As filed with the Securities and Exchange Commission on December 31, 1998
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4592204
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 615-1500
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
------------------
MARK DYNE, CHIEF EXECUTIVE OFFICERBRILLIANT DIGITAL ENTERTAINMENT, INC.
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 615-1500
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
--------------------
Copies to:
MURRAY MARKILES, ESQ.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
2029 CENTURY PARK EAST, 24TH FLOOR
LOS ANGELES, CALIFORNIA 90067
(310) 728-3000
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities on this form are being offered pursuant to dividend
or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------- -------------------------- -------------------------- -------------------------- ----------------------
Proposed Maximum Proposed Maximum
Title of Shares Amount To Be Aggregate Price Aggregate Amount Of
To Be Registered Registered(1) Per Unit Offering Price Registration Fee
- ---------------------------- -------------------------- -------------------------- -------------------------- ----------------------
<S> <C> <C> <C> <C>
Common Stock, par value 1,800,000 $1.875(2) $3,375,000 $939
$.001 per share, issuable
upon exercise of a warrant
or upon conversion of
certain additional
debentures.
- ---------------------------- -------------------------- -------------------------- -------------------------- ----------------------
Common Stock, par value 100,000 $1.875(2) $187,500 $53
$.001 per share, issuable
upon exercise of a
debenture
- ---------------------------- -------------------------- -------------------------- -------------------------- ----------------------
Common Stock, par value 6,000 $1.875(3) $11,250 $4
$.001 per share
============================ ========================== ========================== ========================== ======================
TOTALS: 1,906,000 $3,573,750 $996
============================ ========================== ========================== ========================== ======================
</TABLE>
(1) In the event of a stock split, stock dividend, or similar transaction
involving the Company's Common Stock, in order to prevent dilution, the number
of shares registered shall automatically be increased to cover the additional
shares in accordance with Rule 416(a) under the Securities Act.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) on the basis of the average high and low prices of the
Registrant's Common Stock reported on the American Stock Exchange on December
29, 1998.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average high and low prices of the
Registrant's Common Stock reported on the American Stock Exchange on December
29, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed.
The selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
- --------------------------------------------------------------------------------
PROSPECTUS
BRILLIANT DIGITAL ENTERTAINMENT, INC.
1,906,000 SHARES OF COMMON STOCK
---------------------------------
We have issued to an investor a warrant to acquire up to 1,800,000
shares of our Common Stock and a debenture which is convertible into up to
100,000 shares of our Common Stock. This prospectus covers the resale by the
investor or any other selling stockholders of the shares of Common Stock that
the selling stockholders may acquire by exercising the warrant or converting the
debenture, or by converting any additional debentures that the selling
stockholders may be required to purchase from us under the purchase agreement
for the warrant and the debenture. This prospectus also covers the resale by
Trinity Capital Advisors, Inc. of 6,000 shares of our Common Stock issued to
Trinity Capital Advisors, Inc. for its advisory services in our issuance of the
warrant and the debenture.
Our Common Stock is traded on the American Stock Exchange under the
symbol "BDE." On December 29, 1998, the closing sale price of the Common Stock
on the American Stock Exchange was $1.813.
-------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER BEFORE
INVESTING IN THE SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this prospectus is December 31, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
WHERE YOU CAN FIND MORE INFORMATION......................................3
FORWARD-LOOKING STATEMENTS...............................................3
THE COMPANY..............................................................4
RISK FACTORS.............................................................5
USE OF PROCEEDS.........................................................12
SELLING STOCKHOLDERS....................................................12
PLAN OF DISTRIBUTION....................................................13
LEGAL MATTERS...........................................................14
EXPERTS.................................................................14
DIRECTORS' AND OFFICERS' LIABILITY......................................14
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You can read and
copy these documents at the SEC's Public Reference Room, located at 450 Fifth
Street, NW, Room 1024, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available on the SEC's Website at "http://www.sec.gov." You can
also read our SEC filings at the American Stock Exchange, 86 Trinity Plaza, New
York, New York.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"), until the selling stockholders sell all of the shares:
o Annual Report on Form 10-KSB for the year ended December 31, 1997.
o Quarterly Report on Form 10-QSB for the quarter ended March 31,
1998.
o Quarterly Report on Form 10-QSB for the quarter ended June 30,
1998.
o Quarterly Report on Form 10-QSB for the quarter ended September
30, 1998.
o Current Report on Form 8-K dated December 10, 1998.
o Proxy Statement dated April 27, 1998.
o Description of our capital stock contained in our Registration
Statement on Form 8-A, filed on October 29, 1996, as amended
by our Registration Statement on Form 8-A/A, filed on November
20, 1996.
This prospectus is part of a registration statement we filed with the
SEC. You may request a copy of the above information incorporated by reference,
at no cost, by writing to or calling:
Michael Ozen
Chief Financial Officer
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard, Suite 120
Woodland Hills, California 91367
(818) 615-1500
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement to this prospectus. We have not
authorized anyone else to provide you with different information. The selling
stockholders will not offer to sell these shares in any state where the offer is
not permitted. You should not assume that the information in this prospectus or
any supplement to this prospectus is accurate as of any date other than the date
on the cover page of this prospectus or any supplement.
FORWARD-LOOKING STATEMENTS
This prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and Section
27A of the Securities Act of 1933 (the "Securities Act"). The words "expect,"
"estimate," "anticipate," "predict," "believe" and similar expressions and
variations thereof are intended to identify forward-looking statements. Such
statements appear in a number of places in this prospectus and include
statements regarding our intent, belief or current expectations regarding our
strategies, plans and objectives, our product release schedules, our ability to
design, develop, manufacture and market products, and the ability of our
products to achieve or maintain commercial acceptance. Any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual results
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may differ materially from those projected in this prospectus, for the reasons,
among others, described in the "Risk Factors" section beginning on page 5. You
should read the Risk Factors section carefully, and should not place undue
reliance on any forward-looking statements, which speak only as of the date of
this prospectus. We undertake no obligation to release publicly any updated
information about forward-looking statements to reflect events or circumstances
occurring after the date of this prospectus or to reflect the occurrence of
unanticipated events.
THE COMPANY
Brilliant Digital Entertainment, Inc. ("Brilliant" or "the Company") is
a production and development studio producing a new generation of digital
entertainment that is being distributed over the Internet and on CD-ROM. We plan
to market versions of our digital stories also as television programming and for
home video. Using our proprietary state-of-the-art software tools, we produce
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. Our Multipath Movies
feature seamless interactivity leaving the plot and graphical presentation of
the story uninterrupted by the user's decisions and choices. We utilize 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, we have developed a system that
permits real time distribution of, and user interaction with, our Multipath
Movies over the Internet.
As a key part of our strategy, we have obtained widely recognizable
names and characters for our 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.
We also develop Multipath Movies based on internally-developed content.
Our Multipath Movies combine the best qualities of traditional filmed
entertainment--complex characters, stories and plots, with the best of the
traditional computer game--interactivity. Our Multipath Movies are designed to
appeal to the entire home PC market, including both the hardcore 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,
we are producing a variety of Multipath Movies tailored to various demographic
groups, such as our STORYTELLER(TM) SERIES which presents engaging interactive
stories targeted at children eight to twelve years of age, and Multipath
Adventures, including POPEYE, targeted to children as young as three years old.
Multipath Movies incorporate a number of features that we believe represent
significant technical enhancements over existing digital entertainment. For
example, animated characters created using our tools appear human-like and have
realistic features, facial expressions and mouth movements. Multipath Movies
also allow users to control characters' moods as well as 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.
Beginning in 1999, we plan to release certain of our Multipath Movies
in non-interactive format as television broadcast/cable programming and home
video features. We intend 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. We also intend to produce 80- to
120-minute animated features for the home video market. We believe that we can
produce Multipath Movies for television programming and home video features at
costs substantially below typical industry costs.
We are a Delaware corporation that was formed in July 1996. We are the
parent of Brilliant Interactive Ideas, Pty. Ltd., a corporation formed under the
laws of New South Wales, Australia in September 1993. Our executive offices are
located at 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, California
91367, and our telephone number is (818) 615-1500.
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RISK FACTORS
Investment in the shares covered by this prospectus involves a
significant degree of risk. You should consider all of the information in this
prospectus carefully, and, in particular, should evaluate the following risks
related to an investment in the shares.
ACCEPTANCE OF THE MULTIPATH MOVIE CONCEPT; SUCCESSFUL DEVELOPMENT OF MULTIPATH
MOVIES WITH APPEALING CREATIVE CONTENT.
The success of our Multipath Movie products will depend to a
significant extent on the market's acceptance of the Multipath Movie concept.
The market for entertainment software is emerging and is dependent upon a number
of factors, including:
o consumer preferences;
o the installed base of personal computers; and
o the existence of a sufficient number of recognizable software titles
to interest consumers and stimulate market development.
Any competitive, technological or other factor that would negatively
affect in a material way 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 our 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 success of our Multipath Movies will depend on our ability to
develop stories and characters that capture the attention and imagination of
consumers and to license recognized characters and properties from third parties
for our software titles. We can not guarantee that we will be able to develop or
license popular stories or characters. The success of a Multipath Movie also
depends upon the effectiveness of our marketing and successful introduction of
Multipath Movies through our bundling relationships with retailers and other
third parties. Other influential factors include the quality and acceptance of
programs that compete with our Multipath Movies, critical reviews, the
availability of alternative forms of entertainment and leisure time activities,
general economic conditions and other tangible and intangible factors, which are
all unpredictable. We cannot guarantee that we will be able to successfully
introduce our Multipath Movies into the marketplace.
PRODUCT DELAYS.
We plan to release a number of new Multipath Movies in 1999. However,
due to the numerous obstacles and uncertainties involved in developing and
distributing software to the market, we cannot guarantee that we will be able to
meet our planned release dates for our new Multipath Movies. If we are unable to
begin shipping an important new product during the scheduled quarter, our
revenue and earnings would likely be materially and adversely affected in that
quarter. In the past, we have experienced significant delays in our introduction
of certain new products. For instance, delays in duplication, packaging and
distribution caused our 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. Similarly, we have experienced distribution delays in the fourth quarter
of 1998 resulting in our products reaching retail shelves only at the end of
December. 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 our internal
development schedule or the expectations of public market analysts and
investors.
LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY.
We were founded in September 1993, shipped our initial traditional
CD-ROM product in November 1994 and substantially reduced this aspect of our
business in 1996 to pursue our revised business plan of Multipath Movie
production and distribution. We acquired the software tools necessary to produce
Multipath Movies in August 1996 and have only recently introduced our first
Multipath Movie. We have a limited operating history upon which to evaluate our
future prospects. Our ability to achieve and sustain profitability will depend,
in part, on our ability to enter into a variety of distribution and revenue
5
<PAGE>
generating arrangements as well as arrangements with Internet service providers,
traditional CD-ROM publishers and retailers. We cannot guarantee that we will
enter into any such arrangements, or that we will be able to sustain
profitability.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING.
We believe that current funds and cash generated from our operations
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures during the next year with the exception of our anticipated
expenditures required to complete the planned slate of Multipath Movie episodes
during this period. We intend to raise additional funds through debt or equity
financing (including by issuing shares upon exercise of the warrant described
under "Selling Stockholders") or other means. We intend to explore alternate
sources of financing. We cannot guarantee that additional financing will be
available or that, if available, it can be obtained on terms that we deem
favorable. If necessary funds are not available, we may be required to defer
completion of several titles and reduce overhead significantly, which could have
a material adverse effect on our business, operating results and financial
condition. Additionally, dilution to our stockholders may occur if we raise
additional funds through the sale of our stock.
SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES.
We substantially depend upon third parties for several critical
elements of our business, including the development and licensing of content and
the distribution of our products.
o DEPENDENCE UPON STRATEGIC RELATIONSHIPS. We have entered into
strategic relationships with certain companies, as well as licensing
arrangements with numerous additional companies that own the stories underlying
our Multipath Movies and/or characters in many of our current and planned
products. Our business strategy is based largely on our strategic and licensing
relationships with these and other companies and our ability to continue to
enter into similar strategic and licensing relationships in the future. In these
relationships, mutual agreement by both 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.
Consequently, one of our strategic partners may, in the exercise of its approval
rights, delay the introduction of certain of our Multipath Movie titles. Delays
in shipping schedules or other distribution problems may materially and
adversely affect our ability to release our products. For example, we are
dependent on certain original equipment manufacturers to bundle and sell our
Multipath Movies with their computer hardware products as a significant avenue
for us to achieve market penetration of our Multipath Movies. Any delays in
these OEM distributors' shipping schedules could adversely affect the release of
our products. One such delay that has already occurred is Packard Bell NEC's
distribution of our titles bundled with Packard Bell's computers which has been
significantly delayed beyond initially anticipated launch dates. Additionally,
we believe that because Packard Bell NEC is distributing our software with only
its middle to higher end machines, Packard Bell NEC will not be able to comply
with its commitment to us to ship our products with 6 million computers during
the term of our agreement. We are currently attempting to engage Packard Bell
NEC in discussions with the intention of facilitating distribution of Multipath
Movies on a wider range of Packard Bell NEC computers, but we cannot guarantee
that this will occur or that Packard Bell NEC will achieve its committed
shipment level. We also cannot guarantee that adequate remedies will be
available to us to compensate for Packard Bell NEC's failure to perform under
our agreement. Also, many of our strategic partners and content licensors have
various creative controls and approval rights pursuant to their respective joint
venture agreements they have entered into with us. These creative controls and
approval rights allow these strategic partners and content licensors to
arbitrarily reject or delay the Multipath Movie productions of the respective
joint ventures. We cannot guarantee that we will not be subject to delays
resulting from disagreements with, or an inability to obtain approvals from, our
strategic partners or that we will achieve our objectives in respect of any or
all of our strategic relationships or continue to maintain and develop these or
other strategic relationships, or that licenses between us and any other third
party will be renewed or extended at their expiration dates. Many content
licensers 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, we cannot guarantee that licensed content will
be available to us at prices, or upon terms or conditions that we will consider
acceptable. Delays resulting from disagreements with licensers or joint venture
partners or our failure to renew or extend a key license, maintain any of our
strategic relationships or enter into new licenses and strategic relationships
on sound financial terms could materially adversely affect our business,
operating results and financial condition.
o USE OF INDEPENDENT SOFTWARE DEVELOPERS AND CONTENT PROVIDERS. In
addition to internally developing software and creating content, we use
entertainment software created by independent software developers as well as
content developed by third parties. We have less control over the scheduling and
the quality of the software generated by independent contractors than over that
developed by our own employees. Additionally, we may not be able to secure the
services of talented content developers. Our business and future operating
results will depend in part on our 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 we will be able to maintain such relationships or enter into
and renew such agreements.
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o VENDOR. We presently serve our 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 and adversely affect our ability to conduct our business and
maintain customer satisfaction.
DEPENDENCE ON DEVELOPMENT OF ADDITIONAL MULTIPATH MOVIES.
Our success will depend largely upon our ability to continuously
develop new, commercially successful Multipath Movie titles in the future. If
revenues from new products or other activities fail to replace declining
revenues from existing products, our business, operations and financial
condition could be materially adversely affected. In addition, our success will
depend upon our ability to develop popular characters and to license recognized
characters and properties from third parties for our digital entertainment
products. If we are unable to develop popular characters or if the cost of
licensing characters and properties from third parties becomes too expensive,
our business, operating results and financial condition could be adversely
affected. Also, we may from time to time enter into agreements with licensers of
intellectual property under which we may have to make 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, we will be required to write off any unrecovered
portions of such payments, which could have a material adverse effect on our
business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNET DELIVERY.
We also intend to distribute certain of our Multipath Movies through
our Internet site and through a site on the CompuServe on-line service.
Accordingly, any system failure that causes interruption or delay on the
Company's Internet site or the CompuServe site could result in less traffic to
and reduced distribution of Multipath Movies via the Internet and, if sustained
or repeated, could reduce the attractiveness to consumers of our products. We
are also dependent upon Web browsers and Internet and on-line service providers
to ensure user access to our products. User acceptance with respect to payment
methods over the Internet may also create barriers to distribution of our
products through the Internet. Any disruption in the Internet access provided to
our Internet site or any failure by our Internet site to handle higher volumes
of transactions could have a material adverse effect on our 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, at
least 24 megabytes of random access memory and appropriately configured
operating systems. These requirements are generally 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. 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. Noticeable lag times or negative comparisons to
Multipath Movies distributed on CD-ROM may reduce the attractiveness of Internet
versions of the Multipath Movies.
RISKS ASSOCIATED WITH RETAIL DISTRIBUTION.
We anticipate that a significant amount of sales of Multipath Movies
will be made through distributors to retailers. We are currently expending
significant resources to develop a retail sales channel. Our expenditures
associated with this development are likely to precede any significant sales
that we may realize through this channel. We have no prior experience in the
development or management of a retail channel or sales through such channel. The
competition for shelf space in retail stores is intense. Our products are
expected to constitute a small percentage of a retailer's sales volume, and we
cannot guarantee that retailers will provide our 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 the following:
o price discounts;
o product return rights; and
o cooperative market development funds.
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Increased competition could result in loss of shelf space for our products at
retail stores, as well as significant price competition, any of which could
adversely affect our business, operating results and financial condition.
PRODUCT RETURNS.
