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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
--------------- ------------------
Commission file number 0-21637
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 95-4592204
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6355 TOPANGA CANYON BOULEVARD, SUITE 120 Woodland Hills,
California 91367
(Address of Principal Executive Offices)
(818) 615-1500
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, par value
$0.001, 9,403,001 shares issued and outstanding as of November 5, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
Exhibit index is located on page 21.
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
INDEX
PAGE NO.
PART I Financial Information 3
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheet as of September 30, 1998 3
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1998 and September 30, l9974
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and September 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II Other Information 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
------------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 5,353
Accounts receivable, net................................................... 1,976
Inventory.................................................................. 113
Other current assets, net.................................................. 154
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Total current assets........................................................... 7,596
Property, plant and equipment, net............................................. 837
Movie software costs........................................................... 1,381
Other assets................................................................... 427
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Total assets................................................................... $ 10,241
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...................................... $ 1,553
-------------------
Total current liabilities...................................................... 1,553
Long term liabilities.......................................................... 154
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Total Liabilities.............................................................. 1,707
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Commitments and contingencies
Stockholders' equity:
Common Stock............................................................... 9
Additional paid-in capital................................................. 21,365
Accumulated deficit........................................................ (12,591)
Cumulative other comprehensive income (loss)............................... (249)
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Total stockholders' equity..................................................... 8,534
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Total liabilities and stockholders' equity..................................... $ 10,241
==================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
9/30/98 9/30/98 9/30/98 9/30/97
-------------- --------------- -------------- ---------------
(UNAUDITED) (UNAUDITED ) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Total revenues.................... $ 175 $ 2,057 $ 207 $ 2,377
------------ ------------- ------------ --------------
COST OF REVENUES AND EXPENSES:
Cost of revenues ..................... 50 -- 390 17
Sales & marketing..................... 304 185 1,279 387
General and administrative............ 776 665 2,008 1,665
Research and development.............. 1,297 363 2,989 1,418
Depreciation.......................... 123 80 258 198
---------- ----------- ----------- ------------
Total cost of revenues and expenses... 2550 1293 6924 3685
---------- ----------- ----------- ------------
Income (loss) from operations (2,375) 764 (6,717) (1,308)
OTHER INCOME (EXPENSE):
Export market development grant 40 -- 73 152
Gain (loss) on foreign exchange....... 1 4 (5) (1)
Interest income (expense), net........ 80 45 337 215
------------ ------------- ------------- --------------
Total other income (expense)..... 121 49 405 366
------------ ------------- ------------- --------------
Income (loss) before
income taxes..................... (2,254) 813 (6,312) (942)
Provision for income taxes............ (3) (1) (19) (2)
------------ ------------- ------------- --------------
Net Income (loss)..................... $ (2,257) $ 812 $ (6,331) $ (944)
Foreign currency translation
adjustment (net of tax effects) (58) (18) (54) (21)
Comprehensive income (loss)........... $ (2,315) $ 794 $ (6,385) $ (965)
============ ============= ============ ==============
Basic and diluted net income (loss)
per share............................. $ (0.24) $ 0.11 $ (0.67) $ (0.13)
============ ============= ============= =============
Weighted average number of shares
used in computing basic net
income (loss) per share........ 9,403 7,201 9,403 7,200
============ ============= ============= =============
Weighted average number of shares
used in computing diluted net
income (loss) per share........ 9,403 7,643 9,403 7,200
============ ============= ============= =============
See accompanying notes.
</TABLE>
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1998 1997
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................................... $ (6,331) $ (944)
Adjustments to reconcile net income (loss) to
the net cash provided by (used in)
operating activities:
Depreciation and amortization.................................... 831 418
Changes in operating assets and liabilities:
Accounts receivable........................................... 112 (1,869)
Inventory..................................................... (40) --
Movie software costs.......................................... (797) (424)
Accounts payable and accruals................................. (411) 268
Other assets.................................................. (120) (113)
Deferred revenue.............................................. -- (158)
Effect of warrants granted....................................... 96 140
Effect of options granted........................................ -- 12
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Net cash provided by (used in)
Operating activities................................................
(6,660) (2,670)
INVESTING ACTIVITIES
Purchases of equipment.................................................
(529) (537)
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Net cash used in investing activities ................................. (529) (537)
FINANCING ACTIVITIES
Repayment of notes payable.............................................
-- (57)
Proceeds from operating lease agreement................................ 132 --
------------------ ------------------
Net cash provided by financing activities ............................. 132 (57)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................................... (7,057) (3,264)
Translation adjustments................................................ 72 1
Cash and cash equivalents at beginning
of period........................................................... 12,338 7,591
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Cash and cash equivalents at end of
Period.............................................................. $ 5,353 $ 4,328
================== ==================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest ..................................................... $ 8 $ --
================== ==================
Income taxes................................................. $ 17 3
================== ==================
</TABLE>
See accompanying notes.
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited condensed
consolidated financial statements reflect all adjustments that, in the opinion
of management, are considered necessary for a fair presentation of the financial
position, results of operations, and cashflows for the periods presented. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements of Brilliant Digital Entertainment, Inc. (the
"Company") included in the Company's Form 10-KSB for the fiscal year ended
December 31, 1997.
2. STOCKHOLDERS' EQUITY
On March 20, 1998, the Company granted 513,500 options to employees
pursuant to the 1996 Stock Option Plan.
In March 1998, the Company adopted a stockholder's rights plan and, in
connection therewith, distributed one preferred share purchase right for each
outstanding share of the Company's Common Stock outstanding on April 2, 1998.
Upon the occurrence of certain events, each purchase right not owned by certain
hostile acquirers will entitle its holder to purchase shares of the Company's
Series A Preferred Stock at a value below the then current market value of the
preferred stock. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of the share
purchase rights and of any Preferred Stock that may be issued in the future.
Options and warrants representing common shares of 1,202,000 and
1,678,000 were excluded from the average number of common and common equivalent
shares outstanding in the diluted EPS calculation for the nine months ended
September 30, 1997 and 1998, respectively, because they were anti-dilutive.
In July 1998, the Company entered into a strategic alliance with a
computer chip manufacturer. In connection with the alliance, the Company granted
warrants to purchase 300,000 shares of Common Stock of the Company to the
computer chip manufacturer.
3. MOVIE SOFTWARE COSTS
Technological feasibility of the Company's original Digital Projector
was reached during the third quarter of 1997. Since the date of achieving
technological feasibility, the costs of developing Multipath Movies intended to
be viewed on the original projector have been capitalized. Multipath Movies
developed by the Company during the second quarter of 1998 are intended to be
viewed on the Company's new Internet Digital Projector, which the Company plans
to release in the fourth quarter of 1998. In anticipation of the release of the
new Internet Digital Projector, the Company has written off amounts incurred
during the second and third quarters in the production of Multipath Movies.
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office and production facilities and certain of
its office equipment. The Company has commitments under its lease agreements for
approximately $1,000,000 at September 30, 1998. In addition the Company has
obligations of $198,000 under licensing commitments at September 30, 1998. The
Company has an obligation under its joint venture agreement with KISS Digital,
LLC to fund 75% of the development of a Multipath Movie, up to $900,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Brilliant is a production and development studio producing a new
generation of digital entertainment that is being distributed over the Internet
and on CD-ROM. The Company, headquartered in the United States, was incorporated
in July 1996. The Company was formed through the combination of two businesses:
Brilliant Interactive Ideas, Pty. Ltd. ("BII Australia"), an entertainment
software developer and producer; and Sega Australia New Development ("SAND"), a
"skunk works" research and development operation for leading edge software
tools. BII Australia became a wholly owned subsidiary of the Company through the
exchange of all 100,000 outstanding shares of BII Australia for 1,000,000 shares
of Common Stock of the Company. In addition, the Company acquired SAND on
September 30, 1996. SAND was established during the second quarter of 1994 by
Sega Ozisoft Pty., Limited ("Sega Ozisoft"), one of the largest publishers and
distributors of entertainment software products in Australia and New Zealand,
the predecessor of which was co-founded by Mark Dyne and Kevin Bermeister, the
Chief Executive Officer and President of the Company, respectively.
Founded in September 1993, BII Australia initially developed and sold
interactive education and entertainment CD-ROM titles primarily for children.
With the completion of the acquisition of SAND in September 1996, the nature of
the Company's business changed significantly. SAND is responsible for developing
the Multipath Movie suite of proprietary software tools, production process and
first Multipath Movie product. The Company is focusing its efforts on the
development of the Multipath Movie tools and production process, as well as the
commercialization of the Multipath Movie genre, and has completed the phase-out
of its traditional CD-ROM business. As a result of this change in the Company's
business, the following discussion may not be representative of the Company's
future operations. The Company changed its fiscal year end from June 30 to
December 31, effective December 31, 1996.
The Company intends to generate a substantial majority of its future
revenue from the development, production, distribution, licensing and on-line
exhibition of Multipath Movies and other three-dimensional digitally created
entertainment. The Company launched the first of its Multipath Movie series,
CYBERSWINE, its Multipath Movie for Kids series, POPEYE AND THE QUEST FOR THE
WOOLLY MAMMOTH, and the first two of its StoryTeller Series, NIGHT OF THE
WEREWOLF and THE HALLOWEEN PARTY, in the fourth quarter of 1997. The Company's
annual and quarterly revenue will depend upon the successful development,
distribution, timing and market acceptance of its interactive products and upon
the costs to distribute and promote these products. Specifically, the revenues
derived from the production and distribution of the Company's Multipath Movies
will depend primarily on the acceptance by the market of the Multipath Movie
concept and the underlying content of the Multipath Movie, neither of which can
be predicted nor necessarily bear a direct correlation to the production or
distribution costs incurred. See "Cautionary Statement and Risk Factors
Acceptance of Multipath Movie Concept; Successful Development of Multipath
Movies and Appealing Creative Content" and "Cautionary Statements and Risk
Factors - Dependence on Development of Additional Multipath Movies." The
commercial success of a Multipath Movie is also expected to depend upon
promotion and marketing, production costs, impact and competition and other
factors. Accordingly, the Company's annual and quarterly revenues are and will
be extremely difficult to forecast.
The Company incurred significant marketing and operating expenses and
development costs as it continued development of its proprietary software tools
and its Multipath Movies in anticipation of its planned fourth quarter Multipath
Movie product launch. As a result, the Company incurred a loss in the nine
months ended September 30, 1998. The Company expects that these expenses and
development costs will result in losses in the quarter ended December 31, 1998,
and that the Company could incur quarterly losses thereafter. See "Cautionary
Statements and Risk Factors - Limited Operating History; Uncertain
Profitability."
RESULTS OF OPERATIONS.
REVENUES.
The Company historically has derived its revenues from software sales
and development fees. The Company licenses its traditional CD-ROM products to
publishers and distributors in exchange for non-refundable advances, and
royalties based on product sales. Royalties based on product sales are due only
to the extent revenues exceed any associated non-refundable royalty advance.
Royalties related to non-refundable advances are recognized when the CD-ROM
master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon
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notification by the distributor that a royalty has been earned by the Company.
Development fees are paid by customers in exchange for the Company's development
of software packages in accordance with customer specifications. The software
development agreements generally specify certain "milestones" which must be
achieved throughout the development process. As these milestones are achieved,
the Company recognizes the portion of the development fee allocated to each
milestone. Software sales revenues are recognized upon shipment of product.
Revenues decreased from $2,377,000 for the nine months ended September 30, 1997
to $207,000 for the nine months ended September 30, 1998. This represents a
decrease of $2,170,000. Revenues for the nine months ended September 30, 1998
principally reflect amounts earned under a Multipath Movie technology and
content development agreement. Revenues for the third quarter of the prior year
were primarily the result of $1,900,000 in revenue from a software bundling
agreement with Packard Bell NEC.
As a result of delays in the commencement of the U.S. shipment of
Packard Bell NEC personal computers upon which the Company's products are
bundled, the first U.S. Multipath Movie bundles began shipping during July of
1998. Further, Packard Bell NEC is attempting to achieve the volume commitments
of its agreement with the Company by bundling the Company's products with mid-
and high-end computers only, thereby distributing fewer Multipath Movies. This
delay and the inclusion only on mid- and high-end computers will impact the
Company's 1998 and 1999 revenues and earnings since users will not be equipped
to purchase on-line episodes over the Internet as early as expected, and places
significant doubt on Packard Bell NEC's ability to ship the required number of
units. The Company is currently in discussion with Packard Bell NEC intended to
facilitate distribution of the Company's products on a wider range of Packard
Bell NEC computers, but no assurance can be given that this will occur.
COST OF REVENUES. Cost of revenues related to development fees consists
primarily of salaries, benefits and overhead associated with the development of
specific software products to customer specifications, as well as costs of
outside contractors engaged from time to time in creating aspects of software
products such as animation, voice recording and music. Cost of revenues related
to software sales consists primarily of amortized movie software costs,
royalties to third parties and the direct costs and manufacturing overhead
required to reproduce and package software products. Cost of revenues increased
from $17,000 for the nine months ended September 30, 1997 to $390,000 for the
nine months ended September 30, 1998. This represents an increase of $373,000.
Cost of revenues in the 1997 period included costs associated with software
sales. The increase in cost of revenues in the 1998 period is primarily a result
of the amortization ($188,000) and write down ($161,000) of capitalized movie
software costs for previously released titles. The Company will monitor the
level of commercial success of the slate of Multipath Movies to be introduced in
the fourth quarter and, depending upon results, may write down additional
capitalized movie software costs in subsequent periods.
SALES AND MARKETING. Sales and marketing expenses include primarily
costs for salaries, advertising, promotions, brochures, travel and trade shows.
Sales and marketing expenses increased from $387,000 for the nine months ended
September 30, 1997 to $1,279,000 for the nine months ended September 30, 1998.
