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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________ to _______________.
Commission file number 0-21637
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 95-4592204
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6355 Topanga Canyon Boulevard, Suite 120
Woodland Hills, California 91367
(Address of Principal Executive Offices)
(818) 346-3653
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock, par value
$0.001, 7,203,001 shares issued and outstanding as of November 4, 1997.
Transitional Small Business Disclosure Format (check one):
Yes No X
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
INDEX
PAGE NO.
PART I Financial Information 3
Item 1. Financial Statements (unaudited) 3
Condensed Consolidated Balance Sheet -
September 30, 1997 3
Condensed Consolidated Statements of Operations - Three
and nine months ended September 30, 1997 and l996 4
Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Factors That May Affect Future Results of Operations 14
PART II Other Information 26
Item 2. Changes in Securities 26
Item 6. Exhibits and Reports on Form 8-K 26
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 4,328
Accounts receivable, net..................................... 1,973
Other assets................................................. 68
--------
Total current assets............................................. 6,369
Property, plant and equipment, net............................... 639
Development costs................................................ 404
Other assets..................................................... 263
--------
Total assets..................................................... $ 7,675
--------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................ $ 1,121
Amounts payable to related parties........................... 22
--------
Total current liabilities........................................ 1,143
--------
Stockholders' equity:
Common Stock................................................. 7
Additional paid-in capital................................... 11,472
Accumulated deficit.......................................... (4,899)
Cumulative translation adjustment............................ (48)
--------
Total stockholders' equity....................................... 6,532
--------
Total liabilities and stockholders' equity....................... $ 7,675
--------
--------
See accompanying notes.
3
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
9/30/97 9/30/96 9/30/97 9/30/96
----------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Total revenue...................... $ 2,057 $ 281 $ 2,377 $ 1,139
-------- -------- -------- --------
COST OF REVENUES AND EXPENSES:
Cost of revenues....................... -- 140 17 411
Sales & marketing...................... 185 968 387 1,099
General and administrative............. 665 140 1,665 345
Research and development............... 363 1,518 1,418 1,641
Depreciation........................... 80 31 198 87
-------- -------- -------- --------
Total cost of revenues and expenses.... 1,293 2,797 3,685 3,583
-------- -------- -------- --------
Income (loss) from operations.......... 764 (2,516) (1,308) (2,444)
OTHER INCOME (EXPENSE):
Export market development grant........ -- -- 152 125
Gain (loss) on foreign exchange........ 4 -- (1) (4)
Interest income (expense), net......... 45 (21) 215 (48)
-------- -------- -------- --------
Total other income (expense)....... 49 (21) 366 73
-------- -------- -------- --------
Income (loss) before income taxes...... 813 (2,537) (942) (2,371)
Provision for income taxes............. (1) -- (2) --
-------- -------- -------- --------
Net income (loss)...................... $ 812 $ (2,537) $ (944) $ (2,371)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share............ $ 0.11 $ (0.56) $ (0.13) $ (0.52)
-------- -------- -------- --------
-------- -------- -------- --------
Common shares used in computing
income (loss) per share............... 7,643 4,504 7,200 4,539
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes.
4
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $ (944) $ (2,371)
Adjustments to reconcile net loss to
the net cash provided by (used in) operating
activities:
Depreciation and amortization...................... 418 87
Effect of warrants granted......................... 140 1,096
Effect of stock options granted.................... 12 --
Effect of SAND note................................ -- 1,350
Changes in operating assets and liabilities:
Accounts receivable................................ (1,869) 290
Development costs.................................. (424) --
Other assets..................................... (113) --
Accounts payable and accruals.................... 268 61
Deferred revenue................................. (158) --
Other liabilities................................ -- 13
----------- -----------
Net cash provided by (used in)
operating activities................................ (2,670) 526
INVESTING ACTIVITIES
Purchases of equipment............................... (537) (51)
----------- -----------
Net cash used in investing activities................ (537) (51)
FINANCING ACTIVITIES
Costs related to offering............................ -- (145)
Increases in notes payable........................... -- 815
Repayments of notes payable.......................... (57) (1,166)
----------- -----------
Net cash provided by financing activities............ (57) (496)
----------- -----------
Net decrease in cash and cash equivalents............ (3,264) (21)
Translation adjustments.............................. 1 21
Cash and cash equivalents at beginning
of period........................................... 7,591 86
----------- -----------
Cash and cash equivalents at end of period........... $ 4,328 $ 86
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................... $ -- $ --
----------- -----------
----------- -----------
Income taxes..................................... $ 3 $ --
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
5
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
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 cashflows
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. The accompanying financial statements should be
read in conjunction with the audited consolidated financial statements of
Brilliant Digital Entertainment, Inc. (the "Company") included in the
Company's Form 10-KSB for the transition period from July 1, 1996 to December
31, 1996. The results for the three and nine months ended September 30, 1996
and 1997 include the operations of the parent company (Brilliant Digital
Entertainment, Inc.), which was incorporated in July 1996, BII Australia, and
SAND, which was acquired by the Company in September 1996 (see the Overview
section of Management's Discussions and Analysis of Financial Condition and
Results of Operations). As a result of the restructuring of the group and the
change in the focus of the business, the results for the three and nine
months ended September 30, 1996 are not comparable to those for the three and
nine months ended September 30, 1997.
2. 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 and Staff policy, 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 Company's initial
public offering of Common Stock (in November 1996) 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.
3. SIGNIFICANT CUSTOMER
During the three and nine months ended September 30, 1997, a single
customer, Packard Bell NEC, accounted for 96% and 83%, respectively, of
total revenue. The revenue resulted from recognition of a minimum guarantee
related to the Company's distribution agreement with Packard Bell NEC.
6
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4. WARRANTS
In connection with its strategic relationship with Packard Bell NEC, in
September 1997 the Company issued to Packard Bell NEC warrants to purchase
200,000 shares of the Company's Common Stock, exercisable at $10. The
warrants expire in February 1999. The value of the warrants is calculated to
be approximately $140,000 which has been recorded as an expense charge to
operations with a corresponding credit to stockholders' equity during the
three and nine months ended September 30, 1997.
5. COMMITMENTS AND CONTINGENCIES
The Company has a commitment under its rental agreements for
approximately $850,000 at September 30, 1997.
7
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ITEM 2. 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. The
commercial success of a Multipath Movie is also expected to depend upon
promotion and marketing, production costs, impact of competition and other
factors. Accordingly, the Company's annual and quarterly revenues are and
will be extremely difficult to forecast.
8
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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 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.
RESULTS OF OPERATIONS FOR THE 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.
9
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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 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.
10
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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 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.
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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.
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.
12
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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.
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 "Quote Factors
That May Affect Future Results of Operations -- Future Capital Needs;
Uncertainty of Additional Funding."
13
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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
THIS REPORT 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 REPORT, INCLUDING, WITHOUT LIMITATION, THE STATEMENTS
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 BELOW. 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
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initial Multipath Movie to achieve commercial success would damage the
ability of the Company to introduce additional titles. Accordingly, the
failure of any of the Company's Multipath Movies, and especially its first
Multipath Movie, to achieve commercial success, could have a material adverse
affect on the business, operating results and financial condition of the
Company.
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.
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 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
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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.
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 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.
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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.
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.
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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 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.
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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 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.
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MOVIE STUDIOS AND PRODUCTION COMPANIES. The Company's Multipath Movies will
compete with traditional feature films and television programming produced by
major movie studios, including Disney, Warner Bros. Inc. ("Warner Bros."),
Twentieth Century Fox Film Corporation ("Twentieth Century Fox"), Paramount
Pictures ("Paramount"), Sony Pictures, Inc. ("Sony"), Lucasfilm, Universal City
Studios, Inc. ("MCA Universal") and MGM/UA, as well as numerous other
independent motion picture and television production companies. Several movie
studios already have developed and released animated feature films and the
Company expects additional competition in the animated feature film market from
these and other movie studios. Other movie studios have announced their
intention to enter the animated feature film market, including DreamWorks SKG, a
studio formed in 1994 which is expressly targeting the animated film market. The
Company's broadcast and home video products will compete with the films of these
movie studios for audience acceptance and exhibition over broadcast/cable and
home video channels. In addition, the Company will compete with movie studios
for the acquisition of literary properties, production financing, the services
of performing artists, and the services of other creative and technical
personnel, particularly in the fields of animation and technical direction. Most
of the movie studios with which the Company will compete have significantly
greater name recognition and significantly greater financial, technical,
creative, marketing, and other resources than does the Company. Due to their
substantially greater resources, these movie studios likely will be able to
enter into more favorable distribution arrangements and to promote their films
and television programming more successfully than the Company.