At the time of shipment of our products to retailers, we will establish
reserves, including reserves which estimate the potential for future product
returns based on seasonal terms of sale and distributor and retailer inventories
of our products, as well as other factors. We intend to recognize revenue from
the sale of our products upon shipment except for sales made to certain
distributors where the right of ownership does not pass at delivery. Product
returns or price protection concessions that exceed our reserves could
materially and adversely affect our business, results of operations and
financial condition, and could increase the magnitude of quarterly fluctuations
in our operating and financial results. Furthermore, if our assessment of the
creditworthiness of our customers receiving our products on credit proves
incorrect, we could be required to significantly increase the reserves
previously established. We cannot guarantee that such future write-offs will not
occur or that amounts written off will not have a material adverse effect on our
business, results of operations and financial condition.
MANUFACTURING RISKS.
The production of our 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 us by third party vendors in
accordance with our specifications and forecasts. Currently, we will use
primarily one vendor for these services. While these services are available from
multiple vendors and at multiple sites, there can be no guarantee that an
interruption in the manufacture of our products could be remedied without undue
delay and without materially and adversely affecting our results of operations.
We do not have contractual agreements with any of our 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. We must compete for capacity and priority with the CD-ROM
products of many substantially larger competitors which are able to wield
substantially greater influence with our vendors than we can currently exert. If
we fail to secure adequate services to timely produce and deliver our products,
our business, operating results and financial condition would be materially and
adversely effected.
EXPENSING OF CAPITALIZED MULTIPATH MOVIE COSTS.
Our 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 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. In
accordance with SFAS No. 86 we capitalized certain development costs related to
the production of Multipath Movies during the third and fourth quarters of 1997
and the first quarter of 1998. It is anticipated 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
actual performance of our new products as compared to anticipated sales revenues
for those products in the short term. As a result, the carrying amount of the
capitalized movie software costs and licensing advances may be materially
reduced in the short term. Multipath Movies developed by the Company after the
first quarter of 1998 are intended to be viewed on our new Internet Digital
Projector. We have written off amounts incurred in the production of these
Multipath Movies.
SOFTWARE TOOLS AND PRODUCT DEVELOPMENT.
The software tools that will enable us to create our Multipath Movies
have been developed over the past three years, and additional refinement of
these tools may be necessary in order to continue to enhance the Multipath Movie
format. If problems in the development of our software tools arise, no assurance
can be given that we will be able to successfully remedy these problems. Also,
entertainment products as complex as those that we offer may contain undetected
errors or defects when first introduced or as new versions are released. In the
past, we have discovered software errors in certain of our new products and
enhancements after their introduction. Although we have not experienced material
adverse effects resulting from any such errors to date, we cannot guarantee that
errors or defects will not be found in new products or releases after we have
already begun shipment of these products to market. Such defects could result in
adverse product reviews and a loss of or
8
<PAGE>
delay in market acceptance, which would have a material adverse effect upon our
business, operating results and financial condition.
RAPID EXPANSION AND MANAGEMENT OF GROWTH.
We have experienced a significant expansion as the result of the
implementation of our business plan, which includes the following:
o introduction and marketing of our Multipath Movies;
o management of our joint venture with Morgan Creek;
o negotiation of additional content licensing and distribution
agreements;
o management of Internet service providers; and
o the expansion of our studio in Australia.
The growth of our operations and activities has placed and will continue to
place a significant strain on our management, operational, financial and
accounting resources. Successful management of our operations will require us to
continue to implement and improve our financial and management information
systems. Our ability to manage our future growth, if any, and to increase
production levels and commence marketing and distribution of our products will
also require us to hire and train new employees, including management and
technical personnel. Failure to manage the implementation of our business plan
would have a material adverse effect on our business, operating results and
financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS.
In the future, we may acquire products, technologies or companies that
are complimentary to our business, and from time to time we may engage in
discussions relating to possible acquisitions. Acquisitions involve numerous
risks, including the following:
o adverse short-term effects on the combined business' reported
operating results;
o diversion of management's attention;
o dependence on retention, hiring and training of key personnel;
o amortization and/or impairment of goodwill and other intangible
assets; and
o risks associated with unanticipated problems or legal
liabilities.
RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS.
Rapid technological developments and frequent changes in computer
operating environments in general characterize the entertainment software market
and the PC industry. To compete successfully in these markets, we must
continually improve and enhance our existing products and technologies and
develop new products and technologies that incorporate technological advances
while remaining competitive in terms of performance and price. Our success also
will depend substantially upon our ability to anticipate the emergence of, and
to adapt our products to, popular platforms for consumer software.
Our intention to design future products for use with new platforms 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 we
currently possess. In addition, we cannot guarantee that the new platforms for
which we develop products will achieve market acceptance and, as a result, we
cannot guarantee that our development efforts with
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<PAGE>
respect to such new platforms will lead to 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
our business, operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL.
Our success has and will continue to depend to a large extent upon
certain key management, product development and technical personnel, many of
whom would be difficult to replace, particularly Mark Dyne, the Chairman and
Chief Executive Officer, and Kevin Bermeister, the President. Although we have
entered into employment agreements with certain officers, either party can
terminate such agreements upon 30 days notice. Accordingly, we cannot guarantee
that such employees will continue to be available to us. The loss of the
services of one or more of these key employees could have a material adverse
effect on our business. Our future success will depend in large part upon our
ability to attract, retain and motivate personnel with a variety of technical
and managerial skills, including software development and programming expertise.
Additionally, there is currently an industry-wide shortage of technical
personnel which makes it more difficult to attract and retain such personnel. We
cannot guarantee that we will be able to retain and motivate our managerial and
technical personnel or attract additional qualified members to our management or
technical staff. The inability to attract and retain necessary technical and
managerial personnel could have a material adverse effect upon our business,
operating results and financial condition.
SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF EXECUTIVE
OFFICER AND PRESIDENT.
Our Chief Executive Officer and Chairman, Mark Dyne, and our
President, Kevin Bermeister, also serve as joint managing directors of Sega
Ozisoft Pty., Limited ("Sega Ozisoft") and other businesses. Mark Dyne also
serves as Chairman of the Board of Tag-It Pacific, Inc. Kevin Bermeister also
serves as managing director of Sega Enterprises (Australia) Pty., Ltd. Although
Mr. Dyne and Mr. Bermeister are active in the management of Brilliant, they are
not required to spend a specified amount of time at Brilliant nor are they able
to devote all of their time and resources to Brilliant. Further, we do not have
employment agreements with either Mr. Dyne or Mr. Bermeister. We cannot
guarantee that the inability of Mr. Dyne and Mr. Bermeister to devote their full
time and resources to our business will not adversely affect our business,
operating results or financial condition.
CONFLICTS OF INTEREST.
Certain of our directors and officers are directors or officers of our
potential competitors and/or strategic partners. These relationships may give
rise to conflicts of interest between the Company, on the one hand, and one or
more of our directors, officers and/or their affiliates, on the other hand. Our
Certificate of Incorporation provides that Mark Dyne and Kevin Bermeister are
required to present to us 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 Mr. Dyne and/or Mr. Bermeister solely for Australia, New Zealand and/or
Southern Africa. Our Certificate of Incorporation provides that Mr. Dyne and Mr.
Bermeister are not required to present to us any other opportunities that may
potentially be of benefit to us.
LIMITED PROPRIETARY PROTECTION.
Our future success and ability to compete is dependent in part upon our
proprietary technology. We also rely on trademark, trade secret and copyright
laws to protect our technology, with the source code for our proprietary
software being protected both as a trade secret and as a copyrighted work. Also,
it is our policy that all employees and third-party developers sign
nondisclosure agreements. However, we cannot guarantee that such precautions
will provide meaningful protection from competition or that competitors will not
be able to develop similar or superior technology independently. We do not
copy-protect our software, so it may be possible for unauthorized third parties
to copy our products or to reverse engineer or otherwise obtain and use
information that we regard as proprietary. Our customers may take inadequate
precautions to protect our proprietary information. If we must pursue litigation
in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others, such litigation may not be successful and could result in substantial
costs and diversion of resources. In addition, many foreign countries' laws may
not protect us from improper use of our proprietary technologies overseas. We
may not have adequate remedies if our proprietary rights are breached or our
trade secrets are disclosed.
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<PAGE>
We believe that our products, including our 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, we rely 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 us does not infringe the proprietary rights of others.
Additionally, although we have received no communication from third parties
alleging the infringement of proprietary rights of such parties, we cannot
guarantee 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 us to enter into royalty or licensing agreements. If we
were found to have infringed upon the proprietary rights of third parties, we
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 our business, operating
results and financial condition.
VOLATILITY OF STOCK PRICE.
Our Common Stock is traded on the American Stock Exchange, and there
has been substantial volatility in the market price of the Common Stock. The
trading price of the Common Stock has been and is likely to continue to be
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant contracts, changes in
management, announcements of technological innovations or new products by us or
our 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 we have not experienced significant trading volume in our
Common Stock, have not been actively followed by stock market analysts and have
had limited market-making support from broker-dealers. If market-making support
does not continue at present or greater levels, and/or if we do not continue to
receive analyst coverage, the average trading volume in our Common Stock may not
increase or even sustain its current levels, in which case we cannot guarantee
that an adequate trading market will exist to sell large positions in the Common
Stock.
INFLUENCE BY MANAGEMENT.
As of December 22, 1998, our officers and directors owned, in the
aggregate, approximately 22.3% of our outstanding shares of Common Stock. As a
result, these stockholders are able to exert influence over the outcome of all
matters submitted to a vote of the holders of our Common Stock, including the
election of our Board of Directors and thus, the formation of our company
policies. The voting power of these stockholders could also discourage potential
acquirers from seeking to acquire control of us through the purchase of the
Common Stock, which might have the effect of depressing the price of our Common
Stock.
EFFECT OF CERTAIN CHARTER PROVISIONS; STOCKHOLDER'S RIGHTS PLAN; ANTI-TAKEOVER
EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW.
Our 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, we adopted a stockholder's rights plan (the
"Rights Agreement") and, in connection therewith, distributed one preferred
share purchase right for each outstanding share of our 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
Brilliant, each purchase right not owned by certain hostile acquirers will
entitle its holder to purchase shares of our Series A Preferred Stock at a value
below the then 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 our outstanding voting stock. Further, certain provisions
of our Certificate of Incorporation and Bylaws and of Delaware law could delay
or make more difficult a merger, tender offer or proxy contest involving
Brilliant.
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<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered by
the selling stockholders under this prospectus.
SELLING STOCKHOLDERS
We have entered into a Debenture and Warrant Purchase Agreement dated
as of November 20, 1998 (the "Purchase Agreement") between Brilliant and AMRO
International, S.A. ("AMRO"). At the closing under the Purchase Agreement, we
issued to AMRO (1) a stock purchase warrant exercisable for up to 1,800,000
shares of our Common Stock and (2) a debenture convertible into up to 100,000
shares of our Common Stock. At the closing, we agreed to register the shares
underlying the warrant and the debenture for resale by the holders of those
shares, who (together with Trinity Capital Advisors, Inc.) are the selling
stockholders described in this prospectus. We also agreed to register for resale
any shares acquired by the selling stockholders by converting any additional
debentures, which we may require to be purchased as described below. We agreed
to maintain the effectiveness of the registration statement covering the shares
until all of the shares are sold by the selling stockholders or become eligible
for resale without registration under Rule 144 of the Securities Act. Our
registration of these shares does not necessarily mean that the selling
stockholders will sell any or all of these shares.
TERMS OF THE DEBENTURE. The debenture matures on December 1, 2000 and
bears interest at an annual rate of 4%, payable quarterly in arrears. The
debenture holder may convert the debenture into shares of our Common Stock at
any time. The conversion price is 86% of the market price (as described below)
on the date that the holder delivers a conversion notice. We may pay interest on
the debenture in cash or shares of our Common Stock, valued at the conversion
price on the interest payment date. We may also prepay the debenture at any time
without penalty in cash or shares, valued at the conversion price on the
prepayment date. On the maturity date, the unpaid balance of the debenture and
any accrued and unpaid interest will convert automatically into shares valued at
the conversion price on the maturity date.
TERMS OF THE WARRANT. The warrant expires on November 30, 2001. We may
cancel the warrant in full at any time upon 30 days' notice to the holder. The
holder may exercise the Warrant in full at an exercise price of $25 per share
from October 1, 2001 until the warrant expires, or if we elect to cancel the
warrant in full.
We may call a portion of the warrant for redemption at any time,
subject to minimum and maximum limits and provided that the "market price" of
our Common Stock is at least $1.00 per share and that a registration statement
covering the shares underlying the warrant is effective. Upon any call, the
warrant holder may acquire shares by exercising the portion of the warrant
called by the Company. The exercise price will be 88% of the "market price,"
defined as the lowest trade price of our Common Stock on the American Stock
Exchange over the last ten trading days prior to the redemption notice date. If
the market price is $4.00 or less, the exercise price will be reduced to 86% of
the market price.
If the warrant holder fails to exercise any portion of the warrant that
we call for redemption, we may require the holder to purchase from us an
additional debenture in the amount of such unexercised portion of the warrant.
Any additional debenture would be convertible into shares of our Common Stock
and would have other terms substantially the same as the debenture described
above.
The following table contains information about the selling
stockholders' beneficial ownership of our Common Stock as of December 22, 1998.
Because a selling stockholder may sell some or all of the shares, and because
there are currently no agreements, arrangements or understandings with respect
to the sale of any shares, we cannot estimate the actual number of shares that
will be held by the selling stockholders after completion of such distribution.
See "Plan of Distribution."
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<TABLE>
<CAPTION>
---
Shares Owned Shares Being Shares Owned
Before Offering Offered After Offering
----------- -- ------------ --------------- ------------ -- -----------
NAME Number Percent Number Percent
---- ----------- ------------ ------------ -----------
<S> <C> <C> <C>
AMRO International, S.A. 100,000(1) * (1) (1) *
Trinity Capital Advisors, Inc. 6,000 * (1) (1) *
----------- ------------ --------------- ------------ -----------
Total 106,000(1) * (1) (1) *
</TABLE>
- ----------------------
* Represents less than 1%.
(1) This information will be modified with a Prospectus Supplement to reflect
the number of shares of Common Stock acquired by AMRO or any other selling
stockholder.
No selling stockholder has had any material relationship with us or any
of our affiliates within the past three years other than as a result of the
ownership of the warrant and the debenture or as a result of the negotiation and
the execution of the Purchase Agreement.
PLAN OF DISTRIBUTION
Brilliant is registering the shares on behalf of the selling
stockholders. The selling stockholders may offer and sell their shares as
principals or through one or more underwriters, brokers, dealers or agents, from
time to time, in one or more transactions:
o on any exchange or in the over-the-counter market;
o in transactions otherwise than on an exchange or in the
over-the-counter market;
o through the settlement of short sales of the Common Stock;
o at a fixed offering price, which may be changed;
o at varying prices determined at the time of sale; or
o at negotiated prices.
Brilliant will not receive any cash proceeds from the sale of the
shares by the selling stockholders. Any underwriters, brokers, dealers or agents
may receive underwriting discounts and commissions, which may exceed customary
discounts, concessions or commissions. It is not possible at the present time to
determine the price to the public in any such sale. Accordingly, the public
offering price and the amount of any applicable underwriting discounts and
commissions will be determined at the time of such sale by selling stockholders.
The aggregate proceeds to the selling stockholders from the sale of
their shares will be the purchase price of the selling stockholders' shares sold
less all applicable commissions and underwriters' discounts, if any, and other
expenses of issuance and distribution will not borne by us. We will pay
substantially all the expenses incident to the registration, offering and sale
of the shares to the public by the selling stockholders other than fees,
discounts and commissions of underwriters, dealers or agents, if any, transfer
taxes and certain counsel fees. We have also agreed to indemnify the selling
stockholders and any underwriters against certain liabilities, including
liabilities under the Securities Act.
Because the selling stockholders may be deemed to be "underwriters"
under the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. We have informed the selling stockholders
that the anti-manipulative provisions of Regulation M promulgated under the
Exchange Act may apply to their sales of the Common Stock in the market.
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<PAGE>
Under the securities laws of certain states, the shares may be sold in
such states only through registered or licensed brokers or dealers. In addition,
in certain states the shares may not be sold unless they have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.
If and to the extent required, the specific shares to be sold, the
names of the selling stockholders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts will be set forth in an accompanying
prospectus supplement or, if appropriate, a post-effective amendment to the
registration statement that includes this prospectus.
Trinity Capital Advisors, Inc. acted as finder with respect to the
issuance of the warrant and the debenture to AMRO. See "Selling Stockholders."
We have not had any material engagement with Trinity Capital Advisors, Inc.
prior to our engagement of Trinity Capital Advisors, Inc. in connection with our
issuance of the debenture and the warrant.
LEGAL MATTERS
Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles, California, has
rendered to Brilliant a legal opinion as to the validity of the Common Stock
covered by this prospectus.
EXPERTS
The financial statements incorporated in this Prospectus by reference
to the Annual Report on Form 10-KSB of Brilliant Digital Entertainment, Inc. for
the year ended December 31, 1997, have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
DIRECTORS' AND OFFICERS' LIABILITY
Our Certificate of Incorporation includes provisions to (i) eliminate
the personal liability of our directors for monetary damages resulting from
breaches of their fiduciary duty to the fullest extent permitted by the Delaware
General Corporation Law and (ii) indemnify our directors and officers to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law.
