<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 7372 95-4592204
(State or Other (Primary or Standard (I.R.S. Employer
Jurisdiction Industrial Identification No.)
of Incorporation or Classification Code
Organization) Number)
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(Address and Telephone Number of Principal Executive Offices)
----------------
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Place of Business or Intended Principal Place of Business)
----------------
MARK DYNE, CHIEF EXECUTIVE OFFICER
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(Name, Address and Telephone Number of Agent for Service)
----------------
COPIES TO:
<TABLE>
<S> <C>
Murray Markiles, Esq. David C. Drummond, Esq.
Scott W. Alderton, Esq. Wilson Sonsini Goodrich & Rosati
Troop Meisinger Steuber & Pasich, LLP Professional Corporation
10940 Wilshire Boulevard 650 Page Mill Road
Los Angeles, California 90024 Palo Alto, California 94304
(310) 824-7000 (650) 493-9300
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
----------------
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
NUMBER OF SHARES PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS TO OFFERING OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER SHARE(2) PRICE(1)(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per
share............................. 3,450,000 $7.85 $27,082,500 $8,207
</TABLE>
(1) Includes 450,000 shares of Common Stock issuable upon exercise of an option
granted to the Underwriters to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), and based on the average of the high and low prices
of the Common Stock on the American Stock Exchange on October 30, 1997.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1997
3,000,000 Shares
[LOGO]
Brilliant Digital Entertainment, Inc.
Common Stock
($.001 par value)
--------------
Of the shares of Common Stock (the "Common Stock") of Brilliant Digital
Entertainment, Inc. ("Brilliant" or the "Company") offered hereby (the
"Offering,") 2,200,000 shares are being sold by the Company and
800,000 shares are being sold by the Selling Stockholder named
herein (the "Selling Stockholder"). The Company will not
receive any proceeds from the sale of shares by the
Selling Stockholder.
The Common Stock is traded on the American Stock Exchange under the symbol
"BDE." On November 4, 1997, the closing price of the Common Stock, as
reported by the American Stock Exchange, was $8.25 per share. See
"Price Range of Common Stock."
For a discussion of certain factors that should be considered in connection with
an investment in the Common Stock, see "Risk Factors" beginning on page 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company (1) Stockholder
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Per Share..................................................... $ $ $ $
Total (2)..................................................... $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $650,000.
(2) The Company and the Selling Stockholder have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to
purchase up to 350,000 additional shares from the Company and 100,000
additional shares from the Selling Stockholder 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 $ , Proceeds
to Company will be $ , and Proceeds to the Selling Stockholder will be
$ .
The shares of Common Stock are offered by the several Underwriters when, as
and if 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 , 1997, against payment
in immediately available funds.
<PAGE>
[PICTURES]
INSIDE FRONT COVER
[Collage of images from CYBERSWINE, POPEYE, GRAVITY ANGELS and Storyteller
titles.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
-C- 1997 CYBERSWINE-TM- IS OWNED BY EAT CYBERFIST PTY. LTD. AND USED BY
BRILLIANT DIGITAL ENTERTAINMENT, INC. UNDER LICENSE. BRILLIANT, MULTIPATH
STORYTELLER, DIGITALPROJECTOR, SCUD AND TALKTRACK ARE TRADEMARKS OF BRILLIANT
DIGITAL ENTERTAINMENT, INC. POPEYE-TM- -C- 1997 IS A TRADEMARK OF KING FEATURES
SYNDICATE, INC. & HEARST CORPORATION.
2
<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 THE 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 producing a new generation
of digital entertainment that is being distributed over the Internet and on
CD-ROM. The Company plans to market versions of its digital stories also as
television programming and for home video in 1998. Using its proprietary
state-of-the-art software tools, the Company produces Multipath-TM- Movies,
which are three-dimensional digitally animated stories each with up to hundreds
of plot alternatives, or paths, leading to multiple distinct conclusions that
are influenced by the user. The Company's Multipath Movies feature seamless
interactivity leaving the plot and graphical presentation of the story
uninterrupted by the user's decisions. The Company utilizes a single
cost-efficient production process to produce multiple formats of a particular
Multipath Movie title for different distribution channels, such as the Internet,
CD-ROM or television programming. In addition, the Company has developed a
system that permits real time distribution of, and user interaction with, its
Multipath Movies over the Internet.
As a key part of its strategy, the Company has secured quality content for
its Multipath Movies from a number of proven sources, including SUPERMAN from
D.C. Comics (a subsidiary of Warner Bros.), XENA: WARRIOR PRINCESS and HERCULES
& XENA THE ANIMATED MOVIE, each from Universal Studios, ACE VENTURA from Morgan
Creek, POPEYE from King Features Syndicate and the CHOOSE YOUR OWN NIGHTMARE
series for kids from Bantam Doubleday Dell Books. The Company also develops
Multipath Movies based on internally-developed content. Further to its strategy,
the Company has entered into distribution agreements with key industry
participants Packard Bell NEC, CompuServe, and graphics acceleration hardware
manufacturers Matrox and S3, which the Company believes will enable over four
million PC users to access its Multipath Movies over the next twelve to eighteen
months.
The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment -- complex characters, stories and plots, with the best of
the traditional computer game -- interactivity. The Company's Multipath Movies
are designed to appeal to the entire home PC market, including both the core
gamer and the much larger segment of PC users not currently served by
traditional game developers. In order to offer digital entertainment products
with wide appeal, the Company is producing a variety of Multipath Movies
tailored to various demographic groups, such as its Storyteller-TM- Series in
which an animated storyteller narrates engaging interactive stories targeted at
children eight to twelve years of age and Multipath Movies for Kids-TM-,
including POPEYE, targeted to children as young as three years old. Multipath
Movies incorporate a number of features that the Company 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
interact with the story seamlessly, influencing the plot without interrupting
its flow or graphical presentation.
The Company's first Multipath Movie title, CYBERSWINE, is expected to be
released by January 1998 through its distribution agreement with Packard Bell
NEC. Pursuant to additional distribution agreements, Matrox is also bundling
CYBERSWINE with its latest line of 3D graphics acceleration chip sets, which are
currently being distributed for the 1997 holiday season, and the Company expects
S3 to bundle CYBERSWINE with its graphics chip sets. The Company has also
entered into a distribution agreement with CompuServe through which the Company
is establishing its own Multipath Movie site on the CompuServe service enabling
each of CompuServe's approximately 1.5 million subscribers in the United States
to purchase
3
<PAGE>
CYBERSWINE and other Multipath Movies. The Company intends to use its existing
and future distribution relationships for subsequent Multipath Movie titles that
are currently in production.
Beginning in 1998, 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
30-minute episodes and, by packaging together multiple episodes, can create a
season-length series for the broadcast market. Similarly, the Company intends to
produce 80- 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 intends to enter into joint ventures or partnerships with film and
television production companies to jointly develop and release digital
entertainment for the broadcast and home video markets utilizing the Company's
proprietary tools.
Using its proprietary software tools in conjunction with the Company's
digital production and layup skills, the Company develops Multipath Movies in a
single production process. The Company has five proprietary software tools: (i)
SCRIPNAV, a software tool that enables a script writer to write, review and
correct branching multipath scripts; (ii) TALKTRACK, 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; (iv) MR. COPY, a new software tool that arranges, reorders and, using
licensed technology, compresses and decompresses audio and bit map files created
during the production of a Multipath Movie and optimally organizes the files for
use in playing the Multipath Movie; and (v) DIGITALPROJECTOR, which contains all
the necessary elements to load and play a Multipath Movie. Utilizing its
proprietary software tools, the Company can produce each title in multiple
formats 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 TalkTrack tool allows for low-cost modification of
Multipath Movies to other languages without the awkward appearance of dubbed
movies. The Company believes that its proprietary software tools emulate film
writing and production techniques, allowing screenwriters, directors and
producers to develop Multipath Movies without the use of expensive programming
teams. The Company believes that the utilization of existing entertainment
resources will enable it to generate high-quality digital entertainment at a low
cost.
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 120, Woodland Hills, California
91367, and its telephone number is (818) 346-3653.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 2,200,000 shares
Common Stock offered by the Selling Stockholder.... 800,000 shares
Common Stock outstanding after the Offering........ 9,403,001 shares (1)
Use of Proceeds.................................... Production of Multipath Movies;
software tool development; development
of new California production studio;
expansion of Australian production
studio; content acquisitions; and for
general corporate purposes including
working capital. See "Use of Proceeds."
American Stock Exchange Symbol..................... BDE
</TABLE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SEPTEMBER
JUNE 30, DECEMBER 31, (2) 30,
----------------------------- ----------------------------- -----------------------------
1995 1996 1996 1996 1997
------------- ------------- ------------- ------------- -------------
1995
-------------
(UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues........... $ 842,796 $ 2,053,877 $ 1,184,046 $ 350,147 $ 281,170 $ 2,056,785
Gross profit............. 186,857 1,315,035 750,482 164,286 141,299 2,056,741
Total operating
expenses............... 566,284 804,748 313,007 3,985,824 2,657,667 1,293,055
Income (loss) from
operations............. (379,427) 510,287 437,475 (3,821,538) (2,516,368) 763,686
Net income (loss)........ (423,853) 553,412 390,640 (3,834,963) (2,536,838) 812,382
Net income (loss) per
share (3).............. $ (0.09) $ 0.12 $ 0.09 $ (0.77) $ (0.56) $ 0.11
Common shares used in
computing net income
(loss) per share (3)... 4,508,380 4,557,000 4,557,000 4,953,299 4,503,960 7,643,464
Pro forma net loss per
share (4).............. -- $ (0.15) -- -- -- --
Common shares used in
computing pro forma net
loss per share (4)..... -- 5,337,001 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
AS ADJUSTED
ACTUAL (5)
--------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $4,327,874 $ 20,557,374
Total current assets.................................................................. 6,368,554 22,598,054
Total assets.......................................................................... 7,674,787 23,904,287
Total current liabilities............................................................. 1,142,586 1,142,586
Total stockholders' equity............................................................ 6,532,201 22,761,701
</TABLE>
- ------------------------------
(1) Excludes 1,208,222 shares of Common Stock subject to outstanding options and
warrants as of September 30, 1997.
(2) The Company changed its fiscal year end from June 30 to December 31,
effective December 31, 1996.
(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
(4) For a discussion of the calculation of pro forma net loss per share for the
fiscal year ended June 30, 1996, see "Introduction to Unaudited Pro Forma
Financial Information."
(5) As adjusted to reflect the sale of 2,200,000 shares of Common Stock offered
by the Company hereby, at an assumed public offering price of $8.25 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds."
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS
BEEN ADJUSTED, WHERE APPLICABLE, TO REFLECT A 4.42-FOR-1 STOCK SPLIT EFFECTED BY
THE COMPANY ON SEPTEMBER 13, 1996; AND (II) ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED.
5
<PAGE>
1997 DEVELOPMENTS
Significant developments since the closing of the Company's initial public
offering in which the Company raised net proceeds of $8.5 million include the
following:
COMPLETED AND COMMENCED THE LAUNCH OF THE FIRST MULTIPATH MOVIE,
CYBERSWINE. The Company's first Multipath Movie title, CYBERSWINE, is now
available in retail stores through the Company's bundling arrangement with
Matrox Graphics, Inc. ("Matrox"). CYBERSWINE was also delivered to Packard Bell
NEC, Inc. ("Packard Bell NEC") during August 1997 for bundling under its
three-year marketing agreement with the Company. This title will be bundled on
up to six million PCs expected to be shipped by Packard Bell NEC beginning by
January 1998. In addition, the Company expects to market a retail CD-ROM version
of the title through selected retailers for sale during the 1997 holiday season.
LICENSED AND DEVELOPED ADDITIONAL CONTENT FOR USE IN THE PRODUCTION OF
MULTIPATH MOVIE TITLES. Brilliant has obtained the rights to produce Multipath
Movies based on additional licensed content, including scripts and/or characters
from Universal Studio's XENA: WARRIOR PRINCESS and XENA & HERCULES THE ANIMATED
MOVIE: THE BATTLE FOR MOUNT OLYMPUS ("XENA & HERCULES THE ANIMATED MOVIE") and
D.C. Comics' SUPERMAN. The Company has also placed a third internally generated
title, TEN WEEKS IN THE HEAD BIN, in development. These rights increase the
content previously placed in development, which includes CYBERSWINE, episodes
based on the Bantam Doubleday Dell CHOOSE YOUR OWN NIGHTMARE series for kids,
Morgan Creek's ACE VENTURA character, the POPEYE character licensed from King
Features Syndicate and another internally generated title, GRAVITY ANGELS.
EXPANDED THE COMPANY'S MULTIPATH MOVIE PRODUCTION PIPELINE. In order to
rapidly increase the number of Multipath Movie titles available for release, the
Company has placed a significant number of titles into development. The Company
has completed five titles, and based on the current production schedule, the
Company plans to complete an additional six titles by the end of 1997, 29 titles
by the end of 1998 and 22 titles by the end of 1999.
BROADENED DISTRIBUTION OF MULTIPATH MOVIES THROUGH ONLINE SERVICES AND OEM
ARRANGEMENTS. In addition to its bundling arrangement with Packard Bell NEC, the
Company has entered into a strategic relationship with CompuServe Incorporated
("CompuServe") pursuant to which Brilliant is establishing its own Multipath
Movie site on the CompuServe service which will enable consumers to purchase
Multipath Movies directly and be billed by CompuServe. The Company is developing
a bulletin board, library and conferencing/chat area as part of this site.
CompuServe provides comprehensive online/Internet access through its brands and
affiliates to more than 1.5 million subscribers in the United States. Brilliant
has also entered into arrangements with graphics acceleration hardware
manufacturers Matrox and S3 Incorporated ("S3"), pursuant to which the Company
expects CYBERSWINE to be bundled with products shipped by each company.
LAUNCHED A RETAIL SALES AND MARKETING CAMPAIGN. The Company is conducting a
sales and marketing campaign with various national computer supply chains,
software distributors and other software publishers to introduce the Multipath
Movie genre and place certain titles into the marketplace on a limited basis for
the 1997 holiday season. The Company has also recently launched initial efforts
to establish distribution of Multipath Movies in Europe and throughout Asia.
ESTABLISHED A NEW DIGITAL PRODUCTION STUDIO. The Company's digital
production studio in New South Wales, Australia, is fully operational with six
sound studios and 40 work stations for modeling, animation, scripting and
graphic design. Brilliant anticipates using proceeds of the Offering to further
expand the capacity and capabilities of this studio as well as to establish a
second digital production studio in California.
ENHANCED THE COMPANY'S TECHNOLOGY AND PROPRIETARY SOFTWARE TOOLS. The
Company has enhanced its technology and proprietary software tools during the
past year. Significant improvements and new features
6
<PAGE>
include: (i) substantial improvements in the curves of body shapes and facial
features as well as in the display of other objects by increasing polygon
processing to allow approximately 5,000 polygons to be displayed on screen at
one time compared to approximately 1,000 polygons achievable by the Company one
year ago, (ii) addition of light sourcing providing substantial enhancement to
virtual sets and to character perspectives as they move around a virtual set,
(iii) addition of space warping capability that can be used to create effects
such as smoke and rippling of water, (iv) 3D accelerator card support permitting
display of images on a variety of 3D graphics accelerator card technologies
which improve the look and feel of Multipath Movies, (v) compliance with Intel's
MMX standards, (vi) addition of a fast forward function into the
DIGITALPROJECTOR, and (vii) navigation capability within Multipath Movies
allowing a viewer to move both forward and backward in the plotlines and to
return to and replay previous decision points. The Company has also developed a
new tool, MR. COPY, which locates, arranges and, using licensed technology,
compresses and decompresses audio and bit map files enabling the Company to
produce Multipath Movies with five hours of branching content, utilizing as few
as 60 megabytes of disk storage space.
7
<PAGE>
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 INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 ("SECURITIES ACT") AND SECTION 21E OF THE
EXCHANGE ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED
IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE STATEMENTS UNDER
"PROSPECTUS SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," REGARDING THE
COMPANY'S STRATEGIES, PLANS, OBJECTIVES AND EXPECTATIONS, PRODUCT RELEASE
SCHEDULES, THE COMPANY'S ABILITY TO DESIGN, DEVELOP, MANUFACTURE AND MARKET
PRODUCTS, AND THE ABILITY OF THE COMPANY'S PRODUCTS TO ACHIEVE OR MAINTAIN
COMMERCIAL ACCEPTANCE CONSTITUTE FORWARD-LOOKING STATEMENTS. THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE AT THIS TIME, BUT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE SET FORTH IN THESE "RISK
FACTORS," AS WELL AS ELSEWHERE IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR ANY PERSON ACTING
ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE RISK FACTORS.
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 is introducing CYBERSWINE, its first Multipath Movie, in the fourth
quarter of 1997. 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 and the retail channel, 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, in the retail channel 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
8
<PAGE>
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.
LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY
The Company was founded in September 1993, and shipped its initial
traditional CD-ROM product in November 1994 and substantially curtailed this
aspect of its business in 1996. The Company acquired the software tools
necessary to produce Multipath Movies in August 1996 and has only recently
introduced its first Multipath Movie. The Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based.
In the third quarter of 1997 the Company was profitable due to revenues
associated with its Packard Bell NEC bundling agreement. In order for the
Company to achieve sustained profitability, the Company must continue to enter
into a variety of distribution and revenue generating arrangements of this type,
as well as arrangements with Internet service providers, traditional CD-ROM
publishers and retailers. There can be no assurance that the Company will enter
into any such arrangements, or that the Company will be able to sustain
quarterly profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 Company has commenced the
launch of the first of its Multipath Movies, CYBERSWINE, in the fourth quarter
of 1997. The Company plans to release the first products in the Storyteller
Series and Multipath Movies for Kids series in the fourth quarter of 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 "-- 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."
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, shipping
schedules for PC hardware with which Multipath Movies are bundled, introduction
or enhancement of products by the Company and its competitors, the ability of
the Company to produce and distribute retail packaged versions of Multipath
Movies in advance of peak retail selling seasons, 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,
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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 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
production and research and development, increased marketing operations and
expanded 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."
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 fourth 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 materially adversely affected. See "-- Rapid Technological Change;
Changing Product Platforms and Formats."
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."
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 AND LICENSING RELATIONSHIPS
The Company has entered into strategic relationships with Packard Bell NEC,
Morgan Creek, CompuServe, S3 and Matrox as well as licensing arrangements with
numerous additional companies that own the stories underlying and/or characters
in many of the Company's current and planned products. The Company's business
strategy is based largely on its strategic and licensing relationships with
these and other companies and its ability to continue to enter into similar
strategic and licensing relationships in the future. In these relationships,
mutual agreement of the parties is generally required for significant matters,
or approval of the strategic partner or both parties is required to release
products or to commence
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distribution of products. For example, the Company will be dependent on Packard
Bell NEC and other OEMS to bundle Multipath Movies with their hardware products
as a significant element of the Company's launch of the Multipath Movie genre.
Packard Bell NEC's obligation to distribute such Multipath Movies 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. The Company is also unable to control, manage or accurately predict the
shipping schedules of Packard Bell NEC and other OEM distributors. Delays in
such shipping schedules or other distribution problems affecting OEM
distributors may materially adversely affect the Company's ability to release
its products. Also, Morgan Creek and many other content licensors 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
as well as content licensors to arbitrarily 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. Many content licensors
are also reluctant to grant broad licenses covering multiple formats (e.g., a
license covering both Internet and television distribution rights) to companies
without proven track records in the television production business, and, where
rights are available, there is often significant competition for licenses. As a
result of such competition, and the reluctance by owners of content to grant
broad licenses, there can be no assurance that licensed content will be
available to the Company at prices, or upon terms or conditions acceptable to
the Company or which permit the Company to implement its strategy of producing
Multipath Movies for multiple formats. Delays resulting from disagreements with
licensors or joint venture partners or the Company's failure to renew or extend
a key license, maintain any of its strategic relationships or enter into new
licenses and strategic relationships on sound financial terms could materially
adversely affect 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.
PRODUCT DELAYS AND LIFECYCLES
The Company's current production schedules contemplate that it will release
a number of Multipath Movies in the fourth quarter of 1997, 1998 and 1999. As
with any software product, however, until all aspects of the development and
initial distribution of a product are completed, there can be no assurance of
its release date. Release dates will vary depending on quality assurance testing
and other development factors. If the Company were unable to commence volume
shipments of a significant new product during the scheduled quarter, its revenue
and earnings would likely be materially and adversely affected in that quarter.
In the past, the Company has experienced significant delays in the introduction
of certain new products. It is likely in the future that certain new products
will not be released in accordance with the Company's internal development
schedule or the expectations of public market analysts and investors. A
significant delay in the introduction of, or the presence of a defect in, one or
more new products could
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have a material adverse affect on the ultimate success of such products and on
the Company's business, operating results and financial condition, particularly
in the quarter in which such products are scheduled to be completed.
In particular, the Company will expend substantial resources in connection
with the launch of its initial Multipath Movies during the fourth quarter of
1997. Any failure to complete one or more of these titles as scheduled could
result in the inability to recoup such expenditures and loss of marketing
opportunities, retailer fees and consumer interest. Moreover, any delay in the
introduction of, or the presence of a defect in, one or more of the titles
scheduled to be completed in the fourth quarter could cause the Company to miss
the 1997 holiday retail season or other opportunities and could adversely affect
the ultimate success of such titles. See "Business -- Sales and Marketing."
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, 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 materially
adversely affected.
RISKS ASSOCIATED WITH INTERNET DELIVERY
The Company also intends to distribute certain of its Multipath Movies
through its Internet site and through a site on the CompuServe online service.
Accordingly, any system failure that causes interruption or an increase in
response time on the Company's Internet site or the CompuServe site, could
result in less traffic to and distribution of Multipath Movies via the Internet
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 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 over 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
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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.
The Company presently serves its Multipath Movies delivered over the
Internet through a single vendor. Any significant interruption in service
provided by this vendor could interrupt sales and delivery of Multipath Movies
and materially adversely affect the Company's ability to conduct its business
and maintain customer satisfaction, and thereby materially adversely affect the
Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH RETAIL DISTRIBUTION
The Company anticipates that a significant proportion of sales of Multipath
Movies will be made through distributors and to retailers. The Company is
currently expending significant resources developing a retail sales channel. The
expenditures associated with this development are likely to precede the
realization of significant sales through this channel. Moreover, the Company has
no prior experience in the development or management of the retail channel or
sales through such channel. The competition for shelf space in retail stores is
intense. To the extent that the number of consumer software products and
computer platforms increases, this competition for shelf space may further
intensify. The Company's products are expected to constitute a small percentage
of a retailer's sales volume, and there can be no assurance that retailers will
provide the Company's products with adequate levels of shelf space and
promotional support. Due to the increased competition for limited retail shelf
space and promotional resources, retailers and distributors are increasingly in
a better position to negotiate favorable terms of sale, including price
discounts and product return policies, as well as cooperative market development
funds. Increased competition could result in loss of shelf space for, and
reduction in sell-through of, the Company's products at retail stores, as well
as significant price competition, any of which could adversely affect the
Company's business, operating results and financial condition.
Retailers often require software publishers to pay fees in exchange for
preferred shelf space. The amounts paid to retailers by software publishers and
distributors for preferred shelf space are generally determined on a case by
case basis and there is, as of yet, no industry standard for determining such
fees, although larger publishers and distributors will likely have a competitive
advantage in this regard to the extent they have greater financial resources and
negotiating leverage. See "Business -- Competition."
At the time of retail product shipment, the Company will establish reserves,
including reserves which estimate the potential for future returns based on
seasonal terms of sale and distributor and retailer inventories of the Company's
products, as well as other factors. The Company intends to recognize revenue
from the sale of its products upon delivery except for sales made to certain
distributors where the right of ownership does not pass at delivery. Product
returns or price protection concessions that exceed the Company's reserves could
materially adversely affect the Company's business, operating results and
financial condition and could increase the magnitude of quarterly fluctuations
in the Company's operating and financial results. Furthermore, if the Company's
assessment of the creditworthiness of its customers receiving product on credit
proves incorrect, the Company could be required to significantly increase the
reserves previously established. There can be no assurance that such future
write-offs will not occur or that amounts written off will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
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
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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 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 has 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"), GT Interactive Software, Inc. ("GT Interactive"), Electronic
Arts, The Learning Company, Inc. ("Learning Company"), CUC International, Inc.
("CUC"). Moreover, large corporations, such as the Walt Disney Company
("Disney") and Microsoft Corporation ("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
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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 valuable
leisure 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 adversely affect its business, operating results and financial
condition. See "Business -- Competition."
MANUFACTURING RISKS
The production of the Company's Multipath Movies for the retail distribution
channel consists of pressing CD-ROM disks, assembling purchased product
components, printing product packaging and user manuals and packaging finished
products, all of which will be performed for the Company by third party vendors
in accordance with the Company's specifications and forecasts. Currently, the
Company will use primarily one vendor for each of these services. While these
services are available from multiple vendors and at multiple sites, there can be
no assurance that an interruption in the manufacture of the Company's products
could be remedied without undue delay and without materially adversely affecting
the Company's results of operations. The Company does not have contractual
agreements with any of its third party vendors, which may result in an inability
to secure adequate services in a timely manner. Demand for the services of these
vendors is also seasonal, with peak demand, and service and production backlogs
and delays occurring in September, October and November of each year. The
Company's retail Multipath Movies must be manufactured, assembled, printed,
packaged and shipped in this environment of strained capacity and must compete
for capacity and priority with the CD-ROM products of many substantially larger
competitors of the Company which are able to wield substantially greater
influence with the Company's vendors than can currently be exerted by the
Company. If the Company is unable to secure adequate services to timely produce
and deliver its products for fourth quarter sales, the Company's business,
operating results and financial condition would be materially adversely
effected.
