 CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
2 CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
3 CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
4 CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
5 CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
ITEM 4 Payments Due to Investor (Clause 6):
(a) Multimedia Product
1. The Producer will apply the Gross Receipts from
Commercialisation of the Multimedia Product, or
cause them to be applied, as follows:
CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION of Gross
Receipts to the Investor and
CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION of Gross
Receipts to the Developer
2. Time for Accounting and Payment
The Producer will pay all amounts payable under
this Item 4 within CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION after the
end of each calendar quarter ending on
CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION, CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE
COMMISSION, CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION and
CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION
27
<PAGE>
EXHIBIT 10.35
April 15, 1996
Mr. Mark Miller
President
Brilliant Interactive Ideas Pty. Ltd.
17 The Corso
Manly, NSW, Australia 2095
Dear Mr. Miller:
1. This letter confirms our understanding that Brilliant Interactive Ideas
Pty. Ltd. (the "Company") has engaged Averil Associates, Inc. ("Averil"), on an
exclusive basis, as financial advisor to the Company regarding its strategic and
financing alternatives (the "Engagement"). It is anticipated that the scope of
this retention will take the following form:
(A) Averil will act as the exclusive financial advisor to the Company
with respect to the consideration and implementation of its strategic
alternatives. As part of this assignment, Averil will (i) study and evaluate the
short-term and long-term projected financial performance and capital needs of
the Company, (ii) develop valuation perspectives regarding the Company,
reflecting appropriate strategic, industry and macroeconomic considerations,
(iii) work with management in contacting potential strategic and/or financial
investors/acquirors, (iv) work with management in contacting potential private
and public institutional capital sources, (v) work with management in
identifying and pursuing potential strategic partnerships, licensing
arrangements, content arrangements and other technological opportunities, (vi)
review various structural and tax considerations applicable to a transaction(s)
impacting the Company, (vii) coordinate all financial and legal advisors
involved in the transactional process, and (viii) assist in the negotiation and
execution of any transaction including economic, structural and other terms and
conditions.
In addition to these activities, Averil will also provide other
services in connection with the Company's ongoing business and strategic needs.
In this regard, Averil will (i) assist the Company in establishing U.S. offices,
(ii) assist the Company in identifying and interviewing necessary management
personnel, (iii) if requested, act in the capacity of a corporate officer in
order to assist the Company in carrying out U.S. business functions, (iv) if
requested, act in the capacity of a director of the Company to assist with the
execution of its ongoing business and strategic plan, and (v) any other matters
reasonably related to the above.
The Company agrees that it will not, and it will not permit any of
its affiliates to, directly or indirectly, contact, approach or negotiate with
any person with respect to any transaction, other than through Averil, as agent.
(B) A transaction may include the Company or any of its affiliates,
including (without limitation) a new entity formed for such purpose
(collectively, the "Entities").
2. The Company shall pay to Averil, as compensation for services under
this engagement, as follows:
<PAGE>
(A) Retainer. A non-refundable retainer fee of $25,000, payable upon
--------
execution of this letter agreement.
In addition to the cash fees payable pursuant to this subparagraph,
and in consideration for the corporate services to be rendered pursuant to
paragraph 1(A), the Company shall issue to Averil, at no cost, equity
securities, warrants or other participating interests in the Company (or, if
applicable, another Entity) representing 910 shares of the outstanding common
stock of the Company on a fully-diluted basis.
(B) Transaction Fees. A transaction fee of $200,000, payable in cash,
----------------
at the closing (or, if more than one, at each closing) of a major financing or
strategic transaction in line with the Company's business plan, by wire transfer
or certified bank check. It is understood that Averil shall not be separately
compensated for assistance in any licensing, joint venture or other strategic
arrangement unless such transaction rises to a substantial level and includes
capitalization for the benefit of the Company or any of the Entities.
(C) Expenses. In addition to any fees payable hereunder, the Company
--------
shall, whether or not a transaction shall be consummated, reimburse Averil as
billed for its business class travel and other reasonable out-of-pocket expenses
(including all fees and disbursements of counsel and of other consultants and
advisors retained by it, messenger and duplicating services, telephone and
facsimile expenses, document and database charges and other customary
expenditures), incurred in connection with, or arising out of, Averil's
activities under or contemplated by this engagement, the Company shall also
reimburse Averil, at such times as Averil shall request, for any sales, use or
similar taxes (including additions to such taxes, if any) arising in connection
with any matter referred to or contemplated by this engagement. Averil shall
charge all of its out-of-pocket expenses at its actual cost.
(D) Definitions. As used herein, "transaction" shall mean any
-----------
transaction or series or combination of transactions whereby, directly or
indirectly, a party obtains control of or an interest in any of the Entities or
their respective affiliates or assets. Such transaction may include, but shall
not be limited to, a minority or majority investment, a private or public
financing transaction, an acquisition or exchange of capital stock or assets, a
lease of assets with or without a purchase option, a merger or consolidation,
the formation of a joint venture or partnership or any similar transaction.
(E) As part of this engagement, Averil and the Company understand that
each party is striving to maintain a long-term relationship with the other. As a
result, the Company agrees that, if at any time the Company or any of its
subsidiaries or affiliates proposes directly or indirectly to (i) enter into any
financing transaction (including, without limitation, any sale of debt, equity
or other securities; any bank, working capital or other credit facility; any
leasing transaction; any capital restructuring; or any similar transaction), or
(ii) any acquisition or exchange of capital stock or assets (other than in the
ordinary course of business); any sale or lease of assets (other than in the
ordinary courses of business); any merger or consolidation; any formation of a
joint venture or partnership; or any similar transaction. Averil shall be given
an offer to act as financial advisor in connection therewith, at Averil's
customary fees and upon terms and conditions contained in a mutually acceptable
agreement.
2
<PAGE>
3. In connection with Averil's activities hereunder, the Company will
furnish Averil with all material information regarding the business and
financial condition of the Company (all such information so furnished being the
"Information"). The Company recognizes and confirms that Averil (i) will use
and rely primarily on the Information and on information available from
generally recognized public sources in performing the services contemplated by
this letter without having independently verified the same; (ii) does not assume
responsibility for the accuracy or completeness of the Information and such
other information, (iii) will not make an appraisal of any assets of the
Company, and (iv) retains the right to continue to perform due diligence during
the course of the engagement.
4. Since Averil will be acting on behalf of the Company in connection with
its engagement hereunder, the Company and Averil have entered into a separate
indemnification agreement, dated the date hereof and attached hereto, providing
for the indemnification of Averil and certain related persons. Such
indemnification agreement is an integral part of this letter and the terms
thereof are incorporated by reference herein. It is understood that if any
other person or entity is established for the purpose of carrying out any
transaction contemplated by this engagement letter, such person or entity will
enter into engagement and indemnification agreements substantially similar to
this engagement letter and the associated indemnification agreement dated the
date hereof. THE COMPANY ACKNOWLEDGES AND AGREES THAT THE SERVICES RENDERED BY
AVERIL UNDER THIS ENGAGEMENT ARE FINANCIAL ADVISORY SERVICES ONLY AND DO NOT
INCLUDE THE RENDERING OF ANY LEGAL REPRESENTATION BY AVERIL OR ANY OF ITS AGENTS
OR EMPLOYEES. THE COMPANY REPRESENTS THAT IT EITHER HAS LEGAL COUNSEL, OR WILL
RETAIN LEGAL COUNSEL, TO RENDER APPLICABLE LEGAL SERVICES IN RELATION TO THE
ASSIGNMENTS CONTEMPLATED BY THIS ENGAGEMENT AND WILL IN NO WAY RELY UPON AVERIL
TO RENDER SUCH LEGAL COUNSEL. /s/ MM (initials)
--------
5. Averil's engagement hereunder shall be terminable at will at any time
prior to the closing of the Transaction by either the Company or Averil upon
thirty days' prior written notice thereof to the other party. It is understood,
however, that notwithstanding any termination of Averil's engagement hereunder,
Averil shall be entitled, in any event, to receive any retainer fees and all
out-of-pocket expenses to be paid to it pursuant to clauses (A) and (C) of the
second paragraph of this letter agreement and, for a period of twelve months
subsequent to the termination of this engagement, any transaction fees referred
to in clause (B) of the second paragraph of this letter agreement relating to
assignments within the scope of this engagement. In addition, the provision of
clause (E) of the second paragraph of this letter shall survive for a period of
twelve months subsequent to the termination of this letter. Otherwise, the
parties shall not have any continuing liability or obligation to the other
except for those related to the indemnification agreement referred to in
paragraph 4 hereof and the representations and warranties contained in paragraph
7, the terms of which shall survive any termination of Averil's engagement
hereunder.
6. The advice (written or oral) rendered by Averil pursuant to this
agreement is intended solely for the benefit and use of the Company in
considering the matters to which this agreement relates, and the Company agrees
that neither such advice nor Averil's retention may be disclosed publicly or
made available to third parties without the prior written consent of Averil.
3
<PAGE>
7. The Company represents and warrants to Averil that (i) this Agreement
has been duly authorized, executed and delivered by the Company, and constitutes
a legal, valid and binding agreement of the Company, enforceable in accordance
with its terms; and (ii) any offering materials will not, when delivered for
distribution in connection with the Transaction and at the closing of the
Transaction, contain any untrue statements of a material fact or omit to state
any material fact necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading. The Company
shall advise Averil promptly of the occurrence of any event or any other change
that results in the Information or offering materials containing any untrue
statement of a material fact or omitting to state any material fact necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading.