We believe that these provisions are necessary to attract and retain qualified
persons as directors and officers.
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- --------------------------------------------------------------------------------
No dealer, salesman or other person is authorized to give oral or
written information about this offering that is not included in this prospectus.
If given or made, such information or representation must not be relied upon as
having been authorized by Brilliant. This prospectus does not constitute an
offer to sell, or the solicitation of an offer to buy, Common Stock in any
jurisdiction. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of Brilliant since the date of this prospectus.
- --------------------------------------------------------------------------------
--------------------
BRILLIANT DIGITAL ENTERTAINMENT, INC.
PROSPECTUS
December 31, 1998
--------------------
15
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
Amount
------------
Registration Fee Under Securities Act of 1933.......... $ 996
Legal Fees and Expenses................................ $25,000
Accounting Fees and Expenses........................... $ 5,000
Miscellaneous Expenses................................. $ 2,000
------------
TOTAL........................................ $32,996
============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and its Bylaws provide for
the indemnification by the Company of each director, officer and employee of the
Company to the fullest extent permitted by the Delaware General Corporation Law,
as the same exists or may hereafter be amended. Section 145 of the Delaware
General Corporation Law provides in relevant part that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Company's Certificate of Incorporation provides that a director of
the Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. Section 102(o)(7) of the
Delaware General Corporation Law provides that a provision so limiting the
personal liability of a director shall not
1
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eliminate or limit the liability of a director for, among other things: breach
of the duty of loyalty; acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; unlawful payment of
dividends and transactions from which the director derived an improper personal
benefit.
The Company has entered into separate but identical indemnity
agreements (the "Indemnity Agreements") with each director of the Company and
certain officers of the Company (the "Indemnitees"). Pursuant to the terms and
conditions of the Indemnity Agreements, the Company indemnified each Indemnitee
against any amounts which he or she becomes legally obligated to pay in
connection with any claim against him or her based upon any action or inaction
which he or she may commit, omit or suffer while acting in his or her capacity
as a director and/or officer of the Company or its subsidiaries, provided,
however, that Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal action, had no reasonable cause to believe
Indemnitee's conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Company pursuant to the above statutory provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
ITEM 16. EXHIBITS.
See the Exhibit Index of this Registration Statement.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of the appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
2
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Woodland Hills, State of California, on December 30, 1998.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Registrant)
By: /S/ MICHAEL OZEN
------------------------------
Michael Ozen
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark Dyne and Michael Ozen or any one of
them, his attorney-in-fact and agent, with full power of substitution, for him
in any and all capacities, to sign any amendments to this Registration Statement
on Form S-3, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or their substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
SIGNATURE TITLE DATE
<S> <C> <C>
Chairman of the Board
and Chief Executive Officer December 30, 1998
(Principal Executive Officer
/S/ MARK DYNE and Director)
----------------------------------------
Mark Dyne
President and Director
/S/ KEVIN BERMEISTER December 30, 1998
----------------------------------------
Kevin Bermeister
Chief Financial Officer
(Principal Financial and December 30, 1998
/S/ MICHAEL OZEN Accounting Officer)
----------------------------------------
Michael Ozen
Vice President, Operations
/S/ MARK MILLER and Production and Director December 30, 1998
----------------------------------------
Mark Miller
Director
/S/ DIANA MARANON December 30, 1998
----------------------------------------
Diana Maranon
Director
/S/ RAY MUSCI December 30, 1998
----------------------------------------
Ray Musci
3
<PAGE>
Director
/S/ GARTH SALONER December 30, 1998
----------------------------------------
Garth Saloner
Director
/S/ JEFF SCHEINROCK December 30, 1998
----------------------------------------
Jeff Scheinrock
</TABLE>
4
<PAGE>
EXHIBIT INDEX
No. Item
5.1 Opinion of Troop Steuber Pasich Reddick & Tobey, LLP.
10.1 Debenture and Warrant Purchase Agreement dated as of November 20, 1998
between the Registrant and AMRO International, S.A.
10.2 Registration Rights Agreement dated as of November 20, 1998 between the
Registrant and AMRO International, S.A.
10.3 4% Convertible Debenture of the Registrant due December 1, 2000, in the
principal amount of $100,000, dated as of November 30, 1998.
10.4 Stock Purchase Warrant to purchase 1,800,000 Shares of the Registrant's
Common Stock, dated as of November 30, 1998.
23.1 Consent of Pricewaterhouse Coopers LLP.
23.2 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included as part
of Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
5
[LETTERHEAD OF TROOP STEUBER PASICH REDDICK & TOBEY]
December 31, 1998 Exhibit 5.1
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, California 91367
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-3 (the "Registration Statement") to which this letter is attached as Exhibit
5.1 filed by Brilliant Digital Entertainment, Inc., a Delaware corporation (the
"Company"), in order to register under the Securities Act of 1933, as amended
(the "Act"), 1,906,000 shares of Common Stock of the Company and any additional
shares of Common Stock of the Company which may be issued pursuant to Rule
462(b) under the Act (the "Shares").
We are of the opinion that the Shares have been duly authorized and
upon issuance and sale, the Shares will be validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to the use of our name in the Prospectus constituting a part
thereof.
Respectfully submitted,
/S/ TROOP STEUBER PASICH REDDICK & TOBEY
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
DEBENTURE AND WARRANT PURCHASE AGREEMENT
BETWEEN
BRILLIANT DIGITAL ENTERTAINMENT, INC.
AND
AMRO INTERNATIONAL, S.A.
DEBENTURE AND WARRANT PURCHASE AGREEMENT dated as of November 20, 1998
(the "Agreement"), between AMRO International, S.A., a Panama corporation (the
"Investor"), and Brilliant Digital Entertainment, Inc., a corporation organized
and existing under the laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
and the Investor shall purchase, (i) a $100,000 principal amount Convertible
Debenture (as defined below) (ii) a Warrant (as defined below) to purchase up to
1,800,000 shares of the Common Stock (as defined below) and (iii) possible
Additional Debentures (as defined in Section 5.3).
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") of the United States Securities Act of 1933, as
amended, and Regulation D ("Regulation D") and the other rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in Common Stock to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "CAPITAL SHARES" shall mean the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.2. "CAPITAL SHARES EQUIVALENTS" shall mean any securities, rights, or
obligations that are convertible into or exchangeable for or give any right to
subscribe for any Capital Shares of the Company or any warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 1.3. "CLOSING" shall mean the closing of the purchase and sale of the
Convertible Debenture and Warrants pursuant to Section 2.1.
Section 1.4. "CLOSING DATE" shall mean the date on which all conditions to the
Closing have been satisfied (as defined in Section 2.1 (a) hereto) and the
Closing shall have occurred.
Section 1.5. "COMMON STOCK" shall mean the Company's common stock, par value
$.001 per share.
<PAGE>
Section 1.6. "CONVERSION SHARES" shall mean the shares of Common Stock issuable
upon conversion of the Convertible Debenture and any Additional Debenture, when
and if any Additional Debenture is issued.
Section 1.7. "CONVERTIBLE DEBENTURE" shall mean the $100,000 Convertible
Debenture in the form of Exhibit A hereto to be issued to the Investor pursuant
to this Agreement.
Section 1.8. "DAMAGES" shall mean any loss, claim, damage, liability, costs and
expenses (including, without limitation, reasonable attorney's fees and
disbursements and reasonable costs and expenses of expert witnesses and
investigation).
Section 1.9. "EFFECTIVE DATE" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.
Section 1.10. "ESCROW AGENT" shall have the meaning set forth in the Escrow
Agreement.
Section 1.11. "ESCROW AGREEMENT" shall mean the Escrow Agreement in
substantially the form of Exhibit D hereto executed and delivered
contemporaneously with this Agreement.
Section 1.12. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
Section 1.13. "LEGEND" shall mean the legend set forth in Section 9.1.
Section 1.14. "MARKET PRICE" on any given date shall mean the single lowest
price on the Principal Market (as reported by Bloomberg L.P.) of the Common
Stock at which a trade is executed on any Trading Day during the ten Trading Day
period ending on the Trading Day immediately prior to the date for which the
Market Price is to be determined.
Section 1.15. "MATERIAL ADVERSE EFFECT" shall mean any effect on the business,
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole, and/or any condition, circumstance, or situation that would prohibit
or otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement, the Registration Rights Agreement,
the Escrow Agreement, the Convertible Debenture or the Warrant in any material
respect.
Section 1.16. "OUTSTANDING" when used with reference to shares of Common Stock
or Capital Shares (collectively the "Shares"), shall mean, at any date as of
which the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
PROVIDED, HOWEVER, that "Outstanding" shall not mean any such Shares then
directly or indirectly owned or held by or for the account of the Company.
Section 1.17. "PERSON" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
Section 1.18. "PRINCIPAL MARKET" shall mean the American Stock Exchange, the New
York Stock Exchange, the NASDAQ National Market, or the NASDAQ Small-Cap Market,
whichever is at the time the principal trading exchange or market for the Common
Stock.
Section 1.19. "PURCHASE PRICE" shall mean one hundred five thousand dollars
($105,000).
<PAGE>
Section 1.20. "REGISTRABLE SECURITIES" shall mean the Conversion Shares and the
Warrant Shares until (i) the Registration Statement has been declared effective
by the SEC, and all Conversion Shares and Warrant Shares have been disposed of
pursuant to the Registration Statement, (ii) all Conversion Shares and Warrant
Shares have been sold under circumstances under which all of the applicable
conditions of Rule 144 (or any similar provision then in force) under the
Securities Act ("Rule 144") are met, (iii) all Conversion Shares and Warrant
Shares have been otherwise transferred to holders who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend or (iv) such time as, in the opinion of counsel to the
Company, all Conversion Shares and Warrant Shares may be sold without any time,
volume or manner limitations pursuant to Rule 144(k) (or any similar provision
then in effect) under the Securities Act.
Section 1.21. "REGISTRATION RIGHTS AGREEMENT" shall mean the agreement regarding
the filing of the Registration Statement for the resale of the Registrable
Securities, entered into between the Company and the Investor as of the Closing
Date in the form annexed hereto as Exhibit C.
Section 1.22. "REGISTRATION STATEMENT" shall mean a registration statement on
Form S-3 (if use of such form is then available to the Company pursuant to the
rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate, and which form shall be available for the resale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement and in accordance with the intended
method of distribution of such securities), for the registration of the resale
by the Investor of the Registrable Securities under the Securities Act.
Section 1.23. "REGULATION D" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.24. "SEC" shall mean the Securities and Exchange Commission.
Section 1.25. "SECTION 4(2)" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.26. "SECURITIES ACT" shall have the meaning set forth in the recitals
of this Agreement.
Section 1.27. "SEC Documents" shall mean the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 and each report, proxy
statement or registration statement filed by the Company with the SEC pursuant
to the Exchange Act or the Securities Act since the filing of such Annual Report
through the date hereof.
Section 1.28. "SHARES" shall have the meaning set forth in Section 1.16.
Section 1.29. "TRADING DAY" shall mean any day during which the Principal Market
at such day shall be open for business.
Section 1.30. "WARRANT" shall mean the warrant substantially in the form of
Exhibit B to be issued to the Investor hereunder.
Section 1.31. "WARRANT SHARES" shall mean all shares of Common Stock or other
securities issued or issuable pursuant to exercise of the Warrant.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK
Section 2.1. Investment.
<PAGE>
(a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investor agrees to purchase the Convertible
Debenture and the Warrant at the Purchase Price on the Closing Date as follows:
(i) Upon execution and delivery of this Agreement, the Investor shall
deliver to the Escrow Agent immediately available funds in the
amount of the Purchase Price, and the Company shall deliver the
Convertible Debenture and the Warrant to the Escrow Agent, in
each case to be held by the Escrow Agent pursuant to the Escrow
Agreement.
(ii) Upon satisfaction of the conditions set forth in Section 2.1(b),
the Closing ("Closing") shall occur at the offices of the Escrow
Agent at which the Escrow Agent (x) shall release the Convertible
Debenture and the Warrant to the Investor and (y) shall release
the Purchase Price (after all fees have been paid as set forth in
the Escrow Agreement) to the Company, pursuant to the terms of
the Escrow Agreement.
(b) The Closing is subject to the satisfaction of the following conditions:
(i) acceptance and execution by the Company and by the Investor, of
this Agreement and all Exhibits hereto;
(ii) delivery into escrow by Investor of immediately available funds
in the amount of the Purchase Price of the Convertible Debenture
and the Warrant, as more fully set forth in the Escrow Agreement;
(iii)all representations and warranties of the Investor contained
herein shall remain true and correct as of the Closing Date (as a
condition to the Company's obligations);
(iv) all representations and warranties of the Company contained
herein shall remain true and correct as of the Closing Date (as a
condition to the Investor's obligations);
(v) the Company shall have obtained all permits and qualifications
required by any state for the offer and sale of the Convertible
Debenture and Warrant, or shall have the availability of
exemptions therefrom;
(vi) the sale and issuance of the Convertible Debenture and Warrant
hereunder, and the proposed issuance by the Company to the
Investor of the Common Stock underlying the Convertible Debenture
and the Warrant upon the conversion or exercise thereof shall be
legally permitted by all laws and regulations to which the
Investor and the Company are subject and there shall be no
ruling, judgment or writ of any court prohibiting the
transactions contemplated by this Agreement;
(vii)delivery of the original fully executed Convertible Debenture
and Warrant certificates to the Escrow Agent;
(viii) receipt by the Investor of an opinion of Troop Steuber Pasich
Reddick & Tobey, LLP, counsel to the Company, in the form of
Exhibit E hereto;
(ix) delivery to the Investor of the Irrevocable Instructions to
Transfer Agent in the form attached hereto as Exhibit F; and
(x) delivery to the Investor of the Registration Rights Agreement.
<PAGE>
Section 2.2. ALLOCATION. The Purchase Price shall be allocated $100,000 to the
Convertible Debenture and $5,000 to the Warrant.
Section 2.3. LIQUIDATED DAMAGES. The parties hereto acknowledge and agree that
the sum payable pursuant to the Registration Rights Agreement shall constitute
liquidated damages and not penalties. The parties further acknowledge that (a)
the amount of loss or damages likely to be incurred is incapable or is difficult
to precisely estimate, (b) the amounts specified in such Sections bear a
reasonable proportion and are not plainly or grossly disproportionate to the
probable loss likely to be incurred by the Investor in connection with the
failure by the Company to timely cause the registration of the Registrable
Securities and (c) the parties are sophisticated business parties and have been
represented by sophisticated and able legal and financial counsel and negotiated
this Agreement at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1. INTENT. The Investor is entering into this Agreement for its own
account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Convertible Debenture, the Warrant, any
Conversion Shares or Warrant Shares to or through any person or entity;
provided, however, that by making the representations herein, the Investor does
not agree to hold such securities for any minimum or other specific term and
reserves the right to dispose of the Conversion Shares and Warrant Shares at any
time in accordance with federal and state securities laws applicable to such
disposition.
Section 3.2. SOPHISTICATED INVESTOR. The Investor is a sophisticated investor
(as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it is capable of evaluating the merits and
risks of an investment in the Convertible Debenture, the Warrant and the
underlying Common Stock. The Investor acknowledges that an investment in the
Convertible Debenture, the Warrant and the underlying Common Stock is
speculative and involves a high degree of risk.
Section 3.3. AUTHORITY. This Agreement and each agreement attached as an Exhibit
hereto which is required to be executed by Investor has been duly authorized and
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 3.4. NOT AN AFFILIATE. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 3.5. ABSENCE OF CONFLICTS. The execution and delivery of this Agreement
and the agreements the forms of which are attached as Exhibits hereto and
executed in connection herewith, and the consummation of the transactions
contemplated thereby, and compliance with the requirements thereof, will not
violate any law, rule, regulation, order, writ, judgment, injunction, decree or
award binding on Investor or (a) violate any provision of any indenture,
instrument or agreement to which Investor is a party or is subject, or by which
Investor or any of its assets is bound; (b) conflict with or constitute a
material default thereunder; (c) result in the creation or imposition of any
lien pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by Investor to any third party;
or (d) require the approval of any third-party (which has not been obtained)
pursuant to any material contract, agreement, instrument,
<PAGE>
relationship or legal obligation to which Investor is subject or to which any of
its assets, operations or management may be subject.
Section 3.6. DISCLOSURE; ACCESS TO INFORMATION. The Investor has received all
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed or received copies of all SEC Documents that
have been requested by it.
Section 3.7. MANNER OF SALE. At no time was Investor presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1. ORGANIZATION OF THE COMPANY. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted. The Company does not have any
subsidiaries and does not own more that fifty percent (50%) of or control any
other business entity except as set forth in the SEC Documents other than
Brilliant Digital Filmed Entertainment, a Delaware corporation, and Brilliant
Interactive Ideas, Pty. Ltd., a company incorporated in New South Wales,
Australia, each of which is a wholly-owned subsidiary of the Company. The
Company is duly qualified and is in good standing as a foreign corporation to do
business in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other than those in
which the failure so to qualify would not have a Material Adverse Effect.
