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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-22250
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Name of Small Business Issuer In Its Charter)
DELAWARE 95-4592204
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices and Zip Code)
(818) 615-1500
(Issuer's telephone Number, Including Area Code)
Securities registered under to Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
COMMON STOCK, $.001 PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered under to Section 12(g) of the Exchange Act:
NONE
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 / /
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
The issuer's revenues for the fiscal year ended December 31, 1997 were
$2,481,000.
At March 27, 1998 the aggregate market value of the voting stock held
by non-affiliates of the issuer was $15,489,245.
At March 27, 1998 the issuer had 9,403,001 shares of Common Stock,
$0.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement with respect to its 1998 Annual Meeting
of Stockholders, currently scheduled to be held on May 22, 1998, are
incorporated by reference into Part III of this Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORY AND PRIOR ACTIVITIES
Brilliant Digital Entertainment, Inc. ("Brilliant" or the "Company") is
a production and development studio introducing a new generation of digital
entertainment to be distributed over the Internet, on CD-ROM, as television
programming and for home video. The Company, headquartered in the United States,
was incorporated during July 1996. The Company 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 research and development operation for
leading edge software tools. Since its founding in September 1993, BII Australia
has developed and sold interactive education and entertainment CD-ROM titles
primarily for children.
BII Australia became a wholly-owned subsidiary of the Company in August
1996 through the exchange of all 100,000 outstanding shares of BII Australia for
1,000,000 shares of Common Stock of the Company. In addition, on September 30,
1996 the Company acquired SAND. SAND was established during the second quarter
of 1994 by Sega Ozisoft Pty., Limited ("Sega Ozisoft"), one of the largest
publishers and distributors of entertainment software products in Australia and
New Zealand. Sega Ozisoft and BII Australia began working together during
November of 1994 to jointly continue the development of SAND's software tools.
BII Australia provided consulting advice regarding integration of individual
tool components, the required functionality of the tool suite and technical
issues impacting the use of text, sound, graphics and other special effects in
the development of an interactive digital entertainment product. BII Australia
and Sega Ozisoft formalized their relationship on January 17, 1996 with an
agreement through which BII Australia provided continued technical assistance
for the enhancement of SAND's software tools and in the development of the first
Multipath Movie product, which is based on the Australian comic strip character
"Cyberswine."
GENERAL
Using its proprietary state-of-the-art software tools, the Company
produces Multipath(TM) Movies, which are three-dimensional digitally animated
stories each with up to hundreds of plot alternatives, or paths, leading to
multiple distinct conclusions that are influenced by the user. The Company's
Multipath Movies feature seamless interactivity leaving the plot and graphical
presentation of the story uninterrupted by the user's decisions. The Company
utilizes a single cost-efficient production process to produce multiple formats
of a particular Multipath Movie title for different distribution channels, such
as the Internet, CD-ROM or television programming. In addition, the Company has
developed a system that permits real time distribution of, and user interaction
with, its Multipath Movies over the Internet.
As a key part of its strategy, the Company has secured quality content
for its Multipath Movies from a number of proven sources, including Superman
from D.C. Comics (a subsidiary of Warner Bros.), Xena: Warrior Princess and
Hercules & Xena the Animated Movie, each from Universal Studios, Ace Ventura
from Morgan Creek, Popeye from King Features Syndicate and the Choose Your Own
Nightmare series for kids from Bantam Doubleday Dell Books. The Company also
develops Multipath Movies based on internally-developed content. Further to its
strategy, the Company has entered into distribution agreements with key industry
participants Packard Bell NEC, CompuServe, and graphics acceleration hardware
manufacturers Matrox and S3.
The Company's Multipath Movies combine the best qualities of
traditional filmed entertainment -- complex characters, stories and plots, with
the best of the traditional computer game -- interactivity. The Company's
Multipath Movies are designed to appeal to the entire home PC market, including
both the core gamer and the much larger segment of PC users not currently served
by traditional game developers. In order to offer digital entertainment products
with wide appeal, the Company is producing a variety of Multipath Movies
tailored to various demographic groups, such as its Storyteller(TM) Series in
which an animated storyteller narrates engaging interactive stories targeted at
children eight to twelve years of age and Multipath Movies for Kids(TM),
including Popeye, targeted to children as young as three years old. Multipath
Movies incorporate a number of features that the Company believes represent
significant technical enhancements over existing digital entertainment. For
example, animated characters created using the Company's tools appear humanlike
and have realistic features, facial expressions and mouth movements. Multipath
Movies also allow
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users to control characters' moods as opposed to only their actions. In
addition, a typical Multipath Movie will encourage viewers to interact with the
story seamlessly, influencing the plot without interrupting its flow or
graphical presentation.
The Company's first Multipath Movie title, Cyberswine, was released at
the end of the fourth quarter of 1997. The Company expects to expand the release
of Cyberswine during the second quarter of 1998 through its distribution
agreement with Packard Bell NEC. Pursuant to additional distribution agreements,
Matrox is also bundling Cyberswine with its m3D line of 3D graphics acceleration
chip sets, and S3 may bundle Cyberswine with its graphics chip sets. The Company
has also entered into a distribution agreement with CompuServe through which the
Company is establishing its own Multipath Movie site on the CompuServe service
enabling each of CompuServe's subscribers in the United States to purchase
Cyberswine and other Multipath Movies. The Company intends to use its existing
and future distribution relationships for subsequent Multipath Movie titles that
are currently in production.
Beginning in late 1998, the Company plans to release certain of its
Multipath Movies in non-interactive format as television broadcast/cable
programming and home video features. The Company intends to segment such
Multipath Movies into 30-minute episodes and, by packaging together multiple
episodes, can create a season-length series for the broadcast market. Similarly,
the Company intends to produce 80- to 120-minute animated features for the home
video market. The Company believes that it can produce Multipath Movies for
television programming and home video features at costs substantially below
typical industry costs. The Company intends to enter into joint ventures or
partnerships with film and television production companies to jointly develop
and release digital entertainment for the broadcast and home video markets
utilizing the Company's proprietary tools.
Using its proprietary software tools in conjunction with the Company's
digital production and layup skills, the Company develops Multipath Movies in a
single production process. The Company has five proprietary software tools: (i)
ScripNav, a software tool that enables a script writer to write, review and
correct branching multipath scripts; (ii) TalkTrack, a software tool used to
synchronize facial expressions and mouth movements to voice soundtracks
automatically; (iii) SCuD Engine, a software system which collects and
integrates the output from all of the component tools to produce the Multipath
Movie; (iv) Mr. Copy, a new software tool that arranges, reorders and, using
licensed technology, compresses and decompresses audio and bit map files created
during the production of a Multipath Movie and optimally organizes the files for
use in playing the Multipath Movie; and (v) DigitalProjector, which contains all
the necessary elements to load and play a Multipath Movie. Utilizing its
proprietary software tools, the Company can produce each title in multiple
formats in a single cost-efficient production process, enabling the Company to
amortize its production costs across the revenue streams from each format. In
addition, the Company's TalkTrack tool allows for low-cost modification of
Multipath Movies to other languages without the awkward appearance of dubbed
movies. The Company's proprietary software tools and production process are
designed to emulate traditional film writing and production techniques and allow
screenwriters, directors and producers to develop Multipath Movies without any
detailed knowledge of computer programming or significant assistance from
expensive programming teams. The Company believes that the utilization of
existing entertainment resources will enable it to generate high-quality digital
entertainment at a low cost.
The Company has significantly strengthened its title development and
production pipeline during 1997. As of March 27, 1998, the Company has completed
eleven episodes, as set forth below, and has 54 additional Multipath Movie
episodes in various stages of development and production. The Company plans to
complete an additional 20 episodes during 1998 and the balance of the current
production slate, or 34 episodes, during 1999. The Company plans to release
completed episodes based upon market conditions and other factors, including the
bundling and shipping schedules of its OEM distributors.
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<TABLE>
<CAPTION>
EPISODES IN
DEVELOPMENT 1997 1998 1999
TITLE CONTENT SOURCE OR PRODUCTION COMPLETIONS COMPLETIONS COMPLETIONS
- ------------------------------- ------------------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cyberswine................... Internally developed 2 5 -- 2
Gravity Angels............... Internally developed 8 1 4 4
Ten Weeks in the Head Bin.... Internally developed 4 -- -- 4
Choose Your Own Nightmare.... Bantam Doubleday Dell 12 4 6 6
Popeye....................... King Features Syndicate 2 1 2 --
Ace Ventura.................. Morgan Creek 9 -- 3 6
Xena: Warrior Princess....... Universal Studios 9 -- 3 6
Superman..................... D.C. Comics 8 -- 2 6
------------- ----------- ----------- -----------
TOTAL.................... 54 11 20 34
============= =========== =========== ===========
</TABLE>
THE DIGITAL ENTERTAINMENT MARKET
Digital entertainment is intended to combine the best elements of
filmed entertainment, creative artistry and engaging plotlines, in a multimedia
format complete with high-quality stereo sound, graphics and animation to
produce a realistic experience. Digital entertainment is created, stored and can
be distributed electronically. Examples of current digital entertainment
products include high-end computer games, virtual reality attractions, and
computer-animated television programs and feature films. Traditionally, digital
entertainment has been distributed on CD-ROM and game console cartridges.
Leading edge digital entertainment products are now also being released online
to capitalize on the tremendous current interest in the Internet and the World
Wide Web. In addition, digital entertainment products have recently been
released as broadcast television and cable programming, home videos, and even
full length feature movies, although on a limited basis.
TECHNOLOGY AND DIGITAL ENTERTAINMENT
The market for digital entertainment evolved and has grown dramatically
with the increasing proliferation and sophistication of personal computers and
game playing consoles, and with the widespread use of the Internet. Sales of
personal computers to home users have increased in recent years as a result of
declining prices and increased functionality of PCs. The number of multimedia
PCs used in homes worldwide is expected to grow from 40 million in 1996 to 67
million in 2000. These enhanced processing, graphics, sound, storage and
transmission capabilities have enabled PC users to more easily operate
multimedia software and digital entertainment products. In addition,
technological advances have enabled millions of consumers and businesses to
utilize the Internet, particularly the World Wide Web. International Data
Corporation estimates that World Wide Web users grew to approximately 35 million
by the end of 1996 and will grow to approximately 163 million by 2000.
Widespread use of the Internet has become possible with technological
improvements in data transmission, such as the development of more powerful data
servers and faster modems.
The Company believes that the demand for digital entertainment will
continue to grow given the increasing multimedia capability of today's PCs, the
growing popularity of the Internet and the increasing ease in accessing the
Internet. Despite the technological advances that have been made in producing,
processing and delivering digital entertainment, the Company believes that the
consumer will expect digital entertainment products to have increasingly
sophisticated features, including more realistic graphics and special effects,
user control of more complicated or subtle character movements and real time
interactivity.
INTRODUCING THE MULTIPATH MOVIE
The Company's Multipath Movies combine the best qualities of
traditional filmed entertainment -- complex characters, stories and plots, with
the best of traditional computer games -- interactivity. Multipath Movies are
three-dimensional, digitally animated stories with many plot alternatives, or
paths, that are influenced by user interaction throughout the story. The Company
is targeting a larger market than users of traditional computer games for its
Multipath Movie products; Multipath Movies will be as short as 30 minutes in
length so that users can enjoy them within a single sitting and will utilize
content that is designed to appeal to a wide variety of audiences.
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Multipath Movies are unlike any other entertainment product known to
the Company. In contrast to existing compressed video interactive movies, the
action of a Multipath Movie does not stop while a user makes decisions. A user's
decisions are implemented seamlessly because the Company's proprietary
DigitalProjector has the technical ability to form and manipulate streams of
complex three-dimensional animated images in real time, sequentially, for the
duration of the movie. A Multipath Movie provides the user with up to hundreds
of plot branches leading to a number of different conclusions. The opening
scenes of each Multipath Movie will require limited interaction, which is
intended to introduce users to the story in a manner that builds user empathy
with the lead characters and teaches the user how to interact with a Multipath
Movie. Further into a Multipath Movie, the level of prompted interactivity will
increase and prompts are designed to become less direct and more intuitive.
Users interact with Multipath Movies by responding with a mouse, keyboard or
remote control device to decision points which affect the plot of a Multipath
Movie. Decision points are identified by indicators that include (i) on-screen
or dialogue prompts that manipulate the moods and personality profiles of the
main characters, which in turn produce new plot directions and story lines, (ii)
a character choice icon appearing at pre-scripted points where there is tension
between two characters or characters have differing opinions about an issue
which requires the viewer to make a supportive selection, and (iii) a mechanism
which inventories items a character has collected in prior scenes and provides
the user access to those items at set moments which in turn affect the action
and the outcome of a scene.
For example, in viewing Cyberswine, the users' responses to prompts
determine a character's actions and affect the character's mood, thereby
influencing its future decisions. If the user elects not to respond at any given
prompt, the collective impact of the user's previous responses on the
character's mood will drive subsequent branching decisions. In Cyberswine, if a
user elects aggressive options in response to prompts, subsequent branching
decisions will be made automatically as if an aggressive response was given by
the user. Additionally, in Xena: Warrior Princess the Company plans to
incorporate an interface mechanism enabling users to make characters collect
items such as weapons, valuables or food that they can use in later scenes.
The Multipath Movie allows the user to jump forward or reverse to
previously viewed scenes and, if desired, to select a different decision path.
The user can view the Multipath Movie from the perspective chosen by the
director or elect an almost infinite number of alternative camera angles. The
user can also control camera angles to search for information or clues that
might prove valuable in later scenes. In addition, users or their parents can
select an appropriate age rating (such as "G," "PG," or "R") and thereby limit
certain camera angles or scenes. Multipath Movies can also include a feature
enabling more than one user to interact with the characters of the Multipath
Movie.
The Company plans to release Multipath Movies in the following formats:
Retail CD-ROM Titles. The Company intends to produce versions of its
Multipath Movies in stand alone CD-ROM format for retail distribution.
Bundled Titles with Online Capability: The Company is developing a
system that enables users to play Multipath Movies in real time over the
Internet through various online delivery systems. To date, low data transmission
rates have precluded real-time video viewing of digital entertainment over the
Internet, but the Company has developed a system permitting real-time online
interactivity with its Multipath Movies. As part of the Company's system, most
of the data necessary for viewing Multipath Movies is distributed on CD-ROM or
installed on PC hard drives by manufacturers. This data generally includes a
library of characters, scenes, graphics, sound and other components, as well as
DigitalProjector, which includes the architecture necessary for playing the
Multipath Movie and accessing the Internet for future episodes. Generally,
consumers will receive a preview or first episode of a Multipath Movie title
without being required to connect to the Internet. Because most of the data
necessary to play a Multipath Movie and future episodes is resident on the
CD-ROM or hard drive of the viewer's computer, a low-bit rate data stream can be
delivered via the Internet to provide the animation and storyline for future
episodes. The Company is currently also developing technology that will stream
animation messages as well as sound, which will then not be required to reside
on the user's CD-ROM or hard drive.
Television Broadcast/Cable Programming and Home Video. The Company also
plans to release certain of its Multipath Movie titles in non-interactive
format, as television broadcast/cable programming and as home video features.
The Company intends to segment such Multipath Movies into episodes for sale into
the 30-minute broadcast and cable
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series market. By packaging together multiple episodes, the Company can create a
season-length series. Similarly, the Company plans to produce features from
certain Multipath Movies by selecting a predetermined plot ending and to market
these 80- to 120-minute features to home video publishers.
MULTIPATH MOVIE CONTENT CATEGORIES
The Company is developing a broad range of Multipath Movie titles
designed to appeal to viewers of varying ages and tastes. Much of the PC-based
digital entertainment developed to date has been designed for the dedicated
computer game player, typically an eight to 21-year-old male with substantial
free time and spending money who appreciates game playing complexities. The
Company's strategy is to develop and produce Multipath Movie titles based upon
various types of compelling content directed at discrete consumer categories.
Because internally-developed titles require significant time and expertise, the
Company intends to place even greater emphasis on licensed content in the
future. The Company is currently developing titles according to the following
categories:
Multipath Movie Features. The Company's first Multipath Movie,
Cyberswine, was produced from original scripts developed by the Company, and is
loosely based on an Australian science fiction comic strip series. The Company
has certain royalty obligations on revenues derived from Cyberswine. The Company
is also developing various other titles for this category including the
internally generated series, Gravity Angels and Ten Weeks in the Head Bin, as
well as titles based on licensed content including Ace Ventura, Xena: Warrior
Princess and Superman. Additional titles in this category will be based on
science fiction, adventure, comedic and other types of underlying content and
may capitalize on popular and widely recognized film, television and comic strip
characters and personalities. The Company intends to investigate and pursue
content opportunities for this category that will continually broaden the appeal
of Multipath Movie features.
Storyteller Series. The Company is also developing the Storyteller
Series, which is a series of Multipath Movies targeting children eight to twelve
years of age. The Storyteller Series will be based upon published children's
books and original stories. Initial titles in the Storyteller Series, including
Night of the Werewolf and Biting for Blood, will be based upon Bantam Doubleday
Dell's popular children's series, Choose Your Own Adventure, currently comprised
of approximately 181 titles, and Choose Your Own Nightmare, currently comprised
of approximately 18 titles. Each of these book series is written in a branching
format, in which the reader will skip to different pages or chapters of the book
depending upon responses to questions posed in the story. Because of the
branching nature of the Choose Your Own Adventure and Choose Your Own Nightmare
series, the Company believes that these stories are ideally suited to the
multipath format of the Storyteller Series. The Company introduced the
Storyteller Series at the end of the fourth quarter of 1997.
Multipath Movies for Kids. The Company is developing Multipath Movies
for Kids for children three to twelve years of age. These titles will be
specifically designed to appeal to this age group by including more comic-like
characters and engaging music and sound effects. The first title, Quest for the
Woolly Mammoth, featuring Popeye, was completed at the end of the fourth quarter
of 1997.
INTERNET TICKETING
The Company has also developed its own proprietary ticketing system to
collect revenue from its online users. The Company's ticketing system is
designed for compatibility with a wide variety of data storage and content
billing arrangements, and to provide added value for ISPs and allow customers to
be billed more easily under a variety of charging options. The Company's
ticketing system allows a viewer to purchase a "Movie Ticket." The Company's
proprietary ticketing system and multipath serving software currently reside on
restricted access servers at the facilities of Worldsite Networks ("Worldsite"),
and are maintained, upgraded and queried for reports by the Company via remote
access. Through the facilities of Worldsite, the Company (i) receives requests
from customers to purchase Tickets, (ii) receives, processes and transmits
credit card or other payment authorization sufficient to allow the Company to
receive payment of the price of each Ticket from the customer's bank, credit
card processor, ISP, debit account, or special purpose Internet charge or
payment account, (iii) delivers Tickets to customers, (iv) provides Multipath
Movie instructions after receipt, verification and cancellation of the
customer's Ticket and (v) collects and processes information relating to
customers for the benefit of the Company.
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THE PRODUCTION OF MULTIPATH MOVIES
The production process for Multipath Movies consists of eight phases:
scripting, creative design, voice and sound, model and world building, texturing
and lighting, blocking/camera editing, special effects animation and the
generation of rendered output.
The production of a Multipath Movie is very similar to the production
of a traditional film. Just as the traditional film director identifies
locations, builds sets and chooses actors, the digital Multipath Movie director
builds "worlds" and "models." In the same way that traditional filmed
entertainment directors give actors wardrobes and props, the Multipath Movie
director "textures" the models.
The Multipath Movie production process, however, differs from the
traditional movie process in three important ways. First, the traditional
process is substantially more labor intensive, requiring large crews, artisans
and technicians to produce a final product. Once scenes are filmed and edited,
any reshoots require the re-assembling of actors and crews, which is not only
costly but often not feasible. Second, filming and editing in the traditional
film process are two separate functions that cannot be performed simultaneously.
Through digital production, a scene, or group of scenes, can be blocked,
animated and edited at the same time. As a result, the producer can immediately
view the scene and make any necessary changes while avoiding substantial costs
and logistical problems. Finally, the digital Multipath Movie process allows the
producer to easily substitute models and worlds, alter texturing and lighting,
alter the blocking and editing process and alter special effects. By clicking
the mouse, the director/scriptwriter can preview entire scenes, add/delete
characters and plots, and automatically change the appearance of a character or
object. Because the characters and sets are all digitally produced and then
animated by the Company's tools, set components (such as language on storefronts
and vehicles) and personal features such as skin tone and hair color only need
to be changed once to effect the desired change throughout the Multipath Movie.
TECHNOLOGY; BRILLIANT'S SOFTWARE TOOLS AND PRODUCTION CAPABILITIES
The Company has developed five proprietary software tools that enable
it to produce high-quality Multipath Movies: (i) ScripNav, a software tool that
enables a script writer to write, review and correct branching multipath
scripts; (ii) TalkTrack, a software tool used to synchronize facial expressions
and mouth movements to voice soundtracks automatically; (iii) SCuD Engine, a
software system which collects and integrates the output from all of the
component tools to produce the Multipath Movie; (iv) Mr. Copy, a new software
tool that arranges, reorders and, using licensed technology, compresses and
decompresses audio and bit map files created during the production of a
Multipath Movie and optimally organizes the files for use in playing the
Multipath Movie; and (v) DigitalProjector, which contains all the necessary
elements to load and play a Multipath Movie.
ScripNav. ScripNav was developed specifically for the writing of
complex Multipath Movie scripts. A scriptwriter will use ScripNav to compose,
edit and finalize a script using a commercially available word processing
package. Then, the scriptwriter will insert various subplots into scenes in
order to adapt the script to the Multipath Movie format; the alternative
subplots, or paths, are based upon different temperaments of the lead character.
For example, if the character is angry, the character will approach the other
characters and the events in the scene in a much more aggressive and hostile
manner, which will, in turn, send the plot in the appropriate direction. By
inserting directional guides throughout the script, the scriptwriter is able to
create a script with multiple paths and endings based on a character's moods and
his or her interactions with the other characters. Once the script has been
developed in the Multipath Movie style, ScripNav enables the scriptwriter to
read, review and correct the script. ScripNav then corrects for syntax and
branching errors and allows the scriptwriter to review the multiple plots
produced. Lastly, ScripNav produces statistics that allow the scriptwriter to
identify scenes that either cannot or are unlikely to be reached through the
plot's development and, therefore, should be excluded from the final Multipath
Movie product.
TalkTrack. TalkTrack automatically synchronizes a character's lip
movements with corresponding dialogue tracks by examining wave files and
generating output files that contain references to the appropriate mouth shapes.
The tool samples sounds and matches them to the most appropriate mouth shape,
and in the process, builds a library of correct sound samples with a direct
relationship to a correct mouth shape. As the Company creates more content, it
will build a
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library of improving sound and mouth shape matches. The Company believes that
TalkTrack is a more efficient and cost effective way to incorporate voice into
Multipath Movies than other existing sound tools. In addition, TalkTrack allows
for low cost modification of the Multipath Movies to any language without the
awkward appearance of dubbed movies. The sophistication of this tool was
significantly enhanced during 1997 by incorporation of improved voice sampling
techniques and database applications and by incorporating licensed lip
synchronization technology.
SCuD Engine. SCuD Engine is the centerpiece of the Multipath Movie
development and production process. SCuD Engine is an object-oriented
environment that collects and integrates source files from ScripNav, graphics,
sound and TalkTrack tools and makes them available for layup and editing. SCuD
Engine provides a multi-window editing environment in which the developer can
preview, analyze and edit the final product. When a previously unedited scene is
opened, SCuD Engine retrieves the text for the scene from the script text file
of ScripNav and places the text in on-screen blocks or slots. The layup artist
can then view the descriptive or dialogue text while attaching imported
graphics, sound and other source material to that line of script. SCuD also
includes a Shot Based Editing System which enables multiple sets and or props to
be incorporated into one scene such that cuts and edits can take place in line
with a traditional film environment. For example, in Cyberswine the specific
scene data (sets and props) could be loaded into memory and then shown through
different camera positions. In Gravity Angels, data from a number of different
scenes (multiple scene sets and props) can be loaded into memory residing in an
'off' state until it needs to be used by the camera or editor at which state it
returns to an 'on' state. This substantially improves the visual richness of
scenes.
Mr. Copy. The Company has recently developed Mr. Copy which builds,
integrates and allocates the final data files in composing a Multipath Movie to
be played on the DigitalProjector. Mr. Copy arranges, assembles and, using
licensed technology, compresses and decompresses thousands of audio and bit map
files that are created during the development of a Multipath Movie in a manner
that optimizes the playing of the title. Mr. Copy compresses files allowing up
to five hours of branching content to be captured in as little as 60 megabytes
of disk space, as compared with conventional technologies which presently would
require at least one gigabyte of storage.
DigitalProjector. DigitalProjector contains all the necessary
components to load and play the final Multipath Movie product. DigitalProjector
is the software engine for any system that is being used to play the Multipath
Movie and is generally the only software tool that the Company must modify to
permit the Multipath Movie to be adapted to new platforms. The Company has
developed DigitalProjector for IBM-compatible PCs, and may develop
DigitalProjector for other platforms.
In addition to its proprietary software tools and engines, the Company
uses certain commercially available sound and graphics tools in the Multipath
Movie production process. The Company's proprietary tools used in conjunction
with commercially available tools allow the developer to produce a high quality
Multipath Movie from the initial scripting stage to the generation of title
output.
In order to further promote the Multipath Movie as a digital
entertainment format, the Company intends to release on a limited basis object
code versions of its software tools to selected entertainment production
companies and other entertainment professionals. The Company intends to release
these software tool sets through joint venture arrangements in which the Company
can control the proprietary value of the software tools and control their
dissemination. As part of these joint venture arrangements, the Company will
provide certain technical and production assistance, while deriving revenue from
a retained ownership interest in the Multipath Movie titles produced by the
joint venture partner. The Company will particularly target potential joint
venture partners with either the type and availability of content or other
creative and production skills that are well-suited to the software tools and
production of Multipath Movies. The Company believes that the availability and
use of the software tools by the entertainment community at large will stimulate
the overall level of interest in the Multipath Movie format and will increase
the number of available Multipath Movie titles, thereby helping to establish the
Multipath Movie format as a de facto standard. Additionally, the Company intends
to selectively adapt and enhance its tools to include features suggested by
entertainment production professionals.
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SALES AND MARKETING
The Company's sales and marketing program is designed to achieve
revenue growth, create and continue capturing new customers and promote the
ongoing growth of the Multipath Movie genre through various distribution methods
and promotional initiatives. In order to facilitate the broad acceptance of
Multipath Movies, the Company is pursuing a broad distribution strategy. The
Company is focusing on three primary channels in building broad distribution of
its product formats:
CD-ROM Retail Channels and Direct-To-Retail. The Company is continuing
to establish a retail distribution program in which Multipath Movies will be
marketed through traditional software publishers and distributors nationwide. In
addition, the Company will seek to substantially broaden distribution in retail
and mass market outlets, including video retailers, during 1998. The Company
seeks to develop multiple arrangements without giving broad title exclusivity to
any particular publisher or distributor. To complement these arrangements, the
Company is also establishing a direct-to-retail program in which the Company
will enter into certain marketing and distribution agreements with selected
retailers with particular emphasis on national and regional computer, office and
mass merchants. The Company will outsource the logistical, shipping and
warehousing needs for its direct-to-retail program.
Internet and Online Services. Given the importance of Internet and
online delivery in the overall success of the Multipath Movie format, the
Company believes that it is critical to make Multipath Movies available to as
many Internet and online service users as possible. Consequently, the Company
seeks to bundle its titles on various types of PC hardware. Through its
relationship with Packard Bell NEC, Packard Bell NEC is obligated to bundle the
Company's products on up to six million PCs shipped during a three-year period.
The Company will continue to pursue additional bundling arrangements with other
OEM manufacturers. To complement its title bundling arrangements, the Company is
also establishing a site for its Multipath Movies as part of the online service
offered by CompuServe, including a bulletin board, library and conferencing/chat
area. As part of this program, selected Multipath Movie titles will be
distributed to Compuserve users on CD-ROMs, which will allow them to purchase
Multipath Movies through this site.
Television Broadcast/Cable Programming and Home Video. The Company
currently anticipates that it will begin to market its Multipath Movies as
television programming and home video features. Due to the episodic and serial
nature of its Multipath Movies, the Company's titles are easily adaptable to the
episodic television market. In addition, by grouping multiple episodes together,
the Company can also produce titles for the cable and direct to video markets.
INTERNATIONAL SALES AND MARKETING
The Company's international sales and marketing strategy will be
managed from the United States and will be executed through a combination of
domestic and offshore efforts. The Company's strategy for international
distribution is to utilize exclusive arrangements for specific countries or
dedicated territories with distributors, which in management's opinion, are best
suited to direct the commercial launch and ongoing marketing support of products
in that country or territory. The Company believes that it will be able to
continue to capitalize on management's extensive network of international
relationships and background in the international distribution of CD-ROM
products. In 1997, the Company retained a managing director for Europe, based in
the United Kingdom. The Company is currently exploring possible product
development and distribution joint venture and strategic relationship
opportunities in Europe. The Company believes that product distribution in
Europe will require implementation of localized distribution strategies and
methods through established regional distributors. In addition, the Company
believes that greater emphasis on traditional retail distribution methods will
be required in Europe initially because of lower Internet usage rates in this
region.
Given the global nature of the World Wide Web, the Company believes
that international markets represent a significant incremental opportunity for
its Multipath Movies delivered over the Internet. Utilizing its proprietary
TalkTrack technology, the Company believes it can deliver Multipath Movies in
foreign languages without significant logistical or cost issues. In particular,
the Company intends to initially explore opportunities in France and Germany.
Because the lip movements of the characters are automatically synchronized to
the dialogue track of the Multipath Movie, the Company has the ability to
downstream foreign-language versions to international online users of Multipath
Movies.
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STRATEGIC, CONTENT AND DISTRIBUTION RELATIONSHIPS
The Company has entered into various strategic relationships and other
arrangements to assist in the development, production and distribution of
Multipath Movies. These strategic relationships will be an integral element in
the execution of the Company's business strategy.
Packard Bell NEC. The Company entered into an agreement with Packard
Bell NEC in September 1996 for Packard Bell NEC to bundle software for a
Multipath Movie title with 80% of the first 7.4 million multimedia equipped
personal computers shipped by Packard Bell NEC in the United States, Canada, the
United Kingdom, Australia, New Zealand and South Africa over a three-year period
which began in August of 1997 (the "Shipping Period"). The bundled software
allows the user to play or download Multipath Movies from an Internet site
established by the Company. The bundled software permits viewing of a preview or
the first episode of Cyberswine and includes a library of characters, scenes,
graphics, sound and other components permitting viewing of future episodes of
the title. The Company has the ability to periodically substitute other
Multipath Movie titles for the Cyberswine title initially bundled by Packard
Bell NEC. For a period ending two years following the expiration of the Shipping
Period, Packard Bell NEC has agreed to provide point of sale retail advertising
for the Multipath Movies distributed through Packard Bell NEC, and to create a
prominently displayed icon on the Packard Bell NEC screen display which, when
clicked, will enable the user to view a preview of the Multipath Movie and
purchase the entire Multipath Movie. Packard Bell NEC received warrants to
purchase 600,000 shares of the Company's Common Stock upon execution of the
agreement.
Under the terms of a September 1997 agreement, the Company granted to
Packard Bell NEC the right to distribute a version of Cyberswine loaded on the
hard drives of Packard Bell NEC computers. Under the September 1997 agreement,
the Company will receive a percentage of future revenue from online end users,
for a portion of the Shipping Period, and a minimum fixed fee. The Company also
granted distribution rights to future Multipath Movie titles which become
available during a portion of the Shipping Period, for a percentage of future
revenues from end users. Upon expiration of this portion of the Shipping Period,
the Company will be entitled to all revenues that are derived from Multipath
Movies distributed pursuant to the September 1996 agreement. In connection with
this agreement, the Company granted to Packard Bell NEC warrants to purchase
200,000 shares of the Company's Common Stock.
Morgan Creek Productions. The Company has entered into an agreement to
form a joint venture with Morgan Creek Interactive, a subsidiary of Morgan Creek
Productions. Morgan Creek is a principal developer and distributor of feature
films; past features include "Ace Ventura: Pet Detective," and "Ace Ventura:
When Nature Calls." The agreement provides that Morgan Creek will contribute to
the joint venture a nonexclusive license to two motion picture scripts for use
in the development of Multipath Movies to be distributed on CD-ROM for PCs and
over the Internet. The first project commenced under this agreement is a
thirteen episode comedy adventure series featuring the Ace Ventura character.
The Company is scripting three episodes of Ace Ventura, which it expects to
complete during 1998. The Company expects to complete scripting of an additional
six episodes during 1999. The rights granted by Morgan Creek under the agreement
do not extend to broadcast/cable television programming. Morgan Creek is
providing certain creative, direction and film development assistance to the
Company. The Company will be responsible for all development costs of the
Multipath Movies but will be entitled to recover such costs before Morgan Creek
will participate in any revenues generated from the Multipath Movies created by
the joint venture. The Company will also contribute to the joint venture a
nonexclusive license to the Company's DigitalProjector software tool solely for
use in connection with two Multipath Movies to be produced by the joint venture.
In exchange for the contribution of development content, Morgan Creek will
receive, following the Company's recovery of production costs and the Company's
recovery of its investment in the joint venture, a designated percentage of the
joint venture's revenues. Morgan Creek also received warrants to purchase 85,000
shares of the Company's Common Stock. The agreement provides that Morgan Creek
will own all intellectual property related to the content used in the Multipath
Movies created by the joint venture and will have the right to exploit such
content for other uses without any royalty obligation to the joint venture or
the Company, although the Company will retain all rights to the licensed
software tool.
Bantam Doubleday Dell Books for Young Readers. The Company has entered
into an agreement (the "Bantam Agreement") with Bantam Doubleday Dell providing
the Company with an option to acquire exclusive worldwide interactive rights to
Bantam Doubleday Dell's "Choose Your Own Nightmare" and "Choose Your Own
Adventure" series of interactive books. The Company's option covers over 185
titles, plus any additional titles in each series published by
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Bantam Doubleday Dell. The Company's rights include rights to adapt the licensed
titles to interactive format only and to deliver the products on CD-ROMs and via
the Internet. By exercising its option, the Company will be required to acquire
no less than 18 titles during the seven-year term of the Bantam Agreement.
Bantam Doubleday Dell will be entitled to receive a portion of the net proceeds
from sales of the licensed titles. Upon the Company's election of each of the
first 16 titles, in batches of four titles, the Company is required to pay
Bantam Doubleday Dell a nonrefundable advance against which royalties will be
applied. To date, the Company has exercised its option on 10 titles.
King Features Syndicate. The Company has entered into an agreement with
King Features Syndicate providing the Company with the right to use its
character Popeye and related story characters in Multipath Movies for play on
PC-based CD-ROM products and over the Internet in countries where English is the
predominantly spoken language. The option includes the right to adapt licensed
titles for a number of Multipath Movies. The Company has paid King Features
Syndicate a cash advance against future royalties. If the Company meets certain
minimum earned royalty levels, the Company shall have the option to extend the
agreement for two years beyond its original three-year term which continues
until December 31, 1999.
Universal Studios. The Company's agreement with Universal provides the
Company with the rights to use certain story scripts from the live action
television series Xena: Warrior Princess and animated character designs from the
direct-to-video motion picture Hercules & Xena the Animated Movie for use in the
production of Multipath Movies. The sale of Multipath Movie titles based on the
original plots can be made for the CD-ROM and DVD platforms and additional plots
can be distributed and sold via the Internet. The Company has paid Universal
Studios part of an advance against future royalty payments and guaranteed
minimum royalties. The initial term of this agreement continues until January
31, 2002.
D.C. Comics (Warner Bros.). The Company's agreement with D.C. Comics
provides the Company with the rights to use the comic strip character "Superman"
in Multipath Movies which can be distributed on CD-ROM and DVD platforms, or via
the Internet. The Company has a guaranteed advance against royalties. The
Company is also obligated to pay D.C. Comics a certain percentage of net
advertising proceeds received from the sale of Multipath Movies based on the
Superman character. The initial term of the agreement continues until September
1, 2001.
Crawford Productions. The Company has entered into a production joint
venture with Crawford Productions Pty., Ltd. ("Crawfords"), an Australian
television and production company, to develop two Multipath Movies. The Company
and Crawfords have not identified a mutually agreeable product for the joint
venture. Pursuant to the joint venture, Crawfords and the Company would each
fund one-half of the development budget of the joint venture. Crawfords would be
responsible for distributing broadcast and cable versions of the two Multipath
Movies and the Company would distribute the Multipath Movies in interactive
computer-based formats. Crawfords and the Company would equally divide all
proceeds from exploitation of the two Multipath Movies created by the joint
venture. There can be no assurance that the Company and Crawfords will reach
agreement on a project for the joint venture, or that the joint venture will
successfully produce a Multipath Movie.
CompuServe. CompuServe has agreed to distribute the enabling software
and digital assets for the Company's Multipath Movies on CompuServe's CD-ROMs
sent to its members and prospective members. If CompuServe determines not to
distribute the enabling software and digital assets on its upgrade CD-ROMs, the
Company may terminate the agreement. The Company will establish a site providing
CompuServe users access to Multipath Movies. Through the site, CompuServe users
will be able to download files in order to view various Multipath Movies and
episodes. The site will also include a Forum consisting of a message board,
library and "chat" area. The site will be hosted by computer facilities provided
by CompuServe. Under the agreement, the Company will receive a portion of
Multipath Movie revenues, connect-time fees and advertising and sponsorship fees
generated by use of the Company's CompuServe site. The Company will also receive
"bounties" for CompuServe subscribers brought to CompuServe by the Company's
marketing efforts.