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 continue to enhance the
Multipath Movie format. The Company believes that its future success depends in
large part upon the continuous enhancement of the software tools used 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. 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
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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.
RAPID EXPANSION AND MANAGEMENT OF GROWTH
Implementation of the Company's business plan, including introduction and
marketing of the Company's Multipath Movies, management of the Company's joint
venture with Morgan Creek, management of the Company's strategic relationship
with Packard Bell NEC, negotiation of additional content licensing and
distribution agreements, management of Internet service providers, the expansion
of the Company's studio in Australia and the development of a new studio in
California, and the general strains of the Company's role of a public company
have resulted in a significant expansion of the Company and will require that
the Company continue to significantly expand its operations in all areas. This
growth in the Company's operations and activities has placed and will continue
to 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 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, and to
increase production levels and commence marketing and distribution of its
products will also require it to hire and train new employees, including
management and 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
marketing and production staff, 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.
RISKS ASSOCIATED WITH ACQUISITIONS
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.
RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS
The entertainment software market and the PC 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. 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
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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."
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 and other businesses. Mark Dyne also serves as Chairman of the Board of
Tag-It Pacific, Inc. Kevin Bermeister also serves as managing director
of Sega Enterprises (Australia) Pty., Ltd. ("Sega Enterprises"). 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."
17
<PAGE>
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.
PRODUCTION STUDIOS
The Company expects to use $0.8 million of the net proceeds from the
Offering to expand its production studio in New South Wales, Australia. In
addition, in order to permit the Company to access talent and scripts based in
the United States and to continue to expand its production of Multipath Movies,
the Company intends to use $1.0 million of the net proceeds from the Offering to
establish a new production studio in California. It is expected that the
expansion of the production studio in Australia and the creation of a second
studio in California will require a substantial time commitment of certain
members of management and could result in delays in production. There can be no
assurance that the Company will be able to complete expansion of its Australian
studio or equip a California production studio at the budgeted price.
Additionally, there can be no assurance that expansion of the Australian
facility or development of the California facility will be completed 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.
LIMITED PROPRIETARY PROTECTION
The Company's success and ability to compete is dependent in part upon 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
18
<PAGE>
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."
VOLATILITY OF STOCK PRICE
The Company's Common Stock is traded on the American Stock Exchange, and
there has been substantial volatility in the market price of the Common Stock.
The trading price of the Common Stock has been and is likely to continue to be
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant contracts, changes in
management, announcements of technological innovations or new products by the
Company or its competitors, legislative or regulatory changes, general trends in
the industry, recommendations by securities industry analysts and other events
or factors. In addition, the stock market has experienced extreme price and
trading volume fluctuations which have affected the market price of the common
stock of many technology companies in particular and which have at times been
unrelated to operating performance of the specific companies whose stock is
affected. In addition, in the past the Company has not experienced significant
trading volume in its Common Stock, has not been actively followed by stock
market analysts and has had limited market-making support from broker-dealers.
If market-making support does not continue at present or greater levels and/or
the Company does not continue to receive analyst coverage, the average trading
volume in the Common Stock may not increase or even sustain its current levels,
in which case, there can be no assurance that an adequate trading market will
exist to sell large positions in the Common Stock. See "Price Range of Common
Stock."
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 30.7% of the Company's outstanding shares
(approximately 29.6% 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 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 and Selling Stockholders" and "Description of
Capital Stock."
19
<PAGE>
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 $16.2 million. The Company expects to use
approximately $8.5 million of the net proceeds for the development of Multipath
Movies, approximately $4.5 million to fund software tool development and
preparation of the Company's software tools for distribution, approximately $1.0
million to establish a new production studio in California, approximately $0.8
to fund expansion of the Company's production studio in New South Wales,
Australia, and approximately $0.8 million to acquire content licenses. 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 number 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 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."
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 9,403,001 shares of Common Stock outstanding. Of those
shares, the 3,000,000 shares of Common Stock offered hereby (3,450,000 shares if
the Underwriters' over-allotment option is exercised in full) and 2,003,000
shares held by current stockholders will be freely tradable without restriction
under the Securities Act, except for any such shares held at any time by an
"affiliate" of the Company, as such term is defined in Rule 144 promulgated
under the Securities Act ("Rule 144"). The remaining 4,400,001 shares of Common
Stock outstanding are "restricted securities," as that term is defined by Rule
144, or otherwise subject to Rule 144 because they are held by affiliates of the
Company. Upon expiration of lock-up provisions, 2,486,801 shares of Common Stock
will become eligible for sale 90 days following the date of this Prospectus,
subject to compliance with the volume limitations of Rule 144. Under the lock-up
provisions, certain securityholders of the Company including all officers and
directors, have agreed that they will not, directly or indirectly, sell, assign
or otherwise transfer any shares of Common Stock owned by them for a period of
90 days, and in the case of Messrs. Dyne and Bermeister, 180 days, after the
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 has registered under the Securities Act 1,080,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1996 Stock Option
Plan (the "1996 Plan"). See "Management -- Stock Option Plan." As of October 31,
1997, options to purchase 283,000 shares were outstanding. 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. See "Shares Eligible for Future Sale."
20
<PAGE>
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."
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock being offered by the Company hereby at an assumed public offering
price of $8.25 per share, after deducting the estimated underwriting discounts
and offering expenses, are estimated to be approximately $16.2 million ($18.9
million if the over-allotment option is exercised in full).
The Company expects to use approximately $8.5 million of the net proceeds
for the production of Multipath Movies, approximately $4.5 million to fund
software tool development and preparation of the Company's software tools for
distribution, approximately $1.0 million to establish a new production studio in
California, approximately $0.8 million to fund the expansion of the Company's
production studio in New South Wales, Australia, and approximately $0.8 million
to acquire content licenses. The remainder of the proceeds are expected to be
used for general corporate purposes including working capital.
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, industry changes, 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.
PRICE RANGE OF COMMON STOCK
The Common Stock commenced trading on the American Stock Exchange on
November 22, 1996 under the symbol "BDE." Prior to that time, there was no
public market for the Company's Common Stock. The following table sets forth,
for the periods indicated, certain high and low prices for the Common Stock as
reported by the American Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Fourth Quarter (beginning November 22, 1996)............................. $ 5.125 $ 3.563
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................................ 6.000 3.875
Second Quarter........................................................... 8.375 4.500
Third Quarter............................................................ 9.875 6.250
Fourth Quarter (through November 4, 1997)................................ 9.375 7.250
</TABLE>
On November 4, 1997, the closing price of the Common Stock as reported on
the American Stock Exchange was $8.25 per share. As of November 4, 1997, there
were 16 holders of record of the Common Stock.
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.
22
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1997 and the as adjusted capitalization of the Company after
giving effect to the sale of the 2,200,000 shares of Common Stock offered by the
Company hereby (at an assumed public offering price of $8.25 per share), after
deducting underwriting discounts and commissions and estimated offering
expenses. 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>
SEPTEMBER 30, 1997
-----------------------------
AS ADJUSTED
ACTUAL -------------
--------------
(UNAUDITED)
<S> <C> <C>
Stockholders' equity:
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; 7,203,001 shares
issued and outstanding actual; 9,403,001 shares issued and outstanding as
adjusted (1)................................................................... 7,203 9,403
Additional paid-in capital....................................................... 11,472,591 27,699,891
Accumulated deficit.............................................................. (4,899,297) (4,899,297)
Cumulative translation adjustment................................................ (48,296) (48,296)
-------------- -------------
Total stockholders' equity......................................................... 6,532,201 22,761,701
-------------- -------------
Total capitalization............................................................. $ 6,532,201 $ 22,761,701
-------------- -------------
-------------- -------------
</TABLE>
- ------------------------
(1) Excludes 1,080,000 shares of Common Stock available for issuance pursuant to
the 1996 Stock Option Plan, of which 283,000 shares were subject to
outstanding options as of September 30, 1997 at a weighted average exercise
price of $4.47 per share. Also excludes 925,222 shares of Common Stock
issuable upon exercise of outstanding warrants issued as of September 30,
1997 at a weighted average exercise price of $5.84 per share. See
"Management -- Stock Option Plan."
23
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected financial data for the fiscal years ended June 30,
1995 and June 30, 1996 and the six months ended December 31, 1996 are derived
from the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The financial data for the six months ended
December 31, 1995 and the three and nine month periods ended September 30, 1996
and 1997 are derived from unaudited consolidated financial statements included
elsewhere in this Prospectus. The unaudited consolidated financial statements
include all adjustments, consisting of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the three
and nine month periods ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the entire year ending December 31, 1997
or for any future period. The data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto, the Unaudited Pro
Forma Financial Information and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE SIX MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
30, DECEMBER 31,(1) SEPTEMBER 30,(1) SEPTEMBER 30,
------------------------ ------------------------ ------------------------ ------------------------
1995 1996 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Royalties from
licensing
arrangements......... $ 752,108 $ 1,291,015 $ 703,863 $ 93,699 $ 618,297 $ 2,083,904 $ 35,255 $ 2,048,920
Development fees....... 88,800 585,743 306,956 254,547 518,914 241,322 244,031 7,865
Software sales......... 1,888 177,119 173,227 1,901 1,863 51,524 1,884 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues....... 842,796 2,053,877 1,184,046 350,147 1,139,074 2,376,750 281,170 2,056,785
Cost of revenues......... 655,939 738,842 433,564 185,861 410,552 17,370 139,871 44
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............. 186,857 1,315,035 750,482 164,286 728,522 2,359,380 141,299 2,056,741
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing.... 116,435 163,038 35,160 970,592 1,098,500 386,921 968,755 184,812
General and
administrative....... 223,470 365,491 129,159 1,064,771 345,380 1,664,712 139,861 664,960
Research and
development.......... 183,000 174,395 103,278 1,876,825 1,641,315 1,418,229 1,518,337 363,147
Depreciation........... 43,379 101,824 45,410 73,636 86,933 197,774 30,714 80,136
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 566,284 804,748 313,007 3,985,824 3,172,128 3,667,636 2,657,667 1,293,055
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. (379,427) 510,287 437,475 (3,821,538) (2,443,606) (1,308,256) (2,516,368) 763,686
Other income (expense),
net.................... (44,426) 43,125 (46,835) (13,425) 72,702 366,183 (20,470) 49,476
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... (423,853) 553,412 390,640 (3,834,963) (2,370,904) (942,073) (2,536,838) 813,162
Provision for income
taxes.................. -- -- -- -- -- (2,340) -- (780)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ $ (423,853) $ 553,412 $ 390,640 $(3,834,963) $(2,370,904) $ (944,413) $(2,536,838) 812,382
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per
share (2).............. $ (0.09) $ 0.12 $ 0.09 $ (0.77) $ (0.52) $ (0.13) $ (0.56) $ 0.11
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Common shares used in
computing net income
(loss) per share (2)... 4,508,380 4,557,000 4,557,000 4,953,299 4,539,320 7,200,333 4,503,960 7,643,464
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net loss per
share (3).............. -- $ (0.15) -- -- -- -- -- --
-----------
-----------
Common shares used in
computing pro forma net
loss per share (3)..... -- 5,337,001 -- -- -- -- -- --
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
--------- ------------
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents............................................... $ 53,061 $7,590,932 $ 4,327,874
Total current assets.................................................... 717,474 7,933,453 6,368,554
Total assets............................................................ 915,746 8,484,772 7,674,787
Total current liabilities............................................... 1,045,179 1,139,197 1,142,586
Total stockholders' equity (deficiency)................................. (129,433) 7,345,575 6,532,201
</TABLE>
- ------------------------------
(1) The Company changed its fiscal year end from June 30 to December 31,
effective December 31, 1996.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
(3) For a discussion of the calculation of pro forma net loss per share for the
fiscal year ended June 30, 1996, see "Introduction to Unaudited Pro Forma
Financial Information."
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Brilliant is a production and development studio producing a new generation
of digital entertainment that is being distributed over the Internet and on
CD-ROM. The Company, headquartered in the United States, was incorporated in
July 1996. The Company was 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 prior to September 1996 discussed in
this section reflect only the operations of BII Australia. Founded in September
1993, BII Australia initially developed and sold interactive education and
entertainment CD-ROM titles primarily for children. With the completion of the
acquisition of SAND in September 1996, the nature of the Company's business
changed significantly. SAND is responsible for developing the Multipath Movie
suite of proprietary software tools, production process and first Multipath
Movie product. The Company is focusing its efforts on the development of the
Multipath Movie tools and production process, as well as the commercialization
of the Multipath Movie genre and has substantially completed the phase-out of
its traditional CD-ROM business. As a result of this change in the Company's
business, the following discussion may not be representative of its future
operations. The Company changed 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 Company began the launch
of the first of its Multipath Movies, CYBERSWINE, in the fourth quarter of 1997.
The first products in the Storyteller Series and the Multipath Movies for Kids
series are expected to be completed in the fourth quarter of 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 Multipath Movie is also expected to depend 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.
The Company incurred significant operating expenses and development costs as
it continued development of its proprietary software tools and its Multipath
Movies and as it continued to expand in anticipation of growth. In connection
with the Company's acquisition of SAND in September 1996, the Company expensed
$1,350,000 attributable to in-process research and development. Also, the
Company entered into strategic relationships with Packard Bell NEC and Morgan
Creek. In September 1996, the Company issued to Packard Bell NEC and Morgan
Creek warrants to purchase 600,000 and 85,000 shares of Common Stock,
respectively, resulting in a $1,096,000 expense and corresponding credit to
equity in
25
<PAGE>
September 1996. In September 1997, Packard Bell NEC was issued an additional
200,000 warrants resulting in an expense of $140,000 and a corresponding credit
to equity, based on the value of the warrants issued. The Company also incurred
compensation expense of $125,000 in connection with directors' stock options in
November 1996. As a result of these operating expenses and charges, the Company
incurred a significant loss in the six months ended December 31, 1996, and in
the three months ended March 31, 1997 and June 30, 1997. The Company was
profitable for the three months ended September 30, 1997 as a result of revenue
recognized under its distribution agreement with Packard Bell NEC. However,
costs associated with development of its Multipath Movies in prior quarters
resulted in a net loss for the nine months ended September 30, 1997. See "Risk
Factors--Limited Operating History; Uncertain Profitability."
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996
REVENUES. The Company historically has derived its revenues from royalties,
development fees and software sales. The Company licenses its traditional CD-ROM
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.
For those distribution contracts under which the Company is entitled to a
fixed minimum guaranteed amount which has not yet been received, the minimum
guaranteed amount is recognized as revenue when the CD-ROM master is delivered
to the distributor. Revenues from the sale of electronic tickets to view
Multipath Movies over the Internet will be recognized when such tickets are
sold.
The Company anticipates that revenues from the sale of Multipath Movies
through retail outlets will be recognized when the product is shipped. Product
returns or price protection concessions that exceed the Company's reserves could
materially adversely affect the Company's business, operating results and
financial condition and could increase the magnitude of quarterly fluctuations
in the Company's operating and financial results. Furthermore, if the Company's
assessment of the creditworthiness of its customers receiving product on credit
proves incorrect, the Company could be required to significantly increase the
reserves previously established. There can be no assurance that such future
write-offs will not occur or that amounts written off will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
Revenues increased from $1,139,000 for the nine months ended September 30,
1996 to $2,377,000 for the nine months ended September 30, 1997. This represents
an increase of $1,238,000. Revenues increased from $281,000 for the three months
ended September 30, 1996 to $2,057,000 for the three months ended September 30,
1997. This represents an increase of $1,776,000. Revenues in the 1997 periods
included $1,973,333 of revenue from its distribution agreement with Packard Bell
NEC recognized in the third quarter of 1997. Revenues in the 1996 periods were
generated from sales of the Company's traditional CD-ROM products, a business
which is being phased out.
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
26
<PAGE>
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
decreased from $411,000 for the nine months ended September 30, 1996 to $17,000
for the nine months ended September 30, 1997. This represents a decrease of
$394,000, or 96%. Cost of revenues decreased from $140,000 for the three months
ended September 30, 1996 to $44 for the three months ended September 30, 1997.
Cost of revenues in the 1996 periods include costs associated with development
of the Company's traditional CD-ROM products. During the 1997 periods, most of
the costs associated with the development of the Company's Multipath Movies were
charged to research and development expenses, in accordance with Statement of
Financial Accounting Standards No. 86 ("SFAS No. 86") See "--Accounting
Treatment for Development Costs and Research Expenditures."
SALES AND MARKETING. Sales and marketing expenses include primarily costs
for advertising, promotions, brochures, travel and trade shows. Sales and
marketing expenses decreased from $1,099,000 for the nine months ended September
30, 1996 to $387,000 for the nine months ended September 30, 1997, and from
$969,000 for the three months ended September 30, 1996 to $185,000 for the three
months ended September 30, 1997. Sales and marketing expenses include expenses
related to grants of warrants to Packard Bell NEC of $140,000 in September 1997
and $960,000 in September 1996. Sales and marketing expenses are expected to
increase in future periods due to the expansion of the Company's sales force.
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 $345,000 for the nine months ended September 30, 1996 to
$1,665,000 for the nine months ended September 30, 1997, and from $140,000 for
the three months ended September 30, 1996 to $665,000 for the three months ended
September 30, 1997. These increases are attributable to increased costs
associated with the development of internal management and infrastructure to
support the Company's increased development activity, and other services.
RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating the Company's traditional CD-ROM software tools and the software
tools used to develop Multipath Movies. Research and development expenses
decreased from $1,641,000 for the nine months ended September 30, 1996 to
$1,418,000 for the nine months ended September 30, 1997, and from $1,518,000 for
the three months ended September 30, 1996 to $363,000 for the three months ended
September 30, 1997. These decreases are attributable to the addition in
September 1996 of $1,350,000 in-process research and development costs incurred
in connection with the SAND acquisition. Costs in 1997 include continuing
development of Multipath Movies and the Multipath Movie software tools. In
accordance with SFAS No. 86, the results of operations for the nine months ended
September 30, 1997 include in-process research and development expenses incurred
in connection with development of the Multipath Movie and the Company's
proprietary software tools.
The Company has chosen to focus on the development of Multipath Movies for
the PC and has deferred development for other platforms, including game
consoles, until warranted by market conditions. This focus allows the Company to
devote more of its resources to development of Multipath Movie technology and
development of additional titles. The Company believes that its decision will
have no adverse impact on revenues in the near or medium term.
DEPRECIATION. Depreciation expense relates to depreciation of fixed assets
such as computer equipment and cabling, furniture and fixtures and leasehold
improvements. These fixed assets are depreciated over their estimated useful
lives (up to four years) using the straight-line method. Depreciation expense
increased from $31,000 and $87,000 for the three and nine months, respectively,
ended September 30, 1996
27
<PAGE>
to $80,000 and $198,000 for the three and nine months, respectively, ended
September 30, 1997. These increases are primarily attributable to additional
computer equipment put in place and leasehold improvements made during 1997.
OTHER INCOME AND EXPENSE. Other income includes interest income and
expenses, gains and losses on foreign exchange transactions and export
development grants paid to BII Australia by the Australian Trade Commission for
BII Australia's participation in certain export activities. Interest increased
from a net expense of $20,000 and $48,000 for the three and nine months,
respectively, ended September 30, 1996 to a net income of $45,000 and $215,000
for the three and nine months, respectively, ended September 30, 1997. These
increases are due to the higher cash balances as a result of the initial public
offering in November 1996 and the repayment of all interest bearing debt.
SIX MONTHS ENDED DECEMBER 31, 1996 AS COMPARED TO SIX MONTHS ENDED DECEMBER
31, 1995
REVENUES. Revenues decreased from $1,184,000 for the six months ended
December 31, 1995 to $350,000 for the six months ended December 31, 1996. This
represents a decrease of $834,000 or 70%, mainly attributable to decreased
royalty revenues as a result of a change in the Company's focus from development
of traditional CD-ROM products to the development of Multipath Movies.
COST OF REVENUES. Cost of revenues decreased from $434,000 for the six
months ended December 31, 1995 to $186,000 for the six months ended December 31,
1996. This represents a decrease of $248,000, or 57%. Cost of revenues in the
1995 period included costs associated with development of the Company's own
titles. In the 1996 period, the Company reduced its development of traditional
CD-ROM product. Many of the costs associated with the development of software
for third parties were paid directly by the third parties.
SALES AND MARKETING. Sales and marketing expenses increased from $35,000
for the six months ended December 31, 1995 to $971,000 for the six months ended
December 31, 1996. Sales and marketing expenses include expenses related to
grants of warrants to Packard Bell NEC of $960,000 in September 1996. The
agreement with Packard Bell NEC requires Packard Bell NEC to provide certain
promotional services to the Company. Accordingly, the expense associated with
the warrants has been recorded as a sales and marketing expense.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $129,000 for the six months ended December 31, 1995 to $1,065,000 for the
six months ended December 31, 1996. This increase is associated with increased
accounting, legal and consulting services provided to the Company and the value
of stock options granted during the period.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$103,000 for the six months ended December 31, 1995 to $1,877,000 for the six
months ended December 31, 1996. Of this increase, $1,350,000 is attributable to
the in-process research and development costs incurred in connection with the
SAND acquisition.
DEPRECIATION. Depreciation expense increased from $45,000 for the six
months ended December 31, 1995 to $74,000 for the six months ended December 31,
1996. This increase is attributable to additional computer equipment put in
place during 1996.
OTHER INCOME AND EXPENSE. Other income includes interest income and gains
on foreign exchange transactions. Interest income increased from $0 for the six
months ended December 31, 1995 to $41,000 for the six months ended December 31,
1996 due to the higher cash balances as a result of the initial public offering
in November 1996. Interest expense relates mainly to interest on the Company's
loan from PIE, a significant shareholder. Interest expense decreased from
$64,000 for the six months ended December 31, 1995 to $54,000 for the six months
ended December 31, 1996. This decrease is due to a lower average
28
<PAGE>
balance outstanding on the PIE loan during the six months ended December 31,
1996 as compared to the six months ended December 31, 1995.
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. 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 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 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 increased
from $223,000 for 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.
RESEARCH AND DEVELOPMENT. 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 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. In fiscal year 1996, other income 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 stockholder. 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 NET INCOME (LOSS) PER SHARE. Pro forma net loss per share for the
fiscal year ended June 30, 1996 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). This resulted in a pro forma charge to research and
development expenses of $1,350,000, including the pro forma consolidation of the
operations of SAND. Pro forma net loss per share
29
<PAGE>
for the fiscal year ended June 30, 1996 also reflects the conversion of the SAND
Note into 780,001 shares of Common Stock of the Company. 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.
FLUCTUATING OPERATING RESULTS
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, shipping
schedules for PC hardware with which Multipath Movies are bundled, introduction
or enhancement of products by the Company and its competitors, the ability of
the Company to produce and distribute retail packaged versions of Multipath
Movies in advance of peak retail selling seasons, 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 judgment
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 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
production and research and development, increased marketing operations and
expanded 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.
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 fourth 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 materially adversely affected.
30
<PAGE>
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. Historically, the Company has expensed all
costs related to the development of both its software tools and Multipath Movie
titles. During the third quarter of 1997, the Company began capitalizing certain
development costs related to the production of Multipath Movies in accordance
with SFAS No. 86. 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
Financial Accounting Standards No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films."
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal source of liquidity was
approximately $4.3 million in cash. Prior to the Company's initial public
offering in November 1996, a substantial portion of its operations were financed
through loans from two significant stockholders, PIE and Reefknot.
In November 1996, the Company's initial public offering of 2,000,000 shares
of Common Stock at $5 per share provided approximately $8.5 million in cash
after underwriters' discounts and commissions and offering expenses. All loans
from Reefknot and PIE were repaid from proceeds of the initial public offering.
Net cash provided by operating activities during the nine months ended
September 30, 1996 was primarily attributable to revenues of $1,139,000. Net
cash used in operating activities during the nine months ended September 30,
1997 was primarily attributable to a net loss of $944,000 and an increase in
accounts receivable of $1,869,000. Net cash used in investing activities in the
nine months ended September 30, 1997 was due primarily to the purchase of
computer equipment. Cash flows used in financing activities in the nine months
ended September 30, 1996 was primarily attributable to the repayment of loans
from PIE and Reefknot.
The Company has an obligation under its agreement with Morgan Creek to fund
entirely the development of two Multipath Movies, the first of which, ACE
VENTURA, is currently under development.
The Company believes that current funds and cash generated from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next twelve months. See "Risk Factors --
Future Capital Needs; Uncertainty of Additional Funding."
31
<PAGE>
BUSINESS
GENERAL
Brilliant is a production and development studio producing a new generation
of digital entertainment that is being distributed over the Internet and on
CD-ROM. The Company plans to market versions of its digital stories also as
television programming and for home video in 1998. Using its proprietary
state-of-the-art software tools, the Company produces Multipath-TM- Movies,
which are three-dimensional digitally animated stories each with up to hundreds
of plot alternatives, or paths, leading to multiple distinct conclusions that
are influenced by the user. The Company's Multipath Movies feature seamless
interactivity leaving the plot and graphical presentation of the story
uninterrupted by the user's decisions. The Company utilizes a single
cost-efficient production process to produce multiple formats of a particular
Multipath Movie title for different distribution channels, such as the Internet,
CD-ROM or television programming. In addition, the Company has developed a
system that permits real time distribution of, and user interaction with, its
Multipath Movies over the Internet.
As a key part of its strategy, the Company has secured quality content for
its Multipath Movies from a number of proven sources, including SUPERMAN from
D.C. Comics (a subsidiary of Warner Bros.), XENA: WARRIOR PRINCESS and HERCULES
& XENA THE ANIMATED MOVIE, each from Universal Studios, ACE VENTURA from Morgan
Creek, POPEYE from King Features Syndicate and the CHOOSE YOUR OWN NIGHTMARE
series for kids from Bantam Doubleday Dell Books. The Company also develops
Multipath Movies based on internally-developed content. Further to its strategy,
the Company has entered into distribution agreements with key industry
participants Packard Bell NEC, CompuServe, and graphics acceleration hardware
manufacturers Matrox and S3, which the Company believes will enable over 4
million PC users to access its Multipath Movies over the next twelve to eighteen
months.