The increase is primarily attributable to increased costs associated with the
Company's promotional efforts. Sales and marketing expenses are expected to
increase in future periods due to the continued expansion of the Company's sales
and marketing efforts. The Company is implementing a marketing program in
connection with the release of its slate of Multipath Movies in the fourth
quarter and expects that this program will result in significantly increased
marketing expense in the fourth quarter.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
include, primarily, salaries and benefits for management and administrative
personnel, rent, insurance costs and professional fees. General and
administrative expenses increased from $1,665,000 for the nine months ended
September 30, 1997 to $2,008,000 for the nine months ended September 30, 1998.
The increase is most significantly attributable to increased employment costs
resulting from additional personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating the Company's software tools used to develop Multipath Movies.
Research and development expenses increased from $1,418,000 for the nine months
ended September 30, 1997 to $2,989,000 for the nine months ended September 30,
1998. In accordance with Statement of Financial Accounting Standards No. 86
("SFAS No. 86"), the results of operations include Multipath Movie software
development costs in research and development expenses. Technological
feasibility of the Company's original Digital Projector was reached during the
third quarter of 1997. Since the date of achieving technological feasibility,
the costs of developing Multipath Movies intended to be viewed on the original
projector have been capitalized. Multipath Movies developed by the Company
during the second quarter of 1998 are intended to be viewed on the Company's new
Internet Digital Projector, which the Company plans to release in the fourth
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quarter of 1998. In anticipation of the release of the new Internet Digital
Projector, the Company has written off amounts incurred during the second and
third quarters in the production of Multipath Movies. To the extent capitalized
Multipath Movie software costs are attributable to titles which have begun to
ship, they are subject to amortization. Amortized amounts have been included in
costs of revenues.
DEPRECIATION. Depreciation expense relates to depreciation of fixed
assets such as computer equipment and cabling, furniture and fixtures and
leasehold improvements. These fixed assets are depreciated over their estimated
useful lives (up to five years) using the straight-line method. Depreciation
expense increased from $198,000 for the nine months ended September 30, 1997 to
$258,000 for the nine months ended September 30, 1998. The increase is
attributable to the increase in depreciable assets.
OTHER INCOME AND EXPENSE. Other income includes amounts received under
an export market development grant, as well as interest income and expense and
gains and losses on foreign exchange transactions. Net interest income increased
from $215,000 for the nine months ended September 30, 1997 to $336,000 for the
nine months ended September 30, 1998. These increases are due to the higher cash
balances as a result of the secondary offering in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's principal source of liquidity
was approximately $5,353,000 in cash. In November 1996, the Company's initial
public offering (the "Initial Public Offering") of 2,000,000 shares of Common
Stock at $5 per share provided approximately $8,500,000 in cash after
underwriters' discounts and commissions and offering expenses. On December 10,
1997, the Company closed a secondary offering (the "Secondary Offering") of
2,500,000 shares of Common Stock at $5 per share, 2,200,000 of which were sold
by the Company. The Secondary Offering resulted in gross proceeds of
approximately $9,800,000 in cash after underwriters' discounts and commissions
and offering expenses. Approximately $5,353,000 of the net proceeds of the
Secondary Offering remains available for product development and working capital
and general corporate purposes.
Net cash used in operating activities during the nine months ended
September 30, 1998 was primarily attributable to a net loss of $6,331, 000 and
an increase in movie software costs of $797,000. Net cash used in investing
activities in the nine months ended September 30, 1998 was due primarily to the
acquisition of computer equipment.
The Company has an obligation under its agreement with Morgan Creek to
fund entirely the development of two Multipath Movies, the first of which, ACE
VENTURA, is currently under development. The Company has an obligation under its
joint venture agreement with Crawfords to jointly fund two Multipath Movies. To
date no projects have been identified for development by the parties. The
Company has an obligation under its joint venture agreement with KISS Digital,
LLC to fund 75% of the development of a Multipath Movie, up to $900,000. The
Company also is required to make minimum payments of up to $198,000 under
various licensing agreements. At September 30, 1998, the Company had rental
commitment for its offices and production facilities of $868,000, and leasing
commitments for fixed assets of $132,000, payable over the next 5 years.
The Company believes that current funds and cash generated from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for the next year with the exception of anticipated
expenditures required to complete the planned slate of Multipath Movie episodes
during this period. The Company intends to raise additional funds through debt
or equity financings or other means. The Company is currently exploring
alternate sources of financing. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company and its stockholders. If the Company is unable to
obtain additional financing the Company anticipates that it may be required to
defer completion of several titles and reduce its overhead significantly. The
Company's inability to obtain adequate funds may adversely affect the Company's
operations and ability to implement its strategy. See "Cautionary Statements and
Risk Factors - Future Capital Needs; Uncertainty of Additional Funding."
FLUCTUATING OPERATING RESULTS
Historically, the Company has experienced significant fluctuations in
its operating results from quarter to quarter and expects these fluctuations to
continue in the future. For instance the Company had anticipated completing
foreign
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distribution and licensing relationships in the fourth quarter of 1997. These
relationships were expected to generate substantial revenues in 1997.
Also, as a result of delays in the commencement of U.S. shipments of
personal computers upon which the Company's products are bundled, the first U.S.
Multipath Movie bundles began shipping during July of 1998. Further, Packard
Bell NEC is attempting to achieve the volume commitments of its agreement with
the Company by bundling the Company's products with mid- and high-end computers
only, thereby distributing fewer Multipath Movies. This delay and the inclusion
only on mid- and high-end computers will impact the Company's 1998 and 1999
revenues and earnings since users will not be equipped to purchase on-line
episodes over the Internet as early as expected, and places significant doubt on
Packard Bell NEC's ability to ship the required number of units.
Factors that may influence the Company's quarterly operating results
include customer demand for the Company's products, shipping schedules for PC
hardware with which Multipath Movies are bundled, introduction or enhancement of
products by the Company and its competitors, the ability of the Company to
produce and distribute retail packaged versions of Multipath Movies in advance
of peak retail selling seasons, the timing of releases of new products or
product enhancements by the Company and its competitors, introduction or
availability of new hardware, market acceptance of the Multipath Movies and
other new products, development and promotional expenses relating to the
introduction of new products or enhancements of existing products, reviews in
the industry press concerning the products of the Company or its competitors,
changes or anticipated changes in pricing by the Company or its competitors, mix
of distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major customers, order cancellations,
delays in shipment and other developments and decisions including the timing and
extent of the development expenditures, management's evaluation and judgment
regarding a title's acceptance, other unanticipated operating expenses and
general economic conditions.
Additionally, a majority of unit sales for a product typically is
expected to occur in the quarter in which the product is introduced. As a
result, the Company's revenues may increase significantly in a quarter in which
a major product introduction occurs and may decline in following quarters. The
Company's revenues both domestically and internationally have varied
significantly between monthly and quarterly periods. Therefore, in the future,
the operating results for any quarter should not be taken as indicative of the
results for any quarter in subsequent periods.
The Company's expense levels are, to a large extent, fixed. The Company
may be unable to adjust spending in a timely manner to compensate for any
revenue shortfall. As a result, any significant shortfall in revenue from the
Company's Multipath Movies would have an immediate material adverse effect on
the Company's business, operating results and financial condition. The Company
has increased its operating expenses to fund greater levels of Multipath Movie
production and research and development, increased marketing operations and
expanded distribution channels. As was the case during 1997 and in the first,
second and third quarters of 1998 and as is expected to be the case in at least
the fourth quarter of 1998, to the extent that such expenses precede or are not
subsequently followed by increased revenues, the Company's business, operating
results and financial condition will be materially adversely affected.
The entertainment software business is highly seasonal. Typically, net
revenues are highest during the fourth calendar quarter (which includes the
holiday buying season), decline in the first calendar quarter and are lowest in
the second and third calendar quarters. This seasonal pattern is due primarily
to the increased demand for entertainment software products during the year-end
holiday buying season. As a result, a disproportionate share of the Company's
net revenues historically have been generated in the fourth quarter of the
Company's fiscal year. The Company expects its revenues and operating results
will continue to reflect these seasonal factors.
The entertainment industry historically has been subject to substantial
cyclical variation, with consumer spending for entertainment products tending to
decline during recessionary periods. There can be no assurance that the Company
will be able to adjust its anticipated product development expenditures and
other expenses in the event of an economic downturn during such development.
Accordingly, if a recessionary period occurs, tending to result in decreased
sales of the Company's products, product development expenses likely will remain
constant and the Company's business, operating results and financial condition
could be materially adversely affected.
YEAR 2000
The Company has begun a project to address the potential impact of the
Year 2000 problem on the processing of
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date-sensitive information by the Company's information technology systems and
the information technology systems used by the Company's significant customers
and vendors. The Year 2000 problem is the result of computer programs being
written using two digits to define the applicable year. As a result, certain
computer programs may recognize a date using "00" as the year 1900 rather than
2000, which could cause miscalculations or systems failures. The objectives of
the Company's Year 2000 project are to determine and assess the risks of the
Year 2000 problem and to plan and institute mitigating actions to minimize those
risks to acceptable level.
The Company is dependent upon both internally developed and vendor
supplied information technology systems. The Company's core operations systems
are largely standard package systems for business management and inventory
control, which have been developed by vendors whose products are widely used in
the industry. The Company has already contacted many of its information
technology vendors and suppliers as to their Year 2000 compliance to determine
what changes, if any, must be made to the vendor supplied systems used by the
Company in its operations.
The Company is also in the process of evaluating its internally
developed information technology systems to determine their Year 2000
compliance, which is being coordinated by the Company's Vice President of
Technology. The Company anticipates conducting Year 2000 compliance tests of its
internally developed systems in the fourth quarter of 1998. The Company does not
presently anticipate any material Year 2000 issues or significant expenses from
the conversion of its own information systems, databases or programs. However,
if the Company's current estimates of the resources required to address and
resolve Year 2000 issues prove to be understated, the additional costs and
resources required to address the Year 2000 problem could result in a material
financial risk.
The Company intends to communicate with its significant customers and
vendors to understand their Year 2000 issues and how they may affect the
Company, and to determine what steps these customers and vendors have taken to
prepare and manage their Year 2000 issues as they relate to the Company. These
customers and vendors include the host of the Company's web site and significant
distributors of the Company's products. At this time, the Company does not know
what measures its customers and vendors have taken to address the Year 2000
problem or how that problem's effect on its customers and vendors will impact
the Company. The failure by any of these third parties to adequately address the
Year 2000 problem could result in disruptions in the supply or sale of the
Company's products, either of which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner.
Readers are cautioned that this Year 2000 disclosure contains forward-looking
statements. Readers should understand that the dates on which the Company
believes the Year 2000 project will be completed are based upon Management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Company's Year 2000
compliance project. A delay in specific factors that might cause differences
between the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability of
locating and correcting all relevant computer code, timely responses to and
corrections by third parties and suppliers, the ability to implement interfaces
between any new systems and systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third
parties and the inter-connection of national and international businesses, the
Company cannot ensure that it will be able to timely and cost effectively
resolve problems associated with the Year 2000 issue, which may effect its
operations and business, or expose it to third party liability.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties. Factors associated with
the forward looking statements which could cause actual results to differ
materially from those projected or forecast in the statements that appear below.
In addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risks factors:
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ACCEPTANCE OF MULTIPATH MOVIE CONCEPT; SUCCESSFUL DEVELOPMENT OF
MULTIPATH MOVIES WITH APPEALING CREATIVE CONTENT. The success of the Company's
Multipath Movie products will depend to a significant extent on acceptance by
the market of the Multipath Movie concept. The market for entertainment software
is emerging and is dependent upon a number of variables, including consumer
preferences, the installed base of personal computers and a sufficient number of
entertainment software titles to stimulate market development. Any competitive,
technological or other factor materially adversely affecting the introduction or
sale of personal computers or entertainment software would have a material
adverse effect on the Company. Because the market for entertainment software is
relatively small in comparison to the overall market for consumer software
products, it is impossible to predict with any degree of certainty the future
rate of growth, if any, and the size of the market for the Company's products.
Each Multipath Movie will be an individual artistic work, and its
commercial success primarily will be determined by user reaction, which is
unpredictable. The Company introduced CYBERSWINE, its first Multipath Movie, at
the end of the fourth quarter of 1997. The commercial success of the Company's
Multipath Movies will depend on its ability to predict the type of content that
will appeal to a broad audience and to develop stories and characters that
capture the attention and imagination of the market. In addition, the success of
the Company's Multipath Movies will depend upon the Company's ability to develop
popular characters and to license recognized characters and properties from
third parties for its software titles. There can be no assurance that the
Company will be able to develop or license popular stories or characters. The
success of a Multipath Movie also depends upon the effectiveness of the
Company's marketing and successful introduction of Multipath Movies through the
Company's bundling relationship with Packard Bell NEC and the retail channel, as
well as the quality and acceptance of other competing programs released into the
market at or near the same time, critical reviews, the availability of
alternative forms of entertainment and leisure time activities, general economic
conditions and other tangible and intangible factors, all of which can change
and cannot be predicted with certainty. There can be no assurance that the
Company will be able to successfully introduce the Multipath Movie through its
bundling relationship with Packard Bell NEC, in the retail channel or otherwise.
Accordingly, there exists substantial risk that some or all of the Company's
Multipath Movies will not be commercially successful, resulting in certain costs
not being recouped or anticipated profits not being realized. Further, the
success of the Multipath Movie genre will substantially depend on the market's
reception of the slate of Multipath Movies scheduled for launch in the fourth
quarter of 1998. The failure of this slate of Multipath Movies to achieve
commercial success might damage the ability of the Company to introduce
additional titles, and could have a material adverse affect on the business,
operating results and financial condition of the Company.