Several movie studios, including Disney and Lucasfilm (through its
affiliate ILM), have developed their own internal computer animation
capability and have created computer animation for special effects in
animated films. Other movie studios may internally develop, license or
sub-contract three-dimensional animation capability. Further, the Company
believes that continuing enhancements in computer hardware and software
technology will lower barriers to entry for studios or special effects
companies which intend to produce computer animated feature films or other
products.
In response to all of these competitive forces, the Company will be required
to make a high level of investment in content and tool development, marketing
and customer service and support. There can be no assurance that the Company
will have sufficient resources to make such investments or, even if they are
made, that the Company's products will be competitive. Additionally, present or
future competitors may be able to develop products comparable or superior to
those offered by the Company or adapt more quickly than the Company to new
technologies or evolving customer requirements. The Company's competitors also
may increase their efforts to gain and retain market share through competitive
pricing or product giveaways. These competitive pressures may necessitate price
reductions by the Company, thus reducing the Company's profit margins. In
addition, as the number of competitors increases and competition for 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.
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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 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.
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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.
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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 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.
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.
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SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF EXECUTIVE
OFFICER AND PRESIDENT
The Company's Chief Executive Officer and Chairman, Mark Dyne, and its
President, Kevin Bermeister, also serve as joint managing directors of Sega
Ozisoft 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.
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. 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.
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
24
<PAGE>
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition. Ultimately, the Company may be unable, for
financial or other reasons, to enforce its rights under intellectual property
laws and the laws of certain countries in which the Company's products are or
may be distributed may not protect the Company's products and intellectual
rights to the same extent as the laws of the United States.
The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third parties.
Since the software tools used to create the Multipath Movies were developed by
SAND, a division of Sega Ozisoft, the Company relies entirely on the
representations of Sega Ozisoft contained in the SAND Acquisition Agreement
between BII Australia and Sega Ozisoft that, to Sega Ozisoft's best knowledge,
the SAND technology and software acquired by the Company does not infringe the
proprietary rights of others. Additionally, although the Company has received no
communication from third parties alleging the infringement of proprietary rights
of such parties, there can be no assurance that third parties will not assert
infringement claims in the future. Any such third party claims, whether or not
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. There can be no assurance that the Company
would prevail in any such litigation or that any such licenses would be
available on acceptable terms, if at all. If the Company were found to have
infringed upon the proprietary rights of third parties, it could be required to
pay damages, cease sales of the infringing products and redesign or discontinue
such products, any of which alternatives, individually or collectively could
have a material adverse effect on the Company's business, operating results and
financial condition.
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.
25
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On September 1, 1997, the Company issued warrants to Packard Bell NEC to
purchase up to 200,000 shares of Common Stock for $200.00 (the "Warrants") in
connection with an amendment to the Company's distribution agreement with
Packard Bell NEC. Packard Bell NEC covenanted that (i) it acquired the
Warrant for its own account with the present intention of holding such
Warrant for investment purposes only and not with a view to, or for sale in
connection with, any distribution of such Warrant (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 Warrant 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 Warrant; and (iv) the Company made available, prior to the
date of issuance of the Warrant, 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
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Site Management Agreement, dated June 2, 1997, between
CompuServe Incorporated and Brilliant Digital Entertainment,
Inc. [Confidential Treatment Requested].
10.2 Letter Agreement, dated September 22, 1997, between Packard
Bell NEC and the Company. [Confidential Treatment Requested].
11.1 Computation of Per Share Earnings (Loss).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Report on Form 8-K dated July 21, 1997 reporting under Item 4
thereof the engagement of Price Waterhouse LLP as the Company's
independent auditors for the year ending December 31, 1997 to
replace the firm of Ernst & Young LLP, who were dismissed as
auditors of the Company effective July 21, 1997.
26
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
Date: November 4, 1997 /s/Michael Ozen
---------------------------------------
By: Michael Ozen
Its: Chief Financial Officer
(Principal Financial and
Accounting Officer) and
Secretary
27
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.1 Site Management Agreement, dated June 2, 1997, between CompuServe
Incorporated and Brilliant Digital Entertainment, Inc. [Confidential
Treatment Requested].
10.2 Letter Agreement, dated September 22, 1997, between Packard Bell
NEC and the Company. [Confidential Treatment Requested].
11.1 Computation of Earnings (Loss) per Common Share.
27.1 Financial Data Schedule.
28
<PAGE>
June 2, 1997
Mr. Mark Dyne
Chairman and CEO
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard Suite 513
Woodland Hills, CA 91367
Re: SITE MANAGEMENT AGREEMENT FOR CSI
Dear Mark:
CompuServe Incorporated ("COMPUSERVE") and Brilliant Digital Entertainment, Inc.
("MANAGER" or "YOU") desire to enter into this Agreement with each other. Under
this Agreement, you agree to manage a Forum-Registered Trademark- area,
"Product" area or another form of content site which CompuServe intends to make
available to customers of CompuServe by way of information services of
CompuServe. Capitalized terms used in this Agreement have the meanings given
them in this letter or its attachments.
1. THE SITE AND THE SERVICE. Manager agrees to manage the Site in
cooperation with and support of CompuServe's operation and control of the
Service and as a part of the Service. "SITE" means the organized set of content
(which may include, among other things, images, text, computer programs, sounds,
video and other works, information, products, services and features) and/or
functionality referenced in Section 2 of this letter [SITE SET-UP AND
DESCRIPTION] and with respect to which Manager has hereby agreed to provide the
services specified in this letter. The "SERVICE" means CompuServe's information
service[s] known as: "CSi," consisting of the sites, areas, content, features,
functions, services and other characteristics offered and continued from time to
time by CompuServe as a part of such information service[s] and identified by
CompuServe as such from time to time.
2. SITE SET-UP AND DESCRIPTION.
A. Manager shall set up the Site so that it is arranged and
otherwise technically configured so that it is compatible with the various
standards (systems-related, stylistic and otherwise) necessarily incident to, or
established and communicated by CompuServe from time to time for, the Service or
its various parts (the "SERVICE STANDARDS").
<PAGE>
B. Manager shall develop and maintain the Site so that it has the
characteristics and meets the parameters set forth in this Section 2(B) (the
"SITE CHARACTER").
i. SITE CHARACTER, SUBJECT MATTER AND PURPOSE.
a. The Site shall be dedicated to the following
subject matter: multipath movies, serials and episodes, and other content to be
developed as mutually agreed upon.
b. The Site shall be geared to an audience having the
following characteristics: Members between the ages of 35-50 and their children,
high average household income; owns PC and peripherals and wants experience that
entertains; college educated; works in a white collar profession, or is a
family-member of a white collar professional.
c. The Site shall also have the following additional
characteristics: updated frequently, and some degree of unique content
ii. SPECIFIC SITE DESCRIPTION: CONTENT, KINDS OF CONTENT AND
CONTENT AREAS OF THE SITE.
The Site shall include content consistent with the Site Character
described above. In particular, the Site will contain primarily the following-
described software, research information, service transaction capabilities,
digitized files or other goods or service offerings available for immediate
download subject to terms and conditions of site agreement, use, receipt or
other fulfillment: the multipath engine, Digital projector, and the specific
files for various episodes, movies, and serials (the "RESOURCE(S)").
CompuServe acknowledges that Manager shall attempt to solicit
offers from users of the Site for purchases of Resource(s). Manager agrees to
at all times act with professionalism, honesty, reasonableness and fairness in
all dealings with third parties, and to provide CompuServe immediately with any
information CompuServe may request and which is directly or indirectly available
to Manager, even if such information is otherwise available to CompuServe. The
Resource(s) are represented by Manager, and therefore acknowledged by
CompuServe, as being owned or licensed to Manager or to the following named
person or entity:
Brilliant Digital Entertainment, Inc.