The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment -- complex characters, stories and plots, with the best of
the traditional computer game -- interactivity. The Company's Multipath Movies
are designed to appeal to the entire home PC market, including both the core
gamer and the much larger segment of PC users not currently served by
traditional game developers. In order to offer digital entertainment products
with wide appeal, the Company is producing a variety of Multipath Movies
tailored to various demographic groups, such as its STORYTELLER-TM- SERIES in
which an animated storyteller narrates engaging interactive stories targeted at
children eight to twelve years of age and Multipath Movies for Kids-TM-,
including POPEYE, targeted to children as young as three years old. Multipath
Movies incorporate a number of features that the Company 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
interact with the story seamlessly, influencing the plot without interrupting
its flow or graphical presentation.
The Company's first Multipath Movie title, CYBERSWINE, is expected to be
released by January 1998 through its distribution agreement with Packard Bell
NEC. Pursuant to additional distribution agreements, Matrox is also bundling
CYBERSWINE with its latest line of 3D graphics acceleration chip sets, which are
currently being distributed for the 1997 holiday season, and the Company expects
S3 to bundle CYBERSWINE with its graphics chip sets. The Company has also
entered into a distribution agreement with CompuServe through which the Company
is establishing its own Multipath Movie site on the CompuServe service enabling
each of CompuServe's approximately 1.5 million subscribers in the United States
to purchase CYBERSWINE and other Multipath Movies. The Company intends to use
its existing and future distribution relationships for subsequent Multipath
Movie titles that are currently in production.
Beginning in 1998, 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
30-minute episodes and, by packaging together multiple episodes, can
32
<PAGE>
create a season-length series for the broadcast market. Similarly, the Company
intends to produce 80- 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 intends to enter into joint ventures or partnerships
with film and television production companies to jointly develop and release
digital entertainment for the broadcast and home video markets utilizing the
Company's proprietary tools.
Using its proprietary software tools in conjunction with the Company's
digital production and layup skills, the Company develops Multipath Movies in a
single production process. The Company has five proprietary software tools: (i)
SCRIPNAV, a software tool that enables a script writer to write, review and
correct branching multipath scripts; (ii) TALKTRACK, 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; (iv) MR. COPY, a new software tool that arranges, reorders and, using
licensed technology, compresses and decompresses audio and bit map files created
during the production of a Multipath Movie and optimally organizes the files for
use in playing the Multipath Movie; and (v) DIGITALPROJECTOR, which contains all
the necessary elements to load and play a Multipath Movie. Utilizing its
proprietary software tools, the Company can produce each title in multiple
formats 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 TalkTrack 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. The Company believes that the utilization of
existing entertainment resources will enable it to generate high-quality digital
entertainment at a low cost.
The Company has significantly strengthened its title development and
production pipeline during the past year. Brilliant has completed five episodes
and has 57 Multipath Movie episodes in various stages of development and
production. The Company plans to complete 6 additional episodes prior to the end
of 1997, 29 episodes during 1998 and the balance of the current production
slate, or 22 episodes, during 1999. The Company plans to release completed
episodes based upon market conditions and other factors, including the bundling
and shipping schedules of its OEM distributors.
<TABLE>
<CAPTION>
EPISODES IN
DEVELOPMENT 1997 1998
TITLE CONTENT SOURCE OR PRODUCTION COMPLETIONS COMPLETIONS
- ----------------------------------- ---------------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
CYBERSWINE......................... Internally developed 7 5 2
GRAVITY ANGELS..................... Internally developed 7 1 4
TEN WEEKS IN THE HEAD BIN.......... Internally developed 6 -- 4
CHOOSE YOUR OWN NIGHTMARE.......... Bantam Doubleday Dell 12 4 8
POPEYE............................. King Features Syndicate 3 1 2
ACE VENTURA........................ Morgan Creek 9 -- 3
XENA: WARRIOR PRINCESS............. Universal Studios 9 -- 3
SUPERMAN........................... D.C. Comics 9 -- 3
--
--- ---
TOTAL............................ 62 11 29
--
--
--- ---
--- ---
<CAPTION>
1999
TITLE COMPLETIONS
- ----------------------------------- ---------------
<S> <C>
CYBERSWINE......................... 0
GRAVITY ANGELS..................... 2
TEN WEEKS IN THE HEAD BIN.......... 2
CHOOSE YOUR OWN NIGHTMARE.......... --
POPEYE............................. --
ACE VENTURA........................ 6
XENA: WARRIOR PRINCESS............. 6
SUPERMAN........................... 6
--
TOTAL............................ 22
--
--
</TABLE>
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
33
<PAGE>
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. In addition, technological advances have
enabled millions of consumers and businesses to utilize the Internet,
particularly the World Wide Web. International Data Corporation estimates that
World Wide Web users grew to approximately 35 million by the end of 1996 and
will grow to approximately 163 million by 2000. 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, the growing
popularity of the Internet and the increasing ease 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.
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 has developed 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 also allow users to control
characters' moods and actions. In addition, the Company has developed a system
that enables users to interact in real time with its digital entertainment
products over the Internet. The Company has also developed a software tool that,
when used with licensed compression technologies, decreases download time 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 products have 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
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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 many of the high programming costs 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. 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. Consequently,
the Company expects to be able to amortize its production costs across a number
of revenue streams.
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
valuable leisure time that is required to complete the experience.
Well-conceived games are also 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
multimedia PCs is growing, the penetration rate of a typical game product
remains relatively low.
BRILLIANT'S BROAD TARGET MARKET. The Company's digital entertainment
products are designed to appeal to the entire home PC market, 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 as few as
30 minutes and will utilize content intended to appeal to a wider audience than
the traditional gamer. In order to offer digital entertainment products with
wide appeal, the Company is producing a variety of Multipath Movies tailored to
various demographic groups, such as its Storyteller Series in which an animated
storyteller narrates engaging interactive stories targeted at children eight to
twelve years of age and Multipath Movies for Kids, including POPEYE, targeted to
children as young as three years old.
DIGITAL ENTERTAINMENT FOR THE TELEVISION BROADCAST/CABLE AND HOME VIDEO
MARKETS
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
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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 is expected to enable 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 intends to enter into joint ventures or partnerships with
film and television production companies to jointly develop digital
entertainment for the broadcast and home video markets utilizing the Company's
proprietary tools.
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 the Multipath
Movie -- a new genre of digital entertainment; (ii) continue to develop and
secure compelling content; (iii) devise and aggresively pursue a broad range of
distribution methods; (iv) leverage proprietary software tools and production
capabilities to develop low-cost, high-value, digital entertainment products in
multiple formats; (v) utilize the existing entertainment industry talent base
for content development and establish the Multipath format as a standard; and
(vi) maintain a strong in-house research and development program.
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 will also serve as television broadcast/cable programming and home
video features. The Company has designed its Multipath Movies to capitalize on
underserved segments of the home PC market with stories that can be experienced
in as few as 30 minutes and utilize content intended to appeal to a wider
audience than the traditional gamer. The Company is producing a variety of
Multipath Movies tailored for various demographic groups, including comedies,
adventures, science fiction stories and children's stories. Through its
integrated production process for Multipath Movies, the Company has the ability
to produce 30-minute episodes for the broadcast/cable television market and 80-
to 120-minute animated features 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.
CONTINUE TO DEVELOP AND SECURE COMPELLING CONTENT
In addition to internally developing attractive and creative original
content, a key element of the Company's strategy focuses on securing third party
licensed content which is compelling and has an established level of consumer
recognition. The Company has secured quality content for its Multipath Movies
from a number of proven sources, including SUPERMAN from D.C. Comics (a
subsidiary of Warner Bros.), XENA: WARRIOR PRINCESS and HERCULES & XENA THE
ANIMATED MOVIE, each from Universal Studios, ACE VENTURA from Morgan Creek,
POPEYE from King Features Syndicate and the CHOOSE YOUR OWN NIGHTMARE series for
kids from Bantam Doubleday Dell Books. The Company is collaborating with Morgan
Creek to jointly develop Multipath Movies based on the Ace Ventura character and
plans to work with other studios
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and content providers to develop Multipath Movies. For example, the Company
plans to cooperate with D.C. Comics' writers to script Multipath Movies
featuring the Superman character.
DEVISE AND AGGRESSIVELY PURSUE A BROAD RANGE OF DISTRIBUTION METHODS
In order to maximize the number of users able to play its Multipath Movies
on their PCs, the Company is devising and pursuing a broad range of distribution
methods. The Company is pursuing hardware/software bundling arrangements, retail
CD-ROM sales, and promotional agreements with Internet service providers, as
well as joint ventures with studios and other content owners who have their own
production and distribution capabilities. The Company has entered into
distribution agreements with key industry participants Packard Bell NEC,
CompuServe and graphics acceleration hardware manufacturers Matrox and S3, which
the Company believes will enable over four million PC users to access its
Multipath Movies over the next twelve to eighteen months. The Company intends to
aggressively seek joint ventures with film and television studios to create
their own Multipath Movies under revenue sharing arrangements. The Company
intends to create other innovative distribution methods and is exploring
arrangements with ISPs and Internet advertisers and interactive links to
Internet entertainment sites.
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 produces Multipath Movies in multiple delivery formats, including
CD-ROM and the Internet. The Company plans to market versions of its digital
stories also as television programming and for 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
modification 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. 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 AND ESTABLISH THE MULTIPATH FORMAT AS A STANDARD
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 proprietary software
tools emulate film writing and production techniques allowing screenwriters,
directors and producers to develop Multipath Movies without the use of expensive
programming teams. The Company intends to selectively release object code
versions of its software tools through joint ventures designed to more rapidly
familiarize the creative community with the production processes and commercial
possibilities of Multipath Movies. The Company anticipates that these joint
ventures will generate revenue for the Company through retained interests and
will increase the number of Multipath Movies worldwide to help establish the
Multipath Movie format as a de facto standard. In addition, the Company plans to
derive revenue through sales of subsets of its software tools. The Company also
intends to selectively adapt and enhance its tools to include features suggested
by entertainment production professionals.
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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.
INTRODUCING THE MULTIPATH MOVIE
The Company's Multipath Movies combine the best qualities of traditional
filmed entertainment -- complex characters, stories and plots, with the best of
traditional computer games -- interactivity. Multipath Movies are
three-dimensional, digitally animated stories 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 as short as 30 minutes in
length 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.
Multipath Movies are 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 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. A typical Multipath Movie
will prompt users for a decision approximately every 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 a Multipath
Movie. Further into a Multipath Movie, the level of prompted interactivity will
increase and prompts are designed to become less direct and more intuitive.
Users interact with Multipath Movies by responding with a mouse, joystick,
keyboard or remote control device to decision points which affect the plot of a
Multipath Movie. Decision points are identified by indicators that include (i)
on-screen or dialogue prompts that manipulate the moods and personality profiles
of the main characters, which in turn produce new plot directions and story
lines, (ii) a character choice icon appearing at pre-scripted points where there
is tension between two characters or characters have differing opinions about an
issue which requires the viewer to make a supportive selection, and (iii) a
mechanism which inventories items a character has collected in prior scenes and
provides the user access to those items at set moments which in turn affect the
action and the outcome of a scene.
For example, in viewing CYBERSWINE, the 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. In CYBERSWINE, 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. Additionally, in XENA: WARRIOR PRINCESS the Company plans to
incorporate an interface mechanism enabling users to make characters collect
items such as weapons, valuables or food that they can use in later scenes.
The Multipath Movie allows the user to jump forward or reverse to previously
viewed scenes and, if desired, to select a different decision path. The user can
view the Multipath Movie from the perspective
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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 the characters of the
Multipath Movie.
The Company plans to release Multipath Movies in the following formats:
RETAIL CD-ROM TITLES. The Company intends to produce versions of its
Multipath Movies in stand-alone CD-ROM format for retail distribution.
BUNDLED TITLES WITH ONLINE CAPABILITY. The Company has also developed a
system that enables 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, but the Company has developed a system
permitting real-time online interactivity with its Multipath Movies. As part of
the Company's system, most of the data necessary for viewing Multipath Movies is
distributed on CD-ROM or installed on PC hard drives by manufacturers. This data
generally includes a library of characters, scenes, graphics, sound and other
components, as well as DigitalProjector, which includes the architecture
necessary for playing the Multipath Movie and accessing the Internet for future
episodes. Generally, consumers will receive a preview or first episode of a
Multipath Movie title without being required to connect to the Internet. Because
most of the data necessary to play a Multipath Movie and future episodes is
resident on the CD-ROM or hard drive of the viewer's computer, a low-bit rate
data stream can be delivered via the Internet to provide the animation and
storyline for future episodes. The Company is currently also developing
technology that will stream animation messages as well as sound, which will then
not be required to reside on the user's CD-ROM or hard drive.
TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO. Commencing in 1998,
the Company also plans to release certain of its Multipath Movie titles in
non-interactive format, as television broadcast/cable programming and as home
video features. The Company intends to segment such Multipath Movies into
episodes for sale into the 30-minute broadcast and cable series market. By
packaging together multiple 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 80- to
120-minute features to home video publishers.
MULTIPATH MOVIE CONTENT CATEGORIES
The Company is developing a broad range of Multipath Movie titles designed
to appeal to viewers of varying ages and tastes. Much of the PC-based digital
entertainment developed to date has been designed for the dedicated computer
game player, typically an eight to 21-year-old male with substantial free time
and spending money who appreciates game playing complexities. The Company's
strategy is to develop and produce Multipath Movie titles based upon various
types of compelling content directed at discrete consumer categories. Because
internally-developed titles require significant time and expertise, the Company
intends to place even greater emphasis on licensed content in the future. The
Company is currently developing titles according to the following categories:
MULTIPATH MOVIE FEATURES. The Company's first Multipath Movie, CYBERSWINE,
was produced from original scripts developed by the Company, and is loosely
based on an Australian science fiction comic strip series. The Company has
certain royalty obligations on revenues derived from CYBERSWINE. The Company is
also developing various other titles for this category including the internally
generated series, GRAVITY ANGELS and TEN WEEKS IN THE HEAD BIN, as well as
titles based on licensed content including ACE VENTURA, XENA: WARRIOR PRINCESS
and SUPERMAN. Additional titles in this category will be based on science
fiction, adventure, comedic and other types of underlying content and may
capitalize on popular and widely
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recognized film, television and comic strip characters and personalities. The
Company intends to investigate and pursue content opportunities for this
category that will continually broaden the appeal of Multipath Movie features.
STORYTELLER SERIES. 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 be based upon published children's books and
original stories. Initial titles in the Storyteller Series, including NIGHT OF
THE WEREWOLF and BITING FOR BLOOD, will be based upon Bantam Doubleday Dell's
popular children's series, CHOOSE YOUR OWN ADVENTURE, currently comprised of
over 170 titles, and CHOOSE YOUR OWN NIGHTMARE, currently comprised of over 15
titles. 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 the fourth quarter of 1997.
MULTIPATH MOVIES FOR KIDS. The Company is developing Multipath Movies for
Kids for children three to twelve years of age. These titles will be
specifically designed to appeal to this age group by including more comic-like
characters and engaging music and sound effects. The first title, QUEST FOR THE
WOOLLY MAMMOTH, featuring POPEYE, and is scheduled to be completed in the fourth
quarter of 1997.
DEVELOPMENT AND PRODUCTION SCHEDULE
Over the past year, the Company has placed considerable emphasis on the
development and production of a broad slate of Multipath Movie titles. To date,
the Company has completed five episodes of CYBERSWINE, which are being launched
through its OEM arrangements. The Company also intends to release the first five
CYBERSWINE episodes on a single CD-ROM through retail distribution channels. As
set forth in the chart on the following page, the Company has 62 titles in
various stages of production or development, including 11 titles scheduled for
completion in 1997, 29 titles scheduled for completion in 1998 and 22 titles
scheduled for completion in 1999. The Company plans to release completed titles
based upon market conditions and other factors, including the bundling and
shipping schedules of its OEM distributors.
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CURRENT MULTIPATH MOVIE DEVELOPMENT AND PRODUCTION SCHEDULE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ESTIMATED
TITLE NO. OF COMPLETION DISTRIBUTION
(LICENSOR IF APPLICABLE) STATUS EPISODES DATE FORMAT PROGRAM DESCRIPTION
- ---------------------------------- -------------- ----------- ----------- --------------- -----------------------
MULTIPATH MOVIE FEATURES
CYBERSWINE Completed 1 -- 30 min Q3 1997 Bundled, Science fiction for
ages 13
Completed 4 -- 30 min Q3 1997 Internet, and above
Production 1 -- 30 min Q3 1998 Retail
Production 1 -- 30 min Q3 1998
GRAVITY ANGELS Production 1 -- 30 min Q4 1997 Internet, Science fiction for
ages 13
Production 3 -- 30 min Q2 1998 Retail, and above
Scripting 1 -- 50 min Q3 1998 D1 broadcast(1)
Scripting 1 -- 50 min Q1 1999
Scripting 1 -- 50 min Q3 1999
TEN WEEKS IN THE HEAD BIN Scripting 4 -- 30 min Q3 1998 Internet, Adventure/science
fiction
Scripting 1 -- 50 min Q1 1999 Retail, for ages 16 and above
Scripting 1 -- 50 min Q3 1999 D1 broadcast(1)
ACE VENTURA
(Morgan Creek Productions)
CASE OF THE SERIAL SHAVER Scripting 1 -- 30 min Q4 1998 Internet, Comedic adventures for
THE DON IS DEAD Scripting 1 -- 30 min Q4 1998 Retail ages 8 through 16
FISTS OF FUR Scripting 1 -- 30 min Q4 1998
UNTITLED Development 6 -- 30 min 1999
XENA: WARRIOR PRINCESS Development 3 -- 30 min Q4 1998 Internet, Heroine
(Universal Studios) 6 -- 30 min 1999 Retail action/adventure for
ages 8 and above
SUPERMAN Development 1 -- 30 min Q3 1998 Internet, Superhero action/
(D.C. Comics) 2 -- 30 min Q4 1998 Retail adventure for ages 8
6 -- 30 min 1999 and above
STORYTELLER SERIES
CHOOSE YOUR OWN NIGHTMARE SERIES
(Bantam Doubleday Dell Books)
HALLOWEEN Production 1 -- 30 min Q4 1997 Internet, Light thrillers for
NIGHT OF THE WEREWOLF Production 1 -- 30 min Q4 1997 Retail ages 8 through 12
BITING FOR BLOOD Production 1 -- 30 min Q4 1997
MUMMY WHO WOULDN'T DIE Production 1 -- 30 min Q4 1997
THE SUMMONING Production 1 -- 30 min Q2 1998
SOMETHING IN THE WOODS Production 1 -- 30 min Q2 1998
THUNDERSTRUCK Scripting 1 -- 30 min Q2 1998
BLACK HOLE Scripting 1 -- 30 min Q2 1998
EVIL PENPAL Scripting 1 -- 30 min Q3 1998
HOW I BECAME A FREAK Scripting 1 -- 30 min Q3 1998
CASTLE OF DARKNESS Scripting 1 -- 30 min Q3 1998
HIT GHOST Scripting 1 -- 30 min Q3 1998
MULTIPATH MOVIES FOR KIDS
POPEYE
(King Features Syndicate)
QUEST FOR THE WOOLLY MAMMOTH Production 1 -- 30 min Q4 1997 Internet, Animated cartoon for
RESCUE OF THE WOOLLY MAMMOTH Production 1 -- 30 min Q2 1998 Retail ages 3 through 12
TREASURE HUNT Production 1 -- 30 min Q3 1998
</TABLE>
(1) The Company, as the creator of this title, retains all rights to its future
distribution. Depending upon the title's reception in the market, this title
may be slated for distribution into the television or home video market if
warranted.
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INTERNET DISTRIBUTION AND TICKETING
Given the importance of the Internet as a distribution channel for Multipath
Movies, the Company has expended considerable time and resources during the past
year to enhance Multipath Movies for online delivery. The Company believes that
the widespread commercialization of Multipath Movies as a new digital
entertainment genre is not only dependent upon the quality of the product and
the viewer's experience, but also upon the viewer's ease in accessing the
product online. Given the complexities involved in delivering the Multipath
Movie product over the Internet, which is accessed through numerous delivery
mechanisms including different OEM configurations, Internet service provider
("ISP") systems, proprietary online services systems and directly through the
World Wide Web, the Company has had to overcome various technical challenges in
order to ensure the easy installation, use and payment for use of its Multipath
Movie products in these discrete hardware, software and online environments.
In connection with delivering the CYBERSWINE gold master to Packard Bell NEC
under its bundling arrangement, the Company spent considerable time meeting the
quality control standards of Packard Bell NEC as well as adapting the product
for easy and software error-free use by consumers that might access CYBERSWINE
through various online entry points including online services and ISPs. As part
of this process, the Company believes that it has significantly improved the
delivery of the Multipath Movie format over the Internet and online and will be
able to utilize this expertise in bundling Multipath Movies with other OEMs and
in its current or future online arrangements. The Company has also engineered
its distribution technology and DigitalProjector to be compatible with
Microsoft's Internet Explorer and Netscape Navigator, as well as the multiple
configurations of Windows 95. Once installed, the DigitalProjector and its
installation program query the client computer configuration files and
automatically adjust DigitalProjector to operate within the specific parameters
of the client computer. The Company's server technology can also issue "cookies"
to end-user computers allowing two-way transfer of data that enables the Company
to transparently assist the end-user computer to play a Multipath Movie.
In addition to developing the necessary infrastructure to enable its
products to be delivered over and through numerous online configuration
environments, the Company has also developed its own proprietary ticketing
system to collect revenue from its online users. The Company's ticketing system
is designed for compatibility with a wide variety of data storage and content
billing arrangements, and to provide added value for ISPs and allow customers to
be billed more easily under a variety of charging options. The Company's
ticketing system allows a viewer to purchase a "Movie Ticket" and apply the
ticket to purchase a Multipath Movie from any participating ISP. When a viewer
accesses the "Box Office" at Brilliant's Web site, if the viewer is not a
subscriber with one of the participating ISPs, the viewer purchases a "Direct
Purchase" ticket against a credit card. When the viewer accesses the ISP to
purchase a movie, a verification and authorization sequence begins that enables
the ISP to approve the viewer for viewing and creates an audit process by which
the Company reimburses the ISP for its revenue share. If the viewer accessing
the "Ticket Vendor" is a user of an ISP that has a billing arrangement with the
Company, the viewer's ISP account can be charged as an "Indirect Purchase"
ticket. The ISP charges the viewer on its monthly statement for the Multipath
Movies viewed and the Company's portion of accrued charges is forwarded to the
Company. The Ticket Vendor and the Company's principal Multipath Movie serving
Web site are currently hosted and maintained by Worldsite Networks
("Worldsite"). The Company's proprietary ticketing system and multipath serving
software reside on restricted access servers at Worldsite's facility and are
maintained, upgraded and queried for reports by the Company via remote access.
Through the facilities of Worldsite, the Company (i) receives requests from
customers to purchase Tickets, (ii) receives, processes and transmits credit
card or other payment authorization sufficient to allow the Company to receive
payment of the price of each Ticket from the customer's bank, credit card
processor, ISP, debit account, or special purpose Internet charge or payment
account, (iii) delivers Tickets to customers, (iv) provides Multipath Movie
instructions after receipt, verification and cancellation of the customer's
Ticket and (v) collects and processes information relating to customers for the
benefit of the Company.
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THE PRODUCTION OF MULTIPATH MOVIES
[LOGO]
<TABLE>
<S> <C>
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 EDITING In Blocking, the models are animated, or "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 ANIMATION In this phase, any necessary special effects 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, TalkTrack and SCuD
Engine are gathered by Mr. Copy, fed to the
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.
</TABLE>
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 director builds
"worlds" and "models." In the same way that traditional filmed entertainment
directors give actors wardrobes and props, the Multipath Movie director
"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,
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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 five proprietary software tools that enable it to
produce high-quality Multipath Movies: (i) SCRIPNAV, a software tool that
enables a script writer to write, review and correct branching multipath
scripts; (ii) TALKTRACK, 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; (iv) MR. COPY, a new software
tool that arranges, reorders and, using licensed technology, compresses and
decompresses audio and bit map files created during the production of a
Multipath Movie and optimally organizes the files for use in playing the
Multipath Movie; and (v) DIGITALPROJECTOR, which contains all the necessary
elements to load and play a Multipath Movie.
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.
TALKTRACK. TalkTrack 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 tool samples
sounds and matches them to the most appropriate mouth shape, and in the process,
builds a library of correct sound samples with a direct relationship to a
correct mouth shape. As the Company creates more content, it will build a
library of improving sound and mouth shape matches. The Company believes that
TalkTrack is a more efficient and cost effective way to incorporate voice into
Multipath Movies than other existing sound tools. In addition, TalkTrack allows
for low cost modification of the Multipath Movies to any language without the
awkward appearance of dubbed movies. The sophistication of this tool has been
significantly enhanced during 1997 by incorporation of improved voice sampling
techniques and database applications.
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SCUD ENGINE. SCuD Engine is the centerpiece of the Multipath Movie
development and production process. SCuD Engine is an object-oriented
environment that collects and integrates source files from ScripNav, graphics,
sound and TalkTrack 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 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. SCuD also
includes a Shot Based Editing System which enables multiple sets and or props to
be incorporated into one scene such that cuts and edits can take place in line
with a traditional film environment. For example, in CYBERSWINE the specific
scene data (sets and props) could be loaded into memory and then shown through
different camera positions. In GRAVITY ANGELS, data from a number of different
scenes (multiple scene sets and props) can be loaded into memory residing in an
'off' state until it needs to be used by the camera or editor at which state it
returns to an 'on' state. This substantially improves the visual richness of
scenes.