PRODUCT DELAYS. The Company's current production schedules contemplate
that it will release a number of Multipath Movies in the fourth quarter of 1998
and 1999. As with any software product, however, until all aspects of the
development and initial distribution of a product are completed, there can be no
assurance of its release date. Release dates will vary depending on quality
assurance testing and other development factors. If the Company were unable to
commence volume shipments of a significant new product during the scheduled
quarter, its revenue and earnings would likely be materially and adversely
affected in that quarter. In the past, the Company has experienced significant
delays in the introduction of certain new products. For instance, delays in
duplication, packaging and distribution caused the Company's first Multipath
Movies, CYBERSWINE, POPEYE AND THE QUEST FOR THE WOOLLY MAMMOTH, NIGHT OF THE
WEREWOLF and THE HALLOWEEN PARTY to begin arriving at retailers at the end of
December 1997, after the holiday selling season. It is likely in the future that
such delays will continue to occur and that certain new products will not be
released in accordance with the Company's internal development schedule or the
expectations of public market analysts and investors. A significant delay in the
introduction of, or the presence of a defect in, one or more new products could
have a material adverse affect on the ultimate success of such products and on
the Company's business, operating results and financial condition, particularly
in the quarter in which such products are scheduled to be completed.
LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY. The Company was
founded in September 1993, shipped its initial traditional CD-ROM product in
November 1994 and substantially curtailed this aspect of its business in 1996.
The Company acquired the software tools necessary to produce Multipath Movies in
August 1996 and has only recently introduced its first Multipath Movie. The
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. In the third quarter of 1997 the Company
was profitable due to revenues associated with its Packard Bell NEC bundling
agreement. However, revenues in the fourth quarter of 1997 were adversely
affected by delays in duplication, packaging and distribution which caused the
Company's first Multipath Movies to begin arriving at retailers at the end of
December, after the holiday selling season. In order for the Company to achieve
sustained profitability, the Company must continue to enter into a variety of
distribution and revenue generating arrangements as well as arrangements with
Internet service providers, traditional CD-ROM publishers and
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retailers. There can be no assurance that the Company will enter into any such
arrangements, or that the Company will be able to sustain quarterly
profitability.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
believes that current funds and cash generated from operations will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for the next year with the exception of anticipated expenditures
required to complete the planned slate of Multipath Movie episodes during this
period. The Company intends to raise additional funds through debt or equity
financings or other means. The Company is currently exploring alternate sources
of financing. No assurance can be given that additional financing will be
available or that, if available, it can be obtained on terms favorable to the
Company and its stockholders. If the Company is unable to obtain additional
financing the Company anticipates that it may be required to defer completion of
several titles and reduce its overhead significantly. In addition, any equity
financing could result in dilution to the Company's stockholders. The Company's
inability to obtain adequate funds may adversely affect the Company's operations
and ability to implement its strategy.
SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES. The Company depends
substantially upon third parties for several critical elements of its business
including the development and licensing of content and the distribution of its
products.
DEPENDENCE UPON STRATEGIC RELATIONSHIPS. The Company has entered into
strategic relationships with Packard Bell NEC, Morgan Creek and CompuServe, as
well as licensing arrangements with numerous additional companies that own the
stories underlying and/or characters in many of the Company's current and
planned products. The Company's business strategy is based largely on its
strategic and licensing relationships with these and other companies and its
ability to continue to enter into similar strategic and licensing relationships
in the future. In these relationships, mutual agreement of the parties is
generally required for significant matters, or approval of the strategic partner
or both parties is required to release products or to commence distribution of
products. For example, the Company will be dependent on Packard Bell NEC and
other OEMs to bundle Multipath Movies with their hardware products as a
significant element of the Company's launch of the Multipath Movie genre.
Packard Bell NEC's obligation to distribute such Multipath Movies will depend
upon Packard Bell NEC's acceptance of master CD-ROMs complying with the
Company's specifications. Consequently, Packard Bell NEC may, in the exercise of
its approval rights, delay the introduction of certain of the Company's
Multipath Movie titles. The Company is also unable to control, manage or
accurately predict the shipping schedules of Packard Bell NEC and other OEM
distributors. Delays in such shipping schedules or other distribution problems
affecting OEM distributors may materially adversely affect the Company's ability
to release its products. For instance, the Company expected Packard Bell NEC to
commence U.S. shipment of personal computers bundled with CYBERSWINE in January
1998. As a result of delays in Packard Bell NEC's shipping schedules, Packard
Bell NEC began U.S. shipment of the Company's first Multipath Movie bundles in
mid-1998. Further, Packard Bell NEC is attempting to achieve the volume
commitments of its agreement with the Company by bundling the Company's products
with mid- and high-end computers only. The Company is currently in discussion
with Packard Bell NEC intended to facilitate distribution of the Company's
products on a wider range of Packard Bell NEC computers, but no assurance can be
given that this will occur or that Packard Bell NEC will achieve its committed
shipment level. Also, Morgan Creek and many other content licensers have various
creative controls and approval rights pursuant to their joint venture agreements
with the Company. These creative controls and approval rights allow Morgan Creek
as well as content licensers to arbitrarily reject or delay the Multipath Movie
productions of the respective joint ventures. There can be no assurance that the
Company will not be subject to delays resulting from disagreements with or an
inability to obtain approvals from its strategic partners or that the Company
will achieve its objectives in respect of any or all of its strategic
relationships or continue to maintain and develop these or other strategic
relationships, or that licenses between the Company and any such third party
will be renewed or extended at their expiration dates. Many content 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, there can be no assurance that licensed content will be
available to the Company at prices, or upon terms or conditions acceptable to
the Company or which permit the Company to implement its strategy of producing
Multipath Movies for multiple formats. Delays resulting from disagreements with
licensers or joint venture partners or the Company's failure to renew or extend
a key license, maintain any of its strategic relationships or enter into new
licenses and strategic relationships on sound financial terms could materially
adversely affect the Company's business, operating results and financial
condition.
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USE OF INDEPENDENT SOFTWARE DEVELOPERS AND CONTENT PROVIDERS. In
addition to internally developing software and creating content, the Company
uses entertainment software created by independent software developers as well
as content developed by third parties. The Company has less control over the
scheduling and the quality of the software generated by independent contractors
than over that developed by its own employees. Additionally, the Company may not
be able to secure the services of talented content developers. The Company's
business and future operating results will depend in part on the Company's
continued ability to maintain relationships with skilled independent software
developers and content providers, and to enter into and renew product
development agreements with such developers. There can be no assurance that the
Company will be able to maintain such relationships or enter into and renew such
agreements.
DEPENDENCE ON DEVELOPMENT OF ADDITIONAL MULTIPATH MOVIES. The Company's
success will depend largely upon its ability in the future to continuously
develop new, commercially-successful Multipath Movie titles and to replace
revenues from Multipath Movie titles in the later stages of their life cycles.
If revenues from new products or other activities fail to replace declining
revenues from existing products, the Company's business, operations and
financial condition could be materially adversely affected. In addition, the
Company's success will depend upon its ability to develop popular characters and
to license recognized characters and properties from third parties for its
digital entertainment products. If the Company is unable to develop popular
characters or if the cost of licensing characters and properties from third
parties becomes prohibitive, the Company's business, operating results and
financial condition could be adversely affected. Also, the Company may from time
to time enter into agreements with licensers of intellectual property that
involve advance payments of royalties and guaranteed minimum royalty payments.
If the sales volumes of products subject to such arrangements are not sufficient
to recover such advances and guarantees, the Company will be required to write
off unrecovered portions of such payments. If the Company is required to write
off a material portion of any advances, or ultimately accrue for the guarantees,
its business, operating results and financial condition could be materially
adversely affected.
RISKS ASSOCIATED WITH INTERNET DELIVERY. The Company also intends to
distribute certain of its Multipath Movies through its Internet site and through
a site on the CompuServe on-line service. Accordingly, any system failure that
causes interruption or an increase in response time on the Company's Internet
site or the CompuServe site, could result in less traffic to and reduced
distribution of Multipath Movies via the Internet and, if sustained or repeated,
could reduce the attractiveness of the Company's products. The Company is also
dependent upon Web browsers and Internet and on-line service providers to ensure
user access to its products. User acceptance with respect to payment methods
over the Internet may also create barriers to distribution of the Company's
products through the Internet. Any disruption in the Internet access provided to
the Company's Internet site or any failure by the Company's Internet site to
handle higher volumes of transactions could have a material adverse effect on
the Company's business, operating results and financial condition.
The seamless appearance of Multipath Movies delivered over the Internet
requires that while a scene is being viewed, succeeding scenes must be
downloaded. This requires the use of 28.8 kilobits per second or faster modems,
computers equipped with high-speed Pentium (or equivalent) microprocessors, 24
megabytes of random access memory and appropriately configured operating
systems. These requirements generally are not satisfied by the majority of the
base of currently installed PCs. There can be no assurance that adequately
equipped and configured computers will become widespread. Users of computers
with less sophisticated PCs may experience noticeable latencies or "lag times"
between scene changes. Additionally, the performance characteristics of
Multipath Movies delivered via the Internet may not equal those of Multipath
Movies delivered solely on CD-ROMs, particularly with respect to perceived
seamlessness and sound quality. Moreover, communications between the user and an
Internet site delivering Multipath Movies may require routing of Multipath Movie
instructions through several servers and may result in brief but noticeable lag
times. Noticeable lag times or negative comparisons to Multipath Movies
distributed on CD-ROM may reduce the attractiveness of on-line versions of the
Multipath Movies.
The Company presently serves its Multipath Movies delivered over the
Internet through a single vendor. Any significant interruption in service
provided by this vendor could interrupt sales and delivery of Multipath Movies
and materially adversely affect the Company's ability to conduct its business
and maintain customer satisfaction, and thereby materially adversely affect the
Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH RETAIL DISTRIBUTION. The Company anticipates that
a significant proportion of sales of
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Multipath Movies will be made through distributors and to retailers. The Company
is currently expending significant resources developing a retail sales channel.
The expenditures associated with this development are likely to precede the
realization of significant sales through this channel. Moreover, the Company has
no prior experience in the development or management of the retail channel or
sales through such channel. The competition for shelf space in retail stores is
intense. To the extent that the number of consumer software products and
computer platforms increases, this competition for shelf space may further
intensify. The Company's products are expected to constitute a small percentage
of a retailer's sales volume, and there can be no assurance that retailers will
provide the Company's products with adequate levels of shelf space and
promotional support. Due to the increased competition for limited retail shelf
space and promotional resources, retailers and distributors are increasingly in
a better position to negotiate favorable terms of sale, including price
discounts and product return policies, as well as cooperative market development
funds. Increased competition could result in loss of shelf space for, and
reduction in sell-through of, the Company's products at retail stores, as well
as significant price competition, any of which could adversely affect the
Company's business, operating results and financial condition.
Retailers often require software publishers to pay fees in exchange for
preferred shelf space. The amounts paid to retailers by software publishers and
distributors for preferred shelf space are generally determined on a case by
case basis and there is, as of yet, no industry standard for determining such
fees, although larger publishers and distributors will likely have a competitive
advantage in this regard to the extent they have greater financial resources and
negotiating leverage.
At the time of retail product shipment the Company will establish
reserves, including reserves which estimate the potential for future returns
based on seasonal terms of sale and distributor and retailer inventories of the
Company's products, as well as other factors. The Company intends to recognize
revenue from the sale of its products upon shipment except for sales made to
certain distributors where the right of ownership does not pass at delivery.
Product returns or price protection concessions that exceed the Company's
reserves could materially adversely affect the Company's business, operating
results and financial condition and could increase the magnitude of quarterly
fluctuations in the Company's operating and financial results. Furthermore, if
the Company's assessment of the creditworthiness of its customers receiving
product on credit proves incorrect, the Company could be required to
significantly increase the reserves previously established. There can be no
assurance that such future write-offs will not occur or that amounts written off
will not have a material adverse effect on the Company's business, results of
operations and financial condition.
MANUFACTURING RISKS. The production of the Company's Multipath Movies
for the retail distribution channel consists of pressing CD-ROM disks,
assembling purchased product components, printing product packaging and user
manuals and packaging finished products, all of which will be performed for the
Company by third party vendors in accordance with the Company's specifications
and forecasts. Currently, the Company will use primarily one vendor for these
services. While these services are available from multiple vendors and at
multiple sites, there can be no assurance that an interruption in the
manufacture of the Company's products could be remedied without undue delay and
without materially adversely affecting the Company's results of operations. The
Company does not have contractual agreements with any of its third party
vendors, which may result in an inability to secure adequate services in a
timely manner. Demand for the services of these vendors is also seasonal, with
peak demand and service and production backlogs and delays occurring in
September, October and November of each year. The Company's retail Multipath
Movies must be manufactured, assembled, printed, packaged and shipped in this
environment of strained capacity and must compete for capacity and priority with
the CD-ROM products of many substantially larger competitors of the Company
which are able to wield substantially greater influence with the Company's
vendors than can currently be exerted by the Company. If the Company is unable
to secure adequate services to timely produce and deliver its products for
fourth quarter sales, the Company's business, operating results and financial
condition would be materially adversely effected.
SOFTWARE TOOLS AND PRODUCT DEVELOPMENT. The suite of software tools
that will enable the Company to create its Multipath Movie has been developed
over the past three years, and additional refinement of these tools may be
necessary in order to continue to enhance the Multipath Movie format. The
Company believes that its future success depends in large part upon the
continuous enhancement of the software tools used to create the Multipath Movie.
If problems in the development of the Company's software tools arise, no
assurance can be given that the Company will be able to successfully remedy
these problems. Also, entertainment products as complex as those offered by the
Company may contain undetected errors or defects when first introduced or as new
versions are released. The Company has in the past discovered software errors in
certain of its new products and enhancements after their introduction. Although
the
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Company has not experienced material adverse effects resulting from any such
errors to date, there can be no assurance that errors or defects will not be
found in new products or releases after commencement of commercial shipments,
resulting in adverse product reviews and a loss of or delay in market
acceptance, which would have a material adverse effect upon the Company's
business, operating results and financial condition.