8. The execution of this letter shall not be deemed or construed as
obligating Averil to make any investment in the Company or any other Entity,
directly or indirectly.
9. This Agreement may not be modified or amended except in a writing duly
executed by the parties hereto.
10. Any determination that any one or more of the provisions of this
Agreement may be, or is, invalid, illegal or unenforceable shall not affect the
validity, legality or enforceability of the remainder of this Agreement.
11. THIS AGREEMENT AND ALL CONTROVERSIES ARISING FROM OR RELATING TO
PERFORMANCE UNDER THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO
SUCH STATE'S RULES CONCERNING CONFLICTS OF LAWS. THE PARTIES HERETO HEREBY
IRREVOCABLY CONSENT TO PERSONAL JURISDICTION AND VENUE IN ANY COURT OF THE STATE
OF CALIFORNIA OR ANY FEDERAL COURT SITTING IN THE CITY OF LOS ANGELES FOR THE
PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF THIS AGREEMENT
OR ANY OF THE AGREEMENTS OR TRANSACTIONS CONTEMPLATED HEREBY, WHICH IS BROUGHT
BY OR AGAINST ANY PARTY HERETO, AND HEREBY AGREE THAT ALL CLAIMS IN RESPECT OF
ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT. THE PARTIES HERETO HEREBY IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS
OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID,
TO SUCH PARTIES AT THEIR RESPECTIVE ADDRESSES SET FORTH ABOVE, SUCH SERVICE TO
BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. ANY RIGHT TO TRIAL BY JURY
WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS AGREEMENT OR CONDUCT IN
CONNECTION WITH THIS ENGAGEMENT IS HEREBY WAIVED. /s/ MM (initials)
-------
12. This agreement may be executed in counterparts, each of which together
shall be considered a single document.
Please confirm that the foregoing is in accordance with your understanding
by signing and returning to Averil the enclosed duplicate of this letter, which
shall thereupon constitute a binding agreement.
4
<PAGE>
AVERIL ASSOCIATES, INC.
By: /s/ Diana Maranon
----------------------------------
Diana L. Maranon
ACCEPTED AND AGREED TO:
BRILLIANT INTERACTIVE IDEAS, PTY. LTD.
By: /s/ Mark Miller
-----------------------------------
Mark Miller
5
<PAGE>
April 15, 1996
Averil Associates, Inc,
833 17th Street, Suite Six
Santa Monica, CA 90403
Attn: Diana L. Maranon
Ladies and Gentlemen:
In connection with your engagement as our financial advisor pursuant to a
letter agreement, dated April 15, 1996 (as such agreement may be amended from
time to time, the "Agreement"), between you and us, we hereby agree to indemnify
and hold harmless you and your affiliates, and your respective directors,
officers, agents, employees and controlling persons, and each of their
respective successors and assigns (collectively, the "indemnified persons"), to
the full extent lawful, from and against all losses, claims, damages,
liabilities and expenses (or actions in respect thereof) that are related to or
arise out of (i) actions or alleged actions taken or omitted to be taken
(including any untrue statements made or any statements omitted to be made) by
us or any of our affiliates, directors, officers, employees or agents, (ii)
actions or alleged actions taken or omitted to be taken by an indemnified person
(including acts or omissions constituting ordinary negligence) pursuant to the
terms of or in connection with services rendered pursuant to or in accordance
with the terms of, the Agreement or any transaction or proposed transaction
contemplated thereby or any indemnified person's role in connection therewith,
or (iii) any untrue statement or alleged untrue statement of a material fact
contained in any offering materials or in any amendment or supplement thereto,
or any omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading. We will not
be responsible, however, for any losses, claims, damages, liabilities or
expenses pursuant to clause (ii) of the preceding sentence that are finally
judicially determined to have resulted primarily from the gross negligence or
willful misconduct of the person seeking indemnification hereunder. We also
agree that (i) no indemnified person shall have any liability to us or any of
our affiliates, directors, officers, employees or agents except for losses,
claims, damages, liabilities or expenses incurred by us in connection with the
Transaction that are finally judicially determined to have resulted primarily
from the gross negligence or willful misconduct of such indemnified person; and
(ii) in no event shall the indemnified persons' aggregate liability in
connection with such losses, claims, damages, liabilities and expenses exceed
the fees you actually receive from us pursuant to the Agreement.
Promptly after receipt by an indemnified person of notice of any complaint
or the commencement of any action or proceeding with respect to which
indemnification is being sought hereunder, such person will notify us in writing
of such complaint or of the commencement of such action or proceeding, but
failure so to notify us will relieve us from any liability that we may have
hereunder only if, and to the extent that, such failure results in the
forfeiture by us of any material defenses, and will not in any event relieve us
from any other obligation or liability that we may have to any indemnified
person. We will not, without the prior written consent of you, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification
<PAGE>
or contribution may be sought hereunder (whether or not you or any other
indemnified person is an actual or potential party to such claim, action, suit
or proceeding).
We agree that if any indemnification sought by an indemnified person
pursuant to this letter agreement is held by a court to be unavailable for any
reason other than as specified in the second sentence of the first paragraph of
this letter agreement, then we will contribute to the losses, claims, damages,
liabilities and expenses for which such indemnification is held unavailable (i)
in such proportion as is appropriate to reflect the relative benefits to us, on
the one hand, and you, on the other hand, in connection with your engagement
refereed to above, or (ii) if the allocation provided by clause (i) above in
this paragraph is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
in this paragraph, but also the relative fault of us, on the one hand, and you,
on the other hand, as well as any other relevant equitable considerations;
provided however, that in any event the aggregate contribution by all
- -------- -------
indemnified persons to all losses, claims, damages, liabilities and expenses
with respect to which contribution is available hereunder will not exceed the
amount of fees actually received by you from us pursuant to your engagement
referred to above. It is hereby agreed that for purposes of this paragraph, the
relative benefits to us, on the one hand, and you, on the other hand, with
respect to your engagement shall be deemed to be in the same proportion as (i)
the total value paid or proposed to be paid or received by us or our
stockholders, as the case may be, pursuant to the transaction, whether or not
consummated, for which you are engaged to render financial advisory services,
bears to (ii) the fee paid or proposed to be paid to you in connection with such
engagement. It is agreed that it would not be just and equitable if
contribution pursuant to this paragraph were determined by pro rata allocation
or by any other method which does not take into account the considerations
referred to in this paragraph.
We further agree that we will promptly reimburse you and any other
indemnified person hereunder for all expenses (including fees and disbursements
of counsel) as they are incurred in connection with investigating, preparing or
defending any pending or threatened claim, action, suit or proceeding in respect
of which indemnification or contribution may be sought hereunder, whether or not
in connection with pending or threatened litigation in which any indemnified
person is a party.
Our indemnity, contribution and other obligations under this letter
agreement shall be in addition to any rights that you or any other indemnified
person may have at common law or otherwise, and shall be binding on our
successors and assigns.
We hereby consent to personal jurisdiction, service and venue in any court
in which any claim which is subject to, or which may give rise to a claim for
indemnification or contribution under, this letter agreement is brought against
you or any other indemnified person.
This letter agreement shall be deemed made in California. This letter
agreement and all controversies arising from or relating to performance under
this letter agreement shall be governed by and construed in accordance with the
laws of the State of California, without giving effect to such state's rules
concerning conflicts of laws. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY
CLAIM OR ACTION ARISING OUT OF THIS LETTER AGREEMENT OR ANY ENGAGEMENT OF YOU IS
HEREBY WAIVED.
2
<PAGE>
It is understood that, in connection with your above-mentioned engagement,
you may also be engaged to act in one or more additional capacities, and that
the terms of the original engagement or any such additional engagement may be
embodied in one or more separate written agreements. The provisions of this
letter agreement shall apply to the original engagement, related activities
prior to the date of the original engagement, any such additional engagement and
any modification of the original engagement or such additional engagement and
shall remain in full force and effect following the completion or termination of
your engagement(s).
Sincerely,
BRILLIANT INTERACTIVE IDEAS, PTY, LTD.
By: /s/ Mark Miller
----------------------------------------
Mark Miller
Dated:
------------------------------------
Accepted:
AVERIL ASSOCIATES, INC,
By: /s/ Diana Maranon
-----------------------------------------
Diana L. Maranon
Dated:
-------------------------------------
3
<PAGE>
EXHIBIT 10.36
WARRANT AGREEMENT
This WARRANT AGREEMENT (this "Agreement") is made and entered into as of
the 14th day of September, 1996, by and between Brilliant Digital Entertainment,
Inc., a Delaware corporation (the "Company"), and Chloe Holdings, Inc.
("Holder"). In consideration of these premises and the mutual covenants and
agreements hereinafter set forth, and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the Company and Holder
agree as follows:
1. GRANT OF WARRANT.
In consideration of the sum of $40.23 ($0.001 per Warrant) and in
satisfaction of the obligation to deliver 910 shares of common stock of
Brilliant Interactive Ideas Pty. Ltd. ("Brilliant") pursuant to the Agreement
dated April 15, 1996 between Brilliant and Averil Associates, Inc., the Company
hereby grants to Holder the right and option (the "Warrant"), upon the terms and
subject to the conditions set forth in this Agreement, to purchase all or any
portion of 40,222 shares of the Common Stock, par value $0.001 per share, of the
Company (the "Warrant Shares") at an exercise price of $0.0326 per share (the
"Exercise Price").