Mr. Mark Dyne
Chairman and CEO
6355 Topanga Canyon Boulevard Suite 513
Woodland Hills, CA 91367
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE 2
<PAGE>
The Site will also include the following additional types of
content or areas: a Brilliant Digital Entertainment (BDE) Forum, which will
consist of a message (or "bulletin board") section, a library section and a
conferencing (or "chat") area. Furthermore, Manager agrees that these sections
and areas of the Site shall conform to the framework typical of Forum-Registered
Trademark- areas on the Service. The library section may include additional
databases or other materials that the Manager owns or is properly licensed to
use in the Site, provided that including such content is consistent with the
Site Character and is otherwise in compliance with this Agreement.
Manager represents, warrants and covenants to CompuServe that it
will make it clear to all who use the Site: (1) that CompuServe does not
warrant, verify or endorse the reliability, reputation or quality of performance
of Manager; (2) that any transactions pertaining to the Resource(s) are strictly
between Manager and the user; (3) that CompuServe's sole function with respect
to the transaction is to provide a communication and/or delivery service for use
by the Manager and the user; (4) that CompuServe is not responsible (A)
regarding the Resource(s), their merchantability, fitness for a particular
purpose, title, quality, condition, performance or potential for causing harm,
(B) regarding any transaction concerning the Resource(s) nor (C) regarding any
failure of Manager or any other person to perform or refrain from performing any
act, to use due care or to comply with any law, regulation, contract or other
duty; (5) Manager's policies in respect of time and details of delivery,
returns, refunds, prices, costs, taxes, credit and other matters known to be
important to potential customers for the Resources; and (6) Manager's business
address and relevant contact information. Any such notices or communications
shall be subject to CompuServe's review and approval from time to time.
FURTHER DETAILED DESCRIPTION OF THE SITE:
1. Brilliant Digital Entertainment Inc. HTML Site - this site will be
available on a CompuServe-hosted HTML page only. It will contain the
Digital Projector for download, which will be the engine on which the
multipath movies, serials, and episodes are played. The site will also
include the episodes, movies and serials that are available to view for a
price, as outlined in Schedule A of this Agreement. CompuServe users shall
pay prices that are a minimum of CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION% less than on the
Internet sites.
2. Brilliant Digital Entertainment Inc. Forum - this area will contain
materials and discussion related to the multipath movies, serials and
episodes.
Manager shall keep the Site up-to-date and use its commercially
reasonable efforts to keep the Site compelling for the above-contemplated
audience, and shall also add to the Site all updates, improvements and
enhancements developed by or otherwise available to Manager as fits the Site
Character and as pertains to the content available in the Site from time to
time.
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE 3
<PAGE>
Unless authorized by CompuServe in writing, Manager shall include
or permit in the Site only content or other services or features as specified
above. Manager agrees it will not discontinue in the Site any particular
category of or distinct portion of the Site's content unless authorized by
CompuServe in writing, but this shall not be construed as precluding Manager
from performing routine updating and maintenance of the Site's content.
Manager shall support and manage all activities relating to
functionality and use associated with the Site or its various elements, for
example uploads and downloads of files by users where that capability applies.
Manager acknowledges that it is familiar with the Service's end
user agreement terms posted online (the "MEMBER AGREEMENT"), and the rights of
CompuServe to amend same. Manager agrees that this Agreement shall not in any
event be construed in a manner that would be inconsistent with rights of members
or those of CompuServe under the Member Agreement as amended from time to time.
Manager shall neither act nor omit to act in any way that would be inconsistent
with such rights or with the terms of such Member Agreement.
iii. SERVICE STANDARDS PERTAINING TO THE SITE.
Manager shall develop, maintain and manage the Site so that
it conforms with CompuServe's Service Standards (defined above). The Service
Standards comprise such standards as are communicated by CompuServe in
CompuServe's Sysop Manual and in other publications, compilations, documentation
and communications issued by CompuServe. Manager acknowledges it has received a
copy of the Sysop Manual. CompuServe may change the Service Standards in its
sole discretion, but shall provide Manager reasonable notice of these changes.
As additional Service Standards, Manager, in coordination with CompuServe's
appropriate business contact person, (a) shall be sure that CompuServe's
contractor retained for certain content review purposes has determined or has
all information necessary to determine whether (or to what extent) the Site
ought to be placed within parental control utilities arranged for by CompuServe,
and Manager shall comply and cooperate in connection with any such
determination, and (b) shall cooperate and assist with any initiatives of
CompuServe to implement technology known as (or similar to) "remote password
authentication" (or RPA), and/or related technology.
3. MANAGING THE SITE. The Manager shall: (A) maintain the availability of
the Site on the Service and encourage and facilitate activity in the Site; (B)
set up, maintain and manage the Site so that it continuously conforms with the
Site Character; (C) remain familiar with and, with respect to the Site, notify
CompuServe of a breach of the Member Agreement (defined above), as amended from
time to time, provided that such notification obligation shall not apply if
Manager has no actual or required contact with Users and if the Site has no
interactive features or functionality; (D) diligently perform the Manager's
obligations under this Agreement to prevent and remedy, with respect to the
Site, acts or
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE 4
<PAGE>
occasions of infringement or violation of any patent, copyright, trademark,
trade secret, other intellectual property right, property right, contract or any
other right, obligation, law, regulation, court order or legal rule; (E)
maintain back-up and related procedures (using resources distinct from systems
supplied, operated or maintained by CompuServe) to enable the prompt restoration
or reconstruction of the Site's content in the event of loss of or damage to
such content; (F) review and answer all messages from users of the Site on a
prompt basis, but with no message going unanswered longer than 24 hours, except
in cases where this is not practical; (G) promptly review and manage the files
uploaded to the Site (if upload functionality is applicable to the Site),
including, without limitation, testing them for viruses, worms, cancelbots,
harmful components or corrupted data (and remedying any such situation),
reviewing them with respect to infringement and--when appropriate--merge the
files (i.e., arrange for them to be available for viewing and other contemplated
uses by users of the Site), at least once every 24 hours; (H) update the
Manager's announcement area so that messages and announcements are accurate and
current; (I) if the Site is in the nature of a Forum area (or has a chat,
messaging board or library area) visit the "Sysop Forum" regularly (but at least
once every 24 hours) for the purposes of staying familiar with matters
pertaining to the Service and for checking for messages and announcements from
CompuServe; (J) check and retrieve mail from the Manager's CompuServe e-mail box
regularly (but at least once every 24 hours); (K) to the extent the Site is
referenced in Section 2(b)(ii), above, as being in the nature of a "Product
Site," continuously review the Product content and maintain its reliability,
editing or otherwise controlling the Product content as necessary or
appropriate; and (L) continuously work to keep the Site free of abusive or
otherwise wrongful acts or omissions of others, and the effects thereof.
The Site shall be hosted on computer facilities operated by or on behalf of
CompuServe and supplied by CompuServe for such purposes. Manager shall comply
with CompuServe's requirements relating to these resources, including access to,
use of and the availability and limitations of such resources.
4. PAYMENT. In consideration of the performance of this Agreement, each
party shall pay to the other such fees and other amounts required of it in
SCHEDULE A of this Agreement. Unless otherwise provided in SCHEDULE A, all
required payments shall be made within a reasonable time after they have become
due, usually within not more than sixty (60) days thereafter. However, if
needed information is incomplete, or necessary calculations are unable to be
made, in time for payment to be made within this time, payment shall be due
within a reasonably prompt time after such information and/or calculations is
complete and/or can be made. Each party shall bear its own expenses of entering
into, performing and administering this Agreement, unless otherwise set forth in
SCHEDULE A.
Except with CompuServe's written consent, in the form of a signed amendment
to this Agreement expressly referencing this paragraph, Manager shall not
include or permit any third party to include any premium charges, surcharges or
other fee or charge in connection with the Site, or any other commercialization
or commercial activity in connection with the Site, all
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE 5
<PAGE>
such rights being reserved exclusively to CompuServe. Except as may be
specified in this Agreement, Manager shall have no right, title or interest in
or to any finders fee or other charge in connection with any such activities
that CompuServe may conduct or authorize, nor in or to any profits or revenue of
CompuServe.