RAPID EXPANSION AND MANAGEMENT OF GROWTH. Implementation of the
Company's business plan, including introduction and marketing of the Company's
Multipath Movies, management of the Company's joint venture with Morgan Creek,
management of the Company's strategic relationship with Packard Bell NEC,
negotiation of additional content licensing and distribution agreements,
management of Internet service providers, the expansion of the Company's studio
in Australia, and the general strains of the Company's role as a public company
have resulted in a significant expansion of the Company and will require that
the Company continue to significantly expand its operations in all areas. This
growth in the Company's operations and activities has placed and will continue
to place a significant strain on the Company's management, operational,
financial and accounting resources. Successful management of the Company's
operations will require the Company to continue to implement and improve its
financial and management information systems. In addition, the restructuring of
the Company and resulting management and reporting of Australian operations and
financial results from the United States have placed and will continue to place
an additional strain on the Company's accounting and information systems
resources. The Company's ability to manage its future growth, if any, and to
increase production levels and commence marketing and distribution of its
products will also require it to hire and train new employees, including
management and technical personnel, and motivate and manage its new employees
and integrate them into its overall operations and culture. The Company recently
has made additions to its management team and is in the process of expanding its
marketing and production staff, a process that is expected to continue. The
Company's failure to manage implementation of its business plan would have a
material adverse effect on the Company's business, operating results and
financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS. In the future, the Company may
acquire complementary companies, products or technologies, and from time to time
engages in discussions relating to possible acquisitions. Acquisitions involve
numerous risks, including adverse short-term effects on the combined business'
reported operating results, impairments of goodwill and other intangible assets,
the diversion of management's attention, the dependence on retention, hiring and
training of key personnel, the amortization of intangible assets and risks
associated with unanticipated problems or legal liabilities.
RAPID TECHNOLOGICAL CHANGE; CHANGING PRODUCT PLATFORMS AND FORMATS. The
entertainment software market and the PC industry in general are characterized
by rapid and significant technological developments and frequent changes in
computer operating environments. To compete successfully in these markets, the
Company must continually improve and enhance its existing products and
technologies and develop new products and technologies that incorporate
technological advances while remaining competitive in terms of performance and
price. The Company's success also will depend substantially upon its ability to
anticipate the emergence of, and to adapt its products to, popular platforms for
consumer software.
The Company has designed its Multipath Movies for use with the
IBM-compatible PC. The Company intends to design future products for use with
new platforms that will require substantial investments in research and
development. Generally, such research and development efforts must occur one to
two years in advance of the widespread release or use of the platforms in order
to introduce products on a timely basis following the release of such platforms.
The research and development efforts in connection with games for certain
advanced and emerging platforms may require greater financial and technical
resources than currently possessed by the Company. In addition, there can be no
assurance that the new platforms for which the Company develops products will
achieve market acceptance and, as a result, there can be no assurance that the
Company's development efforts with respect to such new platforms will lead to
marketable products or products that generate sufficient revenues to offset the
research and development costs incurred in connection with their development.
Failure to develop products for new platforms that achieve significant market
acceptance would have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that
technological developments will not render certain of the Company's existing
products obsolete, that the Company will be able to adapt its products or
technologies to emerging hardware platforms, that the Company has chosen to
support platforms that ultimately will be successful or that the Company will be
able successfully to create software titles for such platforms in a timely
manner, or at all. See "-Software Tools and Product Development."
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DEPENDENCE ON KEY PERSONNEL. The Company's success has and will
continue to depend to a significant extent upon certain key management, product
development and technical personnel, many of whom would be difficult to replace,
particularly Mark Dyne, its Chairman and Chief Executive Officer, and Kevin
Bermeister, its President. Although the Company has entered into employment
agreements with certain officers, such agreements are terminable upon 30 days
notice by either party. Accordingly, there can be no assurance that such
employees will continue to be available to the Company. The loss of the services
of one or more of these key employees could have a material adverse effect on
the Company and the Company's future success will depend in large part upon its
ability to attract, retain and motivate personnel with a variety of technical
and managerial skills, including software development and programming expertise.
Significant competition exists for such personnel and the companies with which
the Company competes are often larger and more established than the Company.
Additionally, there is currently an industry-wide shortage of technical
personnel which makes it more difficult to attract and retain such personnel.
There can be no assurance that the Company will be able to retain and motivate
its managerial and technical personnel or attract additional qualified members
to management or technical staff. The inability to attract and retain necessary
technical and managerial personnel could have a material and adverse effect upon
the Company's business, operating results and financial condition.
SHARED RESPONSIBILITIES AND OTHER EMPLOYMENT COMMITMENTS OF CHIEF
EXECUTIVE OFFICER AND PRESIDENT. The Company's Chief Executive Officer and
Chairman, Mark Dyne, and its President, Kevin Bermeister, also serve as joint
managing directors of Sega Ozisoft Pty., Limited ("Sega Ozisoft") and other
businesses. Mark Dyne also serves as Chairman of the Board of Tag-It Pacific,
Inc. Kevin Bermeister also serves as managing director of Sega Enterprises
(Australia) Pty., Ltd. Although Messrs. Dyne and Bermeister are active in the
management of the Company, they are not required to spend a specified amount of
time at the Company nor are they able to devote their full time and resources to
the Company. Further, the Company does not have employment agreements with
either of Messrs. Dyne or Bermeister. There can be no assurance that the
inability of Messrs. Dyne and Bermeister to devote their full time and resources
to the Company will not adversely affect the Company's business, operating
results or financial condition.
CONFLICTS OF INTEREST. Certain of the Company's directors and officers
are directors or officers of potential competitors and/or strategic partners of
the Company. These relationships may give rise to conflicts of interest between
the Company, on the one hand, and one or more of the directors, or officers
and/or their affiliates, on the other hand. The Company's Certificate of
Incorporation provides that Mark Dyne and Kevin Bermeister are required to
present to the Company any corporate opportunities for the development of any
type of digital entertainment with the exception of opportunities for (i)
minority participation in the development of digital entertainment and (ii)
participation in the development by others of digital entertainment where
publishing and distribution rights for the product to be developed are offered
to Messrs. Dyne and/or Bermeister solely for Australia, New Zealand and/or
Southern Africa. The Company's Certificate of Incorporation provides that
Messrs. Dyne and Bermeister are not required to present to the Company any other
opportunities that potentially may be of benefit to the Company.
LIMITED PROPRIETARY PROTECTION. The Company's success and ability to
compete is dependent in part upon its proprietary technology. The Company also
relies on trademark, trade secret and copyright laws to protect its technology,
with the source code for the Company's proprietary software being protected both
as a trade secret and as a copyrighted work. Also, it is the Company's policy
that all employees and third-party developers sign nondisclosure agreements.
However, there can be no assurance that such precautions will provide meaningful
protection from competition or that competitors will not be able to develop
similar or superior technology independently. Also, the Company has no license
agreements with the end users of its products and does not copy-protect its
software, so it may be possible for unauthorized third parties to copy the
Company's products or to reverse engineer or otherwise obtain and use
information that the Company regards as proprietary. Although the Company is not
aware of unauthorized copying of its products, if a significant amount of
unauthorized copying of the Company's products were to occur, the Company's
business, operating results and financial condition could be adversely affected.
Furthermore, policing unauthorized use of the Company's products is difficult
and costly, and software piracy can be expected to be a persistent problem. If
litigation is necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others, such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition. Ultimately, the Company may be unable, for financial or other
reasons, to enforce its rights under intellectual property laws and the laws of
certain countries in which the Company's products are or may be distributed may
not protect the Company's products and intellectual rights to the same extent as
the laws of the United States.
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The Company believes that its products, including its suite of software
tools, do not infringe any valid existing proprietary rights of third parties.
Since the software tools used to create the Multipath Movies were developed by
SAND, a division of Sega Ozisoft, the Company relies entirely on the
representations of Sega Ozisoft contained in the SAND Acquisition Agreement
between BII Australia and Sega Ozisoft that, to Sega Ozisoft's best knowledge,
the SAND technology and software acquired by the Company does not infringe the
proprietary rights of others. Additionally, although the Company has received no
communication from third parties alleging the infringement of proprietary rights
of such parties, there can be no assurance that third parties will not assert
infringement claims in the future. Any such third party claims, whether or not
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. There can be no assurance that the Company
would prevail in any such litigation or that any such licenses would be
available on acceptable terms, if at all. If the Company were found to have
infringed upon the proprietary rights of third parties, it could be required to
pay damages, cease sales of the infringing products and redesign or discontinue
such products, any of which alternatives, individually or collectively, could
have a material adverse effect on the Company's business, operating results and
financial condition.
VOLATILITY OF STOCK PRICE. The Company's Common Stock is traded on the
American Stock Exchange, and there has been substantial volatility in the market
price of the Common Stock. The trading price of the Common Stock has been and is
likely to continue to be subject to significant fluctuations in response to
variations in quarterly operating results, the gain or loss of significant
contracts, changes in management, announcements of technological innovations or
new products by the Company or its competitors, legislative or regulatory
changes, general trends in the industry, recommendations by securities industry
analysts and other events or factors. In addition, the stock market has
experienced extreme price and trading volume fluctuations which have affected
the market price of the common stock of many technology companies in particular
and which have at times been unrelated to operating performance of the specific
companies whose stock is affected. In addition, in the past the Company has not
experienced significant trading volume in its Common Stock, has not been
actively followed by stock market analysts and has had limited market-making
support from broker-dealers. If market-making support does not continue at
present or greater levels, and/or the Company does not continue to receive
analyst coverage, the average trading volume in the Common Stock may not
increase or even sustain its current levels, in which case, there can be no
assurance that an adequate trading market will exist to sell large positions in
the Common Stock.
INFLUENCE BY MANAGEMENT. As of September 30, 1998, the Company's
officers and directors owned, in the aggregate, approximately 22.3% of the
Company's 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 the Company's Common Stock, including the election of the
Company's Board of Directors and thus, the policies of the Company. The voting
power of these stockholders could also discourage potential acquirers from
seeking to acquire control of the Company through the purchase of the Common
Stock, which might have a depressive effect on the price of the Common Stock.
EFFECT OF CERTAIN CHARTER PROVISIONS; STOCKHOLDER'S RIGHTS PLAN;
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW.
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those of
the Common Stock. In March 1998, the Company adopted a stockholder's rights plan
(the "Rights Agreement") and, in connection therewith, distributed one preferred
share purchase right for each outstanding share of the Company's Common Stock
outstanding on April 2, 1998. Pursuant to the Rights Agreement, upon the
occurrence of certain triggering events related to an unsolicited takeover
attempt of the Company, each purchase right not owned by certain hostile
acquirers will entitle its holder to purchase shares of the Company's Series A
Preferred Stock at a value below the then current market value of the preferred
stock. The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of the share purchase rights
and of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company.
PAGE 18
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1998, the Company issued warrants to purchase 300,000 shares of
Common Stock, par value $.001 per share, to a computer chip manufacturer at an
exercise price of $4.00 per share. The warrants were issued as partial
consideration for the manufacturer's obligations under that certain Software
Development Agreement, dated as of July 14, 1998, between the Company and the
manufacturer. The warrants are currently exercisable and expire in July 2001. In
connection with the issuance, the manufacturer represented to the Company, and
the Company believed, that the manufacturer was acquiring the warrants for
investment purposes only and not with a view to, or for sale in connection with,
a distribution of the warrants, and that the manufacturer was capable of bearing
the economic risk of an investment in the Company. The warrants contain
appropriate restrictive legends regarding resale and contain registration rights
in connection with resale of the underlying shares of Common Stock . The
issuance and sale of these securities was made in reliance on Section 4(2) of
the Securities Act as a transaction not involving any public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Exhibits.
<S> <C> <C>
10.1 Architectural Development and Assistance Agreement, dated
July 14, 1998.
10.2 Warrant, dated July 16, 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
</TABLE>
PAGE 19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
Date: November 16, 1998 /S/ MICHAEL OZEN
----------------
By: Michael Ozen
Its: Chief Financial Officer (Principal Financial
and Accounting Officer) and Secretary
PAGE 20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
10.1 Architectural Development and Assistance Agreement, dated July 14, 1998.
10.2 Warrant, dated July 16, 1998.
27.1 Financial Data Schedule.
</TABLE>
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<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
This agreement ("Agreement") is entered into as of July 14, 1998, ("Effective
Date") by and between CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION, having a place of business at
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION ("CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION ") and Brilliant Digital Entertainment
Corporation, having a place of business at 6355 Topanga Canyon Boulevard, Suite
120, Woodland Hills, California, 91367 ("Publisher") on behalf of themselves and
their respective worldwide subsidiaries.
BACKGROUND
A. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION plans to release a processor having
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION technology. Publisher is developing
software which is able to use these enhanced capabilities.
B. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION is willing to provide Publisher with
assistance and funds, and to receive distribution rights to the
software. Publisher is willing to undertake the development activities
and grant the rights set out in this Agreement.
AGREEMENT
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION and Publisher agree as follows:
1. PUBLISHER'S EFFORTS
1.1. THE TITLES. The "Titles" to be developed and delivered under this Agreement
are the initial CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION scaleable episodes of the Titles and
each of the first three subsequent additional episodes (if any) of each
Title, made during the term of this Agreement, named CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
PAGE 1
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
COMMISSION, CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION, CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and a fourth
Title to be determined and agreed upon by the parties no later than
November 1, 1998 (the TBD Title). The features the first episode of each of
the four Titles must posses are more particularly described in the Product
Requirements Document ("PRD") set forth in Attachment A. The Titles include
all versions for all PC platforms, and include all updates and enhancements
thereof made during the term of this Agreement and the collateral material
specified in Attachment B.