Others. The Company has granted Matrox, a manufacturer of graphics
acceleration hardware, the right to place the first episode of Cyberswine on an
Internet enabled CD-ROM bundled with Matrox products. S3, a manufacturer of
graphics acceleration hardware, has entered into a two-year agreement with the
Company permitting, but not requiring, S3 to bundle Cyberswine on a CD-ROM
distributed with its three dimensional hardware products. The Company is also
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actively pursuing additional bundling, distribution and licensing arrangements
pursuant to which Multipath Movies would be distributed through the original
equipment manufacturer and through specialty software and mass merchandiser
retail channels. There can be no assurance that the Company will successfully
conclude any such relationship, or that if concluded, such relationships will be
implemented in a manner that significantly increases Multipath Movie
distribution or revenues.
RESEARCH AND DEVELOPMENT
The Company's research and development program is focused on: (i)
enhancing the Company's software tools to continually add features identified by
and of value to the creative and production entertainment communities, (ii)
developing enhanced Internet delivery capabilities for Multipath Movies, (iii)
improving the Company's proprietary object-oriented database to enhance facial
expressions and mouth movements of Multipath Movie characters, and (iv)
increasing the efficiency of its object-oriented production process. The
Company's research and development program includes development of a proprietary
object-oriented database intended to give Multipath Movie producers ready access
to the Company's database of objects, such as sets, props and characters, and
thereby increase production efficiencies. The Company is expending substantial
resources in its research and development facility in Australia, where it
maintains a staff of sixteen engineers. Research and development expenses for
the years ended December 31, 1996 and 1997 were $1,996,000 and $1,709,000,
respectively. Research and development expenses for 1996 include $1,350,000 of
in-process research and development costs incurred in connection with the SAND
acquisition in September 1996.
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 Company expects to compete
with computer graphics special effects firms, including Pixar, ILM, Digital
Domain, Sony ImageWorks, Pacific Data Images, Rhythm & Hues and Boss Film
Studios, Inc. The Company also expects to compete with firms producing CD-ROM
products such as Broderbund, GT Interactive, Electronic Arts, Learning Company,
CUC and large corporations, such as Disney and Microsoft, with substantial bases
of intellectual property content and substantial financial resources, who have
entered or announced their intention to enter the market for CD-ROM
entertainment products. Finally, the Company's Multipath Movies will compete
with traditional feature films and television programming produced by major
movie studios, including Disney, Warner Bros., Twentieth Century Fox, Paramount,
Sony, Lucasfilm, MCA Universal and MGM/UA, as well as numerous other independent
motion picture and television production companies. Several movie studios
already have developed their own internal computer animation capability and have
developed and released animated feature films or created computer animation for
special effects in animated films. The Company expects additional competition in
the animated feature film market from these and other movie studios. The Company
will also 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.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon
its proprietary technology. The Company also relies on trademark, trade secret
and copyright laws to protect its technology, with the source code for the
Company's proprietary software being protected both as a trade secret and as a
copyrighted work. Also, it is the Company's policy that all employees and
third-party developers sign nondisclosure agreements. However, there can be no
assurance that such precautions will provide meaningful protection from
competition or that competitors will not be able to develop similar or superior
technology independently. Also, the Company has no license agreements with the
end users of its products and does not copy-protect its software, so it may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer or otherwise obtain and use information that the Company
regards as proprietary. Although the Company is not aware of unauthorized
copying of its products, if a 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
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of the proprietary rights of others, such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition. Ultimately, the
Company may be unable, for financial or other reasons, to enforce its rights
under intellectual property laws and the laws of certain countries in which the
Company's products are or may be distributed may not protect the Company's
products and intellectual rights to the same extent as the laws of the United
States.
The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third parties.
Since the software tools used to create the Multipath Movies were developed by
SAND, a division of Sega Ozisoft, the Company relies entirely on the
representations of Sega Ozisoft contained in the SAND Acquisition Agreement
between BII-Australia and Sega Ozisoft that, to Sega Ozisoft's best knowledge,
the SAND technology and software acquired by the Company does not infringe the
proprietary rights of others. Additionally, although the Company has received no
communication from third parties alleging the infringement of proprietary rights
of such parties, there can be no assurance that third parties will not assert
infringement claims in the future. Any such third party claims, whether or not
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. There can be no assurance that any such
licenses would be available on acceptable terms, if at all, or that the Company
would prevail in any such litigation. If the Company were found to have
infringed upon the proprietary rights of third parties, it could be required to
pay damages, cease sales of the infringing products and redesign or discontinue
such products, any of which could have a material adverse effect on the
Company's business, operating results and financial condition.
EMPLOYEES
At December 31, 1997 the Company had 74 full-time employees: 14 engaged
in research and development, 53 in production, five in general administration
and finance and two in sales and marketing. None of the employees of the Company
is covered by a collective bargaining agreement. The Company considers its
relationship with its employees to be good. The Company currently utilizes the
services of nine independent software developers pursuant to contractual
relationships.
The Company intends to hire additional key personnel in the near
future. The Company's expansion may significantly strain the Company's
management, financial and other resources. Any failure to expand these areas in
an efficient manner could have a material adverse effect on the Company's
operating results.
The Company believes its future success will depend in large part on
the Company's ability to recruit and retain qualified employees, particularly
those highly skilled design, process and test engineers involved in the
manufacture of existing systems and the development of new systems and
processes. The competition for such personnel is intense. There can be no
assurances that the Company will be successful in retaining or recruiting key
personnel. Three of the Company's employees, the Chairman and CEO, the CFO and
the Director of Licensing, are based in Los Angeles, California. All other
employees operate out of facilities located in Bondi Junction and Woollahra,
both suburbs of Sydney, Australia.
ITEM 2. DESCRIPTION OF PROPERTIES.
PROPERTIES
The Company's production facilities, consisting of approximately 8,500
square feet, are located in Bondi Junction, Australia. At December 31, 1997, the
research and development facilities, consisting of approximately 1,900 square
feet, were located in Woollahra, Australia. During January 1998, the Company
expanded its production facilities to approximately 12,800 square feet, and
moved and expanded its research and development division into facilities
consisting of approximately 3,300 square feet in Double Bay, Australia. The
current annual rental under the Bondi Junction lease is $163,000 and under the
Double Bay lease is $59,000. The Company also leases an office in Woodland
Hills, California for rent of approximately $69,000 per annum.
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The Company anticipates using up to $0.5 million during 1998 to expand
its current production studio in Bondi Junction and its research and development
facilities in Double Bay. The current facility is fully operational with six
sound studios and fifty four work stations for modeling and animation as well as
a number of additional work station seats for authors and graphic artists that
work on a contract basis. The Company anticipates expanding this studio to
accommodate additional sound studios and work stations. In addition, the Company
anticipates using up to $0.7 million in 1998 and 1999 to establish new
production facilities in California. It is anticipated that these facilities
will develop and produce titles with local joint venture partners and overflow
work from Australia. Research and development with respect to the continual
enhancements and upgrades of the Company's proprietary software tool suite will
be maintained in Double Bay.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any litigation.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITYHOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED MATTERS.
COMMON STOCK
The Company's Common Stock commenced trading on the American Stock
Exchange on November 22, 1996 under the symbol "BDE." Prior to that time, there
was no public market for the Company's Common Stock. The following table sets
forth, for the periods indicated, certain high and low prices for the Common
Stock as reported by the American Stock Exchange.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Fourth Quarter (beginning November 22, 1996) .......... $5.13 $3.56
YEAR ENDED DECEMBER 31, 1997
First Quarter ......................................... 6.00 3.88
Second Quarter ........................................ 8.38 4.50
Third Quarter ......................................... 9.88 6.25
Fourth Quarter ........................................ 9.38 4.00
</TABLE>
On March 27, 1998, the closing price of the Common Stock as reported on
the American Stock Exchange was $2.375 per share. As of March 27, 1998, there
were 20 holders of record of the Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
In November 1997, the Company issued warrants to purchase 15,040 shares
of Common Stock at an exercise price of $5.50 per share to Chloe Holdings, Inc.
("Chloe") as partial consideration valued at $20,000 for services rendered in
connection with the Company's public offering in December 1997. The warrants
vest and become exercisable in December 1998 and expire on November 4, 2000.
Chloe covenanted that (i) it acquired the warrants for its own account with the
present intention of holding such warrants for investment purposes only and not
with a view to, or for sale in connection with, any distribution of such
warrants (other than a distribution in compliance with all applicable federal
and state securities laws); (ii) it is an experienced and sophisticated investor
and has such knowledge and experience in financial and business matters that it
is capable of evaluating the relative merits and the risks of an investment in
the warrants and of protecting its own interests in connection with the
transaction at issue; (iii) it is willing to bear and is capable of bearing the
economic risk of an investment in the warrants; and (iv) the Company made
available to it, prior to the date of the warrant agreement, the opportunity to
ask questions of the Company and its officers, and to receive from the Company
and its officers information concerning the terms and conditions of the warrant
and the warrant agreement and to obtain any additional information with respect
to the Company, its business, operations and prospects, as reasonably requested
by it; and (v) it is an "accredited investor" as that term is defined under Rule
501(a)(4) of Regulation D promulgated by the Commission under the Securities
Act. The issuance and sale of these securities was exempt from the registration
and prospectus delivery requirements of the Securities Act pursuant to Section
4(2) of the Securities Act (in accordance with Rule 506 of Regulation D) as a
transaction not involving any public offering.
DIVIDENDS
The Company has never paid any dividends on its Common Stock. The
Company intends to retain any earnings for use in its business and does not
intend paying any cash dividends on its Common Stock in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read together with the
Consolidated Financial Statements of the Company and notes thereto incorporated
elsewhere in this Form 10-KSB.
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity/cash flows of
the Company for the twelve, six and twelve month periods ended December 31,
1997, December 31, 1996 and June 30, 1996, respectively. Except for the
historical information contained herein, the matters discussed in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward looking statements that involve risks and uncertainties
and are based upon judgments concerning various factors that are beyond the
Company's control. Actual results could differ materially from those projected
in the forward looking statements as a result of, among other factors, the
factors set forth under the caption "Cautionary Statements and Risk Factors"
below.
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, production, distribution, licensing and on-line
exhibition of Multipath Movies and other three-dimensional digitally created
entertainment. The Company launched the first of its Multipath Movie series,
Cyberswine, its Multipath Movie for Kids series, Popeye and the Quest for the
Woolly Mammoth, and the first two of its StoryTeller Series, Night of the
Werewolf and The Halloween Party, in the fourth quarter of 1997. The Company's
annual and quarterly revenue will depend upon the successful development,
distribution, timing and market acceptance of its interactive products and upon
the costs to distribute and promote these products. Specifically the revenues
derived from the production and distribution of the Company's Multipath Movies
will depend primarily on the acceptance by the market of the Multipath Movie
concept and the underlying content of the Multipath Movie, neither of which can
be predicted nor necessarily bear a direct correlation to the production or
distribution costs incurred. See "Cautionary Statements and Risk Factors -
Acceptance of Multipath Movie Concept; Successful Development of Multipath
Movies with Appealing Creative Content," and "Cautionary Statements and Risk
Factors - Dependence on Development of Additional Multipath Movies." The
commercial success of a Multipath Movie is also expected to depend upon
promotion and marketing, production costs, impact of competition and other
factors. Accordingly, the Company's annual and quarterly revenues are and will
be extremely difficult to forecast.
The Company incurred significant operating expenses and development
costs as it continued development of its proprietary software tools and its
Multipath Movies and as it continued to expand in anticipation of growth. In
connection
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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, which, based on the value of the warrants issued, resulted in a
$1,096,000 operating expense and a corresponding credit to equity. In September
1997, Packard Bell NEC was issued 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. During the year ended December 31, 1997, the
Company recognized revenue under its distribution agreement with Packard Bell
NEC. However, costs associated with development of its Multipath Movies resulted
in a net loss for the year ended December 31, 1997. See "Cautionary Statements
and Risk Factors - Limited Operating History; Uncertain Profitability."
RESULTS OF OPERATIONS
Year Ended December 31, 1997 as Compared to Year Ended December 31,
1996
Revenues. Revenues from the sale of Multipath Movies through retail
outlets are 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.
The Company enters into distribution contracts under which the Company
is entitled to fixed minimum guaranteed amounts. Where such amounts have not yet
been received, the minimum guaranteed amount is recognized as revenue when the
CD-ROM master is delivered to the distributor and the terms of the sale are
considered fixed. Revenues from the sale of electronic tickets to view Multipath
Movies over the Internet will be recognized when the tickets are sold.
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.
Revenues increased from $1,213,000 for the year ended December 31, 1996
to $2,481,000 for the year ended December 31, 1997. This represents an increase
of $1,268,000, or 105%. Revenues in 1997 included $1,973,000 of revenue
recognized when the Company and Packard Bell NEC entered into an agreement
which, among other things, granted to Packard Bell NEC the right to distribute a
version of Cyberswine loaded on the hard drives of Packard Bell NEC computers.
Packard Bell NEC committed that the shipments of computers with which the
Company's Multipath Movies will be bundled would occur over the 12 months
commencing on first shipment of Multipath Movies bundled with Packard Bell NEC
computers (which occurred in December, 1997), subject to certain limited time
extensions of the shipping period. Revenues in 1996 were generated from sales of
the Company's traditional CD-ROM products, a business which is being phased out.
Revenues in 1997 were adversely effected by delays in duplication, packaging and
distribution which caused the Company's first Multipath Movies, Cyberswine,
Popeye and the Quest for the Woolly Mammoth, Night of the Werewolf and The
Halloween Party to begin arriving at retailers at the end of December, after the
holiday selling season.
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As a result of delays in the commencement of the U.S. shipment of
personal computers upon which the Company's products are to be bundled, the
first U.S. Multipath Movie bundles are now expected to begin shipment during the
second quarter of 1998. Although this delay should not affect the number of
units to be shipped pursuant to the Company's bundling relationship with Packard
Bell NEC, it will impact the Company's 1998 revenues and earnings since users
will not be equipped to purchase on-line episodes over the Internet as early as
expected.
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 $458,000 for the year ended December 31, 1996 to $44,000 for the year ended
December 31, 1997. This represents a decrease of $414,000, or 90%. Cost of
revenues in 1996 include costs associated with development of the Company's
traditional CD-ROM products. During 1997, the costs associated with the
development of the Company's Multipath Movies were charged to research and
development expenses or capitalized, 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 salaries, advertising, promotions, brochures, travel and trade shows.
Sales and marketing expenses decreased from $1,101,000 for the year ended
December 31, 1996 to $1,090,000 for the year ended December 31, 1997. Sales and
marketing expenses include expenses related to grants of warrants to Packard
Bell NEC of $140,000 in September 1997 and $960,000 in September 1996. Sales and
marketing expenses are expected to increase in future periods due to the
expansion of the Company's sales force.
General and administrative. General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
rent, insurance costs and professional fees. General and administrative expenses
increased from $1,268,000 for the year ended December 31, 1996 to $2,217,000 for
the year ended December 31, 1997. The increase is 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 $1,996,000 for the year ended December 31, 1996 to $1,709,000 for
the year ended December 31, 1997. Research and development expenses for 1996
include $1,350,000 of in-process research and development costs incurred in
connection with the SAND acquisition in September 1996. Excluding this charge,
research and development expenses in 1996 were $646,000. 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 year
ended December 31, 1997 include in-process research and development expenses
incurred in connection with the 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 $130,000 for the year ended December 31, 1996 to $214,000
for the year ended December 31, 1997, primarily attributable to additional
computer equipment put in place and leasehold improvements made during 1997.
Other income and expense. Other income includes interest income and
expenses, gains and losses on foreign exchange transactions and export
development grants paid to BII Australia by the Australian Trade Commission for
BII
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<PAGE> 19
Australia's participation in certain export activities. Interest increased from
a net expense of $41,000 for the year ended December 31, 1996 to a net income of
$313,000 for the year ended December 31, 1997. These increases are due to the
higher cash balances as a result of the initial public offering in November
1996, the secondary offering in December 1997, and the repayment of all interest
bearing debt.
Six Months Ended December 31, 1996 as Compared to Six Months Ended
December 31, 1995
Revenues. Revenues decreased from $1,184,000 for the six months ended
December 31, 1995 to $350,000 for the six months ended December 31, 1996. This
represents a decrease of $834,000 or 70%, mainly attributable to decreased
royalty revenues as a result of a change in the Company's focus from development
of traditional CD-ROM products to the development of Multipath Movies.
Cost of revenues. Cost of revenues decreased from $434,000 for the six
months ended December 31, 1995 to $186,000 for the six months ended December 31,
1996. This represents a decrease of $248,000, or 57%. Cost of revenues in the
1995 period included costs associated with development of the Company's own
titles. In the 1996 period, the Company reduced its development of traditional
CD-ROM product. Many of the costs associated with the development of software
for third parties were paid directly by the third parties.
Sales and marketing. Sales and marketing expenses increased from
$35,000 for the six months ended December 31, 1995 to $970,000 for the six
months ended December 31, 1996. Sales and marketing expenses include expenses
related to the grant of warrants to Packard Bell NEC which was valued at
$960,000 in September 1996. The agreement with Packard Bell NEC requires Packard
Bell NEC to provide certain promotional services to the Company. Accordingly,
the expense associated with the warrants has been recorded as a sales and
marketing expense.
General and administrative. General and administrative expenses
increased from $129,000 for the six months ended December 31, 1995 to $1,065,000
for the six months ended December 31, 1996. This increase is associated with
increased accounting, legal and consulting services provided to the Company and
the value of stock options granted during the period.
Research and development. Research and development expenses increased
from $103,000 for the six months ended December 31, 1995 to $1,877,000 for the
six months ended December 31, 1996. Of this increase, $1,350,000 is attributable
to the in-process research and development costs incurred in connection with the
SAND acquisition.
Depreciation. Depreciation expense increased from $46,000 for the six
months ended December 31, 1995 to $74,000 for the six months ended December 31,
1996. This increase is attributable to additional computer equipment put in
place during 1996.
Other income and expense. Other income includes interest income and
gains on foreign exchange transactions. Interest income increased from $0 for
the six months ended December 31, 1995 to $41,000 for the six months ended
December 31, 1996 due to the higher cash balances as a result of the initial
public offering in November 1996. Interest expense relates mainly to interest on
the Company's loan from PIE, a significant shareholder. Interest expense
decreased from $64,000 for the six months ended December 31, 1995 to $54,000 for
the six months ended December 31, 1996. This decrease is due to a lower average
balance outstanding on the PIE loan during the six months ended December 31,
1996 as compared to the six months ended December 31, 1995.
Fiscal Year Ended June 30, 1996 as Compared to Fiscal Year Ended June
30, 1995
The Company experienced significant growth in fiscal year 1996.
Contracts with Packard Bell NEC and Ocean of America Inc. provided substantial
revenues in 1996, and the Company also entered into new agreements in 1996 to
develop software for other companies. In addition, the Company entered into new
marketing agreements for wider domestic and international sales of its products.
The Company's growth in 1996 resulted in increases in operating expenses,
although with the increased level of activity, the Company realized certain
operating efficiencies and economies of scale.
Revenues. Revenues increased from $843,000 for the year ended June 30,
1995 to $2,054,000 for the year ended June 30, 1996. This represents an increase
of $1,211,000 or 144%. Royalties increased by $539,000, attributable to a
greater
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<PAGE> 20
number of completed software titles. Development fees increased by $497,000 as a
result of more software products being developed. Software sales revenues
increased by $175,000, also as a result of the greater number of completed
titles.
Cost of Revenues. Cost of revenues increased from $656,000 for the year
ended June 30, 1995 to $739,000 for the year ended June 30, 1996. This
represents an increase of $83,000 or 13%, mainly attributable to a greater
number of titles in development. Although revenues almost doubled, costs of
revenues increased only slightly. The Company's gross profit margin increased
from 22% in 1995 to 64% in 1996, attributable to economies of scale and
increased operating efficiencies.
Sales and Marketing. Sales and marketing expenses increased from
$116,000 for the year ended June 30, 1995 to $163,000 for the year ended June
30, 1996. This represents an increase of $47,000 or 41%, attributable primarily
to increases in the Company's sales and marketing efforts.
General and Administrative. General and administrative expenses
increased from $224,000 for the year ended June 30, 1995 to $366,000 for the
year ended June 30, 1996. This represents an increase of $142,000 or 63%,
attributable primarily to increased staff and overhead to support the higher
level of production and sales activity.
Research and Development. Research and development expenses decreased
slightly from $183,000 for the year ended June 30, 1995 to $174,000 for the year
ended June 30, 1996. This represents a decrease of $9,000 or 5%. The decrease is
due to the fact that the Company incurred lower development expenses in 1996 to
enhance software tools that were developed in 1995.
Depreciation. Depreciation expense increased from $43,000 for the year
ended June 30, 1995 to $102,000 for the year ended June 30, 1996. This is
primarily due to increased computer equipment in place during 1996.
Other Income and Expense. In fiscal year 1996, other income includes
$122,000, which represents an export market development grant paid to BII
Australia by the Australian Trade Commission for BII Australia's participation
in certain export activities. Interest expense relates mainly to interest on the
Company's loan from PIE, a significant stockholder. Interest expense increased
from $45,000 for the year ended June 30, 1995 to $95,000 for the year ended June
30, 1996. This represents an increase of $50,000 or 111%, resulting from higher
average outstanding borrowings from PIE in 1996 as compared to 1995.
Pro forma net income (loss) per share. Pro forma net loss per share for
the fiscal year ended June 30, 1996 reflects the acquisition by the Company of
SAND, assumed to have taken place on July 1, 1995, in exchange for a $1,500,000
convertible promissory note. The purchase price has been allocated between
in-process research and development ($1,350,000) and other assets ($150,000).
This resulted in a pro forma charge to research and development expenses of
$1,350,000, including the pro forma consolidation of the operations of SAND. Pro
forma net loss per share for the fiscal year ended June 30, 1996 also reflects
the conversion of the SAND Note into 780,001 shares of Common Stock of the
Company. The unaudited consolidated pro forma financial data may not represent
the results of operations or financial position which actually would have been
obtained if those transactions had been completed as of the date indicated or
which may be obtained in the future.
FLUCTUATING OPERATING RESULTS
Historically, the Company has experienced significant fluctuations in
its operating results from quarter to quarter and it expects these fluctuations
to continue in the future. For instance the Company had anticipated completing
foreign distribution and licensing relationships in the fourth quarter of 1997,
which are now expected to be completed in the first half of 1998. These
relationships were expected to generate substantial revenues in 1997.
Also, as a result of delays in the commencement of U.S. shipments of
personal computers upon which the Company's products are bundled, the first U.S.
Multipath Movie bundles are now expected to begin shipment during the second
quarter of 1998. Although this delay does not affect the number of units to be
shipped pursuant to the Company's bundling relationship with Packard Bell NEC,
it will impact the Company's 1998 revenues and earnings since users will not be
equipped to purchase on-line episodes over the Internet as early as expected.
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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
has increased its operating expenses to fund greater levels of Multipath Movie
production and research and development, increased marketing operations and
expanded distribution channels. As was the case during 1997, and as is expected
to be the case in at least the first and second quarters of 1998, to the extent
that such expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition will
be materially adversely affected.
The entertainment software business is highly seasonal. Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest in
the second and third calendar quarters. This seasonal pattern is due primarily
to the increased demand for entertainment software products during the year-end
holiday buying season. As a result, a disproportionate share of the Company's
net revenues historically have been generated in the fourth quarter of the
Company's fiscal year. The Company expects its revenues and operating results
will continue to reflect these seasonal factors.
The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending to
decline during recessionary periods. There can be no assurance that the Company
will be able to adjust its anticipated product development expenditures and
other expenses in the event of an economic downturn during such development.
Accordingly, if a recessionary period occurs, tending to result in decreased
sales of the Company's products, product development expenses likely will remain
constant and the Company's business, operating results and financial condition
could be materially adversely affected.
ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES
The Company's 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
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Reporting by Producers and Distributors of Motion Picture Films."
ACCOUNTING GUIDANCE FOR REVENUE RECOGNITION FOR SOFTWARE TRANSACTIONS
The Company recognizes software revenue in accordance with AICPA
Statement of Position ("SOP") 91-1, "Software Revenue Recognition". The
Accounting Standards Executive Committee issued SOP 97-2, "Software Revenue
Recognition" in October 1997 effective for transactions entered into in fiscal
periods beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 and
provides revised and expanded guidance on when revenue should be recognized and
in what amounts for licensing, selling, leasing, or otherwise marketing computer
software. The Company adopted SOP 97-2 in the first quarter of 1998. The
adoption of SOP 97-2 may materially affect the period in which revenues from
distribution contracts are recognized in the future, however, the potential
future impact cannot currently be determined .
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal source of liquidity
was approximately $12,300,000 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 (the "Initial
Public Offering") of 2,000,000 shares of Common Stock at $5 per share provided
approximately $8,500,000 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.
On December 10, 1997, the Company closed a secondary offering (the
"Secondary Offering") of 2,500,000 shares of Common Stock at $5 per share,
2,200,000 of which were sold by the Company. The Secondary Offering resulted in
gross proceeds of approximately $9,800,000 in cash after underwriters' discounts
and commissions and offering expenses. Approximately $2,500,000 of the net
proceeds of the Initial Public Offering and all of the proceeds of the Secondary
Offering remain available for product development and working capital and
general corporate purposes.
Net cash provided by operating activities during the year ended
December 31, 1996 was primarily attributable to revenues of $1,213,000. Net cash
used in operating activities during the year ended December 31, 1997 was
primarily attributable to a net loss of $2,305,000 and an increase in accounts
receivable of $1,986,000. Net cash used in investing activities in the year
ended December 31, 1997 was due primarily to the purchase of computer equipment.
Cash provided by financing activities in the years ended December 31, 1996 and
1997 were primarily attributable to the issuance of shares in the public
offerings of Common Stock.
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 has an obligation under its
joint venture agreement with Crawfords to jointly fund two Multipath Movies. To
date no projects have been identified for development by the parties. The
Company also is required to make minimum payments of $198,000 under various
licensing agreements. At December 31, 1997, the Company had rental commitment
for its offices and production facilities of $1,067,000
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 year but will not be
sufficient to permit completion of the entire slate of Multipath Movie episodes
estimated to be completed in 1998. See "Description of Business - General." The
Company intends to raise additional funds to permit completion of all 20 titles
scheduled for completion during 1998 through debt or equity financings or other
means. The Company is currently exploring alternatives to fulfill these
requirements. No assurance can be given that additional financing will be
available or that, if available, it can be obtained on terms favorable to the
Company and its stockholders. If the Company is unable to obtain additional
financing sufficient to fund the completion of all 20 titles scheduled for
completion in 1998, the Company anticipates that it may defer completion of
several titles. See "Cautionary Statements and Risk Factors - Future Capital
Needs; Uncertainty of Additional Funding."
CAUTIONARY STATEMENTS AND RISK FACTORS
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Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties. Factors associated with
the forward looking statements which could cause actual results to differ
materially from those projected or forecast in the statements that appear below.
In addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risks 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 to 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 introduced Cyberswine, its first Multipath Movie, at
the end of the fourth quarter of 1997. The commercial success of the Company's
Multipath Movies will depend on its ability to predict the type of content that
will appeal to a broad audience and to develop stories and characters that
capture the attention and imagination of the market. In addition, the success of
the Company's Multipath Movies will depend upon the Company's ability to develop
popular characters and to license recognized characters and properties from
third parties for its software titles. There can be no assurance that the
Company will be able to develop or license popular stories or characters. The
success of a Multipath Movie also depends upon the effectiveness of the
Company's marketing and successful introduction of the first Multipath Movie
through the Company's bundling relationship with Packard Bell NEC and the retail
channel, as well as the quality and acceptance of other competing programs
released into the market at or near the same time, critical reviews, the
availability of alternative forms of entertainment and leisure time activities,
general economic conditions and other tangible and intangible factors, all of
which can change and cannot be predicted with certainty. There can be no
assurance that the Company will be able to successfully introduce the Multipath
Movie through its bundling relationship with Packard Bell NEC, in the retail
channel or otherwise. Accordingly, there exists substantial risk that some or
all of the Company's Multipath Movies will not be commercially successful,
resulting in certain costs not being recouped or anticipated profits not being
realized. Further, the success of the Multipath Movie genre will substantially
depend on the market's reception of the first Multipath Movie. The failure of
the Company's initial Multipath Movie to achieve commercial success would damage
the ability of the Company to introduce additional titles. Accordingly, the
failure of any of the Company's 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.
Product Delays. The Company's current production schedules contemplate that it
will release a number of Multipath Movies in the fourth quarter of 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. For instance, delays in
duplication, packaging and distribution caused the Company's first Multipath
Movies, Cyberswine, Popeye and the Quest for the Woolly Mammoth, Night of the
Werewolf and The Halloween Party to begin arriving at retailers at the end of
December 1997, after the holiday selling season. It is likely in the future that
such delays will continue to occur and 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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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. However, revenues in
the fourth quarter of 1997 were adversely affected by delays in duplication,
packaging and distribution which caused the Company's first Multipath Movies to
begin arriving at retailers at the end of December, after the the holiday
selling season. In addition, as a result of delays in the commencement of the
U.S. shipment of personal computers upon which the Company's products are
bundled, the first U.S. Multipath Movie bundles are now expected to begin
shipment during the second quarter of 1998. Although this delay should not
affect the number of units to be shipped pursuant to the Company's bundling
relationship with Packard Bell NEC, it will impact the Company's 1998 revenues
and earnings since users will not be equipped to purchase on-line episodes over
the Internet as early as expected. 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.
Fluctuating Operating Results. The Company intends to generate a
substantial majority of its future revenue from the development and production
of Multipath Movies and other three-dimensional digitally created entertainment.
The Company commenced the launch of the first of its Multipath Movies,
Cyberswine, at the end of the fourth quarter of 1997. The Company also released
the first products in the Storyteller Series and Multipath Movies for Kids
series at that time. The Company's annual and quarterly revenue will depend upon
the successful development, timing and market acceptance of its interactive
products and upon the costs to distribute and promote these products.
Specifically, the revenues derived from the production and distribution of the
Company's Multipath Movies will depend primarily on the acceptance by the market
of the Multipath Movie concept and the underlying content of the Multipath
Movie, neither of which can be predicted nor necessarily bear a direct
correlation to the production or distribution costs incurred. See " - Acceptance
of Multipath Movie Concept; Successful Development of Multipath Movies with
Appealing Creative Content," and " - Dependence on Development of Additional
Multipath Movies." The commercial success of a film also depends upon promotion
and marketing, production costs, impact of competition and other factors. See
"Business - Competition." Accordingly, the Company's annual and quarterly
revenues are and will continue to be extremely difficult to forecast.
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 and the timing of
negotiation and completion of distribution arrangements, 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.
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The Company's expense levels are, to a large extent, fixed. The Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall. As a result, any significant shortfall in revenue from the
Company's Multipath Movies would have an immediate material adverse effect on
the Company's business, operating results and financial condition. The Company
plans to increase its operating expenses to fund greater levels of Multipath
Movie production and research and development, increased marketing operations
and expanded distribution channels. To the extent that such expenses precede or
are not subsequently followed by increased revenues, the Company's business,
operating results and financial condition will be materially adversely affected.
The entertainment software business is highly seasonal. Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest in
the second and third calendar quarters. This seasonal pattern is due primarily
to the increased demand for entertainment software products during the year-end
holiday buying season. As a result, a disproportionate share of the Company's
net revenues historically have been generated in the fourth quarter of the
Company's fiscal year. The Company expects its revenues and operating results
will continue to reflect these seasonal factors.
The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending to
decline during recessionary periods. There can be no assurance that the Company
will be able to adjust its anticipated product development expenditures and
other expenses in the event of an economic downturn during such development.
Accordingly, if a recessionary period occurs, tending to result in decreased
sales of the Company's products, product development expenses likely will remain
constant and the Company's business, operating results and financial condition
could be materially adversely affected. See " -- Rapid Technological Change;
Changing Product Platforms and Formats."
Due to all of the foregoing factors, it is also likely that in some
future periods the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
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. The Company
anticipates that its existing funds will not be sufficient to fund completion of
the entire slate of 20 Multipath Movie episodes estimated to be completed in
1998, and intends to attempt to raise additional funds to permit completion of
all titles 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. If the Company
is unable to obtain additional financing sufficient to fund the completion of
all titles scheduled for completion in 1998, the Company anticipates that it may
defer completion of several titles. 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.
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
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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. For instance, the Company expected Packard Bell NEC to commence
U.S. shipment of personal computers bundled with Cyberswine in January 1998. As
a result of delays in Packard Bell NEC's shipping schedules, the Company now
does not expect Packard Bell NEC to begin U.S. shipment of the Company's first
Multipath Movie bundles until the second quarter of 1998 and the Company can
give no assurance that Packard Bell NEC will achieve this schedule. Also, Morgan
Creek and many other content licensors have various creative controls and
approval rights pursuant to their joint venture agreements with the Company.
These creative controls and approval rights allow Morgan Creek as well as
content licensors to arbitrarily reject or delay the Multipath Movie productions
of the respective joint ventures. There can be no assurance that the Company
will not be subject to delays resulting from disagreements with or an inability
to obtain approvals from its strategic partners or that the Company will achieve
its objectives in respect of any or all of its strategic relationships or
continue to maintain and develop these or other strategic relationships, or that
licenses between the Company and any such third party will be renewed or
extended at their expiration dates. Many content licensors are also reluctant to
grant broad licenses covering multiple formats (e.g., a license covering both
Internet and television distribution rights) to companies without proven track
records in the television production business, and, where rights are available,
there is often significant competition for licenses. As a result of such
competition, and the reluctance by owners of content to grant broad licenses,
there can be no assurance that licensed content will be available to the Company
at prices, or upon terms or conditions acceptable to the Company or which permit
the Company to implement its strategy of producing Multipath Movies for multiple
formats. Delays resulting from disagreements with licensors or joint venture
partners or the Company's failure to renew or extend a key license, maintain any
of its strategic relationships or enter into new licenses and strategic
relationships on sound financial terms could materially adversely affect the
Company's business, operating results and financial condition.
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.
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.
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Risks Associated with Internet Delivery. The Company also intends to
distribute certain of its Multipath Movies through its Internet site and through
a site on the CompuServe online service. Accordingly, any system failure that
causes interruption or an increase in response time on the Company's Internet
site or the CompuServe site, could result in less traffic to and distribution of
Multipath Movies via the Internet and, if sustained or repeated, could reduce
the attractiveness of the Company's products. The Company is also dependent upon
Web browsers and Internet and online service providers to ensure user access to
its products. User acceptance with respect to payment methods over the Internet
may also create barriers to distribution of the Company's products through the
Internet. Any disruption in the Internet access provided to the Company's
Internet site or any failure by the Company's Internet site to handle higher
volumes of transactions could have a material adverse effect on the Company's
business, operating results and financial condition.
The seamless appearance of Multipath Movies delivered over the Internet
requires that while a scene is being viewed, succeeding scenes must be
downloaded. This requires the use of 28.8 kilobits per second or faster modems,
computers equipped with high-speed Pentium (or equivalent) microprocessors, 24
megabytes of random access memory and appropriately configured operating
systems. These requirements generally are not satisfied by the majority of the
base of currently installed PCs. There can be no assurance that adequately
equipped and configured computers will become widespread prior to release of the
Company's Multipath Movies. Users of computers with less sophisticated PCs may
experience noticeable latencies or "lag times" between scene changes.
Additionally, the performance characteristics of Multipath Movies delivered via
the Internet may not equal those of Multipath Movies delivered solely on
CD-ROMs, particularly with respect to perceived seamlessness and sound quality.
Moreover, communications between 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.
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 shipment except for sales made to
certain distributors where the right of ownership does not pass at delivery.
Product
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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.
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 three 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 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.
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
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to continue. The Company's failure to manage implementation of its business plan
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, and from time to time
engages in discussions relating to possible acquisitions. Acquisitions involve
numerous risks, including adverse short-term effects on the combined business'
reported operating results, impairments of goodwill and other intangible assets,
the diversion of management's attention, the dependence on retention, hiring and
training of key personnel, the amortization of intangible assets and risks
associated with unanticipated problems or legal liabilities.
Rapid Technological Change; Changing Product Platforms and Formats. The
entertainment software market and the PC industry in general are characterized
by rapid and significant technological developments and frequent changes in
computer operating environments. To compete successfully in these markets, the
Company must continually improve and enhance its existing products and
technologies and develop new products and technologies that incorporate
technological advances while remaining competitive in terms of performance and
price. The Company's success also will depend substantially upon its ability to
anticipate the emergence of, and to adapt its products to, popular platforms for
consumer software.
The Company has designed its Multipath Movies for use with the
IBM-compatible PC. The Company intends to design future products for use with
new platforms which will require substantial investments in research and
development. Generally, such research and development efforts must occur one to
two years in advance of the widespread release or use of the platforms in order
to introduce products on a timely basis following the release of such platforms.
The research and development efforts in connection with games for certain
advanced and emerging platforms may require greater financial and technical
resources than currently possessed by the Company. In addition, there can be no
assurance that the new platforms for which the Company develops products will
achieve market acceptance and, as a result, there can be no assurance that the
Company's development efforts with respect to such new platforms will lead to
marketable products or products that generate sufficient revenues to offset the
research and development costs incurred in connection with their development.