MR. COPY. The Company has recently developed Mr. Copy which builds,
integrates and allocates the final data files in composing a Multipath Movie to
be played on the DigitalProjector. Mr. Copy arranges, assembles and, using
licensed technology, compresses and decompresses thousands of audio and bit map
files that are created during the development of a Multipath Movie in a manner
that optimizes the playing of the title. Mr. Copy compresses files allowing up
to five hours of branching content to be captured in as little as 60 megabytes
of disk space, as compared with conventional technologies which presently would
require at least one gigabyte of storage.
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, and may develop DigitalProjector for
other platforms.
In order to further promote the Multipath Movie as a digital entertainment
format, the Company intends to release on a limited basis object code versions
of its software tools to selected entertainment production companies and other
entertainment professionals. The Company intends to release these software tool
sets through joint venture arrangements in which the Company can control the
proprietary value of the software tools and control their dissemination. As part
of these joint venture arrangements, the Company will provide certain technical
and production assistance, while deriving revenue from a retained ownership
interest in the Multipath Movie titles produced by the joint venture partner.
The Company will particularly target potential joint venture partners with
either the type and availability of content or other creative and production
skills that are well-suited to the software tools and production of Multipath
Movies. The Company believes that the availability and use of the software tools
by the entertainment community at large will stimulate the overall level of
interest in the Multipath Movie format and will increase the number of available
Multipath Movie titles, thereby helping to establish the Multipath Movie format
as a de facto standard. Additionally, the Company intends to selectively adapt
and enhance its tools to include features suggested by entertainment production
professionals.
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.
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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.
[CHART]
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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 30 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 scalable, 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.
<TABLE>
<CAPTION>
HOME VIDEO BROADCAST/CABLE
CRITERIA FEATURE SERIES PC INTERNET/ONLINE
<S> <C> <C> <C> <C>
MOVIE DURATION 80-120 minutes 30-minute episodes 30-120 minutes 30-120 minutes
POLYGONS PER Unlimited Unlimited 1,000 1,000
CHARACTER
POLYGONS PER SCENE Unlimited Unlimited 5,000 5,000
SPECIAL EFFECTS All All Limited Limited
INTERACTIVITY None None Plot branching Plot branching
Camera angle Camera angle
Real time decisions Real time decisions
OUTPUT METHOD Pre-rendered video Pre-rendered video Real time 3D graphics Real time 3D graphics
DISTRIBUTION MEDIA D1 tape D1 tape CD-ROM Internet
</TABLE>
SALES AND MARKETING
The Company's sales and marketing program is designed to achieve revenue
growth, create and continue capturing new customers and promote the ongoing
growth of the Multipath Movie genre through various distribution methods and
promotional initiatives. In order to facilitate the broad acceptance of
Multipath Movies, the Company is pursuing a broad distribution strategy. The
Company will focus on three primary channels in building broad distribution of
its product formats:
CD-ROM RETAIL CHANNELS AND DIRECT-TO-RETAIL. The Company is establishing a
retail distribution program in which Multipath Movies will be marketed through
traditional software publishers and distributors nationwide. The Company seeks
to develop multiple arrangements without giving broad title exclusivity to any
particular publisher or distributor. To complement these arrangements, the
Company is also establishing a direct-to-retail program in which the Company
will enter into certain marketing and distribution agreements with selected
retailers with particular emphasis on national and regional computer, office and
mass merchants. The Company will outsource the logistical, shipping and
warehousing needs for its direct-to-retail program.
INTERNET AND ONLINE SERVICES Given the importance of Internet and online
delivery in the overall success of the Multipath Movie format, the Company
believes that it is critical to make Multipath Movies available to as many
Internet and online service users as possible. Consequently, the Company seeks
to bundle its titles on various types of PC hardware. Through its relationship
with Packard Bell NEC, Packard Bell NEC is obligated to bundle the Company's
products on up to six million PCs shipped during a three-
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year period. In addition to this bundling arrangement, the Company has entered
into bundling arrangements with each of S3 and Matrox. The Company will continue
to pursue additional bundling arrangements with other OEM manufacturers. To
complement its title bundling arrangements, the Company is also establishing a
site for its Multipath Movies as part of the online service offered by
CompuServe, including a bulletin board, library and conferencing/chat area. As
part of this program, selected Multipath Movie titles will be distributed to
Compuserve users on CD-ROMs, which will allow them to purchase Multipath Movies
through this site while being billed on their monthly CompuServe statement. The
Company anticipates that Multipath Movies will become available through the
CompuServe service by the first quarter of 1998.
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 beginning in 1998. Due to the
episodic and serial nature of its Multipath Movies, the Company's titles are
easily adaptable to the episodic television market. In addition, by grouping
multiple episodes together, the Company can also produce titles for the cable
and direct to video markets.
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 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 has
recently retained a managing director for Europe, based in the United Kingdom.
The Company is currently exploring possible product development and distribution
joint venture and strategic relationship opportunities in Europe. The Company
believes that product distribution in Europe will require implementation of
localized distribution strategies and methods through established regional
distributors. In addition, the Company believes that greater emphasis on
traditional retail distribution methods will be required in Europe initially
because of lower Internet usage rates in this region.
Given the global nature of the World Wide Web, the Company believes that
international markets represent a significant incremental opportunity for its
Multipath Movies delivered over the Internet. Utilizing its proprietary
TalkTrack technology, the Company believes it can deliver Multipath Movies in
foreign languages without significant logistical or cost issues. In particular,
the Company intends to initially explore opportunities in France and Germany.
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.
STRATEGIC, CONTENT AND DISTRIBUTION RELATIONSHIPS
The Company has entered into various strategic relationships and other
arrangements to assist in the development, production and distribution of
Multipath Movies. These 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 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, Canada, the United Kingdom, Australia,
New Zealand and South Africa over a three-year period which began in August of
1997 (the "Shipping Period"). The bundled software allows the user to play or
download Multipath Movies from an Internet site established by the Company. The
bundled software permits viewing of a preview or the first episode of CYBERSWINE
and includes a library of characters, scenes, graphics, sound and other
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components permitting viewing of future episodes of the title. The Company has
the ability to periodically substitute other Multipath Movie titles for the
CYBERSWINE 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. Under the terms of the agreement,
which was amended in September, 1997, Packard Bell NEC will pay a royalty on
each bundled unit of a Multipath Movie shipped by Packard Bell NEC during a
portion of the Shipping Period and is entitled to receive a percentage of the
net revenues earned by the Company from those bundled units. Thereafter, the
Company will be entitled to all revenues that are derived from Multipath Movies
distributed pursuant to the Agreement. Packard Bell NEC received warrants to
purchase 600,000 shares of the Company's Common Stock upon execution of the
agreement in 1996, and additional warrants to purchase 200,000 shares of the
Company's Common Stock upon execution of the amendment to the agreement in
September 1997. 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 PCs and
over the Internet. The first project commenced under this agreement is a
thirteen episode comedy adventure series featuring the Ace Ventura character.
The Company is scripting three episodes of ACE VENTURA, which it expects to
complete during 1998. The Company expects to commence scripting of an additional
six episodes in the fourth quarter of 1997. The rights granted by Morgan Creek
under the agreement do not extend to broadcast/cable television programming.
Morgan Creek is providing 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. Morgan Creek also received 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.
BANTAM DOUBLEDAY DELL BOOKS FOR YOUNG READERS. The Company has entered into
an agreement (the "Bantam Agreement") with Bantam Doubleday Dell providing the
Company with an option to acquire exclusive worldwide interactive rights to
Bantam Doubleday Dell's "CHOOSE YOUR OWN NIGHTMARE" and "CHOOSE YOUR OWN
ADVENTURE" series of interactive books. The Company's option covers over 185
titles, plus any additional titles in each series published by Bantam Doubleday
Dell. 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
Doubleday Dell 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 four titles, the Company is required to pay Bantam
Doubleday Dell a non-refundable advance against which royalties will be applied.
To date, the Company has exercised its option on 10 titles.
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KING FEATURES SYNDICATE. The Company has entered into an agreement with
King Features Syndicate providing the Company with the right to use its
character Popeye and related story characters in Multipath Movies for play on
PC-based CD-ROM products and over the Internet in countries where English is the
predominantly spoken language. The option includes the right to adapt licensed
titles for three Multipath Movies. The Company has paid King Features Syndicate
a cash advance against future royalties. If the Company meets certain minimum
earned royalty levels, the Company shall have the option to extend the agreement
for two years beyond its original three-year term which continues until December
31, 1999.
UNIVERSAL STUDIOS. The Company's agreement with Universal provides the
Company with the rights to use certain story scripts from the live action
television series XENA: WARRIOR PRINCESS and animated character designs from the
direct-to-video motion picture HERCULES & XENA THE ANIMATED MOVIE for use in the
production of Multipath Movies. The sale of Multipath Movie titles based on the
original plots can be made for the CD-ROM and DVD platforms and additional plots
can be distributed and sold via the Internet. The Company has paid Universal
Studios part of an advance against future royalty payments and guaranteed
minimum royalties. The initial term of this agreement continues until January
31, 2002.
D.C. COMICS (WARNER BROS.). The Company's agreement with D.C. Comics
provides the Company with the rights to use the comic strip character "Superman"
in Multipath Movies which can be distributed on CD-ROM and DVD platforms, or via
the Internet. The Company has a guaranteed advance against royalties. The
Company is also obligated to pay D.C. Comics a certain percentage of net
advertising proceeds received from the sale of Multipath Movies based on the
Superman character. The initial term of the agreement continues until September
1, 2001.
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. 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.
MATROX. The Company has granted Matrox, a manufacturer of graphics
acceleration hardware, the right to place the first episode of CYBERSWINE on an
Internet enabled CD-ROM bundled with Matrox products. Matrox has bundled the
first episode of CYBERSWINE with its Matrox m3D graphics upgrade. Matrox'
customers who view the first CYBERSWINE episode are connected to the Company's
Internet site where they are able to purchase additional episodes. The Company
will retain all revenues from purchases of additional episodes by Matrox
customers. Matrox has the right to bundle the first episode with its other
products but is not under an obligation to do so.
S3. S3, a manufacturer of graphics acceleration hardware, has entered into
a two-year agreement with the Company permitting, but not requiring, S3 to
bundle CYBERSWINE on a CD-ROM distributed with its three dimensional hardware
products. Under the agreement, CYBERSWINE would be distributed in encrypted form
and may be viewed by users who purchase a code or "key" by calling a service
center using a toll-free phone number. The Company will receive a portion of the
purchase price of each key sold by S3.
COMPUSERVE. CompuServe has agreed to distribute the enabling software and
digital assets for the Company's Multipath Movies on CompuServe's version
upgrade CD-ROMs sent to its members and prospective members. If CompuServe
determines not to distribute the enabling software and digital assets on its
upgrade CD-ROMs, the Company may terminate the agreement. The Company will
establish a site providing CompuServe users access to Multipath Movies. Through
the site, CompuServe users will be able to download the DigitalProjector, and
files for various Multipath Movies and episodes. The site will also include a
forum consisting of a message board, library and "chat" area. The site will be
hosted by computer facilities provided by CompuServe. Under the agreement, the
Company will receive a portion of Multipath
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Movie revenues, connect-time fees and advertising and sponsorship fees generated
by use of the Company's CompuServe site. The Company will also receive
"bounties" for CompuServe subscribers brought to CompuServe by the Company's
marketing efforts.
RESEARCH AND DEVELOPMENT
The Company's research and development program is focused on: (i) enhancing
the Company's software tools to continually add features identified by and of
value to the creative and production entertainment communities, (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 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 research and development facility in Australia, where it maintains a
staff of fourteen engineers, eight of whom are devoted to pioneering new
technologies and six of whom are devoted exclusively to advancing the Company's
existing technology and software tools. The Company intends to apply a portion
of the proceeds of the Offering to increase its research and development staff
in order to progressively enhance existing features of the software tools,
continue development of the user interface of the Company's software tools
re-write sections of code, improve modularity, and provide technical support for
joint venture partners to whom the software tools are licensed.
The Company has significantly enhanced and improved its technology and
proprietary software tools during the past year as a result of discrete
programming upgrades. Significant improvements and new features include: (i)
substantial improvements in the curves of body shapes and facial features as
well as in the display of other objects by increasing polygon processing to
allow approximately 5,000 polygons to be displayed on screen at one time
compared to approximately 1,000 polygons achievable by the Company one year ago,
(ii) the addition of light sourcing providing substantial enhancement to virtual
sets and to character perspectives as they move around a virtual set, (iii)
addition of space warping capability that can be used to create effects such as
smoke and rippling of water, (iv) 3D accelerator card support permitting display
of images on a variety of 3D graphics accelerator card technologies which
improve the look and feel of Multipath Movies, (v) compliance with Intel's MMX
standards, (vi) addition of a fast forward function into the DIGITALPROJECTOR,
and (vii) navigation capability within Multipath Movies allowing a viewer to
move both forward and backward in the plotlines and to return to and replay
previous decision points. The Company has also developed a new tool, MR. COPY,
which locates, arranges and, using licensed technology, compresses and
decompresses audio and bit map files enabling the Company to produce Multipath
Movies with five hours of branching content utilizing as few as 60 megabytes of
disk storage space.
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
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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, GT Interactive,
Electronic Arts, Learning Company and CUC. 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 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.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon 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
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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 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.
EMPLOYEES
At October 31, 1997 the Company had 76 full-time employees: 12 engaged in
research and development, 58 in production, five in general administration and
finance and two in sales and marketing. 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 nine 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 Bondi Junction and Woollahra, both suburbs of Sydney,
Australia.
PROPERTIES
The Company's production facilities, consisting of approximately 8,500
square feet, are located in Bondi Junction, Australia and the research and
development facilities occupied by SAND consisting of approximately 1,900 square
feet are located in Woollahra, Australia. The current annual rental under the
Bondi Junction lease is $126,000 and under the Woollahra lease is $30,000. The
Company also leases an office in Woodland Hills, California for rent of
approximately $69,000 per annum.
The Company anticipates using up to $0.8 million of the proceeds raised in
the Offering to expand its current production studio in Bondi Junction. The
current facility is fully operational with six sound studios
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and forty work stations for modeling and animation as well as a number of
additional work station seats for authors and graphic artists that work on a
contract basis. Brilliant anticipates expanding this studio to accommodate
additional sound studios and work stations. In addition, the Company will use
proceeds form the Offering to establish new production facilities in California.
It is anticipated that these facilities will develop and produce titles with
local joint venture partners and overflow work from Australia. Research and
development with respect to the continual enhancements and upgrades of the
Company's proprietary software tool suite will be maintained in Bondi Junction.
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 31, 1997 is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Mark Dyne................................................ 36 Chairman of the Board of Directors and Chief
Executive Officer
Kevin Bermeister......................................... 37 President and Director
Michael Ozen............................................. 43 Chief Financial Officer and Secretary
Mark Miller.............................................. 38 Vice President, Production and Operations and
Director
Anthony Rose............................................. 33 Vice President, Technology
Olympia Proal............................................ 41 Vice President, Sales and Marketing
Alan Sharam.............................................. 54 Managing Director, Europe
Diana Maranon (1)........................................ 39 Director
Gary Barber (2).......................................... 40 Director
Ray Musci (1)............................................ 37 Director
Garth Saloner (2)........................................ 42 Director
Jeff Scheinrock (1)(2)................................... 46 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
currently is Chairman of the Board of Directors of Tag-It Pacific, Inc., a
position he has held since September 1997. Mr. Dyne also serves as joint
managing director of Sega Ozisoft, a company he helped found in 1982 with 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 a director of Monto
Holdings Pty. Ltd. ("Monto") and Nu-Metro Multimedia Pty. Ltd. ("Nu-Metro"), and
a co-owner of Packard Bell Australia Pty. Ltd. ("Packard Bell NEC Australia").
From June 1995 through May 1997, Mr. Dyne served as a Co-Chief Executive Officer
of Sega Enterprises (Australia) Pty., Ltd. ("Sega Enterprises"), a theme park
developer which operates the $70 million interactive indoor theme park in
Darling Harbor in Sydney, Australia. Nu-Metro is a South African based
distributor of multi-media software products. 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. Packard
Bell NEC 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
Chief Executive Officer of Sega Enterprises, a position he has held since June
1995, a director of Nu-Metro and Jacfun Pty., Ltd. ("Jacfun"), and a co-owner
and director of Packard Bell NEC Australia. Mr. Bermeister also serves as a
director of Jewish House of Sydney, Australia, a charitable organization. Jacfun
is the owner of the Darling Harbor property occupied by the Sega Enterprises
indoor theme park.
MICHAEL OZEN. Mr. Ozen has served as Chief Financial Officer of the Company
since October 1996 and Secretary of the Company since March 1997. From May 1991
through June 1996, Mr. Ozen served as
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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.
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. ("A.R. Technology"), 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.
OLYMPIA PROAL. Ms. Proal has served as Vice President, Sales and Marketing
of the Company since August 1997. From April 1996 until joining the Company, Ms.
Proal served as Vice President, Sales and Marketing of Looking Glass
Technologies, a publisher of entertainment software products. From July 1994
until April 1996, Ms. Proal was Director of Sales for DK Multimedia, a book
publisher, where she helped launch their multimedia division. Prior to joining
DK Multimedia, Ms. Proal served in various positions at Sierra On-Line, Inc. for
over seven years, including Director of Sales.
ALAN SHARAM. Mr. Sharam has served as Managing Director, Europe since June
1977. Mr. Sharam also is a consultant to Magic Touch International Ltd. ("Magic
Touch"), a position he has held since April 1996. Magic Touch is a manufacturer
of touch screen computer monitors. From June 1992 to January 1996, Mr. Sharam
served as a European Board Member of Sega Europe and as Managing Director of
Sega UK.
DIANA MARANON. Ms. Maranon has served as a Director of the Company since
October 1996, and served as Secretary of the Company from August 1996 until
March 1997. Ms. Maranon is the President and Managing Director of Averil
Associates, Inc. ("Averil Associates"), a financial advisory firm and member of
the National Association of Securities Dealers, and serves as a director of
Micronet Technology, Inc. and Tag-It Pacific, Inc. 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.
GARY BARBER. Mr. Barber has served as a Director of the Company since
October 1996. From May 1989 to July 1997, Mr. Barber was employed by Morgan
Creek Productions, Inc. From January 1995 until July 1997, he was Vice Chairman
and Chief Operating Officer of Morgan Creek. 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
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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.
JEFF SCHEINROCK. Mr. Scheinrock has served as a Director of the Company
since October 1996. Since May 1997, Mr. Scheinrock has been Chief Executive
Officer of Scheinrock Advisory Group, Inc. From July 1, 1996 until May 2, 1997,
Mr. Scheinrock served as 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. and SmarTalk TeleServices, Inc., corporations listed on the
Nasdaq Stock Market's National Market. Mr. Scheinrock also is a director of
various other private companies.
The Company's Chief Executive Officer and Chairman, Mark 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 2000 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.
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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 of Directors and $500 for
attendance at any telephonic meeting of the Board of Directors or at any meeting
of a committee of the Board of Directors. Directors also are reimbursed for
their reasonable travel expenses incurred in attending Board of Directors or
committee meetings. In September 1996, the Company granted to each of Ms.
Maranon and Messrs. Barber, Musci, Scheinrock and 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. In November 1996, the
options were repriced to $4.00 per share.
EXECUTIVE COMPENSATION
The following table sets forth both cash and noncash compensation paid or to
be paid by the Company to Mark Dyne, Chief Executive Officer, Kevin Bermeister,
President and Mark Miller, Vice President, Production and Operations (the "Named
Executive Officers"). No officer received compensation in excess of $100,000 for
the fiscal year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL YEAR --------------------
NAME AND PRINCIPAL POSITION ENDED SALARY BONUS
- -------------------------------------------------------- ---------------------- --------- ---------
<S> <C> <C> <C>
Mark Dyne (1)........................................... December 31, 1996 $ 56,250 $ --
Chief Executive Officer June 30, 1996 -- --
June 30, 1995 -- --
Kevin Bermeister (1).................................... December 31, 1996 56,250 --
President June 30, 1996 -- --
June 30, 1995 -- --
Mark Miller (2)......................................... December 31, 1996 23,279 --
Vice President, Production and June 30, 1996 68,931 --
Operations June 30, 1995 50,160 --
</TABLE>
- ------------------------
(1) Messrs. Dyne and Bermeister receive annual salaries of $225,000 and
$225,000, respectively.
(2) Mr. Miller served as President of the Company during the fiscal year ended
December 31, 1996.
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 $165,000 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
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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 $134,000 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,
$37,000 and $90,000 during the period from September 2, 1993 to June 30, 1994,
and the years ended June 30, 1995 and 1996, respectively. For the period from
July 1, 1996 to December 31, 1996, BII Australia paid PIE $18,000 for the
services of Mark Miller and paid directly to Mark Miller an additional $22,000
for his services. 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 may be administered by the Board of Directors or a 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
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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.
As of October 31, 1997, the Board had granted options covering an aggregate
of 286,000 shares of Common Stock to certain directors, officers and employees
of the Company, with a weighted average exercise price of $4.47 per share, of
which options to purchase 283,000 shares were outstanding, and 794,000 options
were available for future grant. Options granted to directors are generally
effective at such time as each director joins the Board of Directors, and are
immediately fully vested. Options granted to officers and employees generally
vest in four equal annual installments commencing on the date of grant or 48
equal monthly installments commencing on the date of grant.
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. 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 and Selling 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. In December 1996, the Company filed a registration
statement under the Securities Act to register the 1,080,000 shares of Common
Stock reserved for issuance under the 1996 Plan. The registration statement
became effective immediately upon filing with the Commission. Shares issued
under the 1996 Plan generally are available for sale to the public without
restriction, except for the 90-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."
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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
("Delaware Law"), as the same exists or may hereafter be amended. Section 145 of
the Delaware Law ("Section 145") 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 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 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.
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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 could borrow from PIE pursuant to the loan
agreement was $631,000. The interest rate of the note was 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 Company's initial public
offering or December 31, 1996. Pursuant to the Note Extension, PIE and BII
Australia increased the maximum amount BII Australia could borrow under the loan
agreement to $710,000. As of June 30, 1995 and 1996, BII Australia owed PIE
$606,000 (including accrued interest in the amount of $46,000), and $670,000
(including accrued interest of $149,000), respectively. In December 1996, the
Company applied a portion of the proceeds of the initial public offering to
repay all amounts owed to PIE ($733,000, including accrued interest of
$199,000).
BII Australia periodically purchases certain computer equipment from PIE.
For the fiscal years ended June 30, 1995 and 1996, the six months ended December
31, 1996 and the nine months ended September 30, 1997, BII Australia's purchases
totaled $15,000, $16,000, $8,000 and $0, 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 fiscal years ended June 30, 1995 and 1996, and the nine months ended
September 30, 1997, BII Australia purchased computer equipment totaling $12,000
and $16,000, and $111,000, respectively. No purchases were made during the six
months ended December 31, 1996.
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 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 $71,000 from Sega Ozisoft in the fiscal year
ended June 30, 1995. In addition, BII Australia was entitled to receive royalty
payments of $6.31 per net unit sold. Such royalty was reducible to $4.73 per net
unit sold after 2000 units had been sold for each title. The non-refundable
advances were 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 expired on December 15, 1996.
Kevin Bermeister and Mark Dyne are both directors and shareholders of
Packard Bell NEC Australia. Between February 1994 and June 30, 1996, BII
Australia purchased an aggregate of approximately $38,000 in goods from Packard
Bell NEC Australia. During the six months ended December 31, 1996 and the nine
months ended September 30, 1997, BII Australia purchased an additional $9,000
and $68,000, respectively, in goods from Packard Bell NEC Australia.
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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 was entitled to receive payment for certain assistant production
services. Amounts were 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. The Development
Agreement was superseded by the SAND Acquisition Agreement.
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 minority shareholders of Sega
Ozisoft. Pursuant to the SAND Acquisition Agreement, the Company acquired SAND
and in consideration therefor issued a $1,500,000 mandatorily convertible note
which, upon the completion of the Company's initial public offering was
automatically converted into 780,001 shares of Common Stock. The terms of the
SAND Acquisition were determined by 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 agreed to fund
certain development expenses of the Company prior to the closing of the
Company's initial public offering; and the Company agreed to reimburse Sega
Ozisoft from the proceeds of the initial public offering for all expenses
advanced by Sega Ozisoft for any period after October 31, 1996, and all expenses
in excess of $59,000 per month advanced by Sega Ozisoft for August, September
and October 1996. As of December 31, 1996 the Company had incurred a total
obligation of $84,000 pursuant to the SAND Acquisition Agreement. During the
nine months ended September 30, 1997 the Company paid $62,000 of the amount due
Sega Ozisoft.
Mark Dyne is a director of 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 the Beyond 2000 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 sales of the Beyond
2000 product. As of June 30, 1996, net receipts under the agreement totaled
approximately $25,000 and payments to Monto totaled $12,000. In addition, a
liability to Monto for $7,000 was recorded at June 30, 1996. In the six months
ended December 31, 1996 no additional receipts or payments were made pursuant to
this agreement. During the nine months ended September 30, 1997, the liability
to Monto was reduced to $4,200.