1.2. COMMITMENT TO DEVELOP. Publisher shall use commercially reasonable efforts
to develop and deliver to CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION the Titles according
to the milestones set forth in Section 3 and the Development Schedule and
specifications contained in the PRD. The CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION Titles, must, at a minimum, noticeably demonstrate
to an end user the advantages of running the Titles on an CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION processor containing CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION technology, a
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION, and CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and associated
graphics cards vs. an CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION Processor running at
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION with a CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and an CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION and associated graphics card. The CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
and the TBD Title must at a minimum, noticeably demonstrate the advantages
of it on an CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION Processor containing CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION running at
PAGE 2
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION, with a CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION and associated graphics card VS. an CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
Processor containing CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION running at CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION, with a CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION and an CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
and associated graphics card.
1.3. LANGUAGES. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION and CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION will be ready
and available for purchase by retailers CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION in the
following languages:
1.4. DIALOGUE AND TEXT: U.S. English, CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
1.5. SUBTITLES AND TEXT: CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
1.6. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION and the TBD Title will be ready and available for
purchase by retailers in U.S. English on or before CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION,
and on or before CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION in the following languages:
PAGE 3
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
1.7. DIALOGUE AND TEXT: CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
1.8. SUBTITLES AND TEXT: CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
1.9. PROGRAM REVIEW. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION, Publisher and any third party(s)
working on the Titles for Publisher shall meet at least twice a month
(either in person or by telephone conference) to review the progress of the
Titles' development, including the milestones set out in the Development
Schedule and the compliance of the Titles with the PRD.
2. TECHNICAL ASSISTANCE FROM CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION is currently helping Publisher optimize and port some of its
products to the CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION microprocessor architecture under a
separate Source Code License Agreement ("SLA") effective April 27, 1998
between the parties. Any technical contributions to the Titles made by
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION hereunder shall be considered Modifications under
that SLA and subject solely to its terms.
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION agrees that an Application Engineer will
coordinate the technical resources needed from CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION to
assist with code optimizations and will be made reasonably available to
Publisher as needed.
3. ADVANCES OF FUNDS
3.1. AMOUNT AND TIMING. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION will advance certain funds,
totaling CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
PAGE 4
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
SECURITIES AND EXCHANGE COMMISSION ($CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) to Publisher
for delivery of 3 Titles, CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION, CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION, and CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. If CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and
Publisher mutually agree upon the specific details of a fourth Title (which
is currently referred to as "Title to be determined") no later than
November 1, 1998, then CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION will advance
additional funds totaling CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION upon CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION acceptance of the milestones identified below (collectively, the
"Funds"). CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION will advance the Funds to Publisher in
the amounts specified below CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION after Publisher's
accomplishing and delivering, subject to CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION reasonable
satisfaction and acceptance not to be unreasonably withheld, each of the
following milestones:
PAGE 5
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION
3.2. USE OF FUNDS. The Funds shall only be used for development of the Title
until the final deliverable hereunder is accepted by CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
4. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PARTICIPATION IN MARKETING
4.1. MARKETING. If accepted and timely delivered, CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION will include the Title prominently in CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION marketing
efforts and, at CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION sole discretion, may
include Publisher in other appropriate marketing activities.
4.2. LICENSE. To the extent it actually possesses the right to do so,
Publisher grants to CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION a royalty-free,
world-wide license, with the right to sublicense, to copy,
demonstrate, prepare derivative works of, and display and perform
publicly the Title and its collateral artwork and documentation in
connection with CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION marketing activities for
the Title as well as any other CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION marketing
activities. This license, however, is contingent upon CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION receiving written approval from Publisher each
time CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION wishes to exercise its rights
hereunder. Publisher will grant such requests if it has the right to
do so.
PAGE 6
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
4.3. Other Titles. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION and Publisher may develop
or market products which are directly competitive with the Title.
5. CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION RECOUPMENT OF THE FUNDS
5.1. "Revenue Copy" means a sale, license, or other distribution of
one copy of a Title for which Publisher receives revenue.
5.2. ROYALTY ON REVENUE COPIES. CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
shall earn a royalty on each Revenue Copy distributed by or
through Publisher according to the rate schedule below, but not
to exceed $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION (or $CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION if additional funds for which the second
sentence of section 3.1 provides, are not advanced by
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION) for Revenue Copies sold,
licensed, or otherwise distributed in the United States and not
to exceed $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION (or $CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION if additional funds for which the second
sentence of section 3.1 provides, are not advanced by
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION) for Revenue Copies sold,
licensed, or otherwise distributed elsewhere.
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
5.3. RESERVES. Publisher shall be entitled to retain a reasonable
reserve for product returns and discounts, not to exceed
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
PAGE 7
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
SECURITIES AND EXCHANGE COMMISSION% of the amount otherwise
payable under section 5.1. Such reserve shall be liquidated no
later than CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION following the
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION in which the reserve was
retained.
5.4. ADVERTISING. Until the funds have been recouped, CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION will also receive from Publisher CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION% of Publisher's CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION revenues from advertising on CD ROM versions of the
Titles and on web pages devoted to the Titles, minus CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION (CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION% of
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION revenues). These revenues
apply towards CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION recoupment
of the Funds. If Publisher derives revenue from web pages on
which the Titles and other properties are advertised,
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION will receive CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION% of CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
revenues for the percentage of advertising revenue derived from
the Titles specifically.
5.5. WEB LINKING. Publisher will provide a link and generate visits
from its World Wide Web page to another World Wide Web page that
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION will, from time to time
specify ("click throughs").
5.5.1.CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE
PAGE 8
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
COMMISSION and Publisher will agree on the specific terms of
this web linking plan no later than CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION for BTS titles and CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION for Holiday titles.
5.6. DISCOUNTED TITLE PURCHASES. For a period of CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION years after the Effective Date, CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION shall have the option, at its sole
discretion, to purchase copies of the Titles at a CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION% discount off the best distributor discount
(minimum of CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION% ), for re-sale by
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION will apply the CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION%
discount towards the recoupment of the Funds for each unit
subsequently sold by CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION or
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION designated agent.
5.7. USE OF AN CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION LOGO. Publisher will,
at CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION request, use an CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION logo on the Titles' packaging in a manner
specified by CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and
according to standard CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION logo
licensing terms.
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<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
Publisher will not use an CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION logo
unless so requested to do so by CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
5.8. FUNDS RECOUPMENT CAP. The maximum aggregate amount payable to
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION under section 5 as royalties,
as advertising revenues, and as discounts shall not exceed the
actual amount of funds paid to publisher by CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION under section 3.1. The discounts may continue
to be provided subject to Section 5.5 following full recoupment
of funds.
6. MONEY
6.1. MANNER OF PAYMENT. All payments shall be made in US dollars, and
shall be sent to the address specified in this Agreement.
Payments shall be made by wire transfer or, if no wire transfer
instructions are given, by check drawn on a U.S. bank. A party
may specify revised instructions and address by written notice to
the other.
6.2. PAYMENTS TO CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION. Payments to
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION shall be by wire transfer to
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION for the account of
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION, General Account CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION.
6.3. PAYMENTS TO PUBLISHER. Payments to Publisher shall be made by
wire transfer to: CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION, ABA#:
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION, Attn: CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION, CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE
PAGE 10
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
COMMISSION, Account Name: Brilliant Digital Entertainment,
Account #: CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
6.4. STATEMENTS. Within CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION after the
end of each calendar quarter during the term of this Agreement
Publisher shall pay any amounts due and shall deliver to
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION at the addresses set out in
this Agreement a report which sets out:
6.4.1. The period covered;
6.4.2. The number of copies of each Title distributed hereunder;
6.4.3. The number of Revenue Copies, 6.4.4. The balance of the
Funds; and 6.4.5. The balance of accounts receivable on the
Titles.
6.5. RECORDS AND AUDITING. Each party shall maintain complete and
accurate records of the activities performed under this Agreement
(including records of sales and distribution) for a period of
three (3) years after the completion thereof. Records relating to
the performance of this Agreement shall be made available in
confidence to other party's independent certified public
accountants (or equivalent for non-U.S. jurisdictions) upon
reasonable notice, which records may be used for the sole purpose
of auditing a party's compliance with the Agreement. In the event
that a shortfall greater than 10% is discovered in royalties paid
by a party, such audit shall be at the audited party's expense,
and such party shall promptly make up the difference.
6.6. TAXES. Each party shall be solely responsible for its own taxes,
including any applicable sales taxes and customs duties on items
acquired under this Agreement. To the extent, if any, that the
applicable taxing authority requires withholding of taxes based
on payments made hereunder, the paying party shall withhold such
taxes and provide the payee with the documentation reasonably
necessary to claim a credit therefor.
7. TERM, TERMINATION, WHAT IF SOMETHING GOES WRONG
7.1. TERM OF AGREEMENT. This Agreement's term commences as of the
Effective Date and terminates on the later of March 31, 2003 or
the last day of the calendar year in which CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION fully recoups the Funds, unless earlier
terminated or unless extended by agreement of the parties.
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<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
7.2. BREACH. Either party may terminate this Agreement by written
notice if the other party is in material breach of any of its
terms and fails to cure such breach within thirty days of written
notice of such breach.
7.3. DELAY. Publisher shall promptly notify CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION of any anticipated delay in meeting the Development
Schedule. If it appears that there will be a delay in having one
or more Titles delivered and accepted as set out in this
Agreement, then CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION and
Publisher shall meet to discuss an appropriate course of action
in good faith before exercising any of the remedies set out
below. Both parties shall use reasonable judgment and efforts to
rearrange development and ingredient delivery schedules to deal
with setbacks, such as unavailability of specific technology
ingredients or difficulty in developing the Titles. 7.3.1. If
Publisher's delay is due to causes beyond its
reasonable control then the remaining dates for Publisher's
deliverables, and all other dates calculated from those
date(s), shall be extended by a reasonable amount of time,
not in any case to exceed three months in the aggregate or
the period of any delay in CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION providing technology labeled "Critical."
If the Delay will be over ninety days, then CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION may terminate the Agreement by written notice to Publisher.
7.4. CONVENIENCE. In addition to the provisions above, CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION may, at its sole discretion, terminate this
Agreement without cause by written notice to Publisher. If
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION chooses to terminate this
Agreement without cause, Publisher shall be entitled to retain
all Funds provided by CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION to
Publisher before the effective date of termination, and
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION shall have no rights in
Publisher's Titles.
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<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
7.5. EFFECT OF TERMINATION. Upon any termination of this Agreement for
any reason: 7.5.1. Publisher shall on CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION written request, return all materials that
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION had provided hereunder. 7.5.2.
The provisions of Section 8 shall survive termination. 7.5.3. Any
third-party licenses directly or indirectly granted by a party
under this Agreement shall survive such termination, provided,
that the party granting such license shall be responsible for any
royalties earned on the license under this Agreement. 7.5.4.
Publisher may retain that portion of the Funds paid prior to
termination, but if termination is other than for Convenience or
for breach by CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION, and
Publisher releases, licenses or otherwise commercializes the
Titles in any format or medium, Publisher shall return the
previously advanced Funds to CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION at a
rate of $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION per retail Revenue
Copy or $CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION per OEM Revenue Copy
until the entire amount of previously advanced Funds is repaid to
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
7.6. RIGHTS. Subject to the limitations in Section 4.2, Publisher
warrants and represents that it has or shall obtain all rights
necessary to undertake the activities described in this Agreement
and to grant the licenses described herein. Publisher shall
promptly notify CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION of any
charge or claim of infringement of any third party's right
relating to development or distribution of the Titles.
7.7. NOT A MUNITION. Publisher warrants and represents that the
Titles, including any updates or revisions, contains and shall
contain no encryption or other capabilities that renders it
subject to the US's
PAGE 13
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
International Traffic and Arms Regulation (ITAR) set forth at 22
C.F.R., Section 120 et seq. or any successor or foreign
counterpart regulations.
7.8. SUITS BASED ON TITLES. Publisher shall defend, indemnify, and
hold CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION and its customers harmless
from and against any suit or proceeding brought against
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION, its subsidiaries or
customers, based upon the development or distribution of Titles,
including any claim that the Titles infringes any third-party
intellectual property right (a "Claim"). Publisher's indemnity
will include all damages and costs awarded, including attorneys'
fees, and settlement costs, provided that CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION shall not settle any claim without
Publisher's consent. 7.8.1. The indemnified party shall promptly
notify Publisher of
any Claim and will provide information, assistance, and
cooperation in defending against it (at Publisher's
expense).
7.8.2. The indemnified party will have the right to participate
in the defense of any Claim, at its own expense.
7.8.3. If there appears, in CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
opinion, to be a reasonable likelihood that distribution of
any portion of the Titles may be found to infringe the
rights of any third party, then CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION may terminate the Agreement or
Publisher, at its expense, will either (i) obtain for
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION or its customers the
right to continue to use such Titles as contemplated herein,
(ii) modify such Titles so that it becomes non-infringing,
but without materially altering its functionality, or (iii)
replace such Titles with a functionally equivalent
non-infringing Titles, all at CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION option.
7.8.4. This indemnity shall not apply to portions of the Titles
prepared or provided by the indemnified party.
7.8.5. Publisher's total liability under this section shall not
exceed the amount of Funds provided by CONFIDENTIAL
INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION under this agreement.