Failure to develop products for new platforms that achieve significant market
acceptance would have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that
technological developments will not render certain of the Company's existing
products obsolete, that the Company will be able to adapt its products or
technologies to emerging hardware platforms, that the Company has chosen to
support platforms that ultimately will be successful or that the Company will be
able successfully to create software titles for such platforms in a timely
manner, or at all. See " - Software Tools and Product Development."
Dependence on Key Personnel. The Company's success has and will
continue to depend to a significant extent upon certain key management, product
development and technical personnel, many of whom would be difficult to replace,
particularly Mark Dyne, its Chairman and Chief Executive Officer, and Kevin
Bermeister, its President. Although the Company has entered into employment
agreements with certain officers, such agreements are terminable upon 30 days
notice by either party. Accordingly, there can be no assurance that such
employees will continue to be available to the Company. The loss of the services
of one or more of these key employees could have a material adverse effect on
the Company and the Company's future success will depend in large part upon its
ability to attract, retain and motivate personnel with a variety of technical
and managerial skills, including software development and programming expertise.
Significant competition exists for such personnel and the companies with which
the Company competes are often larger and more established than the Company.
Additionally, there is currently an industry-wide shortage of technical
personnel which makes it more difficult to attract and retain such personnel.
There can be no assurance that the Company will be able to retain and motivate
its managerial and technical personnel or attract additional qualified members
to management or technical staff. The inability to attract and retain necessary
technical and managerial personnel could have a material and adverse effect upon
the Company's business, operating results and financial condition.
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 Pty. Limited ("Sega Ozisoft") and other
businesses. Mark Dyne also serves as
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Chairman of the Board of Tag-It Pacific, Inc. Kevin Bermeister also serves as
managing director of Sega Enterprises (Australia) Pty., Ltd. 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 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.
Volatility of Stock Price. The Company's Common Stock is traded on the
American Stock Exchange, and there has been substantial volatility in the market
price of the Common Stock. The trading price of the Common Stock has been and is
likely to continue to be subject to significant fluctuations in response to
variations in quarterly operating
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results, the gain or loss of significant contracts, changes in management,
announcements of technological innovations or new products by the Company or its
competitors, legislative or regulatory changes, general trends in the industry,
recommendations by securities industry analysts and other events or factors. In
addition, the stock market has experienced extreme price and trading volume
fluctuations which have affected the market price of the common stock of many
technology companies in particular and which have at times been unrelated to
operating performance of the specific companies whose stock is affected. In
addition, in the past the Company has not experienced significant trading volume
in its Common Stock, has not been actively followed by stock market analysts and
has had limited market-making support from broker-dealers. If market-making
support does not continue at present or greater levels and/or the Company does
not continue to receive analyst coverage, the average trading volume in the
Common Stock may not increase or even sustain its current levels, in which case,
there can be no assurance that an adequate trading market will exist to sell
large positions in the Common Stock.
Control by Existing Stockholders. As of December 31, 1997, the
Company's officers and directors and Sega Ozisoft, of which Messrs. Dyne and
Bermeister are directors and stockholders, owned approximately 30.6% of the
Company's outstanding shares. As a result, these stockholders are able to
control the Company and its operations, including the election of at least a
majority of the Company's Board of Directors and thus, the policies of the
Company. The voting power of these stockholders could also discourage potential
acquirors from seeking to acquire control of the Company through the purchase of
the Common Stock, which might have a depressive effect on the price of the
Common Stock.
Effect of Certain Charter Provisions; Stockholder's Rights Plan;
Anti-Takeover Effects of Certificate of Incorporation, Bylaws and Delaware Law.
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those of
the Common Stock. In March 1998, the Company adopted a stockholder's rights plan
(the "Rights Agreement") and, in connection therewith, will distribute one
preferred share purchase right for each outstanding share of the Company's
Common Stock outstanding on April 2, 1998. Pursuant to the Rights Agreement,
upon the occurrence of certain triggering events related to an unsolicited
takeover attempt of the Company, each purchase right not owned by certain
hostile acquirors will entitle its holder to purchase shares of the Company's
Series A Preferred Stock, which is convertible into Common Stock, at a value
below the then current market value of the preferred stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the share purchase rights and of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. Further, certain provisions of the Company's Certificate of
Incorporation and Bylaws and of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving the Company.
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<PAGE> 32
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT, INC.
Report of Independent Accountants .......................................................................... 33
Consolidated Balance Sheet as of December 31, 1997 ......................................................... 34
Consolidated Statements of Operations for the year ended June 30, 1996, for the six months ended
December 31, 1995 (unaudited) and December 31, 1996, and for the years ended December 31,
1996 (unaudited) and December 31, 1997 .................................................................. 35
Consolidated Statements of Stockholders' Equity (Deficiency) for the year ended June 30, 1996,
the six months ended December 31, 1996, and the year ended December 31 ,1997 ............................ 36
Consolidated Statements of Cash Flows for the year ended June 30, 1996, for the
six months ended December 31, 1995 (unaudited) and December 31, 1996, and for
the years ended December 31, 1996 (unaudited) and December 31,
1997 .................................................................................................... 37
Notes to Consolidated Financial Statements ................................................................. 39
</TABLE>
32
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brilliant Digital Entertainment, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations and stockholders' equity
(deficiency) and of cash flows present fairly, in all material respects, the
financial position of Brilliant Digital Entertainment, Inc. (the "Company") and
its subsidiary at December 31, 1997, and the results of their operations and
their cash flows for the year in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. The financial statements of Brilliant Digital Entertainment, Inc. for the
six months ended December 31, 1996 and the year ended June 30, 1996 were audited
by other independent accountants whose report dated March 24, 1997 expressed an
unqualified opinion on those statements.
Price Waterhouse LLP
March 18, 1998
Los Angeles, California
33
<PAGE> 34
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 12,338
Accounts receivable.................................................. 2,088
Other assets......................................................... 296
-----------
Total current assets...................................................... 14,722
Property, plant and equipment, net........................................ 633
Movie software costs...................................................... 1,136
Other assets, net......................................................... 352
-----------
Total assets.............................................................. $ 16,843
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 179
Accrued expenses..................................................... 1,842
-----------
Total current liabilities................................................. 2,021
Commitments and contingencies
Stockholders equity:
Preferred Stock ($0.001 par value; 1,000,000 shares
authorized; no shares issued or outstanding)...................... --
Common Stock ($0.001 par value; 30,000,000 shares
authorized; 9,403,001 shares issued and outstanding.............. 9
Additional paid-in capital........................................... 21,268
Accumulated deficit.................................................. (6,260)
Cumulative translation adjustment.................................... (195)
-----------
Total stockholders' equity................................................ 14,822
-----------
Total liabilities and stockholders' equity................................ $ 16,843
===========
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 35
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
------------------------ -------------------
1996 1995 1996 1996 1997
---------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Revenues:
<S> <C> <C> <C> <C> <C>
Software sales ..................... $ 1,468 $ 877 $ 96 $ 682 $ 2,246
Development fees ................... 586 307 254 531 235
------- ------- ------- ------- -------
Total revenues ................ 2,054 1,184 350 1,213 2,481
Cost of revenues:
Software sales ..................... 284 195 21 77 44
Development fees ................... 455 239 165 381 --
------- ------- ------- ------- -------
Total cost of revenues ........ 739 434 186 458 44
------- ------- ------- ------- -------
Gross profit .......................... 1,315 750 164 755 2,437
Operating expenses:
Sales and marketing ................ 163 35 970 1,101 1,090
General and administrative ......... 366 129 1,065 1,268 2,217
Research and development ........... 174 103 1,877 1,996 1,709
Depreciation ....................... 102 46 74 130 214
------- ------- ------- ------- -------
Total operating expenses ...... 805 313 3,986 4,495 5,230
------- ------- ------- ------- -------
Income (loss) from operations ......... 510 437 (3,822) (3,740) (2,793)
Other income (expense):
Export market development grant .... 122 -- -- 126 148
Gain (loss) on foreign exchange
transactions ................... 14 17 -- (5) 27
Interest income .................... 2 -- 41 43 313
Interest expense ................... (95) (64) (54) (84) --
------- ------- ------- ------- -------
Total other income (expense) .. 43 (47) (13) 80 488
------- ------- ------- ------- -------
Income (loss) before income taxes ..... 553 390 (3,835) (3,660) (2,305)
Provision for income taxes ............ -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) ..................... $ 553 $ 390 $(3,835) $(3,660) $(2,305)
======= ======= ======= ======= =======
Basic and diluted net income (loss) per
share ............................ $ 0.12 $ 0.09 $ (0.79) $ (0.78) $ (0.31)
======= ======= ======= ======= =======
Weighted average number of shares
used in computing basic and diluted
net income (loss) per share ........ 4,473 4,473 4,883 4,678 7,384
======= ======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 36
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------ ADDITIONAL EARNINGS CUMULATIVE
NO. OF PAID-IN (ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT TOTAL
---------- ------ ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 ........... 4,473,040 4 10 (673) 12 (647)
Repurchase of shares ........... (44,200) -- -- -- -- --
Cancellation of shares ......... (8,840) -- -- -- -- --
Foreign exchange translation ... -- -- -- -- (36) (36)
Net income ..................... -- -- -- 553 -- 553
---------- ----- ------ ------ ---- -------
Balance at June 30, 1996 ........... 4,420,000 4 10 (120) (24) (130)
Grant of warrants .............. -- -- 1,096 -- -- 1,096
Initial public offering, net of
expenses of $1,468 ......... 2,000,000 2 8,530 -- -- 8,532
Conversion of SAND note ........ 780,001 1 1,499 -- -- 1,500
Grant of stock options ......... -- -- 185 -- -- 185
Foreign exchange translation ... -- -- -- -- (3) (3)
Net loss ....................... -- -- -- (3,835) -- (3,835)
---------- ----- ------ ------ ---- -------
Balance at December 31, 1996 ....... 7,200,001 7 11,320 (3,955) (27) 7,345
Grant of warrants .............. -- -- 140 -- -- 140
Grant of stock options ......... -- -- 12 -- -- 12
Exercise of stock options ...... 3,000 -- -- -- -- --
Public offering, net of expenses
of $1,202 .................. 2,200,000 2 9,796 -- -- 9,798
Foreign exchange translation ... -- -- -- -- (168) (168)
Net loss ....................... -- -- -- (2,305) -- (2,305)
---------- ----- ------ ------ ---- -------
Balance at December 31, 1997 ....... 9,403,001 9 21,268 (6,260) (195) 14,822
========== ===== ====== ====== ==== =======
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 37
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------
1996 1995 1996 1996 1997
---------- ---------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) ........................ $ 553 $ 390 $(3,835) $(3,660) $ (2,305)
Adjustments to reconcile net income (loss)
to the net cash provided by (used in)
operating activities:
Depreciation and amortization ....... 102 46 74 150 473
Effect of warrants granted .......... -- -- 1,096 1,096 140
Effect of stock options granted ..... -- -- 125 123 12
Effect of SAND Note ................. -- -- 1,350 1,350 --
Changes in operating assets and
liabilities:
Accounts receivable ............... (633) (869) 551 807 (1,986)
Movie software costs .............. -- -- -- -- (1,284)
Other assets ...................... -- -- (371) (391) (478)
Accounts payable and accruals ..... 40 7 791 823 1,225
Deferred revenue .................. -- -- (50) (49) (154)
----- ----- ------- ------- --------
Net cash provided by (used in) operating
activities ............................ 62 (426) (269) 249 (4,357)
INVESTING ACTIVITIES
Purchases of equipment ................... (110) (72) (69) (104) (599)
----- ----- ------- ------- --------
Net cash used in investing activities .... (110) (72) (69) (104) (599)
FINANCING ACTIVITIES
Proceeds from issuance of shares ......... -- -- 8,532 8,532 9,798
Increase in amounts payable to related
parties ............................... 711 702 491 780 --
Repayments of amounts payable to related
parties ............................... (672) (169) (1,145) (1,943) (78)
----- ----- ------- ------- --------
Net cash provided by financing activities 39 533 7,878 7,369 9,720
----- ----- ------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ...................... (9) 35 7,540 7,514 4,764
Translation adjustments .................. 13 2 (2) (9) (17)
Cash and cash equivalents at beginning
of period ............................. 49 49 53 86 7,591
----- ----- ------- ------- --------
Cash and cash equivalents at end of
period ................................ $ 53 $ 86 $ 7,591 $ 7,591 $ 12,338
===== ===== ======= ======= ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest ............................ $-- $-- $ 204 $ 204 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE> 38
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
In September 1996, the Company acquired SAND and in consideration
therefore issued a one-year $1,500,000 convertible promissory note. (See Note 3
of the Notes to Consolidated Financial Statements.) The purchase price was
allocated to in-process research and development ($1,350,000), which amount was
included in operating expenses for the six months ended December 31, 1996, and
to certain assets ($150,000), which amount was included in other assets at
December 31, 1996.
During the six months ended December 31, 1996, the Company recorded
$60,000 of stock option deferred compensation, which was included in other
assets at December 31, 1996 (see Note 5 of the Notes to Consolidated Financial
Statements).
38
<PAGE> 39
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Brilliant Digital Entertainment, Inc. ("Brilliant" or the "Company") is
a production and development studio producing digital entertainment for
distribution over the Internet and on CD-ROM. In July 1996, the Company
incorporated in the State of Delaware and, in August 1996, issued an aggregate
of 1,000,000 shares of its Common Stock in exchange for all of the capital stock
of Brilliant Interactive Ideas, Pty. Ltd., a company incorporated in the State
of New South Wales, Australia ("BII Australia") (the "Exchange"). Historically,
BII Australia developed, produced and marketed interactive multimedia titles for
the education and entertainment markets. The Company operates, and BII Australia
operated, principally in the computer software industry. BII Australia operated
predominantly in Australia with significant exports to the United States.
On September 13, 1996, the Company effected a 4.42 for 1 stock split
(the "Stock Split") resulting in a 3,420,000 increase in the number of shares of
Common Stock outstanding.
These financial statements have been restated to give retroactive
effect to the Exchange, the subsequent consolidation of the Company and BII
Australia, and the Stock Split.
In September 1996 the Company completed its acquisition of Sega
Australia New Development ("SAND") (see Note 3), which owns the rights to
proprietary software tools which are designed to allow the Company to both
develop a new genre of digital entertainment products, and to produce ancillary
products cost effectively. The results of operations of SAND are included in the
Company's consolidated financial statements from the date of acquisition.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of Brilliant and its wholly owned subsidiary. All significant
inter-company balances and transactions have been eliminated.
Fiscal Year
The Company changed its fiscal year-end from June 30 to December 31,
effective December 31, 1996.
Revenue Recognition
The Company recognizes software revenue in accordance with
AICPA Statement of Position ("SOP") 91-1, "Software Revenue Recognition". The
Accounting Standards Executive Committee issued SOP 97-2, "Software Revenue
Recognition" in October 1997 effective for transactions entered into in fiscal
periods beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 and
provides revised and expanded guidance on when revenue should be recognized and
in what amounts for licensing, selling, leasing, or otherwise marketing computer
software. The Company adopted SOP 97-2 in the first quarter of 1998. The
adoption of SOP 97-2 may materially affect the period in which revenues from
distribution contracts are recognized in the future, however, the potential
future impact cannot currently be determined .
Software Sales: The Company grants distribution rights to its CD-ROM
products to distributors in exchange for a non-refundable minimum fixed fee and
a percentage of sales of the products. Revenue related to the non-refundable
minimum fixed fee is recognized when the CD-ROM master is delivered to the
customer. Revenue related to a percentage of sales is recognized upon
notification by the distributor that a royalty has been earned by the Company.
39
<PAGE> 40
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Software sales resulting from the Company selling completed software
products are recognized upon shipment of product.
It is the Company's policy to provide for estimated returns at the time
software sales revenue is recognized. For the year ended June 30, 1996, the six
months ended December 31, 1996, and the year ended December 31, 1997, the
Company had experienced no returns on software sales.
Development Fees: In exchange for the development of CD-ROM products
pursuant to an agreement with a software customer, the Company receives
development fees. The software development agreements generally specify certain
"milestones" which must be achieved throughout the development process. As these
milestones are achieved, the Company recognizes the portion of the development
fee allocated to each milestone.
Cost of Revenues
Cost of revenues related to software sales consists primarily of
royalties to third parties and the direct costs and production overhead required
to reproduce and package software products. 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.
Research and Development Costs
The Company incurs research and development costs relating to the
development of traditional CD-ROM software tools which provide the technical
infrastructure for production of CD-ROM titles produced by the Company. The
Company incurred research and development costs of $174,000, $1,877,000, and
$1,709,000 for the fiscal year ended June 30, 1996, the six months ended
December 31, 1996, and the year ended December 31, 1997, respectively. The
amount for the six months ended December 31, 1996 includes $1,350,000 of
in-process research and development, which was expensed in accounting for the
SAND acquisition (see Note 3).
Movie Software Costs
Movie software costs include costs of development and production
including labor, material and production overhead.
The Company's current accounting policy follows Statement of Financial
Accounting Standards No. 86 ("SFAS No. 86"), which provides for the
capitalization of software development costs once technological feasibility is
established. The capitalized costs are then amortized beginning on the date the
product is made available for sale either 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. It is reasonably possible that the estimates of anticipated future
gross revenues, the remaining estimated economic life of the product, or both
will be reduced significantly in the near term due to the failure of the
Company's new product to achieve commercial success. As a result, the carrying
amount of the capitalized movie software costs and licensing advances included
in other assets may be materially reduced in the short term.
Prior to reaching technological feasibility, the Company 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. As of December 31, 1997 no amounts of these capitalized
development costs had been amortized.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when acquired to be cash equivalents.
40
<PAGE> 41
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated useful
lives ranging up to four years.
Income Taxes
The Company uses the asset and liability method to account for income
taxes as required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rules and laws that will be in effect when the differences are expected to
reverse.
Foreign Currency Translation
The functional currency of BII Australia is its local currency,
Australian dollars. Assets and liabilities of BII Australia are translated into
U.S. dollars (the reporting currency) using current exchange rates ($0.652 at
December 31, 1997), and revenues and expenses are translated into U.S. dollars
using average exchange rates ($0.760 for the year ended June 30, 1996, $0.792
for the six months ended December 31, 1996, $0.742 for the year ended December
31, 1997). The effects of foreign currency translation adjustments are deferred
and included as a component of stockholders' equity.
Foreign currency transaction gains and losses are a result of the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currency. Foreign currency transaction gains (losses) are
included in the statements of operations.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding. Common equivalent shares from
stock options and warrants (using the treasury stock method) have been included
in the computation when dilutive.
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, presentation, and disclosure requirements 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. Options and warrants representing common shares of 910,000 and
1,223,000 were excluded from the average number of common and common equivalent
shares outstanding in the diluted EPS calculation for the six months ended
December 31, 1996 and the year ended December 31, 1997, respectively, because
they were anti-dilutive. The Company has adopted SFAS No. 128 for the year ended
December 31, 1997 and has restated prior periods presented to conform to SFAS No
128.
Stock Options
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") which defines a fair-value-based
method of accounting for employee stock options or similar equity instruments.
This statement gives entities a choice to recognize related compensation expense
by adopting the new fair-value method or to measure compensation using the
intrinsic value method under Accounting Principles Board (APB) Opinion No. 25,
the former standard. If the former standard for measurement is elected, SFAS No.
123 requires supplemental disclosure to show the effect of using the new
measurement criteria. The Company has used the intrinsic value method prescribed
by APB Opinion No. 25. See Note 5 for supplemental disclosure.
41
<PAGE> 42
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, short-term investments
and accounts receivable. The Company has investment policies that limit
investments to short-term investment grade securities. Accounts receivable are
principally from distributors and retailers of the Company's products. The
Company performs credit evaluations and generally does not require collateral.
At December 31, 1997, 95% of the Company's accounts receivable arose from a
non-exclusive CD-ROM distribution agreement with one customer, Packard Bell NEC.
The Company analyzes customer receivables to determine the necessity of
an allowance for doubtful accounts. For the year ended December 31, 1997, no
such allowance was considered necessary.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. ACQUISITION OF SAND
In September 1996, the Company and Sega Ozisoft entered into an Asset
Purchase Agreement (the "SAND Acquisition Agreement") to acquire SAND, a
division of Sega Ozisoft. Pursuant to the SAND Acquisition Agreement, the
Company acquired SAND and in consideration therefor issued a $1,500,000
convertible promissory note which, upon the completion of the Company's initial
public offering of Common Stock was automatically converted into 780,001 shares
of Common Stock of the Company. The acquisition was accounted for using the
purchase method.
SAND was created to develop state-of-the-art technology for
interactive, digital, Multipath Movies. SAND was in the development stage,
devoting substantially all of its efforts to research and development. During
its development stage, SAND incurred significant costs to develop proprietary
software tools to be used in the creation and development of a new genre of
interactive digital entertainment called "Multipath Movies." (Through the date
of the SAND Acquisition, SAND had incurred research and development expenses of
approximately $1,563,000.)
The SAND Acquisition Agreement also provides that the Company shall pay
to Sega Ozisoft a royalty of 12.5% of "Adjusted Gross Receipts" on the
Cyberswine Multipath Movie. Adjusted Gross Receipts is gross receipts received
by the Company on the Cyberswine Multipath Movie after deducting any royalties
and fees payable to Cyberswine licensors. Pursuant to an agreement between Sega
Ozisoft and the licensor of the characters and content of Cyberswine, the
Company will be required to pay to the Cyberswine licensor a royalty of 2% of
gross revenues less cost of goods on all sales of Cyberswine products.
Pursuant to the SAND Acquisition Agreement, Sega Ozisoft agreed to fund
certain development expenses of the Company prior to the closing of the
Offering; and the Company agreed to reimburse Sega Ozisoft from the proceeds of
the Offering for all expenses advanced by Sega Ozisoft for any period after
October 31, 1996, and all expenses in excess of $59,000 per month advanced by
Sega Ozisoft for August, September and October 1996. As of December 31, 1996,
the Company had incurred a total obligation of $84,000 pursuant to this
agreement which amount is included in amounts payable to related parties at
December 31, 1996. During the year ended December 31, 1997 the Company repaid
all amounts due to Sega Ozisoft.
42
<PAGE> 43
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The following summarized, unaudited pro forma results of operations for
the year ended June 30, 1996 assume the SAND acquisition occurred as of the
beginning of the period, after giving effect to the conversion of the SAND Note
into 780,001 shares of common stock. Because SAND assets were charged to expense
on the date of acquisition, there is no material pro forma effect for the six
months ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1996
-------------
(unaudited)
<S> <C>
Revenues......................................... $1,881,000
Net loss......................................... $(797,000)
Net loss per share............................... $ (0.15)
</TABLE>
4. RELATED PARTY TRANSACTIONS
Pacific Interactive Education Pty. Ltd. ("PIE") entered into an oral
agreement with BII Australia whereby Mark Miller, a shareholder and director of
PIE and a director of BII Australia, provides consulting services to BII
Australia. Pursuant to the oral agreement, PIE was paid $69,000, $18,000 and $0
for the fiscal year ended June 30, 1996, the six months ended December 31, 1996,
and the year ended December 31, 1997, respectively, for such services.
Since March 1994, PIE has made periodic cash advances to BII Australia
for working capital purposes. On October 24, 1994, PIE and BII Australia entered
into a formal loan agreement to reflect the parties' lending relationship. The
maximum amount BII Australia could borrow from PIE pursuant to the loan
agreement was $631,000. The interest rate of the note was 12.5% and the note
plus accrued interest was due and payable on December 31, 1994. By written
agreement (the "Note Extension") dated September 13, 1996, the maturity of the
note was extended until the earlier to occur of the Company's initial public
offering of Common Stock or December 31, 1996. Pursuant to the Note Extension,
PIE and BII Australia increased the maximum amount BII Australia could borrow
under the loan agreement to $710,000. In December 1996, BII Australia repaid PIE
in full for the balance outstanding ($733,000, including accrued interest of
$199,000).
BII Australia periodically purchases certain computer equipment from
PIE. For the fiscal year ended June 30, 1996, the six months ended December 31,
1996, and the year ended December 31, 1997, BII Australia's purchases totaled
$16,000, $8,000 and $0, respectively.
Mark Miller is a shareholder of Multimedia Connexion Pty. Ltd. BII
Australia periodically purchases hardware and software from Multimedia Connexion
Pty. Ltd. For the fiscal year ended June 30, 1996, and the year ended December
31, 1997, BII Australia purchased computer equipment totaling $16,000, and
$121,000, respectively. No purchases were made during the six months ended
December 31, 1996.
Peter Dodds was a shareholder of BII Australia from inception to May
10, 1996. Mr. Dodds is also a shareholder of Andwhen Pty. Limited ("Andwhen").
Mr. Dodds provided consulting services to BII Australia in 1996. In exchange for
such services, fees of $51,000 were paid to Andwhen for the fiscal year ended
June 30, 1996. No consulting fees were paid during the six months ended December
31, 1996 or the year ended December 31, 1997.
Certain equipment owned by Andwhen was leased to BII Australia pursuant
to an agreement dated March 1, 1994. On May 10, 1996, the agreement was
terminated. As a result, the equipment was transferred to BII Australia and BII
Australia agreed to pay to Andwhen a total amount of approximately $87,000 for
the purchase of such equipment. Of this amount, $20,000 was paid upon
termination of the agreement. The balance was due in equal monthly installments
of approximately $4,500 each. The balance was paid in full in December 1996.
In December 1994, BII Australia entered into a Software License
Agreement (the "Sega Agreement") with Sega Ozisoft Pty. Ltd. ("Sega Ozisoft").
Mark Dyne and Kevin Bermeister are directors and shareholders of Sega Ozisoft
and directors and stockholders of the Company. Pursuant to the terms of
43
<PAGE> 44
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
the Sega Agreement, Sega Ozisoft became the exclusive distributor in Australia
and New Zealand of certain CD-ROM products developed by BII Australia. Pursuant
to the terms of the Sega Agreement, BII Australia received non-refundable
advances totaling $71,000 from Sega Ozisoft in the fiscal year ended June 30,
1995. In addition, BII Australia was entitled to receive royalty payments of
$6.31 per net unit sold. Such royalty was reducible to $4.73 per net unit sold
after 2,000 units had been sold of each title. The non-refundable advances were
recoupable from the royalties earned by BII Australia under the Sega Agreement.
As of December 31, 1996, BII Australia had received no royalty payments relating
to the Sega Agreement. The Sega Agreement expired on December 15, 1996.
In November 1995, BII Australia entered into a Distribution Agreement
(the "Consumer Electronics Agreement") with Consumer Electronics Pty. Ltd.
("Consumer Electronics"). Mark Dyne and Kevin Bermeister are both directors and
shareholders of Consumer Electronics. BII Australia developed, pursuant to the
Consumer Electronics Agreement, several CD-ROM products to be distributed by
Consumer Electronics in South Africa and neighboring territories. In addition,
BII Australia granted to Consumer Electronics certain bundling rights to the
CD-ROM products in the same territories. Pursuant to the Consumer Electronics
Agreement, BII Australia was entitled to receive a non-refundable advance of
$85,000, of which $21,000 was paid in the fiscal year ended June 30, 1996. In
September 1996, the Company agreed to reduce the remaining advance by 25% in
exchange for an immediate payment of the balance due. On October 15, 1996, the
Company received $48,000 representing the full amount due pursuant to the
re-negotiated terms. The Company anticipates no further receipts pursuant to the
Consumer Electronics Agreement, which expired on December 6, 1996.
Kevin Bermeister and Mark Dyne are both directors and shareholders of
Packard Bell Pty. Ltd. Between February 1994 and June 30, 1996, BII Australia
purchased an aggregate of approximately $38,000 in goods from Packard Bell Pty.
Ltd. During the six months ended December 31, 1996, and the year ended December
31, 1997, BII Australia purchased an additional $9,000 and $7,000, respectively,
in goods from Packard Bell Pty. Ltd.
In January 1996, BII Australia entered into a Multimedia Software
Development and Production agreement (the "Development Agreement") with Sega
Ozisoft for Cyberswine. Pursuant to the terms of the Development Agreement, BII
Australia was entitled to receive payment for certain assistant production
services. Amounts were payable by Sega Ozisoft upon attainment of mutually
determined milestones. In September 1996, the Company entered into the SAND
Acquisition Agreement (see Note 3) which provided for additional payments for
production services, and which superseded the Development Agreement. As of June
30, 1996, the Company had received $120,000 and had recorded a receivable of
$52,000, which was received in July and August 1996. For the six months ended
December 31, 1996 the Company billed an additional $92,000, of which $29,000 was
receivable at December 31, 1996, and was collected during the year ended
December 31, 1997.
Mark Dyne is a director of Monto Holdings Pty. Ltd. ("Monto"). Monto
entered into a multimedia production agreement with BII Australia dated March
14, 1995 whereby Monto paid BII Australia $180,000 to be used to develop a
series of two CD-ROM interactive magazine programs based on a television series.
BII Australia has arranged for publication and distribution of the completed
software packages and is obligated to pay to Monto 50% of the net receipts from
the sale of the software packages. As of June 30, 1996, net receipts under the
agreement totaled approximately $25,000 and payments to Monto totaled $12,000.
In addition, a liability to Monto for $7,000 was recorded at June 30, 1996. In
the six months ended December 31, 1996, no additional receipts or payments were
made pursuant to this agreement. During the year ended December 31, 1997, the
liability to Monto was reduced to $4,000.
Diana Maranon is a director of the Company. Averil Associates, Inc.
("Averil Associates"), a financial advisory firm founded and controlled by Ms.
Maranon, has, since November 1995, performed services for the Company including
investigation of strategic alternatives and assistance with the Company's common
stock offerings. As consideration for such services, the Company paid to Averil
Associates $25,000 as of June 30, 1996, $200,000 during the six months ended
December 31, 1996, and $22,000 for the year ended December 31, 1997, plus out of
pocket expenses, and granted to Chloe Holding, Inc. ("Chloe"), an affiliate of
Averil Associates, currently exercisable warrants to purchase 40,222 shares of
Common Stock with an exercise price of $0.0326 per share. In connection with the
Company's December 1997 offering of Common Stock, the Company made a cash
payment to Averil Associates of $180,000 and granted to Chloe warrants to
purchase 15,040 shares of Common Stock at an exercise price of 110% of the
offering price.
Between September and November 1996, the Company executed three
promissory notes in favor of Reefknot, a
44
<PAGE> 45
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
shareholder of the Company, in the principal amounts of $150,000, $50,000 and
$145,000. The notes bore interest at the rate of 10% per annum. In December
1996, the Company repaid Reefknot in full the balance outstanding of $350,000
including accrued interest of $5,000.
Gary Barber is a director of the Company and a shareholder of Morgan
Creek Productions, Inc. From May 1989 until July 1997, Mr. Barber was employed
by Morgan Creek Productions, Inc. From January 1995 until July 1997, he was Vice
Chairman and Chief Operating Officer of Morgan Creek Productions, Inc. In
September 1996, the Company entered into a strategic relationship with Morgan
Creek Interactive, Inc. ("Morgan Creek"), an affiliate of Morgan Creek
Productions, Inc., to provide creative product for the Company's Multipath
Movies. Pursuant to the agreement between the Company and Morgan Creek, the
Company is obligated to fund entirely the development of two Multipath Movies.
The first project commenced under this agreement is a thirteen episode comedy
adventure series featuring the Ace Ventura character.
5. STOCKHOLDERS' EQUITY
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters on which the holders of Common Stock are entitled
to vote. The holders of Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled subject to the rights of holders of
Preferred Stock issued by the Company, if any, to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision is made for each class of stock, if any, having preference over
the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and
they are not subject to further calls or assessments by the Company. There are
no redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock,
par value $0.001 per share. As of December 31, 1997 no shares were issued or
outstanding. The Board of Directors has the authority to issue the authorized
and unissued Preferred Stock in one or more series with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock.
Warrants
During September 1996 the Company entered into two strategic agreements
with terms that provided for the issuance of warrants to purchase a total of
685,000 shares of the Company's Common Stock. Warrants to purchase 600,000
shares of Common Stock are exercisable at $5.00, the initial public offering
price of the Company's Common Stock. Additionally, 35,000 and 50,000 of the
warrants are exercisable at $4.00 and $5.20, respectively. The warrants expire
in September 1999. The value of the warrants is calculated to be $1,096,000
which has been recorded as an expense charge to operations with a corresponding
credit to stockholders' equity in the six months ended December 31, 1996.
In September 1997, the Company issued warrants to purchase 200,000
shares of the Company's Common Stock, exercisable at $10.00, in connection with
a distribution agreement. The warrants expire in February 1999. The value of the
warrants is calculated to be $140,000 which has been recorded as an expense
charge to operations with a corresponding credit to stockholders' equity.
1996 Stock Option Plan
45
<PAGE> 46
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The Company adopted a Stock Option Plan (the "1996 Plan") which became
effective on September 13, 1996. Each director, officer, employee or consultant
of the Company or any of its subsidiaries is eligible to be considered for the
grant of awards under the 1996 Plan. The maximum number of shares of Common
Stock that may be issued pursuant to awards granted under the 1996 Plan is
1,080,000, subject to certain adjustments to prevent dilution. Any shares of
Common Stock subject to an award which for any reason expires or terminates
unexercised are again available for issuance under the 1996 Plan. The maximum
number of shares of Common Stock with respect to which options or rights may be
granted under the 1996 Plan to any executive or other employee during any fiscal
year is 100,000, subject to certain adjustments to prevent dilution.
As of October 23, 1996, the Board had granted options covering an
aggregate of 185,000 shares of Common Stock to certain directors (125,000
shares) and employees (60,000 shares) of the Company, with an exercise price of
$10 per share. In November 1996, the exercise price of the options was repriced
to $4.00 per share. The directors options were granted effective as each
director joined the Board of Directors and were immediately fully vested. In
accordance with APB No. 25, the Company recognized compensation expense of
$125,000 in 1996 in connection with the granting of the directors' stock
options. The options granted to employees vest over a four year period. In
connection with these employee stock options, $0 and $15,000 was recognized as
compensation expense in the six months ended December 31, 1996 and the year
ended December 31,1997, respectively, and deferred compensation of $46,000 is
included in other assets at December 31, 1997. Although any award that was duly
granted may thereafter be exercised or settled in accordance with its terms, no
shares of Common Stock may be issued pursuant to any award made after September
13, 2006.
During 1997, the Company granted additional options covering 101,000
shares of Common Stock to certain employees of the Company with a weighted
average exercise price of $5.19 per share, and vesting over a 4 year period. In
connection with these employee stock options, compensation expense of $12,000
was recognized in 1997.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Number
of Shares Option Price
--------- ------------
<S> <C> <C>
Outstanding at June 30, 1996 .................... --
Granted ......................................... 185,000 $4.00
Exercised ....................................... --
- ------------------------------------------------- -------- -----------
Outstanding at December 31, 1996 ................ 185,000 $4.00
Granted ......................................... 101,000 $0.01-$6.38
Exercised ....................................... (3,000) $0.01
- ------------------------------------------------- -------- -----------
Outstanding at December 31, 1997 ................ 283,000 $4.00-$6.38
Exercisable at December 31, 1997 ............... 163,326 $4.00-$5.00
</TABLE>
As discussed in Note 2, the Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 requires the use of option valuation
models to provide supplemental information regarding options granted after 1994.
Pro forma information regarding net income and earnings per share shown below
was determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123.
The fair value of the options as examined at the date of grant is based
on a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1997, respectively: interest rates of 6.6% and 6.0%;
dividend yields of 0% for both years; volatility factors of the expected market
price of the Company's common stock of 38.8% and 45.0%; and expected life of the
options of 3 years for both years. These assumptions resulted in a weighted
average fair value of $2.80 and $2.03 per share for stock options granted in
1996 and 1997, respectively.
46
<PAGE> 47
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have not been traded. In addition, the assumptions used in option
valuation models are highly subjective, particularly the expected stock price
volatility of the underlying stock. Because changes in these subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net income for 1996 and 1997 is not representative of the pro forma effect on
net income in future years because it reflects expense for only one year's
vesting. Pro forma information in future years will reflect the amortization of
a larger number of stock options granted in succeeding years. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss, as reported................................... $(3,835,000) $(2,305,000)
Net loss, pro forma..................................... $(3,992,000) $(2,409,000)
Basic and diluted loss per share, as reported........... $ (0.79) $ (0.31)
Basic and diluted loss per share, pro forma............. $ (0.82) $ (0.33)
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
In 1995, Pick Two Limited ("Pick Two"), made a $193,000 non-refundable
advance to BII Australia to develop certain software. In 1996, Pick Two made an
additional $19,000 non-refundable advance to BII Australia. These advances were
non-interest bearing, and were to be repaid from proceeds from the sales of the
completed software. During the six months ended December 31, 1996, approximately
$48,000 of the advances were repaid out of proceeds received from the sale of
certain research materials. During the year ended December 31, 1997 the balance
of the advances were recognized as revenue.
In September 1996, the Company entered into a strategic relationship
with Crawford Productions Pty., Ltd. ("Crawford") to provide creative product
for the Company's Multipath Movies. Pursuant to the agreement between the
Company and Crawford, the Company is obligated to contribute up to one half of
the costs incurred to develop and produce each project selected by the parties,
if any, for development into Multipath Movie titles, which cost per film is
anticipated to be approximately $790,000. To date, no projects have been
identified for development by the parties.
At December 31, 1997, the Company was obligated under certain licensing
agreements to make minimum payments totalling $198,000 for use of certain
properties and characters in development of its products.