5. PERFORMANCE CRITERIA.
Manager acknowledges that the Site must: (A) be and remain available to
Users and meet the Service Standards within 120 days after the setup and
availability of the site; and (B) beginning on the 121st day after initial Site
availability., have User participation in the Site of an average of two-hundred
fifty (250) unique User IDs per week (the "WEEKLY TARGET"), as measured by
CompuServe's systems, during each 4-week period immediately preceding the date
as of which the calculation is made. Such calculations may be made (on a
rolling basis) for any week(s) ending on or after the 121st day after initial
Site availability (weeks to be 7-day calendar weeks, Sunday through Saturday,
unless otherwise established by CompuServe). These criteria will be referred to
as the "PERFORMANCE CRITERIA." Manager agrees that time is of the essence of
this paragraph. The Weekly Target shall remain equal to the amount specified
above in this paragraph, unless adjusted in accordance with express terms
elsewhere in this Agreement providing for such a change.
6. TRAINING. As may be requested by CompuServe from time to time,
Manager will cause up to two of its personnel to attend training in Columbus,
Ohio, as indicated in this paragraph. CompuServe shall in such cases provide
training in Columbus, Ohio for 2 individuals regarding the management and
operation of areas such as the Site, together with up to 2 copies of materials
made available in connection with such training, such as a Sysop Manual. Such
training shall be on an as available basis, onsite at CompuServe's facilities;
Manager shall endeavor to take such training on a schedule designed to optimize
the effectiveness of such training. CompuServe shall bear the cost of
instructors, facilities and other training resources. Manager will be
responsible for all travel, lodging and other expenses pertaining to attending
training. CompuServe generally will not suggest training if Manager's personnel
have previously attended such training.
7. MARKETING PROGRAM.
MARKETING PROGRAM. The parties agree to perform their respective
obligations as set forth in SCHEDULE B of this Agreement (the "MARKETING
PROGRAM"). Each party acknowledges and agrees that the arrangements set forth
in the Marketing Program are of crucial importance to the respective commercial
interests of each party and therefore commits to the other party that it shall
use commercially diligent efforts to perform such duties with a goal of maximum
effectiveness, and to cooperate as fully as is reasonably possible with the
reasonable requests of the other party regarding the timing, focus, approach and
other details pertaining to such performance.
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE 6
<PAGE>
8. TERM. The initial term of the Agreement is for one (1) year. The
Agreement will be automatically renewed for consecutive one (1) year terms
unless a party gives written notice of non-renewal at least 30 days before the
end of the then-current term.
In the event CompuServe has with respect to a particular period or set of
circumstances paid Manager an advance, minimum or similar pre-payment and this
Agreement is terminated for any reason prior to the completion or fulfillment of
such period or circumstances, then Manager, immediately upon such termination,
shall repay CompuServe the portion thereof pertaining to such incomplete or
unfulfilled period or circumstances, on a straight-line, pro-rata basis unless
otherwise arranged.
9. PROMOTIONAL MATERIALS AND PUBLICITY. Manager understands that any
trade show materials, advertising, brochures, promotional materials, marketing
materials or other publicity, whether in print, electronic form or otherwise
("PROMOTIONAL COMMUNICATIONS") that directly or indirectly make any reference to
or otherwise use any trademark, service mark or trade name of CompuServe, or
otherwise directly or indirectly reference CompuServe, the Service or the Site,
must be with the prior written approval of CompuServe in such cases. Any such
approval requested is not to be unreasonably withheld or delayed, and no
endorsement, legal review, legal approval or verification of accuracy by
CompuServe with respect to such communications shall be inferred or construed by
virtue of any such approval or of this paragraph, such responsibilities being
the obligations of Manager. No approval shall be inferred as continuing or pre-
approved by reason of any prior approval given by CompuServe or course of
practice.
10. ADDITIONAL AGREEMENT DOCUMENTS. The terms of the following documents
(including those of any additional documents they expressly reference as
binding, such as documents containing Service Standards) are an integral part of
this letter and are hereby made a part of this letter: (A) Schedule A --
Compensation; (B) Schedule B -- Marketing Program; and (c) General Terms &
Conditions (collectively, the "AGREEMENT").
THIS AGREEMENT will be effective only when and if (A) the Manager signs and
completes two copies of this Agreement under "Agreed to by Manager" below, (B)
the Manager returns them to CompuServe, and (C) CompuServe signs both copies
under "Accepted by CompuServe" below and delivers one copy to the Manager.
Without compliance with the foregoing, no delivery of this document by
CompuServe to Manager for any purpose will be binding on CompuServe in any way.
The effective date of this Agreement is the date indicated below CompuServe's
signature.
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE 7
<PAGE>
AGREED TO BY MANAGER:
Brilliant Digital Entertainment Incorporated, a California corporation
BY: /S/ Mark Dyne
Name: Mark Dyne
Title: Chairman and CEO
Notice address:
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard Suite 513
Woodland Hills, CA 91367
Attention: Mr. Mark Dyne
Notice fax: 818-346-6303
ACCEPTED BY COMPUSERVE:
COMPUSERVE INCORPORATED, an Ohio corporation
BY: /S/
Name:
--------------------------------
Title: Chairman and CEO
Notice address:
CompuServe Incorporated
5000 Arlington Centre Blvd.
Columbus, Ohio 43220
ATTENTION: Legal Department
Notice fax: 614/457-9665
EFFECTIVE DATE OF THIS AGREEMENT:
---------------------------------------
BUSINESS-CONTRACT INFORMATION:
FOR MANAGER:
Name: Mark Dyne
Title: Chairman and CEO
Telephone: 818-346-3653
Fax: 818-346-6303
FOR COMPUSERVE:
Name: Alex Nikifortchuk
Title: Business Line Manager
Telephone: 614-538-3250
Fax: 614-457-0078
DOCUMENT ELEMENTS:
- - Site Management Letter Agreement (this document)
- - Schedule A -- Compensation
- - Schedule B -- Marketing Program
- - General Terms & Conditions
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE 8
<PAGE>
SCHEDULE A
COMPENSATION
In consideration of the performance of this Site Management Agreement, the
parties shall be entitled to compensation as set forth in this Schedule A.
1. COMMERCE FEES. CompuServe shall pay Manager CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION percent
(CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION%) of all funds actually collected by CompuServe for a given
month as payment by Users of the purchase price for transactions executed
within, through or on the Site ("COMMERCE FEES"). Manager is responsible for
all reports, filings, taxes, interest, penalties and other assessments due or
required by third parties in connection with such transactions. CompuServe may,
as necessary in connection with the sale of disks, establish a reserve for
returns, canceled orders and the like, and shall also be entitled to a refund or
credit in the event of returns, cancellations and the like occurring subsequent
to a corresponding payment of Commerce Fees to Manager, where CompuServe has in
good faith refunded or credited such amounts to the User(s).
2. CONNECT-TIME FEES. CompuServe shall pay Manager a fee of CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION percent (CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION%) of the Revenue from Access to the Forum
as a basic area on the Service ("CONNECT FEES"). CompuServe reserves the right
to determine the billing rates for the Site and each part of it, whether
included in the Service as a basic or a surcharged area. This connect-time fee
shall apply until such time as the Forum is converted to HTML. At that time no
payment shall apply for any activity associated with the Forum. However, Manager
will continue to operate and manage the Forum so long as the Site remains on
CompuServe, unless otherwise agreed upon by both Parties in writing.
3. SPONSORSHIP, PRODUCT PLACEMENT AND OTHER ADVERTISING FEES. Manager agrees
to work with CompuServe to incorporate product placement, billboards, or other
sponsorship opportunities into the multipath movies, serials, and episodes on
the Site. In the event that CompuServe sells the sponsorship or product
placement, CompuServe shall take for it's own CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION% of all funds
actually collected by CompuServe for said sponsorship or product placement, and
will pay Manager CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION percent (CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION%) of the remainder.
In the event that Manager sells the sponsorship or product placement, Manager
shall take for it's own CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION% of all funds actually collected by
Manager for said sponsorship or product placement, and will pay CompuServe
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION percent (CONFIDENTIAL INFORMATION OMITTED AND
<PAGE>
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION%) of the remainder.
4. BOUNTIES. CompuServe shall pay Manager the fee set forth below
("BOUNTY(IES)") for individuals who become qualified Users during a given month
while this Agreement is in effect and have been acquired as new members of the
Service through Manager's execution of the marketing program set forth in
SCHEDULE B, attached (the "MARKETING PROGRAM"). A bounty will be paid to Manager
for a qualified User that was obtained through Manager's efforts prior to the
termination. A "QUALIFIED USER" is a new member of the Service who: (a) does not
have an existing membership to the Service; (b) becomes a member of the Service
in direct response to Membership Kits (defined in SCHEDULE B) or a toll-free
inquiry phone number specifically designated for Manager's use in executing the
Marketing Program; and (c) remains a member of the Service in good standing for
at least three (3) paid months.