2. TERM OF WARRANT.
The Warrant shall terminate and expire at 5:00 p.m., Los Angeles time, on
September 14, 1999 (the "Warrant Expiration Date"), unless sooner terminated as
provided herein.
3. VESTING.
(a) The Warrant is immediately exercisable with respect to all
40,222 shares of Common Stock.
(b) Notwithstanding anything to the contrary contained in this
Agreement, the Warrant may not be exercised, in whole or in part, unless and
until any then-applicable requirements of all state and federal laws and
regulatory agencies shall have been fully complied with to the satisfaction of
the Company and its counsel.
4. EXERCISE OF WARRANT.
There is no obligation to exercise the Warrant, in whole or in part. The
Warrant may be exercised, in whole or in part, only by delivery to the Company
of:
<PAGE>
(a) written notice of exercise in form and substance identical to
Exhibit "A" attached to this Agreement stating the number of Warrant Shares then
being purchased (the "Purchased Shares"); and
(b) payment of the Exercise Price of the Purchased Shares in cash,
by check, or by wire transfer.
Upon receipt of the foregoing, the Company shall promptly issue in the name
of the Holder a stock certificate evidencing the Purchased Shares by such
exercise and deliver such certificate to the Holder.
5. RESTRICTIONS ON PURCHASED SHARES.
(a) Each certificate for Purchased Shares initially issued upon the
exercise of the Warrants, shall be stamped or otherwise imprinted with a legend
in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
CONDITIONS SPECIFIED IN A CERTAIN WARRANT AGREEMENT DATED SEPTEMBER
14, 1996. NO TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR
OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL
BE VALID OR EFFECTIVE UNTIL REGISTERED OR THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL, SATISFACTORY TO IT, THAT THE TRANSACTION IS EXEMPT
FROM REGISTRATION, AND UNTIL SUCH CONDITIONS AS ARE CONTAINED IN THE
WARRANT AGREEMENT HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE
WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF BRILLIANT DIGITAL
ENTERTAINMENT, INC. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF
THIS CERTIFICATE, AGREES TO BE BOUND BY THE PROVISIONS OF THE WARRANT
AGREEMENT."
If the Purchased Shares are no longer subject to the transfer restrictions
imposed by applicable state and Federal securities law because either (i) the
Purchased Shares or the resale of the Purchased Shares has been registered on a
registration statement declared effective by the Commission, or (ii) in the
reasonable opinion of counsel for the Company, or the opinion of counsel for
Holder, which opinion is reasonably satisfactory to counsel for the Company, all
future dispositions of any of the Purchased Shares by the contemplated
transferee would be exempt from or would satisfy the registration and prospectus
delivery requirements of the Securities Act and the qualification requirements
of the applicable state securities laws, then the restrictions on transfer of
such securities contained in this Section 5(a) shall not apply to any subsequent
transfer thereof and the Company shall, promptly upon request by Holder, remove
the legend set forth
2
<PAGE>
above and shall promptly issue, in exchange for the certificate bearing such
legend, a certificate without such legend to Holder.
(b) HOLDER AGREES THAT THE WARRANT MAY NOT BE TRANSFERRED, SOLD,
ASSIGNED OR HYPOTHECATED EXCEPT (I) TO ITS SUCCESSORS IN A MERGER OR
CONSOLIDATION OR OTHER BUSINESS COMBINATION; (II) TO PURCHASERS OF ALL OR
SUBSTANTIALLY ALL OF ITS ASSETS; OR (III) BY OPERATION OF LAW. HOLDER FURTHER
AGREES THAT THE COMPANY SHALL HAVE NO OBLIGATION TO EFFECT ANY TRANSFER OF THE
WARRANTS DURING THE TIME PERIOD REFERRED TO ABOVE, UNLESS THE TRANSFEREE,
PURCHASER, ASSIGNEE OR PLEDGEE, AS THE CASE MAY BE, SHALL HAVE EXECUTED AN
AGREEMENT OBLIGATING THE TRANSFEREE TO COMPLY WITH ALL TERMS AND CONDITIONS OF
THIS AGREEMENT APPLICABLE TO THE TRANSFEROR.
(c) Prior to any exercise of the Warrants or any transfer or
attempted transfer of any of the Warrants or Warrant Shares, the Holder shall
give the Company written notice of Holder's intention so to do, describing
briefly the manner of any such proposed exercise, sale or transfer. The Holder
may effect such exercise or transfer, provided that such exercise or transfer is
not prohibited by this Section 5 and such exercise or transfer complies with all
applicable federal and state securities laws and regulations. If in the
reasonable opinion of counsel for the Company, notwithstanding the opinion of
counsel to a Holder to the contrary, if any, the proposed transfer of such
Warrant Shares or the Warrant may not be effected without registration thereof
under the Securities Act and such registration has not been accomplished, the
Company shall, as promptly as practicable, so notify the Holder and the Holder
shall not consummate the proposed transfer.
(d) The Holder agrees to enter into a lock-up agreement with the
underwriters of the initial public offering of the Company's common stock (the
"IPO") pursuant to which Holder agrees not to sell the Warrant Shares for such
period of time from and after the effective date of such public offering as may
be requested by such underwriters; provided that the term of the lock-up
agreement shall not exceed the term of similar lock-up agreements executed in
favor of the underwriter by the senior officers of the Company.
6. ADJUSTMENTS UPON RECAPITALIZATION.
(a) In the event the Company should at any time or from time to
time after the date of this Warrant (the "Issuance Date") fix a record date for
the effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record
3
<PAGE>
date (or the date of such dividend distribution, split or subdivision if no
record date is fixed), the Exercise Price shall be appropriately decreased
(i.e., the per share Exercise Price shall be adjusted such that the aggregate
exercise price for all Warrant Shares issuable upon exercise of the Warrants in
full, as adjusted, shall remain the same) and the number of Warrant Shares shall
be increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
(b) If the number of shares of Common Stock outstanding at any time
after the Issuance Date is decreased by a combination of the outstanding shares
of Common Stock, then, following the record date of such combination, the
Exercise Price shall be appropriately increased (i.e., the per share Exercise
Price shall be adjusted such that the aggregate exercise price for all Warrant
Shares issuable upon exercise of the Warrants in full, as adjusted, shall remain
the same) and the number of Warrant Shares shall be decreased in proportion to
such decrease in the aggregate number of shares of Common Stock outstanding and
those issuable with respect to such Common Stock Equivalents.
(c) In case of any capital reorganization, any reclassification of
the Common Stock (other than a change in par value or a recapitalization
described in Section 6(a) or 6(b) of this Agreement), or the consolidation of
the Company with, or a sale of substantially all of the assets of the Company to
(which sale is followed by a liquidation or dissolution of the Company), or
merger of the Company with, another person, the Holder shall thereafter be
entitled upon exercise of the Warrant to purchase the kind and number of shares
of stock or other securities or the amount or value of any cash, assets or other
property receivable upon such event by a holder of the number of shares of the
Common Stock which the Warrant entitles the holder of the Warrant to purchase
from the Company immediately prior to such event; and in any such case,
appropriate adjustment shall be made in the application of the provisions set
forth in this Agreement with respect to the Holder's rights and interests
thereafter, to the end that the provisions set forth in this Agreement
(including the specified changes and other adjustments to the Exercise Price)
shall thereafter be applicable in relation to any shares or other property
thereafter purchasable upon exercise of the Warrant.
(d) In the event the Company should at any time or from time to
time after the Issuance Date fix a record date for the determination of holders
of Common Stock entitled to receive a dividend or other distribution payable in
securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock or the
securities or such rights of any other corporation (other than Common Stock
Equivalents covered be Section 6(a) hereof), the Holder shall thereafter be
entitled upon exercise of the Warrant to receive, in addition to the Purchased
Shares being purchased upon such exercise, the securities or rights convertible
into securities receivable upon such event by a holder of the number of shares
of the Common Stock which the Holder is purchasing upon such exercise.
4
<PAGE>
(e) If it is expected that there will occur any event described in
Section 6(c) or 6(d) hereof, the Company shall give the holder of the Warrants
notice thereof, which notice shall be given at such time or times as notice is
given to the holders of the Company's Common Stock.
(f) The provisions of this Section 6 are intended to be exclusive,
and the holder of the Warrant shall have no rights other than as set forth in
this Agreement (and the rights of a stockholder upon exercise of the Warrant)
upon the occurrence of any of the events described in this Section 6.
(g) The grant of the Warrant shall not affect in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes in its capital or business structure, or to merge, consolidate,
dissolve or liquidate, or to sell or transfer all or any part of its business or
assets.
7. REPRESENTATIONS AND WARRANTIES OF HOLDER.
Holder makes the following representations and warranties:
(a) Holder is acquiring the Warrants for its own account with the
present intention of holding such securities for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
securities (other than a distribution in compliance with all applicable federal
and state securities laws).
(b) Holder is an experienced and sophisticated investor and has
such knowledge and experience in financial and business matters that it is
capable of evaluating the relative merits and the risks of an investment in the
Warrants and in the Warrant Shares and of protecting its own interests in
connection with this transaction.
(c) Holder is willing to bear and is capable of bearing the
economic risk of an investment in the Warrants and the Warrant Shares.