PAGE 15
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
8. WARRANTS. As partial consideration for CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION obligations under Section 2 of this Agreement and the
requirements under "Next Step" in clause 6 ("Application Feature
Specifications") of the "CONFIDENTIAL INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
Brilliant Digital Entertainment Technical Production Requirements
Document" attached hereto as Attachment A, Publisher has granted
to CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION a Warrant, attached hereto as
Attachment D.
9. GENERAL PROVISIONS
9.1. CONFIDENTIAL TERMS. Except as otherwise provided herein,
each party shall maintain other party's confidential
disclosures in confidence pursuant to CNDA #89580. Neither
party may disclose the existence or terms of this Agreement
without the prior written consent of the other party except
as required by law or as required by section 401(a),
"Immediate Public Disclosure of Material Information," of
the American Stock Exchange Company Guide. Any such required
disclosure(s) will be to the most limited extent allowable.
9.2. TITLE. Except for the licenses expressly provided here, or
in a "shrink wrap" or other written license, no licenses are
granted by either party, either expressly or by implication,
to any intellectual property of the other. Notwithstanding
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION ownership in the
copyrights in the CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
Technology, Publisher shall own all copyrights in its own
original work, including its own Titles.
9.3. RELATIONSHIP OF PARTIES. The parties are not partners or
joint venturers, or liable for the obligations, acts, or
activities of the other.
9.4. AMENDMENTS AND ASSIGNMENTS. Any change, modification or
waiver to this Agreement must be in writing and signed by an
authorized representative of each party. Neither party may
assign this Agreement or any portion of this Agreement to
any other party without the other's prior written consent.
9.5. MERGER AND WAIVER. This Agreement is the entire agreement
between the parties with respect to the development and
distribution of the Titles, and it supersedes any prior or
contemporaneous agreements and negotiations
PAGE 15
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
relating thereto. No waiver of any breach or default shall
constitute a waiver of any subsequent breach or default.
9.6. LIMITED LIABILITY. Neither party shall be liable to the
other for lost profits, expected revenues, or development or
support costs arising from any termination of this
Agreement. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
OTHER FOR LOSS OF PROFITS, DATA, OR USE OR ANY SPECIAL,
CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED, EVEN IF
ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE PARTIES
ACKNOWLEDGE THAT THESE LIMITATIONS ON POTENTIAL LIABILITIES
WERE AN ESSENTIAL ELEMENT IN SETTING CONSIDERATION UNDER
THIS AGREEMENT.
9.7. EXPORT. Neither party shall export the Titles or the
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION in violation of US or
other applicable law.
9.8. NOTICES AND REQUESTS. All notices and requests required or
made under this Agreement must be in writing and shall be
personally delivered or if mailed postage prepaid, certified
or registered mail, or overnight courier to the addresses
listed below: CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
9.9. CHOICE OF LAW. Any claim based on this Agreement shall be
governed by the laws of Delaware, and shall be subject to
the exclusive jurisdiction of the state and federal courts
located there.
9.10.ATTACHMENTS. The following Attachments are incorporated by
reference into this Agreement:
9.10.5 Attachment D-- Warrants
IN WITNESS OF THEIR AGREEMENT, the parties have caused the
Agreement to be executed below by their authorized
representatives.
CONFIDENTIAL INFORMATION OMITTED BRILLIANT DIGITAL ENTERTAINMENT, INC.
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION BY: /S/ MICHAEL OZEN
----------------
MICHAEL OZEN
CHIEF FINANCIAL OFFICER
By: /S/
------------------------------
CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION
VICE-PRESIDENT
Exhibit 10.2
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
WARRANT
-------
THE WARRANT EVIDENCED OR CONSTITUTED HEREBY, AND ALL SHARES OF COMMON STOCK
ISSUABLE HEREUNDER, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD,
OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION
UNDER THE ACT UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL,
IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT
REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE
SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION
RULE 144.
WARRANT TO PURCHASE COMMON STOCK OF BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Subject to Adjustment)
NO. __ July 16, 1998
THIS CERTIFIES THAT, for value received by Brilliant Digital Entertainment,
Inc., a Delaware corporation (the "Company") under clause 8 of the Software
Development Agreement entered into by the Company and CONFIDENTIAL INFORMATION
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION on July
14, 1998, CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION, or its permitted registered assigns
("Holder"), is entitled, subject to the terms and conditions of this Warrant, at
any time or from time to time after the issuance date of this Warrant (the
"Effective Date"), and before 5:00 p.m. Pacific Time on the third anniversary of
the Effective Date (the "Expiration Date"), to purchase from the Company, three
hundred thousand (300,000) shares of Common Stock of the Company at a price per
share of $4.00 (the "Purchase Price"). Both the number of shares of Common Stock
purchasable upon exercise of this Warrant and the Purchase Price are subject to
adjustment and change as provided herein. This Warrant Agreement confirms, sets
forth in long term and in its entirety, and supersedes an agreement between the
Company and CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION reached on CONFIDENTIAL INFORMATION OMITTED
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
1. CERTAIN DEFINITIONS. As used in this Warrant the following terms shall have
the following respective meanings:
1.1. "FAIR MARKET VALUE" of a share of Common Stock as of a particular date
shall mean:
(a) If traded on a securities exchange or the Nasdaq National Market,
the Fair Market Value shall be deemed to be the average of the
closing prices of
PAGE 1
<PAGE>
the Common Stock of the Company on such exchange or market over
the five (5) trading days ending immediately prior to the
applicable date of valuation;
(b) If actively traded over-the-counter, the Fair Market Value shall
be deemed to be the average of the closing bid prices over the
thirty (30)-day period ending immediately prior to the applicable
date of valuation; and
(c) If there is no active public market, the Fair Market Value shall
be the value thereof, as agreed upon by the Company and the
Holder; provided, however, that if the Company and the Holder
cannot agree on such value, such value shall be determined by an
independent valuation firm experienced in valuing businesses such
as the Company and jointly selected in good faith by the Company
and the Holder. Fees and expenses of the valuation firm shall be
paid for by the Company.
1.2. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
1.3. "Registered Holder" shall mean any Holder in whose name this Warrant
is registered upon the books and records maintained by the Company.
1.4. "WARRANT" as used herein, shall include this Warrant and any warrant
delivered in substitution or exchange therefor as provided herein.
1.5. "COMMON STOCK" shall mean the Common Stock of the Company and any
other securities at any time receivable or issuable upon exercise of
this Warrant.
2. EXERCISE OF WARRANT
2.1. PAYMENT. Subject to compliance with the terms and conditions of this
Warrant and applicable securities laws, this Warrant may be exercised,
in whole or in part at any time or from time to time, on or before the
Expiration Date by the delivery (including, without limitation,
delivery by facsimile) of the form of Notice of Exercise attached
hereto as EXHIBIT 1 (the "Notice of Exercise"), duly executed by the
Holder, at the principal office of the Company, and as soon as
practicable after such date, surrendering
(a) this Warrant at the principal office of the Company, and
(b) payment, (i) in cash (by check) or by wire transfer, (ii) by
cancellation by the Holder of indebtedness of the Company to the
Holder; or (iii) by a combination of (i) and (ii), of an amount
equal to the product obtained by multiplying the number of shares
of Common Stock being purchased upon such exercise by the then
effective Purchase Price (the "Exercise Amount"), except that if
Holder is subject to HSR Act Restrictions (as defined in Section
2.4 below), the Exercise Amount shall be paid to the Company
within five (5) business days of the termination of all HSR Act
Restrictions.
<PAGE>
2.2. NET ISSUE EXERCISE. In lieu of the payment methods set forth in
Section 2.1(b) above, the Holder may elect to exchange all or some of
this Warrant for shares of Common Stock equal to the value of the
amount of the Warrant being exchanged on the date of exchange. If
Holder elects to exchange this Warrant as provided in this Section
2.2, Holder shall tender to the Company the Warrant for the amount
being exchanged, along with written notice of Holder's election to
exchange some or all of the Warrant, and the Company shall issue to
Holder the number of shares of the Common Stock computed using the
following formula:
X = Y (A-B)
-------------
A
Where X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock purchasable under the
amount of the Warrant being exchanged (as adjusted to the date of
such calculation).
A = the Fair Market Value of one share of the Common Stock.
B = Purchase Price (as adjusted to the date of such calculation).
2.3. "EASY SALE" EXERCISE. In lieu of the payment methods set forth in
Section 2.1(b) above, when permitted by law and applicable regulations
(including Nasdaq and NASD rules), the Holder may pay the Purchase
Price through a "same day sale" commitment from the Holder (and if
applicable a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer")), whereby the
Holder irrevocably elects to exercise this Warrant and to sell a
portion of the shares so purchased to pay the Purchase Price and the
Holder (or, if applicable, the NASD Dealer) commits upon sale (or, in
the case of the NASD Dealer, upon receipt) of such shares to forward
the Purchase Price directly to the Company.
2.4. STOCK CERTIFICATES; FRACTIONAL SHARES. As soon as practicable on or
after the date of any exercise of this Warrant, the Company shall
issue and deliver to the person or persons entitled to receive the
same a certificate or certificates for the number of whole shares of
Common Stock issuable upon such exercise, together with cash in lieu
of any fraction of a share equal to such fraction of the current Fair
Market Value of one whole share of Common Stock as of such date of
exercise. No fractional shares or scrip representing fractional shares
shall be issued upon an exercise of this Warrant.
2.5. HSR ACT. The Company hereby acknowledges that exercise of this Warrant
by Holder may subject the Company and/or the Holder to the filing
requirements of the HSR Act and that Holder may be prevented from
exercising this Warrant until the expiration or early termination of
all waiting periods imposed by the HSR Act ("HSR Act Restrictions").
If on or before the Expiration Date Holder has sent the Notice of
Exercise to Company and Holder has not been able to complete the
exercise of this Warrant prior to the Expiration Date because of HSR
Act Restrictions, the Holder shall be entitled to complete the process
of exercising this
<PAGE>
Warrant in accordance with the procedures contained herein
notwithstanding the fact that completion of the exercise of this
Warrant would take place after the Expiration Date.
2.6. PARTIAL EXERCISE; EFFECTIVE DATE OF EXERCISE. In case of any partial
exercise of this Warrant, the Company shall cancel this Warrant upon
surrender hereof and shall execute and deliver a new Warrant of like
tenor and date for the balance of the shares of Common Stock
purchasable hereunder. This Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of
its surrender for exercise as provided above. However, if Holder is
subject to HSR Act filing requirements this Warrant shall be deemed to
have been exercised on the date immediately following the date of the
expiration of all HSR Act Restrictions. The person entitled to receive
the shares of Common Stock issuable upon exercise of this Warrant
shall be treated for all purposes as the holder of record of such
shares as of the close of business on the date the Holder is deemed to
have exercised this Warrant.
2.7. VESTING. The warrants shall vest fully upon issuance.
3. VALID ISSUANCE: TAXES. All shares of Common Stock issued upon the exercise
of this Warrant shall be validly issued, fully paid and non-assessable, and
the Company shall pay all taxes and other governmental charges that may be
imposed in respect of the issue or delivery thereof. The Company shall not
be required to pay any tax or other charge imposed in connection with any
transfer involved in the issuance of any certificate for shares of Common
Stock in any name other than that of the Registered Holder of this Warrant,
and in such case the Company shall not be required to issue or deliver any
stock certificate or security until such tax or other charge has been paid,
or it has been established to the Company's reasonable satisfaction that no
tax or other charge is due.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of shares of
Common Stock issuable upon exercise of this Warrant (or any shares of stock
or other securities or property receivable or issuable upon exercise of
this Warrant) and the Purchase Price are subject to adjustment upon
occurrence of the following events:
4.1. ADJUSTMENT FOR STOCK SPLITS, STOCK SUBDIVISIONS OR COMBINATIONS OF
SHARES. The Purchase Price of this Warrant shall be proportionally
decreased and the number of shares of Common Stock issuable upon
exercise of this Warrant (or any shares of stock or other securities
at the time issuable upon exercise of this Warrant) shall be
proportionally increased to reflect any stock split or subdivision of
the Company's Common Stock. The Purchase Price of this Warrant shall
be proportionally increased and the number of shares of Common Stock
issuable upon exercise of this Warrant (or any shares of stock or
other securities at the time issuable upon exercise of this Warrant)
shall be proportionally decreased to reflect any combination of the
Company's Common Stock.
4.2. ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS OF STOCK OR OTHER SECURITIES
OR PROPERTY. In case the Company shall make or issue, or shall fix a
record date for the determination of eligible holders entitled to
receive, a dividend or other distribution with respect to the Common
Stock (or any shares of stock or other securities at the time issuable
upon exercise of the Warrant) payable in (a)
<PAGE>
securities of the Company or (b) assets (excluding cash dividends paid
or payable solely out of retained earnings), then, in each such case,
the Holder of this Warrant on exercise hereof at any time after the
consummation, effective date or record date of such dividend or other
distribution, shall receive, in addition to the shares of Common Stock
(or such other stock or securities) issuable on such exercise prior to
such date, and without the payment of additional consideration
therefor, the securities or such other assets of the Company to which
such Holder would have been entitled upon such date if such Holder had
exercised this Warrant on the date hereof and had thereafter, during
the period from the date hereof to and including the date of such
exercise, retained such shares and all such additional securities or
other assets distributed with respect to such shares as aforesaid
during such period giving effect to all adjustments called for by this
Section 4.
4.3. RECLASSIFICATION. If the Company, by reclassification of securities or
otherwise, shall change any of the securities as to which purchase
rights under this Warrant exist into the same or a different number of
securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change
with respect to the securities that were subject to the purchase
rights under this Warrant immediately prior to such reclassification
or other change, and the Purchase Price therefor shall be
appropriately adjusted, all subject to further adjustment as provided
in this Section 4. No adjustment shall be made pursuant to this
Section 4.3 upon any conversion or redemption of the Common Stock
which is the subject of Section 4.5.