Bounty Fee: A one-time bounty payment of $CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION per qualified User.
5. SPONSORED ACCOUNT(S). CompuServe shall provide Manager with two (2) User
ID(s) to allow Manager to Access the Service. The maximum permitted usage
through each User ID is one-hundred fifty (150) hours per month per User ID, to
be used primarily in connection with Manager's performance of its
responsibilities as defined in this Agreement.
CompuServe may, in its sole discretion, charge You for any use of the
Service or other CompuServe resources that exceeds the above-stated amount. All
calculations are made at then-current rates. You are responsible for paying
local, long-distance and other communications charges You incur while using a
communications network other than CompuServe's. In using the Service or other
resources that CompuServe provides, you and your employees and agents are bound
by the Member Agreement (as amended from time to time) posted on the Service,
and the terms of any separate sponsored account agreement required by
CompuServe.
Agreed to by Manager: Accepted by CompuServe:
By: /S/ By: /S/
Date: SEPTEMBER 11, 1997 Date: SEPTEMBER 18, 1997
------------------ ------------------
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE A-2
<PAGE>
SCHEDULE B
MARKETING PROGRAM
Manager agrees to perform the marketing duties set forth in this Schedule.
Manager acknowledges the obligations set forth in Section 9 of the Letter of
Agreement (Promotional Materials and Publicity). Manager shall cooperate with
any efforts or guidelines of CompuServe to make the marketing program(s) set
forth below effective, and/or to make them consistent with an image appropriate
for the Service and the Site.
Manager understands that any trade show materials, advertising, brochures,
promotional materials, marketing materials, product or packaging stickers, press
releases or other publicity, whether in print, electronic form or otherwise
(previously defined as "Promotional Communications") that directly or indirectly
make any reference to or otherwise use any trademark, service mark or trade name
of CompuServe, or otherwise directly or indirectly reference CompuServe, the
Service or the Site, must be with the prior written approval of CompuServe in
such cases. Any such approval requested is not to be unreasonably withheld or
delayed, and no endorsement, legal review, legal approval or verification of
accuracy by CompuServe with respect to such communications shall be inferred or
construed by virtue of any such approval or of this paragraph, such
responsibilities being the obligations of Manager. No approval shall be
inferred as continuing or pre-approved by reason of any prior approval given by
CompuServe or course of practice.
1. MEMBER ACQUISITION ACTIVITIES
DEFINITIONS -- As used in this Agreement, the following terms have the meanings
here given to them:
"SITE BROCHURE" means a promotional work dedicated exclusively to and
descriptive of the Site, but also containing clear and complete information
describing how recipients can obtain Membership Kits from CompuServe.
"MEMBERSHIP KIT" means a combination of one or more of the following items,
as determined by CompuServe from time to time: software for accessing the
Service (e.g., CompuServe's interface software); instructions for signing
up for the Service; a User ID; a password; introductory usage credit;
and/or such other elements as CompuServe may identify from time to time.
(a) PRESS RELEASE. You (Manager) shall create and distribute a press
release announcing the Site within sixty (60) days after the effective
date of this Agreement.
(b) SITE BROCHURE DEVELOPMENT AND DISTRIBUTION. You shall, print and
prominently include a SITE BROCHURE into/with all products and
services that you market or distribute and all Promotional
Communications you issue in connection with such products or services.
The Site Brochure is to be of a high quality and contain clear, useful
and compelling information about the Site and describe how recipients
can obtain MEMBERSHIP KITS from CompuServe. You shall also, where
possible, Site Brochures (or a similar communication you adapt for
such purpose) at all trade and consumer shows you attend, and shall be
sure to have an adequate
<PAGE>
supply on hand for such purposes. You shall start to include and
distribute Site Brochures as described above within forty-five (45)
days of the site becoming effective.
2. MEMBERSHIP KIT FULFILLMENT
CompuServe shall, on an "as available" basis, undertake to fulfill
requests for Membership Kits that result from the above member acquisition
efforts and are received from prospective members of the
Service who have called CompuServe by using agreed upon toll-free phone
number(s). CompuServe may suspend or terminate further fulfillment if it
determines it is not likely to be effective.
3. MEMBERSHIP MARKETING
(a) CompuServe shall promote the Site as frequently as possible in
service-wide What's New announcements.
(b) CompuServe shall promote the Site in the Tip Sheet direct mail piece
for CSi members.
(c) CompuServe shall provide and set up a Brilliant Digital Entertainment
Forum at no cost to Manager. This Forum can be used as a promotional
tool for the Site and its contents.
(d) CompuServe shall provide the Site with favorable menu positioning
within the Arts & Entertainment Community.
(e) CompuServe shall include the assets of Brilliant Digital
Entertainment's Multipath Movies on CD-ROMs sent out to members and
other prospects, which assets enable the users to utilize the site.
The BDE assets must first be approved by CompuServe's Quality
Assurance department before they can be included on the CD-ROMs.
CompuServe reserves the right to discontinue the distribution of these
assets at their sole discretion. Should CompuServe discontinue the
distribution of BDE assets on their CD-ROMs, Brilliant Digital
Entertainment shall then have the right to terminate this Agreement
upon 30-days written notice.
Agreed to by Manager: Accepted by CompuServe:
By: /S/ By: /S/
Date: September 11, 1997 Date: September 18, 1997
------------------ ------------------
1. BACKGROUND AND DEFINITIONS. CompuServe intends to offer its customers
Access to the Service. The term "SERVICE" is defined in the Letter Agreement.
"ACCESS" means being connected to the Service or the Site. "USERS" are persons
who Access the Service. "SITE" is
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-2
<PAGE>
defined in the Letter Agreement. "LETTER AGREEMENT" refers to a document styled
in the form of a letter of agreement, naming CompuServe and Manger as its
parties, describing the Site and various duties and incorporating these General
Terms & Conditions. Other capitalized terms used herein have the meanings given
them in the Letter Agreement or its other attachments. Terms such as "content"
and "information" are intended to have the broadest construction reasonably
possible unless context or other terms of this Agreement indicate otherwise.
2. YOUR ROLE. In addition to the obligations set forth in the Letter
Agreement and its other attachments, Manager shall:
A. at all times present the Site and its contents, and conduct itself
with respect to the Site and Service, so as to project a professional and
positive image of the Site, the Service and CompuServe. You shall ensure that
your employees, agents and subcontractors at all times comply with this
requirement and this Agreement;
B. within ten (10) days of notice from CompuServe, correct any conditions
that do not meet the Service Standards or are not permitted by this Agreement.
CompuServe may remove the Site or any part of its from the Service until all of
these conditions are corrected.
C. within 24 hours of notice from CompuServe, remove from the Site any
information which CompuServe counsel advises likely: (i) infringe an
intellectual property right (such as partner, copyright, design, trademark or
trade secret); (ii) libel, defame or invade the privacy, or violate other
rights, of any person; or (iii) violate any agreement, duty or applicable law,
regulation, rule or order;
D. not reproduce, distribute or commercially exploit information obtained
through the Service or participate in or allow these activities by any person
except as CompuServe consents, except for the purposes of distributing,
promoting or selling Multipath Movie-TM- updates, CD's etc.;
E. refrain from activities within the Site that promote products or
services that compete with the Service;
F. except as set forth in the Letter Agreement, not use the Service or
permit the Site to be used to directly or indirectly advertise goods or services
or conduct surveys without CompuServe's prior consent;
G. not post or require agreement to any rules or agreement terms except
with the consent of CompuServe (such consent not to be construed as review or
approval of the legal sufficiency thereof), and shall remove any such rules or
terms as CompuServe may request; and
H. as requested by CompuServe, assist CompuServe with its promotional and
customer service efforts and with Site-related inquiries and requests from
Users, prospects, governmental bodies and other third parties.