In November 1995, BII Australia entered into a distribution agreement (the
"Consumer Electronics Agreement") with Consumer Electronics. Mark Dyne and Kevin
Bermeister are both directors and significant shareholders of Consumer
Electronics. BII Australia developed, pursuant to the Consumer Electronics
Agreement, several CD-ROM software entertainment products to be distributed by
Consumer
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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 was entitled to a non-refundable advance of $85,000, of
which $21,000 was paid in fiscal year ended June 30, 1996. In September 1996,
the Company agreed to reduce the remaining advance by 25% in exchange for an
immediate payment of the balance due. On October 15, 1996, the Company received
$48,000, representing the full amount due pursuant to the re-negotiated terms.
The Company anticipates no further receipts pursuant to the Consumer Electronics
Agreement, which expired on December 6, 1996.
OTHER:
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.
Between September and November 1996, the Company executed three promissory
notes in favor of Reefknot in the principal amounts of $150,000, $50,000 and
$145,000. The interest rate on the notes was 10% per annum and the notes were
due and payable on the earlier to occur of the closing of the Company's initial
public offering and the first anniversary of the date of issuance of each note.
In December 1996, the Company repaid Reefknot in full the balance outstanding of
$350,000, including accrued interest of $5,000.
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 Company's initial public offering and in
connection with this Offering. As consideration for services rendered in the
initial public offering, the Company paid to Averil Associates the aggregate
amount of $225,000, plus out of pocket expenses, and 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. During the nine months ended September 30, 1997, the Company
paid Averil Associates $22,000 for consulting services. As consideration for
services rendered in connection with this Offering, the Company has agreed to
pay Averil Associates a cash payment of $180,000 upon consummation of the
Offering and has issued to Chloe warrants to purchase a number of shares of
Common Stock having a warrant value equal to $20,000 (9,090 shares, assuming a
public offering price of $8.25 per share) and an exercise price equal to 110% of
the price to the public of the shares offered in this Offering (the "1997
Warrants"). The 1997 Warrants will first become exercisable on the first
anniversary 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 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.
In September 1996, the Company and Packard Bell NEC entered into a CD-ROM
Distribution Agreement pursuant to which Packard Bell NEC has agreed 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 and other countries over a three year period. Packard Bell NEC received
warrants to purchase 600,000 shares of the Company's Common Stock upon execution
of the agreement in September 1996. In September 1997, the agreement was amended
to provide for the payment by Packard Bell NEC of a royalty on each bundled unit
of a Multipath Movie shipped by Packard Bell NEC during a portion of the three
year period, and Packard Bell NEC obtained the right to receive a percentage of
the revenues earned by the Company from those bundled units. Thereafter, the
Company will be entitled to all
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revenues derived from Multipath Movies distributed pursuant to the agreement. In
connection with the amendment to the CD-ROM Distribution Agreement, the Company
granted to Packard Bell NEC warrants to purchase up to an additional 200,000
shares of the Company's Common Stock in September 1997. As of October 31, 1997,
no payments had been made by the Company to Packard Bell NEC under the
agreement.
Certain of the Company's directors and officers, including Mark Dyne and
Kevin Bermeister, 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."
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PRINCIPAL AND SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Com-
pany's Common Stock as of October 31, 1997 and as adjusted to reflect the sale
of 2,200,000 shares of Common Stock by the Company and 800,000 shares of Common
Stock by the Selling Stockholder 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 120, Woodland Hills, California
91367, unless otherwise set forth below such person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING (1) THE OFFERING (1)
----------------------- -----------------------
NUMBER PERCENT NUMBER OF NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS SHARES OFFERED OF SHARES OF CLASS
- ---------------------------------------------------- ---------- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Insinger Group, as manager of the Reefknot Limited 1,500,118 20.8% 800,000 700,118 7.4%
(2)...............................................
One Stokes Place
St. Stephens Green
Dublin 2
Republic of Ireland
Mark Dyne........................................... 795,600 11.0 -- 795,600 8.5
Kevin Bermeister.................................... 795,600 11.0 -- 795,600 8.5
Sega Ozisoft Pty. Ltd. ............................. 780,001 10.8 -- 780,001 8.3
Bldg. A, Southern Industrial Estates,
200 Coward Street, Mascot, NSW
2020 Australia
Packard Bell NEC (3) ............................... 800,000 10.0 -- 800,000 7.8
One Packard Bell Way
Sacramento, California 95828
Mark Miller (4) .................................... 500,013 6.9 -- 500,013 5.3
Safcor, Inc. ....................................... 486,669 6.8 -- 486,669 5.2
8474 Commerce Ave.
Suite B
San Diego, California 92121
Diana Maranon (5)................................... 65,222 * -- 65,222 *
Gary Barber (6)..................................... 25,000 * -- 25,000 *
Ray Musci (6)....................................... 25,000 * -- 25,000 *
Garth Saloner (6)................................... 25,000 * -- 25,000 *
Jeff Scheinrock (6)................................. 25,000 * -- 25,000 *
All of the directors and executive officers as a 2,309,761 31.2 -- 2,309,761 24.1
group (11 persons) (7)............................
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
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- ------------------------
* 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 October 31, 1997 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 800,000 shares of Common Stock underlying warrants which are
currently exercisable. See "Description of Capital Stock -- Warrants."
(4) Includes 430,013 shares of Common Stock held by PIE, and 70,000 shares of
Common Stock held by the Mark Miller Family Trust, of which PIE is trustee.
Mark Miller and his wife are the sole stockholders of PIE.
(5) Consists of (i) 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are currently exercisable; and
(ii) 40,222 shares of Common Stock underlying warrants which are currently
exercisable. See "Description of Capital Stock -- Warrants."
(6) Consists of 25,000 shares of Common Stock of the Company reserved for
issuance upon exercise of stock options which are currently exercisable.
(7) Includes (i) 158,326 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 31, 1997; and (ii) 40,222 shares of Common Stock
underlying warrants which are currently exercisable. See "Description of
Capital Stock -- Warrants."
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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 31, 1997, the Company had 7,203,001 shares of Common Stock
outstanding held by approximately 16 holders of record of the Company's Common
Stock. After the Offering there will be 9,403,001 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, 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. See "Business -- Strategic
Relationships." On September 1, 1997, the Company issued to Packard Bell NEC an
additional warrant to purchase 200,000 shares of Common Stock.
The warrant issued to Packard Bell NEC on September 14, 1996 was purchased
for $100.00 and is currently exercisable in full at an exercise price of $5.00
per share and expires three years from the date of grant. The warrant issued to
Packard Bell NEC on September 1, 1997 was purchased for $200.00 and is currently
exercisable in full at an exercise price of $10.00 per share and expires on
February 28, 1999. These warrants provide for piggyback registration rights. See
"-- Registration Rights."
On or after November 27, 1997, the Company has the right to redeem all, but
not less than all, of the warrants to purchase 600,000 shares of Common Stock
issued to Packard Bell NEC on September 14, 1997, 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
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shares to be issued to Packard Bell NEC are publicly tradeable and the high
closing bid of the shares of Common Stock on the American Stock Exchange exceeds
a per share price equal to $6.25.
The Company has a similar right to redeem all, but not less than all, of the
warrants to purchase 200,000 shares of Common Stock issued to Packard Bell NEC
on September 1, 1997 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 American Stock Exchange exceeds a per share
price equal to $12.50.
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 $4.00 per share and warrants to purchase
the additional 50,000 shares of Common Stock are immediately exercisable at
$5.20 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 closing sale price of
the shares of Common Stock on the American Stock Exchange 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 connection with the Offering, the Company issued to
Chloe the 1997 Warrants. 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 or Form S-3. The warrants provide for piggyback registration rights and
the Chloe Warrants and 1997 Warrants expire on September 14, 1999 and November
4, 2000, respectively. See "-- Registration Rights."
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
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<PAGE>
"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.
REGISTRATION RIGHTS
The holders of 780,001 shares of Common Stock and the holders of warrants to
purchase 934,312 shares of Common Stock are 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, Sega
Ozisoft, with respect to 780,001 shares of Common Stock, and Common Stock
issuable to Packard Bell NEC, Morgan Creek and Chloe, are entitled to notice of
such registration and are entitled to include their respective shares 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
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 31, 1997, the Company will have outstanding an aggregate of
9,403,001 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, 2,000,000 shares previously sold by the Company in its initial
public offering completed on November 27, 1996, 3,000 shares issued upon the
exercise of stock options, and the 3,000,000 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 4,400,001 shares of
Common Stock held by existing stockholders are "restricted" securities within
the meaning of Rule 144 under the Securities Act ("Rule 144"). 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) ("Rule
144(k)") or 701 ("Rule 701") promulgated under the Securities Act, which rules
are summarized below.
Officers, directors and certain other shareholders holding approximately
38.2% of the Company's Common Stock outstanding immediately after the Offering
will, prior to the Offering, be subject to "lock-
70
<PAGE>
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 90 days, and in the case of Messrs. Dyne and
Bermeister, 180 days, after the effective date of this Prospectus 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, 2,486,801 currently outstanding
shares of Common Stock will be eligible for sale 90 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 90 days after the
effective date of this Prospectus, upon the expiration of contractual lock-up
provisions with the Company, an aggregate of approximately 160,408 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 one year but less than two 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 97,030 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 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 one year 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 31, 1997, 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 283,000 shares were outstanding under the 1996 Plan. In December 1996,
the Company filed a registration statement under the Securities Act on Form S-8
to register the 1,080,000 shares of Common Stock reserved for issuance under the
1996 Plan. Such registration statement became effective immediately upon filing
with the Securities and Exchange Commission. Shares issued under the 1996 Plan
are 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 90-day lock-up provisions. See
"Underwriting." Additionally, the holders of 780,001 shares of Common Stock and
the holders of warrants to purchase 934,312 shares of Common Stock will be
entitled to certain rights with respect to registration of such shares under the
Securities Act.
71
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated November , 1997 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation and Cruttenden Roth Incorporated are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Company and the Selling Stockholder the following
respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- --------------------------------------------------------------------------- -----------------
<S> <C>
Credit Suisse 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 the shares of 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 and the Selling Stockholder have 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 350,000 additional shares from the Company and up
to 100,000 additional shares from the Selling Stockholder at the 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 offered hereby. 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 and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer Shares of the Common
Stock to the public 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 public offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.
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 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 Credit
Suisse First Boston Corporation for a period of 90 days after the date of this
Prospectus.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
72
<PAGE>
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position for the Underwriters. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of shares of Common Stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when the Common Stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on the American Stock Exchange or otherwise and, if
commenced, may be discontinued at any time.
The shares of Common Stock are listed on the American Stock Exchange under
the symbol "BDE."
Pursuant to the terms of lock-up provisions, certain securityholders of the
Company, including all officers, directors and the Selling Stockholder, will
have agreed that, until 90 days, and in the case of Messrs. Dyne and Bermeister,
180 days, 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 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.
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 and the
Selling Stockholder 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 Selling
Stockholder 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
73
<PAGE>
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 (ONTARIO PURCHASERS)
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.
ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers as well as the experts named
herein and the Selling Stockholder, may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the Issuer 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 issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer 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.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
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 December 31, 1996, and for each of the two years in
the period ended June 30, 1996, and the six months ended December 31, 1996 as
well as the financial statements 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,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditor, as set forth in their reports thereon
appearing
74
<PAGE>
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANT
Effective July 21, 1997, Price Waterhouse LLP was engaged as the independent
certified public accountants for the Company. Price Waterhouse LLP succeeded
Ernst & Young LLP. The decision to change independent certified public
accountants was unanimously approved by the Company's Board of Directors. There
were no disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures.
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.
The Securities and Exchange Commission maintains a Web Site which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission
(such as the Company) at http://www.sec.gov.
75
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT, INC.
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets as of June 30, 1996, December 31, 1996 and September 30, 1997 (unaudited)...... F-3
Consolidated Statements of Operations for the years ended June 30, 1995 and 1996, for the six months ended
December 31, 1995 (unaudited) and December 31, 1996, and the three and nine months ended September 30,
1996 and 1997 (unaudited)................................................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended June 30, 1995 and 1996,
the six months ended December 31, 1996 and the nine months ended September 30, 1997 (unaudited).......... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995 and 1996, for the six months ended
December 31, 1995 (unaudited) and December 31, 1996, and the three and nine months ended September 30,
1996 and 1997 (unaudited)................................................................................ F-6
Notes to Consolidated Financial Statements................................................................. F-8
FINANCIAL STATEMENTS OF SEGA AUSTRALIA NEW DEVELOPMENTS
Report of Independent Auditors............................................................................. F-24
Balance Sheets as of June 30, 1995 and 1996................................................................ F-25
Statements of Operations and Business Unit Deficit for the period from March 1, 1994 (inception) to June
30, 1994 and for the years ended June 30, 1995 and 1996.................................................. F-26
Statements of Cash Flows for the period from March 1, 1994 (inception) to June 30, 1994 and for the years
ended June 30, 1995 and 1996............................................................................. F-27
Notes to Financial Statements.............................................................................. F-28
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Financial Information.................................................. F-30
Unaudited Pro Forma Statement of Operations for the year ended June 30, 1996............................... F-31
Notes to Pro Forma Financial Statements.................................................................... F-32
</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 December 31, 1996, and the
related statements of operations, stockholders' equity (deficiency), and cash
flows for each of the two years in the period ended June 30, 1996 and the six
months ended December 31, 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 December 31, 1996, 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 six months ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
March 24, 1997
Los Angeles, California
F-2
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER SEPTEMBER
1996 31, 1996 30, 1997
--------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 53,061 $7,590,932 $4,327,874
Accounts receivable (net of allowance for doubtful
accounts of $0 at June 30, 1996, and $93,140 at
December 31, 1996, and $0 at September 30, 1997).... 657,550 80,558 1,973,333
Accounts receivable from related parties.............. -- 28,796 --
Other assets.......................................... 6,863 233,167 67,347
--------- ---------- ----------
Total current assets.................................... 717,474 7,933,453 6,368,554
Property, plant and equipment, net...................... 198,272 345,069 639,253
Development costs....................................... -- -- 403,536
Other assets, net....................................... -- 206,250 263,444
--------- ---------- ----------
Total assets............................................ $ 915,746 $8,484,772 $7,674,787
--------- ---------- ----------
--------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses................. $ 99,187 $ 890,797 $1,120,682
Deferred revenue...................................... 213,003 164,441 --
Amounts payable to related parties.................... 732,989 83,959 21,904
--------- ---------- ----------
Total current liabilities............................... 1,045,179 1,139,197 1,142,586
Commitments and contingencies
Stockholders' equity (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; 4,420,000 shares issued and outstanding
at June 30, 1996; 7,200,001 shares issued and
outstanding at December 31, 1996; and 7,203,001
shares issued and outstanding at September 30,
1997................................................ 4,420 7,200 7,203
Additional paid-in capital............................ 10,163 11,320,564 11,472,591
Accumulated deficit................................... (119,921) (3,954,884) (4,899,297)
Cumulative translation adjustment..................... (24,095) (27,305) (48,296)
--------- ---------- ----------
Total stockholders' equity (deficiency)................. (129,433) 7,345,575 6,532,201
--------- ---------- ----------
Total liabilities and stockholders' equity
(deficiency).......................................... $ 915,746 $8,484,772 $7,674,787
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------ ------------------------ ------------------------
1995 1996 1995 1996 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Royalties from
licensing
arrangements......... $ 752,108 $ 1,291,015 $ 703,863 $ 93,699 $ 618,297 $ 2,083,904 $ 35,255 $2,048,920
Development fees....... 88,800 585,743 306,956 254,547 518,914 241,322 244,031 7,865
Software sales......... 1,888 177,119 173,227 1,901 1,863 51,524 1,884 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues....... 842,796 2,053,877 1,184,046 350,147 1,139,074 2,376,750 281,170 2,056,785
Cost of revenues:
Royalties from
licensing
arrangements......... 594,719 254,510 194,825 19,529 75,615 8,198 19,354 44
Development fees....... 60,234 455,414 238,739 165,540 344,162 -- 119,732 --
Software sales......... 986 28,918 -- 792 775 9,172 785 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of
revenues........... 655,939 738,842 433,564 185,861 410,552 17,370 139,871 44
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit:............ 186,857 1,315,035 750,482 164,286 728,522 2,359,380 141,299 2,056,741
Operating expenses:
Sales and marketing.... 116,435 163,038 35,160 970,592 1,098,500 386,921 968,755 184,812
General and
administrative....... 223,470 365,491 129,159 1,064,771 345,380 1,664,712 139,861 664,960
Research and
development.......... 183,000 174,395 103,278 1,876,825 1,641,315 1,418,229 1,518,337 363,147
Depreciation........... 43,379 101,824 45,410 73,636 86,933 197,774 30,714 80,136
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 566,284 804,748 313,007 3,985,824 3,172,128 3,667,636 2,657,667 1,293,055
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations:............ (379,427) 510,287 437,475 (3,821,538) (2,443,606) (1,308,256) (2,516,368) 763,686
Other income (expense):
Export market
development grant.... -- 122,488 -- -- 125,083 152,280 -- --
Gain (loss) on foreign
exchange
transactions......... -- 13,382 16,944 (503) (4,026) (664) -- 4,204
Interest income........ 707 2,017 186 41,245 2,272 214,567 411 45,272
Interest expense....... (45,133) (94,762) (63,965) (54,167) (50,627) -- (20,881) --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other income
(expense).......... (44,426) 43,125 (46,835) (13,425) 72,702 366,183 (20,470) 49,476
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... (423,853) 553,412 390,640 (3,834,963) (2,370,904) (942,073) (2,536,838) 813,162
Provision for income
taxes.................. -- -- -- -- -- (2,340) -- (780)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ $ (423,853) $ 553,412 $ 390,640 $(3,834,963) $(2,370,904) $ (944,413) $(2,536,838) $ 812,382
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per
share.................. $ (0.09) $ 0.12 $ 0.09 $ (0.77) $ (0.52) $ (0.13) $ (0.56) $ 0.11
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average number
of shares used in
computing net income
(loss) per share....... 4,508,380 4,557,000 4,557,000 4,953,299 4,539,320 7,200,333 4,503,960 7,643,464
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS CUMULATIVE
NO. OF PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
---------- --------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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)
Grant of warrants............. -- -- 1,096,000 -- -- 1,096,000
Initial public offering, net
of expenses of $1,468,000... 2,000,000 2,000 8,530,181 -- -- 8,532,181
Conversion of SAND note....... 780,001 780 1,499,220 -- -- 1,500,000
Grant of stock options........ -- -- 185,000 -- -- 185,000
Foreign exchange
translation................. -- -- -- -- (3,210) (3,210)
Net loss...................... -- -- -- (3,834,963) -- (3,834,963)
---------- --------- ------------- ------------- ----------- -------------
Balance at December 31, 1996.... 7,200,001 7,200 11,320,564 (3,954,884) (27,305) 7,345,575
Grant of warrants
(unaudited)................. -- -- 140,000 -- -- 140,000
Grant of stock options
(unaudited)................. -- -- 12,000 -- -- 12,000
Exercise of stock options
(unaudited)................. 3,000 3 27 -- -- 30
Foreign exchange translation
(unaudited)................. -- -- -- -- (20,991) (20,991)
Net loss (unaudited).......... -- -- -- (944,413) -- (944,413)
---------- --------- ------------- ------------- ----------- -------------
Balance at September 30, 1997
(unaudited)................... 7,203,001 $ 7,203 $ 11,472,591 $(4,899,297) $ (48,296) $ 6,532,201
---------- --------- ------------- ------------- ----------- -------------
---------- --------- ------------- ------------- ----------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------- ------------------------ ------------------------
1995 1996 1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)... $ (423,853) $ 553,412 $ 390,640 $(3,834,963) $(2,370,904) $ (944,413) $(2,536,838) $ 812,382
Adjustments to
reconcile net
income (loss) to
the net cash
provided by (used
in) operating
activities:
Depreciation and
amortization.... 43,379 101,824 45,410 73,636 86,933 417,511 30,714 158,798
Effect of warrants
granted......... -- -- -- 1,096,000 1,096,000 140,000 1,096,000 140,000
Effect of stock
options
granted......... -- -- -- 123,333 -- 12,000 -- 12,000
Effect of SAND
Note............ -- -- -- 1,350,000 1,350,000 -- 1,350,000 --
Changes in
operating assets
and liabilities:
Accounts
receivable.... -- (633,461) (868,785) 551,179 290,210 (1,868,520) 30,311 (1,871,481)
Development
costs......... -- -- -- -- -- (423,797) -- (411,830)
Other assets.... (6,577) (152) 178 (370,838) (768) (112,772) (746) (32,498)
Accounts payable
and
accruals...... (3,181) 37,471 6,323 790,326 60,623 268,121 36,663 340,722
Deferred
revenue....... 66,510 -- -- (49,902) -- (157,610) -- --
Other
liabilities... 7,000 3,203 -- -- 13,365 -- 2,774 --
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in)
operating
activities........ (316,722) 62,297 (426,234) (271,229) 525,459 (2,669,480) 8,878 (851,907)
INVESTING ACTIVITIES
Purchases of
equipment......... (168,619) (110,753) (71,651) (68,630) (51,251) (537,230) (13,112) (205,770)
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities........ (168,619) (110,753) (71,651) (68,630) (51,251) (537,230) (13,112) (205,770)
FINANCING ACTIVITIES
Proceeds from
issuance of
shares............ 175 -- -- 8,532,181 -- 30 -- 30
Repurchase of
shares............ -- (152) -- -- -- -- -- --
Costs related to
offering.......... -- -- -- -- (145,000) -- (145,000) --
Increase in amounts
payable to related
parties........... 1,075,660 711,686 701,958 490,792 814,952 -- 178,721 --
Repayments of
amounts payable to
related parties... (555,870) (672,018) (168,932) (1,143,040) (1,165,790) (57,467) (13,345) (54,912)
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities........ 519,965 39,516 533,026 7,879,933 (495,838) (57,437) 20,376 (54,882)
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS....... 34,624 (8,940) 35,141 7,540,074 (21,630) (3,264,147) 16,142 (1,112,559)
Translation
adjustments....... (2,812) 12,718 1,761 (2,203) 21,387 1,089 16,738 (1,609)
Cash and cash
equivalents at
beginning of
period............ 17,471 49,283 49,283 53,061 86,184 7,590,932 53,061 5,442,042
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end
of period......... $ 49,283 $ 53,061 $ 86,185 $ 7,590,932 $ $85,941 $ 4,327,874 $ 85,941 $ 4,327,874
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Supplemental
disclosure of cash
flow information:
Cash paid during the
period for:
Interest.......... $ -- $ -- $ -- $ 204,463 $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Income taxes...... $ -- $ -- $ -- $ -- $ -- $ 3,118 $ -- $ --
</TABLE>
See accompanying notes.
F-6
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
In September 1996, the Company acquired SAND and in consideration therefore
issued a one-year $1,500,000 convertible promissory note. (See Note 3 of the
Notes to Consolidated Financial Statements.) The purchase price was allocated to
in-process research and development ($1,350,000), which amount was included in
operating expenses for the six months ended December 31, 1996, and to certain
assets ($150,000), which amount was included in other assets at December 31,
1996.
During the six months ended December 31, 1996, the Company recorded $60,000
of stock option deferred compensation, which was included in other assets at
December 31, 1996 (see Note 5 of the Notes to Consolidated Financial
Statements).
See accompanying notes.
F-7
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
In August 1996, a newly formed holding company, Brilliant Digital
Entertainment, Inc., incorporated in the State of Delaware (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"). The Company is a production and development studio producing
digital entertainment for distribution over the Internet and on CD-ROM.
Historically, BII Australia developed, produced and marketed interactive
multimedia titles for the education and entertainment markets. The Company
operates and BII Australia operated, principally in the computer software
industry. BII Australia operated predominantly in Australia with significant
exports to the United States.
On September 13, 1996, the Company effected a 4.42 for 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.
In September 1996 the Company completed its acquisition of Sega Australia
New Development ("SAND") (see Note 3), which owns the rights to proprietary
software tools which are designed to allow the Company to both develop a new
genre of digital entertainment products, and to produce ancillary products cost
effectively. The results of operations of SAND are included in the Company's
consolidated financial statements from the date of acquisition.
In November 1996, the Company completed its initial public offering of
Common stock (see Note 5). The Company has changed its fiscal year-end from June
30 to December 31, effective December 31, 1996.
The accompanying unaudited consolidated financial statements for the three
and nine months ended September 30, 1996 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The accompanying unaudited condensed consolidated financial
statements reflect all adjustments which, in the opinion of management, are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
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 ($0.789 at June
30, 1996, $0.794 at December 31, 1996, and $0.725 at September 30, 1997), and
revenues and expenses are translated into U.S. dollars using average exchange
rates ($0.739 for the year ended June 30, 1995, $0.760 for the year ended June
30, 1996, $0.743 for the six months ended December 31,
F-8
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1995, $0.792 for the six months ended December 31, 1996, $0.776 for the nine
months ended September 30, 1996, $0.761 for the nine months ended September 30,
1997, $0.785 for the three months ended September 30, 1996, and $0.740 for the
three months ended September 30, 1997). 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.
NET INCOME (LOSS) PER SHARE
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 Accounting Bulletins, all common and common equivalent shares issued by
the Company at an exercise price below the 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 $5.00 per share for stock options
and warrants).
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128, effective for periods ending after December 15, 1997,
revises the computation and disclosure of earnings per share. Principal among
computation revisions is the replacement of primary earnings per share with
basic earnings per share, which does not consider common stock equivalents. In
addition, SFAS No. 128 modifies certain dilutive computations and replaces fully
diluted earnings per share with diluted earnings per share. Disclosure
requirements include, among others, dual presentation of basic and diluted
earnings per share, along with a reconciliation of the elements used in
computing basic and diluted earnings per share. At this time, the Company does
not expect that the adoption of SFAS No. 128 will have a material impact on the
Company's reported results.