Section 4.2. AUTHORITY. (i) The Company has the requisite corporate power and
corporate authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Escrow Agreement, and the
Warrant and to issue the Convertible Debenture, the Conversion Shares, the
Additional Debentures, the Warrant and the Warrant Shares pursuant to their
respective terms, (ii) the execution, issuance and delivery of this Agreement,
the Registration Rights Agreement, the Escrow Agreement, the Convertible
Debenture and the Warrant by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required, and (iii) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Convertible Debenture
and the Warrant have been duly executed and delivered by the Company and at the
Closing shall constitute valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws relating to, or affecting generally the enforcement of, creditors' rights
and remedies or by other equitable principles of general application. The
Company has duly and validly authorized and reserved for issuance shares of
Common Stock sufficient in number for the conversion of the Convertible
Debenture (assuming a Market Price of $1.00) and for the exercise of the
Warrant. The Company understands and acknowledges the potentially dilutive
effect to the Common Stock of the issuance of the Conversion Shares and the
Warrant Shares. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Convertible Debenture or any Additional
Debenture and Warrant Shares upon exercise of the Warrants in accordance with
this Agreement and the Convertible Debenture is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company and notwithstanding the
commencement of any case under 11 U.S.C. ss. 101 et seq. (the "Bankruptcy
Code"). The Company shall not seek judicial relief from its obligations
hereunder except pursuant to the Bankruptcy Code. In the event the Company is a
debtor under the Bankruptcy Code, the
<PAGE>
Company hereby waives to the fullest extent permitted any rights to relief it
may have under 11 U.S.C. ss. 362 in respect of the conversion of the Convertible
Debenture and the exercise of the Warrants. The Company agrees, without cost or
expense to the Investor, to take or consent to any and all action necessary to
effectuate relief under 11 U.S.C. ss. 362.
Section 4.3. CAPITALIZATION. The authorized capital stock of the Company
consists of 30,000,000 shares of Common Stock, par value $0.001, of which
9,403,001 shares are issued and outstanding as of November 20, 1998 and
1,000,000 shares of preferred stock, par value $0.001 per share, of which no
shares are issues and outstanding. Except for outstanding options to acquire a
total of 796,500 shares of Common Stock, there are no outstanding Capital Shares
Equivalents. All of the outstanding shares of Common Stock of the Company have
been duly and validly authorized and issued and are fully paid and
non-assessable.
Section 4.4. COMMON STOCK. The Company has registered its Common Stock pursuant
to Section 12(b) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and the Company is in compliance
with all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the American Stock
Exchange and the Company has not received any notice regarding, and to its
knowledge there is no threat, of the termination or discontinuance of the
eligibility of the Common Stock for such listing.
Section 4.5. SEC DOCUMENTS. The Company has delivered or made available to the
Investor true and complete copies of the SEC Documents. The Company has not
provided to the Investor any information that, according to applicable law, rule
or regulation, should have been disclosed publicly prior to the date hereof by
the Company, but which has not been so disclosed. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Exchange Act, and rules and regulations of the SEC promulgated thereunder and
the SEC Documents did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents complied in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto at the time of such
inclusion. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company nor any
of its subsidiaries has any material indebtedness, obligations or liabilities of
any kind (whether accrued, absolute, contingent or otherwise, and whether due or
to become due) that would have been required to be reflected in, reserved
against or otherwise described in the financial statements or in the notes
thereto in accordance with GAAP, which was not fully reflected in, reserved
against or otherwise described in the financial statements or the notes thereto
included in the SEC Documents or was not incurred in the ordinary course of
business consistent with the Company's past practices since the last date of
such financial statements.
Section 4.6. EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject to the
accuracy of the Investor's representations in Article III, the sale of the
Convertible Debenture, the Conversion Shares, any Additional Debentures, the
Warrant and the Warrant Shares will not require registration under the
Securities Act and/or any applicable state securities law. When issued and paid
for in accordance with the Warrant and the Convertible Debenture or any
Additional Debenture, the Conversion Shares and the Warrant Shares will be duly
and validly issued, fully paid, and non-assessable. Neither the sales of the
Convertible Debenture, the
<PAGE>
Conversion Shares, any Additional Debentures, the Warrant or the Warrant Shares
pursuant to, nor the Company's performance of its obligations under, this
Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Convertible Debenture, any Additional Debenture, or the Warrant will (i) result
in the creation or imposition by the Company of any liens, charges, claims or
other encumbrances upon the Convertible Debenture, any Additional Debenture, the
Conversion Shares, the Warrant Shares or, except as contemplated herein, any of
the assets of the Company, or (ii) entitle the holders of Outstanding Capital
Shares to preemptive or other rights to subscribe to or acquire the Capital
Shares or other securities of the Company. The Convertible Debenture, any
Additional Debenture, the Conversion Shares, and the Warrant Shares shall not
subject the Investor to personal liability to the Company or its creditors by
reason of the possession thereof.
Section 4.7. NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor any of its affiliates nor any person acting
on its or their behalf (i) has conducted or will conduct any general
solicitation (as that term is used in Rule 502(c) of Regulation D) or general
advertising with respect to any of the Convertible Debenture, any Additional
Debenture, the Conversion Shares, the Warrant or the Warrant Shares, or (ii)
made any offers or sales of any security or solicited any offers to buy any
security under any circumstances that would require registration of the
Convertible Debenture, any Additional Debenture, the Conversion Shares, the
Warrant or the Warrant Shares under the Securities Act; provided, that the
Company makes no representation or warranty with respect to the Investor or
Trinity Capitol Advisors, Inc.
Section 4.8. CORPORATE DOCUMENTS. The Company has furnished or made available to
the Investor true and correct copies of the Company's Certificate of
Incorporation, as amended and in effect on the date hereof (the "Certificate"),
and the Company's By-Laws, as amended and in effect on the date hereof (the
"By-Laws").
Section 4.9. NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the
Convertible Debenture, any Additional Debenture, the Conversion Shares, the
Warrant and the Warrant Shares, do not and will not (i) result in a violation of
the Company's Certificate of Incorporation or By-Laws or (ii) conflict with, or
constitute a material default (or an event that with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument, or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state or local law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or by which any material property or asset of the Company is bound or
affected, nor is the Company otherwise in violation of, conflict with or default
under any of the foregoing (except in each case for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not have, individually or in the aggregate, a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a Material
Adverse Effect. The Company is not required under federal, state or local law,
rule or regulation to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement or issue
and sell the Convertible Debenture or the Warrant in accordance with the terms
hereof (other than any SEC, American Stock Exchange or state securities filings
that may be required to be made by the Company subsequent to Closing, any
registration statement that may be filed pursuant hereto, and any shareholder
approval required by the rules applicable to companies whose common stock trades
on the American Stock Exchange); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
<PAGE>
Section 4.10. NO MATERIAL ADVERSE CHANGE. Since September 30, 1998, no Material
Adverse Effect has occurred or exists with respect to the Company, except as
disclosed in the SEC Documents.
Section 4.11. NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September 30, 1998,
no event or circumstance has occurred or exists with respect to the Company or
its businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
Section 4.12. NO INTEGRATED OFFERING. Other than pursuant to an effective
registration statement under the Securities Act, or pursuant to the issuance or
exercise of employee stock options, or pursuant to its discussion with the
Investor and Trinity Capital Advisors, Inc. in connection with the transactions
contemplated hereby, the Company has not issued, offered or sold the Convertible
Debenture, the Warrant or any shares of Common Stock (including for this purpose
any securities of the same or a similar class as the Convertible Debenture, the
Warrant or Common Stock, or any securities convertible into a exchangeable or
exercisable for the Convertible Debenture or Common Stock or any such other
securities) within the six-month period next preceding the date hereof, and the
Company shall not permit any of its directors, officers or Affiliates directly
or indirectly to take, any action (including, without limitation, any offering
or sale to any person or entity of the Convertible Debenture, Warrants or shares
of Common Stock), so as to make unavailable the exemption from Securities Act
registration being relied upon by the Company for the offer and sale to Investor
of the Convertible Debenture (and the Conversion Shares) or the Warrant (and the
Warrant Shares) as contemplated by this Agreement.
Section 4.13. LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the SEC
Documents, there are no lawsuits or proceedings pending or, to the knowledge of
the Company, threatened, against the Company, nor has the Company received any
written or oral notice of any such action, suit, proceeding or investigation,
which could reasonably be expected to have a Material Adverse Effect. Except as
set forth in the SEC Documents, no judgment, order, writ, injunction or decree
or award has been issued by or, to the knowledge of the Company, requested of
any court, arbitrator or governmental agency which could result in a Material
Adverse Effect.
Section 4.14. NO MISLEADING OR UNTRUE COMMUNICATION. The Company and, to the
knowledge of the Company, any person representing the Company, or any other
person selling or offering to sell the Convertible Debenture or the Warrant in
connection with the transaction contemplated by this Agreement, have not made,
at any time, any oral communication in connection with the offer or sale of the
same which contained any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.15. MATERIAL NON-PUBLIC INFORMATION. The Company has not disclosed to
the Investor any material non-public information that (i) if disclosed, would,
or could reasonably be expected to have, a material effect on the price of the
Common Stock or (ii) according to applicable law, rule or regulation, should
have been disclosed publicly by the Company prior to the date hereof but which
has not been so disclosed.
Section 4.16. INSURANCE. The Company maintains property and casualty, general
liability, workers' compensation, environmental hazard, personal injury and
other similar types of insurance with financially sound and reputable insurers
that is adequate, consistent with industry standards and the Company's
historical claims experience. The Company has not received notice from, and has
no knowledge of any threat by, any insurer (that has issued any insurance policy
to the Company) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any insurance policy presently in force.
<PAGE>
Section 4.17. TAX MATTERS.
(a) The Company has filed all Tax Returns which it is required to file
under applicable laws; all such Tax Returns are true and accurate and have been
prepared in compliance with all applicable laws; the Company has paid all Taxes
due and owing by it (whether or not such Taxes are required to be shown on a Tax
Return) and have withheld and paid over to the appropriate taxing authorities
all Taxes which it is required to withhold from amounts paid or owing to any
employee, stockholder, creditor or other third parties; and since December 31,
1997, the charges, accruals and reserves for Taxes with respect to the Company
(including any provisions for deferred income taxes) reflected on the books of
the Company are adequate to cover any Tax liabilities of the Company if its
current tax year were treated as ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction where
the Company does not file tax returns that such corporation is or may be subject
to taxation by that jurisdiction. There are no foreign, federal, state or local
tax audits or administrative or judicial proceedings pending or being conducted
with respect to the Company; no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority; and, except
as disclosed above, no written notice indicating an intent to open an audit or
other review has been received by the Company from any foreign, federal, state
or local taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to ss. 7121 of the Internal Revenue
Code or any predecessor provision thereof or any similar provision of state,
local or foreign law; or (B) has not agreed to or is required to make any
adjustments pursuant to ss. 481 (a) of the Internal Revenue Code or any similar
provision of state, local or foreign law by reason of a change in accounting
method initiated by the Company or any of its subsidiaries or has any knowledge
that the IRS has proposed any such adjustment or change in accounting method, or
has any application pending with any taxing authority requesting permission for
any changes in accounting methods that relate to the business or operations of
the Company. The Company has not been a United States real property holding
corporation within the meaning of ss. 897(c)(2) of the Internal Revenue Code
during the applicable period specified in ss. 897(c)(1)(A)(ii) of the Internal
Revenue Code.
(c) The Company has not made an election under ss. 341(f) of the Internal
Revenue Code. The Company is not liable for the Taxes of another person that is
not a subsidiary of the Company under (A) Treas. Reg. ss. 1.1502-6 (or
comparable provisions of state, local or foreign law), (B) as a transferee or
successor, (C) by contract or indemnity or (D) otherwise. The Company is not a
party to any tax sharing agreement. The Company has not made any payments, is
obligated to make payments or is a party to an agreement that could obligate it
to make any payments that would not be deductible under ss. 280G of the Internal
Revenue Code.
(d) For purposes of this Section 4.18:
"IRS" means the United States Internal Revenue Service.
"TAX" or "TAXES" means federal, state, county, local, foreign, or
other income, gross receipts, ad valorem, franchise, profits, sales or
use, transfer, registration, excise, utility, environmental,
communications, real or personal property, capital stock, license,
payroll, wage or other withholding, employment, social security,
severance, stamp, occupation, alternative or add-on minimum, estimated
and other taxes of any kind whatsoever (including, without limitation,
deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and
including any amendment thereof.
<PAGE>
Section 1.18. PROPERTY. Neither the Company nor either of its subsidiaries owns
any real property. Each of the Company and its subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects except such as do not materially affect the
value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and to the Company's
knowledge any real property and buildings held under lease by the Company as
tenant are held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
intended to be made of such property and buildings by the Company.
Section 4.19. INTELLECTUAL PROPERTY. Each of the Company and its subsidiaries
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, except as disclosed
in the SEC Documents neither the Company nor any of its subsidiaries is
infringing upon or in conflict with any right of any other person with respect
to any Intangibles. Except as disclosed in the SEC Documents, no claims have
been asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.
Section 4.20. INTERNAL CONTROLS AND PROCEDURES. The Company maintains books and
records and internal accounting controls which provide reasonable assurance that
(i) all transactions to which the Company is a party or by which its properties
are bound are executed with management's authorization; (ii) the recorded
accountability of the Company's assets is compared with existing assets at
regular intervals; (iii) access to the Company's assets is permitted only in
accordance with management's authorization; and (iv) all transactions to which
the Company is a party or by which its properties are bound are recorded as
necessary to permit preparation of the financial statements of the Company in
accordance with U.S. generally accepted accounting principles.
Section 4.21. PAYMENTS AND CONTRIBUTIONS. Neither the Company nor any of its
directors, officers or, to its knowledge, other employees has (i) used any
Company funds for any unlawful contribution, endorsement, gift, entertainment or
other unlawful expense relating to political activity; (ii) made any direct or
indirect unlawful payment of Company funds to any foreign or domestic government
official or employee; (iii) violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe,
rebate, payoff, influence payment, kickback or other similar payment to any
person with respect to Company matters.
Section 4.22. NO MISREPRESENTATION. No representation or warranty of the Company
contained in this Agreement, any schedule, annex or exhibit hereto or any
agreement, instrument or certificate furnished by the Company to the Investor
pursuant to this Agreement, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading.
ARTICLE V
COVENANTS OF THE INVESTOR
Section 5.1. COMPLIANCE WITH LAW. The Investor's trading activities with respect
to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and rules
and regulations of the Principal Market on which the Company's Common Stock is
listed.
<PAGE>
Section 5.2. SHORT SALES. The Investor and its affiliates shall not
engage in short sales of the Company's Common Stock; provided, however, that the
Investor may enter into any short sale or other hedging or similar arrangement
it deems appropriate with respect to Conversion Shares or Warrant Shares one
Trading Day after it delivers a Conversion Notice with respect to such
Conversion Shares, or an Exercise Notice with respect to Warrant Shares so long
as such arrangements do not involve more than the number of such Conversion
Shares or Warrant Shares (determined as of the date of such Conversion Notice or
Exercise Notice, as applicable).
Section 5.3. ADDITIONAL DEBENTURES. If the Investor shall not exercise any
portion of the Warrant which has been properly and validly called for Partial
Redemption by the Company by the Partial Redemption Date, then the Investor
shall be obligated, and hereby agrees, on not less than three (3) Business Days'
written notice from the Company, to purchase from the Company an Additional
Debenture in the principal amount of the Exercise Price which would have been
applicable to such Partial Redemption of the Warrant. The Additional Debenture
shall be identical in form and substance to the Convertible Debenture, except
that the issuance date shall be the date of payment therefor. All such
Additional Debentures shall have a maturity date of December 1, 2001. The
Conversion Shares issuable upon conversion of any Additional Debenture shall be
Registrable Securities as provided in the Registration Rights Agreement, subject
to the limitations as provided therein. The Investor's obligation to purchase
any Additional Debentures shall terminate if the SEC shall require that the
Investor be named in any Registration Statement as an underwriter of the Warrant
Shares or the Conversion Shares issuable upon conversion of the Additional
Debentures. Each purchase of an Additional Debenture shall be closed through
escrow as provided in the Escrow Agreement.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. REGISTRATION RIGHTS. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.
Section 6.2. RESERVATION OF COMMON STOCK. As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to issue the Conversion Shares and the Warrant Shares
pursuant to any conversion of the Convertible Debenture or exercise of the
Warrant; such amount of shares of Common Stock to be reserved shall be
calculated based upon a Market Price for the Common Stock under the terms of the
Debenture of $1.00. The number of shares so reserved from time to time, as
theretofore increased or reduced as hereinafter provided, may be reduced by the
number of shares actually delivered pursuant to any conversion of the
Convertible Debenture or exercise of the Warrant and the number of shares so
reserved shall be increased or decreased to reflect potential increases or
decreases in the Common Stock that the Company may thereafter be obligated to
issue by reason of adjustments to the Warrant.
Section 6.3. LISTING OF COMMON STOCK. The Company hereby agrees to maintain the
listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing (but in any event prior to the effective date
of the Registration Statement) to list the Conversion Shares and the Warrant
Shares on the Principal Market. The Company further agrees, if the Company
applies to have the Common Stock traded on any other Principal Market, it will
include in such application the Conversion Shares and the Warrant Shares, and
will take such other action as is necessary or desirable in the opinion of the
Investor to cause the Common Stock to be listed on such other Principal Market
as promptly as possible. The Company will take all action to continue the
listing and trading of its Common Stock on a Principal Market (including,
without limitation, maintaining sufficient net tangible assets) and will comply
in all
<PAGE>
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of the Principal Market and shall provide Investor with copies
of any correspondence to or from such Principal Market which questions or
threatens delisting of the Common Stock, within three (3) Business Days of the
Company's receipt thereof, until the Investor has disposed of all of its
Registrable Securities.