3. COMPUSERVE'S ROLE.
A. In addition to the obligations set forth in the Letter Agreement and
its other attachments, CompuServe shall:
i. provide access to computer resources CompuServe generally makes
available to others similarly situated for purposes of assisting with
the management of sites on the Service, to be used only for performing
Your duties under this Agreement;
ii. promote Access to the Service, subject to its marketing and
business decisions; and
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-3
<PAGE>
iii. require all paying Users of the Site to agree to the following
terms of the current Member Agreement (as such terms may be amended
from time to time): Sections 7.4 (Limitation on Use of Content), 12
(Disclaimer of Warranties and Exclusion of Liability), 13 (Indemnity)
and 14 (Third Party Beneficiaries), or such variations thereof as
CompuServe may in its discretion deem appropriate given the
circumstances of Users' means of Accessing the Site.
B. Notwithstanding any other provision of this Agreement, CompuServe may
change the Service and its offering of the Service. In particular,
CompuServe remains free (i) to offer, operate, set pricing for, enhance,
adapt, establish and administer advertising on, bundle, unbundle,
restructure and otherwise modify the Service, in whole and in part and in
its sole discretion, as well as (ii) to cease or refrain from doing so.
CompuServe will not, however, make substantive editorial revision of any
content identified in this Agreement as proprietary to Manager or its
grantors, nor use same other than in the context of an information or
Internet service offering or in promoting the Service or a part of it.
CompuServe may also, with respect to the Service, change system
architecture, rules of operation, billing periods, Service availability
periods and User identification procedures, and may also change processes
or formats for data configuration, storage or transmission, Service access
software and equipment, software, tools, documentation and other materials
used or required for operating, maintaining, modifying or otherwise
supporting or administering the Service or its parts. CompuServe may also
change the Service Standards from time to time.
CompuServe shall endeavor in good faith to keep Manager advised of all
changes of the kind referenced in this Section 3(B).
C. In the event (i) CompuServe alters its pricing structure for the
Service, modifies the Service Standards or discontinues the Service or a
significant part thereof, and (ii) such change causes or will cause a
demonstratable, material adverse effect for Manager and/or CompuServe with
respect to payments under or operations central to performing this
Agreement, then either party may so notify the other and (if the notice so
states) thereby terminate this Agreement effective ninety (90) days after
such notice is given and received; provided, however, that such termination
shall not be effective if within such ninety (90) day period CompuServe
cancels such change or makes other adjustments such that the material
adverse effect ceases or is substantially cured or offset, or the parties
reach an agreed resolution (signed by both parties). The parties shall
cooperate with each other in good faith during any such period.
4. LICENSE. You grant to CompuServe a worldwide license to (A) as part of the
Site provide Users, consistent with all usage available to Users under the
Member Agreement (as amended from time to time) and including that customarily
available to users of the Service, with Access to and use of any portions of the
Site that You own, with respect to which you have obtained a license for the
Site from a third party or that You have similarly arranged to provide and (B)
make such reproductions, distributions and displays and do such other acts as
are reasonably related to CompuServe's business of providing such Access and
use. You understand and agree that CompuServe may conduct caching regarding the
Site and other content or sites, establish (or consent to the establishment of)
hypertext links and other and/or "pointers" in and/or
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-4
<PAGE>
to the Site, include the Site in indices or rating services and otherwise make
the Site and its contents available or accessible as a part of the Service.
5. OWNERSHIP. Manager owns all original or licensed material that it places
in libraries on the Site, and Manager grants CompuServe a worldwide fully-paid
license to display or use throughout the Service and its methods of delivery all
material Manager places on the Site. Manager and its grantors (specifically
Users for purposes of this Agreement) retain any and all proprietary rights they
might have in and to any content Manager makes available in the Site or any
information, software, tools and developments Manager owned prior to its
relationship with CompuServe or developed by Manager independent of this
Agreement or its performance. As between CompuServe and Manager, all
proprietary rights (including, without limitation, copyright, patent trademark
and trade secret rights) in or to the Site, the Service and any software or
tools (specifically excluding 3rd party software or tools) used for accessing,
operating, maintaining or managing the Service or any sites or areas included as
part of the Service, in or to any advertising data, User or usage related data,
User lists or other data specific to the Service or its sites or areas, in or to
any names, labels, slogans, indicators, or sources or other identifiers under
which the Service or any of its sites, areas or content are provided (except any
such identifiers listed on an attachment hereto) and any commands (including
"GO" commands) and other reference terms for the Service or its sites or areas
(including without limitation, quick reference words) shall be and remain the
exclusive property of CompuServe. Neither party obtains rights to any
information gathered in performing its obligations or exercising its rights
under this Agreement. Manager understands it has no right, title or interest in
or to any content or communications uploaded, posted, or otherwise transmitted
on or to the Site or the Service by Users, all such right, title and interest
being reserved exclusively to such Users, their grantors and/or CompuServe.
Manager will have access to the e-mail addresses of customers who have joined
the Manager's Forum for purposes of sending notification of player updates, new
Multipath Movie-TM- releases, or other informational messages pertaining to
Manager's Multipath Movie-TM- site. Manager shall also have similar promotional
opportunities through larger system-wide mailings to members through the
CompuServe promotional department and based upon the approval of the promotional
department.
6. CONTENT DISTRICTS. CompuServe may in its discretion establish areas or
organizational structures available as part of the Service that serve to group
specified kinds of content or sites available on the Service ("CONTENT
DISTRICTS"). CompuServe may do this by way of special menu interfaces,
technology, access controls or other means. Manager shall not permit any
content in (or to remain in) the Site if, in CompuServe's judgment, this could
render the Site similar to or competitive with the content or sites within any
such Content District; except if and to the extent the Site is within, and is
authorized by CompuServe to be and remain within, such Content District.
Although CompuServe may grant and revoke such authorizations in its discretion,
authorizations to Content Districts established after the Effective Date will be
granted on a reasonable and good faith basis and once an authorization is
granted, such grant shall continue during the term of this Agreement so long as
the Site continues to meet the authorization criteria established by CompuServe
and the Site District is not discontinued or substantially changed.
7. CONFIDENTIALITY.
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-5
<PAGE>
A. Neither party may disclose or use any of the other party's
Confidential Material, except to the extent necessary to perform or to exercise
rights under this Agreement and except as required by laws and regulations
applicable to the business and current and future operations of the parties.
Each party shall implement reasonable measures to prevent its employees, agents
and subcontractors from violating this restriction.
B. "Confidential Material" is any and all information (regardless of form
and including all copies) relating to the business of the disclosing party: (i)
of which the receiving party becomes aware because of its performance of or
activities surrounding this Agreement; (ii) which is not generally known at the
time of disclosure to the receiving party; and (iii) which is treated as, or is
known (or reasonably should have been known) to the receiving party to be
considered as, confidential by the disclosing party.
C. Although not an exhaustive list of Confidential Material, the
following items are presumed to be "Confidential Material:"
i. product or service developments and specifications, business
plans, computer programs and system documentation, marketing
plans, financial plans and any know-how, protocols, formulas,
methods, techniques, concepts and ideas pertaining to the
Service, to operating or managing a site on the Service or to
either party's business;
ii. the terms of this Agreement;
iii. information exchanged in the "SYSOP" or "BIZPART" areas of the
Service;
iv. names of, identifying or location information pertaining to,
demographics of and survey results with input from, Users or
customers and other service providers of CompuServe;
v. information which has been specifically designated as being
confidential or secret;
vi. information that is deemed to be a trade secret, or have similar
status; and
vii. copies, in any medium, of any of the above.
D. "Confidential Material" does NOT include information that:
i. is or becomes generally available to the public other than by
disclosure by the receiving party;
ii. was known to the receiving party at the time of disclosure from a
source other than the disclosing party and this knowledge is
shown in the receiving party's written records;
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-6
<PAGE>
iii. is or becomes known to the receiving party from an independent
source and the receiving party can show that it knows of and
should anticipate no restriction on disclosure binding on the
source; or
iv. is independently developed by the receiving subcontractors who
perform any aspect of this Agreement are familiar with this
Agreement (as well as the Member Agreement) and comply with it at
all times.
8. SOLICITATION. During the term of this Agreement and for 12 months
following termination of this Agreement, neither CompuServe or Brilliant Digital
Entertainment shall directly or indirectly solicit or participate in soliciting,
on their own or any other person's behalf:
A. in the case of Brilliant Digital Entertainment, any of the Users or
CompuServe's other customers to compete with CompuServe;
B. in the case of CompuServe any customers of Brilliant Digital
Entertainment (excluding CompuServe members);
C. any of the other parties suppliers or contractors to compete or
terminate a relationship with the other party; or
D. any of the other parties employees or agents to terminate a
relationship with the other party;
9. SPECIAL RELIEF. Any breach of Sections 5 (Ownership), 7 (Confidentiality)
or 8 (Solicitation), 12B (duties on termination) or any provisions of the Letter
Agreement identified as "Service Alliance" provisions would cause irreparable
injury not compensable solely in money damages. If a party breaches or
threatens to breach any of those provisions, the other party is entitled to a
restraining order, preliminary injunction or other equivalent or appropriate
relief it may have at law or in equity, as to the breach or threatened breach.