4.4. ADJUSTMENT FOR CAPITAL REORGANIZATION, MERGER OR CONSOLIDATION. In
case of any capital reorganization of the capital stock of the Company
(other than a combination, reclassification, exchange or subdivision
of shares otherwise provided for herein), or any merger or
consolidation of the Company with or into another corporation, or the
sale of all or substantially all the assets of the Company then, and
in each such case, as a part of such reorganization, merger,
consolidation, sale or transfer, lawful provision shall be made so
that the Holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified
herein and upon payment of the Purchase Price then in effect, the
number of shares of stock or other securities or property of the
successor corporation resulting from such reorganization, merger,
consolidation, sale or transfer that a holder of the shares
deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or
transfer if this Warrant had been exercised immediately before such
reorganization, merger, consolidation, sale or transfer, all subject
to further adjustment as provided in this Section 4. The foregoing
provisions of this Section 4.4 shall similarly apply to successive
reorganizations, consolidations, mergers, sales and transfers and to
the stock or securities of any other corporation that are at the time
receivable upon the exercise of this Warrant. If the per-share
consideration payable to the Holder hereof for shares in connection
with any such transaction is in a form other than cash or marketable
securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events,
appropriate adjustment (as determined in good faith by the Company's
Board of Directors) shall be made in
<PAGE>
the application of the provisions of this Warrant with respect to the
rights and interests of the Holder after the transaction, to the end
that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or
other property deliverable after that event upon exercise of this
Warrant.
4.5. CONVERSION OF COMMON STOCK. In case all or any portion of the
authorized and outstanding shares of Common Stock of the Company are
redeemed or converted or reclassified into other securities or
property pursuant to the Company's Certificate of Incorporation or
otherwise, or the Common Stock otherwise ceases to exist, then, in
such case, the Holder of this Warrant, upon exercise hereof at any
time after the date on which the Common Stock is so redeemed or
converted, reclassified or ceases to exist (the "Termination Date"),
shall receive, in lieu of the number of shares of Common Stock that
would have been issuable upon such exercise immediately prior to the
Termination Date, the securities or property that would have been
received if this Warrant had been exercised in full and the Common
Stock received thereupon had been simultaneously converted immediately
prior to the Termination Date, all subject to further adjustment as
provided in this Warrant. Additionally, the Purchase Price shall be
immediately adjusted to equal the quotient obtained by dividing (x)
the aggregate Purchase Price of the maximum number of shares of Common
Stock for which this Warrant was exercisable immediately prior to the
Termination Date by (y) the number of shares of Common Stock of the
Company for which this Warrant is exercisable immediately after the
Termination Date, all subject to further adjustment as provided
herein.
5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in the
Purchase Price, or number or type of shares issuable upon exercise of this
Warrant, the Chief Financial Officer or Controller of the Company shall
compute such adjustment in accordance with the terms of this Warrant and
prepare a certificate setting forth such adjustment and showing in detail
the facts upon which such adjustment is based, including a statement of the
adjusted Purchase Price. The Company shall promptly send (by facsimile and
by either first class mail, postage prepaid or overnight delivery) a copy
of each such certificate to the Holder.
6. LOSS OR MUTILATION. Upon receipt of evidence reasonably satisfactory to the
Company of the ownership of and the loss, theft, destruction or mutilation
of this Warrant, and of indemnity reasonably satisfactory to it, and (in
the case of mutilation) upon surrender and cancellation of this Warrant,
the Company will execute and deliver in lieu thereof a new Warrant of like
tenor as the lost, stolen, destroyed or mutilated Warrant.
7. RESERVATION OF COMMON STOCK. The Company hereby covenants that at all times
there shall be reserved for issuance and delivery upon exercise of this
Warrant such number of shares of Common Stock or other shares of capital
stock of the Company as are from time to time issuable upon exercise of
this Warrant and, from time to time, will take all steps necessary to amend
its Certificate of Incorporation to provide sufficient reserves of shares
of Common Stock issuable upon exercise of this Warrant. All such shares
shall be duly authorized, and when issued upon such exercise, shall be
validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges
<PAGE>
and other encumbrances or restrictions on sale and free and clear of all
preemptive rights, except encumbrances or restrictions arising under
federal or state securities laws. Issuance of this Warrant shall constitute
full authority to the Company's Officers who are charged with the duty of
executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the exercise of this Warrant.
8. TRANSFER AND EXCHANGE. Subject to the terms and conditions of this Warrant
and compliance with all applicable securities laws, this Warrant and all
rights hereunder may be transferred to any Registered Holder's parent,
subsidiary or affiliate, in whole or in part, on the books of the Company
maintained for such purpose at the principal office of the Company referred
to above, by the Registered Holder hereof in person, or by duly authorized
attorney, upon surrender of this Warrant properly endorsed and upon payment
of any necessary transfer tax or other governmental charge imposed upon
such transfer. Upon any permitted partial transfer, the Company will issue
and deliver to the Registered Holder a new Warrant or Warrants with respect
to the shares of Common Stock not so transferred. Each taker and holder of
this Warrant, by taking or holding the same, consents and agrees that when
this Warrant shall have been so endorsed, the person in possession of this
Warrant may be treated by the Company, and all other persons dealing with
this Warrant, as the absolute owner hereof for any purpose and as the
person entitled to exercise the rights represented hereby, any notice to
the contrary notwithstanding; provided, however that until a transfer of
this Warrant is duly registered on the books of the Company, the Company
may treat the Registered Holder hereof as the owner for all purposes.
9. RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof, agrees that,
absent an effective registration statement filed with the Securities and
Exchange Commission (the "SEC") under the Securities Act covering the
disposition or sale of this Warrant or the Common Stock issued or issuable
upon exercise hereof, as the case may be, and registration or qualification
under applicable state securities laws, such Holder will not sell,
transfer, pledge, or hypothecate any or all of this Warrant or such Common
Stock, as the case may be, unless either (i) the Company has received an
opinion of counsel, in form and substance reasonably satisfactory to the
Company, to the effect that such registration is not required in connection
with such disposition or (ii) the sale of such securities is made pursuant
to SEC Rule 144.
10. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the Holder
hereby represents, warrants and covenants that any shares of stock
purchased upon exercise of this Warrant shall be acquired for investment
only and not with a view to, or for sale in connection with, any
distribution thereof; that the Holder has had such opportunity as such
Holder has deemed adequate to obtain from representatives of the Company
such information as is necessary to permit the Holder to evaluate the
merits and risks of its investment in the Company; that the Holder is able
to bear the economic risk of holding such shares as may be acquired
pursuant to the exercise of this Warrant for an indefinite period; that the
Holder understands that the shares of stock acquired pursuant to the
exercise of this Warrant will not be registered under the 1933 Act (unless
otherwise required pursuant to exercise by the Holder of the registration
rights, if any, granted to the Registered Holder) and will be "restricted
securities" within the meaning of Rule 144 under the 1933 Act and that the
exemption from registration under Rule 144 will not be available for at
least one (1) year from the date of exercise of this Warrant, subject to
any special treatment by the SEC for exercise of this Warrant pursuant to
Section 2.2, and
<PAGE>
even then will not be available unless a public market then exists for the
stock, adequate information concerning the Company is then available to the
public, and other terms and conditions of Rule 144 are complied with; and
that all stock certificates representing shares of stock issued to the
Holder upon exercise of this Warrant or upon conversion of such shares may
have affixed thereto a legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT
AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not entitle
the Holder to any voting rights or other rights as a stockholder of the
Company. In the absence of affirmative action by such Holder to purchase
Common Stock by exercise of this Warrant or Common Stock upon conversion
thereof, no provisions of this Warrant, and no enumeration herein of the
rights or privileges of the Holder hereof shall cause such Holder hereof to
be a stockholder of the Company for any purpose.
12. REGISTRATION RIGHTS. All shares of Common Stock issuable upon exercise of
this Warrant shall be "Registrable Securities" or such other definition of
securities entitled to registration rights pursuant to Exhibit 3 to this
Warrant.
13. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Holder that:
13.1.DUE AUTHORIZATION; CONSENTS. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for (a)
the authorization, execution and delivery of, and the performance of
all obligations of the Company under, this Warrant, and (b) the
authorization, issuance, reservation for issuance and delivery of all
of the Common Stock issuable upon exercise of this Warrant, has been
duly taken. This Warrant constitutes a valid and binding obligation of
the Company enforceable in accordance with its terms, subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency,
moratorium, reorganization and similar laws affecting creditors'
rights generally and to general equitable principles. All consents,
approvals and authorizations of, and registrations, qualifications and
filings with, any federal or state governmental agency, authority or
body, or any third party, required in connection with the execution,
delivery and performance of this Warrant and the consummation of the
transactions contemplated hereby and thereby have been obtained.
<PAGE>
13.2.ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power to own, lease and operate its
property and to carry on its business as now being conducted and as
currently proposed to be conducted.
13.3.SEC REPORTS; FINANCIAL STATEMENTS.
(a) The Company has duly filed with the SEC the Company's annual
report on Form 10-K for the year ended December 31, 1998 (the
"Brilliant Digital Entertainment, Inc. SEC Reports"). As of their
respective filing dates, the Brilliant Digital Entertainment,
Inc. SEC Reports complied in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended,
and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not
misleading, except to the extent corrected by a subsequently
filed document with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the Brilliant Digital
Entertainment, Inc. SEC Reports complied as to form in all
material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in
accordance with generally accepted accounting principles applied
on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in
the case of unaudited statements, as permitted for by Form 10-Q)
and presented fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as at the
respective dates and the consolidated results of its operations
and cash flows for the periods indicated, except that the
unaudited interim financial statements are subject to normal and
recurring year-end adjustments which are not expected to be
material in amount.
13.4.VALID ISSUANCE OF STOCK. The outstanding shares of the capital
stock of the Company are duly and validly issued, fully paid and
non-assessable, and such shares, and all outstanding options and
other securities of the Company, have been issued in full
compliance with the registration and prospectus delivery
requirements of the Securities Act and the registration and
qualification requirements of all applicable state securities
laws, or in compliance with applicable exemptions therefrom, and
all other provisions of applicable federal and state securities
laws, including without limitation, anti-fraud provisions.
13.5.GOVERNMENTAL CONSENTS. All consents, approvals, orders,
authorizations or registrations, qualifications, declarations or
filings with any federal or state governmental authority on the
part of the Company required in connection with the consummation
of the transactions contemplated herein shall have been obtained
prior to and be effective as of the Effective Date.
14. NOTICES. Except as may be otherwise provided herein, all notices, requests,
waivers and other communications made pursuant to this Agreement shall be
in writing and shall be conclusively deemed to have been duly given (a)
when hand delivered to the other party; (b) when received when sent by
facsimile at the address and number set forth
<PAGE>
below; (c) three business days after deposit in the U.S. mail with first
class or certified mail receipt requested postage prepaid and addressed to
the other party as set forth below; or (d) the next business day after
deposit with a national overnight delivery service, postage prepaid,
addressed to the parties as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of
delivery from the delivery service provider.
To Holder: To the Company:
CONFIDENTIAL INFORMATION OMITTED Brilliant Digital Entertainment, Inc.
AND FILED SEPARATELY WITH THE 6355 Topanga Canyon Blvd. Suite 120
SECURITIES AND EXCHANGE COMMISSION Woodland Hills, CA 91367
Attn: Treasurer Attn: Chief Financial Officer
Fax Number: CONFIDENTIAL INFORMATION Fax Number: (818) 615-0995
OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
With copies to: With copies to:
CONFIDENTIAL INFORMATION OMITTED Brilliant Digital Entertainment, Inc.
AND FILED SEPARATELY WITH THE 6355 Topanga Canyon Blvd. Suite 120
SECURITIES AND EXCHANGE COMMISSION Woodland Hills, CA 91367
Attn: General Counsel Attn: Chief Executive Officer
Fax Number: CONFIDENTIAL INFORMATION Fax Number: (818) 615-0995
OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
Each person making a communication hereunder by facsimile shall promptly
confirm by telephone to the person to whom such communication was addressed
each communication made by it by facsimile pursuant hereto but the absence
of such confirmation shall not affect the validity of any such
communication. A party may change or supplement the addresses given above,
or designate additional addresses, for purposes of this Section 14 by
giving the other party written notice of the new address in the manner set
forth above.
15. HEADINGS. The headings in this Warrant are for purposes of convenience in
reference only, and shall not be deemed to constitute a part hereof.
16. LAW GOVERNING. This Warrant shall be construed and enforced in accordance
with, and governed by, the laws of the State of California.
17. NO IMPAIRMENT. The Company will not, by amendment of its Certificate of
Incorporation or bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets 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
<PAGE>
action as may be necessary or appropriate in order to protect the rights of
the Registered Holder of this Warrant against impairment. Without limiting
the generality of the foregoing, the Company (a) will not increase the par
value of any shares of stock issuable upon the exercise of this Warrant
above the amount payable therefor upon such exercise, and (b) will take all
such action as may be necessary or appropriate in order that the Company
may validly and legally issue fully paid and non-assessable shares of
Common Stock upon exercise of this Warrant.