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 $183,000, $174,000,
F-9
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$1,877,000, $1,641,000 and $1,418,000 for the fiscal years ended June 30, 1995
and 1996, the six months ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997, respectively. The amount for the six months ended
December 31, 1996 includes $1,350,000 of in-process research and development,
which was expensed in accounting for the SAND acquisition (see Note 3).
The Company's current 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 results in the greater
amortization amount. Prior to the establishment of technological feasibility,
these costs are expensed as incurred. Historically, the Company has expensed all
costs related to the development of both its software tools and Multipath Movie
titles. During the third quarter of 1997, the Company began capitalizing certain
development costs related to the production of Multipath Movies in accordance
with SFAS No. 86. 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
Financial Accounting Standards No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films."
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. For those
distribution contracts under which the Company is entitled to a fixed minimum
guaranteed amount which has not yet been received, the minimum guaranteed amount
is recognized as revenue when the CD-ROM master is delivered to the distributor.
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 six months ended December 31, 1996, and the nine months ended
September 30, 1996 and 1997, the Company had experienced no returns on software
sales.
F-10
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
The Company 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 years ended June 30, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, no such allowance was
considered necessary. For the six months ended December 31, 1996 the Company
recorded an allowance for doubtful accounts of $93,140.
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 four years.
F-11
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS No. 121.") SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995, and requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. The Company adopted SFAS
No. 121 for the six months ended December 31, 1996. The provisions of SFAS No.
121 do not have a material effect on the Company's consolidated results of
operations for that period, or for the nine months ended September 30, 1997.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123.") This new standard defines a fair-value-based
method of accounting for employee stock options or similar equity instruments.
This statement gives entities a choice to recognize related compensation expense
by adopting the new fair-value method or to measure compensation using the
intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25,
the former standard. If the former standard for measurement is elected, SFAS No.
123 requires supplemental disclosure to show the effect of using the new
measurement criteria. The Company has used the measurement prescribed by APB
Opinion No. 25. See Note 5 for supplemental disclosure.
3. ACQUISITION OF SAND
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 $1,500,000 convertible promissory note which,
upon the completion of the Company's initial public offering of Common Stock was
automatically converted into 780,001 shares of Common Stock of the Company. The
acquisition was accounted for using the purchase method.
SAND was created to develop state-of-the-art technology for interactive,
digital, Multipath Movies. SAND was in the development stage, devoting
substantially all of its efforts to research and development. During its
development stage, SAND 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." (Through the date
of the SAND Acquisition, SAND had incurred research and development expenses of
approximately $1,563,000.)
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 an agreement between Sega Ozisoft
and the licensor
F-12
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
3. ACQUISITION OF SAND (CONTINUED)
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.
Pursuant to the SAND Acquisition Agreement, Sega Ozisoft agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company 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 $59,000 per month advanced by
Sega Ozisoft for August, September and October 1996. As of December 31, 1996,
the Company had incurred a total obligation of $84,000 pursuant to this
agreement which amount is included in amounts payable to related parties at
December 31, 1996. During the nine months ended September 30, 1997 the Company
paid $62,000 of the amount due to Sega Ozisoft.
The following summarized, unaudited pro forma results of operations for the
year ended June 30, 1996 assume the SAND acquisition occurred as of the
beginning of the period, after giving effect to the conversion of the SAND Note
into 780,001 shares of common stock. Because SAND assets were charged to expense
on the date of acquisition, there is no material pro forma effect for the six
months ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
<S> <C>
Revenues....................................................................... $ 1,881,000
Net loss....................................................................... $ (797,000)
Net loss per share............................................................. $ (0.15)
</TABLE>
4. 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 $23,000, $69,000,
$18,000 and $0 for the fiscal years ended June 30, 1995 and 1996, the six months
ended December 31, 1996, and the nine months ended September 30, 1997,
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 could borrow from PIE pursuant to the loan
agreement was $631,000. The interest rate of the note was 12.5% and the note
plus accrued interest 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 Company's initial public
offering of Common Stock or December 31, 1996. Pursuant to the Note Extension,
PIE and BII Australia increased the maximum amount BII Australia could borrow
under the loan agreement to $710,000. As of June 30, 1996, BII Australia owed
PIE $670,000 including accrued interest in the amount of $149,000. In December
1996, BII Australia repaid PIE in full for the balance outstanding ($733,000,
including accrued interest of $199,000).
F-13
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
BII Australia periodically purchases certain computer equipment from PIE.
For the fiscal years ended June 30, 1995 and 1996, the six months ended December
31, 1996, and the nine months ended September 30, 1997, BII Australia's
purchases totaled $15,000, $16,000, $8,000 and $0, 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 fiscal years ended June 30, 1995 and 1996, and the nine months ended
September 30, 1997, BII Australia purchased computer equipment totaling $12,000,
$16,000, and $111,000, respectively. No purchases were made during the six
months ended December 31, 1996.
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 $71,000 and $51,000 were paid to Andwhen for
the years ended June 30, 1995 and 1996, respectively. No consulting fees were
paid during the six months ended December 31, 1996 or the nine months ended
September 30, 1997.
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 $4,000 and $0 for the years
ended June 30, 1995 and 1996, respectively. 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 approximately $87,000 for
the purchase of such equipment. Of this amount, $20,000 was paid upon
termination of the agreement. The balance was due in equal monthly installments
of approximately $4,500 each. As of June 30, 1996, approximately $62,000, was
payable under the terms of the agreement. This balance was paid in full in
December 1996.
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
directors 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 $71,000 from Sega Ozisoft in the fiscal year ended June 30, 1995. In
addition, BII Australia was entitled to receive royalty payments of $6.31 per
net unit sold. Such royalty was reducible to $4.73 per net unit sold after 2000
units had been sold of each title. The non-refundable advances were recoupable
from the royalties earned by BII Australia under the Sega Agreement. As of
December 31, 1996, BII Australia had received no royalty payments relating to
the Sega Agreement. The Sega Agreement expired on December 15, 1996.
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 both directors and
shareholders 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 was entitled to receive a non-refundable advance of
F-14
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
$85,000, of which $21,000 was paid in the fiscal year ended June 30, 1996. In
September 1996, the Company agreed to reduce the remaining advance by 25% in
exchange for an immediate payment of the balance due. On October 15, 1996, the
Company received $48,000 representing the full amount due pursuant to the
re-negotiated terms. The Company anticipates no further receipts pursuant to the
Consumer Electronics Agreement, which expired on December 6, 1996.
Kevin Bermeister and Mark Dyne are both directors and shareholders of
Packard Bell Pty. Ltd. Between February 1994 and June 30, 1996, BII Australia
purchased an aggregate of approximately $38,000 in goods from Packard Bell Pty.
Ltd. During the six months ended December 31, 1996, and the nine months ended
September 30, 1997, BII Australia purchased an additional $9,000 and $68,000,
respectively, in goods from 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 was entitled to receive payment for certain assistant production
services. Amounts were payable by Sega Ozisoft upon attainment of mutually
determined milestones. In September 1996, the Company entered into the SAND
Acquisition Agreement (see Note 3) which provided for additional payments for
production services, and which superseded the Development Agreement. As of June
30, 1996, the Company had received $120,000 and had recorded a receivable of
$52,000, which was received in July and August 1996. For the six months ended
December 31, 1996 the Company billed an additional $92,000, of which $29,000 was
receivable at December 31, 1996, and was collected during the nine months ended
September 31, 1997.
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 under the agreement totaled
approximately $25,000 and payments to Monto totaled $12,000. In addition, a
liability to Monto for $7,000 was recorded at June 30, 1996. In the six months
ended December 31, 1996, no additional receipts or payments were made pursuant
to this agreement. During the nine months ended September 30, 1997, the
liability to Monto was reduced to $4,200.
Diana Maranon is a director 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 paid to Averil Associates $25,000
as of June 30, 1996, $200,000 during the six months ended December 31, 1996, and
$22,000 for the nine months ended September 30, 1997, plus out of pocket
expenses. The Company 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. The Company has
committed, upon consummation of the Offering, to a cash payment to Averil
Associates of $180,000 and to a grant to Chloe of warrants to purchase 9,090
shares of Common Stock at an exercise price of 110% of the offering price.
F-15
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
Between September and November 1996, the Company executed three promissory
notes in favor of Reefknot in the principal amounts of $150,000, $50,000 and
$145,000. The notes bore interest at the rate of 10% per annum. In December
1996, the Company repaid Reefknot in full the balance outstanding of $350,000
including accrued interest of $5,000.
Gary Barber is a director of the Company and a shareholder of Morgan Creek
Productions, Inc. From May 1989 until July 1997, Mr. Barber was employed by
Morgan Creek Productions, Inc. From January 1995 until July 1997, he was Vice
Chairman and Chief Operating Officer of Morgan Creek Productions, Inc. In
September 1996, the Company entered into a strategic relationship with Morgan
Creek Interactive, Inc. ("Morgan Creek"), an affiliate of Morgan Creek
Productions, Inc., to provide creative product for the Company's Multipath
Movies. Pursuant to the agreement between the Company and Morgan Creek, the
Company is obligated to fund entirely the development of two Multipath Movies.
The first project commenced under this agreement is a thirteen episode comedy
adventure series featuring the Ace Ventura character.
5. STOCKHOLDERS' EQUITY
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 100 shares of Common Stock of BII Australia held by an
employee of BII Australia.
In November 1996, the Company completed its initial public offering of 2
million shares of Common Stock for $5 per share, which resulted in proceeds to
the Company of $8,532,000, net of issuance costs of $1,468,000.
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 fully paid and nonassessable.
F-16
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
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, 1996, December 31, 1996, and September
30, 1997 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.
WARRANTS
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 $5, the initial public offering price of the
Company's Common Stock. Additionally, 35,000 and 50,000 of the warrants are
exercisable at $4.00 and $5.20, respectively. The warrants expire in September
1999. The value of the warrants is calculated to be approximately $1,096,000 and
this value represented an expense charge to operations with a corresponding
credit to stockholders' equity in the six months ended December 31, 1996.
In September 1997, the Company issued warrants to purchase an additional
200,000 shares of the Company's Common Stock, exercisable at $10, to Packard
Bell NEC in connection with an amendment to the distribution agreement between
the companies. The warrants expire in February 1999. The value of the warrants
is calculated to be approximately $140,000 and this value represented an expense
charge to operations with a corresponding credit to stockholders' equity.
1996 STOCK OPTION PLAN
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 October 23, 1996, the Board had granted options covering an aggregate
of 185,000 shares of Common Stock to certain directors (125,000 shares) and
employees (60,000 shares) of the Company, with an exercise price of $10 per
share. In November 1996, the options were repriced to $4.00 per share. The
directors options were granted effective as each director joined the Board of
Directors and were immediately fully vested. In accordance with APB No. 25, the
Company recognized compensation expense of $125,000 in connection with the
granting of the directors' stock options. The options granted to
F-17
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
employees vest over a four year period. In connection with these employee stock
options, deferred compensation of $60,000 is included in other assets at
December 31, 1996. Although any award that was duly granted 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.
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires the use of option valuation models to
provide supplemental information regarding options granted after 1994. Pro forma
information regarding net income and earnings per share shown below was
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123.
The fair value of the options as examined at the date of grant based on a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1997: interest rates of 6.6%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock of
38.8%; and expected life of the options of 3 years. These assumptions resulted
in a weighted average fair value of $2.80 per share for stock options granted in
1996.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options. The Company's employee stock options have not
been traded. In addition, the assumptions used in option valuation models are
highly subjective, particularly the expected stock price volatility of the
underlying stock. Because changes in these subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net income for 1996 is not representative of the pro forma effect on net income
in future years because it reflects expense for only one year's vesting. Pro
forma information in future years will reflect the amortization of a larger
number of stock options granted in succeeding years. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
1996
-------------
<S> <C>
Net loss, as reported.......................................................... $ (3,835,000)
Net loss, pro forma............................................................ $ (3,992,000)
Loss per share, as reported.................................................... $ (0.77)
Loss per share, pro forma...................................................... $ (0.81)
</TABLE>
6. COMMITMENTS AND 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.
F-18
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of June 30, 1996, net receipts totaled $25,000 and payments to Monto totaled
$12,000. In addition, a liability to Monto of $7,000 was recorded at June 30,
1996. In the six months ended December 31, 1996, no additional receipts or
payments were made pursuant to this agreement. During the nine months ended
September 30, 1997, the liability to Monto was reduced to $4,200.
In 1995, Pick Two Limited ("Pick Two"), advanced $193,000 to BII Australia
to develop certain software. In 1996, Pick Two advanced an additional $19,000 to
BII Australia. These advances are non-interest bearing, will be repaid from
proceeds from the sales of the completed software, and are included in deferred
revenues. As of December 31, 1996, the software development had not been
completed. During the six months ended December 31, 1996, approximately $48,000
of the advances were repaid out of proceeds received from the sale of certain
research materials.
In September 1996, the Company entered into a strategic relationship with
Crawford Productions Pty., Ltd. ("Crawford") 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 cost per film is anticipated
to be approximately $790,000.
During the nine months ended September 30, 1997 the Company entered into
non-cancellable operating leases for its premises, which require payments of
approximately $225,000 for each of the next three years, and approximately
$70,000 for each of the subsequent two years.
7. 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 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 was 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 approximately $160,000, which increased to
approximately $853,000 at December 31, 1996, and which are available for offset
against Australian taxable income in the future. These NOL's may be carried
forward indefinitely. During the six months ended December 31, 1996, the U. S.
parent incurred a tax loss resulting in an NOL carryforward of approximately
$594,000. The loss will expire in the year 2011. No tax benefit has been
recorded for these NOL's.
F-19
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
The significant components of the net deferred tax asset recorded in the
accompanying consolidated balance sheet as of June 30, 1996 and December 31,
1996 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
---------- -------------
<S> <C> <C>
Deferred tax assets:
Acquired in-process research and development..................... $ -- $ 495,000
Directors' stock options......................................... -- 49,000
Warrants issued.................................................. -- 438,000
Allowance for doubtful accounts.................................. -- 34,000
Net operating loss carryforward.................................. -- 545,000
Deferred development costs....................................... 36,000 --
---------- -------------
Total deferred tax assets........................................ 36,000 1,561,000
Valuation allowance.............................................. (36,000) (1,561,000)
---------- -------------
Net deferred tax assets............................................ $ -- $ --
---------- -------------
---------- -------------
</TABLE>
The Company recorded a valuation allowance amounting to the entire deferred
tax asset balance.
The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31,
--------------------- ---------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal income tax
rate................... 34.0% 34.0% 34.0% 34.0%
State income tax, net of
Federal benefit........ -- -- -- --
Foreign and U. S. tax
effect attributable to
foreign operations..... -- 2.0 2.0 --
Effect of net operating
loss and net operating
loss carryforward...... (34.0) (36.0) (36.0) (34.0)
--------- --------- --------- ---------
Effective income tax
rate................... 0.0% 0.0% 0.0% 0.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-20
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER SEPTEMBER
1996 31, 1996 30, 1997
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and Equipment.................. $ 350,000 $ 568,000 $ 836,000
Leasehold Improvements................... -- -- 148,000
Furniture and Fixtures................... 12,000 16,000 61,000
--------- ----------- -----------
362,000 584,000 1,046,000
Less accumulated depreciation............ (164,000) (239,000) (407,000)
--------- ----------- -----------
$ 198,000 $ 345,000 $ 639,000
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
9. OTHER INCOME AND EXPENSE
Other income for the fiscal year ended June 30, 1996, and the nine months
ended September 30, 1996 and 1997 include an export market development grant of
$122,000, $125,083 and $152,280, respectively, from the Australian Trade
Commission for participating in certain export activities. Interest expense for
each of the years ended June 30, 1995 and 1996 and for the six months ended
December 31, 1995, and the three and related to the note payable to PIE (see
Note 4). Interest expense for the six months ended December 31, 1996 included
$49,000 related to PIE and $5,000 related to Reefknot (see Note 4).
10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company's operations for the years ended June 30, 1995 and 1996, the six
months ended December 31, 1995 and 1996, and the nine months ended September 30,
1995 consisted solely of the operations of BII Australia. The operations of BII
Australia are in Australia, with significant exports to the United States. In
September 1997, the Company recognized revenue under a distribution agreement
with a significant U.S. customer. The following schedule sets forth the revenues
and accounts receivable of the Company by geographic area:
<TABLE>
<CAPTION>
UNITED
STATES AUSTRALIA OTHER
------------ ---------- ----------
<S> <C> <C> <C>
Year ended June 30, 1995:
Revenues from unaffiliated customers..................................... $ 46,000 $ 2,000 $ --
Revenues from affiliated customers....................................... 635,000 160,000 --
------------ ---------- ----------
Total revenues........................................................... $ 681,000 $ 162,000 $ --
------------ ---------- ----------
------------ ---------- ----------
Year ended June 30, 1996:
Revenues from unaffiliated customers..................................... $ 932,000 $ 258,000 $ 235,000
Revenues from affiliated customers....................................... 316,000 264,000 49,000
------------ ---------- ----------
Total revenues........................................................... $1,248,000 $ 522,000 $ 284,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-21
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
<TABLE>
<CAPTION>
UNITED
STATES AUSTRALIA OTHER
------------ ---------- ----------
<S> <C> <C> <C>
Six months ended December 31, 1995:
Revenues from unaffiliated customers (unaudited)......................... $ 715,000 $ 48,000 $ 233,000
Revenues from affiliated customers (unaudited)........................... 130,000 30,000 28,000
------------ ---------- ----------
Total revenues (unaudited)............................................... $ 845,000 $ 78,000 $ 261,000
------------ ---------- ----------
------------ ---------- ----------
Six Months ended December 31, 1996:
Revenues from unaffiliated customers..................................... $ 68,000 $ 184,000 $ 8,000
Revenues from affiliated customers....................................... -- 63,000 27,000
------------ ---------- ----------
Total revenues........................................................... $ 68,000 $ 247,000 $ 35,000
------------ ---------- ----------
------------ ---------- ----------
Nine Months ended September 30, 1996:
Revenues from unaffiliated customers (unaudited)......................... $ 272,000 $ 336,000 $ 2,000
Revenues from affiliated customers (unaudited)........................... 186,000 296,000 47,000
------------ ---------- ----------
Total revenues (unaudited)............................................... $ 458,000 $ 632,000 $ 49,000
------------ ---------- ----------
------------ ---------- ----------
Nine Months ended September 30, 1997:
Revenues from unaffiliated customers (unaudited)......................... $2,125,000 $ 196,000 $ 56,000
Revenues from affiliated customers (unaudited)........................... -- -- --
------------ ---------- ----------
Total revenues (unaudited)............................................... $2,125,000 $ 196,000 $ 56,000
------------ ---------- ----------
------------ ---------- ----------
Accounts Receivable as of:
June 30, 1996............................................................ $ 413,000 $ 223,000 $ 22,000
------------ ---------- ----------
------------ ---------- ----------
December 31, 1996........................................................ $ 81,000 $ -- $ --
------------ ---------- ----------
------------ ---------- ----------
September 30, 1997 (unaudited)........................................... $1,973,000 $ -- $ --
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
For each of the periods shown above, all of the operating expenses of the
Company were incurred and paid in Australia, with the exception of royalties due
to third parties incurred in September 1997, and certain corporate expenses
since September 1996. The identifiable assets of the Company, other than
accounts receivable and corporate assets, are predominantly related to the
operations in Australia.
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). In the six months ended December 31,
1995, four customers accounted for more than 10% of total revenues (Packard Bell
Electronics, Inc., 11% or $130,000; Shortland Publications, 14% or $160,000;
Ocean of America, Inc., 39% or $465,000; and Roadshow Films, 11% or $134,000).
In the six months ended December 31, 1996, four customers accounted for more
than 10% of total revenues
F-22
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
(Frontline Agency, 17% or $60,000; Interplay Productions, Inc., 17% or $60,000;
Sega Ozisoft, 18% or $62,000; and Golden Dolphin Productions Pty. Ltd., 35% or
$122,000). In the nine months ended September 30, 1996, three customers
accounted for more than 10% of total revenues (Ocean of America,Inc., 30% or
$348,000; Packard Bell Electronics, Inc., 16% or $186,000; and Golden Dolphin,
11% or $122,000). For the nine months ended September 30, 1997, one customer
accounted for more than 10% of total revenues (Packard Bell NEC, 83% or
$1,973,000).
F-23
<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-24
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1995 1996
----------- -------------
<S> <C> <C>
ASSETS
Total assets.......................................................................... $ -- $ --
----------- -------------
----------- -------------
LIABILITIES AND DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
Liabilities:
Due to parent company............................................................... $ 472,318 $ 1,306,331
----------- -------------
Total liabilities..................................................................... 472,318 1,306,331
Deficit accumulated during the development stage:
Deficit accumulated during the development stage.................................... (485,839) (1,244,209)
Cumulative translation adjustment................................................... 13,521 (62,122)
----------- -------------
Total deficit accumulated during the development stage................................ (472,318) (1,306,331)
----------- -------------
Total liabilities and deficit accumulated during the development stage................ $ -- $ --
----------- -------------
----------- -------------
</TABLE>
See accompanying notes.
F-25
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
STATEMENTS OF OPERATIONS AND BUSINESS UNIT DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1,
1994 CUMULATIVE
(INCEPTION) MARCH 1, 1994
THROUGH YEAR ENDED JUNE 30, (INCEPTION)
JUNE 30, ------------------------ THROUGH JUNE
1994 1995 1996 30, 1996
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Expenses:
General and administrative expenses........................ $ -- $ 43,871 $ 89,903 $ 133,774
Research and development expenses.......................... 11,095 430,873 668,467 1,110,435
----------- ---------- ------------ -------------
Total expenses........................................... 11,095 474,744 758,370 1,244,209
Beginning deficit accumulated during the development
stage.................................................... -- 11,218 472,318 --
Translation adjustment..................................... 123 (13,644) 75,643 62,122
----------- ---------- ------------ -------------
Ending deficit accumulated during the development stage.... $ 11,218 $ 472,318 $ 1,306,331 $ 1,306,331
----------- ---------- ------------ -------------
----------- ---------- ------------ -------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT STAGE BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1,
1994 CUMULATIVE
(INCEPTION) MARCH 1, 1994
THROUGH YEAR ENDED JUNE 30, (INCEPTION)
JUNE 30, ------------------------ THROUGH JUNE
1994 1995 1996 30, 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $ (11,095) $ (474,744) $ (758,370) $(1,244,209)
----------- ----------- ----------- -------------
Net cash used in operating activities...................... (11,095) (474,744) (758,370) (1,244,209)
FINANCING ACTIVITIES
Increase in amounts due to parent company.................. 11,095 474,744 758,370 1,244,209
----------- ----------- ----------- -------------
Net cash provided by financing activities.................. 11,095 474,744 758,370 1,244,209
----------- ----------- ----------- -------------
Increase in cash........................................... -- -- -- --
Cash at beginning of period................................ -- -- -- --
----------- ----------- ----------- -------------
Cash at end of period...................................... $ -- $ -- $ -- $ --
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>
F-27
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT 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 $11,095, $430,873 and $668,467 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 ended June 30, 1995 and
1996.
FOREIGN CURRENCY TRANSLATION
The functional currency of SAND is its local currency, Australian dollars.
Assets and liabilities of SAND 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
F-28
<PAGE>
SEGA AUSTRALIA NEW DEVELOPMENTS
(A DEVELOPMENT BUSINESS UNIT OF SEGA OZISOFT PTY. LTD.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
using the average exchange rate ($0.72 for the period from March 1, 1993 to June
30, 1994, $0.739 for the year ended June 30, 1995 and $0.760 for the year ended
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,
$29,111 and $43,924 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-29
<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 periods 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 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, as if this
transaction had occurred as of the beginning of the period presented, for
purposes of the statement of operations data. There is no material pro forma
effect for the six months ended December 31, 1996. As such, no pro forma
statement of operations has been included for that period. The Unaudited Pro
Forma Financial Information does not give effect to any transactions other than
that 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 transaction in fact occurred on such date, 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-30
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
BRILLIANT
AS SAND AS PRO FORMA PRO FORMA
REPORTED REPORTED ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------- --------- ------------- ----------- ---------
(NOTES 1 AND
2) (NOTE 3)
<S> <C> <C> <C> <C> <C>
Revenues:
Royalties............................. $1,291,015 $ -- $ -- $ -- $1,291,015
Development fees...................... 585,743 -- -- (172,542) 413,201
Software sales........................ 177,119 -- -- -- 177,119
--------- --------- ------------- ----------- ---------
Total revenues...................... 2,053,877 -- -- (172,542) 1,881,335
Cost of revenues........................ 738,842 -- -- -- 738,842
--------- --------- ------------- ----------- ---------
1,315,035 -- -- (172,542) 1,142,493
Operating expenses:
Sales and marketing................... 163,038 -- -- -- 163,038
General and administrative............ 365,491 89,903 (89,903) -- 365,491
Research and development.............. 174,395 668,467 681,533 (172,542) 1,351,853
Depreciation.......................... 101,824 -- -- -- 101,824
--------- --------- ------------- ----------- ---------
804,748 758,370 591,630 (172,542) 1,982,206
Income (loss) from operations........... 510,287 (758,370) (591,630) -- (839,713
Other:
Export market development grant....... 122,488 -- -- -- 122,488
Gain on foreign exchange
transactions........................ 13,382 -- -- -- 13,382
Interest income....................... 2,017 -- -- -- 2,017
Interest expense...................... (94,762) -- -- -- (94,762)
--------- --------- ------------- ----------- ---------
43,125 -- -- -- 43,125
Income (loss) before income taxes....... 553,412 (758,370) (591,630) -- (796,588)
Provision for income taxes.............. -- -- -- -- --
--------- --------- ------------- ----------- ---------
Net income (loss)....................... $ 553,412 $(758,370) $(591,630) $ -- $(796,588)
--------- --------- ------------- ----------- ---------
--------- --------- ------------- ----------- ---------
Net income (loss) per share............. $ 0.12 $ (0.15)
--------- ---------
--------- ---------
Common shares used in calculating net
income (loss) per share............... 4,557,000 780,001 5,337,001
--------- ------------- ---------
--------- ------------- ---------
</TABLE>
See Notes to Unaudited Pro Forma Financial Information.