10. WARRANTIES, PERFORMANCE COVENANTS, CLARIFICATIONS, AND DISCLAIMERS.
A. The following warranties and performance covenants are deemed to be
made continuously during the term of this Agreement; each party shall promptly
notify the other of any fact, event or circumstances that causes one or more of
its warranties or performance covenants to be untrue or breached.
i. WARRANTIES. Each party represents and warrants to the other
that:
a. it has all necessary corporate and organizational power and
authority necessary to enter into this Agreement and that,
to its knowledge, neither the entering into nor the
existence of this Agreement will cause it to be in violation
of any other agreement or duty or any applicable law,
regulation, rule or order;
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-7
<PAGE>
b. it is carrying on its business, is financially solvent, is
not the subject of bankruptcy, insolvency or any liquidation
or receivership proceeding and (with respect to Manager) is
not contemplating any transaction or plans that Manager
knows or should know would materially affect the value of
the Site's content or this Agreement to CompuServe; and
c. to its knowledge, no claim is pending against it that, if
true or resolved adversely to it, would cause any
representation, warranty, performance covenant or other
covenant set forth in this Agreement to be untrue or
breached.
ii. PERFORMANCE COVENANTS. You make the following performance
covenants:
a. that You shall at all relevant times have sufficient rights
with respect to all content and services you supply to the
Site;
b. that neither Your conduct, elements constituting the Site
not provided or prepared by CompuServe nor the content other
than such content as may be supplied or prepared by
CompuServe, or activities within the Site infringe upon any
patent, copyright, trademark, trade secret or other
intellectual, industrial or proprietary right; and
c. that neither Your conduct, the Site nor the content or
activities within the Site shall libel, defame, cause injury
to, invade the privacy of or otherwise violate any rights of
any person, nor in any material manner violate or breach
this Agreement, any other agreement or duty or any
applicable law, regulation, rule or order.
B. Manager's foregoing warranties and performance covenants applicable to
the Site or its content shall be construed to apply to any hypertext links or
other links in the Site other than links required or installed by CompuServe
that lead directly to any websites, Internet-based sites or other areas or sites
remote to the Site, and to any content and activities within such areas or sites
as if included within the Site itself.
C. COMPUSERVE PROVIDES THE SERVICE AND ANY RESOURCES IT SUPPLIES OR
COMMITS TO ON AN "AS IS" AND "AS AVAILABLE" BASIS. EXCEPT AS STATED IN THIS
SECTION 10 OR IN THE LETTER AGREEMENT, ANY PRODUCTS, SERVICES OR OTHER
PERFORMANCE PROVIDED OR TO BE PROVIDED BY COMPUSERVE UNDER OR IN CONNECTION WITH
THIS AGREEMENT IS PROVIDED OR PROMISED ONLY ON AN "AS IS" AND "AS AVAILABLE"
BASIS AND THERE ARE NO REPRESENTATIONS, WARRANTIES OR GUARANTEES BY COMPUSERVE
OF ANY KIND, EXPRESS OR IMPLIED, IN CONNECTION WITH THIS AGREEMENT. COMPUSERVE
EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTIES OF TITLE, MERCHANTIBILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER NATURE. THIS AGREEMENT SHALL NOT BE
CONSTRUED TO INCLUDE, NOR SHALL EITHER PARTY HAVE RIGHTS OR OBLIGATIONS ARISING
OUT OF, ANY COURSE OF
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-8
<PAGE>
DEALING, USAGE, CUSTOM OR TRADE PRACTICE. NOTHING IN THIS AGREEMENT WILL BE
CONSTRUED AS A WARRANTY OR COMMITMENT BY COMPUSERVE, NOR SOURCE OF RELIANCE BY
MANAGER, THAT ANY FACILITY, PRODUCT OR SERVICE OPERATED OR OFFERED BY
COMPUSERVE, WILL BE ERROR-FREE, UNINTERRUPTED, UNCHANGED OR CONTINUE TO BE
OPERATED OR OFFERED BY COMPUSERVE OR OTHERWISE AVAILABLE.
11. INDEMNIFICATION AND LIMITATION OF LIABILITY.
A. INDEMNITY. Each party (as "INDEMNITOR") agrees to defend, indemnify
and hold harmless the other party (the "INDEMNITEE") with respect to any third
party claim or action asserted against the Indemnitee based on or arising out of
a breach or violation by the Indemnitor of a warranty, representation or
performance covenant specified in Section 10 above, of any right of any third
party or of any law, regulation, rule, order or other legal duty, including all
damages, costs and expenses (including reasonable defense fees, costs and
expenses) as awarded or settled upon in connection with such claim or action or
as incurred as a result of or in connection with defending such claim or action;
provided such claim or action arises out of or relates to this Agreement
including without limitation its performance or non-performance. The Indemnitee
will promptly notify the Indemnitor of any claim or action as to which this
indemnity obligation might apply, will (upon mutual agreement on defense
counsel) allow the Indemnitor to conduct and control the defense of any such
claim or action with respect to which it claims indemnity relief hereunder (and
will provide reasonable assistance with same, at Indemnitor's expense) and
neither party will settle any such claim or action without the prior written
consent of the other. The Indemnitee may also participate in any such claim or
action, and its defense, at its expense.
B. LIMITATION OF LIABILITY. Insofar as arising out of or relating to
this Agreement, including without limitation its breach, performance or non-
performance or any of its subject matter, neither party shall be liable to the
other for any loss or damage constituting or relating to business interruption
or loss of or damage to revenue, profits, data or business opportunity, nor for
any special, exemplary, consequential, incidental or indirect loss or damages.
These limitations apply in full regardless of the theory of relief upon which
any claim is based (including, without limitation, any form of negligence),
regardless of whether a party charged with fault or liability was advised or
knew of the possibility of the loss or damage claimed or its likelihood, and
regardless of any claim or finding that any warranty, representation, covenant
or remedy failed of its essential purpose; provided, however, that they shall
not apply to limit or reduce any express purpose; provided, however, that they
shall not apply to limit or reduce any express obligation of a party to
indemnify the other party with respect to third party claims, nor to a violation
of Sections 4 (License) or 5 (Ownership) nor to an intentional violation of
Section 7 (Confidentiality).
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-9
<PAGE>
12. TERMINATION.
A. Either party may terminate this Agreement in the event the other party
fails to cure a material breach of this Agreement within ten (10) days of
receipt of written notice of such breach and termination, and also as provided
for in Section 3(C) above and in Section 13(B). In addition, if due to
extraordinary market or industry developments not within the reasonable control
of CompuServe, CompuServe determines it is necessary to change the basis for the
compensation provided for in this Agreement and a new basis for compensation is
not mutually agreed upon, either party may terminate this Agreement by giving 90
days written notice. CompuServe may terminate this Agreement in its discretion,
on thirty (30) days notice, in the event Manager fails to meet any of the
Performance Criteria (set forth in the Letter Agreement) or engages in conduct
detrimental to the Service and repeatedly engages in such conduct despite
written notice from CompuServe, including specific reference to the possibility
of termination.
B. On termination, the parties shall cooperate with each other reasonably
and in good faith to facilitate a smooth transition from Manager's provision of
services and (if applicable) content, with the goal of furthering a transparent,
non-interrupting transition from the viewpoint of members of the Service,
Subject to the outcome of any such efforts, the parties will work together to
promptly return to You any content in the Site, or otherwise related to this
Agreement, that is proprietary to You or your grantor (excluding Users). While
any notice of breach or termination is pending, You shall continue to perform
the service for CompuServe in a professional manner. Upon any termination (or
while a notice of termination or breach is pending) You shall not change or
affect the Site in any way except as first notified to and approved by
CompuServe, in writing, or as a natural consequence of Your services pursuant to
the preceding sentence. The duties set forth in this paragraph are CompuServe's
sole obligations with respect to content or other information you may have
supplied.