Section 6.4. EXCHANGE ACT REGISTRATION. The Company will cause its Common Stock
to continue to be registered under Section 12(b) or (g) of the Exchange Act,
will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investor has
disposed of all of its Registrable Securities.
Section 6.5. LEGENDS. The certificates evidencing the Registrable Securities
shall be free of legends, except as set forth in Article IX.
Section 6.6. CORPORATE EXISTENCE. The Company will take all steps necessary to
preserve and continue the corporate existence of the Company.
Section 6.7. CONSOLIDATION; MERGER. The Company shall not, at any time after the
date hereof, effect any merger or consolidation of the Company with or into, or
a transfer of all or substantially all of the assets of the Company to, another
entity (a "Consolidation Event") unless the resulting successor or acquiring
entity (if not the Company) assumes by written instrument or by operation of law
the obligation to deliver to the Investor such shares of stock and/or securities
as the Investor is entitled to receive pursuant to this Agreement.
Section 6.8. ISSUANCE OF CONVERTIBLE DEBENTURE AND WARRANT SHARES. The sale of
the Convertible Debenture and the issuance of the Warrant Shares pursuant to
exercise of the Warrant and the Conversion Shares upon conversion of the
Convertible Debenture shall be made in accordance with the provisions and
requirements of Section 4(2) of Regulation D and any applicable state securities
law. The Company shall make all necessary SEC and "blue sky" filings required to
be made by the Company in connection with the sale of the Securities to the
Investor as required by all applicable Laws, and shall provide a copy thereof to
the Investor promptly after such filing.
Section 6.9. LIMITATION ON FUTURE FINANCING. The Company agrees that it will not
enter into any sale of its securities for cash at a discount to Market Price
until the Warrant has been fully exercised, redeemed or the Termination Date has
passed, without the Investor's prior written consent, except (x) pursuant to any
(i) presently existing employee benefit plan which plan has been approved by the
Company's stockholders, (ii) compensatory plan for a full-time employee or key
consultant, or (iii) strategic partnership or other business transaction, the
principal purpose of which is not simply to raise money; or (y) if the Investor
does not exercise that part of the Warrant which is validly called for Partial
Redemption and does not purchase an Additional Debenture in connection therewith
upon demand by the Company; or (z) if the Market Price of the Common Stock is
less than $1.00 for 30 out of 45 consecutive Trading Days, and the Investor does
not agree in writing to provide financing to the Company on terms offered by a
bona fide third party within three (3) Business Days of notice from the Company
setting forth the terms of such proposed financing.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. SURVIVAL. The representations, warranties and covenants made by
each of the Company and the Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement
<PAGE>
and certificate entered into and delivered by them pursuant to this Agreement,
shall survive the Closing and the consummation of the transactions contemplated
hereby. In the event of a breach or violation of any of such representations,
warranties or covenants, the party to whom such representations, warranties or
covenants have been made shall have all rights and remedies for such breach or
violation available to it under the provisions of this Agreement or otherwise,
whether at law or in equity, irrespective of any investigation made by or on
behalf of such party on or prior to the Closing Date.
Section 7.2. INDEMNITY. (a) The Company hereby agrees to indemnify and hold
harmless the Investor, its Affiliates and their respective officers, directors,
partners and members (collectively, the "Investor Indemnitees"), from and
against any and all losses, claims, Damages, judgments, penalties, liabilities
and deficiencies (collectively, "Losses"), and agrees to reimburse the Investor
Indemnitees for all reasonable out-of-pocket expenses (including the reasonable
fees and expenses of legal counsel), in each case promptly as incurred by the
Investor Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any of the
Company's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement; or
(ii) any failure by the Company to perform in any material respect any
of its covenants, agreements, undertakings or obligations set forth in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company pursuant
to this Agreement.
(b) The Investor hereby agrees to indemnify and hold harmless the Company,
its Affiliates and their respective officers, directors, partners and members
(collectively, the "Company Indemnitees"), from and against any and all Losses,
and agrees to reimburse the Company Indemnitees for reasonable all out-of-pocket
expenses (including the reasonable fees and expenses of legal counsel), in each
case promptly as incurred by the Company Indemnitees and to the extent arising
out of or in connection with:
(i) any misrepresentation, omission of fact, or breach of any of the
Investor's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Investor pursuant to this
Agreement; or
(ii) any failure by the Investor to perform in any material respect
any of its covenants, agreements, undertakings or obligations set forth in
this Agreement or any instrument, certificate or agreement entered into or
delivered by the Investor pursuant to this Agreement.
Section 7.3. NOTICE. Promptly after receipt by either party hereto seeking
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to Section
7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is materially prejudiced and forfeits
substantive rights and defenses by reason of such failure. In connection with
any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-
<PAGE>
pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party
reasonably shall have concluded that representation of the Indemnified Party and
the Indemnifying Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the Indemnified Party,
potentially differing interests between such parties in the conduct of the
defense of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those available to
the Indemnifying Party, or (z) the Indemnifying Party shall have failed to
employ legal counsel reasonably satisfactory to the Indemnified Party within a
reasonable period of time after notice of the commencement of such Claim. If the
Indemnified Party employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and expenses of such
legal counsel shall be borne exclusively by the Indemnified Party. Except as
provided above, the Indemnifying Party shall not, in connection with any Claim
in the same jurisdiction, be liable for the fees and expenses of more than one
firm of legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
Section 7.4. DIRECT CLAIMS. In the event one party hereunder should have a claim
for indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association as set forth in
Article X. Judgment upon any award rendered by any arbitrators may be entered in
any court having competent jurisdiction thereof.
ARTICLE VIII
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
Section 8.1. DUE DILIGENCE REVIEW. Subject to Section 8.2, the Company shall
make available for inspection and review by the Investor, advisors to and
representatives of the Investor (who may or may not be affiliated with the
Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, American Stock Exchange or
other filing, all SEC Documents and other filings with the SEC, and all other
publicly available corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such publicly available
information reasonably requested by the Investor or any such representative,
advisor or underwriter in connection with such Registration Statement
(including, without limitation, in response to all questions and other inquiries
reasonably made or submitted by any of them), prior to and from time to time
after the filing and effectiveness of the Registration Statement for the sole
purpose of enabling the Investor and such representatives, advisors and
underwriters and their respective accountants and attorneys to conduct initial
and ongoing due diligence with respect to the Company and the accuracy of the
Registration Statement.
Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
(a) The Company shall not disclose material non-public information to the
Investor, advisors to or representatives of the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. Other than
<PAGE>
disclosure of any comment letters received from the SEC staff with respect to
the Registration Statement, the Company may, as a condition to disclosing any
non-public information hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investor.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investor or its advisors or representatives, and
the Company represents that it does not disseminate material non-public
information to any investors who purchase stock in the Company in a public
offering, to money managers or to securities analysts, provided, however, that
notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, promptly notify the advisors and representatives of the
Investor and, if any, underwriters, of any event or the existence of any
circumstance (without any obligation to disclose the specific event or
circumstance) of which it becomes aware, constituting material non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein in light
of the circumstances in which they were made, not misleading. Nothing contained
in this Section 8.2 shall be construed to mean that such persons or entities
other than the Investor (without the written consent of the Investor prior to
disclosure of such information) may not obtain non-public information in the
course of conducting due diligence in accordance with the terms of this
Agreement and nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an untrue
statement of a material fact or omits a material fact required to be stated in
the Registration Statement or necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading.
ARTICLE IX
LEGENDS; TRANSFER AGENT INSTRUCTIONS
Section 9.1. LEGENDS. Unless otherwise provided below, each certificate
representing Registrable Securities will bear the following legend or equivalent
(the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION.
Section 9.2. TRANSFER AGENT INSTRUCTIONS. Upon the execution and delivery
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions in substantially the form of Exhibit F hereto. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be, except as otherwise expressly provided in the Registration
Rights Agreement. It is the intent and purpose of such instructions, as provided
therein, to require the
<PAGE>
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investor to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and without consultation by the transfer agent with
the Company or its counsel and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor:
(a) at any time after the Effective Date, upon surrender of one or more
certificates evidencing Common Stock that bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered; provided that (i) the Registration
Statement shall then be effective; (ii) the Investor confirms to the transfer
agent that it has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Common Stock in a bona fide transaction to a
third party that is not an affiliate of the Company; and (iii) the Investor
confirms to the transfer agent that the Investor has complied with the
prospectus delivery requirement.
(b) at any time upon any surrender of one or more certificates evidencing
Registrable Securities that bear the Legend, to the extent accompanied by a
notice requesting the issuance of new certificates free of the Legend to replace
those surrendered and containing representations that (i) the Investor is
permitted to dispose of such Registrable Securities without limitation as to
amount or manner of sale pursuant to Rule 144(k) under the Securities Act or
(ii) the Investor has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Registrable Securities in a manner other than
pursuant to an effective registration statement, to a transferee who will upon
such transfer be entitled to freely tradable securities.
Any of the notices referred to above in this Section 9.2 may be sent by
facsimile to the Company's transfer agent.
Section 9.3. NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No legend other
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article IX.
Section 9.4. INVESTOR'S COMPLIANCE. Nothing in this Article shall affect in any
way the Investor's obligations under any agreement to comply with all applicable
securities laws upon resale of the Common Stock.
ARTICLE X
CHOICE OF LAW
Section 10.1. GOVERNING LAW/ARBITRATION. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made in New York by persons domiciled in New York City and without
regard to its principles of conflicts of laws. Any dispute under this Agreement
or any Exhibit attached hereto shall be submitted to arbitration under the
American Arbitration Association (the "AAA") in New York City, New York, and
shall be finally and conclusively determined by the decision of a board of
arbitration consisting of three (3) members (hereinafter referred to as the
"Board of Arbitration") selected as according to the rules governing the AAA.
The Board of Arbitration shall meet on consecutive business days in New York
City, New York, and shall reach and render a decision in writing (concurred in
by a majority of the members of the Board of Arbitration) with respect to the
amount, if any, which the losing party is required to pay to the other party in
respect of a claim filed. In connection with rendering its decisions, the Board
of Arbitration shall adopt and follow the laws of the State of New York. To the
extent practical, decisions of the Board of Arbitration shall be rendered no
more than thirty (30) calendar
<PAGE>
days following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. Any decision made by the Board of Arbitration (either
prior to or after the expiration of such thirty (30) calendar day period) shall
be final, binding and conclusive on the parties to the dispute, and entitled to
be enforced to the fullest extent permitted by law and entered in any court of
competent jurisdiction. The non-prevailing party to any arbitration (as
determined by the Board of Arbitration) shall pay the expenses of the prevailing
party including reasonable attorney's fees, in connection with such arbitration.
ARTICLE XI
ASSIGNMENT; ENTIRE AGREEMENT
Section 11.1. ASSIGNMENT. Neither this Agreement nor any rights of the Investor
or the Company hereunder may be assigned by either party to any other person.
Notwithstanding the foregoing, (a) the provisions of this Agreement shall inure
to the benefit of, and be enforceable by, any permitted transferee of any of the
Convertible Debenture or Warrant purchased or acquired by the Investor hereunder
with respect to the Convertible Debenture or Warrant held by such person, and
(b) upon the prior written consent of the Company, which consent shall not
unreasonably be withheld or delayed, the Investor's interest in this Agreement
may be assigned at any time, in whole or in part, to any other person or entity
(including any affiliate of the Investor) who agrees to make the representations
and warranties contained in Article III and who agrees to be bound by the
covenants of Article V. Such permitted assignment shall not relieve the Investor
of its obligations under Article V.
ARTICLE XII
NOTICES
Section 12.1. NOTICES. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
<PAGE>
If to the Company: Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, California 91367
Attention: Mark Dyne, Chief Executive Officer
Telephone: (818) 615-1500
Facsimile: (818) 615-0995
with a copy to: Troop Steuber Pasich Reddick & Tobey, LLP
(shall not constitute notice) 2029 Century Park East
24th Floor
Los Angeles, CA 90067
Attention: Murray Markiles, Esq.
Telephone: (310) 728-3233
Facsimile: (310) 728-2233
if to the Investor:
c/o Ultra Finance
Grossmunster Platz 26
Zurich, CH8022
Switzerland
Telephone: 011-
Facsimile: 011-
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Facsimile: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
ARTICLE XIII
MISCELLANEOUS
Section 13.1. COUNTERPARTS/ FACSIMILE/ AMENDMENTS. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 13.2. ENTIRE AGREEMENT. This Agreement, the agreements attached as
Exhibits hereto, which include, but are not limited to the Convertible
Debenture, the Warrant, the Escrow Agreement, and the
<PAGE>
Registration Rights Agreement, set forth the entire agreement and understanding
of the parties relating to the subject matter hereof and supersedes all prior
and contemporaneous agreements, negotiations and understandings between the
parties, both oral and written relating to the subject matter hereof. The terms
and conditions of all Exhibits to this Agreement are incorporated herein by this
reference and shall constitute part of this Agreement as is fully set forth
herein.
Section 13.3. SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.
Section 13.4. HEADINGS. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 13.5. REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity relied
upon for the determination of the trading price or trading volume of the Common
Stock on any given Trading Day for the purposes of this Agreement shall be
Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.
Section 13.6. REPLACEMENT OF CERTIFICATES. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Convertible Debenture or any
Conversion Shares or Warrant or any Warrant Shares and (ii) in the case of any
such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form and amount to
the Company (which shall not exceed that required by the Company's transfer
agent in the ordinary course) or (iii) in the case of any such mutilation, on
surrender and cancellation of such certificate, the Company at its expense will
execute and deliver, in lieu thereof, a new certificate of like tenor.
Section 13.7. FEES AND EXPENSES. Each of the Company and the Investor agrees to
pay its own expenses incident to the performance of its obligations hereunder,
except that the Company shall pay the fees, expenses and disbursements of
Investor's counsel in an amount not to exceed $15,000 plus $1,000 for its
services as Escrow Agent at the Closing, and $500 for its services as Escrow
Agent for each Debenture Conversion and Warrant Exercise (as such terms are
defined in the Escrow Agreement), all as set forth in the Escrow Agreement.
Section 13.8. BROKERAGE. Each of the parties hereto represents that it has had
no dealings in connection with this transaction with any finder or broker who
will demand payment of any fee or commission from the other party except for
Trinity Capital Advisors, Inc., whose fee shall be paid by the Company. The
Company on the one hand, and the Investor, on the other hand, agree to indemnify
the other against and hold the other harmless from any and all liabilities to
any person claiming brokerage commissions or finder's fees on account of
services purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by the undersigned, thereunto duly authorized, as of the date first
set forth above.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE
------------------------------------
Mark Dyne
Chief Executive Officer
AMRO INTERNATIONAL, S.A.
By: /S/ H.U. BACHOFEN
------------------------------------
Name: H. U. Bachofen,
Director
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of the 20th day of November, 1998,
between AMRO INTERNATIONAL, S.A., a Panama corporation having an address at c/o
ultra Finance, Grossmunster Platz 26, Zurich CH8022, Switzerland ("Holder"), and
BRILLIANT DIGITAL ENTERTAINMENT, INC., a corporation incorporated under the laws
of the State of Delaware, and having its principal place of business at 6355
Topanga Canyon Blvd., Suite 120, Woodland Hills, CA 91367 (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Holder is purchasing from the Company, pursuant to a Convertible
Debenture and Warrant Purchase Agreement dated the date hereof (the "Purchase
Agreement"), a $100,000 Convertible Debenture and a Warrant to purchase up to
1,800,000 shares of the Company's Common Stock (terms not defined herein shall
have the meanings ascribed to them in the Purchase Agreement); and
WHEREAS, the Company desires to grant to the Holder the registration
rights set forth herein with respect to the shares of Common Stock issuable upon
conversion of the Convertible Debenture and shares of Common Stock issuable upon
exercise of the Warrant (hereinafter referred to as the "Stock" or "Securities"
of the Company) and also the shares of Common Stock issuable upon conversion of
the Additional Debentures which the Holder may purchase from time to time
pursuant to the Purchase Agreement (the "Additional Securities").
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. REGISTRABLE SECURITIES. As used herein the term
"Registrable Security" means the Securities and Additional Securities until (i)
the Registration Statement has been declared effective by the Commission, and
all Securities and Additional Securities have been disposed of pursuant to the
Registration Statement, (ii) all Securities and Additional Securities have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (iii) all Securities and Additional Securities have been
otherwise transferred to holders who may trade such Securities or Additional
Securities without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such Securities
or Additional Securities not bearing a restrictive legend or (iv) such time as,
in the opinion of counsel to the Company, all Securities and Additional
Securities may be sold without any time, volume or manner limitations pursuant
to Rule 144(k) (or any similar provision then in effect) under the Securities
Act. The term "Registrable Securities" means any and/or all of the securities
falling within the foregoing definition of a "Registrable Security." In the
event of any merger, reorganization, consolidation, recapitalization or other
change in corporate structure affecting the Common Stock, such adjustment shall
be deemed to be made in the definition of "Registrable Security" as is
appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Agreement.