The Company leases its facilities under operating lease agreements
expiring through 2003. Future minimum payments as of December 31, 1997 under
these leases are as follows:
<TABLE>
<S> <C>
1998 $ 290,000
1999 310,000
2000 268,000
2001 122,000
2002 71,000
2003 6,000
=============
$ 1,067,000
=============
</TABLE>
Rent expense was $24,000, $18,000 and $166,000 for the year ended June 30, 1996,
the six months ended December 31, 1996 and the year ended December 31, 1997,
respectively.
47
<PAGE> 48
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
7. INCOME TAXES
The Company has adopted the asset and liability method of accounting
for income taxes. Income tax expense shown in the statements of operations is
calculated on the operating profit before tax, adjusted for items which, due to
treatment under income tax legislation, create permanent differences between
accounting profit and taxable income. Deferred income taxes under FAS No. 109
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
The Company's net income for fiscal year ended June 30, 1996 is related
to the Australian operations of BII Australia. As a result, no provision was
made for United States federal income taxes. Due to BII Australia's net losses
for 1994 and 1995, net operating loss carry forwards ("NOL's") were generated
for Australian tax purposes. A portion of these Australian NOL's were offset
against BII Australia's taxable income for fiscal year ended June 30, 1996. At
June 30, 1996 BII Australia had NOL's remaining of approximately $160,000, which
increased to approximately $743,000 at December 31, 1996 and decreased to
approximately $186,000 at December 31, 1997, and which are available for offset
against Australian taxable income in the future. These NOL's may be carried
forward indefinitely. During the six months ended December 31, 1996 and the year
ended December 31, 1997, the U.S. parent incurred tax losses resulting in an NOL
carry forwards of approximately $477,000 and $3,949,000, respectively. The
losses will begin to expire in the year 2011.
No tax benefit has been recorded for these NOL's.
The significant components of the net deferred tax assets and
liabilities recorded in the accompanying consolidated balance sheet as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
Deferred tax assets:
Acquired in-process research and development.......................... $ 450,000
Stock options......................................................... 56,000
Warrants issued....................................................... 494,000
Provisions............................................................ 143,000
Net operating loss carry forward...................................... 1,623,000
Other deferred tax assets............................................. 4,000
-------------
Total deferred tax assets............................................. 2,770,000
Valuation allowance................................................... 2,348,000
-------------
Net deferred tax assets.................................................. 422,000
Deferred tax liabilities:
Deferred movie software costs......................................... 422,000
=============
Net deferred tax assets (liabilities) ................................... --
=============
</TABLE>
48
<PAGE> 49
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The reconciliation of the effective income tax rate to the
Federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE SIX MONTHS ENDED YEAR ENDED
30, DECEMBER 31, DECEMBER 31,
1996 1996 1997
--------------- ---------------- ------------
<S> <C> <C> <C>
Federal income tax rate ........................... 34.0% 34.0% 34.0%
Foreign and U. S. tax effect attributable to
foreign operations ............................. 2.0 -- --
Effect of net operating loss and net operating loss
carry forward .................................. (36.0) (34.0) (34.0)
------- ------- -------
Effective income tax rate ......................... 0.0% 0.0% 0.0%
======= ======= =======
</TABLE>
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
<S> <C>
Computers and Equipment ..... $ 838,000
Leasehold Improvements ...... 152,000
Furniture and Fixtures ...... 90,000
-----------
1,080,000
Less accumulated depreciation (447,000)
-----------
$ 633,000
===========
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Employee compensation $ 670,000
Advertising .......... 445,000
Offering costs payable 321,000
Insurance ............ 153,000
Other ................ 253,000
----------
$1,842,000
==========
</TABLE>
49
<PAGE> 50
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
10. OTHER INCOME AND EXPENSE
Other income for the fiscal year ended June 30, 1996, and the year
ended December 31, 1997 include an export market development grant of $122,000,
and $148,000, respectively, from the Australian Trade Commission for
participating in certain export activities. Interest expense for the year ended
June 30, 1996 related to the note payable to PIE (see Note 4). Interest expense
for the six months ended December 31, 1996 included $49,000 related to PIE and
$5,000 related to Reefknot (see Note 4).
11. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company's operations for the year ended June 30, 1996 consisted
solely of the operations of BII Australia. The operations of BII Australia are
in Australia, with significant exports to the United States. In September 1997,
the Company recognized revenue under a distribution agreement with a significant
U.S. customer. The following schedule sets forth the revenues and accounts
receivable of the Company by geographic area:
<TABLE>
<CAPTION>
UNITED
STATES AUSTRALIA OTHER
---------- --------- --------
<S> <C> <C> <C>
Year ended June 30, 1996:
Revenues from unaffiliated customers $ 932,000 $258,000 $235,000
Revenues from affiliated customers . 316,000 264,000 49,000
---------- -------- --------
Total revenues ..................... $1,248,000 $522,000 $284,000
========== ======== ========
Six Months ended December 31, 1996:
Revenues from unaffiliated customers $ 68,000 $184,000 $ 8,000
Revenues from affiliated customers . -- 63,000 27,000
---------- -------- --------
Total revenues ..................... $ 68,000 $247,000 $ 35,000
========== ======== ========
Year ended December 31, 1997:
Revenues from unaffiliated customers $2,229,000 $196,000 $ 56,000
Revenues from affiliated customers . -- -- --
---------- -------- --------
Total revenues ..................... $2,229,000 $196,000 $ 56,000
========== ======== ========
Accounts Receivable as of:
December 31, 1997 ................. $2,088,000 -- --
========== ======== ========
</TABLE>
For each of the periods shown above, all of the operating expenses of
the Company were incurred and paid in Australia, with the exception of royalties
due to third parties incurred in 1997, and certain corporate expenses since
September 1996. The identifiable assets of the Company, other than accounts
receivable and corporate assets, are predominantly related to the operations in
Australia.
In the fiscal year ended June 30, 1996, three customers accounted for
more than 10% of total revenues (Packard Bell Electronics, Inc., 15% or
$316,000; Shortland Publications, 11% or $226,000; and Ocean of America, Inc.,
40% or $813,000). In the six months ended December 31, 1996, four customers
accounted for more than 10% of total revenues (Frontline Agency, 17% or $60,000;
Interplay Productions, Inc., 17% or $60,000; Sega Ozisoft, 18% or $62,000; and
Golden Dolphin Productions Pty. Ltd., 35% or $122,000). For the year ended
December 31, 1997, one customer accounted for more than 10% of total revenues
(Packard Bell NEC, 80% or $1,973,000).
50
<PAGE> 51
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
12. SUBSEQUENT EVENT
On March 20, 1998 the Company authorized the issuance of 513,500
options to employees pursuant to the 1996 Plan.
In March 1998, the Company adopted a stockholder's rights plan and, in
connection therewith, will distribute one preferred share purchase right for
each outstanding share of the Company's Common Stock outstanding on April 2,
1998. Upon the occurrence of certain events, each purchase right not owned by
certain hostile acquirors will entitle its holder to purchase shares of the
Company's Series A Preferred Stock, which is convertible into Common Stock, at a
value below the then current market value of the preferred stock. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of the share purchase rights and of any Preferred
Stock that may be issued in the future.
51
<PAGE> 52
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
Information regarding Directors and Executive Officers of Registrant
will appear in the proxy statement for the 1998 Annual Meeting of Stockholders,
and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear in the proxy
statement for the 1998 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management will appear in the proxy statement for the 1998 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions
will appear in the proxy statement for the 1998 Annual Meeting of Stockholders,
and is incorporated by this reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits:
See attached Exhibit List.
(b) Reports on Form 8-K.
Report on Form 8-K dated November 4, 1997 reporting under Item
5 thereof Registrant's press release dated October 24, 1997,
disclosing the Registrant's distribution agreement with
Packard Bell NEC.
52
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
/s/ Michael Ozen
--------------------------------------------
By: Michael Ozen
Its: Chief Financial Officer (Principal Financial
and Accounting Officer) and Secretary
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mark
Dyne and Michael Ozen, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-KSB and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mark Dyne Chief Executive Officer and Chairman March 27, 1998
- -------------------------------- of the Board of Directors
Mark Dyne
/s/ Kevin Bermeister President and Director March 27, 1998
- --------------------------------
Kevin Bermeister
/s/ Michael Ozen Chief Financial Officer (Principal Financial March 27, 1998
- -------------------------------- and Accounting Officer) and Secretary
Michael Ozen
/s/ Mark Miller Vice President, Operations and Production March 27, 1998
- -------------------------------- and Director
Mark Miller
/s/ Gary Barber Director March 27, 1998
- --------------------------------
Gary Barber
/s/ Diana Maranon Director March 27, 1998
- --------------------------------
Diana Maranon
/s/ Ray Musci Director March 27, 1998
- --------------------------------
Ray Musci
/s/ Garth Saloner Director March 27, 1998
- --------------------------------
Garth Saloner
/s/ Jeff Scheinrock Director March 27, 1998
- --------------------------------
Jeff Scheinrock
</TABLE>
53
<PAGE> 54
EXHIBIT INDEX
EXHIBIT
NUMBER
EXHIBIT DESCRIPTION
2.1 Exchange Agreement, dated August 20, 1996, by and among the
Registrant, Brilliant Interactive Ideas Pty. Ltd. ("BII
Australia"), Reefknot Limited and Pacific Interactive
Education Pty. Limited. Incorporated by reference to Exhibit
2.1 to Form S-1 filed on September 17, 1996, and the
amendments thereto.
2.2 Asset Purchase Agreement, dated September 12, 1996, by and
between the Registrant and Sega Ozisoft Pty. Ltd. Incorporated
by reference to Exhibit 2.2 to Form S-1 filed on September 17,
1996, and the amendments thereto.
3.1 Amended and Restated Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.1 to Form
S-1 filed on September 17, 1996, and the amendments thereto.
3.2 Amended and Restated Bylaws of Registrant. Incorporated by
reference to Exhibit 3.2 to Form S-1 filed on September 17,
1996, and the amendments thereto.
4.1 Specimen Stock Certificate of Common Stock of Registrant.
Incorporated by reference to Exhibit 4.1 to Form S-1 filed on
September 17, 1996, and the amendments thereto.
10.1 Registrant's 1996 Stock Option Plan. Incorporated by reference
to Exhibit 10.1 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory
Stock Option). Incorporated by reference to Exhibit 10.2 to
Form S-1 filed on September 17, 1996, and the amendments
thereto.
10.3 Form of Registrants's Stock Option Agreement (Incentive Stock
Option). Incorporated by reference to Exhibit 10.3 to Form S-1
filed on September 17, 1996, and the amendments thereto.
10.4 Distribution Agreement, dated November 22, 1995, by and
between BII Australia and Consumer Electronics Pty. Ltd.
Incorporated by reference to Exhibit 10.4 to Form S-1 filed on
September 17, 1996, and the amendments thereto. [Portions of
this Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.5 CD-ROM Distribution Agreement, dated September 14, 1996 by and
between the Registrant and Packard Bell NEC. Incorporated by
reference to Exhibit 10.5 to Form S-1 filed on September 17,
1996, and the amendments thereto. [Portions of this Exhibit
have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.6 Distribution Agreement, dated August 22, 1995, by and between
BII Australia and Packard Bell Electronics Inc. Incorporated
by reference to Exhibit 10.6 to Form S-1 filed on September
17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.7 Software License Agreement, dated May 2, 1995, by and between
BII Australia and Packard Bell Electronics Inc. Incorporated
by reference to Exhibit 10.7 to Form S-1 filed on September
17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.8 Agreement, dated February 18, 1996, by and between Golden
Dolphin Productions Pty. Ltd.
54
<PAGE> 55
EXHIBIT
NUMBER
EXHIBIT DESCRIPTION
and BII Australia. Incorporated by reference to Exhibit 10.8
to Form S-1 filed on September 17, 1996, and the amendments
thereto. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.]
10.9 Memorandum of Agreement, dated September 5, 1996, by and
between the Registrant and Bantam Doubleday Dell Books For
Young Readers. Incorporated by reference to Exhibit 10.9 to
Form S-1 filed on September 17, 1996, and the amendments
thereto. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.]
10.10 Production Agreement, dated March 18, 1994, by and between
Pick Two Ltd. and BII Australia. Incorporated by reference to
Exhibit 10.10 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.11 Assistant Multimedia Software Development & Production
Agreement, dated January 17, 1996, by and between Sega Ozisoft
Pty. Limited and BII Australia. Incorporated by reference to
Exhibit 10.11 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.12 Licensing Agreement for "Cyberswine" Story Concept &
Characters, dated July 19, 1995, by and between Eat Cyberfist
Pty. Limited and Sega Ozisoft Pty Limited. Incorporated by
reference to Exhibit 10.12 to Form S-1 filed on September 17,
1996, and the amendments thereto. [Portions of this Exhibit
have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.13 Distribution Agreement, dated November 2, 1995, by and between
BII Australia and Roadshow Entertainment Pty. Ltd.
Incorporated by reference to Exhibit 10.13 to Form S-1 filed
on September 17, 1996, and the amendments thereto. [Portions
of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.14 Publishing Agreement, dated March 9, 1994, by and between
Shortland Publications Limited and BII Australia. Incorporated
by reference to Exhibit 10.14 to Form S-1 filed on September
17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.15 Settlement Agreements and Mutual General Releases, by and
among BII Australia, Ray Musci, Ocean of America, Inc., and
Ocean Software, Ltd. and Ocean International, Ltd.
Incorporated by reference to Exhibit 10.15 to Form S-1 filed
on September 17, 1996, and the amendments thereto. [Portions
of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.16 Publishing Agreement, dated December 1, 1994, by and between
Shortland Publications Limited and BII Australia. Incorporated
by reference to Exhibit 10.16 to Form S-1 filed on September
17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.17 Distribution Agreement, dated July 1, 1996, by and between BII
Australia and Fujitsu Basic Software Corporation. Incorporated
by reference to Exhibit 10.7 to Form S-1 filed on
55
<PAGE> 56
EXHIBIT
NUMBER
EXHIBIT DESCRIPTION
September 17, 1996, and the amendments thereto. [Portions of
this Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.18 License Agreement -- Domestic, dated July 31, 1996, between
the Hearst Corporation, King Features Syndicate Division and
the Registrant. Incorporated by reference to Exhibit 10.18 to
Form S-1 filed on September 17, 1996, and the amendments
thereto. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.]
10.19 Distribution Agreement, dated September 29, 1995, by and
between BII Australia and Ocean of America, Inc. Incorporated
by reference to Exhibit 10.19 to Form S-1 filed on September
17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.20 Distribution Agreement, dated February 22, 1996, by and
between BII Australia and Shortland Publications Limited.
Incorporated by reference to Exhibit 10.20 to Form S-1 filed
on September 17, 1996, and the amendments thereto. [Portions
of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.21 Heads of Agreement, dated November 25, 1994, by and between
SAND and Eat Cyberfist Pty. Limited. Incorporated by reference
to Exhibit 10.21 to Form S-1 filed on September 17, 1996, and
the amendments thereto. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.22 Software License Agreement, dated December 15, 1994, by and
between BII Australia and Sega Ozisoft. Incorporated by
reference to Exhibit 10.22 to Form S-1 filed on September 17,
1996, and the amendments thereto. [Portions of this Exhibit
have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.23 Memorandum of Understanding, dated September 14, 1996, by and
between the Registrant and Morgan Creek Interactive, Inc.
Incorporated by reference to Exhibit 10.23 to Form S-1 filed
on September 17, 1996, and the amendments thereto. [Portions
of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.24 Multimedia Production Agreement, dated March 14, 1995, by and
between BII Australia and Monto Holdings Pty. Ltd.
Incorporated by reference to Exhibit 10.24 to Form S-1 filed
on September 17, 1996, and the amendments thereto. [Portions
of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.25 Nontransferable Redeemable Warrant Agreement, dated September
14, 1996, by and between the Registrant and Packard Bell NEC.
Incorporated by reference to Exhibit 10.25 to Form S-1 filed
on September 17, 1996, and the amendments thereto.
10.26 License Agreement by and between Beyond Properties Pty. Ltd.
and BII Australia. Incorporated by reference to Exhibit 10.26
to Form S-1 filed on September 17, 1996, and the amendments
thereto. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.]
56
<PAGE> 57
EXHIBIT
NUMBER
EXHIBIT DESCRIPTION
10.27 Registrant's Promissory Note, dated September 10, 1996.
Incorporated by reference to Exhibit 10.27 to Form S-1 filed
on September 17, 1996, and the amendments thereto.
10.28 Form of Registrant's Indemnification Agreement. Incorporated
by reference to Exhibit 10.28 to Form S-1 filed on September
17, 1996, and the amendments thereto.
10.29 Form of Registrant's Employee Confidential Information and
Non-Solicitation Agreement. Incorporated by reference to
Exhibit 10.29 to Form S-1 filed on September 17, 1996, and the
amendments thereto.
10.30 Commercial Lease by and among Hilrok Properties Pty. Limited,
Peter Dodds and Simon Van Wyk. Incorporated by reference to
Exhibit 10.30 to Form S-1 filed on September 17, 1996, and the
amendments thereto.
10.31 Loan Agreement, dated October 10, 1994, by and between BII
Australia and PIE. Incorporated by reference to Exhibit 10.31
to Form S-1 filed on September 17, 1996, and the amendments
thereto.
10.32 Commercial Lease, dated August 8, 1994, by and between PW
Securities Pty. Ltd. and Sega Ozisoft. Incorporated by
reference to Exhibit 10.32 to Form S-1 filed on September 17,
1996, and the amendments thereto.
10.33 PIE Loan Extension, dated September 13, 1996, by and among
PIE, BII Australia and the Registrant. Incorporated by
reference to Exhibit 10.33 to Form S-1 filed on September 17,
1996, and the amendments thereto.
10.34 Agreement, dated September 12, 1996, by and between the
Registrant and Crawford Productions Pty. Limited. Incorporated
by reference to Exhibit 10.34 to Form S-1 filed on September
17, 1996, and the amendments thereto.
10.35 Engagement Letter, dated May 1, 1996, by and between Averil
Associates, Inc. and the Registrant. Incorporated by reference
to Exhibit 10.35 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
10.36 Warrant Agreement by and between Chloe Holdings, Inc. and the
Registrant. Incorporated by reference to Exhibit 10.36 to Form
S-1 filed on September 17, 1996, and the amendments thereto.
10.37 Product Agreement, dated January 12, 1996, by and between
Interplay Productions and BII Australia. Incorporated by
reference to Exhibit 10.37 to Form S-1 filed on September 17,
1996, and the amendments thereto. [Portions of this Exhibit
have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.38 Standard Form Lease Agreement, dated May 16, 1997, between
Topanga & Victory Partners L.P. and the Registrant.
Incorporated by reference to Exhibit 10.1 to Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997. [Portions
of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.39 Site Management Agreement, dated August 1, 1997, between
CompuServe Incorporated and the Registrant. Incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997. [Portions of this
Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
57
<PAGE> 58
EXHIBIT
NUMBER
EXHIBIT DESCRIPTION
10.40 Redeemable Warrant Agreement, dated September 1, 1997, between
Packard Bell NEC and the Registrant. Incorporated by reference
to Exhibit 10.40 to Form SB-2 filed on November 5, 1997, and
the amendments thereto.
10.41 Engagement Letter, dated August 1, 1997, between Averil
Associates, Inc. and the Registrant. Incorporated by reference
to Exhibit 10.41 to Form SB-2 filed on November 5, 1997, and
the amendments thereto.
10.42 CD-ROM Distribution Agreement, dated September 22, 1997,
between Packard Bell NEC and the Registrant. Incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997. [Portions of this
Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.43 Warrant Agreement, dated November 4, 1997, between Chloe
Holdings, Inc. and the Registrant. Incorporated by reference
to Exhibit 10.43 to Form SB-2 filed on November 5, 1997, and
the amendments thereto.
10.44 Lease Agreement, dated January 12, 1998, between Capital
Credit Company Pty. Limited and Winmor Pty. Limited and BII
Australia.
10.45 Lease Agreement between Daiwa Real Estate Co. Ltd. and BII
Australia.
21.1 List of Subsidiaries. Incorporated by reference to Exhibit
21.1 to Form S-1 filed on September 17, 1996, and the
amendments thereto.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Price Waterhouse LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
58
<PAGE> 1
Exhibit 10.44
LEASE
Real Property Act, 1900
Office of State Revenue use only
(A) PROPERTY LEASED
Show more than 20 References to Title
If appropriate, specify the share transferred
FOLIO IDENTIFIER 1/580-401
PART being the Second Floor
of the building known as
1 Transvaal Avenue, Double Bay
(B) LODGED BY LTO BOX Name, Address or DX and Telephone
48T CITYLINK
for
PRENTICE JARVIN
REFERENCE: (max 15 characters)
PJ\Capital
(C) LESSOR CAPITAL CREDIT COMPANY PTY.
LIMITED (ACN 000 574 407) and WINMOR
PTY. LIMITED (ACN 000 734 912)
(D) The Lessor leases the property described above subject to the following
ENCUMBRANCES
1. Q696636 2. T756183 3. Y916051 4. _________
(E) LESSEE BRILLIANT INTERACTIVE IDEAS PTY LTD (ACN 061
288 668) Level 53, MLC Centre, Martin Place, Sydney
[omitted]
(F) 1. TERM: Two (2) years
2. COMMENCING DATE: 12 January 1998
3. TERMINATING DATE: 11 January 2000
4. With an OPTION TO RENEW for a period of two (2) years set out in
Clause 18
<PAGE> 2
5. [omitted]
6. [omitted]
7. Incorporates the provisions set out in ANNEXURE "A" hereto
8. [omitted]
INSTRUCTIONS FOR FILLING OUT THIS FORM ARE AVAILABLE FROM THE LAND TITLES OFFICE
CHECKED BY (office use only)
(G) [omitted]
(H) I solemnly and sincerely declare that the time for the exercise of the
Option to Renew/Purchase in expired Lease No ______________________ has
ended and the Lessee under that Lease has not exercised the option. I
make this solemn declaration conscientiously believing the same to be
true and by virtue of the Oaths Act, 1900.
Made and subscribed at
__________________the State of ___________________ on _______________
19__ in the presence of:
______________________________________
Signature of Witness
______________________________________
Name of Witness (BLOCK LETTERS)
______________________________________ _____________________________
Address of Witness Signature of Lessor
<PAGE> 3
THIS REFERENCE SCHEDULE AND THE FOLLOWING 33 PAGES COMPRISE ANNEXURE "A" TO THE
LEASE MADE BETWEEN CAPITAL CREDIT COMPANY PTY. LIMITED AND WINMOR PTY. LIMITED
(LESSOR) AND BRILLIANT INTERACTIVE IDEAS PTY. LIMITED (LESSEE)
REFERENCE SCHEDULE
ITEM 1 THE LAND
(Clause 2.1.11) Lot 1 in Deposited Plan 580401
ITEM 2 THE LESSOR
CAPITAL CREDIT COMPANY PTY. LIMITED (ACN 000 574 407)
and WINMOR PTY. LIMITED (ACN 000 734 912) both of
1 Transvaal Avenue, Double Bay
ITEM 3 THE LESSEE
BRILLIANT INTERACTIVE IDEAS PTY LTD (ACN 061 288 668)
of Level 53, MLC Centre, Martin Place, Sydney
ITEM 4 THE GUARANTOR
(Clause 17) Nil
ITEM 5 THE PREMISES
(Clause 2.1.20) The whole of the Second Floor of the building known
as 1 Transvaal Avenue, Double Bay
ITEM 6 PERMITTED USE
(Clause 5.1) Commercial offices
ITEM 7 SPECIFIED MINIMUM HOURS FOR TRADING
(Clause 5.8) Monday to Friday - 9.00 am to 5.00 pm
ITEM 8 INSURANCES
(Clause 8.1) Public Risk - $5 million
ITEM 9 THE TERM
(Clause 3.1) Date of Commencement - 12 January 1998
Date of Termination - 11 January 2000
Term - Two (2) years
ITEM 10 ANNUAL RENT
(Clause 15.1) Ninety Thousand Dollars ($90,000.00)
ITEM 11 CONSUMER PRICE INDEX ADJUSTMENT DATES
(Clause 15.1.2) Nil
<PAGE> 4
ITEM 12 FIXED INCREASE ADJUSTMENT DATES
(Clause 15.1.5) 12 January 1999 - Ninety Four Thousand Dollars
($94,000.00)
ITEM 13 SECURITY DEPOSIT
(Clause 16) Bank Guarantee for $22,500.00
ITEM 14 TERM OF RENEWED LEASE
(Clause 18.1) Two (2) years
ITEM 15 CPI ADJUSTMENT DATES FOR RENEWED TERM
(Clause 18.3.4) 12 January 2001
<PAGE> 5
PART 1 - EXCLUSION OF STATUTORY PROVISIONS
1.1 The covenants, powers and provisions implied in leases by virtue of
Sections 84, 84A, 85 and 86 of the Conveyancing Act, 1919 as amended are hereby
expressly negatived.
1.2 The Lessor and the Lessee agree that the provisions of the Retail Leases
Act, 1994 do not apply to this Lease.
1.3 The employment in this Lease of words in any of the forms of words
contained in the first column of Part II of Schedule IV to the Conveyancing Act,
1919 shall not imply any covenant under Section 86 of that Act.
1.4 To the extent permitted by law the application to this Lease of any
moratorium or other Act whether State or Federal having the effect of extending
the term, reducing or postponing the payment of rent, or otherwise affecting the
operation of the terms of this Lease is excluded and negatived.
PART 2 - DEFINITIONS AND INTERPRETATION
DEFINITIONS
2.1 For all purposes of this Lease, except to the extent that such
interpretation shall be excluded by or be repugnant to the context:
2.1.1 "ACCOUNTANT" means an accountant nominated by the Lessor from time to
time.
2.1.2 "AUTHORITY" includes any government, semi or local government, statutory
or other authority or body.
2.1.3 "BOMA" means the Building Owners & Managers Association of Australia
Limited (New South Wales Division).
2.1.4 "BUILDING" means the building or buildings erected on the Land including
any part thereof together with any modifications, extensions or
alterations thereto from time to time and together with the fixtures,
fittings, furnishings, plant, machinery and equipment of the Lessor
therein from time to time and including the Common Areas.
2.1.5 "COMMON AREAS" means any parts of the Land or the Building not intended to
be demised or licensed to any person and designed or intended for use by
the tenants or other occupiers of the Land and their respective employees
invitees and licensees in common with each other.
2.1.6 "CORPORATIONS LEGISLATION" means the legislation regulating corporations
in the State in which the Land is situate.
<PAGE> 6
2
2.1.7 "DATE OF COMMENCEMENT" means the date of commencement of this Lease as
set out in Item 9 of the Reference Schedule.
2.1.8 "DATE OF TERMINATION" means the date of termination as set out in Item 9
of the Reference Schedule.
2.1.9 "GUARANTOR" means the person(s) described in Item 4 of the Reference
Schedule and in the case one natural person is named as Guarantor, that
person, his executors and administrators and in the case one corporation
is named as Guarantor, that corporation and its successors and where
there are two or more Guarantors named, those Guarantors jointly and
severally and each and every or any of them and the executors and
administrators and the successors of each and every and any of them.
2.1.10 "INDEX" in relation to a quarter means the Consumer Price Index All
Groups (Sydney) published by the Australian Statistician or the
Australian Bureau of Statistics in respect of that quarter.
2.1.11 "LAND" means the land described in Item 1 of the Reference Schedule and
includes any additional land which the Lessor owns develops controls or
uses in conjunction with the Land and upon which additional land the
Lessor erects improvements which it manages and operates as a commercial
office building, parking area or other commercial and recreational uses
in conjunction with the improvements from time to time existing on the
Land.
2.1.12 "LAWS" means the requirements of all statutes, rules, regulations,
proclamations, ordinances or by-laws present or future,
2.1.13 "LESSEE" means and includes: -
(a) in the case of a company the Lessee its successors and permitted
assigns.
(b) in the case of a person his executors administrators and permitted
assigns,
(c) where there are two or more Lessees, those Lessees jointly and
severally and each and every or any of them and the successors and
permitted assigns or the executors administrators and permitted
assigns (as the case may be) of each and every and any of them.
2.1.14 "LESSEE'S BUSINESS" means the permitted use of the Premises set out in
Item 6 of the Reference Schedule.
2.1.15 "LESSEE'S EMPLOYEES AND AGENTS" means each and every of the Lessee's
employees agents contractors invitees sublessees licensees and
concessionaires or others who may at any time be in or upon the Premises
or the Land with the consent of the Lessee (express or implied).
<PAGE> 7
3
2.1.16 "LESSOR" means and includes the Lessor and its successors and assigns.
2.1.17 "LESSOR'S FIXTURES AND FITTINGS" shall include (but shall not be limited
to) all the Lessor's plant and equipment mechanical or otherwise,
fixtures, furniture, furnishings of whatsoever nature in or upon the
Premises or any parts thereof from time to time including the existing
partitions, workstations, safe and one compactus.
2.1.18 "MANAGING AGENT" means any agent appointed from time to time by the
Lessor relating to the management of the Premises.
2.1.19 "MONTH" means calendar month.
2.1.20 "PREMISES" means that part of the Land hereby demised as described in
Item 5 of the Reference Schedule and includes the Lessor's fixtures and
fittings.
2.1.21 "PROPERTY" means any legal or equitable estate or interest (whether
present or future and whether vested or contingent) in real or personal
property of any description and includes things in action.
2.1.22 "REFERENCE SCHEDULE" means the Reference Schedule to this Lease.
2.1.23 "REQUIREMENTS" means any requirements notices orders or directions
received from or given by any statutory, public or other competent
authority of whatsoever nature including without prejudice to the
generality of the foregoing any governmental semi-governmental city
municipal health licensing or civic authority.
2.1.24 "RULES" means the Rules promulgated by the Lessor pursuant to Clause 10.6
hereof, as from time to time varied as herein provided.
2.1.25 "THE TERM" or "THE TERM OF THIS LEASE" means the term as set out in Item
9 of the Reference Schedule.
2.1.26 "THIS LEASE" or "THE LEASE" means and includes all schedules, appendices,
annexures to this Lease and the Rules (as herein defined) from time to
time current.
INTERPRETATION
2.2 PLURALS - Words importing the singular number include the plural and vice
versa.
2.3 GENDER - Words importing any particular gender include all genders. The
word "person" includes a corporation and vice versa.
2.4 TENANTS SEVERALLY BOUND - Any covenant or agreement on the part of two or
more lessees shall bind such parties jointly and each of them their
successors and assigns severally.
<PAGE> 8
4
2.5 STATUTES AND REGULATIONS - Any reference in this Lease to any Act,
Statute, Regulation, Ordinance or By-Law is except in so far as the
contrary intention appears: -
2.5.1 a reference to that Act, Statute, Regulation, Ordinance or By-Law as
originally enacted and as amended from time to time.
2.5.2 where that Act, Statute, Regulation, Ordinance or By-Law has been
repealed or re-enacted, with or without modification, the reference shall
be construed as including a reference to the re-enacted Act, Statute,
Regulation, Ordinance or By-Law as originally enacted and as amended from
time to time, and, where in connection with that reference, particular
provisions of the repealed Act, Statute, Regulation, Ordinance or By-Law
are referred to, being provisions to which provisions of the re-enacted
Act, Statute, Regulation, Ordinance or By-Law correspond, the reference
to those particular provisions shall be construed as including a
reference to those corresponding provisions.
2.6 COVENANTS - Every obligation undertaken by any of the parties hereto
shall, notwithstanding the wording thereof, be deemed to be and be
construed as a covenant by the party undertaking such obligation, and
shall unless the context otherwise requires be construed as continuing
throughout the term hereof or any holding over period and thereafter so
far as the same remain to be observed or performed.
2.7 SEVERABILITY - If any provision of this Lease is found by a Court to be
illegal invalid or unenforceable that provision may at the option of the
Lessor be read down to the extent necessary to ensure that it is not
illegal invalid or unenforceable to give it a valid operation of a
partial character. In the event that any provision cannot be so read down
the provision shall be deemed to be void and severable and the remaining
provisions of this Lease shall not be affected or impaired.
2.8 WHOLE AGREEMENT - The Lessor and the Lessee agree that the terms
contained in this Lease cover and comprise the whole of the agreement
between the Lessor and the Lessee and declare that no further terms
whether in respect of the Premises or otherwise shall be implied or arise
between the Lessor and the Lessee by way of collateral or other agreement
made by or on behalf of the Lessor or the Lessee on or prior to the
execution of the Lease and any implication or collateral or other
agreement is negatived.
2.9 HEADINGS - Marginal notes, headings and the Index to this Lease have been
inserted for guidance only and shall not form part of the context and
shall not limit or govern the construction of this Lease.
2.10 BODIES AND AUTHORITIES - Where a reference is made to any body or
authority such reference shall, if the body or authority has ceased to
exist, be deemed a reference to the body or authority as then serves
substantially the same objects as that body or authority and any
reference to the President of such body or authority shall in the absence
of a President
<PAGE> 9
5
be read as a reference to the senior officer for the time being of the
body or authority or such other person fulfilling the duties of
President.
2.11 RECKONING OF TIME -
2.11.1 Where in this Lease a period of time dating from a given day, act or
event is specified or allowed for any purpose, unless the contrary
intention appears the time shall be reckoned exclusively of that day or
of the day of the act or event.
2.11.2 Where the last day of a period specified or allowed by this Lease for the
doing of anything falls on a Saturday or a Sunday or on a day that is a
public holiday or a bank holiday in the place where the thing is to be
done, the thing may be done on the first day following that is not a
Saturday, Sunday or public or bank holiday.
PART 3 - TERM
TERM OF LEASE
3.1 Subject to the provisions of this Lease the term of this Lease shall
commence on the Date of Commencement and shall expire on the Date of
Termination.
MONTHLY TENANCY
3.2 If the Lessee continues to occupy the Premises with the permission of the
Lessor after the Date of Termination (other than under a further lease) the
Lessee shall do so as a monthly tenant only at a monthly rental payable monthly
in advance without any deduction or right of set-off whatever, being an amount
equal to one-twelfth of the sum of the following amounts calculated at the Date
of Termination of this Lease: -
3.2.1 the amount of the Annual Rent payable under this Lease; and
3.2.2 any other moneys payable by the Lessee m the Lessor pursuant to this
Lease
AND the first rental payment shall be made on the day following the Date of
Termination.
The monthly tenancy so created shall be determinable at any time by either party
by one (1) month's notice in writing given to expire on any day but otherwise
the tenancy shall continue on the same terms and conditions (so far as are
applicable to a monthly tenancy) as are contained in this Lease, provided that
if the Lessee shall be in default in the performance of its obligations then
such tenancy may be determined by written notice to the Lessee expiring at any
time after the expiration of seventy-two (72) hours after the date of such
notice.
PART 4 - DELETED
<PAGE> 10
6
PART 5 - USE OF PREMISES AND BUILDING
PERMITTED USE
5.1 The Lessee shall not without the prior written consent of the Lessor (which
consent may be withheld at the absolute discretion of the Lessor) carry on or
permit or suffer any other person to carry on in or from the Premises any
business or purpose except the Lessee's business set out in Item 6 of the
Reference Schedule and without limiting the generality of the foregoing the
Lessee shall:-
MAINTAIN CAPACITY OF BUSINESS
5.1.1 At all times as required by this Lease operate and conduct its business
for the purpose set out in Item 6 of the Reference Schedule in a proper
orderly and businesslike manner including the proper staffing and
stocking of the Premises;
NON RESIDENCE
5.1.2 Not use the Premises for the purposes of a residence;
RODENTS AND VERMIN
5.1.3 At its own cost keep the Premises free and clear of pests insects and
vermin;
ANNOYING OR INJURIOUS CONDUCT
5.1.4 Not at any time during the continuance of this Lease (notwithstanding
anything to the contrary herein or any consent or permission granted
hereunder) do or permit any other person to do in or about the Premises
any noxious noisy or offensive thing and without limiting the generality
of this clause shall not use:-
(a) any medium which may be heard or experienced outside the Premises
such as loudspeakers, video equipment, photographs, television or
radio broadcasts or the like; or
(b) any flashing lights or signs (other than those approved by the
Lessor) which in the opinion of the Lessor would create an audible
or visual nuisance as the case may be;
AUCTION SALE
5.1.5 Not hold or allow to be held any auction bankrupt or fire sale on the
Premises;
<PAGE> 11
7
ARTIFICIAL METHODS OF HEATING
5.1.6 Not use or permit to be used without the Lessor's approval in writing any
methods of heating, cooling or lighting the Premises other than those
facilities provided in the Premises by the Lessor;
ALTERATIONS OR ADDITIONS TO SERVICES
5.1.7 Not make any connections alterations or additions to any gas or
electrical system or modify the wiring or install electric fittings
equipment machines or fixtures nor interfere with any drains, water
supply or other services until a drawing or other specification of the
proposed work, class of material to be used and the name of the
contractor to be employed have been first submitted to and approved of by
the Lessor in writing;
MAINTAIN LICENCES
5.1.8 Maintain and renew from time to time all licences, permits, consents and
registrations required for the carrying on of the Lessee's business in
the Premises.
NO EXCLUSIVE USE
5.2 The right to conduct a business of the kind referred to in Item 6 of the
Reference Schedule is not exclusive to the Lessee and the Lessor may permit
other persons to conduct in or from the Building such businesses as it thinks
fit notwithstanding that any such business is similar in whole or in part to the
business permitted to be conducted in the Premises.