(d) The Company has made available, prior to the date of this
Agreement, to Holder the opportunity to ask questions of the Company and its
officers, and to receive from the Company and its officers information
concerning the terms and conditions of the Warrants and this Agreement and to
obtain any additional information with respect to the Company, its business,
operations and prospects, as reasonably requested by Holder.
(e) Holder is an "accredited investor" as that term is defined
under Rule 501(a)(8) of Regulation D promulgated by the Securities and Exchange
Commission under the Act.
5
<PAGE>
(f) For purposes of the application of federal and state securities
laws, Holder acknowledges that the offer and sale of the Warrants to such Holder
occurred in the State of California and that such Holder is a resident of the
State of California.
8. LEGEND ON STOCK CERTIFICATES.
Holder agrees that all certificates representing the Purchased Shares will
be subject to such stock transfer orders and other restrictions as the Company
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission (the "Commission"), any stock exchange upon
which the Common Stock is then listed and any applicable federal or state
securities laws, and the Company may cause the following legend to be put on
such certificates to make appropriate reference to such restrictions:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED OR
OTHERWISE HYPOTHECATED WITHOUT REGISTRATION UNDER SUCH ACT OR PURSUANT TO
AN EXEMPTION THEREFROM.
9. NO RIGHTS AS STOCKHOLDER.
Holder shall have no rights as a stockholder of the Company with respect to
the Warrant Shares until the date of the issuance to Holder of a stock
certificate or stock certificates evidencing such Warrant Shares. Except as may
be provided in Paragraph 6 of this Agreement, no adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
10. MODIFICATION.
The Board or a committee thereof may modify, extend or renew the Warrant or
accept the surrender of, and authorize the grant of a new option in substitution
for, the Warrant (to the extent not previously exercised). No modification of
the Warrant shall be made without the consent of Holder which would alter or
impair any rights of Holder under the Warrant.
11. COVENANTS OF HOLDER AND THE COMPANY.
(a) Form S-8. In the event no exemption from registration is
---------
available enabling the Holder to freely transfer the Warrant Shares, commencing
one year following the closing of the IPO, the Company shall file a registration
statement on Form S-8 within 30 days after receipt of written request of the
Holder.
6
<PAGE>
(b) Piggyback Registration of Warrant Shares. If, at any time during
----------------------------------------
the period commencing on the date that is 180 days from the date upon which an
IPO is declared effective by the Commission and on or before September 14, 1999,
the Company shall propose to register any shares of Common Stock (but excluding
any shares or securities being registered pursuant to Form S-8 or Form S-4 or
any successor form thereto), the Company shall (i) give the Holder written
notice, or telegraphic, telecopy or telephonic notice followed as soon as
practicable by written confirmation thereof, of such proposed registration at
least 20 business days prior to the filing of such registration statement and,
(ii) upon written notice, or telegraphic or telephonic notice followed as soon
as practicable by written confirmation thereof, given to the Company by the
Holder within 15 days after the giving of such written confirmation or written
notice by the Company, the Company shall include or cause to be included in any
such registration statement all or such portion of the Warrant Shares as the
Holder may request; provided, however, that the Company may at any time withdraw
-------- -------
or cease proceeding with any such registration if it shall at the same time
withdraw or cease proceeding with the registration of the Common Stock
originally proposed to be registered; and provided further, that in connection
----------------
with any registered public offering involving an underwriting, the managing
underwriter may (if in its reasonable opinion marketing factors so re quire)
limit the number of securities (including any Warrant Shares) included in such
offering (other than securities of the Company). In the event of any such
limitation, the total number of Warrant Shares to be offered for the account of
the Holder in the registration shall be reduced in proportion to the respective
number of shares requested to be included therein by all holders of the
Company's Common Stock (other than the Company) entitled to include shares of
Common Stock in the registration to the extent necessary to reduce the total
number of shares proposed to be registered to the number of shares recommended
by the managing underwriter.
(c) Company's Obligations in Registration. The following provisions
--------------------------------------
shall also be applicable at the sole cost and expense of the Company in the case
of registrations under Section 11:
i) Following the effective date of such registration statement, the
Company shall, upon the request of the Holder, forthwith supply such number of
prospectuses meeting the requirements of the Securities Act as shall be
requested by the Holder to permit it to make a public distribution of all of its
Warrant Shares, provided that the Holder shall from time to time furnish the
Company with such appropriate information (relating to the intentions of the
Holder) in connection therewith as the Company shall request in writing.
ii) the Company shall bear the entire cost and expense of the
registration of securities provided for in this Section (but not the selling
expenses of the Holder).
7
<PAGE>
iii) the Company shall indemnify and hold harmless the Holder from and
against any and all losses, claims, damages and liabilities (including
reasonable fees and expenses of counsel) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or any prospectus included therein required to be filed
or furnished by reason of this Section or otherwise or in any application or
other filing under, the Securities Act or any other applicable Federal or state
securities law, or arising out of or based upon any omission or alleged omission
to state therein a material fact required to be stated therein (i.e., in any
such registration statement, prospectus, application or other filing) or
necessary to make the statements therein not misleading, to which such person
may become subject, or any violation or alleged violation by the Company to
which such Person may become subject, under the Securities Act, the Exchange
Act, or other Federal or state laws or regulations, at common law or otherwise,
except to the extent that such losses, claims, damages or liabilities are caused
by any such untrue statement or alleged untrue statement or omission or alleged
omission based upon and in strict conformity with written information furnished
to the Company by such person expressly for use therein; provided however, that
-------- -------
the Holder shall at the same time indemnify the Company, its directors, each
officer signing the related registration statement, and each person, if any, who
controls the Company within the meaning of the Securities Act, from and against
any and all losses, claims, damages and liabilities (including reasonable fees
and expenses of counsel) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or any prospectus included therein required to be filed or furnished
by reason of this Section, or otherwise or in any application or other filing
under, the Securities Act or any other applicable Federal or state securities
law, or arising out of or based upon any omission or alleged omission to state
therein a material fact required to be stated therein (i.e., in any such
registration statement, prospectus, application or other filing) or necessary to
make the statements therein not misleading, to which such person may become
subject, or any violation or alleged violation by the Holder to which the
Company, its directors, each officer signing the related registration statement,
and each person, if any, who controls the Company within the meaning of the
Securities Act, may become subject, under the Securities Act, the Exchange Act,
or other Federal or state laws or regulations, at common law or otherwise, to
the extent that such losses, claims, damages or liabilities are caused by any
such untrue statement or alleged untrue statement or omission or alleged
omission based upon and in strict conformity with written information furnished
to the Company by the Holder expressly for use therein.
(d) In the event any person entitled to indemnification hereunder
receives in writing a complaint, claim or other written notice of any loss,
claim, damage, liability or action giving rise to a claim for indemnification
under Section 11(c)(iii), the person claiming indemnification under Section
11(c)(iii) shall promptly notify the person or persons against whom
indemnification is sought (the "Indemnitor") of such complaint, notice, claim or
action, and the Indemnitor shall have the right to investigate and defend any
such loss, claim, damage, liability or action. The person claiming
indemnification shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of the Indemnitor. In no event shall
the Indemnitor be obligated to indemnify any person for any settlement of any
claim or action effected without the Indemnitor's consent, which consent shall
not be unreasonably withheld.
8
<PAGE>
12. DISPUTES.
(a) ARBITRATION. All disputes arising in connection with this
Agreement shall be finally settled by arbitration in Los Angeles, California, in
accordance with the rules of the American Arbitration Association (the "Rules of
Arbitration") and judgment on the award rendered by the arbitration panel (the
"Arbitration Panel") may be entered in any court or tribunal of competent
jurisdiction.
(b) Any party which desires to initiate arbitration proceedings as
provided in Section 11(a) above may do so by delivering written notice to the
other party (the "Arbitration Notice") specifying (A) the nature of the dispute
or controversy to be arbitrated, (B) the name and address of the arbitrator
appointed by the party initiating such arbitration and (C) such other matters as
may be required by the Rules of Arbitration.
(c) The Parties shall appoint a single arbitrator who shall
constitute the Arbitration Panel hereunder. Should the parties not agree upon
the appointment of the arbitrator within 30 days of delivery of the Arbitration
Notice, the Arbitrator shall be appointed in accordance with the Rules of
Arbitration.
(d) In any arbitration proceeding conducted pursuant to the
provisions of this Section 11, both parties shall have the right to discovery,
to call witnesses and to cross-examine the opposing party's witnesses, either
through legal counsel, expert witnesses or both.
(e) FINALITY OF DECISION. All decisions of the Arbitration Panel
shall be final, conclusive and binding on all parties and shall not be subject
to judicial review. The arbitrator shall divide all costs (other than fees of
counsel) incurred in conducting the arbitration proceeding and the final award
in accordance with what they deem just and equitable under the circumstances.
(f) LIMITATIONS. Notwithstanding anything to the contrary contained
in Sections 11(a) and 11(b) above, any claim by either party for injunctive or
other equitable relief, including specific performance, may be brought in any
court of competent jurisdiction and any judgment, order or decree relating
thereto shall have precedence over any arbitral award or proceeding.
13. GENERAL PROVISIONS.
(a) FURTHER ASSURANCES. Holder shall promptly take all actions and
execute all documents requested by the Company which the Company deems to be
reasonably necessary to effectuate the terms and intent of this Agreement.
(b) NOTICES. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be given to
the parties hereto as follows:
9
<PAGE>
If to the Company, to:
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd.