Section 2. RESTRICTIONS ON TRANSFER. The Holder acknowledges and
understands that prior to the registration of the Securities and/or Additional
Securities as provided herein, the Securities and the Additional Securities are
"restricted securities" as defined in Rule 144 promulgated under the Act. The
Holder understands that no disposition or transfer of the Securities or
Additional Securities may be made by Holder in the absence of (i) an opinion of
counsel to the Holder that such transfer may be made without registration under
the Securities Act or (ii) such registration.
<PAGE>
With a view to making available to the Holder the benefits of
Rule 144 under the Securities Act or any other similar rule or regulation of the
Commission that may at any time permit the Holder to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
(a) comply with the provisions of paragraph (c)(1) of Rule 144;
and
(b) file with the Commission in a timely manner all reports and
other documents required to be filed by the Company pursuant to Section 13 or
15(d) under the Exchange Act; and, if at any time it is not required to file
such reports but in the past had been required to or did file such reports, it
will, upon the request of any Holder, make available other information as
required by, and so long as necessary to permit sales of, its Registrable
Securities pursuant to Rule 144.
Section 3A. REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("Commission"), within forty-five (45) days
after the Closing Date, a registration statement (on Form S-3, or other
appropriate registration statement) under the Securities Act (the "Registration
Statement"), at the sole expense of the Company (except as provided in Section
3A(c) hereof), in respect of all holders of Securities, so as to permit a public
offering and resale of the Securities under the Act.
The Company shall use its best efforts to cause the Registration
Statement to become effective within ninety (90) days from the Closing Date, or,
if earlier, within five (5) days of SEC clearance to request acceleration of
effectiveness. The number of shares designated in the Registration Statement to
be registered shall include all the Warrant Shares and the number of shares of
Common Stock which would be issued upon conversion of the Convertible Debenture
assuming a Market Price of $1.00 per share of Common Stock, and shall include
appropriate language regarding reliance upon Rule 416 to the extent permitted by
the Commission. The Company will notify Holder of the effectiveness of the
Registration Statement within one Business Day of such event.
(b) The Company will maintain the Registration Statement or
post-effective amendment filed under this Section 3A hereof effective under the
Securities Act until the earlier of (i) the date that none of the Convertible
Debenture, the Warrant or the Securities are or may become issued and
outstanding, (ii) the date that all of the Securities have been sold pursuant to
the Registration Statement, (iii) the date the holders thereof receive an
opinion of counsel to the Company, which counsel shall be reasonably acceptable
to the Holder, that the Securities may be sold under the provisions of Rule 144
without limitation as to volume, (iv) all Securities have been otherwise
transferred to Holders who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend, or
(v) all Securities may be sold without any time, volume or manner limitations
pursuant to Rule 144(k) or any similar provision then in effect under the
Securities Act in the opinion of counsel to the Company, which counsel shall be
reasonably acceptable to the Holder (the "Effectiveness Period").
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3A(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys' fees
of the Company) shall be borne by the Company. The Holder shall bear the cost of
underwriting and/or brokerage discounts, fees and commissions, if any,
applicable to the Securities being registered and the fees and expenses of its
counsel. The Holder and its counsel shall have a reasonable
<PAGE>
period, not to exceed three (3) Business Days, to review the proposed
Registration Statement or any amendment thereto, prior to filing with the
Commission, and the Company shall provide each Holder with copies of any comment
letters received from the Commission with respect thereto within two (2)
Business Days of receipt thereof. The Company shall make reasonably available
for inspection by Holder, any underwriter participating in any disposition
pursuant to the Registration Statement, and any attorney, accountant or other
agent retained by such Holder or any such underwriter all relevant financial and
other records, pertinent corporate documents and properties of the Company and
its subsidiaries, and cause the Company's officers, directors and employees to
supply all information reasonably requested by such Holder or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
PROVIDED, HOWEVER, that all records, information and documents that are
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material non-public information shall be kept
confidential by such Holder and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such Holder or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
promptly to seek a protective order or otherwise limit the scope of the
information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and PROVIDED FURTHER that, if the foregoing inspection and information gathering
would otherwise disrupt the Company's conduct of its business, such inspection
and information gathering shall, to the maximum extent possible, be coordinated
on behalf of the Holder and the other parties entitled thereto by one firm of
counsel designed by and on behalf of the majority in interest of Holder and
other parties. The Company shall qualify any of the securities for sale in such
states as such Holder reasonably designates and shall furnish indemnification in
the manner provided in Section 6 hereof. However, the Company shall not be
required to qualify in any state which will require an escrow or other
restriction relating to the Company and/or the sellers, or which will require
the Company to qualify to do business in such state or require the Company to
file therein any general consent to service of process. The Company at its
expense will supply the Holder with copies of the Registration Statement and the
prospectus included therein and other related documents in such quantities as
may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3A to
include a Holder's Securities in any Registration Statement which is to be filed
if, in the opinion of counsel for both the Holder and the Company (or, should
they not agree, in the opinion of another counsel experienced in securities law
matters acceptable to counsel for the Holder and the Company) the proposed
offering or other transfer as to which such registration is requested is exempt
from applicable federal and state securities laws and would result in all
purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the Securities Act.
(e) In the event that (i) the Registration Statement to be filed
by the Company pursuant to Section 3A(a) above is not filed with the Commission
within forty-five (45) days from the Closing Date, (ii) the Registration
Statement is not declared effective by the Commission within ninety (90) days
from the Closing Date (or, if the Registration Statement receives a review by
the Commission staff, within one hundred twenty (120) days from the Closing
Date), or (iii) the Registration Statement is not maintained as effective by the
Company for the period set forth in Section 3A(b) above (each a "Registration
Default") then the Company will pay Holder (pro rated on a daily basis), as
liquidated damages for such failure and not as a penalty one percent (1%) of the
aggregate market value of shares of Common Stock purchased from the Company
(including the Conversion Shares which would be issuable upon conversion of the
Convertible Debenture on any date of determination) and held by the Investor for
every seven (7) day period or portion thereof thereafter until the Registration
Statement has been filed, and in the event of late effectiveness (in case of
clause (ii) above) or lapsed effectiveness (in the case of clause (iii) above),
one percent (1%) of the aggregate market value of shares of Common Stock
purchased from the Company and
<PAGE>
held by the Investor for every seven (7) day period or portion thereof
thereafter (regardless of whether one or more such Registration Defaults are
then in existence) until the Registration Statement has been declared effective.
Such payment of the liquidated damages shall be made to the Holder in cash,
within five (5) calendar days of demand, provided, however, that the payment of
such liquidated damages shall not relieve the Company from its obligations to
register the Securities pursuant to this Section. The market value of the Common
Stock for this purpose shall be the closing price (or last trade, if so
reported) on the Principal Market for each day during such Registration Default.
Notwithstanding anything to the contrary contained herein, a failure to maintain
the effectiveness of the Registration Statement or the ability of a Holder to
use the Registration Statement to effect resales of Securities during the period
after 45 days and within 90 days from the end of the Company's fiscal year
resulting solely from the need to update the Company's financial statements
contained or incorporated by reference in the Registration Statement shall not
constitute a Registration Default and shall not trigger the accrual of
liquidated damages hereunder.
If the Company does not remit the damages to the Holder as set
forth above, the Company will pay the Holder reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. The
registration of the Securities pursuant to this provision shall not affect or
limit Holder's other rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any Registration Statement in which it is
required to include Securities pursuant to this Section 3A.
(g) If at any time or from time to time after the effective date
of the Registration Statement, the Company notifies the Holder in writing of the
existence of a Potential Material Event (as defined in Section 3A(h) below), the
Holder shall not offer or sell any Securities or engage in any other transaction
involving or relating to Securities, from the time of the giving of notice with
respect to a Potential Material Event until such Holder receives written notice
from the Company that such Potential Material Event either has been disclosed to
the public or no longer constitutes a Potential Material Event; provided,
however, that the Company may not so suspend the right to such holders of
Securities for more than twenty (20) days in the aggregate (or such greater
period, not to exceed 90 days in the aggregate, as may be required to prepare
and file audited financial statements of a company or business acquired) during
any twelve month period, during the periods the Registration Statement is
required to be in effect. If a Potential Material Event shall occur prior to the
date the Registration Statement is filed, then the Company's obligation to file
the Registration Statement shall be delayed without penalty for not more than
twenty (20) days (or such greater period, not to exceed 90 days in the
aggregate, as may be required to prepare and file audited financial statements
of a company or business acquired). The Company must give Holder notice in
writing at least two (2) business days prior to the first day of the blackout
period.
(h) "Potential Material Event" means any of the following: (a)
the possession by the Company of material information not ripe for disclosure in
a registration statement, as determined in good faith by the Chief Executive
Officer or the Board of Directors of the Company that disclosure of such
information in the Registration Statement would be detrimental to the business
and affairs of the Company; or (b) any material engagement or activity by the
Company which would, in the good faith determination of the Chief Executive
Officer or the Board of Directors of the Company, be adversely affected by
disclosure in a registration statement at such time, which determination shall
be accompanied by a good faith determination by the Chief Executive Officer or
the Board of Directors of the Company that the Registration Statement would be
materially misleading absent the inclusion of such information.
Section 3B. REGISTRATION RIGHTS WITH RESPECT TO THE ADDITIONAL
SECURITIES.
<PAGE>
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("Commission"), within forty-five (45) days
after the earlier of the date on which (i) the Holder has purchased and paid for
Additional Debentures having an aggregate principal amount of $250,000 or more
or (ii) the Termination Date of the Warrant, if any Additional Debentures are
issued and outstanding on such Termination Date (the "Trigger Date"), a
registration statement (on Form S-3, or other appropriate registration
statement) under the Securities Act (the "Registration Statement"), at the sole
expense of the Company (except as provided in Section 3B(c) hereof), in respect
of all holders of Additional Securities, so as to permit a public offering and
resale of the Additional Securities under the Act.
The Company shall use its best efforts to cause the Registration
Statement to become effective within ninety (90) days from the Trigger Date, or,
if earlier, within five (5) days of SEC clearance to request acceleration of
effectiveness. The number of shares designated in the Registration Statement to
be registered shall include all the shares of Common Stock which would be issued
upon conversion of the Additional Debenture assuming a Market Price of $1.00 per
share of Common Stock, and shall include appropriate language regarding reliance
upon Rule 416 to the extent permitted by the Commission. The Company will notify
Holder of the effectiveness of the Registration Statement within one Business
Day of such event.
(b) The Company will maintain the Registration Statement or
post-effective amendment filed under this Section 3B hereof effective under the
Securities Act until the earlier of (i) the date that none of the Additional
Debentures or the Additional Securities are or may become issued and
outstanding, (ii) the date that all of the Additional Securities have been sold
pursuant to the Registration Statement, (iii) the date the holders thereof
receive an opinion of counsel to the Company, which counsel shall be reasonably
acceptable to the Holder, that the Additional Securities may be sold under the
provisions of Rule 144 without limitation as to volume, (iv) all Additional
Securities have been otherwise transferred to Holders who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend, or (v) all Additional Securities may be sold without any
time, volume or manner limitations pursuant to Rule 144(k) or any similar
provision then in effect under the Securities Act in the opinion of counsel to
the Company, which counsel shall be reasonably acceptable to the Holder (the
"Effectiveness Period").
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3B(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys' fees
of the Company) shall be borne by the Company. The Holder shall bear the cost of
underwriting and/or brokerage discounts, fees and commissions, if any,
applicable to the Additional Securities being registered and the fees and
expenses of its counsel. The Holder and its counsel shall have a reasonable
period, not to exceed three (3) Business Days, to review the proposed
Registration Statement or any amendment thereto, prior to filing with the
Commission, and the Company shall provide each Holder with copies of any comment
letters received from the Commission with respect thereto within two (2)
Business Days of receipt thereof. The Company shall make reasonably available
for inspection by Holder, any underwriter participating in any disposition
pursuant to the Registration Statement, and any attorney, accountant or other
agent retained by such Holder or any such underwriter all relevant financial and
other records, pertinent corporate documents and properties of the Company and
its subsidiaries, and cause the Company's officers, directors and employees to
supply all information reasonably requested by such Holder or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
PROVIDED, HOWEVER, that all records, information and documents that are
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material non-public information shall be kept
confidential by such Holder and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case
<PAGE>
of any such Holder or agent), unless such disclosure is made pursuant to
judicial process in a court proceeding (after first giving the Company an
opportunity promptly to seek a protective order or otherwise limit the scope of
the information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and provided further that, if the foregoing inspection and information gathering
would otherwise disrupt the Company's conduct of its business, such inspection
and information gathering shall, to the maximum extent possible, be coordinated
on behalf of the Holder and the other parties entitled thereto by one firm of
counsel designed by and on behalf of the majority in interest of Holder and
other parties. The Company shall qualify any of the securities for sale in such
states as such Holder reasonably designates and shall furnish indemnification in
the manner provided in Section 6 hereof. However, the Company shall not be
required to qualify in any state which will require an escrow or other
restriction relating to the Company and/or the sellers, or which will require
the Company to qualify to do business in such state or require the Company to
file therein any general consent to service of process. The Company at its
expense will supply the Holder with copies of the Registration Statement and the
prospectus included therein and other related documents in such quantities as
may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section 3B to
include a Holder's Additional Securities in any Registration Statement which is
to be filed if, in the opinion of counsel for both the Holder and the Company
(or, should they not agree, in the opinion of another counsel experienced in
securities law matters acceptable to counsel for the Holder and the Company) the
proposed offering or other transfer as to which such registration is requested
is exempt from applicable federal and state securities laws and would result in
all purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the Securities Act.
(e) In the event that (i) the Registration Statement to be filed
by the Company pursuant to Section 3B(a) above is not filed with the Commission
within forty-five (45) days from the Trigger Date, (ii) the Registration
Statement is not declared effective by the Commission within ninety (90) days
from the Trigger Date (or, if the Registration Statement receives a review by
the Commission Staff, within one hundred twenty (120) days from the Trigger
Date), or (iii) the Registration Statement is not maintained as effective by the
Company for the period set forth in Section 3B(b) above (each a "Registration
Default") then the Company will pay Holder (pro rated on a daily basis), as
liquidated damages for such failure and not as a penalty one percent (1%) of the
aggregate market value of shares of Common Stock purchased from the Company
(including the Conversion Shares which would be issuable upon conversion of the
Additional Debentures on any date of determination) and held by the Investor for
every seven (7) day period or portion thereof thereafter until the Registration
Statement has been filed, and in the event of late effectiveness (in case of
clause (ii) above) or lapsed effectiveness (in the case of clause (iii) above),
one percent (1%) of the aggregate market value of shares of Common Stock
purchased from the Company and held by the Investor for every seven (7) day
period or portion thereof thereafter (regardless of whether one or more such
Registration Defaults are then in existence) until the Registration Statement
has been declared effective. Such payment of the liquidated damages shall be
made to the Holder in cash, within five (5) calendar days of demand, provided,
however, that the payment of such liquidated damages shall not relieve the
Company from its obligations to register the Additional Securities pursuant to
this Section. The market value of the Common Stock for this purpose shall be the
closing price (or last trade, if so reported) on the Principal Market for each
day during such Registration Default. Notwithstanding anything to the contrary
contained herein, a failure to maintain the effectiveness of the Registration
Statement or the ability of a Holder to use the Registration Statement to effect
resales of Additional Securities during the period after 45 days and within 90
days from the end of the Company's fiscal year resulting solely from the need to
update the Company's financial statements contained or incorporated by reference
in the Registration Statement shall not constitute a Registration Default and
shall not trigger the accrual of liquidated damages hereunder.
<PAGE>
If the Company does not remit the damages to the Holder as set
forth above, the Company will pay the Holder reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. The
registration of the Additional Securities pursuant to this provision shall not
affect or limit Holder's other rights or remedies as set forth in this
Agreement.
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any Registration Statement in which it is
required to include Additional Securities pursuant to this Section 3B.
(g) If at any time or from time to time after the effective date
of the Registration Statement, the Company notifies the Holder in writing of the
existence of a Potential Material Event (as defined in Section 3A(h) above), the
Holder shall not offer or sell any Additional Securities or engage in any other
transaction involving or relating to Additional Securities, from the time of the
giving of notice with respect to a Potential Material Event until such Holder
receives written notice from the Company that such Potential Material Event
either has been disclosed to the public or no longer constitutes a Potential
Material Event; provided, however, that the Company may not so suspend the right
to such holders of Additional Securities for more than twenty (20) days in the
aggregate (or such greater period, not to exceed 90 days in the aggregate, as
may be required to prepare and file audited financial statements of a company or
business acquired) during any twelve month period, during the periods the
Registration Statement is required to be in effect. If a Potential Material
Event shall occur prior to the date the Registration Statement is filed, then
the Company's obligation to file the Registration Statement shall be delayed
without penalty for not more than twenty (20) days (or such greater period, not
to exceed 90 days in the aggregate, as may be required to prepare and file
audited financial statements of a company or business acquired). The Company
must give Holder notice in writing at least two (2) business days prior to the
first day of the blackout period.
Section 4. COOPERATION WITH COMPANY. Holder will cooperate with the
Company in all respects in connection with this Agreement, including timely
supplying all information reasonably requested by the Company (which shall
include all information regarding the Holder and proposed manner of sale of the
Registrable Securities required to be disclosed in the Registration Statement)
and executing and returning all documents reasonably requested in connection
with the registration and sale of the Registrable Securities and entering into
and performing its obligations under any underwriting agreement, if the offering
is an underwritten offering, in usual and customary form, with the managing
underwriter or underwriters of such underwritten offering. Nothing in this
Agreement shall obligate the Holder to consent to be named as an underwriter in
the Registration Statement. The obligation of the Company to register the
Registrable Securities shall be absolute and unconditional as to those
Securities and Additional Securities which the Commission will permit to be
registered without naming the Holder as an underwriter, notwithstanding that
such Registrable Securities may be limited to only those Conversion Shares
issuable upon conversion of the Convertible Debenture.