NO WARRANTY AS TO USE
5.3 Notwithstanding anything expressly or impliedly to the contrary the
Lessor gives no warranty as to the use to which the Premises may be put and the
Lessee shall satisfy itself thereon and shall be deemed to have accepted this
Lease with full knowledge of and subject to any prohibitions or restrictions on
the use thereof under or in pursuance of any Law or Requirement. Should the
Lessee's business be permissible only with the consent or approval of any
Authority under or in pursuance of any such Law or Requirement the Lessee shall
obtain such consent or approval at his own expense and the Lessee shall not by
any act or omission cause such permitted use to lapse or the consent to such use
to be revoked.
COMPLY WITH REQUIREMENTS OF AUTHORITIES, ETC.
5.4 The Lessee shall at all times comply with and observe at the Lessee's own
expense all Laws and Requirements in relation to or affecting: -
(a) the Premises or any fittings or fixtures installed by the Lessee therein;
and/or
<PAGE> 12
8
(b) the use or occupation of the Premises from time to time including such as
arise as a result of the sex or number of persons in the Premises from
time to time
whether or not any such Laws or Requirements are addressed to or required to be
effected by the Lessor and/or the Lessee and/or any other person PROVIDED THAT
the Lessee before observing and/or complying with any such Laws or Requirements
shall obtain the prior written consent of the Lessor and otherwise observe the
provisions herein PROVIDED FURTHER THAT (without prejudice to any of the
Lessor's other rights or remedies in respect of such non-compliance or
non-observance) the Lessor may (but without being under any obligation to do so)
at the Lessee's expense and otherwise in accordance with its rights hereunder
elect to comply with and observe any such Laws or Requirements or any part or
parts thereof and may elect as aforesaid to have the balance performed and
observed by the Lessee AND PROVIDED FURTHER THAT the Lessee shall not be liable
for structural alterations or additions except those caused by or arising from
the nature of the Lessee's business or the number or sex of the Lessee's
employees.
FAILURE BY LESSEE TO COMPLY
5.5 If the Lessee shall fail to comply with or observe each and every or such
part or parts of any such Laws or Requirements as the Lessor elects to have the
Lessee perform and observe (as the case may be) or where the Lessor shall elect
to observe any such Laws or Requirements or any part or parts thereof (which the
Lessee was otherwise responsible for performing), the Lessor may exercise and
use any or all of the rights, powers and privileges given hereunder for inter
alia the purpose of complying with or observing each and every of any such Laws
or Requirements. The Lessee covenants with the Lessor that all reasonable costs
and expenses of whatsoever nature suffered or incurred by the Lessor in
performing and observing any such Laws or Requirements shall upon demand
forthwith be paid by the Lessee to the Lessor as if such monies were rent in
arrears.
OVERLOADING - FLOORS AND ELECTRICAL CIRCUITS
OVERLOADING OF FLOOR
5.6.1 The Lessee shall observe the maximum floor loading weights for which the
Premises were designed and shall not permit the floors of the Premises to
be broken strained or damaged by overloading in any manner howsoever. In
particular the Lessee shall not install any safes or other heavy
equipment except in such positions and subject to such conditions as the
Lessor may in writing approve.
OVERLOADING OF ELECTRICAL CIRCUITS
5.6.2 The Lessee shall not install any electrical equipment in the Premises
that overloads the electrical services to the Premises. If the Lessor at
the request of the Lessee upgrades the electrical services to accommodate
the equipment which the Lessee desires to install the Lessee shall pay to
the Lessor upon demand the entire cost to the Lessor of such alterations
<PAGE> 13
9
(inclusive of consultants' fees) provided always that the Lessor may
require the Lessee to deposit with the Lessor the estimated cost thereof
before any such alterations are commenced.
SECURING OF THE PREMISES
5.7 The Lessee shall cause all exterior doors and windows in the Premises to
be securely locked and fastened at all times when the Premises are not occupied
and authorizes the Lessor or any agent or employee of the Lessor to enter the
Premises whenever necessary for the purpose of locking any such door window left
unlocked or unfastened.
TRADING HOURS - MANDATORY
5.8 The Lessee shall cause the Premises to remain open for business between
the hours and on such days as are referred to in Item 7 of the Reference
Schedule subject to such temporary closures AS are usual in the Lessee's
business and do not affect the Lessor or other tenants of the Building.
TRADING HOURS - VOLUNTARY
5.9 The Lessee may in addition keep the Premises open for business and
conduct its business in the Premises during any days and hours not referred to
in Clause 5.8 subject only to Clause 5.10.
TRADING HOURS - PROHIBITED
5.10 The Lessee shall not, nor shall it be obliged to, keep the Premises open
for business or conduct its business in the Premises at any time prohibited by
or unenforceable as a result of any law.
CLEANING OF PREMISES AND REMOVAL OF REFUSE
5.11 The Lessee shall:-
CLEANING OF PREMISES
5.11.1 keep the Premises (and the Common Area adjacent to the Premises which is
used exclusively by the occupier of the Premises) in a thorough state of
cleanliness and shall not allow any accumulation of useless property or
rubbish therein and shall at its own expense cause the Premises and the
exterior surfaces of windows and partitions to be kept clean at all times
during which the Premises are open for business; and
<PAGE> 14
10
REMOVAL OF REFUSE
5.11.2 at the Lessee's own cost and expense cause all packing materials cartons
and other waste materials which are not removed by the local authority to
be removed periodically so that they do not become visible from the
Common Areas and in this regard the Lessee will comply with the
directions of the Lessor from time to time.
ILLUMINATION OF PREMISES AND SIGNS
5.12 is deleted
ERECTION OF SIGNS
5.13 The Lessee shall not paint erect affix or place or permit to be painted
erected affixed or placed any signs notices or advertisements to any part of the
exterior of the Premises and/or affix any blinds or awnings to the outside of
the Premises or any blinds to the interior of the windows display windows or
doors thereof or affix any fittings to the floors walls or ceilings of the
Premises without the consent in writing of the Lessor which consent may be
granted or refused subject to conditions in the absolute discretion of the
Lessor. The Lessee shall pay the cost of any application or licence fee in
relation thereto to any appropriate Authority.
HOLING OF WALLS
5.14 The Lessee shall not suffer or permit any person to cut make holes or
mark deface drill or damage any of the floors walls ceilings or other parts of
the Premises except so far as may be reasonably necessary for the installation
of computer network cables the erection of approved cables signs blinds awnings
or fittings as aforesaid and on the removal of any such signs blinds awnings or
fittings the Lessee shall reinstate repair and make good any damage caused in or
about the erection or removal thereof.
AIR-CONDITIONING AND FIRE ALARM EQUIPMENT
5.15 Where any air-conditioning plant or fire alarm equipment is installed in
or about the Premises being the property of the Lessor, the Lessee shall not in
any way interfere with such plant or equipment and shall not in any manner
whatsoever obstruct or hinder access thereto.
USE OF APPURTENANCES
5.16 The Lessee shall not use or permit persons under its control to use the
appurtenances contained in or about the Premises for any purpose other than
those for which the same were constructed and shall not place or permit any
person under its control to place in the toilets urinals drains basins or sinks
any substances which they were not designed to receive.
<PAGE> 15
11
FIRE DRILLS & EVACUATION PROCEDURES
5.17 The Lessor and persons under its control shall have the right to require
the Lessee to perform from time to time fire drills and observe all necessary
and proper emergency evacuation procedures and procedures in the event of
protests demonstrations and other disruptive procedures and the Lessee and
persons under its control shall co-operate with the Lessor in performing such
drills and procedures PROVIDED THAT in requiring the Lessee and persons under
its control to carry out such drills and procedures the Lessor shall use its
best endeavors to minimise any disturbance thereby caused to the Lessee in its
occupation and use of the Premises but without compensation by the Lessor for
any loss damage or injury caused or sustained by the Lessee, the Lessee's
employees or the Premises or business as a result of such participation.
LESSEE TO PAY CHARGES LEVIED ON PREMISES
5.18 The Lessee shall pay all charges and assessments separately charged to the
Premises, including charges for electricity gas oil and water separately metered
and consumed in or on the Premises and shall also pay all charges in respect of
any telephone services connected to the Premises and all other charges and
impositions imposed by any public utility or authority for the supply of any
service separately supplied to the Premises.
NOTICE TO LESSOR
5.19 The Lessee shall give to the Lessor prompt notice in writing of any
accident to or defect or want of repair in any part of the Premises including
any services to or fittings at the Premises and of any circumstances likely to
be or cause any danger risk or hazard to the Premises or to the Building or to
any person therein.
PART 6 - MAINTENANCE, REPAIR AND ALTERATIONS TO PREMISES
OBLIGATION TO MAINTAIN
6.1 The Lessee will when where and so often as need shall be maintain repair
and keep the Premises in good and substantial repair (which expression shall
include repapering and/or repainting as the case may be) working order and
condition fair wear and tear and damage by fire flood lightning storm tempest
Act of God and war damage only excepted PROVIDED HOWEVER that nothing herein
contained shall impose any obligation upon the Lessee to do any work of a
structural nature except such as may be occasioned by the act neglect or default
of the Lessee and/or the Lessee's employees and agents or by the Lessee's use or
occupancy of the Premises and/or the use or occupancy of the Premises by the
Lessee's employees and agents and without affecting the generality of the
foregoing shall at the Lessee's expense:-
<PAGE> 16
12
MAINTAIN LESSEE'S FITTINGS
6.1.1 keep and maintain clean and in good order repair and condition all
fittings plant furnishings and equipment of the Lessee including any
signs painted erected or affixed to the exterior of the Premises;
BREAKAGE TO COMMON AREA
6.1.2 from time to time make good any breakage defect or damage to the Common
Area or to any adjoining premises or any facility or appurtenance thereof
occasioned by want of care misuse or abuse on the part of the Lessee or
the Lessee's employees or otherwise occasioned by any breach or default
of the Lessee hereunder or under any Rules or Regulations made pursuant
hereto;
REPLACE BROKEN GLASS
6.1.3 from time to time immediately repair and replace all plate glass windows
with glass of the same or similar quality and all damaged or broken or
faulty (including those reasonably suspected by the Lessor to be faulty
or required by the Lessor to be replaced in accordance with the Lessor's
cyclical program for replacements) heating lighting electrical equipment
(including light globes and fluorescent tubes) installed upon the
Premises;
MAINTAIN LIGHTING EQUIPMENT
6.1.4 maintain in full working order and keep safe all lighting equipment and
illuminated signs in or attached to the Premises.
ALTERATIONS TO THE PREMISES
6.2 The Lessee will not without the previous consent in writing of the Lessor
(which consent may be withheld by the Lessor in its absolute discretion) make
any alteration or addition in or to the Premises or any part thereof and shall
in the course of such alterations or additions made with the consent of the
Lessor observe and comply with requirements of the Lessor and any public
authorities.
INSPECTION BY LESSOR
6.3 The Lessor and its agents may at all reasonable times upon giving to the
Lessee reasonable notice (except in case of emergency when no notice shall be
required) enter upon the Premises and view the state of repair thereof and may
serve upon the Lessee a notice in writing of any defect for the repair of which
the Lessee may be responsible requiring the Lessee within a reasonable time to
repair the same and in default of the Lessee so doing it shall be lawful for the
Lessor from time to time to execute the required repairs as if it were the
Lessee and for that purpose the Lessor its architects contractors workmen and
agents may enter upon the whole or any part of the
<PAGE> 17
13
Premises and there remain for the purpose of doing erecting or effecting any
such work AND any expenses and costs of carrying out such work shall forthwith
be payable by the Lessee to the Lessor without any deduction or right of set-off
on demand and until payment thereof by the Lessee any such amounts shall for the
purposes of this Lease be deemed to be rent overdue.
REPAIR BY LESSOR BY REQUIREMENT OF AUTHORITY OR OTHERWISE
6.4 If at any time during the term any Authority having jurisdiction or
authority over or in respect of the Building, the Premises or the user thereof
requests requires notifies or orders any structural alterations additions
conversions improvements or other works to be made to the Building or the
Premises which the Lessor elects to do or if the Lessor otherwise elects to
carry out any repairs renovations maintenance or alterations thereto and for
which the Lessee is not liable under its covenants herein contained the Lessor
its architects contractors workmen servants and others and the servants and
workmen of any of its contractors may enter into and on the Premises at all
times for the purpose of making any such structural alterations additions
conversions improvements or other works or any of them as aforesaid PROVIDED
ALWAYS that in the exercise of any such power under this clause the Lessor shall
cause no more inconvenience to the business of the Lessee than is reasonably
necessary.
NOTICE OF DAMAGE
6.5 The Lessee shall advise the Lessor promptly in writing of any damage
sustained to the Premises or any part thereof which is reasonably apparent or of
damage to or defective operation of any of the appurtenances therein.
LESSEE TO PAINT
6.6 The Lessee shall as and when reasonably necessary and in addition within six
months before the termination of this Lease, paint or paper those parts of the
Premises previously painted or papered in a proper and workmanlike manner and to
the satisfaction of the Lessor.
PART 7 - ASSIGNMENTS SUBLEASES AND MORTGAGES
SUBLEASES/MORTGAGES
7.1 The Lessee shall not without the written consent of the Lessor (which
consent may be withheld at the Lessor's absolute discretion) sublet part with or
share the possession of or grant any licence franchise or concession affecting
or mortgage charge or otherwise deal with or dispose of the Premises or any part
thereof or any estate or interest therein or by any act or deed procure the
Premises or any part thereof or any estate or interest therein to be sublet unto
shared with or put into possession of any person or persons or to be the subject
of any licence or concession or to be mortgaged charged or otherwise dealt with
or disposed of.
<PAGE> 18
14
ASSIGNMENT
7.2 The Lessee shall not assign this Lease without first making a written
request to the Lessor therefor and obtaining the prior consent in writing of the
Lessor provided such consent shall not be unreasonably refused or withheld if:-
CAPACITY OF ASSIGNEE
7.2.1 The proposed assignee has financial resources which will enable such
assignee to perform and discharge the obligations of the Lessee
hereunder, including the obligation to pay rent and other monies reserved
by this Lease, the onus of proving which shall be upon the Lessee;
LESSEE TO PAY COSTS
7.2.2 The Lessee pays or reimburses m the Lessor an amount equal to the proper
and reasonable administrative and legal costs charges and expenses
incurred by the Lessor of and incidental to the assignment including any
enquiries which may be made by or on behalf of the Lessor as to the
financial soundness or skills of any proposed assignee, the documentation
relating thereto and any other matters concerning the proposed
assignment;
NO UNREMEDIED BREACH
7.2.3 All rent and other monies due or payable by the Lessee to the Lessor as
at the date of assignment shall have been paid by the Lessee and there
shall not then be any existing unremedied breach of the terms covenants
conditions and restrictions herein contained which has not been waived by
the Lessor;
ASSIGNEE TO ENTER INTO COVENANT
7.2.4 The proposed assignee shall by deed covenant with the Lessor to observe
and perform the terms covenants conditions and restrictions on the part
of the Lessee hereunder whether expressed or implied positive or negative
including the obligation to indemnify the Lessor as provided herein such
deed to be prepared and stamped by the Lessor's solicitors and to be in
such form as the Lessor's solicitors may reasonably require and shall if
required by the Lessor's solicitors submit a stamped transfer of lease to
the Lessor's solicitors and put the registration of such transfer in the
hands of the Lessor's solicitors all such things to be at the cost and
expense of the Lessee;
GUARANTEES ON ASSIGNMENT
7.2.5 Where the proposed assignee is a corporation (other than a corporation
whose shares are listed on any member exchange of the Australian Stock
Exchange Limited) the Lessor may as a condition of its consent to such
assignment require that the covenants on the part of the proposed
<PAGE> 19
15
assignee be guaranteed by the directors and/or principal shareholders of such
corporation or other appropriate person such guarantee to be prepared and
stamped by the Lessor's solicitors at the cost of the Lessee;
CORPORATE OWNERSHIP
7.3 For the purpose of this Part where the Lessee is a corporation not being
a company whose shares are listed on a member exchange of the Australian Stock
Exchange Limited the following circumstances shall constitute or be deemed to
constitute an assignment of this Lease: -
7.3.1 if at any time during the term hereof any corporation or any related
corporation (as defined in the Corporations Legislation) or any person or
any person and his relatives (as defined in the Income Tax Assessment Act
1936 as amended as at the Date of Commencement), as the case may be, not
holding or holding between them as at the Date of Commencement, more than
fifty percent of the issued capital or voting rights of the Lessee
acquires or acquire between them so much of the issued capital or voting
rights of the Lessee as when added to the issued capital or voting rights
(if any) previously held by such corporation or related corporations or
person or persons, as the case may be, represent in the aggregate more
than fifty percent of the issued capital or voting rights of the Lessee;
or
7.3.2 if at any time during the term hereof the changes referred, to in Clause
7.3.1 occur in any holding company (as defined in the Corporations
Legislation) of the Lease or in any holding company of any holding
company of the Lessee and the provisions of Clause 7.2 shall apply to
such deemed assignment, and if the Lessee has failed to obtain the
Lessor's consent as provided then the Lessee shall be in default of the
provisions of this Lease.
LEASING AND CHARGING LESSEE'S EQUIPMENT ETC.
7.4 The Lessee shall not mortgage charge lease or otherwise deal with any
equipment, fixtures or fittings or anything else which requires the Lessor to
sign a landlord's waiver or any like document without first obtaining the
consent of the Lessor, which consent will not be unreasonably withheld where the
Lessee is entering into a proper and bona fide mortgage charge or lease as a
means of financing such equipment, fixtures or fittings, and provided that the
Lessee uses the standard form of waiver prepared by the Lessor and pays the
Lessor's reasonable costs (including legal costs where applicable) in relation
thereto.
PART 8 - INSURANCES DISCLAIMERS INDEMNITIES AND RELEASES
PUBLIC RISK
8.1 The Lessee will at all times during the continuance of this Lease (including
any extension or renewal hereof or holding over hereunder) in the joint names of
the Lessor and the Lessee for their respective interests effect and keep current
a public risk insurance policy bearing an endorsement whereby the indemnity
under the policy is extended to include claims arising out of
<PAGE> 20
16
or in connection with this Lease such policy to be for an amount of not less
than the amount specified in Item 8 of the Reference Schedule, or such other
amount as the Lessor may notify the Lessee from time to time in respect of any
single accident and with an insurance office or company approved by the Lessor.
PLATE GLASS
8.2 The Lessee will insure in the joint names of the Lessor and the Lessee for
their respective interests and in such amount (not being less than the full
insurable value) and against such risks as the Lessor may require all plate
glass windows (and other glass referred to in Clause 6.1.3) forming part of or
within the Premises. Without limiting the Lessee's obligations under Clause
6.1.3, the Lessee may apply to the Lessor in writing for its consent (which may
be withheld at the Lessor's absolute discretion) to waive the Lessee's
obligations to insure pursuant to the provisions of this Clause 8.2.
VITIATION OF INSURANCES
8.3 The Lessee will not without the consent in writing of the Lessor bring keep
do or permit or suffer to be brought kept or done any thing act or matter to or
upon the Premises which shall or may increase the rate of fire insurance on the
Premises or the Building or on any property therein or vitiate or render void or
voidable any insurance in respect thereof or (without prejudice to the
generality of the foregoing) which may conflict with the laws or regulations
relating to fires or any insurance policy in respect of the Premises or the
Building or any property therein or the regulations or ordinances of any public
authority or the provisions of any statute for the time being in force and in
the event of the Lessor approving in writing of the proposal of the Lessee to
increase the risk, the Lessee as and when required shall pay to the Lessor all
extra premiums of insurance (including stamp duty) on the Premises or the
Building and on any property therein (if any be required) on account of the
extra risk.
INFLAMMABLE SUBSTANCES
8.4 Without prejudice to the generality of Clause 8.3 the Lessee will not other
than in accordance with the permitted use of the Premises store chemicals
inflammable liquids acetylene gas or volatile or explosive oils compounds or
substances upon the Premises and will not use any of such substances or fluids
in the Premises for any purpose.
APPROVED INSURERS
8.5 All policies of insurance liable or required to be effected by the Lessee
pursuant to this Part 8 shall be taken out with an Insurance Office or Company
approved by the Lessor and such approval shall not be unreasonably withheld.
<PAGE> 21
17
EVIDENCE OF INSURANCE
8.6 The Lessee will in respect of any policy of insurance to be effected by the
Lessee pursuant to this Part 8 as and when reasonably required by the Lessor
produce to the Lessor the policy of insurance the receipt for the last premium
and a certificate of currency.
LESSOR NOT A PARTNER
8.7 The Lessor does not in any way or for any purpose become a partner of the
Lessee in the conduct of its business, or otherwise, or joint venturer or a
member of a joint enterprise with the Lessee. The provisions of this lease
relating to the percentage rent of sales are included solely for the purpose of
providing a method whereby the rent is to be measured and ascertained.
INDEMNIFICATION OF LESSOR - DAMAGE TO PROPERTY
8.8 The Lessee will indemnify and keep indemnified the Lessor from and against
all loss and damage to the Premises or the Building and all property therein
caused by the acts omissions or negligence of the Lessee or any clerk servant
workman licensee invitee employee agent client customer or visitor of the Lessee
by reason of the negligent or careless use or misuse waste or abuse of water gas
or electricity or faulty fittings and fixtures.
INDEMNIFICATION OF LESSOR - DAMAGE TO PERSON
8.9 The Lessee will indemnify and keep indemnified the Lessor from and against
all damages costs charges expenses actions claims and demands which may be
sustained or suffered or recovered or made against the Lessor by any person for
any injury such person may sustain when using or entering or near any portion of
the Building whether in the occupation of the Lessor or of the Lessee or of any
other person where such injury arises or has arisen as a result of the
negligence of or as a result of the creation of some dangerous thing or state of
affairs by the Lessee or by any clerk servant workman employee or agent of the
Lessee and whether the existence of such dangerous thing or dangerous state of
affairs was or ought to have been known to the Lessor or not.
COMPLIANCE WITH REQUIREMENTS OR AUTHORITIES
8.10 The Lessee will comply with all Laws or Requirements of any Authority and
of the Insurance Council of Australia and the proper requirements of any
interested Insurer in relation to the relative position of the partitions
proposed to be or erected by the Lessee within the Premises and the position for
the time being of sprinklers and other fire prevention equipment and
installations (including alarms) and the Lessee will pay the costs of any
alterations to such sprinkler and fire prevention equipment and installations
(including alarms) which are at any time required by reason of non-compliance by
the Lessee with any such Laws or Requirements or which may result from a
variation or amendment in such Laws or Requirements.
<PAGE> 22
18
RELEASE
8.11 The Lessee acknowledges that if any merchandise property or effects which
may be in the Premises during the continuance of this Lease shall be injured or
destroyed by fire water or otherwise howsoever no part of the loss or damage
occasioned thereby shall be borne by the Lessor whether the same shall occur by
reason of any fault in the construction of the Building or the Lessor's fixtures
and fittings or apparatus therein or by reason of the state of repair thereof or
howsoever otherwise the same may be caused or arise except as a result of the
negligence of the Lessor or any servant or agent of the Lessor and the Lessee
shall indemnify and keep indemnified the Lessor against any liability for damage
or loss to any other person or property whomsoever and howsoever caused by any
act or negligence whatsoever on the part of the Lessee or on the part of any
clerk servant workman licensee invitee employee agent client customer or visitor
of the Lessee.
NON-LIABILITY OF LESSOR
8.12 The Lessee agrees that the Lessor shall not be responsible for and releases
the Lessor from liability in respect of the loss of or damage to any property or
effects of the Lessee or any other person from or in the Building howsoever
occurring nor for any damage or injury to any person or property in the Building
or in the streets lanes and other lands adjacent to or adjoining the Building.
NON-LIABILITY FOR FAILURE OF EQUIPMENT
8.13 The Lessee agrees that the Lessor shall not be responsible for and shall
incur no liability in respect of any failure of any of the equipment or
machinery for the time being in the Building (including without limiting the
generality thereof any air-conditioning system, ventilation system, fire
sprinkler system, escalator or lifts) or for the ineffectual operation thereof
or for any of that equipment or machinery not working for any reason whatsoever
or for any damage or loss occasioned or arising in consequence thereof to the
Lessee or to any person claiming by through or under the Lessee. The Lessor
shall use its best endeavors to ensure that such equipment and machinery is kept
and maintained in good working order. The Lessee shall indemnify and keep
indemnified the Lessor from and against all actions, claims, costs, damages,
decrees, demands, expenses, judgments, losses, orders, proceedings, summons,
suits and writs of any nature whatsoever arising out of or in consequence of any
of the matters aforesaid.
BUILDING TO BE VACATED DUE TO EMERGENCY
8.14 It shall not be a breach of the Lessor's covenant for quiet enjoyment nor
shall the Lessee have any claim on the Lessor for any rebate of rent or
compensation if the Lessor in its absolute discretion shall cause the Premises
or the Building or any part thereof to be vacated by announcement on the public
address system or otherwise where it considers that a bomb or other explosive
device may have been placed in or about the Building or that some other danger
or emergency exists.
<PAGE> 23
19
DAMAGE OR DESTRUCTION OF BUILDING/PREMISES
8.15 If the Building or the Premises or any pan thereof shall at any time be
damaged or destroyed by any disabling cause so as to render the Premises or any
part wholly or substantially unfit for the occupation and use of the Lessee or
(having regard to the nature and location of the Premises and the normal means
of access) wholly or substantially inaccessible then and so often as the same
shall happen:-
8.15.1 Except where the damage or destruction aforesaid has been caused or
contributed to or arises from any act or omission of the Lessee or the
Lessee's employees and any policy or policies of insurance effected on
the Building shall have been vitiated or payment of the policy moneys
refused in consequence of some act or default of the Lessee or of the
Lessee's employees:-
(a) proportionate part of the Annual Rent according to the nature and
extent of damage sustained shall abate and all other remedies for
recovery of such proportionate part thereof falling due after such
damage shall be suspended until the Premises have been restored or
made fit for the occupation and use of the Lessee or accessible to
the Lessee as the case may be provided that the obligation to pay
percentage Rent as hereinafter provided shall remain;
(b) this Lease may be determined by written notice by either the
Lessor or the Lessee without liability attaching to either party
by reason of such determination PROVIDED THAT the Lessee shall not
be entitled to determine this Lease as hereinbefore provided if
the Lessor within a period of two (2) months after the occurrence
of the destruction or damage aforesaid shall have given written
notice to the Lessee of its intention to reinstate the Building
("restoration notice") and make the Premises fit for occupation
and use of the Lessee or accessible to the Lessee and if the
Lessor shall thereafter with all reasonable expedition (and
subject to all necessary approvals first being obtained) proceed
to reinstate the Building and make the Premises fit for occupation
and use of the Lessee or accessible to the Lessee as aforesaid;
(c) if the Lessor gives a restoration notice to the Lessee and
thereafter does not, within a reasonable time (having regard to
the extent of the damage or destruction and the time expected to
commence and carry out the necessary works), restore the Premises,
or make them fit for the occupation and use of, or render them
accessible to the Lessee, as the case may be, the Lessee may serve
on the Lessor notice of intention to terminate this Lease, and
unless the Lessor shall upon receipt of that notice proceed with
reasonable expedition and diligence to restore the Premises, or
make them fit for the occupation and use of, or render them
accessible to the Lessee as the case may be, the Lessee may
terminate this Lease by giving not less than one (1) month's
notice in writing to the Lessor, and at the expiration of the last
mentioned notice this Lease shall be at an end; and
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20
(d) if the Premises have not been restored or made fit for occupation
within six (6) months after the occurrence of the destruction or
damage aforesaid the Lessor or the Lessee may terminate this Lease
by giving to the other not less than one month's notice in writing
to the other and at the expiration of such notice this Lease shall
be at an end.
8.15.2 If in the Lessor's opinion the damage to the Building or the Premises as
aforesaid is such that it is impractical or undesirable to restore the
Premises, or make them fit for the occupation and use of the Lessee or
render them accessible to the Lessee as the case may be, the Lessor may
terminate this Lease by giving not less than one (1) month's notice in
writing to the Lessee and at the expiration of that notice this Lease
shall be at an end.
8.15.3 No liability shall attach to the Lessor or the Lessee by reason of
termination of this Lease pursuant to this Clause 8.15 but, except as
aforesaid, any such termination shall be without prejudice to the rights
of either party in respect of any antecedent breach or non-observance of
any covenant or provision of this Lease.
8.15.4 Any dispute arising under this Clause 8.15 shall be determined by a loss
assessor being a member of the Insurance Council of Australia Ltd.
appointed by the President for the time being of the said Council. The
person so appointed shall be an assessor having substantial experience in
assessing buildings of a similar type within the appropriate area in
which the Building is located or other comparable area and shall in
making his determination act as an expert and not as an arbitrator and
his determination shall be final and binding on both parties. The cost of
any such determination shall be borne by either or both of the parties
hereto (and if by both of the parties in the proportion between them) as
the person making the determination shall decide.
Nothing contained in this Clause 8.15 shall impose upon the Lessor any
obligation to restore or reinstate the Building or the Premises.
PART 9 - LESSOR'S COVENANTS
QUIET ENJOYMENT
9.1 The Lessor warrants that the Lessee paying the rent hereby reserved and
observing and performing the covenants conditions and restrictions on its part
herein contained shall and may peaceably hold and enjoy the Premises during the
term without any interruption by the Lessor or by any person rightfully claiming
through under or in trust for it subject always to the rights powers remedies
and reservations of the Lessor.
PAYMENT OF RATES AND TAXES
9.2 The Lessor shall conduct, manage and operate the Building and shall pay
or cause to be paid as and when they fall due all rates, taxes and charges
assessed against the Land which are not
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21
payable by any tenant or occupier of any part of the Building. The Lessee shall
not be liable for any part of such rates, taxes and charges or any other
outgoings of the Building except as provided elsewhere in this Lease.
SERVICES TO BE PROVIDED BY LESSOR
9.3 Without limiting the generality of Clause 8.13, the Lessor shall use
reasonable endeavors to ensure the services of the Building are operational and
functional during such times as the Lessee is required to be open for business
pursuant to Clause 5.8 but should any of such services be inoperative or fail to
function or should the Lessor by reason of the need to repair or maintain or
replace such services or by reason of the operation of any Laws or Requirements
issued by any Authority be compelled to shut off or remove any such service the
Lessee shall not be entitled to terminate this Lease by that reason alone nor
shall the Lessee have any right of action claim for compensation damages or
claim for abatement of rent against the Lessor in that respect.
MAINTENANCE OF COMMON AREAS
9.4 Subject to the provisions of Clause 9.3 the Lessor shall keep and maintain
in good order and repair and in a clean and tidy condition all Common Areas.
USE OF COMMON AREAS WITHIN THE BUILDING
9.5 Subject to the limitations and restrictions herein contained the Lessor
agrees that the Lessee its employees and agents shall be entitled (in common
with other persons authorised by the Lessor) to use the Common Areas within the
Building for the purposes for which the Common Areas within the Building were
designed or intended to be used.
9.6 The Lessor warrants that prior to the commencement of this Lease it
obtained the consents of all mortgagees and debenture holders having an interest
in the Land.
PART 10 - COMMON AREAS
OBSTRUCTION OF DRIVEWAYS
10.1 The Lessee shall not obstruct and shall do all such acts and things as may
be reasonably necessary to prevent its employees service suppliers and others
over whom it may have control from obstructing in any manner howsoever the
entrances exits and driveways in from and within the Building.
OBSTRUCTION OF PASSAGEWAYS
10.2 The Lessee shall not obstruct or permit to be obstructed by its employees
service suppliers and others over whom it may have control any part of the
Common Areas (and in particular the
<PAGE> 26
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vestibules entrances passageways driveways loading docks and stairways therein)
by leaving or placing therein any article or thing or by any meeting of persons.
REVOCATION OF LICENCE TO ENTER
10.3 The Lessor may in the name of and as the agent of the Lessee give notice
in writing to any person who purports to enter upon and make use of any part of
the Land as an invitee of the Lessee and who does not observe the rules and
regulations of the Lessor relating thereto or who is deemed not to be bona fide,
revoking the licence of such person to enter upon any part of the Land.
INTERFERENCE WITH SERVICES
10.4 The Lessee shall not interfere with or permit any person under the
control to interfere with the air-conditioning equipment fire equipment or any
other services or appurtenances contained in or about the Common Areas.
DIRECTORY BOARDS
10.5 Any directory boards provided by the Lessor shall be under the sole
control of the Lessor who may allot space therein for the names and descriptions
of the tenants of the Building. The form of the Lessee's name and description
and any change thereto shall be approved of by the Lessor and erected by the
lessor at the expense of the Lessee.
RULES AND REGULATIONS
10.6 The Lessor may promulgate rules and regulations relating to the Building
not inconsistent with or in derogation of the rights of the Lessee hereunder
including but not limited to:-
10.6.1 the use safety care and cleanliness thereof;
10.6.2 the preservation of good order therein;
10.6.3 the comfort of persons lawfully using the same;
10.6.4 the location of garbage and refuse therein pending its removal;
10.6.5 the closure thereof or any part thereof outside of normal trading hours;
10.6.6 the external appearance of the Building.
Any such rules and regulations may from time to time be repealed amended or
added to at the discretion of the Lessor and upon notice in writing thereof
signed by the Lessor or its Managing
<PAGE> 27
23
Agent being given to the Lessee shall be and become as binding upon the Lessee
as if the same were expressly set forth herein as covenants on the part of the
Lessee.
PART 11 - RESERVATIONS
ROOF
11.1 The Lessor reserves the sole and exclusive right to the use of the roof and
external walls of the Premises including the right to erect and display
advertising signs thereon.
ALTERATIONS OR ADDITIONS TO THE BUILDING
11.2 The Lessor expressly reserves the right from time to time to effect
alterations or additions to the Building (other than the Premises) or to
increase or reduce the area of Land or to sell transfer lease mortgage or
otherwise deal with any of the Land PROVIDED ALWAYS THAT in so doing (except
temporarily during the course of works) the means of ingress to and egress from
the Premises from and to public streets shall be no less adequate than those
prevailing at the Date of Commencement and provided further that in exercising
any such rights the Lessor will endeavor to cause as little inconvenience to the
Lessee as is practicable in the circumstances and will not unreasonably
interfere with the conduct of the Lessee's business and the estate or interest
of the Lessee under this Lease shall be subject to all such reservations.
VIEWING
11.3 The Lessor reserves the right and the Lessee shall permit at all reasonable
times of the day prospective purchasers of the Land (and also prospective
tenants of the Premises during the period of three months immediately preceding
the date of expiry of this Lease) either bearing the written authority of or
accompanied by the Lessor or its employees or agents to view the Premises.
LICENCES FOR USE OF COMMON AREAS
11.4 The Lessor reserves the right to grant to any person a licence to use any
part of the Common Areas either exclusively or in common with others for such
purposes for such periods and upon such terms and conditions as the Lessor in
its discretion may think fit and may also at its discretion permit the
installation of vending machines on the Common Areas, provided that in doing so
the Lessor does not unreasonably interfere with the conduct of the Lessee's
business.
GRANT OF EASEMENTS
11.5 The Lessor reserves the right for the purpose of providing public or
private access to or egress from the Land or other land adjacent thereto (herein
called "adjacent land") or the support of structures erected or to be erected on
the Land or adjacent land or the provision of transportation or other services
(including water drainage gas electricity telephonic and electronic
communications) to the Land or to adjacent land to enter into any arrangements
or agreements with
<PAGE> 28
24
any of the owners lessees tenants or occupiers of adjacent land or with any
public or other authority and for such purposes may dedicate land for road or
other purposes transfer grant or create easements in favour of such persons
and/or authorities and upon such terms and conditions as the Lessor thinks fit
provided always that the Lessor in exercising the rights reserved by this Clause
shall not enter into any arrangement or agreement or dedicate land or grant or
create any easement right or privilege in favour of any person other than the
Lessee which shall materially derogate from the enjoyment of the rights
conferred on the Lessee by this Lease.
HEAD LEASE OR OTHER INTERESTS
11.6 The Lessee shall at all times during the term hereof permit any person
having any estate or interest in the Premises superior to or concurrent with the
Lessor to exercise the Lessor's or such other person's powers to enter and view
the Premises and to carry out repairs renovations maintenance and other work
thereon and otherwise to exercise or perform their lawful rights or obligations
in regard thereto.
BENEFIT OF LESSEE'S COVENANTS
11.7 In the event of a person other than the Lessor becoming entitled to receive
the rents hereby reserved either by operation of law or otherwise such person
shall have the benefit of all covenants and agreements on the part of the Lessee
hereunder and the Lessee at the cost of the Lessor shall enter into such
covenants with such other person in this regard as the Lessor may reasonably
require.
MANAGING AGENT
11.8 The Lessor may from time to time appoint a Managing Agent to manage the
Building and/or Premises and any Managing Agent so appointed shall represent the
Lessor in all matters relating to this Lease except insofar as the Lessor shall
otherwise in writing direct and provided always that any communication from the
Lessor shall to the extent of any inconsistency supersede any communication from
the Managing Agent.
RESUMPTION OF LAND
11.9 Notwithstanding anything herein contained the Lessee hereby acknowledges to
the Lessor that if the whole or any part of the Land shall be resumed during the
term of this Lease the Lessor shall be at liberty by notice in writing to the
Lessee to terminate this Lease without any claim or right against the Lessor on
the part of the Lessee for damages or loss by reason of such termination but
without prejudice to the remedies and rights of either the Lessor or Lessee for
any antecedent breach of covenant.