Woodland Hills, California 91367
Attention: President
If to Holder, to the address set
forth in the records of the Company,
or at such other address or addresses as may have been furnished by either party
in writing to the other party hereto. Any such notice, request, demand or other
communication shall be effective (i) if given by mail, two days after such
communication is deposited in the mail by first-class certified mail, return
receipt requested, postage prepaid, addressed as aforesaid, or (ii) if given by
any other means, when delivered at the address specified in this subparagraph
(b).
(c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE. JURISDICTION AND
VENUE OVER ANY LEGAL ACTION BROUGHT HEREUNDER SHALL RESIDE EXCLUSIVELY IN THE
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO WAIVE
THEIR RIGHT TO A JURY TRIAL WITH RESPECT TO ANY SUCH LEGAL ACTIONS.
(d) ATTORNEYS' FEES. In the event that any action, suit or
arbitration or other proceeding is instituted upon any breach of this Agreement,
the prevailing party shall be paid by the other party thereto an amount equal to
all of the prevailing party's costs and expenses, including attorneys' fees
incurred in each and every such action, suit or proceeding (including any and
all appeals or petitions therefrom). As used in this Agreement, "attorneys'
fees" shall mean the full and actual cost of any legal services actually
performed in connection with the matter involved calculated on the basis of the
usual fee charged by the attorney performing such services and shall not be
limited to "reasonable attorneys' fees" as defined in any statute or rule of
court.
(e) AMENDMENT; WAIVER. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors, heirs and personal representatives. No provision of this Agreement
may be amended or waived unless in writing signed by all of the parties to this
Agreement. Waiver of any one provision of this Agreement shall not be deemed to
be a waiver of any other provision.
10
<PAGE>
(f) NO FINDERS. The parties each agree to indemnify and hold
harmless the other against any expense incurred by reason of any consulting,
brokerage commission or finder's fee alleged to be payable to any person in
connection with the transactions contemplated hereby because of any act,
omission or statement of indemnifying party or any dealings by the indem nifying
party with any consultant, broker or finder.
(g) EXPENSES. Each of the parties shall pay its own expenses
incurred in connection with the preparation of this Agreement and the
consummation of the transactions contemplated hereby.
(h) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provi sion of this Agreement shall be or become
prohibited or invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which together shall constitute one agreement binding on
all parties hereto, notwithstanding that all of the parties have not signed the
same counterpart.
(j) ENTIRE AGREEMENT. This Agreement constitutes and embodies the
entire understanding and agreement of the parties hereto relating to the subject
matter hereof and there are no other agreements or understandings, written or
oral, in effect between the parties relating to such subject matter except as
expressly referred to herein.
(k) MISCELLANEOUS. Titles and captions contained in this Agreement
are inserted for convenience of reference only and do not constitute a part of
this Agreement for any other purpose. Except as specifically provided herein,
neither this Agreement nor any right
11
<PAGE>
pursuant hereto or interest herein shall be assignable by any of the parties
hereto without the prior written consent of the other party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
Brilliant Digital Entertainment, Inc.
By: /s/ Mark Dyne
_________________________
Its: Chief Executive Officer
_________________________
Chloe Holdings, Inc.
By: /s/ Diana Maranon
_________________________
Its: President
_________________________
12
<PAGE>
EXHIBIT "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Warrant)
TO: Brilliant Digital Entertainment, Inc.
The undersigned hereby irrevocably elects (to the extent indicated herein)
to exercise the purchase right represented by the Warrant granted to the
undersigned on September 14, 1996 and to purchase thereunder ___________ shares
of Common Stock of Brilliant Digital Entertainment, Inc., a Delaware corporation
(the "Company"). The closing of the exercise of the purchase right shall take
place at _____ on _________________, ____ at the principal executive office of
the Company located at 6355 Topanga Canyon Blvd., Woodland Hills, California
91367.
Chloe Holdings, Inc.
By: _______________________________
Its: _______________________________
13
<PAGE>
EXHIBIT 10.37
PRODUCT AGREEMENT
THIS PRODUCT AGREEMENT is made this 12th day of January, 1996, by and
between INTERPLAY PRODUCTIONS, a California corporation (herein called
"Interplay"), and BRILLIANT INTERACTIVE IDEAS, a corporation incorporated under
the laws of Australia, Tax ID ACN #061288668 (herein called "Developer").
WHEREAS, Interplay desires to have the property specified in Schedule A
attached hereto developed by Developer for Interplay on a work-for-hire basis
(herein such article or articles shall be referred to as the "Work"); and
WHEREAS, Developer desires to develop the Work for Interplay on a work-for-
hire basis;
NOW, THEREFORE, the parties do hereby agree as follows:
1. DEVELOPMENT OF PRODUCT: OWNERSHIP BY INTERPLAY
----------------------------------------------
1.01 Developer hereby agrees to develop the Work in accordance with
the provisions set forth on Schedule A. Interplay's right to sell, distribute
and license the product for the referenced system(s) on Schedule A applies to
any existing plus any yet to be developed media of delivery.
1.02 (a) Subject to the provisions of Section 1.06 below, Interplay
will be the owner of the copyright and all other proprietary rights in the Work
and all products, materials, reports or other data developed under the terms of
the Agreement. Subject to the provisions of Section 1.06 below, Developer
agrees and acknowledges that the Work shall be considered a "work made for
hire," that developer has no claim to any right, title or interest in the Work
supplied Interplay pursuant to the terms of this Agreement or otherwise, and
that Developer will make no claims that any of such Works infringe upon the
copyright or other right, title or interest of Developer and that the Work
shall, upon creation, be owned exclusively by Interplay.
(a) Subject to the provisions of Section 1.06 below, if and to the
extent Developer may, under applicable law be entitled to claim any ownership
interest in the Work, Developer hereby transfers, grants, conveys , assigns and
relinquishes exclusively to Interplay all of Developer's rights, title and
interest in and to the Work, under patent, copyright trade secret and trademark
law, in perpetuity. Developer agrees and acknowledges that Interplay may
utilize the Work in any other software program or license or sell the Work for
incorporation into or as a basis for producing other products at the sole
discretion of Interplay without the payment of any royalty or any other fee to
Developer, except as set forth in Section 2.
(b) Developer agrees to execute any and all consents, assignments and
other documents and agreements as requested by Interplay to evidence ownership
of the copyright or the proprietary rights in the Work in the exclusive name of
Interplay. Without
<PAGE>
limiting the proprietary rights in the Work in the exclusive name of Interplay.
Without limiting the foregoing, to the extent the Work may not be considered a
work made for hire, Developer hereby assigns to Interplay the ownership of
copyright in the Work, without the necessity of any further consideration, and
Interplay shall be entitled to obtain and hold in its own name all copyrights in
respect thereof. The rights of Interplay under this Paragraph 1 shall survive
the termination of this Agreement.
(c) The ownership rights of Interplay shall be broadly construed to
include, without limitation, the unrestricted right to modify the Work and
prepare derivative products therefrom, to control all publication, distribution,
sales and marketing activities with respect to the Work and any derivative
product therefrom, and to be listed as the exclusive publisher, owner and author
of the Work therein and in all derivative products and related materials.
1.03 The key employees of Developer who will be assigned to complete
the responsibilities of Developer under this Agreement, including necessary
development work, shall be identified on Schedule A. Developer agrees not to
reassign such individuals to other projects which would interfere with the
completion by the named individuals of the obligations of Developer hereunder or
assign any different individuals to complete the obligations of Developer under
this Agreement without the prior written agreement of Interplay, which consent
shall be provided by Interplay in its sole and absolute discretion. Interplay
may immediately terminate this agreement if any individuals other than those
listed on Schedule A or otherwise approved by Interplay in writing perform, or
are assigned to perform, any of the obligations of Developer under this
Agreement.
1.04 Developer acknowledges that time is of the essence in this
Agreement and that Developer's best efforts must be utilized to complete the
development of the Work as defined in Schedule A, as the same may be amended.
Interplay expressly reserves the right to terminate this Agreement at any time
for any reason by providing written notice to Developer. Upon any such
termination of this Agreement, all sums previously provided to Developer shall
be non-refundable. In the event termination occurs because of a breach of
Developer's representations and warranties herein, Interplay shall not be
required to make any further payments to Developer and Developer shall be
required to deliver all work-in-process and other materials and equipment to
Interplay. However, in the event Interplay terminates the Agreement for reasons
other than a breach by Developer, upon the delivery by Developer to Interplay of
all work-in-process and other materials, Interplay shall pay Developer for the
next due Milestone which was then under development by Developer.
1.05 Subject to the provisions of Section 1.06 below, all artwork,
software routines, designs and trademarks created by or on behalf of Interplay,
any reproduction thereof, or any computer game which is designed, devised and/or
created by Interplay, and the artwork, software routines, designs, trademarks
thereto, shall be and remain Interplay's sole and exclusive property.
2
<PAGE>
1.06 (a) Interplay acknowledges that Developer's pre-existing
utilities, languages and similar development tools (the "Developer Tools") will
remain the exclusive property of Developer. Developer will disclose all pre-
existing Developer Tools to Interplay in writing on Schedule B of this Agreement
prior to the commencement of development of the Work. For a period of twelve
(12) months from the first commercial release of the Game by Interplay,
Developer agrees not to use (or license another to use) the Developer Tools in
connection with the development of any sea character-based storybook genre
software product with the same or substantially similar activities as the Game
unless prior agreement is obtained from Interplay. Developer grants Interplay a
perpetual, non-exclusive, irrevocable, royalty-free license and right to use the
Developer Tools solely in connection with (i) the Work and support maintenance
of the Work, (ii) preparing translations of the Work, (iii) preparing
conversions of the Work for additional video or computer standards or platforms,
and (iv) otherwise preparing derivatives of the Work.