F-31
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
NOTE 1:
Reflects the immediate conversion of the SAND Note into 780,001 shares of
$.001 par value common stock. As a result, the SAND Note was reduced to $0.
Common Stock was increased by $780 and additional paid in capital was increased
by $1,499,220.
NOTE 2:
SAND incurred $758,370 in total expenses for the year ended June 30, 1996.
In order to reflect the allocation of $1,350,000 of the SAND purchase price to
in-process research and development costs, total expenses have been increased by
$591,630.
NOTE 3:
Reflects the elimination of revenues recorded by the Company relating to
development fees paid by SAND during the fiscal year ended June 30, 1996. SAND
recorded research and development expenses when the payment was made to the
Company. Therefore, development fees will be reduced and research and
development costs will be reduced by $172,542.
F-32
<PAGE>
INSIDE BACK COVER:
MAKING MULTIPATH MOVIES
SCRIPTING
SCRIPNAV, one of the Company's proprietary software tools assists scriptwriters
in developing Multipath Movie scripts, which may have hundreds of branching plot
lines.
CREATIVE DESIGN
Talent, character design, set design, props, sound and music are all elements of
the creative design process.
VOICE/SOUND
The Company's proprietary TALKTRACK matches dialogue tracks produced by voice
actors to each character's lip movements. Music and sound effects are added.
MODEL/WORLD BUILDING
Talented graphic artists and 3-D modelers create new characters using software
modeling packages, including 3-D MAX and Softimage.
TEXTURING/LIGHTING
Patterns, textures, finish and color are added to the sets and characters to
provide realistic features and life-like appearances. Lighting and shading are
added to enhance depth and motion.
BLOCK/CAMERA/EDITING
The Company's ScuD engine is used to layup, edit, film and synchronize timing
for each scene. Multiple virtual cameras provide the director control and
flexibility throughout the production process.
SPECIAL EFFECTS ANIMATION
Special sound and visual effects are added.
RENDERED OUTPUT
Mr. Copy arranges, reorders, compresses and decompresses, and optimally
organizes files for playing of the Multipath Movie by the DigitalProjector.
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or 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 subsequent
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
1997 Developments......................................................... 6
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 22
Price Range of Common Stock............................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Selected Historical and Pro Forma
Consolidated Financial Data.............................................. 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 32
Management................................................................ 55
Certain Relationships and Related
Transactions............................................................. 62
Principal and Selling Stockholders........................................ 66
Description of Capital Stock.............................................. 68
Shares Eligible For Future Sale........................................... 70
Underwriting.............................................................. 72
Notice to Canadian Residents.............................................. 73
Legal Matters............................................................. 74
Experts................................................................... 74
Change in Independent Public Accountant................................... 75
Additional Information.................................................... 75
Index to Consolidated Financial Statements................................ F-1
</TABLE>
[LOGO]
3,000,000 Shares
Common Stock
($.001 par value)
P R O S P E C T U S
Credit Suisse First Boston
Cruttenden Roth
Incorporated
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. 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.
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(o)(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
II-1
<PAGE>
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 25. 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............ $ 8,207
NASD filing fee................................................... 3,208
American Stock Exchange fee for listing additional shares......... 17,500
Accounting fees and expenses...................................... 100,000
Legal fees and expenses (other than blue sky)..................... 175,000
Blue sky fees and expenses, including legal fees.................. 20,000
Printing; stock certificates...................................... 80,000
Transfer agent and registrar fees................................. 5,000
Consulting fees................................................... 200,000
Miscellaneous..................................................... 41,085
---------
Total........................................................... 650,000
---------
---------
</TABLE>
ITEM 26. 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 to purchase
600,000 and 85,000 shares of Common Stock to Packard Bell NEC and to Morgan
Creek, respectively, each for $100.00, and on September 1, 1997, the Company
issued additional warrants to Packard Bell NEC to purchase up to 200,000 shares
of Common Stock for $200.00 (collectively, the "Warrants"). 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
II-2
<PAGE>
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.
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. In connection with the Offering, the Company issued to Chloe
warrants to purchase a number of shares of Common Stock having a warrant value
equal to $20,000 (9,090 shares, assuming a public offering price equal to 110%
of the price to the public in the Offering). In each case, 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 27. 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.(1)
2.2 Asset Purchase Agreement, dated September 12, 1996, by and between the Registrant and Sega Ozisoft Pty.
Ltd.(1)
3.1 Amended and Restated Certificate of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(1)
4.1 Specimen Stock Certificate of Common Stock of Registrant.(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP.
10.1 Registrant's 1996 Stock Option Plan.(1)
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option).(1)
10.3 Form of Registrants's Stock Option Agreement (Incentive Stock Option).(1)
10.4 Distributing Agreement, dated November 22, 1995, by and between BII Australia and Consumer Electronics
Pty. Ltd.(1)
10.5 CD-ROM Distribution Agreement, dated September 14, 1996 by and between the Registrant and Packard Bell
NEC.(1)
10.6 Distribution Agreement, dated August 22, 1995, by and between BII Australia and Packard Bell Electronics
Inc.(1)
10.7 Software License Agreement, dated May 2, 1995, by and between BII Australia and Packard Bell Electronics
Inc.(1)
10.8 Agreement, dated February 18, 1996, by and between Golden Dolphin Productions Pty. Ltd. and BII
Australia.(1)
10.9 Memorandum of Agreement, dated September 5, 1996, by and between the Registrant and Bantam Doubleday
Dell Books For Young Readers.(1)
10.10 Production Agreement, dated March 18, 1994, by and between Pick Two Ltd. and BII Australia.(1)
10.11 Assistant Multimedia Software Development & Production Agreement, dated January 17, 1996, by and between
Sega Ozisoft Pty. Limited and BII Australia.(1)
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.(1)
10.13 Distribution Agreement, dated November 2, 1995, by and between BII Australia and Roadshow Entertainment
Pty. Ltd.(1)
10.14 Publishing Agreement, dated March 9, 1994, by and between Shortland Publications Limited and BII
Australia.(1)
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.(1)
10.16 Publishing Agreement, dated December 1, 1994, by and between Shortland Publications Limited and BII
Australia.(1)
10.17 Distribution Agreement, dated July 1, 1996, by and between BII Australia and Fujitsu Basic Software
Corporation.(1)
10.18 License Agreement -- Domestic, dated July 31, 1996, between the Hearst Corporation, King Features
Syndicate Division and the Registrant.(1)
10.19 Distribution Agreement, dated September 29, 1995, by and between BII Australia and Ocean of America,
Inc.(1)
10.20 Distribution Agreement, dated February 22, 1996, by and between BII Australia and Shortland Publications
Limited.(1)
10.21 Heads of Agreement, dated November 25, 1994, by and between SAND and Eat Cyberfist Pty. Limited.(1)
10.22 Software License Agreement, dated December 15, 1994, by and between BII Australia and Sega Ozisoft.(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.23 Memorandum of Understanding, dated September 14, 1996, by and between the Registrant and Morgan Creek
Interactive, Inc.(1)
10.24 Multimedia Production Agreement, dated March 14, 1995, by and between BII Australia and Monto Holdings
Pty. Ltd.(1)
10.25 Nontransferable Redeemable Warrant Agreement, dated September 14, 1996, by and between the Registrant
and Packard Bell NEC.(1)
10.26 License Agreement by and between Beyond Properties Pty. Ltd. and BII Australia.(1)
10.27 Registrant's Promissory Note, dated September 10, 1996.(1)
10.28 Form of Registrant's Indemnification Agreement.(1)
10.29 Form of Registrant's Employee Confidential Information and Non-Solicitation Agreement.(1)
10.30 Commercial Lease by and among Hilrok Properties Pty. Limited, Peter Dodds and Simon Van Wyk.(1)
10.31 Loan Agreement, dated October 10, 1994, by and between BII Australia and PIE.(1)
10.32 Commercial Lease, dated August 8, 1994, by and between PW Securities Pty. Ltd. and Sega Ozisoft.(1)
10.33 PIE Loan Extension, dated September 13, 1996, by and among PIE, BII Australia and the Registrant.(1)
10.34 Agreement, dated September 12, 1996, by and between the Registrant and Crawford Productions Pty.
Limited.(1)
10.35 Engagement Letter, dated May 1, 1996, by and between Averil Associates, Inc. and the Registrant.(1)
10.36 Warrant Agreement between Chloe Holdings, Inc. and the Registrant.(1)
10.37 Product Agreement, dated January 12, 1996, by and between Interplay Productions and BII Australia.(1)
10.38 Standard Form Lease Agreement dated May 16, 1997, between Topanga & Victory Partners L.P. and the
Registrant.(2)
10.39 Site Management Agreement, dated June 2, 1997, between CompuServe Incorporated and the Registrant.(3)
10.40 Redeemable Warrant Agreement, dated September 1, 1997, between Packard Bell NEC and the Registrant.
10.41 Engagement Letter, dated August 1, 1997 between Averil Associates, Inc. and the Registrant.
10.42 Amendment to CD-ROM Distribution Agreement, dated September 22, 1997, between Packard Bell NEC and the
Registrant.(3)
10.43 Warrant Agreement, dated November 4, 1997, between Chloe Holdings, Inc. and the Registrant.
11.1 Earnings (Loss) per share.
21.1 List of Subsidiaries.(1)
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
24.1 Power of Attorney (included in signature page).
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (SEC Reg. No. 333-12163) filed with the Commission on September 17,
1996, as amended.
(2) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997.
(3) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997.
ITEM 28. 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-6
<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 SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on November 5,
1997.
<TABLE>
<S> <C> <C>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /s/ MARK DYNE
------------------------------------------
Mark Dyne, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mark
Dyne, Diana Maranon and Michael Ozen 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
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ MARK DYNE
------------------------------------------- Chief Executive Officer and November 5, 1997
Mark Dyne Chairman of the Board
/s/ KEVIN BERMEISTER
------------------------------------------- President and Director November 5, 1997
Kevin Bermeister
/s/ MICHAEL OZEN Chief Financial Officer
------------------------------------------- (Principal Financial and November 5, 1997
Michael Ozen Accounting Officer)
/s/ DIANA MARANON
------------------------------------------- Director November 5, 1997
Diana Maranon
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ MARK MILLE
------------------------------------------- Vice President, Operations and November 5, 1997
Mark Miller Production and Director
/s/ GARY BARBER
------------------------------------------- Director November 5, 1997
Gary Barber
/s/ RAY MUSCI
------------------------------------------- Director November 5, 1997
Ray Musci
/s/ GARTH SALONER
------------------------------------------- Director November 5, 1997
Garth Saloner
/s/ JEFF SCHEINROCK
------------------------------------------- Director November 5, 1997
Jeff Scheinrock
</TABLE>
II-8
<PAGE>
3,000,000 SHARES
BRILLIANT DIGITAL ENTERTAINMENT, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_______________, 1997
CREDIT SUISSE FIRST BOSTON CORPORATION, and
CRUTTENDEN ROTH INCORPORATED
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, New York 10010-3629
Dear Sirs:
1. INTRODUCTORY. Brilliant Digital Entertainment, Inc., a Delaware
corporation ("Company"), proposes to issue and sell 2,200,000 shares of its
Common Stock, par value $.001 ("Securities") and Insinger Group, as manager
of the Reefknot Limited ("Selling Stockholder") proposes to sell 800,000
outstanding shares of the Securities (such 3,000,000 shares of Securities
being hereinafter referred to as the "Firm Securities"). The Company also
proposes to sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than 350,000 additional shares of its Securities, and
the Selling Stockholder also proposes to sell to the Underwriters, at the
option of the Underwriters, not more than 100,000 additional outstanding
shares of the Company's Securities, as set forth below (such 450,000
additional shares being hereinafter referred to as the "Optional
Securities"). The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities". The Company, 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, and the Selling Stockholder hereby agree with the several
Underwriters named in Schedule A hereto ("Underwriters") as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, BII AUSTRALIA AND THE
SELLING STOCKHOLDER. (a) The Company and BII Australia represent and warrant
to, and agree with, the several Underwriters that:
(i) 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 (A) has
been declared effective under the Securities Act of 1933 ("Act") and is
not proposed to be amended or (B) is proposed to be amended by amendment
or post-effective amendment. If such registration statement (the "initial
registration statement") has been declared effective, either (A) an
additional registration statement (the "additional registration
statement") relating to the Offered Securities may have been filed with
the
<PAGE>
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 (B) such an additional registration statement
is proposed to be filed with the Commission pursuant to Rule 462(b) and
will become effective upon filing 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 (A) 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 (B) 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 hereinafter 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.
-2-
<PAGE>
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) 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 a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (B) 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 (C) 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 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 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(c) hereof.
(iii) 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.
(iv) 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.
-3-
<PAGE>
(v) 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 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.
(vi) 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 in connection with this offering.
(vii) 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).
(viii) The Offered Securities have been approved for listing on the
American Stock Exchange, subject to notice of issuance.
(ix) 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, except
such as have been obtained and made under the Act and such as may be
required under state securities laws.
(x) The execution, delivery and performance of this Agreement, and
the consummation of the transactions herein contemplated, 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. The
Company and the Selling Stockholder have full power and authority to
authorize, issue and sell the Offered Securities as contemplated by this
Agreement.
(xi) This Agreement has been duly authorized, executed and delivered
by the Company.
(xii) 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, in each case free from liens,
encumbrances and defects that would materially affect the value thereof
-4-
<PAGE>
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.
(xiii) 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 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.
(xiv) No labor dispute with the employees of the Company or BII
Australia exists or, to the knowledge of the Company or BII Australia, is
imminent that might have a material adverse effect on, or on the
prospects of, the Company and BII Australia taken as a whole.
(xv) 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 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 disclosed 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.
(xvi) 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 or BII Australia, is contaminated
with any substance that is subject to any environmental laws, nor is the
Company or BII Australia to their knowledge liable for any off-site
disposal or contamination pursuant to any environmental laws, or is
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.
(xvii) 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
-5-
<PAGE>
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 no such actions, suits or
proceedings are threatened or, to the Company and BII Australia's
knowledge, contemplated.
(xviii) 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 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 statements
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.
(xix) 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.
(xx) 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.
(xxi) 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.
(b) The Selling Stockholder represents and warrants to, and agrees with,
the several Underwriters that:
(i) The Selling Stockholder has and on each Closing Date hereinafter
mentioned will have valid and unencumbered title to the Offered
Securities to be delivered by the Selling Stockholder on such Closing
Date and full right, power and authority to enter into this Agreement and
to sell, assign, transfer and deliver the Offered Securities to be
delivered by the Selling Stockholder on such Closing Date hereunder; and
upon the delivery of and payment for the Offered Securities on each
Closing Date hereunder the several Underwriters will acquire
-6-
<PAGE>
valid and unencumbered title to the Offered Securities to be delivered by
the Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) 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 and did not include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, (B) 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 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 (C) 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 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 not misleading. The two
preceding sentences apply only to the extent that any statements in or
omissions from a Registration Statement or the Prospectus are based on
written information furnished to the Company by the Selling Stockholder
specifically for use therein.
(iii)Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Selling Stockholder and any
person that would give rise to a valid claim against the Selling
Stockholder or any Underwriter for a brokerage commission, finder's fee
or other like payment in connection with this offering.
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 and the Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter,
and each Underwriter agrees, severally and not jointly, to purchase from the
Company and the Selling Stockholder, at a purchase price of $ per
share, the number of Firm Securities set forth below the caption "Company" or
"Selling Stockholder", as the case may be, and opposite the name of such
Underwriter in Schedule A hereto.
Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholder hereunder have been placed in custody, for delivery
under this Agreement, under a Custody Agreement
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<PAGE>
made with U.S. Stock Transfer Corporation, as custodian ("Custodian"). The
Selling Stockholder agrees that the shares represented by the certificates
held in custody for the Selling Stockholder under such Custody Agreement are
subject to the interests of the Underwriters hereunder, that the arrangements
made by the Selling Stockholder for such custody are to that extent
irrevocable, and that the obligations of the Selling Stockholder hereunder
shall not be terminated by operation of law, whether by the death of the
Selling Stockholder or the occurrence of any other event, or in the case of a
trust, by the death of any trustee or trustees or the termination of such
trust. If the Selling Stockholder or any such trustee or trustees should
die, or if any other such event should occur, or if any of such trusts should
terminate, before the delivery of the Offered Securities hereunder,
certificates for such Offered Securities shall be delivered by the Custodian
in accordance with the terms and conditions of this Agreement as if such
death or other event or termination had not occurred, regardless of whether
or not the Custodian shall have received notice of such death or other event
or termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, at the office of Credit
Suisse First Boston Corporation ("CSFBC"), Eleven Madison Avenue, New York,
New York, against payment of the purchase price in Federal (same day) funds
by official bank check or checks or wire transfer to an account at a bank
acceptable to CSFBC, drawn to the order of the Company in the case of
2,200,000 shares of Firm Securities and to the order of the Selling
Stockholder in the case of 800,000 shares of Firm Securities, at the office
of Troop Meisinger Steuber & Pasich, LLP, 10940 Wilshire Boulevard, Los
Angeles, California at A.M., New York time, on _____________, 1997, or
at such other time not later than seven full business days thereafter as
CSFBC 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 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 CSFBC requests and will be made available for checking and packaging
at the above office of CSFBC in New York at least 24 hours prior to the First
Closing Date.
In addition, upon written notice from CSFBC given to the Company and the
Selling Stockholder 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 and the Selling Stockholder agree, severally
and not jointly, to sell to the Underwriters the respective numbers of
Optional Securities obtained by multiplying the number of shares specified in
such notice by a fraction the numerator of which is in the case
of the Company and in the case of the Selling Stockholder and the denominator
of which is the total number of Optional Securities (subject to adjustment by
CSFBC to eliminate fractions). Such Optional Securities shall be purchased
from the Company and the Selling Stockholder for the account of each
Underwriter in the same proportion as the number of Firm Securities set forth
opposite such Underwriter's name bears to the total number of Firm Securities
(subject to adjustment by CSFBC 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 CSFBC to the Company and the Selling Stockholder.
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<PAGE>
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the
First Closing Date (the First Closing Date and each Optional Closing Date, if
any, being sometimes referred to as a "Closing Date"), shall be determined by
CSFBC but shall be not later than five full business days after written
notice of election to purchase Optional Securities is given. The Company and
the Custodian will deliver the Optional Securities being purchased on each
Optional Closing Date to the Representatives for the accounts of the several
Underwriters, at the above office of CSFBC in New York, against payment of
the purchase price therefor in Federal (same day) funds by official bank
check or checks or by wire transfer to a bank acceptable to CSFBC drawn to
the order of the Company in the case of 350,000 Option Securities and to the
order of the Selling Stockholder in the case of 100,000 Optional Securities
at the above office of Troop Meisinger Steuber & Pasich, LLP in Los Angeles.
The certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered
in such names as CSFBC requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the
above office of CSFBC 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 AND THE SELLING STOCKHOLDER. The
Company and the Selling Stockholder agree 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 CSFBC,
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 CSFBC 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 CSFBC.
(b) The Company will advise CSFBC 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 CSFBC's consent; and
the Company will also advise CSFBC 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
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<PAGE>
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 CSFBC 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 CSFBC'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.
(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 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 CSFBC 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 such
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 CSFBC
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 CSFBC may reasonably request.
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<PAGE>
(h) For a period of 90 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, disposition or filing, without the prior
written consent of CSFBC, 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.
(i) The Company and the Selling Stockholder agree with the several
Underwriters that the Company and the Selling Stockholder will pay all
expenses incident to the performance of the obligations of the Company
and the Selling Stockholder, as the case may be, under this Agreement,
for any filing fees and other expenses (including fees and disbursements
of counsel) in connection with qualification of the Offered Securities
for sale under the laws of such jurisdictions as CSFBC designates and the
printing of memoranda relating thereto, for the filing fee incident to,
and the reasonable fees and disbursements of counsel to the Underwriters
in connection with, the review by the National Association of Securities
Dealers, Inc. of 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, for any transfer taxes on the sale by the
Selling Stockholder of the Offered Securities to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(j) The Selling Stockholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form
W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
(k) The Selling Stockholder agrees, for a period of 90 days after
the date of the initial public offering of the Offered Securities, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, any additional shares of the Securities of the Company or
securities convertible into or exchangeable or exercisable for any shares
of Securities, or publicly disclose the intention to make any such offer,
sale, pledge or disposition, without the prior written consent of CSFBC.
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<PAGE>
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, BII Australia and the Selling
Stockholder herein, to the accuracy of the statements of Company, BII
Australia and Selling Stockholder officers made pursuant to the provisions
hereof, to the performance by the Company, BII Australia and the Selling
Stockholder 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 in their opinion the financial
statements and schedules and summary of earnings examined by them and
included in the Registration Statements for the fiscal years ended June
30, 1995 and 1996 and the six months ended December 31, 1996 comply as to
form in all material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations;
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 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 Statement 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) 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 Price Waterhouse
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 for the three-month and nine-month periods
ended September 30, 1997 comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related published Rules and Regulations;
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<PAGE>
(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 for the three-month and nine-month periods
ended September 30, 1997 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 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
three-month and nine-month periods ended September 30, 1997
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;
(C) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business 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
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<PAGE>
(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 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
Statement 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.
(c) 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 CSFBC. 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 CSFBC. If
the Effective Time of the Initial
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<PAGE>
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 Selling Stockholder, the Company or the Representatives,
shall be contemplated by the Commission.
(d) 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, American 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.
(e) 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 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
Delaware 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
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<PAGE>
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 to be obtained or made by the Company for the consummation
of the transactions contemplated by this Agreement or the Custody
Agreement in connection with the issuance or sale of the Offered
Securities, 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
or the Custody Agreement and the consummation of the transactions
herein or therein contemplated 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 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
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<PAGE>
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
(viii) This Agreement has been duly authorized, executed and
delivered by the Company.
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;
(f) The Representatives shall have received an opinion, dated such
Closing Date, of Roth Warren Solicitors, 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;
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<PAGE>
(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);
(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
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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 the Company 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.
(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.
(g) The Representatives shall have received an opinion, dated such
Closing Date, of , counsel for the Selling Stockholder, to
the effect that:
(i) The Selling Stockholder had valid and unencumbered title
to the Offered Securities delivered by the Selling Stockholder on
such Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities delivered by the
Selling Stockholder on such Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the
Offered Securities purchased by them from the Selling Stockholder on
such Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required to be obtained or made by the Selling Stockholder for the
consummation of the transactions contemplated by the Custody
Agreement on this Agreement in connection with the sale of the
Offered Securities sold by the Selling Stockholder, except such as
have been obtained and made under the Act and such as may be
required under state securities laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the
transactions therein and herein contemplated will not result in a
breach or violation of any of the terms and provisions
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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 the Selling Stockholder or any of its properties
or any agreement or instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder is bound or to which any
of the properties of the Selling Stockholder is subject, or the
charter or by-laws of the Selling Stockholder;
(iv) The Power of Attorney and related Custody Agreement with
respect to the Selling Stockholder has been duly authorized,
executed and delivered by the Selling Stockholder and constitute
valid and legally binding obligations of the Selling Stockholder
enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and
(v) This Agreement has been duly authorized, executed and
delivered by the Selling Stockholder.
(h) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, 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, BII
Australia and the Selling Stockholder 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, Professional Corporation, 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 Roth Warren Solicitors referred to
above.
(i) 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.
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<PAGE>
(j) 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 business days
prior to such Closing Date for the purposes of this subsection.
(k) The Representatives shall have received a letter, dated such
Closing Date, of Price Waterhouse LLP which meets the requirements of
subsection (b) of this Section, except that the specified date referred
to in such subsection will be a date not more than three business days
prior to such Closing Date for the purposes of this subsection.
The Selling Stockholder and the Company will furnish the
Representatives with such conformed copies of such opinions,
certificates, letters and documents as the Representatives reasonably
request. CSFBC 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 (c) below.
(b) The Selling Stockholder will 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
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such expenses are incurred; provided, however, that the Selling
Stockholder 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
(c) below.
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company and the Selling Stockholder against any losses,
claims, damages or liabilities to which the Company or the Selling
Stockholder 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 and the
Selling Stockholder 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 paragraphs under the caption "Underwriting".