<PAGE> 29
25
PART 12 - DEFAULT, TERMINATION, ETC
DEFAULT
12.1 In case:-
RENT IN ARREARS
12.1.1 the rent(s) hereby reserved or any part(s) thereof shall be in arrears
and unpaid for the space of fourteen (14) days next after any of the days
appointed for payment thereof as aforesaid (whether demanded or not);
FAILURE TO PAY MONEYS
12.1.2 any moneys payable by the Lessee to the Lessor hereunder on demand shall
not have been paid within fourteen (14) days of making of demand therefor
or if any other moneys payable by the Lessee m the Lessor shall not have
been paid by the due date therefor;
FAILURE TO PERFORM COVENANTS
12.1.3 the Lessee neglects or fails to perform or observe any of the covenants,
conditions or agreements contained in this Lease which on the part of the
Lessee are or ought to be performed or observed;
FAILURE TO EFFECT REPAIRS
12.1.4 the Lessee neglects fails or refuses to perform the repairs properly
required by any notice given by the Lessor under this Lease or in case
any such repairs are not completed by the Lessee within the time therein
specified;
ASSIGNMENT FOR BENEFIT OF CREDITORS
12.1.5 any assignment shall be made of the property of the Lessee for the
benefit of creditors;
BANKRUPTCY LIQUIDATION OR RECEIVERSHIP
12.1.6 the Lessee being an individual shall be declared bankrupt or being a
company shall enter into liquidation (whether voluntary, compulsory or
provisional) or be wound-up or dissolved or enter into a scheme of
arrangement for creditors or shall be placed under official management or
a receiver and/or manager of any of its assets be appointed; or
EXECUTION AGAINST LESSEE
12.1.7 execution is levied against the Lessee and is not discharged within
twenty-one (21) days
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26
then and in any of the said cases the Lessee shall be deemed to have made
default. The Lessor may elect to treat any such default as a repudiation of this
Lease by the Lessee.
FORFEITURE OF LEASE
12.2 If the Lessee shall have made default as aforesaid the Lessor may (after
first giving prior notice where required by law) at its option:-
DETERMINATION BY RE-ENTRY
12.2.1 without any prior demand or notice re-enter into and take possession of
the Premises or any part thereof in the name of the whole (by force if
necessary) and eject the Lessee and all other persons therefrom and
repossess and enjoy the same as of its first and former estate therein
and thereupon the Lease shall be absolutely determined;
DETERMINATION BY NOTICE
12.2.2 by notice in writing to the Lessee determine this Lease and from the date
of giving such notice this Lease shall be absolutely determined; or
CONVERSION TO MONTHLY TENANCY
12.2.3 by notice in writing to the Lessee elect to convert the unexpired portion
of the term of this Lease into a tenancy from month to month in which
event this Lease shall be determined as from the giving of such notice
and thereafter until the tenancy is determined the Lessee shall hold the
Premises from the Lessor as tenant from month to month.
LESSOR TO RECTIFY
12.3 The Lessor may but shall not be obliged to remedy at any time without
notice any default by the Lessee under this Lease and whenever the Lessor so
elects all reasonable costs and expenses incurred by the Lessor (including legal
costs and expenses) in remedying a default shall constitute a liquidated debt
and shall be paid by the Lessee to the Lessor on demand.
WAIVER
12.4.1 The Lessor's failure to take advantage of any default or breach of
covenant on the part of the Lessee shall not be or be construed as a
waiver thereof, nor shall any custom or practice which may grow up
between the parries in the course of administering this Lease be
construed to waive or to lessen the right of the Lessor to insist upon
the performance by the Lessee of any term, covenant or condition hereof,
or to exercise any rights given to the Lessor on account of any such
default.
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27
12.4.2 A waiver by the Lessor of a particular breach or default shall not be
deemed to be a waiver of the same or any other subsequent breach or
default.
12.4.3 The subsequent acceptance of rent under this Lease by the Lessor shall
not be deemed to be a waiver of any preceding breach by the Lessee of any
term, covenant or condition of this Lease, other than the failure of the
Lessee to make the particular payment or payments of rental so accepted,
regardless of the Lessor's knowledge of such preceding breach at the time
of acceptance of such rent.
REMOVAL BY LESSOR OF STOCK-IN-TRADE, FITTINGS AND FIXTURES
12.5 The Lessor may upon re-entry as aforesaid remove from the Premises any
contents of every description including but without limiting the foregoing all
plant equipment stock-in-trade and fittings and fixtures of the Lessee in or
about the Premises and store the same in a public warehouse or elsewhere at the
cost of and for the account of the Lessee or otherwise dispose of the same as
the Lessor shall think fit without being deemed guilty of conversion or becoming
liable for any loss or damage occasioned by such removal storage and/or
disposal. Any costs incurred by the Lessor in or about such removal, storage
and/or disposal shall be paid by the Lessee to the Lessor upon demand.
TENDER AFTER DETERMINATION
12.6 Any moneys tendered by the Lessee after the determination of this Lease
in the manner described in Clauses 12.2.1 and 12.2.2 and accepted by the Lessor
may be and (in the absence of any express election of the Lessor) shall be
applied firstly on account of any rental and other moneys accrued due hereunder
but unpaid at the date of determination and secondly on account of the Lessor's
costs of re-entry.
INTEREST ON OVERDUE MONEYS
12.7 Without prejudice to the rights, powers and remedies of the Lessor
otherwise under this Lease the Lessee will pay to the Lessor interest at the
rate of fifteen per cent (15%) per annum, calculated on a day to day basis on
any moneys due but unpaid by the Lessee to the Lessor on any account whatsoever
pursuant to this Lease such interest to be computed (notwithstanding the
provision of Clause 12.1.1) from the due date for the payment of the moneys in
respect of which the interest is chargeable until payment of such moneys in
full.
POWER OF ATTORNEY
12.8 The Lessee hereby irrevocably makes, nominates, constitutes and appoints
the Lessor and its nominee or nominees and their substitute or substitutes
jointly and severally to be the true and lawful Attorney or Attorneys of the
Lessee to act any time after the power to re-enter herein contained shall have
become exercisable or shall have been exercised (a sufficient proof whereof
shall be the statutory declaration of any officer of the Lessor duly authorized
by the Lessor in that
<PAGE> 32
28
behalf) to execute and sign a transfer or a surrender of this Lease and to
procure the same to be registered for this purpose to use the name of the Lessee
and generally to do, execute and perform any act, matter or thing relative to
the Premises as fully and effectually as the Lessee could do in and about the
Premises AND the Lessee hereby covenants to ratify and confirm all and
whatsoever the said Attorney or Attorneys shall lawfully do or cause to be done
in or about the Premises.
DAMAGES FOR BREACH
12.9 The Lessee expressly acknowledges and agrees that:-
12.9.1 in the event that the Lessee's conduct (whether by acts or omissions)
constitutes a repudiation of this Lease (or of the Lessee's obligations
under this Lease) or constitutes a breach of any lease covenants the
Lessee covenants to compensate the Lessor for any loss or damage suffered
by reason of or arising from any such repudiation or breach;
12.9.2 the Lessor shall be entitled to recover damages against the Lessee in
respect of repudiation or breach of covenant for the damage suffered by
the Lessor for and/or during the entire term of this Lease;
12.9.3 the Lessor's entitlement to recover damages from the Lessee and/or any
other person shall not be affected or limited by inter alia any of the
following:-
(a) if the Lessee shall abandon or vacate the Premises;
(b) if the Lessor shall elect to re-enter or terminate the Lease;
(c) if the Lessor shall accept the Lessee's repudiation; and/or
(d) if the parties' conduct (or that of any servant or agent thereof)
shall constitute a surrender by operation of law.
12.10 The Lessor shall be entitled at any time in the Lessor's absolute
discretion to institute legal proceedings claiming damages against the Lessee in
respect of the entire lease term including the period before and after the
abandonment termination repudiation acceptance of repudiation or surrender by
operation of law referred to in the immediately preceding sub-paragraph(s)
whether the proceedings are instituted either before or after such conduct.
12.11 In the event of the Lessee vacating the Premises whether with or without
the Lessor's consent the Lessor shall take reasonable steps to mitigate its loss
and to endeavor to re-lease the Premises at a reasonable rent and on reasonable
terms. The Lessor's entitlement to damages shall be assessed on the basis that
the Lessor has observed the obligation to mitigate damages. The lessor's conduct
taken in pursuance of this duty to mitigate damages shall not of itself
constitute acceptance of the Lessee's breach or repudiation or a surrender by
operation of law.
<PAGE> 33
29
12.12 Should the Lessor terminate this Lease following any breach of a
fundamental/essential provision or otherwise then without prejudice to any other
right or remedy of the Lessor herein contained or implied the Lessor shall be
entitled to recover from the Lessee the difference between the aggregate of the
Annual Rent and other rents and moneys payable by the Lessee hereunder for the
unexpired residue of the term less any amount the Lessor is able to obtain or
could in the Lessor's opinion reasonably be expected to obtain by observing the
provisions of Clause 12.1 1.
PART 13 - DETERMINATION OF TERM
LESSEE TO YIELD UP
13.1 The Lessee shall at the expiration or sooner determination of the term
hereof yield up the Premises in the order and condition described in Clause 6.1
hereof.
LESSEE'S OBLIGATIONS TO REMOVE FITTINGS
13.2 The Lessee shall unless the Lessor otherwise agrees in writing during the
last fourteen (14) days of the term hereof remove from the Premises all fixtures
fittings floor coverings signs and notices which have been erected or installed
by or on behalf of the Lessee during or prior to the term hereof or acquired
with the consent of the Lessor from any previous tenant of the Premises (other
than fixtures the cost of which have been paid or subsidised by the Lessor or
its predecessors in title) provided that such removal can be effected without
causing any substantial damage to the Premises or the Building and provided
further that the Lessee shall make good any damage whatsoever caused to the
Premises or Building by such removal.
FITTINGS NOT REMOVED
13.3 If the Lessee shall not have removed the said fixtures, fittings, floor
coverings, signs and notices referred to in the preceding clause by the Date of
Termination then the Lessor may at its option itself cause any such fixtures,
fittings, floor coverings, signs and notices to be removed and to be stored in a
public warehouse or elsewhere at the risk of the Lessee or otherwise disposed of
in such manner as the Lessor shall think fit and any damage to the Premises or
the Building in such removal to be made good and may recover any costs of such
removal storage and making good from the Lessee as a liquidated debt payable on
demand.
REMOVAL OF STOCK-IN-TRADE
13.4 The Lessee shall remove from the Premises all stock-in-trade and other
movable chattels prior to the expiration of the term hereof except that if the
Lease is determined prior to the date of Termination the Lessor shall if
requested so to do by the Lessee allow the Lessee its servants and contractors
access to the Premises during any one of the three days (excluding Saturdays,
Sundays and public holidays) next following the date of determination between
the hours of 9.00am and 5.00pm for the purpose of removing any such
stock-in-trade or chattels from the
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30
Premises. If the Lessee shall fail to remove any such stock-in-trade or chattels
as mentioned in this clause the Lessor may at its option:-
13.4.1 cause any such stock-in-trade or chattels to be removed and stored in a
public warehouse or elsewhere at the risk and at the cost of the Lessee;
or
13.4.2 treat any such stock-in-trade or chattels as if the Lessee had abandoned
its interest therein and deal with the same in such manner as the Lessor
shall think fit.
The Lessee shall indemnify and hold indemnified the Lessor in respect of any
damage done to the Premises or to the Building in or about the removal of such
stock-in-trade or chattels and also in respect of any costs incurred by the
Lessor in the removal and storage thereof as aforesaid and also in respect of
all claims demands actions costs judgments and expenses which the Lessor may
suffer or incur at the suit of any person (other than the Lessee) claiming an
interest in such stock-in-trade or chattels by reason of the Lessor acting in
any manner abovementioned.
ANTECEDENT BREACHES
13.5 The determination of this Lease shall not prejudice or affect any rights
or remedies of the Lessor against the Lessee on account of any antecedent breach
by the Lessee of any terms, covenants and restrictions on the part of the Lessee
hereunder.
PART 14 - MISCELLANEOUS
EXECUTION OF LESSOR'S NOTICE
14.1 Any notice or other document or writing served or given by the Lessor
hereunder shall be valid and effectual if signed by the manager of properties or
secretary or attorney(s) or solicitors for the time being of the Lessor or any
other person or persons nominated from time to time by the Lessor.
SERVICE OF NOTICE ON LESSOR
14.2 Any notice required to be served on the Lessor hereunder shall be served
personally or by sending the same prepaid security post addressed to the Lessor
at the address of the Lessor herein set forth or at such address as the Lessor
shall from time to time by notice in writing to the Lessee nominate.
SERVICE OF NOTICE ON LESSEE
14.3 Any notice required to be served or which the Lessor may elect to serve
on the Lessee shall be sufficiently served if served personally or by sending
the same by prepaid security post addressed to the Lessee at Level 4, 75 Grafton
Street Bondi Junction or at such address as the Lessee shall from time to time
by notice in writing to the Lessor nominate.
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TIME OF SERVICE
14.4 Any notice sent by post shall be deemed to be served at the time when it
would be delivered in the ordinary course of post.
LESSEE TO PAY COSTS AND DISBURSEMENTS
14.5 The Lessee will pay all stamp duty (including penalties and fines other
than penalties and fines due to the default of the Lessor) and all the Lessor's
reasonable legal and other costs charges and expenses of and incidental to the
preparation completion stamping and registration of this Lease and any certified
copy thereof required by the Lessor and of any consent required hereunder
whether by the Lessor's Mortgagee or otherwise and of any subletting and of any
surrender or termination of this Lease otherwise than by effluxion of time and
in case of default by the Lessee in observing or performing any covenants in
this Lease contained or implied the Lessee shall pay to the Lessor all legal and
other costs charges and expenses for which the Lessor shall become liable or
which the Lessor shall suffer or incur in consequence of or in connection with
such default.
PART 15 - ANNUAL RENT
DEFINITIONS
15.1 For the purposes of this Lease:-
15.1.1 "ANNUAL RENT" shall mean the amount specified in Item 10 of the Reference
Schedule as varied from time to time in accordance with the provisions of
this Lease;
15.1.2 "CONSUMER PRICE INDEX ADJUSTMENT DATE" means each end every date referred
to in Item 11 of the Reference Schedule;
15.1.3 "CURRENT CPI" means the Consumer Price Index for All Groups (Sydney) as
last published by the Australian Statistician prior to the relevant
Consumer Price Index Adjustment Date;
15.1.4 "PREVIOUS CPI" means the Consumer Price Index for All Groups (Sydney) as
last published by the Australian Statistician prior to the date being
twelve (12) months prior to the Consumer Price Index Adjustment Date then
relevant for the purpose of adjustment of the Annual Rent pursuant to
Clause 15.3; and
15.1.5 "FIXED INCREASE ADJUSTMENT DATE" means each and every date referred to in
Item 12 of the Reference Schedule.
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PAYMENT OF ANNUAL RENT
15.2 The Lessee shall pay to the Lessor without demand and without any
deduction or right of set-off whatever the Annual Rent hereby reserved by equal
monthly instalments in advance on the first day of each month (and
proportionately for any part of a month) the first instalment to be paid on the
Date of Commencement. All such instalments shall be paid to the Management
Office at the Building or as otherwise directed from time to time by the Lessor.
CONSUMER PRICE INDEX ADJUSTMENT
15.3 At each Consumer Price Index Adjustment Date the Annual Rent shall be
adjusted and the Annual Rent payable hereunder for the ensuing year shall be the
greater of:-
(a) the Annual Rent payable immediately prior to the relevant Consumer Price
Index Adjustment Date multiplied by the Current CPI and divided by the
Previous CPI; and
(b) the Annual Rent payable immediately prior to the relevant Consumer Price
Index Adjustment Date multiplied by 104 and divided by 100.
REPLACEMENT PRICE INDEX
15.4 Should the Price Index referred to in Item 12 of the Reference Schedule
be discontinued or abolished then the Price Index substituted therefor by the
Australian Statistician shall be used for the calculations hereinbefore referred
to and if no Price Index shall be substituted therefor by the Australian
Statistician then such index or indices shall be used as in the opinion of the
Chief Accountant or other similar responsible officer of Westpac Banking
Corporation (or such other bank as the Lessor may nominate from time to time)
will most accurately reflect the changes in the prevailing levels of prices that
the discontinued or abolished Price Index previously catered for.
FIXED INCREASE ADJUSTMENT
15.5 At each Fixed Increase Adjustment Date the Annual Rent shall be increased
to the amount specified adjacent to that date in Item 12 of the Reference
Schedule or by a percentage of the Annual Rent if a percentage is specified
therein.
PART 16 - SECURITY DEPOSIT/BANK GUARANTEE
16.1 The Lessee hereby covenants with the Lessor as follows:-
16.1.1 On the signing of this Lease the Lessee shall pay to the Lessor the
amount referred to in Item 13 of the Reference Schedule as a security
deposit for the due observance and performance by the Lessee of all the
covenants and provisions herein contained on the part of the Lessee to be
observed or performed.
<PAGE> 37
33
16.1.2 If at any time the Lessee fails to duly observe or perform any of the
covenants and provisions contained herein on the part of the Lessee to be
observed or performed the Lessor may in its discretion at any time
appropriate to itself absolutely all or any part of the security deposit
as may be necessary in the reasonable opinion of the Lessor to compensate
the Lessor for all loss or damage suffered or which may be suffered by
the Lessor by reason of such failure. Any such appropriation by the
Lessor shall not constitute a waiver of such failure and shall not
prejudice any other remedy or right of the Lessor in respect of such
failure.
16.1.3 If the security deposit or any part thereof is appropriated by the Lessor
as aforesaid and this lease remains on foot the Lessee shall upon demand
by the Lessor pay to the Lessor the amount so appropriated so that the
security deposit is maintained during the term of this lease at the
amount referred to in Item 13 of the Reference Schedule.
16.1.4 In the event that the Lessor's interest in the Premises is assigned or
transferred the Lessor shall pay the security deposit less all sums
appropriated by it in accordance with this clause to any such assignee or
transferee and thereupon the Lessor shall be discharged from all
liability to the Lessee or any other person in respect of the security
deposit.
16.2 The Lessor hereby covenants with the Lessee that within twenty-one days
of the Lessor receiving the written request of the Lessee made after the
termination of this lease, the Lessor shall pay to the Lessee or its assigns so
much of the security deposit as has not been appropriated by the Lessor in
accordance with this clause.
16.3 After each review of the Annual Rent upon the demand of the Lessor the
Lessee shall pay to the Lessor such amount as may be necessary to increase the
security deposit to the same proportion that it bore to the Annual Rent prior to
such review.
16.4 The Lessee's obligation to pay the security deposit referred to in this
Part 16 may be satisfied by the Lessee delivering to the Lessor a written
guarantee in favor of the Lessor issued by a trading bank approved by the Lessor
for the amount referred to in Item 13 of the Reference Schedule and after each
adjustment or review of the Annual Rent or in the event of the appropriation of
all or part of the monies secured by such guarantee the Lessee will provide a
replacement Bank Guarantee for such amount as represents the same proportion of
the Annual Rent as the amount specified in Item 13 of the Reference Schedule
bears to the Annual Rent specified in Item 10 of the Reference Schedule.
16.5 The Guarantee referred to in Clause 16.4 ("the Bank Guarantee") shall be
irrevocable and shall remain in full force and effect until the obligations of
the Lessee have been fully satisfied and if the Lessee shall at any time fail to
duly observe or perform any of the covenants and provisions contained herein the
Lessor may at its absolute discretion at any time appropriate to itself
absolutely all or any part of the monies secured by the Bank Guarantee as may be
necessary in the reasonable opinion of the Lessor to compensate the Lessor for
such loss or damage but such
<PAGE> 38
34
appropriation shall not constitute a waiver of such failure and shall not
prejudice any other remedy or right of the Lessor in respect thereof.
PART 17 - GUARANTEE AND INDEMNITY
17.1 The Guarantor hereby guarantees to the Lessor the due payment of all
moneys hereby covenanted or agreed by the Lessee to be paid and the due
performance, observance and fulfillment by the Lessee of all the covenants,
terms, provisions and conditions herein contained or implied and on the part of
the Lessee to be performed observed and fulfilled.
17.2 The Guarantor hereby indemnifies the Lessor and agrees at all times,
hereafter to keep the Lessor indemnified from and against all damages and all
claims costs losses expenses or obligations direct or indirect which the Lessor
may suffer or incur consequent upon or arising directly or indirectly out of any
breach or non-observance by the Lessee of any of the covenants terms provisions
or conditions contained or implied in this Lease or any extension or renewal
thereof and on the part of the Lessee to be performed observed or fulfilled.
17.3 Without limiting the generality of any other provision of this Lease the
rights remedies and recourse of the Lessor pursuant to this Part 17 shall not in
any way be prejudiced or affected and shall remain fully enforceable and the
liability of the Guarantor hereunder shall not be abrogated prejudiced limited
or affected notwithstanding any one or more or all of the following
circumstances :-
17.3.1 the granting of any time, credit, forbearance, indulgence or concession
at any time by the Lessor to the Lessee or any Guarantor;
17.3.2 any absolute or partial release of the Lessee or any one or more
Guarantor or any compromise with the Lessee or any one or more Guarantor;
17.3.3 any variation of the provision of this Lease or any extension or renewal
thereof and any extension or renewal or holding over of the term or other
continued occupation of the Premises by the Lessee;
17.3.4 any composition, compromise, release, discharge, arrangement,
abandonment, waiver, variation, relinquishment or renewal of any security
or right by the Lessor;
17.3.5 any assignment or sub-lease of the Premises or any part thereof;
17.3.6 any determination of the Lease (whether by effluxion of time re-entry
forfeiture surrender or otherwise);
17.3.7 the fact that the several rentals and other moneys hereby reserved or any
part thereof may not be recoverable or may cease to be recoverable or may
never have been recoverable or that any transaction affecting in any way
the several rentals and such other moneys or the
<PAGE> 39
35
obligations contained in or secured by this Lease is void, voidable or
unenforceable in whole or in part whether initially or otherwise;
17.3.8 any failure or agreement not to sue, exchange or modification made or
any other dealing act or omission (whether constituting a waiver
election estoppel or otherwise) by the Lessor with respect to any
judgment, order for payment of moneys, specialty, instrument negotiable
or otherwise, or other security whatsoever recovered held or enforceable
by the Lessor or with respect to any obligation or liability whatsoever
in respect of all or any of the several rentals and other moneys hereby
reserved or the obligations contained in this Lease;
17.3.9 the death, disability, bankruptcy, infancy, deed of arrangement
assignment or composition for the benefit of creditors, winding-up,
schemes of arrangement reduction of capital, capital reconstruction, or
the appointment of a receiver and manager (whether by the court or under
the powers contained in any instrument) or official management of the
Lessee or any Guarantor or notice of any of the preceding circumstances;
17.3.10 the fact that one or more of the persons named herein as a Guarantor may
never execute this Lease as Guarantor or that the execution of this
Lease by any one or more of such Guarantor (other than the person sought
to be made liable hereunder) is or may become unenforceable, void or
voidable;
17.3.11 any exercise or purported exercise by the Lessor of its right of
re-entry
AND EACH of the above circumstances shall be construed separately and
independently and so as not to limited the meaning or any other listed
circumstance and shall not be limited by the provisions of any other clause.
17.4 This Guarantee and Indemnity shall be irrevocable and continuing and
shall extend to cover all obligations of the Lessee to the Lessor howsoever
arising and it shall continue and remain in full force and effect until the due
performance observance and fulfillment by the Lessee of all the covenants terms
provisions and conditions on the part of the Lessee to be performed observed and
fulfilled in accordance with the terms hereof.
17.5 Neither the Guarantor's liability nor the Lessor's rights under this
Guarantee and Indemnity or otherwise shall be prejudiced or discharged by any
act or omission or any event or securities of any description which might
otherwise have the effect (whether at law in equity or under statute) of
prejudicing or discharging the liability of the Guarantor hereunder either as a
guarantor or principal debtor or as an indemnifier.
17.6 The Guarantor further agrees that any payment made to the Lessor and
later avoided by any statutory provision shall be deemed not to have discharged
the Guarantor's liability and in any such event the Lessor, the Lessee and the
Guarantor shall be restored to the rights which each respectively would have had
if the payment had not been made.
<PAGE> 40
36
17.7 The Guarantor hereby agrees to indemnify and keep indemnified the Lessor
against all losses claims costs expenses damages or obligations direct or
indirect sustained or incurred by the Lessor consequent upon any disclaimer of
this Lease by a liquidator of the Lessee for the residue of the term which Would
have remained if there had been no disclaimer.
17.8 The Guarantor shall not prove or claim in any such liquidation
composition arrangement or assignment or in respect of such appointment until
the Lessor has received one hundred cents in the dollar in respect of the moneys
due, owing or payable by the Lessee to the Lessor and the Guarantor shall hold
in trust for the Lessor such proof and claim and any dividend received thereon.
17.9 In the event that the Lease is transferred or assigned to any person or
persons the benefit of this Guarantee and Indemnity shall extend to the
transferee or assignee AND the benefit of this Guarantee and Indemnity shall
continue to enure concurrently for the benefit of the Lessor notwithstanding any
such transfer or assignment.
17.10 Where used herein "Guarantor" shall mean the party or parties referred to
in Item 4 of the Reference Schedule and if more than one jointly and severally.
PART 18 - OPTION FOR RENEWAL
GRANT OF OPTION
18.1 If the Lessee shall desire to take a renewed Lease of the Premises for
the further term of years set out in Item 14 of the Reference Schedule
commencing from the expiration of the Lease and shall give to the Lessor not
less than three (3) months nor more than six (6) months previous notice in
writing thereof and shall during the term duly and punctually pay the Annual
Rent and all other monies reserved by the Lease at the times hereinbefore
appointed for payment thereof and shall duly observe and perform the covenants
and agreements by and on the part of the Lessee expressed or implied in the
Lease up to the expiration of the term of the Lease the Lessor shall at the cost
and expense of the Lessee grant to the Lessee a renewed Lease for the further
term of years so specified upon the same terms and conditions as are herein
contained but excluding this entire Part 18 and subject to the variations set
out in Clauses 18.2 and 18.3 hereof.
ANNUAL RENT FOR RENEWED TERM
18.2 The Annual Rent for the renewed term shall be determined as follows:-
18.2.1 The Annual Rent shall be the amount determined by agreement between the
Lessor and the Lessee as being the current market rent of the Premises
based on a lease comprising all of the conditions herein contained
(except as to rent payable) made between willing parties and taking no
account of the value of any goodwill attributable to the Lessee's
occupation of the Premises or the value of the Lessee's fixtures and
fittings.
<PAGE> 41
37
18.2.2 For the purpose of this Part 18 of the Lease the current market rent
shall mean the rent that, having regard to the terms and conditions of
this Lease and such other matters as are relevant to the assessment of
current market rent, would be reasonably expected to be paid for the
Premises if the Premises were unoccupied and offered for renting for the
use permitted by this Lease.
18.2.3 If the Lessor and the Lessee are unable to agree on the current market
rent within twenty-one (21) days after the Lessor receives the Lessee's
notice exercising the option such rent shall be determined by valuation
carried out by a person appointed by agreement between the Lessor and the
Lessee or, failing agreement, appointed by the person for the time being
holding or acting in the office of President of the Australian Institute
of Valuers and Land Economists (NSW Division) Inc. and such valuation
shall include detailed reasons for the Valuer's determination and the
matters taken into account in making such determination.
18.2.4 For the purposes of Clause 18.2.4 if the said Institute has ceased to
exist then there shall be substituted therefor a reference to the body or
association as then serves substantially the same objects and purposes as
the said Institute.
18.2.5 All costs of the valuation obtained pursuant to Clause 18.2.3 shall be
borne by the Lessor and the Lessee in equal shares unless such valuation
is equal to or greater than the rent last nominated by the Lessor prior
to the appointment of the valuer in which event all costs of the
valuation shall be borne by the Lessee.
18.2.6 Notwithstanding the foregoing provisions the Annual Rent shall not be
less than the Annual Rent payable hereunder at the Date of Termination of
this Lease.
OTHER VARIATIONS FOR RENEWED LEASE
18.3 The renewed Lease shall contain the following variation to the terms of
this Lease:-
18.3.1 The Term of the renewed Lease shall be the term set out in Item 14 of the
Reference Schedule.
18.3.2 The Date of Commencement shall be the date after the date of termination
of this Lease.
18.3.3 The Date of Termination shall be the appropriate date of termination
having regard to the Date of Commencement and the Term.
18.3.4 The Consumer Price Index Adjustment Dates shall be those dates specified
in Item 15 of the Reference Schedule.
<PAGE> 42
38
EARLY DETERMINATION OF RENT
18.4 At any time which is not more than six (6) months but not less than three
(3) months before the last day on which the option to renew may be exercised and
provided that the Lessor and the Lessee have not already agreed on the current
market rent the Lessee may by notice in writing to the Lessor request a
determination of the current market rent in which event the following procedures
shall apply:-
18.4.1 The amount of the current market rent shall be determined (as at the date
of the request) in accordance with the provisions of Clause 18.1 and the
period within which the Lessee must exercise the option to renew shall be
varied so that the last day on which the option may be exercised is
twenty-one (21) days after the Lessee receives written notification of
the determination made pursuant to this sub-clause or the last day of the
term of this Lease, whichever is the earlier.
18.4.2 The amount of rent determined pursuant to Clause 18.4.1 shall be the
current market rent for the purposes of the exercise of the option
notwithstanding that it may be a determination of the current market rent
as at some earlier date.
18.4.3 All costs of the valuation obtained pursuant to Clause 18.4.1 shall be
borne by the Lessor and the Lessee in equal shares.
PART 19 - COVENANTS TO BE ESSENTIAL
19.1 Without limiting the generality of any of the other provisions contained
in this Lease the covenants by the Lessee as to the payment of rent herein
contained are essential terms of this Lease and the breach or non-observance of
any of which terms constitute and shall be deemed to constitute a fundamental
breach of the provisions of this Lease on the Lessee's part. Should the Lessor
terminate this Lease following any such fundamental breach then without
prejudice to any other right or remedy of the Lessor herein contained or implied
it is expressly agreed and declared that the Lessor shall be entitled to recover
from the Lessee as and by way of liquidated damages for such breach the
aggregate of the several rentals rates taxes and outgoings and other moneys
which would have been payable by the Lessee under this Lease had this Lease
continued until the date of expiration of the term of this Lease less the rent
or other income, if any, received by the Lessor from the Premises in respect of
the period from the date of such termination and such expiration date. The
Lessor's rights hereunder shall include the right to recover damages incurred by
the Lessor either before or at any time after the breach resulting from the
breach of the Lessee of a fundamental or essential term of this Lease. In
assessing and calculating the quantum of damages to which the Lessor may be
entitled under this provision such damages shall include in addition to all
other moneys which the Lessor might become entitled to receive:-
(i) all costs and expenses incurred in the recovery or attempted recovery of
rent or of possession of the Premises;
<PAGE> 43
39
(ii) all costs and expenses incurred in the reletting or attempted re-letting
of or in preparing the Premises for re-letting including advertising
expenses, agents commission, expenses in cleaning and tidying, removing
property or rubbish or restoring the Premises to the state and condition
in which the same are by the terms of this Lease required to be delivered
up at the expiration or sooner determination of the term hereby granted;
and
(iii) loss of the benefits and bargain which, but for the breach by the Lessee
of this Lease and the repudiation thereby accompanied, the due
performance of this Lease until the expiration of the term hereby granted
would otherwise have conferred upon the Lessor.
Except where repugnant to or excluded by the context reference to "rent" in this
clause shall mean and include not only the rent and additional rent(s) (if any)
hereby reserved but also interest which may become payable by virtue of a
default or breach by the Lessee hereunder and all moneys which under any other
provision of this Lease shall become payable to the Lessor whether on account of
rates taxes and outgoings or otherwise relating to the Premises so that failure
on the part of the Lessee to properly pay any such moneys shall be deemed to
constitutes a fundamental breach by the Lessee of this Lease to which the
provisions of this clause shall apply.
<PAGE> 44
40
We certify this dealing correct for the purposes of the Real Property Act, 1900.
DATE OF EXECUTION 12 JAN 1998
THE COMMON SEAL of CAPITAL )
CREDIT COMPANY PTY. LIMITED )
was hereunto affixed by authority of the )
Board of Directors in the presence of: )
THE COMMON SEAL of WINMOR )
PTY. LIMITED was hereunto affixed by )
authority of the Board of Directors in the )
the presence of: )
THE COMMON SEAL of BRILLIANT )
INTERACTIVE IDEAS PTY LTD was )
hereunto affixed by authority of the Board )
Board of Directors in the presence of: )
- ------------------- -------------------
Secretary Director
<PAGE> 45
41
CONSENT TO LEASE
LEASE between Capital Credit Pty. Limited A.C.N. 000 574 407 and Winmor Pty.
Limited (ACN 000 734 912) (the LESSOR) and BRILLIANT Interactive Ideas Pry Ltd
(the LESSEE) of premises at Level 2, 1 Transvaal Avenue, Double Bay (the
PREMISES)
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
(ACN 005 357 522) of Level 2, 100 Queen Street, Melbourne (the BANK)
the proprietor of Mortgage Nos. Q696636 and T756183 over the land described in
Certificate of Title Folio Identifier 1/580401 at the request of the parties to
the subject Lease CONSENTS to the granting of the Lease (including any further
term validly resulting from the exercise of any option to renew the Lease) and
all other provisions of the Lease subject to these provisions:-
- - This consent is without prejudice to the right of the Bank to exercise
its right under its Mortgages subject to the rights of the Lessee under
the Lease.
- - When the Bank exercises its rights under its Mortgages, it has all the
rights of the Lessor under the Lease:-
- to enforce observance of all covenants in the Lease relating to
the use and occupation of the Premises;
- to exercise all rights, powers, privileges, remedies and
authorities of the Lessor (including all right of re-entry and all
incidental powers); and
- to do all acts and grant all consents and licences to the same
extent as if those covenants, provisions, rights, powers,
privileges and authorities were given to the Bank.
- - If the Bank exercises its rights under its Mortgages and gives a written
notice to the Lessee to pay the rent to it, the Lessee must pay all
future rents and other monies payable under the Lease to the Bank, who
may demand and sue for them if not paid. Upon receipt of that notice, the
Lease is then deemed to be executed by the Lessee and the Bank.
- - All rights, powers and remedies of the Lessor under the Lease are not
capable of being enforced by the Lessor without the consent in writing of
the Bank until that notice is withdrawn or the Mortgages are discharged.
Until then the Bank will have the same rights and remedies as the Lessor
by virtue of the Lease, but if the Lessee has any legal or equitable
rights of set-off against the Lessor, the Lessee cannot enforce them
against the Bank.
<PAGE> 46
42
- - Subject to the Lessee's right of quiet enjoyment of the Premises, the
Bank will not be liable to observe or perform any of the obligations of
the Lessor under the Lease unless it becomes Mortgagee in possession.
- - The Lessor and the Lessee must not:-
- agree to assign or mortgage the Lease, or sublet all or any part
of the Premises, or change the use of the Premises; or
- vary the terms and conditions of the Lease or any renewal of it
without the written consent of the Bank, which it will not
withhold unreasonably.
- - If the Lessee does not observe the terms and conditions of this consent,
then the Bank's consent to the granting of the Lease, may at the option
of the Bank, become void if the rights of the Bank as Mortgagee can be
enforced without reference to the Lease.
Any statutory form of consent by the Bank is given without prejudice to these
conditions.
THE BANK AGREES that while the Lessee is not in default under the Lease it will
not interfere with the Lessee's use or occupation of the Premises even though
the Lessor is in default under the Mortgage.
<PAGE> 47
43
THE LESSOR AND THE LESSEE accept these conditions.
DATED this 13th day of February 1998
EXECUTED IN MY PRESENCE BY } AUSTRALIA AND NEW ZEALAND
Michael Wayne Coulter } BANKING GROUP LIMITED
As Attorney of } By its Attorney
AUSTRALIA AND NEW ZEALAND BANKING }
GROUP LIMITED he being } And I, the said Attorney, state
personally known to me } that I have not received any Notices
} of the Revocation of the Power of
} Attorney Registered No. 878 Book 4001
} under the authority of which I have
Signature of Witness } just executed this document.
}
} Manager Securities [omitted] for the
Name of Witness (Block Letters) } time being of the Australia and New
Zealand Banking Group Limited for
New South Wales.
(Execution by the THE COMMON SEAL of CAPITAL CREDIT COMPANY PTY.
Lessor) LIMITED was hereunto affixed in accordance with its
Articles of Association by authority of a resolution
of its Board of Directors in the presence of:
DIRECTOR:
DIRECTOR:
[omitted]
(Execution by the THE COMMON SEAL of WINMOR PTY. LIMITED was hereunto
Lessor) affixed in accordance with its Articles of Association
by authority of a resolution of its Board of Directors
in the presence of:
DIRECTOR:
SECRETARY:
<PAGE> 48
44
(Execution by the THE COMMON SEAL of BRILLIANT INTERACTIVE IDEAS PTY
Lessor) LTD was hereunto affixed in accordance with its
Articles of Association by authority of a resolution
of its Board of Directors in the presence of:
DIRECTOR:
SECRETARY:
<PAGE> 49
45
MORTGAGEE'S CONSENT
Carmor Pry. Limited (ACN 000 172 716) as Mortgagee under Mortgage Registered No.
Y916051 hereby consents to the within Lease.
THE COMMON SEAL of CARMOR )
PTY. LIMITED was hereunto affixed )
by authority of the Board of Directors )
in the presence of: )
- --------------------- ---------------------
Secretary Director
CAVEATOR'S CONSENT
Carmor Pty. Limited (ACN 000 172 716) as Caveator under Caveat Registered No.