(b) Utilities, languages and similar development tools are not
identified in Schedule B to this Agreement as "Developer Tools" deemed to have
been funded by Interplay pursuant to this Agreement and have been developed
through the use of confidential information provided Interplay to Developer in
furtherance of this Agreement and shall be subject to work-for-hire provisions
hereof.
2. CONSIDERATION
-------------
2.01 Interplay shall make the payments to Developer as set forth in
Schedule A attached hereto.
2.02 Interplay shall use its commercially reasonable efforts to place
the name of Developer on the reverse side of the Game packaging. In addition,
Interplay shall give Game screen credits to Developer, in such form and manner
determined by Interplay.
3. RIGHT TO MODIFY SOFTWARE
------------------------
3.01 Interplay shall have the right to request any and all reasonable
modifications which it deems to be necessary to adapt the Work Specifications
accepted by Interplay. The Work shall not be deemed accepted until all
modifications requested by Interplay have been made by Developer.
3.02 In the event Interplay requests significant or material
modifications to the Work which significantly go beyond the scope of the
storyboards, backgrounds and character design (the "Specifications") approved by
Interplay (the "Additional Work"), Interplay and Developer shall mutually agree
upon the terms and conditions of such modifications (with any additional fee
being based upon Developer's actual direct costs of performing such Additional
Work), before such Additional Work is commenced. For example, but not by way of
limitation, changes to color palette, click regions, and icon changes would not
rise to the level of significant or material modifications.
3
<PAGE>
4. COPYRIGHT: MARKINGS ON MATERIALS
--------------------------------
4.01 The copyright notice for this Product shall be:
"Copyright (year of publication) Interplay Productions. All
rights reserved."
5. REPRESENTATIONS AND WARRANTIES
------------------------------
5.01 With the exception of the Materials and the rights to use the
"Flipper" character in the Game, which shall be the responsibility of Interplay,
developer hereby represents and warrants that it has the full and exclusive
right and power to the Work sold to Interplay hereunder; that it has not
heretofore granted any rights to the Work to any other person, party or company
which remain in effect; that the rights granted herein will not infringe upon
the rights of any other person or entity or breach or cause a default under
Developer's organizational documents or any agreements entered into by
Developer; that the Work will be merchantable and fit for use on the computer
system for which the work is intended to be used; that Developer will complete
the Work in accordance with the provisions set forth on Schedule A and that the
work and any enhancements made thereto, does not and shall not violate or
infringe any United States or foreign patent, trademark, trade secret,
copyright, or similar law or right.
5.02 Interplay hereby represents and warrants and it has the full
corporate right and power to enter into this Agreement; and that the rights
granted herein will not breach or cause a default under Interplay's
organizational documents or any agreements enter into the Interplay.
6. INDEMNIFICATION
---------------
6.01 Developer hereby agrees to indemnify Interplay from all claims,
suits, judgments, costs, expenses (including costs of suit and reasonable
attorney's fees) and damages (collectively the "Claims") as a result of
Developer's breach of any of Developer's representations, warranties and
agreements herein made. IN NO EVENT SHALL DEVELOPER BE LIABLE TO INTERPLAY FOR
ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS) EVEN IF DEVELOPER KNOWS OR SHOULD KNOW OF THE POSSIBILITY OF SUCH
DAMAGES OR LOSSES.
6.02 Interplay hereby agrees to indemnify Developer from all claims,
suits, judgments, costs, expenses (including costs of suit and reasonable
attorney's fees) and damages (collectively the "Claims") as a result of
Interplay's breach of any of Interplay's representations, warranties and
agreements herein made. The foregoing indemnities shall be contingent upon (i)
the Developer giving written notice to Interplay of any claim, demand, or action
for which indemnity is sought; (ii) the full cooperation of the Developer in the
defense or settlement of any
4
<PAGE>
such claim, demand or action; and (iii) the prior written agreement of Interplay
to any settlement or proposal of settlement being obtained. IN NO EVENT SHALL
INTERPLAY BE LIABLE TO DEVELOPER FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) EVEN IF INTERPLAY KNOWS OR SHOULD
KNOW OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES.
7. EVENTS OF DEFAULT BY DEVELOPER
------------------------------
7.01 Developer shall be deemed to be in default of this Agreement in
the event any of the following occurs:
(a) Developer breaches any material representation, warranty or
covenant of Developer under this Agreement; or
(b) Developer is dissolved or shall make an assignment for the benefit
of creditors; or a petition for relief under appropriate bankruptcy laws is
filed by Developer; Developer consents or acquiesces in any filing by or
against, Developer of any petition or action looking to or seeking any
reorganization, liquidation, dissolution or similar relief under any other
present or future statute, law or regulation applicable to Developer, or there
is appointed, with or without the consent of Developer, any trustee, custodian,
receiver or liquidator of Developer or for any property or assets of Developer,
provided that any such petition, filing or appointment is not vacated or
dismissed within ninety (90) days after any of the same is filed or appointed.
7.02 In the event a breach under paragraph 7.01 above shall occur,
then, in addition to any other right of any nature that Interplay may have at
law or in equity against Developer, all of which rights shall be available to
Interplay to the maximum extent permitted by law, including the right to
injunctive relief, Interplay shall have the right upon a thirty (30) day written
notice to Developer to terminate this Agreement; provided, however, that
Developer has not cured such breach in such thirty (30) day period.
8. EVENTS OF DEFAULT BY INTERPLAY
------------------------------
8.01 Interplay shall be deemed to be in default of this Agreement in
the event any of the following occurs:
(a) Interplay breaches any material representation, warranty or
covenant of Interplay under this Agreement; or
(b) Interplay is dissolved or shall make an assignment for the benefit
of creditors; or a petition for relief under appropriate bankruptcy laws is
filed by Interplay, Interplay consents or acquiesces in any filing by or
against, Interplay of any petition or action looking to or seeking any
reorganization, liquidation, dissolution or similar relief under any other
present or future statue, law or regulation applicable to Interplay, or there is
appointed, with or without the consent of Interplay, any trustee, custodian,
receiver, or liquidator of the Interplay or
5
<PAGE>
for an property or assets of Interplay, provided that any such petition, filing
or appointment is not vacated or dismissed within ninety (90) days after any of
the same is filed or appointed; or
(c) Nonpayment of monies due to Developer pursuant to this
Agreement; or
(d) Failure to provide sales and royalty statements when due
pursuant to this Agreement.
8.02 Developer's rights and remedies upon breach of this Agreement
shall be limited to Developer's right, if any, to recover damages in an action
of law, and Developer shall not have the right to enjoin or restrain or to seek
to enjoin or restrain the sale, license, distribution or marketing of any
product of Interplay.
9. TERMINATION OF AGREEMENT BY INTERPLAY: SURVIVING PROVISIONS
-----------------------------------------------------------
9.01 The Developer understands that changes in circumstances may
require that Interplay terminate this Agreement before all milestones are
completed. Developer agrees that Interplay may unilaterally terminate this
Agreement in Interplay's sole discretion, as provided in Section 1.04 of this
Agreement.
9.02 Sections 1 (for Work delivered prior to the date of termination),
2 (for sales prior to termination), 3 through 8, 11.05, 11.08 and 11.09 of this
Agreement, and Section A in Schedule A, shall survive termination of this
Agreement. All other provisions of this Agreement, and all obligations of the
parties hereunder, shall terminate on the termination of this Agreement.
10. NOTICES
-------
10.01 Any notice, consent, approval, request, waiver or statement to
be given, made or provided for under this Agreement shall be in writing and
deemed to have been duly given (i) by its delivery personally; (ii) by its being
sent by telex (confirmed in writing); or (iii) five (5) days after delivery by
courier requiring receipt upon delivery, or mail, return receipt requested,
addressed as follows:
TO INTERPLAY INTERPLAY PRODUCTIONS
17922 Fitch Avenue
Irvine, CA 92714
Attention: Brian Fargo, CEO
WITH A COPY TO INTERPLAY PRODUCTIONS
17922 Fitch Avenue
Irvine, CA 92714
6
<PAGE>
Attention: Christopher J. Kilpatrick, President
TO DEVELOPER BRILLIANT INTERACTIVE IDEAS
17 The Corso
Manly NSW Australia, 2095
Attention: Mark Miller,
Managing Director
or such other address as either party may designate by notice given as
aforesaid.
11. MISCELLANEOUS
-------------
11.01 This Agreement, and all rights and obligations hereunder, are
not assignable without the written consent of the other party hereto, which
consent shall not be unreasonably withheld.
11.02 The entire understanding between the parties hereto relating to
the subject matter hereof is contained herein and this Agreement supersedes all
prior agreements and understandings between the parties, including any letters
of intent previously executed by the parties. This Agreement cannot be changed,
modified, amended or terminated except by an instrument in writing executed by
both Interplay and Developer.
11.03 No waiver, modification or cancellation of any term or
condition of this agreement shall be effective unless executed in writing by the
party charged therewith. No written waiver shall excuse the performance of any
act other than those specifically referred to therein and shall not be deemed or
construed to be a waiver or such terms or conditions for the future or any
subsequent breach thereof. Developer and Interplay make no warranties except
those specifically expressed herein. Time is of the essence in completion of
the terms of this Agreement.