Section 5. REGISTRATION PROCEDURES. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible, subject to
the Holder's assistance and cooperation as reasonably required:
(a)(i) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the Holder of such Registrable Securities shall desire to sell or otherwise
dispose of the same (including prospectus supplements with respect to the sales
of securities from time to time in connection with a registration statement
pursuant to
<PAGE>
Rule 415 promulgated under the Act) and (ii) take all lawful action
such that each of (A) the Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading and (B) the Prospectus forming part
of the Registration Statement, and any amendment or supplement thereto, does not
at any time during the Registration Period include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b)(i) prior to the filing with the Commission of any
Registration Statement (including any amendments thereto) and the distribution
or delivery of any prospectus (including any supplements thereto), provide draft
copies thereof to the Holders and reflect in such documents all such comments as
the Holders (and their counsel) reasonably may propose respecting the Selling
Shareholders and Plan of Distribution sections (or equivalents) and (ii) furnish
to each Holder such numbers of copies of a prospectus including a preliminary
prospectus or any amendment or supplement to any prospectus, as applicable, in
conformity with the requirements of the Act, and such other documents, as such
Holder may reasonably request in order to facilitate the public sale or other
disposition of the securities owned by such Holder;
(c) register and qualify the Registrable Securities covered by
the Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Holder shall reasonably request (subject to the limitations
set forth in Section 3(d) above), and do any and all other acts and things which
may be necessary or advisable to enable each Holder to consummate the public
sale or other disposition in such jurisdiction of the securities owned by such
Holder, except that the Company shall not for any such purpose be required to
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified or to file therein any general consent to service of
process;
(d) list such Registrable Securities on the American Stock
Exchange, other national securities exchange, the NASDAQ National Market or the
NASDAQ Small-Cap Market, on which the Common Stock of the Company is then
listed, if the listing of such Registrable Securities is then permitted under
the rules of such exchange or NASDAQ;
(e) notify each Holder of Registrable Securities covered by the
Registration Statement, at any time when a prospectus relating thereto covered
by the Registration Statement is required to be delivered under the Act, of the
happening of any event of which it has knowledge as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, and the Company
shall prepare and file a curative amendment under Section 5(a) as quickly as
commercially possible;
(f) as promptly as practicable after becoming aware of such
event, notify each Holder who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the Commission of any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time and
take all lawful action to effect the withdrawal, recession or removal of such
stop order or other suspension;
(g) cooperate with the Holders who hold Registrable Securities
being offered to facilitate the timely preparation and delivery of certificates
for the Registrable Securities to be offered pursuant to the Registration
Statement and enable such certificates for the Registrable Securities to be in
such denominations or amounts, as the case may be, as the Holders reasonably may
request and registered in such names as the Holder may request; and, within
three business days after a Registration Statement which includes Registrable
Securities is declared effective by the Commission, deliver and cause legal
counsel
<PAGE>
selected by the Company to deliver to the transfer agent for the Registrable
Securities (with copies to the Holders whose Registrable Securities are included
in such Registration Statement) an appropriate instruction and, to the extent
necessary, an opinion of such counsel;
(h) take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Holders of their Registrable
Securities in accordance with the intended methods therefor provided in the
prospectus which are customary for issuers to perform under the circumstances;
(i) in the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment; and
(j) maintain a transfer agent and registrar for its Common Stock.
Section 6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the Holder
and each person, if any, who controls the Holder within the meaning of the
Securities Act ("Distributing Holder") against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees), to which the Distributing
Holder may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, or any related
preliminary prospectus, final prospectus or amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
preliminary prospectus, final prospectus or amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished to the
Company by the Distributing Holder, specifically for use in the preparation
thereof. This Section 6(a) shall not inure to the benefit of any Distributing
Holder with respect to any person asserting such loss, claim, damage or
liability who purchased the Registrable Securities which are the subject thereof
if the Distributing Holder failed to send or give (in violation of the
Securities Act or the rules and regulations promulgated thereunder) a copy of
the prospectus contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of such Registrable
Securities, where the Distributing Holder was obligated to do so under the
Securities Act or the rules and regulations promulgated thereunder. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable costs
of defense and investigation and all reasonable attorneys' fees) to which the
Company or any such officer, director or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, or any related preliminary prospectus, final
<PAGE>
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by such Distributing Holder, specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which the Distributing Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
except to the extent of actual prejudice demonstrated by the indemnifying party.
In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, assume the defense
thereof, subject to the provisions herein stated and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless the indemnifying party shall not
pursue the action to its final conclusion. The indemnified party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall not be at the
expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is the Distributing Holder, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party, or (ii) the named parties to any such action
(including any impleaded parties) include both the Distributing Holder and the
indemnifying party and the Distributing Holder shall have been advised by such
counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Distributing Holder (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the Distributing Holder, it being understood, however, that the indemnifying
party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 6 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 6 hereof provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any indemnified party, then the Company and the
applicable Distributing Holder shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable costs
of defense and investigation and all reasonable attorneys' fees), in either such
case (after contribution from others) on the basis of relative fault as well as
any other relevant equitable considerations. The relative fault shall be
<PAGE>
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the applicable Distributing Holder on the other hand, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Distributing Holder
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section 7. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section 7 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
Notwithstanding any other provision of this Section 7, in no event shall any (i)
Holder be required to undertake liability to any person under this Section 7 for
any amounts in excess of the dollar amount of the proceeds to be received by
such Holder from the sale of such Holder's Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) pursuant to
any Registration Statement under which such Registrable Securities are to be
registered under the Securities Act and (ii) underwriter be required to
undertake liability to any person hereunder for any amounts in excess of the
aggregate discount, commission or other compensation payable to such underwriter
with respect to the Registrable Securities underwritten by it and distributed
pursuant to the Registration Statement.
Section 8. NOTICES. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: BRILLIANT DIGITAL ENTERTAINMENT, INC.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, CA 91367
Attention: Mark Dyne
Telephone: (818) 615-1500
Fax: (818) 615-0995
<PAGE>
with a copy to: Murray Markiles, Esq.
(shall not constitute notice) Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East
24th Floor
Los Angeles, CA 90067
Telephone: (310) 728-3233
Fax: (310) 728-2233
If to the Investor:
AMRO International, S.A.
C/o Ultra Finance
Grossmunster Platz 26
Zurich CH8022
Switzerland
Telephone: 011-
Fax: 011-
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Fax: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 8 by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 9. ASSIGNMENT. This Agreement is binding upon and inures to
the benefit of the parties hereto and their respective heirs, successors and
permitted assigns. The rights granted the Holder under this Agreement may be
assigned to any purchaser of substantially all of the Registrable Securities (or
the rights thereto) from Holder, as otherwise permitted by the Purchase
Agreement. In the event of a transfer of the rights granted under this
Agreement, the Holder agrees that the Company may require that the transferee
comply with reasonable conditions as determined in the discretion of the
Company.
Section 10. ADDITIONAL COVENANTS OF THE COMPANY. The Company agrees
that at such time as it meets all the requirements for the use of Securities Act
Registration Statement on Form S-3 it shall file all reports and information
required to be filed by it with the Commission in a timely manner and take all
such other action so as to maintain such eligibility for the use of such form.
Section 11. COUNTERPARTS/FACSIMILE. This Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which, when together shall constitute but one and the same instrument, and shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other party. In lieu of the original, a facsimile
transmission or copy of the original shall be as effective and enforceable as
the original.
Section 12. REMEDIES. The remedies provided in this Agreement are
cumulative and not exclusive of any remedies provided by law. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
<PAGE>
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
Section 13. CONFLICTING AGREEMENTS. The Company shall not enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement or
otherwise prevents the Company from complying with all of its obligations
hereunder.
Section 14. HEADINGS. The headings in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 15. GOVERNING LAW, ARBITRATION. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made in New York by persons domiciled in New York City
and without regard to its principles of conflicts of laws. Any dispute under
this Agreement shall be submitted to arbitration under the American Arbitration
Association (the "AAA") in New York City, New York, and shall be finally and
conclusively determined by the decision of a board of arbitration consisting of
three (3) members (hereinafter referred to as the "Board of Arbitration")
selected as according to the rules governing the AAA. The Board of Arbitration
shall meet on consecutive business days in New York City, New York, and shall
reach and render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to the amount, if any, which
the losing party is required to pay to the other party in respect of a claim
filed. In connection with rendering its decisions, the Board of Arbitration
shall adopt and follow the laws of the State of New York. To the extent
practical, decisions of the Board of Arbitration shall be rendered no more than
thirty (30) calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the Board
of Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the parties to
the dispute, and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. The non-prevailing party to
any arbitration (as determined by the Board of Arbitration) shall pay the
expenses of the prevailing party, including reasonable attorneys' fees, in
connection with such arbitration.
Section 16. SEVERABILITY. If any provision of this Agreement shall for
any reason be held invalid or unenforceable, such invalidity or unenforceablity
shall not affect any other provision hereof and this Agreement shall be
construed as if such invalid or unenforceable provision had never been contained
herein. Terms not otherwise defined herein shall be defined in accordance with
the Agreement.
<PAGE>
Section 17. CAPITALIZED TERMS. All capitalized terms not otherwise
defined herein shall have the meaning assigned to them in the Purchase
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, on the day and year first above written.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE
------------------------------------
Mark Dyne
Chief Executive Officer
AMRO INTERNATIONAL, S.A.
By: /S/ H.U. BACHOFEN
------------------------------------
Name: H. U. Bachofen,
Director
EXHIBIT A
4% CONVERTIBLE DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE
BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE OR CANADIAN PROVINCE, OR UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES ARE RESTRICTED AND MAY NOT
BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
No. A-1 US $100,000
- ------- -----------
BRILLIANT DIGITAL ENTERTAINMENT, INC.
4% CONVERTIBLE DEBENTURE DUE DECEMBER 1, 2000
THIS DEBENTURE is issued by BRILLIANT DIGITAL ENTERTAINMENT, INC., a
corporation organized and existing under the laws of the State of Delaware (the
"Company") and is designated as its 4% Convertible Debenture Due December 1,
2000.
FOR VALUE RECEIVED, the Company promises to pay to AMRO INTERNATIONAL,
S.A., a Panama corporation, or permitted assigns (the "Holder"), the principal
sum of One Hundred Thousand and 00/100 (US $100,000) Dollars on December 1, 2000
(the "Maturity Date") and to pay interest on the principal sum outstanding from
time to time quarterly in arrears at the rate of 4% per annum accruing from the
date of initial issuance. Accrual of interest shall commence on the first
business day to occur after the date of initial issuance and continue until
payment in full of the principal sum has been made or duly provided for.
Quarterly interest payments shall be due and payable on July 1, October 1,
January 1 and April 1 of each year, commencing with January 1, 1999. If any
interest payment date or the Maturity Date is not a business day in the State of
New York, then such payment shall be made on the next succeeding business day.
Subject to the provisions of Paragraph 4 below, the interest on this Debenture
is payable at the option of the Company, in cash or in shares of Common Stock of
the Company, $.001 par value per share ("Common Stock") valued at the Conversion
Price (as defined herein) on the interest payment date, at the address last
appearing on the Debenture Register of the Company as designated in writing by
the Holder from time to time. The Company will pay the principal of and any
accrued but unpaid interest due upon this Debenture on the Maturity Date, less
any amounts required by law to be deducted, to the registered holder of this
Debenture as of the tenth day prior to the Maturity Date and addressed
<PAGE>
to such holder at the last address appearing on the Debenture Register. The
forwarding of such check, or the required number of shares of Common Stock
determined pursuant to the provisions of Paragraph 4 below, shall constitute a
payment of principal and interest hereunder and shall satisfy and discharge the
liability for principal and interest on this Debenture to the extent of the sum
represented by such check or the equivalent Conversion Price value of such
shares of Common Stock (as defined in Paragraph 3 below) plus any amounts so
deducted.
This Debenture is subject to the following additional provisions:
1. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
2. This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended (the
"Act"), and other applicable state and foreign securities laws. In the event of
any proposed transfer of this Debenture, the Company may require, prior to
issuance of a new Debenture in the name of such other person, that it receive
reasonable transfer documentation including legal opinions that the issuance of
the Debenture in such other name does not and will not cause a violation of the
Act or any applicable state or foreign securities laws. Prior to due presentment
for transfer of this Debenture, the Company and any agent of the Company may
treat the person in whose name this Debenture is duly registered on the
Company's Debenture Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not this
Debenture be overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary. This Debenture has been executed and
delivered pursuant to the Debenture and Warrant Purchase Agreement dated as of
November 20, 1998 between the Company and the original Holder (the "Purchase
Agreement"), and is subject to the terms and conditions of the Purchase
Agreement, which are, by this reference, incorporated herein and made a part
hereof. Capitalized terms used and not otherwise defined herein shall have the
meanings set forth for such terms in the Purchase Agreement.
3. The Holder of this Debenture is entitled, at its option, to convert
at any time commencing on the date hereof, the principal amount of this
Debenture or any portion thereof, together with accrued but unpaid interest,
provided that the portion of the principal amount so converted is Five Thousand
Dollars (US $5,000) or a multiple thereof (unless if at the time of such
election to convert the aggregate principal amount of this Debenture is less
than Five Thousand Dollars (US $5,000), then the whole amount thereof) into
shares of Common Stock of the Company ("Conversion Shares") at a conversion
price for each share of Common Stock ("Conversion Price") equal to 86% of the
Market Price at the Conversion Date (as defined in Section 8 hereof). The term
"Market Price" shall have the meaning set forth in the Purchase Agreement.
<PAGE>
4. The entire unpaid balance of this Debenture and accrued interest
thereon outstanding on the Maturity Date hereof shall automatically convert into
Common Stock at the Conversion Price on the Maturity Date.
5. The Company may, at any time and from time to time, prepay all or
any portion of the outstanding principal amount of this Debenture and all
accrued but unpaid interest thereon upon five (5) Business Days' prior written
notice to the Holder. Prepayment may be made in cash or in shares of Common
Stock valued at the Conversion Price as of the prepayment date, as elected by
the Company. The Holder shall be entitled to convert this Debenture at any time
prior to the prepayment date set forth in such notice of prepayment.
6. Notwithstanding anything to the contrary contained herein, in the
event that a conversion (when aggregated with all prior conversions of portions
of this Debenture and all shares of Common Stock issuable upon exercise of the
Warrant (as defined in the Agreement)) requires the Company to issue a number of
shares of Common Stock which would exceed 19.5% of the number of shares of
Common Stock issued and outstanding on the date of this Debenture, the Company
shall issue only such number of shares of Common Stock as shall not exceed such
limit and shall pay the Holder cash in the amount of the Market Price for the
number of shares of Common Stock in excess of such number of shares into which
this Debenture (or the portion thereof then being converted) is then convertible
at the Conversion Price.
7. In the event that the Market Price of the Common Stock is less than
$5.00 per share on any Conversion Date, or in the event a registration statement
permitting the immediate resale of the Conversion Shares by the Holder is not
effective on such Conversion Date, the Company may elect to deliver to the
Holder in consideration of any such conversion cash, Conversion Shares or any
combination thereof. The amount of cash to be delivered shall equal the Market
Price of the number of shares of Common Stock as would have been issued at the
Conversion Price upon such conversion. The Company's ability to deliver cash as
full or partial conversion consideration in accordance with this Section 7 shall
be conditioned on the Company's delivery of notice to the Holder of such
election by the Company no later than twenty-four (24) hours following the
Company's receipt of a Notice of Conversion. The Holder shall then have a
further twenty-four (24) hour period in which to withdraw his Notice of
Conversion, or else the Holder shall be deemed to have accepted such alternative
cash consideration.
8. Conversion shall be effectuated by surrendering this Debenture to
the Escrow Agent (if such Conversion will convert all outstanding principal)
together with the form of conversion notice attached hereto as Exhibit A (the
"Notice of Conversion"), executed by the Holder of this Debenture evidencing
such Holder's intention to convert this Debenture or a specified portion (as
above provided) hereof, and accompanied, if required by the Company, by proper
assignment hereof in blank. Interest accrued or accruing from the date of
issuance to the date of conversion shall, at the option of the Company, be paid
in cash as set forth above or in Common Stock upon conversion at the Conversion
Price on the Conversion Date. No fraction of a shares or scrip representing a
fraction of a share will be issued on conversion, but the number
<PAGE>
of shares issuable shall be rounded to the nearest whole share. The date on
which Notice of Conversion is given (the "Conversion Date") shall be deemed to
be the date on which the Holder faxes the Notice of Conversion duly executed, to
the Company and to the Escrow Agent. Facsimile delivery of the conversion notice
shall be accepted by the Company at facsimile number (818) 615-0995 Attn.: Mark
Dyne, and by the Escrow Agent at the facsimile number set forth in the Escrow
Agreement. Certificates representing Common Stock upon conversion will be
delivered to the Escrow Agent within five (5) business days from the date the
Notice of Conversion is delivered to the Escrow Agent.