E922903 hereby consents to the within Lease.
THE COMMON SEAL of CARMOR )
PTY. LIMITED was hereunto affixed )
by authority of the Board of Directors )
in the presence of: )
- --------------------- ---------------------
Secretary Director
<PAGE> 1
97-07L Exhibit 10.45
LTO Licence No. Land Titles Office use only
27C/0036/95
LEASE
Real Property Act 1900
Office of State Revenue use only
(A) PROPERTY LEASED
Show no more than 20
References to Title.
Specify the part or
premises if appropriate.
Folio Identifier 11/771961
Part being Level 4 within the office complex
at 59-75 Grafton Street, Bondi Junction
(B) LODGED BY
L.T.O. Box Name, Address or DX and Telephone
FREEHILL HOLLINGDALE & PAGE
Level 38, MLC Centre
19-29 Martin Place Phone: (02) 9225 5000
27c SYDNEY NSW 2000 DX 361 SYDNEY
` REFERENCE (max. 15 characters): MAS:29F
(C) LESSOR
DAIWA REAL ESTATE CO LTD A.C.N. 010 968 000
The lessor leases to the lessee the property described above subject to the
following ENCUMBRANCES
(D)
1. 2. 3. 4.
(E) LESSEE L BRILLIANT INTERACTIVE IDEAS PTY LTD A.C.N. 061 288 668
(F) TENANCY:
(G) 1. TERM: Four (4) years
2. COMMENCING DATE: 1997
3. TERMINATING DATE: 2001
4. With an OPTION TO RENEW for a period of 2 years expiring
set out part 17
6. Together with and reserving the RIGHTS set out in Annexure A
7. Incorporates the provisions set out in ANNEXURE A hereto.
INSTRUCTIONS FOR FILLING OUT THIS FORM ARE GIVEN AT THE BACK
CHECKED BY (office use only)
<PAGE> 2
(H) DATE We certify this dealing correct for the purposes of
the Real Property Act 1900.
THE COMMON SEAL of
DAIWA REAL ESTATE CO LTD
was hereunto affixed by authority of
the Board of Directors in the presence of:
- ---------------------------------------- -------------------------------
Secretary/Director Director
- ---------------------------------------- -------------------------------
Name (PLEASE PRINT) Name (PLEASE PRINT)
THE COMMON SEAL of
BRILLIANT INTERACTIVE IDEAS PTY LTD
was affixed to this document
in the presence of
- ---------------------------------------- -------------------------------
Secretary/Director Director
- ---------------------------------------- -------------------------------
Name (PLEASE PRINT) Name (PLEASE PRINT)
<PAGE> 3
CAR PARKING LICENCE DEED
THIS DEED made on between:
THE LICENSOR named and described in Item 1 in the Reference Schedule
(hereinafter referred to as "the Licensor") of the one part AND
THE LICENSEE named and described in Item 2 in the Reference Schedule
(hereinafter referred to as "the Licensee") of the other part
WHEREAS:
A. By a Lease bearing the date set out in Item 3 in the Reference Schedule
(hereinafter referred to as "the Lease") the Licensor leased to the
Licensee premises being part of the building referred to in Item 4 in the
Reference Schedule situated at 59-75 Grafton Street Bondi Junction
(hereinafter referred to as "the Building") for the term and subject to
the covenants and provisions therein contained.
B. The Building contains an area for the parking of Motor Cars which is
hereinafter referred to as "the Car Parking Area".
C. The Licensee has requested the Licensor to grant to it a licence to park
in the Car Parking Area that number of motor cars (hereinafter, and
whether one or more than one, called "the motor cars") set out in Item 5
in the Reference Schedule on the terms and conditions hereinafter set
forth.
NOW THIS DEED WITNESSES AS FOLLOWS:
1. The Licensor hereby grants to the Licensee the non-exclusive licence and
privilege to park the motor cars in the Car Parking Area as hereinafter
provided.
2. The Licence shall take effect on and from the date referred to in Item 6
in the Reference Schedule and subject as hereinafter provided shall
continue until terminated pursuant to the provisions of the following
Clause.
3. The Licence shall terminate (without any right of the Licensee to claim
compensation or to make any other claim against the Licensor in respect
thereof) on the earliest to occur of:
(a) the determination of the Lease;
(b) on the determination of this Licence by the Licensor upon default
by the Licensee hereunder; or
(c) one month's notice expiring any time by either the Licensor or the
Licensee;
whichever shall be the earliest.
4. The Licensee DOES HEREBY COVENANT AND AGREE with the Licensor as follows:
(a) To pay to the Licensor or the Manager during the continuance of the
Licence in respect of the motor cars a Licence fee of the amount per
annum set out in Item 7 in
<PAGE> 4
2
the Reference Schedule, or as revised from time to time in
accordance with clause 5, payable by equal monthly instalments in
advance on the same days as the rent is payable under the Lease.
(b) To park the motor cars in the position in the Car Parking Area
designated from time to time by the Licensor, its Manager or the
Manager of the Car Parking Area or any employee of the Licensor, its
Manager or the Manager of the Car Parking Area and not elsewhere.
(c) Not to clean, grease, oil, repair or wash the motor cars in the Car
Parking Area or any part thereof.
(d) To keep the Licensor its Manager and the Manager of the Car Parking
Area indemnified to the same extent as provided in any indemnity by
the Licensee (as lessee) contained in the Lease in respect of
anything occurring in the Car Parking Area and the effect of any
such indemnity is hereby extended to include the Car Parking Area;
(e) to pay on execution of this Deed the Licensor's proper solicitors'
costs of the preparation and completion of this Licence together
with stamp duty and any out-of-pocket expenses,
(f) to pay on demand in the case of default by the Licensee in observing
or performing any of its agreements in this Licence expressed or
implied all legal costs on a solicitor and client basis and other
costs and expenses for which the Licensor shall become liable in
consequence of or in connection with such default.
5. On each anniversary of the commencement of this Licence, the Licensor is
entitled (but not obliged) to revise the Licence Fee to the current
annual open market licence fee. The Licensor's estimate of the revised
Licence Fee must be notified to the Licensee by written notice served
within one month of the anniversary of the commencement of this Licence
and, unless the Licensee issues a notice ("dispute notice") indicating
that it does not accept the Licensor's estimate within 14 days of
receiving the Licensor's notice ( in which respect time shall be of the
essence), the Licensor's estimate will be deemed to the the Licence Fee
payable for the relevant year.
6. If the Licensee issues a dispute notice in accordance with clause 5, the
dispute must be referred to a qualified valuer selected by the Licensee
from a panel nominated by the Licensor of 3 qualified valuers carrying on
practice in New South Wales or, if no valuer is selected by the Licensee
within 14 days after the panel has been nominated, selected by the
Licensor.
7. The decision of the valuer selected under clause 6, acting as an expert
and not as an arbitrator, will be final and binding on the Licensor and
the Licensee including any decision as to the costs of such determination.
8. AND IT IS HEREBY AGREED AND DECLARED as follows:
(a) The Licensor, its Manager or the Manager of the Car Parking Area
shall not be responsible for any damage whether malicious or
accidental that the motor cars may sustain whilst entering or
leaving the Car
<PAGE> 5
3
Parking Area or whilst within the Car Parking Area or whilst being
moved by any employee of the Licensor, its Manager or the Manager of
the Car Parking Area nor for any actions, damages, claims and
demands in respect thereof.
(b) The Licensor, its Manager or the Manager of the Car Parking Area
shall not be responsible for any theft of the motor cars while in
the Car Parking Area or for the theft of any of the parts, equipment
or personal property and contents of the motor cars belonging to the
Licensee or any other person howsoever occurring.
(c) Any default hereunder shall be deemed default under the Lease.
9. The Licensee FURTHER COVENANTS with the Licensor that upon the
termination of this Licence it will promptly remove any motor cars
belonging to it or to any of its employees from the Car Parking Area and
every part thereof and in default thereof the Licensor, its Manager or
the Manager of the Car Parking Area shall be entitled to remove the same
and whatsoever the Licensor or any person authorised by it shall do or
purport to do in good faith under this Clause shall be deemed to be done
with the full authority of and as agent for and at the risk in all
respects of the Licensee.
10. If the said Licence fee or any part thereof is in arrears for twenty-eight
(28) days although no formal demand therefor has been made or in case
default is made in the observance or performance of any covenant condition
or stipulation hereof and on the part of the Licensee to be performed and
observed then and in any of such events the Licensor shall be entitled to
forthwith determine this Licence.
11. IT IS HEREBY AGREED AND DECLARED that in the interpretation of this Deed:
(a) "Manager" means the Licensor's Manager for the time being of the
Building.
(b) "Manager of the Car Parking Area" means such other person appointed
from time to time by the Licensor.
(c) Any rights conferred upon the Licensee hereunder shall be deemed to
have been conferred upon the Licensee his or its employees and
authorised sub-tenants (if any) under the Lease and any breach of
any of the covenants on the part of the Licensee contained in
sub-clauses (b), (c), (d) and (e) of Clause 4 by any said employee
or authorised sub-tenant shall constitute a breach of the terms
hereof by the Licensee.
(d) Words importing the masculine gender only shall include the feminine
or neuter gender and singular shall include the plural as the case
may require.
12. Any notice to be given hereunder may be signed on behalf of the Licensor
by a Director or Secretary or the Manager and without prejudice to any
other mode of service may be served in the manner mentioned in Section 170
of the Conveyancing Act, 1919 (as amended).
13. Notwithstanding anything herein contained or implied the Licensor consents
to the Licensee and any person authorised by the Licensee entering and use
the Car Parking Area at any time of the day or night to park the motor
cars PROVIDED THAT the Licensee shall comply with any reasonable
requirements of the Licensor from time to time providing for control of
the entrances to the Building an identification of persons entering the
Building outside the normal business hours of the Building.
<PAGE> 6
4
IN WITNESS WHEREOF the parties hereto have hereunto executed this Deed on the
date first hereinbefore written.
THE COMMON SEAL of
DAIWA REAL ESTATE CO LTD
was hereunto affixed by authority of
the Board of Directors in the presence of:
- ------------------------------------- ----------------------------
Secretary/Director Director
- ------------------------------------- ----------------------------
Name (PLEASE PRINT) Name (PLEASE PRINT)
THE COMMON SEAL of
was affixed to this document
in the presence of
- ------------------------------------- ----------------------------
Secretary/Director Director
- ------------------------------------- ----------------------------
Name (PLEASE PRINT) Name (PLEASE PRINT)
<PAGE> 7
THIS DEED CONCERNING LEASE is made on between:
1. DAIWA REAL ESTATE CO LIMITED A.C.N. 010 968 000 ("Lessor"); and
2. BRILLIANT INTERACTIVE IDEAS PTY LTD A.C.N. 061 288 668 ("Lessee").
RECITALS
A. By lease ("Lease") bearing the same date as this deed the Lessor has
leased to the Lessee and the Lessee has agreed to accept a lease from the
Lessor of the premises known as Level 4 within the Office Complex at
59-75 Grafton Street, Bondi Junction ("the Premises") on the terms and
conditions contained, inter alia, in the Lease and in this Deed.
B. It is agreed between the parties that as some of the terms of the tenancy
arrangement between the Lessor and the Lessee are to be kept strictly
confidential to the parties to the Lease, they will be incorporated in
this Deed and that reference to this Deed will be made in the Lease.
THIS DEED WITNESSES:
1. RENT REDUCTION
1.1 AMOUNT OF RENT REDUCTION
Notwithstanding anything provided in the Lease, the Lessor shall allow as a
concession to the Lessee a discount of Base Rent such that the Base Rent payable
in the first years of the Term shall be reduced by the amount of $30,000 (the
"Abatement Amount").
1.2 APPORTIONMENT OF ABATEMENT AMOUNT
The Abatement Amount shall be apportioned to the payment of Base Rent on and
from the date of commencement of the term of the lease until the total Abatement
Amount has been fully allowed.
2. FITTING OUT
2.1 OCCUPATION FOR FITTING OUT
Prior to the commencement of the term of the Lease the Lessor will allow the
Lessee to occupy the Premises for the purpose of fitting out the Premises and,
except for the payment of Base Rent and Outgoings the Lessee's occupation shall
be on the terms and conditions of the Lease.
2.2 CARRYING OUT OF FITTING OUT WORK
During the fitting out of the Premises the Lessee must ensure that:
(a) all work in connection with the fitting out is carried out in a
workmanlike manner and in accordance with the approved plans,
specifications and design and with the requirements of all appropriate
authorities;
(b) all work in connection with the fitting out is carried out to the
reasonable satisfaction of the Lessor and without unreasonable delays;
<PAGE> 8
2
(c) the Lessee obeys and does all things reasonably necessary to ensure that
the Lessee's contractor or employees obey all the reasonable directions
and observe all the reasonable requirements of the Lessor; and
(d) all work in connection with the fitting out is carried out in such manner
as to cause as little inconvenience as possible to other persons upon,
within or connected with the Building; and
(e) all rubbish and debris, wrappings, containers and residual materials which
result from the Lessee's work are removed from the Premises, the Building
and the Land.
2.3 OCCUPATION DURING FITTING OUT AT THE LESSEE'S RISK
The use and occupation of the Premises by the Lessee during the fitting out of
the Premises is for the carrying out of the fitting out work only and is at the
risk of the Lessee in all respects.
2.4 LESSEE MUST REPAIR ANY DAMAGE
The Lessee must repair and make good any damage which may be caused to the
Premises or other parts of the Land and Building either directly or indirectly
as a result of the carrying out of the Lessee's work and hereby indemnifies and
agrees to keep indemnified the Lessor in respect of any loss, damage or claim
caused by or arising out of anything done or omitted by the Lessee or anyone
acting on his behalf in carrying out the Lessee's work.
3. COMMENCEMENT OF LEASE TERM
3.1 PRACTICAL COMPLETION OF THE FITTING OUT
Notwithstanding any other provision of the Lease or of this deed the
commencement date of the Lease shall be the date (the "Practical Completion
Date") on which the fitting out of the Premises is practically complete so that
the Premises are in a state where they are able to be occupied by the Lessee for
the conduct of its business in the ordinary course.
3.2 DETERMINATION OF PRACTICAL COMPLETION DATE
The Practical Completion Date shall be certified to the Lessor by written notice
from the Lessee. If the Lessor disagrees with the Practical Completion Date
nominated by the Lessee or, in the absence of nomination by the Lessee, if the
Lessor believes that a date should have been nominated, the Lessor may request
the President of the New South Wales Law Society to appoint a suitably qualified
person acting as an expert and not as an arbitrator to decide the matter and the
decision of such qualified person (including any decision as to the costs of
such determination) will be final and binding on both the Lessor and the Lessee.
3.3 COMPLETION OF LEASE
The Lessor's solicitor is authorised to insert the Commencing and Terminating
Dates in the Lease in accordance with this clause 4.
<PAGE> 9
3
4. GENERAL
4.1 INTERPRETATION
All words and phrases defined in the Lease will, unless the context otherwise
requires, have the same meanings in this Deed.
4.2 ASSIGNMENT
The Lessee shall not assign or part with or be relieved of any of its rights,
powers or obligations hereunder or the benefit of this Deed without the consent
of the Lessor such consent not to be unreasonably withheld in the event of an
approved assignment of the Lease where the assignee covenants to perform any
outstanding obligations of the Lessee hereunder.
4.3 NOTICES
Without prejudice to any other means of giving notice, notices required to be
served hereunder shall be sufficiently served on the Lessee if served personally
or if left addressed to the Lessee on the Premises or forwarded to the Lessee by
prepaid post to the last known place of business or abode of the Lessee and
shall be sufficiently served on the Lessor if served personally or if addressed
to the Lessor and left at or sent by prepaid post to the Lessor's registered
office for the time being and a notice sent by post shall be deemed to be given
at the time when it ought to be delivered in due course by post.
4.4 APPLICABLE LAW
This Deed shall be governed and performed according to the law of the State of
New South Wales.
<PAGE> 10
4
IN WITNESS WHEREOF the parties have executed this document as a deed:
THE COMMON SEAL of
DAIWA REAL ESTATE CO LTD
was hereunto affixed by authority of
the Board of Directors in the presence of:
- ----------------------------------- --------------------------
Secretary/Director Director
- ----------------------------------- --------------------------
Name (PLEASE PRINT) Name (PLEASE PRINT)
THE COMMON SEAL of
BRILLIANT INTERACTIVE IDEAS
PTY LTD was affixed to this document
in the presence of
- ----------------------------------- --------------------------
Secretary/Director Director
- ----------------------------------- --------------------------
Name (PLEASE PRINT) Name (PLEASE PRINT)
<PAGE> 11
THIS IS ANNEXURE "A" REFERRED TO IN LEASE DATED BETWEEN
DAIWA REAL ESTATE CO LTD (AS LESSOR) AND BRILLIANT INTERACTIVE IDEAS
PTY LTD (AS LESSEE)
PART 1
INTERPRETATION
1.1 DEFINITIONS
In this Lease and in any Rules and Regulations made hereunder pursuant to clause
12.9 unless the contrary intention appears:
"AGREED PROPORTION" means the proportion that the floor area of the Premises
bears to the total lettable floor area of the Office Complex (expressed as a
percentage to the nearest second decimal point). At the Date of Commencement the
Agreed Proportion is that stated in Item 2 of the Reference Schedule.
"APPENDIX" means the appendix of this Lease.
"BASE RENT" has the meaning given to it in clause 3.1.
"BASE YEAR" means the year ending 30 June 1996.
"CAR PARKING LICENCE DEED" means the deed so styled between the Lessor and the
Lessee entered into on or about the date of this Lease;
"DEED CONCERNING LEASE" means the deed so styled between the Lessor and the
Lessee entered into on or about the date of this Lease;
"DATE OF COMMENCEMENT" means the date on which the term of this Lease commences.
"DATE OF EXPIRY" means the date on which the term of this Lease expires.
"COMMON AREAS" means those parts of the Office Complex provided by the Lessor
from time to time for common use by the occupants of the Office Complex and
including (but without limiting the generality hereof) the entrances corridors
vestibules stairways lifts machinery -toilets common amenities and conveniences
thereof and car parks.
"THE LAND" means the land described and referred to herein as the "Torrens Title
Reference".
"LEASE" means this Lease including all appendices and schedules.
"LESSEE" means and includes the Lessee and the executors administrators
successors and permitted assigns of the Lessee and where not repugnant to the
context the officers servants and agents of the Lessee.
"LESSOR" means and includes the Lessor its successors and assigns and where not
repugnant to the context the servants officers and agents of the lessor.
"LESSEE'S OUTGOINGS CONTRIBUTIONS" means the Agreed Proportion of the increases
in Outgoings accruing during each Lease year over the Base Year.
"OFFICE COMPLEX" means the building or buildings (herein called "the building")
erected on the land together with any modifications extensions or alterations
effected from time to time and together with the fittings and fixtures and other
improvements and conveniences amenities and appurtenances
<PAGE> 12
2
thereof and including (but without limiting the generality hereof) any entrances
corridors vestibules stairways car parks gardens and other plant machinery
toilets and Common Areas and conveniences.
"OUTGOINGS" means the total of all costs charges outgoings and expenses properly
and reasonably paid charged or otherwise incurred or to be paid charged or
otherwise incurred by the Lessor in and about the ownership conduct management
and maintenance of the Office Complex (including the Premises) as a high class
commercial building and without limiting the generality of the foregoing shall
include:
(a) the costs (including wages, holiday pay and sick pay ) of caretaking and
security, management, control, accounting, audit and administration of
the Office Complex;
(b) the cost of operating and supplying all air-conditioning and/or
mechanical ventilation from time to time to the Office Complex;
(c) all rates and taxes including water and sewerage rates and municipal rates
and charges, land tax (on a single holding basis), charges, fire service
levies, assessments, duties and fees of any public municipal government or
semi-government body authority or department assessed or payable in
respect of the Premises the land and the Office Complex or any of them or
in respect of the Lessor's ownership of the same (but excluding income
tax, capital gains tax-and fringe benefits tax);
(d) all premiums on all insurances effected by the Lessor against damage or
destruction of the building Public Risk and Worker's Compensation in
respect of the Office Complex and any other risk arising out of the
Lessor's ownership of or interest in the office Complex;
(e) the cost of cleaning of the Office Complex (including the Common Areas,
the Premises, those areas of building leased to or otherwise occupied by
the occupants of the Office Complex and any other lettable floor area of
the Office Complex ) including materials and including costs of the
removal of all waste, trade waster and other garbage;
(f) the cost of lighting of and power to Common Areas, including replacements;
(g) the costs of operating and supplying all other services from time to time
provided by the Lessor for the tenants and occupiers of the Office Complex
and all plant and equipment required in connection with any of such
services;
(h) the costs of renovations replacements repairs and maintenance of the
Office Complex and the plan and equipment installed therein; and
(i) the costs of maintaining the gardens in and about the office Complex,
PROVIDED ALWAYS that Outgoings shall not include amounts wholly payable by
any tenant of the premises within the office Complex. All Outgoings and
rental irrespective of the period in respect of which they are assessed or
charged shall be deemed to accrue from day to day and shall be apportioned
in respect of time accordingly.
"PREMISES" means the premises as hereinbefore described and shall include (where
the context so admits) the Lessor's fixtures, fittings, plants and equipment (if
any) now or at any time hereafter installed therein.
"REFERENCE SCHEDULE" means the schedule referred to as such forming part of this
Lease.
<PAGE> 13
3
1.2 INTERPRETATION
Words importing the singular number shall include the plural and the masculine
gender shall include the feminine and neuter and vice versa and words importing
persons shall include corporations. Any covenant or agreement on the part of two
or more persons shall be deemed to bind them jointly and severally. Headings of
clauses have been inserted for guidance only and shall not be deemed to form
part of the contest.
References to statutes regulations ordinances or by-laws shall be deemed to
extend to all statutes regulations ordinances or by-laws amending consolidating
or replacing the same.
PART 2
IMPLIED COVENANTS AND POWERS
The covenants and powers implied in every lease by virtue of Sections 84, 84A
and 85 of the Conveyancing Act 1919 are expressly negatived and shall not apply
or be implied in this Lease except in so far as the same or same parts thereof
are included in the covenants herein contained.
PART 3
RENT
3.1 RENT PAID QUARTERLY
The Lessee covenants to pay to the Lessor without demand and free of all
deductions or setoff, a rent per annum of the amount(s) set out in Item 1 of the
Reference Schedule (hereinafter called "the Base Rent") such rent to be paid in
advance by regular and consecutive monthly payments each equal to 1/12 of the
Base Rent on the first day of each month in each year during the term except in
respect of the first and last months of the term (a "broken period") payments
for which if necessary will be proportionate instalments calculated in
accordance with the following formula:
<TABLE>
<S> <C> <C>
Amount payable = number of days in broken period x $Base Rent for particular year
-------------------------------
365
</TABLE>
3.2 OUTGOINGS
(a) In addition to the rent hereby reserved and any other moneys payable by
the Lessee to the Lessor hereunder the Lessee shall pay forthwith upon
demand to the Lessor the Lessee's Outgoings Contributions.
(b) The Lessor shall at the end of each Lease Year cause to be prepared and
furnished to the Lessee a statement setting out the total amount of the
Outgoings audited by a public accountant appointed by the Lessor for that
purpose.
(c) Notwithstanding anything hereinbefore contained the Lessor shall be
entitled from time to time to notify the Lessee of the Lessor's
reasonable estimate of the Lessee's Outgoings Contributions for any
period not exceeding one year in advance of the said estimate whereupon
the Lessee will pay to the Lessor during such period such estimated
Lessee's Outgoings Contributions by equal quarterly instalments in
advance on the days hereinbefore fixed for payment of rent provided that
upon computation of the actual Lessee's Outgoings Contributions at the
end of each Lease Year any necessary adjustment between the actual
<PAGE> 14
4
Lessee's Outgoings Contributions and the estimated Lessee's Outgoings
Contributions shall be made between the parties.
3.3 RENT ABATEMENT
(a) In the event that the whole or any part of the Premises shall at any time
during this term or any holding over or renewal thereof be destroyed or
damaged by fire, storm, flood, lightning, tempest, Act of God or riot,
civil commotion, or act of or in resisting the acts of the Queen's
enemies or by any other disabling cause and without any wilful act,
omission, default or neglect on the part of the Lessee, its servants,
agents, invitees or licensees so as to render the Premises wholly or
partially unfit for use and occupation by the Lessee by reason of such
destruction or damage then the Base Rent and all other moneys payable by
the Lessee pursuant to this Lease, hereby reserved or a fair and just
proportion of the same according to the nature and extent of the damage
sustained shall until the Premises have been rendered fit for occupation
or use by the Lessee be suspended and cease to be payable AND in case any
dispute shall arise pursuant to this clause then such dispute shall be
referred for arbitration pursuant to the provisions of the laws for the
time being in force in the State of New South Wales PROVIDED HOWEVER that
if the Premises shall be destroyed or damaged as aforesaid so as to
render the Premises either wholly or substantially unfit for use and
occupation by the Lessee or so as to deprive the Lessee of the whole or
substantial use of the same or so as to render the rebuilding and/or the
reconstruction and reinstatement of the Premises in its previous form
impracticable in the proper and reasonable opinion of the Lessor THEN
this Lease may be terminated without compensation by either the Lessor or
the Lessee by one (1) month's notice in writing to the other PROVIDED
ALWAYS that in the latter case the Lessor shall have failed to have
commenced to rebuild, reconstruct and/or reinstate the Premises within
two (2) months after notice in writing from the Lessee requiring the
Lessor to do so PROVIDED HOWEVER that such period may be extended by the
Lessor in the event that the Lessor has acted diligently and has carried
out with expedition all things necessary to commence the rebuilding,
reconstruction and/or reinstatement but is prevented from commencing the
rebuilding, reconstruction and/or reinstatement by matters without and
beyond the control of the Lessor.
(b) Any such termination as aforesaid shall be without prejudice to the rights
of either party in respect of any antecedent breach of any covenant,
condition or restriction contained or implied in this Lease.
(c) Nothing herein contained or implied shall be deemed to impose any
obligation upon the Lessor to rebuild reconstruct and/or reinstate the
Premises or make the same fit for occupation by the Lessee.
PART 4
LESSEE'S USE OF PREMISES
4.1 PERMISSIBLE USE
The Lessee will not use or permit the Premises or any part thereof to be used
for any purpose other than for the purpose specified in Item 4 of the Reference
Schedule.
<PAGE> 15
5
4.2 SOLICITING
The Lessee shall not solicit business nor distribute pamphlets or other
advertising matter in the Common Areas.
4.3 ANNOYING OR INJURIOUS CONDUCT
The Lessee will not (without the consent in writing of the Lessor first had and
obtained) at any time during the continuance of this Lease:
(a) use or permit or suffer the Premises or any part thereof to be used for or
exercise or carry on or permit or suffer to be used exercised or carried
on in or upon the Premises or any part thereof any noxious noisome or
offensive act trade business occupation or calling; or
(b) do or omit or permit or suffer to be done or omitted any act matter or
thing whatsoever in upon or about the Premises or the Office Complex or
any part thereof which is or shall or may be or may grow to the annoyance
nuisance grievance damage or disturbance of other lessees, tenants or
occupiers of the Office Complex or persons otherwise lawfully therein or
occupiers or owners of any adjacent premises in their reasonable opinion.
4.4 PUBLIC ADDRESS SYSTEM
The Lessee will not without the consent in writing of the Lessor first had and
obtained erect or place upon within or without the Premises or the Office
Complex any radio or television aerial or antenna or any loudspeaker screens or
similar devices or equipment and will not use or permit to be used without the
consent in writing of the Lessor first had and obtained radio, gramophone,
television or other like media or equipment likely to be heard or seen from
outside the Premises.
4.5 LESSEE NOT TO ASSIGN
The Lessee will not assign this Lease sub-let or part with or share the
possession of the Premises or any part thereof or by any act or deed permit this
Lease or the Premises or any part thereof to be assigned sub-let unto or put
into possession of any person or persons or grant any licence affecting the
Premises. Any proposed assignment sub-letting or licence shall be deemed not to
be a breach of the foregoing provisions of this clause 4.5 if at all times
during the currency of this Lease up to and including the time of any such
assignment sub-letting or licence the Lessee shall have strictly observed and
performed the covenants and agreements on the Lessee's part herein contained OR
if the Lessee has not strictly observed and performed those covenants then any
breach of this Lease has been rectified to the reasonable satisfaction of the
Lessor and if prior thereto:
(a) the proposed assignee sublessee or licensee has proved to the reasonable
satisfaction of the Lessor that he is a respectable and responsible person
whose assets and means in the reasonable opinion of the Lessor are such
that he is capable of adequately carrying on the use permitted by clause
4.1 hereof and of observing and performing all of the obligations on the
Lessee's part herein contained or implied;
(b) any such assignee sublessee or licensee has entered into a covenant with
the Lessor in the form required by the Lessor that he will duly observe
and perform the covenants on the part of the Lessee herein contained or
implied;
(c) in the case of any such assignment sub-letting or licence the Lessor shall
have been furnished with such unconditional guarantees of the performance
by the proposed assignee sublessee or
<PAGE> 16
6
licensee of the covenants and conditions herein contained or implied as
the Lessor shall reasonably require;
(d) in the case of a proposed assignment sublease or licence:
(1) the Lessee has paid to the Lessor the Lessor's fair and reasonable
expenses of and incidental to the documentation of such assignment
sublease or licence and any necessary consents to the assignment
sublease or licence;
(2) the Lessee has paid to the Lessor the costs reasonably incurred by
the Lessor in investigating any proposed assignee sublessee licensee
and/or guarantors; and
(3) the Lessee and the Covenantor have entered into a covenant with the
Lessor acknowledging that the Lessee and the Covenantor will not be
released from and shall continue to be bound by the obligations on
the Lessee's and the Covenantor's part contained herein for the
balance of the term of this Lease and any extension or renewal of
the option for extension or renewal contained in this Lease;
(e) in the case of a proposed sublease or licence the Lessee has established
to the satisfaction of the Lessor that any such sublessee or licensee will
be obliged to pay a rental or licence fee reasonably acceptable to the
Lessor; and
(f) in the case of a proposed assignment sublease or licence, the Lessor has
executed an acknowledgment in writing that any such assignment sub-letting
or licence is deemed not to be a breach of the provisions of this clause
4.5.
4.6 CHANGE IN SHAREHOLDING OF LESSEE
The Lessee being a corporation other than a corporation whose shares are listed
on any Australian Stock Exchange hereby covenants with the Lessor that no
transfer of any share or shares in the capital of the Lessee shall be
registered, recorded or entered in its books and that no beneficial interest in
any such share or shares shall be issued or other action taken or attempted to
be taken having the effect that the shareholders of the Lessee at the date
hereof together beneficially hold or control less than fifty-one per centum
(51%) of the voting, income and capital participation rights in the Lessee or
less than that percentage of the voting rights at a meeting of Directors of the
Lessee without the prior consent in writing of the Lessor which shall not be
unreasonably withheld where the proposed new shareholders satisfy the same
requirements applicable to a proposed assignee , sublessee or licensee referred
to in sub-paragraphs (a), (b ) and (c) of clause 4.5 and the Lessee complies
with the requirements of sub-paragraph (d) of clause 4.5.
4.7 LESSEE NOT TO MORTGAGE
The Lessee shall not mortgage charge or otherwise encumber its estate or
interest in this Lease without the consent in writing of the Lessor first had
and obtained which consent may be granted conditionally or refused if the
security documents entitle the mortgagee to enter into possession of the
Premises but subject thereto shall not be unreasonably withheld by the Lessor.
4.8 SUITABILITY OF PREMISES
The Lessee acknowledges and declares that no promise representation warranty or
undertaking has been given by or on behalf of the Lessor in respect to the
suitability of the Premises or the Office Complex for any business to be carried
on therein or to the fittings finish facilities and amenities of
<PAGE> 17
7
the Premises or the Office Complex or as to other businesses to be carried on in
the Office Complex otherwise than as contained in this Lease.
4.9 AUCTION SALE
The Lessee shall not conduct or permit to be conducted on the Premises any
auction bankrupt or fire sale.
PART 5
SERVICES TO THE PREMISES
5.1 CHARGES FOR SERVICES
The Lessee will pay all charges for electricity and water separately metered and
consumed in or on the Premises and will also pay all charges in respect of any
telephone services connected to the Premises and all other charges and
impositions levied by any public utility or authority for the supply of any
service separately supplied to the Premises.
5.2 AIR-CONDITIONING PLANT
Where any plant machinery or equipment for heating cooling or circulating air
(herein called "air-conditioning plant") is provided or installed in the Office
Complex or the Premises by the Lessor:
(a) the use operation and control of the air-conditioning plant shall at all
times be at the discretion of the Lessor (and the Lessor shall use its
reasonable endeavours to keep the airconditioning plant operating during
normal business hours ) but the Lessor shall not be under any inability to
operate control or maintain the air-conditioning plant at any time or
times for any reason; and
(b) the Lessee will at all times comply with and observe the reasonable
requirements of the Lessor in regard to the air-conditioning plant and
will not do or permit to be done anything in relation to the same or
otherwise in relation to the use or ventilation of the Premises which
might interfere with or impair the efficient operation of the
air-conditioning plant in the Premises or the Office Complex.
PART 6
MAINTENANCE REPAIR AND ALTERATIONS
6.1 MAINTENANCE
The Lessee will during the whole of the term of this Lease and otherwise as long
as the Lessee may remain in possession or occupation of the Premises when where
and so often as need be maintain repair and keep the whole of the Premises is
good and substantial repair working order and condition and particularly all
machinery plant equipment fixtures and things thereto belonging or which at any
time during the term of this Lease or the term of possession or occupation as
aforesaid shall be erected therein or thereon or be part thereof damage without
any act omission default or neglect on the part of the Lessee its servants
agents invitees or licensees by fair wear and tear fire flood lightning storm
tempest Act of God and war damage only excepted PROVIDED HOWEVER that nothing
herein contained shall impose any obligation upon the Lessee to do any work of a
structural
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8
nature except such as may be occasioned by the wilful act neglect or default of
the Lessee or by its use or occupancy of the Premises.
6.2 LEASE TO YIELD UP
The Lessee will at the expiration or sooner determination of this Lease
surrender and yield up unto the Lessor the whole of the Premises and every part
thereof in good and substantial repair order and condition in all respects and
clean and free from rubbish, damage by fair wear and tear fire lightning storm
tempest Act of God and war damage without any wilful act omission default or
neglect on the part of the Lessee its servants agents invitees or licensees only
excepted.
6.3 SPECIFIC OBLIGATIONS
The Lessee will without affecting the generality of the preceding Clauses 6.1
and 6.2 at the Lessee's expense:
(a) cause the Premises to be cleaned in a proper and workmanlike manner and
during the whole of the term of this Lease to be kept clean and free from
dirt and rubbish and particularly shall store and keep all trade waste
trash and garbage in proper receptacles and arrange for the regular
removal thereof from the Premises to such proper receptacles therefor as
are provided by the Lessor;
(b) keep and maintain clean and in good order repair and condition all
fittings plants furnishings and equipment of the Lessee;
(c) from time to time make good any breakage defect or damage to the Common
Areas or to any adjoining premises or any facility or appurtenance thereof
occasioned by want or care misuse or abuse on the part of the Lessee or
the Lessee's servants agents contractors sub-contractors sub-tenants or
other persons claiming through or under the Lessee or otherwise occasioned
by any breach or default of the Lessee hereunder;
(d) from time to time immediately repair and replace all broken glass in the
Premises with glass of the same or similar quality and all damaged or
broken heating lighting electrical equipment and plumbing installed upon
the Premises PROVIDED THAT:
(1) this clause does not impose any obligation on the Lessee to repair
or replace structural items;
(2) where any such damage is occasioned by the wilful act, omission,
negligence of the Lessor or its servants, agents, workmen or
employees, it shall be the obligation of the Lessor to effect such
repair and replacement at its expense;
(e) from time to time forthwith comply with all statutes by-laws ordinance
proclamations orders or regulations present or future affecting or
relating to the use of the Premises and with all requirements which may
be made or notices which may be given by any governmental
semi-governmental city municipal health licensing civic or any other
authority having jurisdiction or authority over or in respect of the
Premises or the use thereof and will keep the Lessor indemnified in
respect of all such matters referred to in this paragraph PROVIDED ALWAYS
that the Lessee shall be under no liability in respect of any structural
alterations the requirements for which were not caused or contributed to
by the Lessee's particular use or occupation of the Premises;
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(f) upon vacating the Premises or immediately prior thereto at the request of
the Lessor remove any signs names advertisements or notices erected
painted displayed or affix or exhibited upon to or within the Premises and
remove all Lessee's fixtures fittings plant and equipment and all other
items of the Lessee from the Premises and make good any damage or
disfigurement caused by reason of such erection painting displaying
affixing exhibiting or removal thereof.
PART 7
INSURANCES
7.1 PUBLIC RISK INSURANCE
The Lessee will effect and keep effected at all times during the continuance of
this Lease in respect of the Premises a public risk policy for not less than ten
million ($10,000,000.00) or such higher amount as shall be reasonably determined
by the Lessor from time to time.
7.2 LESSEE TO INSURE PLATE GLASS
The Lessee will insure in such amount (not being less than the full insurable
value from time to time) and against such risks as the Lessor may require all
plate glass windows doors and display show cases upon the Premises.