11.04 This Agreement does not constitute and shall not be construed
as constituting a partnership or joint venture between Developer and Interplay.
Neither party hereto shall have the right to obligate or bind the other in any
manner whatsoever, and nothing herein contained shall give or is intended to
give any rights of any kind to any third persons.
11.05 This Agreement shall be governed by and construed in accordance
with the laws of the State of California and the United States without regard to
conflicts of laws provisions thereof and without regard to the United Nations
Convention on Contracts for the International Sale of Goods. The sole
jurisdiction and venue for actions related to the subject matter hereof shall be
the state and federal courts having within their jurisdiction the location of
Interplay's principal place of business. The losing party to any litigation
between the parties hereto shall pay to the prevailing party all expenses, costs
and fees (including attorney's fees) incurred by such prevailing party in such
litigation.
7
<PAGE>
11.06 The Schedules annexed hereto constitute an integral part of
this Agreement and are incorporated herein by reference. This Agreement shall
not be deemed effective, final or binding upon Developer or Interplay until
signed by each of them. This Agreement may be signed in counterparts.
11.07 The headings in this Agreement are inserted for convenience
only and are not deemed a part of this Agreement and shall not be considered in
interpreting this Agreement.
11.08 The parties hereto acknowledge that the remedies at law are not
adequate to protect the proprietary interests of the parties hereto, and that
any breach by Developer or Interplay of the terms of this Agreement will cause
irreparable damage to the other party hereto the exact amount of which will be
difficult or impossible to ascertain, and that remedies at law for any such
breach will be inadequate. Accordingly, Developer and Interplay agree that the
nonbreaching party shall be entitled to injunctive relief ordering specific
performance of the covenants and agreements set forth in this Agreement without
necessity for bond or other security to be posted by the nonbreaching party, in
addition to such further relief as may be proper.
11.09 Developer and Interplay agree to protect all proprietary
information of the other hereto from disclosure to others with the same degree
of care as that which is accorded to its own proprietary information during the
term of this Agreement and for ten (10) years after the termination of this
Agreement.
11.10 Interplay Shall Be Entitled To Use And Authorize others to use
the name, likeness and biography of the Developer and members of its staff who
have worked on the Work in connection with the Work and in the advertising,
marketing and exploitation of the Work throughout the World.
11.11 Neither Interplay nor Developer shall be responsible for delays
in performance or failure to perform any term or condition imposed upon such
party by this Agreement due to acts beyond the reasonable control of such party,
provided that such failure to perform shall be limited to thirty (30) days from
the date upon which performance was required. Such acts shall include, without
limitation, acts of God, strikes, walkouts, riots, acts of war, epidemics,
earthquakes, power failures, governmental regulations or other natural
disasters.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
day and year first above written.
INTERPLAY PRODUCTIONS BRILLIANT INTERACTIVE IDEAS
By: /s/ Christopher J. Kilpatrick By: /s/Mark Miller
------------------------------- ------------------------------
Christopher J. Kilpatrick, Mark Miller
President Managing Director
8
<PAGE>
By: /s/ Alan Parlish Mark Miller
------------------------------- -------------------------------------
Alan Parlish, Print Name
Executive Producer
"Interplay" "Developer"
9
<PAGE>
SCHEDULE A
12. DEFINITION OF WORK
------------------
The Work is herein defined as:
(1) Programming and Development of that certain computer software game
known as "Flipper" (the "Game") which shall operate on the IBM-PC and Macintosh
computer systems supporting Windows 3.1 and Windows '95 (the "Systems") having
at least the following system requirements:
(a) For the IBM-PC: 486/33 with a 4 MB Free RAM at 640 X 480
resolution with double-sized CD-ROM drive and 256-color with all major sound
card support; and
(b) For the Macintosh: 68030 system with 4MB Free RAM (or more
advanced).
(2) The Work includes delivery to Interplay of the object and source codes
for the Work for use on the Systems and all data and information at each
milestone delivery date and deemed necessary by Interplay to carry out and
perform its right under this Agreement. Such source code delivered must include
all the files necessary to compile and create the final sellable version of the
Work.
(3) The Work may include, at Interplay's option as more fully set forth in
Milestone #7, localization of the Work into the French, German and/or Japanese
languages.
13. MATERIALS PROVIDED TO DEVELOPER
-------------------------------
Interplay shall provide to Developer, in connection with its performance of
this agreement, still photographs of key scenes from the "Flipper" movie on or
about January 19, 1996 and appropriate voice-overs as scripted in Milestone #2
delivered on DAT tape on or before March 6, 1996 (the "Materials"). Developer
acknowledges and agrees that the Materials may be used by Developer only in
connection with the Work to be performed pursuant to this Agreement and that the
Materials are subject to the confidentiality provisions of this Agreement and
that Interplay may withhold the payment of Milestone #7 unless and until
Developer returns the Materials to Interplay in the same condition as provided
to Developer.
14. DEVELOPMENT OF WORK
-------------------
(1) Developer shall immediately initiate the development of the Work and
will notify interplay of Developer's expected delivery to Interplay of the
completed Work and the associated computer software in conformity with the
milestones described herein. Developer shall consult with Interplay during the
development of the Work and Interplay shall have the right to review
10
<PAGE>
Developer's work. Developer shall make available to Interplay all of Developer's
work product in connection with such Work.
(2) In the event any "bug" may appear in the Work at any time after
acceptance of the Work, in addition to any other rights or remedies which
Interplay may have in such event, Developer agrees to immediately, following
Interplay's notification to Developer of such problem, correct such "bug" at
Developer's own cost and expense. If Developer fails or refuses to correct such
"bug" and Interplay does so, then in such event Developer shall, upon
Interplay's demand, reimburse Interplay for any and all reasonable costs
incurred by Interplay in connection with correcting such "bug." Interplay
reserves the right to offset any amounts not reimbursed to Interplay against
amounts otherwise owed to Developer.
(3) Developer shall complete the work on the Work in accordance with the
milestones and no later than the dates set forth below, as such may be modified
from time to time by written agreement of the parties. Interplay shall pay
Developer the sums set forth opposite each milestone below upon Interplay's
being satisfied that such milestone has been satisfactorily achieved. With the
exception of the Final version of the Work, in the even that Interplay does not
believe that any milestone has been satisfactorily achieved, within five (5)
business days of receipt of such milestone Interplay shall so notify Developer,
together with Interplay's comments regarding such rejection, and Developer shall
promptly submit or resubmit the materials to Interplay. This procedure shall be
repeated until Interplay determines that the milestone has been met or that
further submission will be to no avail. If Interplay determines that further
submission would be to no avail, or that the project should be terminated for
any reason Interplay may terminate this Agreement whereby Interplay's entire
liability to Developer hereunder shall be the payments already made to Developer
at the time such determination is made, minus amounts recoupable as a result of
any breach of any representation of warranty by Developer. If Interplay decides
to retain the work product of Developer as of such date and to incorporate the
same in and to the Work then the advances to Developer shall be terminated and
any cost incurred by Interplay to complete the Work shall be offset against any
payments due to Developer.