9. No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin or
currency or shares of Common Stock, herein prescribed. This Debenture is a
direct obligation of the Company.
10. No recourse shall be had for the payment of the principal of, or
the interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, employee, officer or
director, as such, past, present or future, of the Company or any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
11. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, subject to adjustments which shall
be as nearly equivalent as may be practicable. In the event of any proposed
merger, consolidation or sale or transfer of all or substantially all of the
assets of the Company (a "Sale"), the Holder hereof shall have the right to
convert by delivering a Notice of Conversion to the Company and the Escrow Agent
within fifteen (15) days of receipt of notice of such Sale from the Company. In
the event the Holder hereof shall elect not to convert, the Company may prepay
all outstanding principal and accrued interest on this Debenture as provided in
Section 5, less all amounts required by law to be deducted, upon which tender of
payment following such notice, the right of conversion shall terminate.
12. The Holder of the Debenture, by acceptance hereof, agrees that
this Debenture is being acquired for investment and that such Holder will not
offer, sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
<PAGE>
13. This Debenture shall be governed by and construed in accordance
with the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions.
14. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or
interest on this Debenture and same shall continue for a
period of three (3) days; or
b. Any of the representations or warranties made by the Company
herein, in the Purchase Agreement, the Registration Rights
Agreement, or in any agreement, certificate or financial or
other written statements heretofore or hereafter furnished
by the Company in connection with the execution and delivery
of this Debenture or the Purchase Agreement shall be false
or misleading in any material respect at the time made; or
c. The Company fails to issue shares of Common Stock to the
Holder or to cause its Transfer Agent to issue shares of
Common Stock upon exercise by the Holder of the conversion
rights of the Holder in accordance with the terms of this
Debenture, fails to transfer or to cause its Transfer Agent
to transfer any certificate for shares of Common Stock
issued to the Holder upon conversion of this Debenture as
and when required by this Debenture or the Registration
Rights Agreement, and such transfer is otherwise lawful, or
fails to remove any restrictive legend or to cause its
Transfer Agent to transfer any certificate or any shares of
Common Stock issued to the Holder upon conversion of this
Debenture as and when required by this Debenture, the
Purchase Agreement or the Registration Rights Agreement and
such legend removal is otherwise lawful, and any such
failure shall continue uncured for five (5) business days;
or
d. The Company shall fail to perform or observe, in any
material respect, any other covenant, term, provision,
condition, agreement or obligation of the Company under the
Purchase Agreement, the Registration Rights Agreement or
this Debenture and such failure shall continue uncured for a
period of thirty (30) days after written notice from the
Holder of such failure; or
e. The Company shall (1) admit in writing its inability to pay
its debts generally as they mature; (2) make an assignment
for the
<PAGE>
benefit of creditors or commence proceedings for its
dissolution; or (3) apply for or consent to the appointment
of a trustee, liquidator or receiver for its or for a
substantial part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or
business without its consent and shall not be discharged
within sixty (60) days after such appointment; or
g. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency
shall assume custody or control of the whole or any
substantial portion of the properties or assets of the
Company and shall not be dismissed within sixty (60) days
thereafter; or
h. Any money judgment, writ or warrant of attachment, or
similar process in excess of One Hundred Thousand ($100,000)
Dollars in the aggregate shall be entered or filed against
the Company or any of its properties or other assets and
shall remain unpaid, unvacated, unbonded or unstayed for a
period of sixty (60) days or in any event later than five
(5) days prior to the date of any proposed sale thereunder;
or
i. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Company and, if instituted
against the Company, shall not be dismissed within sixty
(60) days after such institution or the Company shall by any
action or answer approve of, consent to, or acquiesce in any
such proceedings or admit the material allegations of, or
default in answering a petition filed in any such
proceeding; or
j. The Company shall have its Common Stock suspended or
delisted from trading on an exchange or the Nasdaq market
for in excess of two trading days; .
Then,or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein or
in any note or other instruments contained to the contrary notwithstanding, and
the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law;
provided, that any payment of this Debenture in connection with an Event of
Default (other than a delisting of its Common Stock pursuant to
<PAGE>
clause (j.)) may be made, at the Company's election, in cash
or in shares of Common Stock, in such number as would be
issued at the Conversion Price on the date the Debenture
becomes due and payable.
15. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed by an officer thereunto duly authorized.
Dated: November 30, 1998
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE
------------------------------------
Name: MARK DYNE
------------------------------------
Title: CHIEF EXECUTIVE OFFICER
------------------------------------
Attest:
/S/ MICHAEL OZEN
- -----------------------
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ ____________ of
the principal amount of the above Debenture No. ___ into Shares of Common Stock
of BRILLIANT DIGITAL ENTERTAINMENT, INC. (the "Company") according to the
conditions hereof, as of the date written below.
Date of Conversion* _________________________________________________________
Applicable Conversion Price * _______________________________________________
Signature____________________________________________________________________
[Name]
Address:_____________________________________________________________________
_____________________________________________________________________
* This original Notice of Conversion must be received by the Company's Escrow
Agent by the third business date following the Date of Conversion, and, if such
conversion represents the remaining principal balance of the Debenture, the
original Debenture.
EXHIBIT B
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN
OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE WARRANT OR THE SHARES
ISSUABLE UPON EXERCISE HEREOF IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD,
PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS,
OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF
THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS; AND
IN THE CASE OF AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THE WARRANT OR
SUCH SHARES, WHICH OPINION AND WHICH COUNSEL SHALL BE SATISFACTORY TO THE
COMPANY IN ITS SOLE DISCRETION.
STOCK PURCHASE WARRANT
To Purchase 1,800,000 Shares of Common Stock of
BRILLIANT DIGITAL ENTERTAINMENT, INC.
THIS CERTIFIES that, for value received, AMRO International. S.A., a
Panama corporation (the "Holder"), is entitled, upon the terms and subject to
the conditions hereinafter set forth, at any time on or after October 1, 2001
(the "Initial Exercise Date") and on or prior to the close of business on
November 30, 2001 (the "Termination Date") but not thereafter, to subscribe for
and purchase from BRILLIANT DIGITAL ENTERTAINMENT, INC., a corporation
incorporated in Delaware (the "Company"), up to One Million Eight Hundred
Thousand (1,800,000) shares (the "Warrant Shares") of Common Stock, par value US
$0.001 per share of the Company (the "Common Stock"). The purchase price of one
share of Common Stock (the "Exercise Price") under this Warrant shall be
Twenty-five Dollars ($25.00). The Exercise Price and the number of shares for
which the Warrant is exercisable shall be subject to adjustment as provided
herein. This Warrant is being issued in connection with the Debenture and
Warrant Purchase Agreement between the Holder and the Company dated as of
November 20, 1998 (the "Agreement") and is subject to its terms and conditions.
In the event of any
conflict between the terms of this Warrant and the Agreement, the Agreement
shall control. Capitalized terms used and not otherwise defined herein shall
have the meanings set forth for such terms in the Agreement.
1. TITLE OF WARRANT. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. AUTHORIZATION OF SHARES. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. EXERCISE OF WARRANT. Except as provided in Section 4 herein,
exercise of the purchase rights represented by this Warrant may be made at any
time or times on or after the Initial Exercise Date, and before the close of
business on the Termination Date, or such earlier date on which this Warrant may
terminate as provided elsewhere in this Warrant, by the surrender of this
Warrant and the Notice of Exercise Form annexed hereto duly executed, at the
office of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company) and upon payment of the
Exercise Price of the shares thereby purchased by wire transfer or cashier's
check drawn on a United States bank, the holder of this Warrant shall be
entitled to receive a certificate for the number of shares of Common Stock so
purchased. Certificates for shares purchased hereunder shall be delivered to the
holder hereof within three (3) business days after the date on which this
Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to
have been exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised by payment to the
Company of the Exercise Price and all taxes required to be paid by Holder, if
any, pursuant to Section 5 prior to the issuance of such shares, have been paid.
If this Warrant shall have been exercised in part, the Company shall, at the
time of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased shares of Common Stock called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.
<PAGE>
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. CHARGES, TAXES AND EXPENSES. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involving in the issuance
or delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. CLOSING OF BOOKS. The Company will not close its shareholder books
or records in any manner which prevents the timely exercise of this Warrant.
7. TRANSFER, DIVISION AND COMBINATION. (a) Subject to compliance with
any applicable securities laws, transfer of this Warrant and all rights
hereunder, in whole or in part, shall be registered on the books of the Company
to be maintained for such purpose, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name of
the assignee or assignees and in the denomination specified in such instrument
of assignment, and shall issue to the assignor a new Warrant evidencing the
portion of this Warrant not so assigned, and this Warrant shall promptly be
cancelled. A Warrant, if properly assigned, may be exercised by a new Holder for
the purchase of shares of Common Stock without having a new Warrant issued.
(b) This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
<PAGE>
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d) The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Warrants.
8. NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
9. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
certificate or any stock certificate relating to the Warrant Shares, and in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to it, and upon surrender and cancellation of such Warrant or stock certificate,
if mutilated, the Company will make and deliver a new Warrant or stock
certificate of like tenor and dated as of such cancellation, in lieu of such
Warrant or stock certificate.
10. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. (a)
STOCK SPLITS, ETC. The number and kind of securities purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following. In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per such Warrant Share or other security
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of Warrant
Shares or other securities of the Company resulting from such adjustment. An
adjustment made pursuant to this paragraph shall become effective immediately
after the effective date of such event retroactive to the record date, if any,
for such event.
<PAGE>
(b) REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of this Warrant, the number of shares of common stock of the successor
or acquiring corporation or of the Company, if it is the surviving corporation,
and Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 11. For purposes of
this Section 11, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 11 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
(c) CERTAIN LIMITATIONS. Notwithstanding anything herein to the
contrary, the Company agrees not to enter into any transaction which, by reason
of any adjustment hereunder, would cause the Exercise Price to be less than the
par value per share of Common Stock.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at any time
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
13. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
<PAGE>
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made. Such notice, in absence of
manifest error, shall be conclusive evidence of the correctness of such
adjustment.
14. NOTICE OF CORPORATE ACTION. If at any time
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 30
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 17(d).
15. AUTHORIZED SHARES. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this Warrant. The
Company further covenants that its issuance of this Warrant shall constitute
full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued
<PAGE>
as provided herein without violation of any applicable law or regulation, or of
any requirements of Nasdaq or any domestic securities exchange upon which the
Common Stock may be listed.
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
Before taking any action which would cause an adjustment reducing the
current Exercise Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock at
such adjusted Exercise Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
16. REDEMPTION BY THE COMPANY.
(a) IN ENTIRETY. The entire unexercised portion of this Warrant
may be redeemed by the Company in whole, but not in part, at any time upon
thirty (30) days' prior written notice to the Holder, upon payment to Holder of
the pro-rata share of the original $5,000 purchase price of this Warrant
remaining unexercised on the date of redemption. In such case, Section 16(b) of
this Warrant shall be inapplicable. The Holder shall be entitled to exercise
this Warrant in accordance with its terms at any time prior to the expiration of
such thirty day notice period.
(b) IN PART. This Warrant may also be redeemed in part, from time
to time by the Company (a "Partial Redemption"), upon the following terms and
conditions:
<PAGE>
(i) Each Partial Redemption shall require at least three (3)
Business Days' advance written notice to the Holder, specifying the date on
which such Partial Redemption shall occur (the "Partial Redemption Date") and
the number of Warrants to be redeemed. The Holder shall be entitled to exercise
the Warrants to be redeemed until 5:00 pm California time on the date specified
in such notice as the redemption date, as set forth in the Escrow Agreement. The
date that notice of a Partial Redemption is given is referred to herein as a
"Partial Redemption Notice Date."
(ii) No Partial Redemption may be made when the Market Price of
the Company's Common Stock (as defined in the Agreement) is less than $1.00.
(iii) No Partial Redemption may be made unless there is an
effective registration statement on the effective date of such Partial
Redemption which will permit the immediate resale by the Holder of the Warrant
Shares to be issued upon exercise of this Warrant.
(iv) No Partial Redemption Date shall occur within fifteen (15)
Business Days of any other Partial Redemption Date.
(v) No Partial Redemption shall be for a portion of the Warrant
representing a number of Warrant Shares, the aggregate Exercise Price of which
(determined as of the Partial Redemption Notice Date) is less than One Hundred
Thousand Dollars ($100,000) nor more than the number of Warrant Shares whose
aggregate Exercise Price is determined by the following formula:
Average Stock Price: Average of the closing prices on the Principal
Market (so long as the Principal Market is an
exchange, and the average of the closing bid
prices otherwise) for the 10 consecutive trading
days immediately prior to the Partial Redemption
Notice Date.
Average Trading Volume: Trading Volume: Average daily trading volume for
the Common Stock on all markets during the 10
consecutive trading days immediately prior to
the Partial Redemption Notice Date.
Maximum aggregate Exercise
Price of Warrant Shares
to be redeemed: 20% of (Average Stock Price*(Average
Trading Volume*22))
Further, no Partial Redemption may be made, if, upon exercise by the Holder of
that portion of this Warrant being called for Partial Redemption by the Company,
such exercise would cause the Holder to be deemed the beneficial owner of 9.9%
or more of the Company's Common Stock for
<PAGE>
purposes of Section 16(b) under the Exchange Act, or any rules or court
interpretations thereunder, whether in existence on the date of issuance of this
Warrant or coming into existence at any time thereafter through the Termination
Date. In the event of any dispute as to whether the Holder may be deemed to be
deemed to be the beneficial owner of 9.9% or more of the Common Stock for
purposes of said Section 16(b), the Holder shall be entitled to receive an
unqualified opinion of counsel for the Company that such proposed Partial
Redemption will not cause the Holder to be deemed to be the beneficial owner of
9.9% or more of the Common Stock for purposes of Section 16(b). The Holder shall
provide such counsel with such information about the Holder's interests in the
Company as shall be reasonably necessary for counsel to render such opinion. The
cost of such opinion shall be the sole responsibility of the Company.
(vi) No Partial Redemption Date shall occur on or after July 30,
2001.
(vii) Upon any Partial Redemption, the Exercise Price shall be
adjusted by the Company to equal 86% of the Market Price (as defined in the
Agreement) on the Partial Redemption Notice Date (if the Market Price on such
date is $4.00 or less) or to equal 88% of the Market Price on the Partial
Redemption Notice Date (if the Market Price on such date is greater than $4.00),
but in no event shall such adjustment cause the Exercise Price to exceed $25.00.
(viii) Any portion of the Warrant called for Partial Redemption
and not exercised in accordance with the terms hereof shall thereafter be void
and of no further force and effect.
17. MISCELLANEOUS.
(a) JURISDICTION. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of New York without regard to its conflict of law, principles or
rules, and be subject to arbitration pursuant to the terms set forth in the
Agreement.
(b) RESTRICTIONS. The holder hereof acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws and by the
Agreement.
(c) NONWAIVER AND EXPENSES. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Termination Date. If the
Company fails to make, when due, any payments provided for hereunder, or fails
to comply with any other provision of this Warrant, the Company shall pay to
Holder such amounts as shall be sufficient to cover any costs and expenses
including, but not limited to, reasonable attorneys' fees, including those of
appellate proceedings, incurred by Holder in collecting any amounts due pursuant
hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.
<PAGE>
(d) NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Agreement.
(e) LIMITATION OF LIABILITY. No provision hereof, in the absence
of affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall give rise
to any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
(f) REMEDIES. Holder, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
(g) SUCCESSORS AND ASSIGNS. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant are
intended to be for the benefit of all Holders from time to time of this Warrant
and shall be enforceable by any such Holder or holder of Warrant Stock.
(h) COOPERATION. The Company shall cooperate with Holder in
supplying such information as may be reasonably necessary for Holder to complete
and file any information reporting forms presently or hereafter required by the
SEC as a condition to the availability of an exemption from the Securities Act
for the sale of any Warrant or Restricted Common Stock.
(i) INDEMNIFICATION. The Company agrees to indemnify and hold
harmless Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; PROVIDED,
HOWEVER, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
(j) AMENDMENT. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the Holder.
(k) SEVERABILITY. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision
<PAGE>
of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Warrant.
(l) HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: November 30, 1998
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE
----------------------------------------
Mark Dyne,
Chief Executive Officer
<PAGE>
NOTICE OF EXERCISE
To: BRILLIANT DIGITAL ENTERTAINMENT, INC.
(1)______The undersigned hereby elects to purchase ________ shares of
Common Stock, par value $0.001 per share (the "Common Stock"), of BRILLIANT
DIGITAL ENTERTAINMENT, INC. pursuant to the terms of the attached Warrant, and
tenders herewith payment of the exercise price in full, together with all
applicable transfer taxes, if any.
(2)______Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
- -----------------------------------
(Name)
- -----------------------------------
(Address)
- -----------------------------------
Dated:
- ----------------------------------
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights
evidenced thereby are hereby assigned to
- --------------------------------------------------------------------------------
whose address is
- --------------------------------------------------------------------------------
Dated: ----------------, --------
Holder's Signature:
-------------------------------
Holder's Address: -------------------------------
-------------------------------
-------------------------------
Signature Guaranteed:
-----------------------------------------------------
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
March 18, 1998 appearing on page 32 of Brilliant Digital Entertainment's Annual
Report on Form 10-KSB for the year ended December 31, 1997. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/S/ PRICEWATERHOUSE COOPERS LLP
Los Angeles, California
December 24, 1998