7.3 CONDUCT VOIDING INSURANCE
The Lessee will not at any time during the term of this Lease do permit or
suffer to be done any act matter or thing upon the Premises whereby any
insurances in respect thereof or in respect of the Office Complex may be
vitiated or rendered void or voidable or (except with the approval in writing of
the Lessor first had and obtained) whereby the rate of premium in respect of any
such insurances shall be liable to increase and the Lessee will not use permit
or suffer to be used in the Premises any method of lighting other than by
electricity nor any method of heating other than by electricity or
air-conditioning.
7.4 INFLAMMABLE SUBSTANCES
Without prejudice to the generality of the preceding clause 7.3 the Lessee will
not store chemicals inflammable liquids acetylene gas or alcohol volatile or
explosive oils compounds or substances or fluids in the Premises.
7.5 EXTRA PREMIUMS OF INSURANCE
The Lessee will from time to time as and when required by notice in writing from
the Lessor pay all extra premiums of insurance of the Premises and/or the Office
Complex and their contents if any be required on account of extra risk caused by
the use to which the Premises are put by the Lessee and approved by the Lessor.
7.6 INSURER TO BE APPROVED
All policies of insurance liable or required to be effected by the Lessee
hereunder whether in respect of the property or risk either of the Lessor or
Lessee shall be taken out in the joint names of the Lessor and the Lessee with a
licensed Insurance Office or Company approved in writing by the Lessor and in
the case of loss or damage arising from any cause covered by such insurances the
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Lessee will immediately expend the money received by virtue of such insurances
in restoring and/or reinstating and/or making good the same and in case such
moneys shall be insufficient for the purpose the Lessee will make good the
deficiency out of the Lessee's own moneys.
7.7 LESSEE TO PRODUCE POLICIES OF INSURANCE
The Lessee will in respect of any policy of insurance to be effected by the
Lessee hereunder if required by the Lessor forthwith produce to the Lessor the
Policy and Certificate of Currency of Insurance.
PART 8
INDEMNITIES
8.1 ASSUMPTION OF RISK BY LESSEE
The Lessee agrees to occupy use and keep the Premises at the risk of the Lessee
and hereby releases the Lessor and its agents servants and contractors and
employees in the absence of any wilful act or omission on their /its part from
all claims and demand of every kind resulting from any accident damage or injury
occurring therein and the Lessee EXPRESSLY AGREES that the Lessor shall have no
responsibility or liability for any loss of or damage to fixtures or personal
property of the Lessee in the absence of any wilful act or omission on their/its
part.
8.2 LESSEE TO INDEMNIFY LESSOR
The Lessee will and does hereby indemnify the Lessor in the absence of wilful
acts, omissions or negligence on the part of the Lessor from and against all
actions claims demands losses damages costs and expenses which the Lessor may
sustain or incur or for which the Lessor shall or may be or become liable
whether during or after the term of this Lease in respect of or arising from:
(a) the negligent use misuse waste or abuse by the Lessee or any servant agent
sub-agent of or any other person claiming through or under the Lessee of
the water gas electricity oil lighting and other services and facilities
of the Premises or the Office Complex;
(b) overflow or leakage of water (excluding penetration of the external walls
of the building by rain water ) fire gas electricity or any other harmful
agent in or from the Premises or caused or contributed to by any act or
omission on the part of the Lessee his servants agents sub-tenants or
other persons as aforesaid;
(c) loss damage or injury from any cause whatsoever to property or person
caused or contributed to by the use of the Premises by the Lessee or any
servant agent sub-tenant or other person as aforesaid; or
(d) loss damage or injury from any cause whatsoever to property or person
within or without the Premises or the Office Complex occasioned or
contributed to by any wilful act omission neglect breach or default of the
Lessee or any servant agent contractor sub-contractor sub-tenant or other
person as aforesaid.
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PART 9
LESSOR'S COVENANTS
9.1 QUIET ENJOYMENT
The Lessor covenants with the Lessee that upon the Lessee paying the rent hereby
reserved and duly and punctually observing and performing the covenants
obligations and provisions in this Lease on the part of the Lessee to be
observed and performed the Lessee shall and may peaceably possess and enjoy the
Premises for the term of this Lease without any interruption or disturbance from
the Lessor or any other person or persons lawfully claiming by from or under the
Lessor and shall be entitled to access to the Premises on a 24 hour basis.
9.2 HOLDING OVER
The Lessee covenants with the Lessor that in the event of the Lessee holding
over after the expiration or sooner determination of the term of this Lease with
the consent of the Lessor, the Lessee shall become a monthly tenant only of the
Lessor at a monthly rental for the first month of such period of holding over
equivalent to the amount payable by the Lessee hereunder at the expiration or
sooner determination of such term increased pursuant to clause 3.3 hereof
notwithstanding such expiration or sooner determination and at a monthly rental
for the second and each subsequent month of such period of holding over
equivalent to the amount payable by the Lessee hereunder in the immediately
preceding month multiplied by one point zero one (1.01) and otherwise on the
same terms and conditions mutatis mutandis as those herein contained so far as
applicable. Such tenancy may be determined:
(a) by the Lessor at -any time upon two (2) calendar months' notice being
given in writing by the Lessor to the Lessee expiring on any day; or
(b) by the Lessee at any time upon two (2) calendar months' notice being given
in writing by the Lessee to the Lessor expiring on any day.
9.3 LESSEE'S RIGHT TO REMOVE FITTINGS
The Lessor covenants with the Lessee that provided the Lessee shall have duly
paid the rent hereby reserved and is not then in breach of any of the terms
covenants and conditions on his part to be observed performed and fulfilled
hereunder the Lessee may at or prior to the expiration of this Lease take remove
and carry away from the Premises all fixtures fittings floor coverings blinds
and curtains plant equipment or other articles upon the Premises in the nature
of trade or tenant's fixtures brought upon the premises by the Lessee who shall
in such removal do no damage to the Premises and shall forthwith make good any
damage which the Lessee may occasion thereto and shall remove all rubbish and
shall leave the Premises in a clean state and condition.
9.4 LESSOR TO PAY CHARGES
The Lessor will pay all taxes rates charges and assessments whether municipal
local government parliamentary or otherwise which at any time during the term of
this Lease or any renewal thereof shall be charged upon the Premises or upon the
Lessor on account thereof including Land Tax and all taxes for local
improvements or works assessed upon the property benefited thereby.
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9.5 MAINTENANCE OF SERVICES
The Lessor will ensure that the connection of electrical, water, telephone and
drainage services with the Premises is maintained PROVIDED THAT the Lessor shall
not be liable if the loss of connection is caused by the Lessee whether as a
result of non-payment of charges for these services or otherwise.
9.6 LESSOR TO MAINTAIN DRAINS
The Lessor will maintain the drains, downpipes and stormwater plumbing in good
condition and clear of blockages provided that the Lessor shall not be
responsible for any blockage or damage caused by the Lessee.
PART 10
DEFAULT
10.1 DEFINITION OF DEFAULT
In any of the following cases or circumstances, namely:
(a) if the rent hereby reserved or any part thereof or any other moneys
payable by the Lessee to the Lessor hereunder shall be unpaid for the
space of fourteen (14) days after any of the days on which the same ought
to have been paid in accordance with the covenants for payment herein
contained (although no formal or legal demand shall have been made
therefor);
(b) if the Lessee commits permits or suffers to occur any breach or default in
the due and punctual observance and performance of any of the covenants
obligations and provisions of this Lease or any Rule or Regulation made
hereunder;
(c) if (the Lessee being a Company ) an order is made or a resolution is
effectively passed for the winding up of the Lessee (except for the
purpose or reconstruction or amalgamation with the written consent of the
Lessor which consent shall not be unreasonably withheld );
(d) if the Lessee goes into liquidation or makes an assignment for the benefit
of or enters into an arrangement or composition with its creditors or
stops payment or is unable to pay its debts or if a receiver or receiver
and manager or the undertaking or property of the Lessee or any part
thereof is appointed;
(e) if execution is levied against the Lessee and not discharged within
thirty ( 30 ) day s;
(f) if the Lessee commits permits or suffers to occur any breach of clause
4.6 or clause 4.7 hereof;
(g) if the Lessee shall abandon, vacate or otherwise surrender the Premises
or be dispossessed thereof by process of law,
the Lessee shall be deemed to have made default.
10.2 REMEDIES OF LESSOR
If the Lessee shall be deemed to have made default as aforesaid then the Lessor
may at its option (but subject to any legal obligation to the contrary):
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(a) without any prior demand or notice re-enter into and take possession of
the Premises or any part thereof in the name of the whole (by force if
necessary ) and eject the Lessee and all other persons therefrom and
repossess and enjoy the same as of its first and former estate therein and
thereupon this Lease shall be absolutely determined by notice in writing
to the Lessee determine this Lease and from the date of giving such notice
this Lease shall be absolutely determined; or
(b) by notice in writing to the Lessee elect to convert the said term into a
tenancy from month to month in which event this Lease shall be determined
as from the giving of such notice and thereafter the Lessee shall hold
the Premises from the Lessor as tenant from month to month at a monthly
rental equal to the monthly rental payable hereunder at the date of
giving such notice (such rental being payable monthly in advance) and
such tenancy being liable to be determined at any time upon one calendar
month's notice given in writing by the Lessor to the Lessee expiring on
any day but otherwise on the terms and conditions of this Lease so far as
they can be applied to a monthly tenancy,
PROVIDED ALWAYS that the determination of this Lease or of the said term
thereunder shall not prejudice or affect any rights or remedies of the Lessor
against the Lessee on account of any antecedent breach by the Lessee of any of
the terms conditions or stipulations on his or their parts herein contained.
10.3 DAMAGES IN EVENT OF DETERMINATION
Without limiting the generality of the foregoing it is expressly agreed and
declared that if the Lessor re-enters into the Premises (or any part thereof) or
otherwise determines this Lease or converts the term to a tenancy from month to
month pursuant to clause 10.2 hereof, the Lessor may (in addition to any other
rights and remedies which the Lessor may have) recover from the Lessee as
damages the difference between the amount of the moneys which would have been
payable in relation to the term of this Lease which would have subsisted but for
such re-entry or determination or conversion and the amount of money which it
may reasonably be anticipated that the Lessor will receive for such period from
another or other tenants PROVIDED THAT the amount to which the Lessor is
entitled will be subject to a rebate determined by applying to that amount a
discount rate per annum equal to:
(a) the general commercial prime rate of interest charged by the Commonwealth
Bank of Australia, Head Office, Sydney; or
(b) if that rate is not available, the maximum rate payable under a money
judgment issued in the Supreme Court of New South Wales at the date the
Lessor terminates this Lease.
10.4 ESSENTIAL TERMS
Each of the covenants by the Lessee contained in each of the following clauses
are and are deemed to be essential terms of this Lease:
(a) the covenant to pay monthly in advance the Base Rent as specified in
clause 3.1;
(b) the covenant to pay the Lessee's Outgoing Contributions;
(c) the covenant relating to the permissible use of the Premises as specified
in clause 4.1;
(d) the covenant against permitting annoying or injurious conduct as
specified in clause 4.3;
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(e) the covenant relating to assigning, subletting or parting with possession
of the Premises contained in clause 4.6;
(f) the covenant to repair as specified in clause 6.1;
(g) the covenant as to yielding up the Premises upon the expiration or sooner
determination of this Lease as specified in clause 6.2; and
(h) the covenant against permitting conduct voiding insurance as specified in
clause 7.3.
10.5 DAMAGES FOR BREACH OF ESSENTIAL TERM
The Lessee shall compensate the Lessor in respect of any breach of any essential
term of this Lease and the Lessor is entitled to recover damages from the Lessee
in respect of such breaches. The entitlement of the Lessor under this clause is
in addition to any other remedy or entitlement to which the lessor is entitled
(including without limiting the generality of the foregoing the remedies
conferred by clause 10.2).
10.6 REPUDIATION AND ABANDONMENT
In the event that the conduct of the Lessee (whether acts or omissions )
constitute repudiation of this Lease (or of the Lessee's obligations under this
Lease) or constitutes a breach of any of the covenants contained in this Lease,
the Lessee shall compensate the Lessor for the loss or damage suffered by reason
of the repudiation or breach. The entitlement of the Lessor to recover damages
shall not be affected or limited by any of the following:
(a) the abandonment or vacating of the Premises by the Lessee;
(b) the election by the Lessor to re-enter or determine the Lease;
(c) the acceptance by the Lessor of the Lessee's repudiation;
(d) the surrender of the Lease by operation of law as a result of the conduct
of the Lessor and the Lessee.
In the event of the Lessee abandoning or vacating the Premises prior to the
expiration of the term hereof, whether with or without the Lessor's consent and
without lawful excuse, the Lessor may in its absolute discretion and without any
obligation so to do seek to find another tenant for the Premises. The conduct of
the Lessor taken in pursuance of the exercise of its discretion under this
clause shall not by itself constitute acceptance of the Lessee's breach or
repudiation or a surrender by operation of law.
10.7 DAMAGES IN EVENT OF REPUDIATION OR ABANDONMENT
The Lessor shall be entitled to institute legal proceedings claiming damages
(and shall be entitled to recover the same) against the Lessee in respect of the
entire term of the Lease including the periods before and after the Lessee has
vacated the Premises and before or after the abandonment, termination,
repudiation, acceptance of repudiation or surrender by operation of law referred
to in clause 10.6 whether the proceedings are instituted either before or after
such conduct.
10.8 REMOVAL OF STOCK-IN-TRADE
The Lessor may upon re-entry or determination as aforesaid or upon the failure
of the Lessee to exercise its rights under clause 9.3 remove from the Premises
and contents of every description
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including but without limiting the foregoing all plant equipment stock-in-trade
and fittings and fixtures of the Lessee in or about the Premises and store the
same in a public warehouse or elsewhere at the cost of and for the account of
the Lessee without being deemed guilty of conversion or becoming liable for any
loss or damage occasioned by such removal or storage. Any costs incurred by the
Lessor in or about such removal and/or storage shall be paid by the Lessee to
the Lessor upon demand. In the event that the Lessee shall fail to claim from
the lessor the plant equipment stock-in-trade and fittings and fixtures within
fourteen (14) days of the removal of same by the Lessor they shall be deemed
abandoned by the Lessee and shall become the property of the Lessor.
10.9 LESSOR MUST RECTIFY
On each and every occasion on which the Lessee omits or neglects to pay any
money or to do or effect or appoint any thing or person which the Lessee has
herein covenanted or agreed to pay do effect or appoint then it shall be lawful
for but not obligatory upon the lessor following notice in writing to the
lessee, except in the case of emergencies (and without prejudice to any rights
and powers arising from such default) to pay such money or to effect or appoint
such thing or person by its architects contractors workmen and agents as if it
were the Lessee and for that purpose the Lessor its architects contractors
workmen and agents may enter upon the whole or any part of the Premises and
there remain for the purpose of doing effecting or appointing any such thing or
person and the Lessor may recover the amount expenses and costs of such payment
doing effecting or appointing forthwith.
10.10 INTEREST ON OVERDUE PAYMENTS
Without prejudice to the rights powers and remedies of the Lessor otherwise
under this Lease the Lessee must pay to the Lessor interest on any moneys due by
the Lessee to the Lessor on any account whatsoever pursuant to this Lease but
unpaid for 14 days. The interest will be computed from the due date for the
payment of the moneys in respect of which the interest is chargeable until
payment of such moneys in full and be recoverable in like manner as rent in
arrears. The interest will be at a rate equal to:
(1) the general commercial prime rate of interest charged by the Commonwealth
Bank of Australia; head Office, Sydney; or
(2) if that rate is not available, the maximum rate payable under a money
judgment issued in the Supreme Court of New South Wales at the due date
for payment of the moneys.
PART 11
HEAD LESSEE OR OTHER INTERESTS
11.1 RIGHT TO ENTER AND VIEW
The Lessee will at all times during the terms of this Lease or otherwise during
the occupation of the Premises by the Lessee permit the Lessor and any person
having any estate or interest in the Premises superior to or concurrent with the
Lessor to exercise the Lessor's powers to enter and view the Premises and to
carry out repairs renovations maintenance and other work thereon and otherwise
to exercise or perform their lawful rights or obligations in regard thereto.
<PAGE> 26
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11.2 BENEFIT OF COVENANTS
In the event of a person other than the Lessor becoming entitled to receive the
rents hereby reserved either by operation of law otherwise the Lessee agrees
that such person shall have the benefit of all covenants and agreements on the
part of the Lessee hereunder and the Lessee at the cost of the Lessor will enter
into such covenant with such other person in that regard as the Lessor may
reasonably require.
PART 12
MISCELLANEOUS COVENANTS
12.1 OVERLOADING OF FLOORS
The Lessee shall not bring or do or permit or suffer to be brought or done upon
the Premises anything which in the opinion of the Lessor may overload the floors
of the Office Complex or any part thereof or cause the floors or walls of the
Office Complex to sag or deflect from the correct line or otherwise damage the
Premises or the Office Complex or any part thereof and without limiting the
generality of the foregoing shall not bring upon the Premises or the Office
Complex any heavy machinery iron safe or other heavy plant or equipment without
first obtaining the consent in writing of the Lessor.
12.2 RIGHT TO ENTRY TO VIEW
The Lessor and its servants and agents may at all reasonable times upon giving
to the Lessee reasonable notice (except in case of emergency when no notice
shall be required) (in the company of an authorised representative of the Lessee
if that representative is available following such reasonable notice) enter upon
the Premises and view the state of repair thereof and may serve upon the Lessee
a notice in writing of any defect for the repair of which the Lessee may be
responsible hereunder requiring the Lessee within thirty (30) days to repair the
same and in default of the Lessee so doing it shall be lawful for the Lessor
from time to time to enter and execute the required repairs as it if were the
Lessee and for that purpose the Lessor its architects contractors workmen and
agents may enter upon the whole or any part of the Premises and there remain for
the purpose of doing erecting or effecting any such thing AND any proper and
reasonable expenses and costs of carrying out such work shall forthwith be
payable by the Lessee to the Lessor PROVIDED ALWAYS THAT in the exercise of the
Lessee's powers under this clause no undue inconvenience shall be caused to the
Lessee or its business nor damage occasioned to its fixtures and fittings.
12.3 RIGHT OF ENTRY TO REPAIR
The Lessee will permit the Lessor at all reasonable times on reasonable notice
and in the case of the demised Premises only (in the company of an authorised
representative of the Lessee if that representative is available following such
reasonable notice) to carry out repairs renovations maintenance modifications
extensions or alterations to the Premises or to any part thereof or to the
Office Complex or any part thereof deemed reasonably necessary (in the case of
the Premises only ) and otherwise necessary or desirable by the Lessor and for
any of these purposes to enter the Premises or the Office Complex PROVIDED
ALWAYS THAT in the exercise of the Lessee's powers under this clause no undue
inconvenience shall be caused to the Lessee or its business and the Lessor shall
endeavour to ensure no damage is occasioned to its fixtures and fittings.
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12.4 REQUIREMENTS OF AUTHORITIES
If at any time during the said term any authority having jurisdiction or
authority over or in respect of the Premises of the user thereof requests
requires notifies or orders any structural improvements or other works to be
made to the Premises which the Lessor elects to do during the term including any
holding over periods and for which the Lessee is not liable under the terms
conditions or covenants herein contained the Lessor its architects contractors
workmen servants and other and the servants and workmen of any of its
contractors may enter into and the Premises at all reasonable times (in the
company of an authorised representative of the Lessee if that representative is
available following such reasonable notice) for the purposes of making any such
works or any of them as aforesaid PROVIDED ALWAYS that in the exercise of any
such power under this paragraph no undue inconvenience is caused to the Lessee.
12.5 DRAINS AND WASTE
The Lessee shall not use nor permit nor suffer to be used the lavatories toilets
sinks and drainage and other plumbing facilities in the Premises or the Common
Areas for any purposes other than those for which they were constructed or
provided and shall not deposit or permit to be deposited therein any sweepings
rubbish or other matter and any damage thereto caused by misuse shall be made
good by the Lessee forthwith.
12.6 RODENTS AND VERMIN
The Lessee will take all reasonable precautions to keep the Premises free of
rodents vermin insects pests birds and animals and will if so required by the
Lessor but at the cost of the Lessee employ from time to time or periodically
pest exterminators reasonably approved by the Lessor.
12.7 INFECTIOUS DISEASES
The Lessee will in the event of any infectious illness of a serious nature
occurring in the Premises forthwith give notice thereof to the Lessor and to the
proper public authorities and at the expense of the Lessee will take all
reasonable steps to prevent the spread of the infectious illness to the
reasonable satisfaction of the Lessor and such public authorities and otherwise
comply with their reasonable and lawful requirements in regard to the same.
12.8 LESSEE TO GIVE NOTICE
The Lessee will give to the Lessor prompt notice in writing of any accident to
or defect or want of repair in any services to or fittings of the Premises and
of any circumstances likely to be or cause any danger risk or hazard to the
Premises or to the Office Complex or any person therein.
12.9 RULES AND REGULATIONS
The Lessee will at all times observe and comply with any Rules and Regulations
of the Office Complex as may from time to time be made varied added to or
amended by the Lessor and notified in writing to the Lessee provided that no
such Rule or Regulation nor amendment or variation to such Rules or Regulations
shall be inconsistent with nor derogate from the rights of the Lessee as
expressed in this Lease and shall only be reasonably made for regulating the use
of the Premises or the common Areas or the Office Complex or any part thereof or
for the safety care and cleanliness thereof or for the preservation of good
order therein appropriate to a high class commercial building AND the Lessee
acknowledges agrees and declares that failure of the lessee to keep any such
Rules
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and Regulations as may from time to time be in force shall constitute a breach
of the terms of this Lease in the same manner as if the Rules and Regulations
were contained herein as covenants with the Lessor. In case of any inconsistency
between such Rules or Regulations and this ease, the provisions of the Lease
shall prevail.
12.10 USE OF COMMON AREAS
The Lessee shall not in any way obstruct or permit the obstructions of the
pavement entry arcade vestibule car parks corridors passages or stairways fire
doors and escape doors or any other part or parts of the Common Areas or use
them or any of them for any other purpose then for ingress or egress.
12.11 LIGHTING
The Lessee shall not cover or obstruct the skylights glazed panels ventilators
or windows that reflect or admit light or air into passageways or into any part
of the Office Complex or cover or obstruct any lights or other means of
illumination in the Office Complex.
12.12 SIGNS
The Lessee shall not inscribe paint display or affix any sign advertisement name
flagpole flag or notice on any part of the outside or inside of the Office
Complex except with the consent in writing of the Lessor and then only of such
colour size and style and in such place or places as shall be first approved by
the Lessor.
12.13 NON-WAIVER
No waiver by the Lessor of one breach of any covenant obligation or provision in
this Lease contained or implied shall operate as a waiver of another provision
of the same or of any other of the covenants obligations or provisions in this
Lease contained or implied.
12.14 NOTICE
Without prejudice to any other means of giving notice, notices required to be
served hereunder shall be sufficiently served on the Lessee if served personally
or if left addressed to the Lessee on the Premises or forwarded to the Lessee by
prepaid post to the last known place of business or abode of the Lessee and
shall be sufficiently served on the Lessor if served personally or if addressed
to the Lessor and left at or sent by prepaid post to the Lessor's registered
office for the time being and a notice sent by post shall be deemed to be given
at the time when it ought to be delivered in due course by post.
12.15 ADDITIONAL COSTS
(a) The Lessee shall pay to the Lessor or as it shall direct within seven (
7) days of demand having been made the reasonable professional fees of
the Lessor's solicitors of and incidental to the instructions for and the
preparation execution and stamping of this Lease and all annexures and
appendices and plans attached hereto and all stamp duty and registration
fees and other proper costs and disbursements payable on or with respect
to this Lease and signed copies hereof and all the Lessor's proper legal
costs charges and expenses and disbursements of or incidental to any
further stamping, any upstamping, obtaining any refund of stamp duty,
obtaining the consent of the mortgagee (if any) and any production fee
charged by such mortgages and the-preparation and service of a notice
under the provisions of the
<PAGE> 29
19
Conveyancing Act 1919 requiring the Lessee to remedy a breach of any of
the covenants herein contained.
(b) The Lessee will within seven ( 7) days of demand having been made pay to
the Lessor as soon as the Lessor has expended the same all moneys costs
charges and expenses (including legal costs on a solicitor and own client
basis and disbursements ) which the Lessor shall or may properly incur or
expend in consequence of any default by the Lessee in the performance or
observance of any covenant condition agreement or proviso herein
contained and to - be observed or performed by the Lessee or under or in
the exercise or enforcement or attempted exercise or enforcement of any
power or authority herein contained.
12.16 VIEWING
(a) The Lessee will in the company. of an authorised representative of the
Lessee permit the Lessor upon reasonable prior notice to show the
Premises to:
(1) prospective purchasers at all reasonable times; and
(2) prospective tenants within the three (3) months immediately
preceding the termination of this Lease at all reasonable times,
PROVIDED ALWAYS THAT this right in relation to prospective tenants
shall be of no force and effect if the Lessee shall have exercised
its option to renew the term of the Lease herein contained.
(b) The Lessee shall permit the Lessor:
(1) at all reasonable times during the term of this Lease to affix the
usual "For Sale" sign; and
(2) within three (3) months immediately preceding the termination of
this Lease affix and exhibit the usual "To Be Let" notice PROVIDED
THAT the right in relation to "To Let" notice shall be of no force
or effect if the Lessee shall have exercised its option contained in
this Lease.
In such places as the Lessor shall think fit other than the interior of
the Premises and in each case with the name and address of the Lessor or
its agents or both thereon and the Lessee will not remove any such notice
without the written consent of the Lessor.
12.17 NO PARTNERSHIP
Nothing contained herein shall be deemed or construed by the parties hereto nor
by any third party as creating the relationship or partnership or of principal
and agent or of joint venture between the parties hereto it being understood and
agreed that neither the method of computation of rent nor any other provision
contained herein nor any acts of the parties hereto shall be deemed to create
any relationship of Lessor and Lessee upon the terms and conditions only as
provided in this Lease.
12.18 CONSENTS
In any case where pursuant to these presents or to any Rule or Regulation made
hereunder the doing or executing of any act matter or thing by the Lessee is
dependent upon the consent or approval of the Lessor such consent or approval
may be given or withheld by the Lessor in its absolute uncontrolled discretion
unless otherwise herein provided.
<PAGE> 30
20
12.19 WHOLE OF THE AGREEMENT
The covenants provisions terms and agreements contained herein, in the Car
Parking Licence Deed and in the Deed Concerning Lease expressly or by statutory
implication cover and comprise the whole of the agreement between the parties
and the parties expressly agree and declare that no further or other covenants
agreements provisions or terms whether in respect of the Premises or otherwise
shall be deemed to implied herein or to arise between the parties by reason of
any promise representation warranty or undertaking given or made by either party
to the other on or prior to the execution hereof.
PART 13
NON WAIVER
In no event shall demand and/or acceptance by the Lessor of rent or other moneys
payable hereunder be or be deemed to be a waiver of any subsisting or antecedent
breach of covenant by the Lessee.
PART 14
SEVERABILITY
In case any one or more of the provisions herein contained should be invalid,
illegal or unenforceable in any respect, such provision may be severed herefrom
and the validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby.
PART 15
NO ADVERTISEMENTS
The Lessor shall not by itself or through its agents cause or permit any
newspaper or other advertisement to be produced advising of the presence of the
Lessee or its computer operations in the Office Complex and no signage in or
about the Office Complex shall make mention of the Lessee's computer operations.
PART 16
RESERVATIONS AND LIBERTIES
The Lessee its customers and all persons authorised by the Lessee in accordance
with this Lease shall have the right to use all common or public malls,
stairways and galleries of the Office Complex in common with other persons
entitled to use the same subject to any restrictions contained in this Lease but
reserving unto the Lessor and persons authorised by it the passage of
air-conditioning equipment fire and sprinkler systems pipes ducts plumbing and
drainage and draining pipes, telephone cables, electric wiring, water and
sewerage connections and gas piping and all other pipes, cables and sewers
through or along or in or into the Premises and also access to and through the
Premises at any time for the purpose of installing maintain or repairing any
such equipment systems pipes cables or wires or connecting plumbing drainage or
other pipes cables or sewers.
<PAGE> 31
21
PART 17
RIGHT OF FIRST REFUSAL
17.1 RIGHT OF FIRST REFUSAL
If at any time during the term of this Lease, the area known as Level 3 of the
Office Complex should be available for lease, the Lessor will not grant a lease
of Level 3 to any person other than the Lessee without first offering in writing
a lease of Level 3 to the Lessee. The Lessee shall indicate to the Lessor within
ten (10) business days of receiving the written offer of lease whether or not it
wishes to accept the offer in default of which the Lessor may offer the lease of
Level 3 to any other person but on terms which for a period of six (6) months
from the date of the Lessor's offer to the Lessee are no more favourable than
the terms offered to the Lessee.
PART 18
OPTION TO RENEW
18.1 OPTION TERM
If the Lessee desires to take a renewed Lease of the Premises for the one
further term of years set out in Item G(4) of the Lease from the expiration of
this Lease and gives to the Lessor not less than 3 months' previous notice in
writing of such desire and provided the Lessee is not then in default under the
express or implied provisions of this Lease, the Lessor will at the Lessee's
cost and expense grant to the Lessee a renewal of this Lease for the further
term ("Option Term") on the same terms and conditions as are contained in this
Lease with the exception of this Part 18.
18.2 RENT FOR OPTION TERM
The Base Rent payable during the Option Term shall be the greater of:-
(a) the Base Rent per annum payable as at the end of the term of this Lease;
and
(b) the current annual open market rental value of the Premises based on a
lease between a willing lessor and a willing lessee granted with vacant
possession and taking no account of any goodwill attributable to the
Premises by reason of any trade or business carried on in the Premises by
the Lessee and in all other respects (except as to rent payable) on the
terms covenants and conditions of this Lease.
18.3 TIME FOR RENT REVIEW
During the last 3 months of the term of this Lease the Lessor will serve on the
Lessee notice in writing ("Lessor's Notice") specifying the amount of Base Rent
payable during the Option Term.
18.4 RESOLUTION OF DISPUTES AS TO MARKET RENT
Should the Lessee disagree with the Lessor's Notice then the following
procedures apply:
(a) The Lessee must within 14 days of delivery of the Lessor's notice (in
which regard time is of the essence) give written notice to the Lessor
that it disputes the rent proposed and within 14 days of the date on which
that notice is given (in which regard time is of the essence) will
nominate in writing to the Lessor a valuer qualified in the manner
provided in clause subclause (f).
<PAGE> 32
22
(b) Within 1 month after the Lessee has given the notice referred to in clause
subclause (a), (in which regard time is of the essence) the Lessor must
give written notice to the Lessee also nominating a valuer qualified in
the manner provided in clause subclause (f).
(c) Within 1 month from the date of the Lessor's notice of nomination referred
to in clause subclause (b), the valuers so nominated must jointly
determine the annual open market rental of the Premises at the review
date.
(d) If either the Lessor or the Lessee fail to nominate a valuer in the manner
provided in clauses subclauses (a) and (b), the determination of such
annual open market rental will be made by the sole valuer nominated by
either the Lessor or the Lessee as the case may be.
(e) Prior to proceeding with their determination under clause subclause (c),
the valuers so nominated must agree on and appoint a valuer ("the
umpire") possessing the qualifications stated in subclause (f) and obtain
in writing his acceptance of the appointment. If the valuers are unable
to agree on the umpire, then either the Lessor or the Lessee may request
the President of the New South Wales Division of the Australian Institute
of Valuers and Land Economists Inc. (or if such Institute does not at
that time exist then such body or association nominated by the Lessor as
at that time fulfils functions similar to those performed at the date of
this Lease by the said Institute) to nominate such an umpire within 21
days of such request.
(f) A valuer nominated by either party under this clause must be a full member
of not less than 5 years' standing of the New South Wales Division of the
Australian Institute of Valuers and Land Economists Inc. and must be the
holder of a licence to practice as a valuer of the kind of premises
demised by this Lease.
(g) If the valuers are unable to agree on the annual market rental of the
Premises within the period of 1 month referred to in subclause (c), then
the umpire must make a final determination of the annual open market
rental of the Premises referred to in clause subclause (c) as at the
relevant date. Such determination must be made within 2 months of the
notice of nomination referred to in clause subclause (b) (if the umpire
has been appointed by the valuers) or within 1 month of the appointment
of the umpire (if the umpire has been appointed by the President of the
New South Wales Division of the Australian Institute of Valuers and Land
Economists Inc. or if such other Institute chosen in accordance with
clause subclause (e)).
(h) If it is necessary for the umpire to determine the annual open market
rental appropriate to the Premises, his determination will be final and
binding on the parties but in considering his determination the umpire
must have due regard to any evidence submitted by the valuers as to their
assessments of the annual market rental of the Premises. The umpire must
give his determination and the reasons for it in writing.
(i) In determining such annual open market rental any valuers, valuer or
umpire will:
(1) be deemed to be acting as expert(s) and not as arbitrator(s);
(2) exclude the value of any goodwill attributable to the Lessee's
business and the value of the Lessee's fixtures and fittings in the
Premises and must also exclude any
<PAGE> 33
23
deleterious condition of the Premises if such condition results from
any breach of any term of this Lease by the Lessee;
(3) have regard to the terms and conditions of this Lease and in
particular to the actual liability of the Lessee to pay a
contribution to the outgoings of the Building;
(4) have regard to the rental value of comparable premises in the
Building, comparable premises in the vicinity of the Building and
comparable premises in comparable buildings;
(5) value the Premises as being fit for immediate occupation and use
even if work has been carried out on the Premises by the Lessee or
subtenant which has diminished the annual open market rental of the
Premises and, if the Premises have been destroyed or damaged, as if
they had been fully restored and were in tenantable repair;
(6) value the Premises as being available to be let by a willing
landlord to a willing tenant as a whole without a premium but with
vacant possession and subject to the provisions of this Lease for a
term equal to the original Term;
(7) assume that all covenants on the Lessee's contained in this Lease
have been fully performed and observed;
(8) make no reduction on account of any concession otherwise required
to secure a lessee or any period of rent abatement;;
(9) exclude any difference in the annual open market rental that is
accountable to fluctuations caused by any subleasing of the
Premises; and
(10) call for and if submitted consider submissions by the Lessor and
the Lessee.
(j) Any determination by a valuer must be in writing and must include the
valuer's reasons and calculations in arriving at the determination.
(k) The costs incurred in the determination of such annual open market rental
value must be borne by the parties equally.
(l) Any variation in the rent resulting from such determination will take
effect on and from the review date.
18.5 PROVISION FOR ADJUSTMENT
If the amount of the Base Rent for the Option Term rent has not been ascertained
by the commencement of the Option Term, the Lessee must, pending ascertainment
of the Base rent for the Option Term, pay rent to the Lessor at a rate equal to
the Base Rent applicable in respect of the last year or the term of this Lease,
AND, on the revised rent being ascertained, any necessary adjustment of rent
calculated from the expiration of the Lease must be paid by the Lessee or
adjusted by the Lessor within 14 days of the Option Term rent being ascertained.
<PAGE> 34
24
PART 19
BANK GUARANTEE
19.1 MEANING OF "LEASE"
For the purposes of this Part, "Lease" includes any lease or agreement to
lease with respect to the Premises arising at law or in equity between the
Lessor and the Lessee.
19.2 BANK GUARANTEE
Immediately on execution of this Lease, the Lessee must provide to the Lessor a
bank guarantee in favour of the Lessor guaranteeing to the Lessor an amount of
not less than twenty seven thousand five hundred and eighty dollars
($27,580.00). The Lessor will not be obliged to perform any of its obligations
under this Lease until the guarantee has been provided.
In relation to such bank guarantee:-
(a) Such guarantee must be obtained from a bank or such other financial
institution as the Lessor may in its absolute discretion accept;
(b) Such guarantee will entitle the Lessor by notice in writing to the
provider thereof to make demand under the guarantee for an amount up to
and including the amount of such guarantee;
(c) The provider of such bank guarantee will not be required to, and will not,
enquire as to whether or not circumstances have arisen under this Lease
entitling the Lessor to make demand under the bank guarantee;
(d) If payment is made to the Lessor consequent on a demand made under the
bank guarantee, the Lessee must immediately ensure that a fresh bank
guarantee is provided to the Lessor for an amount of not less than the
amount described in this clause to the intent that there will be
maintained during the Term and any renewal or extension thereof a bank
guarantee which at all times secures to the Lessor the amount aforesaid.
<PAGE> 35
25
REFERENCE SCHEDULE
Item 1: Base Rent: Year 1: $110.000
Year 2: $165,480
Year 3: $181,240
Year 4: $204,880
Item 2: Agreed Proportion: 16.7%
Item 3: Permissible Use of Premises: Office Accommodation as well
as multimedia and digital
facility
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-18411) of Brilliant Digital Entertainment, Inc. of our audit
report dated March 24, 1997.
/s/ ERNST & YOUNG LLP
----------------------
Ernst & Young LLP
Woodland Hills, California
March 30, 1998
<PAGE> 1
Exhibit 23.2
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-18411) of Brilliant Digital Entertainment, Inc.
of our report dated March 18,1998 appearing on page 33 of this Annual Report on
Form 10-K.
Price Waterhouse LLP
Los Angeles, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT, INC. AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,338
<SECURITIES> 0
<RECEIVABLES> 2,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,722
<PP&E> 1,080
<DEPRECIATION> (477)
<TOTAL-ASSETS> 16,843
<CURRENT-LIABILITIES> 2,021
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 14,813
<TOTAL-LIABILITY-AND-EQUITY> 16,843
<SALES> 2,481
<TOTAL-REVENUES> 2,481
<CGS> 44
<TOTAL-COSTS> 5,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,305)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,305)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