(4) The key employees who will be assigned to complete the Work are:
Mark Miller Executive Producer
Rod Morris Producer
Craig Phillips Technical Director
Greg Hodge Sound Manager
Marie Taylor Creative Director
Joanne Kropman Creative Assistant and
Lay-Up Manager
15. PAYMENTS: MILESTONE PAYMENTS
----------------------------
11
<PAGE>
Developer shall receive milestone payments, which are not advances against
royalties, if the Work is developed and delivered in form acceptable to
Interplay (subject to the provisions of Section B above), in accordance with the
following schedule:
<TABLE>
<CAPTION>
MILESTONE DESCRIPTION DELIVERY DATE PAYMENT
- --------------------- -------------- -------
<S> <C> <C>
1. CONFIDENTIAL INFORMATION OMITTED AND FILED CONFIDENTIAL
SEPARATELY WITH THE SECURITIES AND EXCHANGE INFORMATION
COMMISSION OMITTED AND
FILED
SEPARATELY
WITH THE
SECURITIES AND
EXCHANGE
COMMISSION
2. CONFIDENTIAL INFORMATION OMITTED AND FILED CONFIDENTIAL CONFIDENTIAL
SEPARATELY WITH THE SECURITIES AND EXCHANGE INFORMATION INFORMATION
COMMISSION OMITTED AND OMITTED AND
FILED FILED
SEPARATELY SEPARATELY
WITH THE WITH THE
SECURITIES AND SECURITIES AND
EXCHANGE EXCHANGE
COMMISSION COMMISSION
3. CONFIDENTIAL INFORMATION OMITTED AND FILED CONFIDENTIAL CONFIDENTIAL
SEPARATELY WITH THE SECURITIES AND EXCHANGE INFORMATION INFORMATION
COMMISSION OMITTED AND OMITTED AND
FILED FILED
SEPARATELY SEPARATELY
WITH THE WITH THE
SECURITIES AND SECURITIES AND
EXCHANGE EXCHANGE
COMMISSION COMMISSION
4. CONFIDENTIAL INFORMATION OMITTED AND FILED CONFIDENTIAL CONFIDENTIAL
SEPARATELY WITH THE SECURITIES AND EXCHANGE INFORMATION INFORMATION
COMMISSION OMITTED AND OMITTED AND
FILED FILED
SEPARATELY SEPARATELY
WITH THE WITH THE
SECURITIES AND SECURITIES AND
EXCHANGE EXCHANGE
COMMISSION COMMISSION
5. CONFIDENTIAL INFORMATION OMITTED AND FILED CONFIDENTIAL CONFIDENTIAL
SEPARATELY WITH THE SECURITIES AND EXCHANGE INFORMATION INFORMATION
COMMISSION OMITTED AND OMITTED AND
FILED FILED
SEPARATELY SEPARATELY
WITH THE WITH THE
SECURITIES AND SECURITIES AND
EXCHANGE EXCHANGE
COMMISSION COMMISSION
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
6. CONFIDENTIAL INFORMATION OMITTED AND FILED CONFIDENTIAL CONFIDENTIAL
SEPARATELY WITH THE SECURITIES AND EXCHANGE INFORMATION INFORMATION
COMMISSION OMITTED AND OMITTED AND
FILED FILED
SEPARATELY SEPARATELY
WITH THE WITH THE
SECURITIES AND SECURITIES AND
EXCHANGE EXCHANGE
COMMISSION COMMISSION
7. CONFIDENTIAL INFORMATION OMITTED AND FILED CONFIDENTIAL CONFIDENTIAL
SEPARATELY WITH THE SECURITIES AND EXCHANGE INFORMATION INFORMATION
COMMISSION OMITTED AND OMITTED AND
FILED FILED
SEPARATELY SEPARATELY
WITH THE WITH THE
SECURITIES AND SECURITIES AND
EXCHANGE EXCHANGE
COMMISSION COMMISSION
CONFIDENTIAL INFORMATION OMITTED AND CONFIDENTIAL
FILED SEPARATELY WITH THE SECURITIES INFORMATION
AND EXCHANGE COMMISSION OMITTED AND
FILED
SEPARATELY
WITH THE
SECURITIES AND
EXCHANGE
COMMISSION
CONFIDENTIAL INFORMATION OMITTED AND CONFIDENTIAL
FILED SEPARATELY WITH THE SECURITIES INFORMATION
AND EXCHANGE COMMISSION OMITTED AND
FILED
SEPARATELY
WITH THE
SECURITIES AND
EXCHANGE
COMMISSION
CONFIDENTIAL INFORMATION OMITTED AND CONFIDENTIAL
FILED SEPARATELY WITH THE SECURITIES INFORMATION
AND EXCHANGE COMMISSION OMITTED AND
FILED
SEPARATELY
WITH THE
SECURITIES AND
EXCHANGE
COMMISSION
CONFIDENTIAL INFORMATION OMITTED AND CONFIDENTIAL
FILED SEPARATELY WITH THE SECURITIES INFORMATION
AND EXCHANGE COMMISSION OMITTED AND
FILED
SEPARATELY
WITH THE
SECURITIES AND
EXCHANGE
COMMISSION
</TABLE>
All such milestones must be accompanied by the latest version of the
materials identified in Section A(2) of this Schedule A and all files necessary
to compile and create the final sellable version of the Work.
13
<PAGE>
Interplay acknowledges and agrees that any delay caused by Interplay, which
Interplay determines resulted in the failure of Developer to meet a Milestone
Delivery Date and/or Early Completion Bonus, shall result in an extension of the
affected Milestone Delivery Date(s) or Early Completion Bonus(es) by that number
of days equal to the number of days of delay caused by Interplay.
16. PAYMENTS: ROYALTY
-----------------
Interplay hereby agrees to pay Developer the following royalties:
(1) With respect to the sale or license of the Work on the Systems, a
royalty equal to CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION of net receipts, for all units in excess
of the first CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION sold or licensed.
(2) Interplay shall pay to Developer a royalty on all sublicenses of the
Work for the Systems equal to CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION of the royalty received
by Interplay under the sublicense.
(3) Notwithstanding any of the foregoing, royalties shall be reduced or
eliminated according to the following table:
Percent of Royalty Set
Forth Elsewhere in this Schedule
--------------------------------
Scrap Sales CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION
Budget Sales CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION
For purposes of the foregoing table, "Scrap Sales" shall mean sales and
licenses of the Work by Interplay furnished free to users or sold as scrap or
"cut-outs" at prices equal to or less than CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION of original
wholesale price and on the Work furnished on a so called "no charge" basis to
distributors, subdistributors, dealers and others; "Budget Sales" shall mean
the sale or license of the Work by Interplay at prices equal to CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION of original wholesale price.
Notwithstanding anything herein to the contrary, in no event shall any
royalties be paid on any Products which are sold by Interplay at or below its
cost of goods.
(4) Any sales or license of the Work in compilations (i.e., groupings of
two or more in one package) shall be subject to such royalty rates as may be
allocated by Interplay in good faith.
(5) For purposes of this Agreement, "net receipts" shall mean the gross
receipts actually received by Interplay from sales or licenses of the Work, less
the following amounts:
i) Any applicable taxes;
ii) Amounts reimbursed by customers such as insurance or shipping;
iii) Any cash discounts, freight discounts, mark down allowances or
marketing funds required from customers;
iv) Any commissions that must be paid in conjunction with the sale or
license of such product;
v) Amounts for returns, such as credits or refunds;
vi) No royalties to be paid on products furnished by Interplay on a
so called "no charge" basis as demos to dealers or journalists.
(6) Accountings
-----------
i) Statements as to royalties payable hereunder shall be sent by
Interplay to Developer, together with payment of any accrued royalties earned by
Developer, as follows:
For Amounts Received by Interplay Date of Statement
for Sales or License of the Work with Royalty Payment
in the Months Set Forth Below
14
<PAGE>
November, December, January April 15
February, March, April
July 15
May, June, July October 15
August, September, October January 15
ii) in connection with each such accounting period, Interplay shall
have the right to retain, as a reserve against charges, credits, or returns,
such portion of payable royalties as shall be reasonable in Interplay's best
business judgment, but not to exceed ten percent (10%) of such payable
royalties. Each such reserve so established shall be liquidated and paid, to the
extent it is not reduced for actual returns and credits, on the first
anniversary of the date such reserve was taken.
iii) No royalties shall be payable to Developer in respect of sales or
licenses by Interplay until payment therefore has been received by Interplay.
iv) Royalties in respect of sale or license by Interplay outside of
the United States shall be computed in the national currency in which Interplay
is paid and shall be credited to developer's royalty account hereunder in the
same currency as Interplay is paid, and shall be proportionately subject to any
taxes imposed on the remittance of the receipts derived from the sale or license
of the Work from the country in which the sale or license is made to the United
States to the extent actually paid by Interplay or deducted from receipts to
Interplay.
v) Developer shall be deemed to have consented to all royalty
statements and all other accountings rendered by Interplay hereunder and each
such royalty statement or other accounting shall be conclusive, final, and
binding, shall constitute an account stated, and shall not be subject to any
question for any reason whatsoever unless specific objection in writing, stating
the basis thereof, is given by Developer to Interplay within six (6) months
after the receipt of such statement. No action, suit, or proceeding of any
nature in respect of any royalty statement or other accounting rendered by
Interplay hereunder may be maintained against Interplay unless such action,
suit, or proceeding is commenced against Interplay in a court of competent
jurisdiction within six (6) months after the date of Interplay's notice
rejecting such objection.
vi) Interplay shall maintain, at its executive offices, which are
presently in Orange County, California, books of account concerning sales and
license of the Work. Developer, or a certified public accountant in its behalf,
may at Developer's sole expense, examine Interplay's said books relating to the
sale or license of the Work hereunder, (including any sublicense agreements
relating to the sale or rental of the product but excluding any of Interplay's
books or records relating to the manufacture of the Work) solely for the purpose
of verifying the accuracy thereof, only during Interplay's normal business hours
and upon reasonable written notice. The books of Interplay relating to any
particular royalty statement may be examined as aforesaid only within six (6)
months after the date rendered and Interplay shall have no obligation to permit
Developer to so examine its books relating to any particular royalty statement
more than once for any one statement.
The rights hereinabove granted to Developer shall constitute
Developer's sole and exclusive rights to examine Interplay's books and records.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
15
<PAGE>
EXHIBIT 11.1
BRILLIANT DIGITAL ENTERTAINMENT, INC.
COMPUTATION OF PRO FORMA EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 3, 1993 YEAR ENDED JUNE 30,
(INCEPTION) ----------------------
TO JUNE 30, 1994 1995 1996
----------------- ---------- ----------
<S> <C> <C> <C>
Historical weighted average shares
outstanding......................... 4,420,000 4,424,420 4,473,040
Pro forma effect of:
Shares issued in connection with
acquisition of SAND............... 780,001 780,001 780,001
Common Stock equivalents:
Stock options granted............ 37,000 37,000 37,000
Warrants granted................. 47,117 47,117 47,117
---------- ---------- ----------
Common shares used in computing pro
forma net income (loss) per share... 5,284,118 5,288,538 5,337,158
========== ========== ==========
Net income (loss).................... $ (249,480) $ (423,853) $ 553,412
========== ========== ==========
Pro forma net income (loss) per
common share........................ $ (0.05) $ (0.08) $ .10
========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated September 13, 1996, in the Registration Statement
Form S-1 and related Prospectus of Brilliant Digital Entertainment, Inc. for
the registration of 2,300,000 shares of its Common Stock.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
October 23, 1996
Los Angeles, California