13. GENERAL.
A. PAYMENT, TAXES. Unless otherwise set forth in this Agreement, all
payments of fees and other amounts will be made in United States currency, and
may be made by any reasonable means. Either party may also defer payment until
the amounts owed exceed US$1,000. Manager shall pay, and shall reimburse
CompuServe for its payments of, any national, federal, state, provincial or
local sales, use, value-added excise, property, license and services tax
(including any penalties, interest or special assessments) assessed by reason of
this Agreement or any services, licensing or other performance under this
Agreement, and any other similar taxes or assessments. Manager shall also
perform all filings and reporting required in connection with any taxes or
assessments addressed in this paragraph. The foregoing does not apply to any
taxes on CompuServe's net income or taxes assessed against CompuServe for
providing its online service to its customers.
B. ASSIGNMENT. You may not assign your obligations under this Agreement
without CompuServe's consent. But if you transfer substantially all of your
assets, you may assign this Agreement in connection with this transfer. If this
transfer occurs, CompuServe may terminate this Agreement on 90 days' notice.
CompuServe may assign (or novate) this Agreement on written notice to Manager.
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-10
<PAGE>
C. AFFILIATES. "Affiliate" means any organization controlling or owning,
controlled or owned by or under common control or ownership with CompuServe, or
contractually authorized to provide service consisting of or similar to
CompuServe's network of online information service, or a substantial portion
thereof. CompuServe may make available the rights and benefits under this
Agreement to its Affiliates; provided the Affiliate agrees to be bound by this
Agreement with respect thereto. CompuServe will be responsible for securing
such agreement and compliance and the terms of this Agreement shall be construed
in accordance with this paragraph.
D. SURVIVING PROVISIONS. In addition to any terms which by their nature
should so survive, Sections 5 (Ownership), 7 (Confidentiality), 8
(Solicitation), 9 (Special Relief), 10(C) (disclaimer of certain warranties and
responsibilities), 11 (Indemnification and Limitation of Liability), 12
(Termination), 13 (General) and any provisions of the Letter Agreement
identified as "Service Alliance" provisions shall survive any expiration or
termination of this Agreement, for any reason.
E. AMENDMENTS. Any amendment to, or extension of, this Agreement must be
in writing and signed by an authorized officer of each party.
F. WAIVER. A party's waiver of any right under this Agreement must be in
writing and signed by a representative of the party. No waiver is deemed to be
a continuing waiver of the same specified right.
G. LAW AND JURISDICTION. This Agreement and the parties respective
rights and obligations related hereto shall be interpreted under the substantive
laws (excluding conflicts rules) of the State of Ohio and, as applicable the
U.S.A. Any litigation arising out of or relating to the Agreement or any of its
subject matter shall be commenced and maintained only in the state and federal
courts located in Franklin County, Ohio.
H. NOTICES AND CONSENTS. Each notice and consent required under this
Agreement must be in writing and is effective on the date sent (by certified
mail, return receipt requested, by recognized commercial overnight courier or by
fax with confirmation of delivery) to the address or fax number listed in the
Letter Agreement or hereafter identified by the recipient. Each party may
change its address or fax number by notice to the other party. Unless this
Agreement specifically provides otherwise , each party shall provide consents
promptly in writing and must not unreasonably withhold them.
I. INDEPENDENT CONTRACTORS. The parties are independent contractors with
respect to each other and shall conduct themselves accordingly at all times.
Nothing in this Agreement makes either party an agent or partner of the other.
Neither party may, no shall either party purport to, represent or legally bind
the other in any manner.
J. EMPLOYEES, AGENTS AND SUBCONTRATORS. You shall not use any
subcontractors to work on the Site who CompuServe disapproves and, if CompuServe
so requires, You shall obtain CompuServe's consent, which consent shall not be
unreasonably withheld prior to hiring subcontractors to work on the Site. You
shall be responsible for assuring that Your employees, agents and subcontractors
who perform any aspect of this Agreement are familiar with this Agreement (as
well as the Member Agreement) and comply with it at all times.
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-11
<PAGE>
K. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not effect that of any other provision; the parties agree
that any such provision shall be reformed to the extent necessary to make it
valid and enforceable.
L. CONSTRUCTION AND MISCELLANEOUS. These General Terms and Conditions
control over any other part of this Agreement in the event of a conflict or
inconsistency. The parties agree to give each other such cooperation and
assistance (including, without limitation, attending meetings or phone
conferences as necessary, assisting with regulatory and enforcement agency
inquiries and executing appropriate certificates, assignments, registrations or
other documents) as may be necessary to give effect to the intentions of the
terms of this Agreement.
M. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between You and CompuServe with respect to the subject matter hereof and
supersedes and replaces proposals, understandings or other communications,
written or oral.
CONFIDENTIAL TO COMPUSERVE INCORPORATED PAGE B-12
<PAGE>
By Facsimile: (916) 388-7499
Original by mail
September 16, 1997
Mr. Karim Kano
Packard Bell
1 Packard Bell Way
Sacramento, CA 95828-0903
Dear Karim,
The following modifies the CD-ROM DISTRIBUTION AGREEMENT entered into between
BDE and PB on September 14, 1996.
1. PB will participate in the online revenues generated from accepted
Multipath Movie Run Time CD-ROMs "bundled" with PB computers under the
distribution agreement during the 12 month period beginning with the date
the first bundled Multipath Movie is shipped by PB on its hard drives, and
will have the rights to available additional titles that BDE produces
during this period. PB's participation right will be set at CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION percent (CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION%) of net online revenues
received by BDE during this 12 month period from bundled Multipath Movies
shipped.
2. After the 12 month period has elapsed our arrangement reverts to that set
out in the distribution agreement.
3. PB will ship at least one third of the units required under clause 5.6(a)
of the distribution agreement during the first 12 months, failing which the
12 month period will be extended to allow PB to ship the required number of
units. The extension will not exceed an additional 6 months.
4. In return for the right to participate in online revenues PB will make
payments to BDE of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION ($CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
for each computer shipped with a Multipath Movie bundled thereon during
this 12 month period or the extension thereof.
5. PB will have the right to put BDE's products directly on the hard drive
instead of including a CD as per the distribution agreement.
6. We will each account to the other within thirty (30) days following the end
of each calendar quarter. The accounts should show in detailed form the
appropriate information and calculation of the payments to be made. Any
required payments will accompany the accounts.
7. "Net Online Revenues" are defined as the revenues from the sale of tickets
to view these Multipath Movies which have been bundled on PB computers,
after deducting all associated third party costs including commissions,
discounts, chargebacks and fees.
<PAGE>
8. Our agreement may be reflected in a long form amendment, and unless and
until we complete such amendment this letter will govern our conduct under
the distribution agreement.
OTHER THAN AS ABOVE, THE DISTRIBUTION AGREEMENT WILL CONTINUE UNCHANGED.
Yours Sincerely,
/s/ Mark Dyne
Mark Dyne
Chief Executive Officer
Brilliant Digital Entertainment, Inc.
AGREED AND ACCEPTED
Karim Kano September 22, 1997
- ------------------------------------- --------------------
Packard Bell NEC Date
by Karim Kano
VP Strategic Planning
<PAGE>
EXHIBIT 11.1
BRILLIANT DIGITAL ENTERTAINMENT, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------- --------------
Weighted average shares outstanding 7,200 4,455
Common Stock equivalents:
Stock options granted 37
Warrants granted 47
------------- --------------
Weighted average number of shares used in
computing net income(loss) per share 7,200 4,539
------------- --------------
------------- --------------
Net income (loss) $ (944) $ (2,371)
------------- --------------
------------- --------------
Net income (loss) per common shares $ (0.13) $ (0.52)
------------- --------------
------------- --------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-QSB OF BRILLIANT DIGITAL
ENTERTAINMENT, INC. TO WHICH THIS EXHIBIT IS A PART AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER
SHARE DATA).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,328
<SECURITIES> 0
<RECEIVABLES> 1,973
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,369
<PP&E> 1,023
<DEPRECIATION> (384)
<TOTAL-ASSETS> 7,675
<CURRENT-LIABILITIES> 1,143
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 6,525
<TOTAL-LIABILITY-AND-EQUITY> 7,675
<SALES> 2,377
<TOTAL-REVENUES> 2,377
<CGS> 17
<TOTAL-COSTS> 3,685
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (942)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (944)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (944)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