(d) 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 an
indemnifying party under subsection (a), (b) or (c) above, notify the
indemnifying party of the 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 otherwise than under
subsection (a), (b) or (c) above. In case any such action is brought
against any indemnified party and it notifies an 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 (who shall
not, except with the consent of the indemnified party, be counsel to the
indemnifying 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; PROVIDED, HOWEVER, that (i) if the
indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and
of the indemnified party or parties in conducting the defense of such
action, suit, investigation, inquiry or proceeding or that there
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<PAGE>
may be legal defenses available to such indemnified party or parties
different from or in addition to those available to the indemnifying
party or parties, then separate counsel chosen by the indemnified party
or parties shall be entitled to conduct the defense to the extent
reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by
such indemnified party or parties to participate in, but not conduct, the
defense, however, in no event shall the indemnifying parties be obligated
to pay for more than one firm of attorneys and one local counsel in each
appropriate jurisdiction for all of the indemnified parties. 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.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) 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), (b) or (c) above (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling
Stockholder 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, BII
Australia and the Selling Stockholder 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 and the Selling Stockholder 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 and the Selling Stockholder 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, BII Australia or by
the Selling Stockholder or 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 (e)
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
(e). Notwithstanding the provisions of this subsection (e), 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
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<PAGE>
misrepresentation. The Underwriters' obligations in this subsection (e)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholder
under this Section shall be in addition to any liability which the
Company, BII Australia or the Selling Stockholder 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, CSFBC may make arrangements satisfactory to the Company and the
Selling Stockholder 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 CSFBC, the
Company and the Selling Stockholder 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, the Company or the Selling Stockholder, 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 Selling Stockholder, 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 Selling Stockholder, 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, BII Australia and the Selling Stockholder shall remain
responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, BII Australia, the
Selling Stockholder 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
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of this Agreement pursuant to Section 8 or the occurrence of any event
specified in clause (ii), (iii) or (iv) of Section 6(d), the Company, BII
Australia and the Selling Stockholder will, jointly and severally, reimburse
the Underwriters for all out-of-pocket 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 Credit Suisse First Boston Corporation,
Eleven Madison Avenue, New York, New York 10010-3629, 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, or, if sent to the
Selling Stockholder, will be mailed, delivered or telegraphed and confirmed
to Insinger Group, as manager of the Reefknot Limited, at One Stokes Place,
St. Stephens Green, Dublin 2, Republic of Ireland; 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. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representatives
jointly or by CSFBC will be binding upon all the Underwriters. U.S. Stock
Transfer Corporation will act for the Selling Stockholder in connection with
such transactions, and any action under or in respect of this Agreement taken
by U.S. Stock Transfer Corporation will be binding upon the Selling
Stockholder.
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, BII Australia and the Selling Stockholder 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.
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<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 among the
Selling Stockholder, 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: ______________________________
Insinger Group, as manager of the
Reefknot Limited
By: _________________________________
Name: _______________________________
Title: ______________________________
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION, and
CRUTTENDEN ROTH INCORPORATED
Acting on behalf of themselves and as the
Representatives of the several
Underwriters.
By Credit Suisse First Boston Corporation
By: _________________________________
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Name: _______________________________
Title: ______________________________
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SCHEDULE A
NUMBER OF FIRM TOTAL
SECURITIES NUMBER OF
TO BE SOLD BY FIRM
--------------------- SECURITIES
SELLING TO BE
UNDERWRITER COMPANY STOCKHOLDER PURCHASED
----------- ------- ----------- ---------
Credit Suisse First Boston Corporation.....
Cruttenden Roth Incorporated...............
------- ----------- ---------
Total........................
------- ----------- ---------
------- ----------- ---------
<PAGE>
[LETTERHEAD OF
TROOP MEISINGER STEUBER & PASICH, LLP
LAWYERS]
November 5, 1997
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard, Suite 120
Woodland Hills, CA 91367
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 (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 (the "Act"), 2,200,000 shares of Common Stock, par value $0.001 per
share (the "Common Stock"), of the Company (the ""Company Firm Shares"),
800,000 shares of Common Stock of a selling stockholder (the "Selling
Stockholder Firm Shares"), up to an additional 350,000 shares of Common Stock
of the Company (the "Company Option Shares") and 100,000 shares of Common
Stock of a selling stockholder (the "Selling Stockholder Option Shares" and
together with the Selling Stockholder Firm Shares, the "Selling Stockholder
Shares") subject to the Underwriters' 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 (together with the Company Firm Shares
and the Company Option Shares, the "Company Shares").
We are of the opinion that the Company Shares have been duly
authorized and upon issuance and sale of the Company Shares in conformity
with and pursuant to the Registration Statement, the Company Shares will be
validly issued, fully paid and non-assessable.
We are of the opinion that the Selling Stockholder Shares have been
duly authorized and are 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>
THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
REDEEMABLE WARRANT AGREEMENT
This Warrant Agreement (the "Agreement") is made and entered into this
1st day of September, 1997 by and between Brilliant Digital Entertainment, Inc.,
a Delaware corporation (the "Company"), and Packard Bell NEC, Inc. , or
permitted transferee pursuant to Section 8.2 below (the "Holder").
In consideration of the premises and mutual covenants contained herein, the
Holder and the Company hereby agree as follows:
1. GRANT OF WARRANT. In consideration of the sum of $200.00 and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company hereby grants to the Holder the right and
option (the "Warrant") to purchase at any time during the "Exercise Period"
(as defined in Section 2 below), upon the terms and subject to the conditions
set forth in this Agreement, an aggregate of 200,000 shares of Common Stock,
par value $0.001 per share, of the Company (the "Common Stock"), for an
exercise price per share (the "Exercise Price"), equal to $10.00, subject to
adjustment as provided in Section 5 below. The shares of Common Stock
issuable upon exercise of the Warrant are referred to as the "Warrant
Shares," and the Warrant Shares and the Warrant are together referred to as
the "Securities."
2. EXERCISE PERIOD. The Warrant shall be immediately exercisable and
terminate and expire at 5:00 p.m. (Los Angeles Time) on February 28, 1999 .
3. EXERCISE OF WARRANT. There is no obligation to exercise all or any
portion of the Warrant. The Warrant may be exercised, in whole or in part,
at any time after the date hereof only by delivery to the Company of:
3.1 Written notice of exercise in form and substance identical to
and containing the representations set forth in Exhibit "A" attached to this
Agreement; and
3.2 Payment of the Exercise Price for the Warrant Shares being
acquired upon exercise of the Warrant, by wire transfer in immediately
available Federal funds. Upon receipt of the foregoing, the Company shall
promptly issue in the name of the Holder a certificate
<PAGE>
evidencing the Warrant Shares being purchased by such exercise and deliver
such certificate to the address requested in the notice of exercise.
4. REDEMPTION.
(a) On or after the first anniversary of the date of this Agreement
(the "Initial Warrant Redemption Date"), the Company may redeem and cancel
all, and not less than all, the unexercised rights to purchase Warrant Shares
evidenced by the Warrant for an aggregate redemption price (the "Redemption
Price") of $0.001 multiplied by the number of Warrant Shares then issuable
under the Warrant, provided, however, that before any such call for
redemption of the Warrant can take place, (i) the resale of the Warrant
Shares issuable upon exercise of the Warrant shall have been registered
pursuant to the provisions of the Securities Act of 1933, or be eligible for
sale by the Holder at any time without restriction or pursuant to the
provisions of Rule 144(k), and (ii) the (A) high closing bid price for the
Common Stock in the over-the-counter market as reported by the NASD Automated
Quotation System or (B) the closing sale price on the primary exchange on
which the Common Stock is traded, if the Common Stock is traded on a national
securities exchange, shall have for fifteen (15) consecutive trading days
subsequent to the Initial Warrant Redemption Date equaled or exceeded 125% of
the Exercise Price.
(b) In case the Company shall exercise its right to redeem all, and
not less than all, the unexercised rights to purchase Warrant Shares
evidenced by the Warrant, it shall give or cause to be given notice to the
Holder by mailing to the Holder a notice of redemption, first class, postage
prepaid, to the address of the Holder set forth in Section 11.2 below, within
twenty (20) calendar days of the aforementioned fifteen (15) consecutive
trading days and not later than the thirtieth (30th) day before the date
fixed for redemption. Any notice mailed in the manner provided herein shall
be conclusively presumed to have been duly given whether or not the Holder
receives such notice.
(c) The notice of redemption shall specify (i) the Redemption
Price, (ii) the date fixed for redemption (the "Redemption Date"), and (iii)
that the right to exercise the Warrant shall terminate at the close of the
market upon which the Common Stock is then traded on the business day
immediately preceding the date fixed for redemption.
(d) Any right to exercise the Warrant shall terminate on close of
the market upon which the Common Stock is then traded on the business day
immediately preceding the Redemption Date. The Redemption Price payable to
the Holder shall be mailed to the Holder at its address set forth in Section
11.2 below.
5. ADJUSTMENTS TO EXERCISE PRICE, REDEMPTION PRICE AND NUMBER OF
SHARES. The Exercise Price, Redemption Price and number of Shares shall be
subject to adjustment from time to time as follows:
5.1 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
2
<PAGE>
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 date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Exercise Price and the Redemption Price shall be appropriately decreased
(i.e., the per share Exercise Price and the Redemption Price shall be
adjusted such that the aggregate exercise price and for all Warrant Shares
issuable upon exercise of the Warrant in full and the Redemption Price for
the entire Warrant, 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.
5.2 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 and Redemption Price shall each be appropriately increased
(i.e., the per share Exercise Price and the Redemption Price shall be
adjusted such that the aggregate exercise price for all Warrant Shares
issuable upon exercise of the Warrant in full and the aggregate redemption
price for the entire Warrant, as adjusted, shall remain the same) and the
number of 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.
5.3 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 5.1 or 5.2 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 and Redemption Price) shall thereafter be applicable in
relation to any shares or other property thereafter purchasable upon exercise
of the Warrant.
5.4 If it is expected that there will occur any event described in
Section 5.3 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.
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5.5 The provisions of this Section 5 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 5.
5.6 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.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF HOLDER. The Holder
makes the following representations, warranties and covenants:
6.1 The Holder is acquiring the Securities 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).
6.2 The 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 Securities and of protecting its own interests in connection with this
transaction.
6.3 The Holder is willing to bear and is capable of bearing the
economic risk of an investment in the Securities.
6.4 The Company has made available, prior to the date of this
Agreement, to the 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 Securities and this Agreement and
to obtain any additional information with respect to the Company, its
business, operations and prospects, as reasonably requested by the Holder.
6.5 The 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 Securities Act of 1933, as amended (the
"Securities Act").
6.6 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.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The
Company makes the following representations, warranties and covenants:
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7.1 The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Company
has the requisite corporate power and authority to carry on its business as
now being conducted and to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby.
7.2 All corporate action on the part of the Company, its directors
and shareholders necessary for the authorization, execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby has been taken. This Agreement constitutes
the valid and binding obligation of the Company, enforceable in accordance
with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies.
7.3 The execution and delivery of this Agreement by the Company
does not, and the consummation by the Company of the transactions
contemplated by this Agreement will not constitute or result in (a) a breach
or violation of, or (with or without the giving of notice or the lapse of
time) a default under, (a) the Certificate of Incorporation or By-laws of the
Company or (b) any law to which the Company is subject.
7.4 The Warrant Shares, when issued in accordance with the terms of
this Warrant, will be duly authorized, issued and nonassessable shares of the
Common Stock of the Company, free and clear of any liens, claims or
restrictions imposed by or through the Company other than as set forth in
this Agreement.
7.5 The Company covenants that it will at all times reserve and
keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the issuance of the Warrant Shares upon
exercise of all or part of the Warrant, such number of shares of Common Stock
as shall then be issuable upon the exercise of all of the Warrants.
8. RESTRICTIONS ON TRANSFER OR EXERCISE OF THE WARRANTS AND SHARES.
8.1 Each certificate for Warrant 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 22, 1997. 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
5
<PAGE>
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 Warrant Shares are no longer subject to the transfer restrictions
imposed by applicable state and Federal securities law because either (i) the
Warrant Shares or the resale of the Warrant 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
the Holder, which opinion is reasonably satisfactory to counsel for the
Company, all future dispositions of any of the Warrant 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 8.1
shall not apply to any subsequent transfer thereof and the Company shall,
promptly upon request by the Holder, remove the legend set forth above and
shall promptly issue, in exchange for the certificate bearing such legend, a
certificate without such legend to the Holder.
8.2 Holder agrees that the Warrant may not be transferred, sold,
assigned or hypoth ecated 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.
8.3 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 his 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 8 and such exercise or transfer complies with
all applicable federal and state securities laws and regulations.
8.4 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 pursuant to Section 9.1 below or
otherwise, the Company shall, as promptly as practicable, so notify the
Holder and the Holder shall not consummate the proposed transfer.
8.5 The Holder agrees to enter into a lock-up agreement with the
underwriters of the IPO whereby 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;
6
<PAGE>
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.
9. COVENANTS OF HOLDER AND THE COMPANY.
9.1 PIGGYBACK REGISTRATION OF WARRANT SHARES. If, at any time
during the period commencing on the date hereof and on or before September
22, 2002, 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 require) 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.
9.2 COMPANY'S OBLIGATIONS IN PIGGYBACK REGISTRATION. The following
provisions shall also be applicable at the sole cost and expense of the
Company in the case of registrations under Section 9.1:
(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.
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<PAGE>
(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).
(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
8
<PAGE>
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 or Permitted Transferee expressly for
use therein.
(iv) 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 9.2(iii), the person claiming indemnification under
Section 9.2(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.
10. DISPUTES.
10.1 ARBITRATION.
(a) Except as otherwise expressly provided for in Section 10.3
below, 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 10.1(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 party who receives an Arbitration Notice shall appoint
an arbitrator and notify the initiating party of such arbitrator's name and
address within 30 days after
9
<PAGE>
delivery of the Arbitration Notice; otherwise, a second arbitrator shall be
appointed at the request of the party who delivered the Arbitration Notice as
provided in the Rules of Arbitration. The two arbitrators so appointed shall
appoint a third arbitrator who shall be the chairman or the Arbitration Panel
and who shall be of American nationality. Should the arbitrators appointed by
the parties not agree upon the appointment of the third arbitrator within 30
days of their appointment, the third shall be appointed in accordance with
the Rules of Arbitration.
(d) In any arbitration proceeding conducted pursuant to the
provisions of this Section 10, 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, and such proceedings shall be
conducted in the English language.
10.2 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.
10.3 LIMITATIONS. Notwithstanding anything to the contrary
contained in Sections 10.1 and 10.2 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.
11. MISCELLANEOUS PROVISIONS.
11.1 FURTHER ASSURANCES. The Company and the Holder agree to
execute such further documents or instruments and to take such other actions as
are necessary to carry out the transactions contemplated by this Agreement and
the other agreements referred to herein.
11.2 NOTICES. Any and all notices and other communications to be
served hereunder shall be either delivered (i) by hand; (ii) by prepaid
overnight delivery service; or (iii) by certified or registered mail, postage
pre-paid, in each case, addressed as follows:
If to the Holder:
One Packard Bell Way
Sacramento, California 95828
Attn: Chief Financial Officer
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With a copy to:
5701 Lindero Canyon Road
Westlake Village
California, 91362
General Counsel's Office
If to the Company:
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, CA 91367
Attn: Chairman
or at such other address and to the attention of such other person as any party
hereto may designate by written notice to the other in accordance with the terms
hereof.
Any such notice shall be effective (i) if delivered by hand, when
personally delivered; (ii) if given by overnight delivery service, on the
business day following deposit with such service addressed as aforesaid; or
(iii) if given by registered or certified mail, 72 hours after deposit in the
mail postage pre-paid, addressed as aforesaid.
11.3 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.
11.4 GOVERNING LAW. This 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. Each of the parties hereto hereby waive their right to a
jury trial with respect to any such legal actions.
11.5 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 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.
11.6 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 indemnifying
party with any consultant, broker or finder.
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11.7 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.
11.8 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 provision 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.
11.9 HEADINGS. The section and subsection headings contained in
this Agreement are included for convenience only and form no part of the
agreement between the parties.
11.10 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.
11.11 SURVIVAL. The provisions of Section 9.2(iii), Section
9.2(vi), Section 10 and Section 11 shall survive termination of this Agreement.
11.12 INTERPRETATION. In all matters of interpretation, whenever
necessary to give effect to any provision of this Agreement, each gender shall
include the others, the singular shall include the plural, and the plural shall
include the singular. The titles of the paragraphs of this Agreement are for
convenience only and shall not in any way affect the interpretation of any
provision or condition of this Agreement. Each party and its counsel have
reviewed and revised this Agreement. As a result, the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments or exhibits thereto.
11.13 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.
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IN WITNESS WHEREOF, the parties have entered into and executed this Warrant
Agreement as of the date first above written.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /s/ MARK DYNE
-----------------------------------------
Name: Mark Dyne
Title: Chief Executive Officer
PACKARD BELL NEC, INC.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
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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 Warrant granted to the undersigned pursuant to that
certain Redeemable Warrant Agreement dated September 22, 1997 between the
undersigned and Brilliant Digital Entertainment, Inc., a Delaware corporation
(the "Company") and to purchase ___________ shares of Common Stock (the
"Securities") of the Company. The closing of the exercise of the Warrants
shall take place at _____ on _________________, ________ at the principal
executive office of the Company located at Brilliant Digital Entertainment,
Inc., 6355 Topanga Canyon Blvd., Suite 120, Woodland Hills, CA 91367.
The undersigned represents, warrants and agrees that the undersigned (a)
is acquiring the Securities 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 and the provisions of the Agreement), (b) 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 Securities
Act of 1933, as amended (the "Securities Act").
By:
---------------------------------------------------
Name:
-------------------------------------------------
Title:
------------------------------------------------
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August 1, 1997
Brilliant Digital Entertainment, Inc.
Attn: Mark Dyne, Chairman
6355 Topanga Canyon Boulevard
Woodland Hills, CA 91367
Dear Mr. Dyne:
1. This letter confirms our understanding that Brilliant Digital
Entertainment, Inc. (the "Company") has engaged Averil Associates, Inc.
("Averil") 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, (iv) work with management in contacting potential
private and public institutional capital sources, (v) review various
structural and tax considerations applicable to a transaction(s) impacting
the Company, (vi) coordinate all financial and legal advisors involved in the
transactional process, and (vii) assist in the negotiation and execution of
any transaction including economic, structural and other terms and
conditions.
(B) A trasaction 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:
(A) Retainer. A non-refundable retainer fee of $21,000, payable upon
execution of this letter agreement.
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. At Averil's election, Averil shall have the option to be paid
any portion of the cash fees payable pursuant to this paragraph (B) in the
form of equity securities of the Company. <PAGE>
(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.
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. ________
(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
<PAGE>
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.
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. ________ (initials)
12. This agreement may be executed in counterparts, each of which together
shall be considered a single document.
<PAGE>
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.
AVERIL ASSOCIATES, INC.
By: /s/ DIANA MARANON
----------------------------
Diana L. Maranon
ACCEPTED AND AGREED TO:
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /s/ MARK DYNE
----------------------------
Mark Dyne
<PAGE>
August 1, 1997
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 August 1, 1997 (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 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
<PAGE>
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.
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 DIGITAL ENTERTAINMENT, INC.
By:
----------------------------
Dated:
Accepted:
AVERIL ASSOCIATES, INC.
By:
----------------------------
Diana L. Maranon
Dated:
<PAGE>
EXHIBIT 10.43
WARRANT AGREEMENT
This WARRANT AGREEMENT (this "Agreement") is made and entered into as of
the 4th day of November, 1997, 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 $0.001 per Warrant and in consideration of
services rendered to the Company, the Company hereby grants to Holder,
effective upon the closing of the public offering by the Company of shares of
its Common Stock which is scheduled to commence in November or December of
1997 (the "Public Offering") 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 the number of shares of the Common Stock of the Company
(the "Warrant Shares") at an exercise price per share equal to 110% of the
price at which the Company's Common Stock is offered for sale to the public
in the Public Offering (the "Exercise Price"), where the value of the
warrants is equal to $20,000, as determined using the Black Shoals Model with
the following variables:
(a) The date of grant shall be the closing of the Public Offering;
(b) The exercise price shall be equal to the Exercise Price;
(c) A volatility factor of 45%;
(d) A risk free rate of 6%; and
(e) A discount rate of 10%.
2. TERM OF WARRANT.
The Warrant shall terminate and expire at 5:00 p.m., Los Angeles time, on
October 4, 2000 (the "Warrant Expiration Date"), unless sooner terminated as
provided herein.
3. VESTING.
(a) The Warrant shall be exercisable with respect to all Warrant
Shares on the first anniversary of the closing of the Public Offering.
(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:
(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.
<PAGE>
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 NOVEMBER 4, 1997. 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
above and shall promptly issue, in exchange for the certificate bearing such
legend, a certificate without such legend to Holder.
(b) Intentially omitted.
2
<PAGE>
(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.
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 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
3
<PAGE>
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.
(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).
4
<PAGE>
(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) of Regulation D promulgated by the Securities and Exchange
Commission under the Act.
(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.
5
<PAGE>
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) DEMAND REGISTRATION.
i) At the later to occur of (i) one year following the closing of
the Public Offering, and (ii) that date upon which the Company is eligible to
register the Warrant Shares for resale on a Form S-3, the Holder may deliver
a written request (the "Notice") executed by the Holder and requesting
registration of the resale by Holder of all of the Purchased Shares. As soon
as practicable after receipt of the Notice, the Company shall at its sole
cost and expense file a registration statement with the Commission on Form
S-3 or any successor form, under the Securities Act, covering the issuance of
the Warrant Shares issuable to the Holder upon exercise of the Warrant or the
resale of the Warrant Shares issuable upon exercise of the Warrant by the
Holder. The Company will use its best efforts to have such registration
statement declared effective as soon as possible thereafter, and shall keep
such registration statement current and effective until such time as the
Warrant Shares issuable upon exercise of the Warrant may be sold by the
Holder at any time without restriction or pursuant to the provisions of Rule
144(k) of the Commission or until such earlier date as all of the Purchased
Shares registered pursuant to such registration statement shall have been
sold or otherwise transferred by the Holder to a third party. The Company
shall also prepare and file with the Commission such amendments and
supplements to such registration statement (and the prospectus used in
connection therewith) as may be necessary to update and keep such
registration statement (and the prospectus used in connection therewith)
current and effective for such three-year period and to comply with the
provisions of the Securities Act with respect to the sale of all securities
covered by such registration statement.
ii) The Company shall not be required to effect a registration
pursuant to this Section 11(a): (i) after the Company has effected one (1)
registration pursuant to this Section 11(a), and such registration has either
(A) been declared or ordered effective or (B) the request for such
registration has been subsequently withdrawn by the Holder (and such
withdrawal is not based on materially adverse information concerning the
Company of which the Holder was not reasonably aware at the time of such
request); or (ii) if the Warrant Shares issuable upon exercise of the Warrant
may be sold by the Holder at any time without restriction or pursuant to the
provisions of Rule 144(k); or (iii) if Form S-3 (or a successor or similar
form) is not available for such offering by the Holder; or (iv) if the
Company shall furnish to the Holder following receipt of its written request
for registration, a certificate signed on behalf of the Board of Directors by
the Chairman of the Board stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its
6
<PAGE>
shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, in which event
the Company shall have the right to defer such filing for a period of not
more than one hundred eighty (180) days after receipt of the Holder's request
for registration.
(b) PIGGYBACK REGISTRATION OF WARRANT SHARES. If, at any time
during the period commencing on the first anniversary of the closing of the
Public Offering and on or before December 31, 2000, 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 require) 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
8
<PAGE>
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.
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.
9
<PAGE>
(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:
If to the Company, to:
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard, Suite 120
Woodland Hills, CA 91367
Attn: Chairman of the Board
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 indemnifying
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 provision 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 pursuant hereto or interest herein shall be
assignable by any of the parties hereto without the prior written consent of the
other party hereto.
11
<PAGE>
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
------------------------------------
Mark Dyne
Its: Chief Executive Officer
Chloe Holdings, Inc.
By: /s/ Diana Maranon
---------------------------------------
Diana Maranon
Its: President
12
<PAGE>
EXHIBIT "A"
NOTICE OF EXERCISE
(TO BE SIGNED ONLY UPON EXERCISEBDO SEIDMAN LLP 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 November 4, 1994 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 6355 Topanga Canyon Blvd., Suite 120,
Woodland Hills, CA 91367.
HOLDER
_______________________________
13
<PAGE>
EXHIBIT 11.1
BRILLIANT DIGITAL ENTERTAINMENT, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended Three Months Ended
Year Ended June 30, December 31, September 30, September 30,
--------------------- ----------------------- ----------------------- --------------------
1995 1996 1995 1996 1996 1997 1996 1997
--------- --------- --------- ----------- --------- --------- --------- ---------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding .................... 4,424,420 4,473,040 4,473,040 4,883,333 4,455,360 7,200,333 4,473,040 7,201,001
Common Stock equivalents:
Stock options granted ....... 37,000 37,000 37,000 30,833 37,000 -- 37,000 131,026
Warrants granted ............ 46,960 46,960 46,960 39,133 46,960 -- 46,960 311,437
--------- --------- --------- ----------- ----------- --------- --------- ---------
Common shares used in computing
net income (loss) per share .... 4,508,380 4,557,000 4,557,000 4,953,299 4,539,320 7,200,333 4,503,960 7,643,464
--------- --------- --------- ----------- ----------- --------- --------- ---------
--------- --------- --------- ----------- ----------- --------- --------- ---------
Net income (loss)................. $(423,853) $553,412 $390,640 $(3,834,963) $(2,370,904) $(944,413) $(282,031) $812,382
--------- --------- --------- ----------- ----------- --------- --------- ---------
--------- --------- --------- ----------- ----------- --------- --------- ---------
New income (loss per
common share ................... $(0.09) $.12 $0.09 $(0.77) $(0.52) $(0.13) $(0.06) $0.11
--------- --------- --------- ----------- ----------- --------- --------- ---------
--------- --------- --------- ----------- ----------- --------- --------- ---------
</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 March 24, 1997 and September 13, 1996 in the
Registration Statement Form SB-2 and related Prospectus of Brilliant Digital
Entertainment, Inc. for the registration of up to 3,450,000 shares of its Common
Stock.
Ernst & Young LLP
Woodland Hills, California
November 4, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,591
<SECURITIES> 0
<RECEIVABLES> 202
<ALLOWANCES> (93)
<INVENTORY> 0
<CURRENT-ASSETS> 7,933
<PP&E> 584
<DEPRECIATION> (239)
<TOTAL-ASSETS> 8,484
<CURRENT-LIABILITIES> 1,139
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 7,338
<TOTAL-LIABILITY-AND-EQUITY> 8,484
<SALES> 350
<TOTAL-REVENUES> 350
<CGS> 186
<TOTAL-COSTS> 3,986
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (3,835)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,835)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,835)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> (.77)
</TABLE>