18. NOTICES OF RECORD DATE. In case:
18.1.the Company shall take a record of the holders of its Common Stock (or
other stock or securities at the time receivable upon the exercise of
this Warrant), for the purpose of entitling them to receive any
dividend or other distribution, or any right to subscribe for or
purchase any shares of stock of any class or any other securities or
to receive any other right; or
18.2.of any consolidation or merger of the Company with or into another
corporation, any capital reorganization of the Company, any
reclassification of the Capital Stock of the Company, or any
conveyance of all or substantially all of the assets of the Company to
another corporation in which holders of the Company's stock are to
receive stock, securities or property of another corporation; or
18.3.of any voluntary dissolution, liquidation or winding-up of the
Company; or
18.4. of any redemption or conversion of all outstanding Common Stock;
then,and in each such case, the Company will mail or cause to be mailed to
the Registered Holder of this Warrant a notice specifying, as the case may
be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation, winding-up, redemption or conversion is to take
place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock or (such stock or securities as at the time are
receivable upon the exercise of this Warrant), shall be entitled to
exchange their shares of Common Stock (or such other stock or securities),
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, dissolution,
liquidation or winding-up. The Company shall use all reasonable efforts to
ensure such notice shall be delivered at least thirty (30) days prior to
the date therein specified.
19. SEVERABILITY. If any term, provision, covenant or restriction of this
Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Warrant shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
20. COUNTERPARTS. For the convenience of the parties, any number of
counterparts of this Warrant may be executed by the parties hereto and each
such executed counterpart shall be, and shall be deemed to be, an original
instrument.
21. NO INCONSISTENT AGREEMENTS. The Company will not on or after the date of
this Warrant enter into any agreement with respect to its securities which
is inconsistent with the rights granted to the Holders of this Warrant or
otherwise conflicts with the
<PAGE>
provisions hereof. The rights granted to the Holders hereunder do not in
any way conflict with and are not inconsistent with the rights granted to
holders of the Company's securities under any other agreements, except
rights that have been waived.
22. SATURDAYS, SUNDAYS AND HOLIDAYS. If the Expiration Date falls on a
Saturday, Sunday or legal holiday, the Expiration Date shall automatically
be extended until 5:00 p.m. the next business day.
23. CONFIDENTIALITY. Confidential or proprietary information disclosed by
either party under this Agreement, as well as the terms of this Agreement
and Holder's investment in the Company (subject to Section 24 below), shall
be considered confidential information (the "CONFIDENTIAL INFORMATION") and
shall not be disclosed by the Company or Holder to any third party. The
Company or Holder shall immediately notify the other party of any
information that comes to its attention which might indicate that there has
been a loss of confidentiality with respect to the Confidential
Information. In the event that the Company or Holder is requested or
becomes legally compelled (by statute or regulation or by oral questions,
interrogatories, request for information or documents, subpoena, criminal
or civil investigative demand or similar process, including without
limitation, in connection with any public or private offering of the
Company's capital stock) to disclose any of the Confidential Information,
such party (the "DISCLOSING PARTY") shall provide the other party (the
"NON-DISCLOSING PARTY") with prompt written notice of that fact so that the
other party may seek (with the cooperation and reasonable efforts of the
Disclosing Party) a protective order, confidential treatment or other
appropriate remedy. In such event, the Disclosing Party shall furnish only
that portion of the Confidential Information which is legally required and
shall exercise reasonable efforts to obtain reliable assurance that
confidential treatment will be accorded the Confidential Information to the
extent reasonably requested by the Non-Disclosing Party. The provisions of
this Section 23 shall be in addition to, and not in substitution for, the
provisions of any separate nondisclosure agreement executed by the parties
hereto with respect to the transaction contemplated hereby.
24. PUBLIC ANNOUNCEMENTS. Notwithstanding the provisions of Section 23 above,
from and after the Closing, the Company may disclose the existence of this
Agreement and Holder's investment in the Company solely to the Company's
investors, investment bankers, lenders, accountants, legal counsel,
business partners, and bona fide prospective investors, employees, lenders
and business partners, in each case only where such persons or entities
have executed appropriate nondisclosure agreements with the Company. The
Company shall not issue any press release or make any other announcement to
the general public or in any professional or trade publication regarding
Holder, this Agreement or any of the terms hereof without the prior written
consent of Holder, which consent may be withheld at the sole discretion of
Holder. Notwithstanding the foregoing, Holder may disclose its investment
in the Company and the terms thereof to third parties or to the public at
its discretion, and the Company shall have the right to disclose to third
parties any such information disclosed by Holder in a press release or
other public announcement. If the Company or Holder determines that any
disclosure not otherwise authorized by this Agreement is required by law or
regulation, then the provisions of Section 23 regarding disclosure of
Confidential Information by a Disclosing Party shall govern.
<PAGE>
25. DISPUTE RESOLUTION. The parties agree to negotiate in good faith to resolve
any dispute between them regarding this Warrant. If the negotiations do not
resolve the dispute to the reasonable satisfaction of both parties, then
each party shall nominate one senior officer of the rank of Vice President
or higher as its representative. These representatives shall, within thirty
(30) days of a written request by either party to call such a meeting, meet
in person and alone (except for one assistant for each party) and shall
attempt in good faith to resolve the dispute. If the disputes cannot be
resolved by such senior managers in such meeting, the parties agree that
they shall, if requested in writing by either party, meet within thirty
(30) days after such written notification for one day with an impartial
mediator and consider dispute resolution alternatives other than
litigation. If an alternative method of dispute resolution is not agreed
upon within thirty (30) days after the one day mediation, either party may
begin litigation proceedings. This procedure shall be a prerequisite before
taking any additional action hereunder.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the
Effective Date.
CONFIDENTIAL INFORMATION OMITTED Brilliant Digital Entertainment, Inc.
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION
/s/ /s/ Michael Ozen
- ----------------------------------- -------------------------------------
By By
Michael Ozen
- ----------------------------------- -------------------------------------
Printed Name Printed Name
Chief Financial Officer
- ----------------------------------- -------------------------------------
Title Title
SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK
<PAGE>
EXHIBIT 1
---------
NOTICE OF EXERCISE
(To be executed upon exercise of Warrant)
Brilliant Digital Entertainment, Inc.
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
the securities Brilliant Digital Entertainment, Inc., as provided for therein,
and (check the applicable box):
__ tenders herewith payment of the exercise price in full in the form of cash
or a certified or official bank check in same-day funds in the amount of
$____________ for _________ such securities.
__ Elects the [Net Issue Exercise][Easy Sale Exercise] option pursuant to
Section 2.2 or 2.3 of the Warrant, and accordingly requests delivery of a
net of ______________ of such securities.
Please issue a certificate or certificates for such securities in the name of,
and pay any cash for any fractional share to (please print name, address and
social security number):
Name:
----------------------------------------------------------------------
Address:
----------------------------------------------------------------------
Signature:
----------------------------------------------------------------------
Note: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.
If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher whole number of shares.
<PAGE>
EXHIBIT 2
---------
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, hereby sells, assigns and transfers unto
------------------
the within Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint
----------------
attorney, to transfer said Warrant Certificate on the books of the within-named
Company with respect to the number of Warrants set forth below, with full power
of substitution in the premises:
- ---------------------- --------------------- ---------------------
NAME(S) OF ASSIGNEE(S) ADDRESS # OF WARRANTS
- ---------------------- --------------------- ---------------------
- ---------------------- --------------------- ---------------------
- ---------------------- --------------------- ---------------------
- ---------------------- --------------------- ---------------------
- ---------------------- --------------------- ---------------------
- ---------------------- --------------------- ---------------------
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants registered by said
Warrant Certificate.
---------------------------------------------------------------------
Dated:
---------------------------------------------------------------------
Signature:
---------------------------------------------------------------------
Notice: The signature to the foregoing Assignment must correspond to the name as
written upon the face of this security in every particular, without alteration
or any change whatsoever; signature(s) must be guaranteed by an eligible
guarantor institution (banks, stock brokers, savings and loan associations and
credit unions with membership in an approved signature guarantee medallion
program) pursuant to Securities and Exchange Commission Rule 17Ad-15.
<PAGE>
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION / BRILLIANT DIGITAL
ENTERTAINMENT, INC. CONFIDENTIAL
EXHIBIT 3
---------
1. REGISTRATION RIGHTS.
1.1 DEFINITIONS. For purposes of this Section 1:
(a) REGISTRATION. The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to a registration effected by preparing and
filing a registration statement in compliance with the Securities
Act of 1933, as amended, (the "SECURITIES ACT"), and the
declaration or ordering of effectiveness of such registration
statement
(b) REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES" means:
(1) any Common Stock of the Company issued or to be issued upon
exercise of the Warrant and (2) any shares of Common Stock of the
Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange
for or in replacement of, any shares of Common Stock described in
clause (1) of this subsection (b). Notwithstanding the foregoing,
"Registrable Securities" shall exclude any Registrable Securities
sold by a person in a transaction in which rights under this
Section 1 are not assigned in accordance with this Agreement or
any Registrable Securities sold in a public offering, whether
sold pursuant to Rule 144 promulgated under the Securities Act,
or in a registered offering, or otherwise.
(c) REGISTRABLE SECURITIES THEN OUTSTANDING. The number of shares of
"REGISTRBLE SECURITIES then outstanding" shall mean the number of
shares of Common Stock of the Company that are Registrable
Securities and (l) are then issued and outstanding or (2) are
then issuable pursuant to an exercise of the Warrant or pursuant
to conversion of securities issuable pursuant to an exercise of
the Warrant.
(d) HOLDER. For purposes of this Section 1, the term "HOLDER" means
any person owning of record Registrable Securities that have not
been sold to the public or pursuant to Rule 144 promulgated under
the Securities Act or any permitted assignee of record of such
Registrable Securities to whom rights under this Section 1 have
been duly assigned in accordance with this Agreement.
(e) FORM S-3. The term "FORM S-3" means such form under the
Securities Act as is in effect on the date hereof or any
successor registration form under the Securities Act subsequently
adopted by the SEC which permits
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inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(f) SEC. The term "SEC" or "COMMISSION" means the U.S. Securities and
Exchange Commission.
1.2 [Intentionally Omitted].
1.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to
filing any registration statement under the Securities Act for
purposes of effecting a public offering of securities of the Company
(including, but not limited to, registration statements relating to
secondary offerings of securities of the Company, but EXCLUDING
registration statements relating to any registration under Section 1.4
of this Agreement or to any employee benefit plan or a corporate
reorganization) and will afford each such Holder an opportunity to
include in such registration statement all or any part of the
Registrable Securities then held by such Holder. Each Holder desiring
to include in any such registration statement all or any part of the
Registrable Securities held by such Holder shall within twenty (20)
days after receipt of the above-described notice from the Company, so
notify the Company in writing, and in such notice shall inform the
Company of the number of Registrable Securities such Holder wishes to
include in such registration statement. If a Holder decides not to
include all of its Registrable Securities in any registration
statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable
Securities in any subsequent registration statement or registration
statements as may be filed by the Company with respect to offerings of
its securities, all upon the terms and conditions set forth herein.
(a) UNDERWRITING. If a registration statement under which the Company
gives notice under this Section 1.3 is for an underwritten
offering, then the Company shall so advise the Holders of
Registrable Securities. In such event, the right of any such
Holder's Registrable Securities to be included in a registration
pursuant to this Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their
Registrable Securities through such underwriting shall enter into
an underwriting agreement in customary form with the managing
underwriter or underwriters selected for such underwriting
(including a market stand-off agreement of up to 180 days if
required by such underwriters). Notwithstanding any other
provision of this Agreement, if the managing underwriter(s)
determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the
Company shall include in such offering (i) first, all the
securities the Company proposes to register for its own
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account and (ii) second, Holder's Registrable Securities and
other shares of Common Stock of the Company requested to be
included by other investors having written registration rights
agreements with the Company respecting such shares ("Other
Registrable Securities"), with Holder and each such investor
proposing to sell such shares participating in such registration
on a pro rata basis, such participation to be based upon the
number of shares of Registrable Securities and Other Registrable
Securities then held by the Holder and each such investor,
respectively; PROVIDED, HOWEVER, that the right of the
underwriters to exclude shares (including Registrable Securities)
from the registration and underwriting as described above shall
be restricted so that all shares that are not Registrable
Securities or Other Registrable Securities and are held by any
other person, including, without limitation, any person who is an
employee, officer or director of the Company (or any subsidiary
of the Company) shall first be excluded from such registration
and underwriting before any Registrable Securities and Other
Registrable Securities are so excluded. If any Holder disapproves
of the terms of any such underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company and the
underwriter(s), delivered at least ten (10) business days prior
to the effective date of the registration statement. Any
Registrable Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the
registration. For any Holder that is a partnership, the Holder
and the partners and retired partners of such Holder, or the
estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing
persons, and for any Holder that is a corporation, the Holder and
all corporations that are affiliates of such Holder, shall be
deemed to be a single "Holder," and any pro rata reduction with
respect to such "Holder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and
individuals included in such "Holder," as defined in this
sentence.
(b) EXPENSES. All expenses incurred in connection with a registration
pursuant to this Section 1.3 (excluding underwriters' and
brokers' discounts and commissions relating to shares sold by the
Holders and legal fees of counsel for the Holders), including,
without limitation all federal and "blue sky" registration,
filing and qualification fees, printers' and accounting fees, and
fees and disbursements of counsel for the Company, shall be borne
by the Company.
(c) NO LIMIT ON REGISTRATIONS. Except as otherwise provided herein,
there shall be no limit on the number of times the Holders may
request registration of Registrable Securities under this Section
1.3.
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1.4 FORM S-3 REGISTRATION. In case the Company shall at any time after the
first anniversary of the date hereof receive from any Holder or
Holders of a majority of all Registrable Securities then outstanding a
written request or requests that the Company effect a registration on
Form S-3 and any related qualification or compliance with respect to
all or a part of the Registrable Securities owned by such Holder or
Holders, then the Company will:
(a) NOTICE. Promptly give written notice of the proposed registration
and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable
Securities; and
(b) REGISTRATION. As soon as practicable, effect such registration
and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and
distribution of all or such portion of such Holders or Holders'
Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any
other Holder or Holders joining in such request as are specified
in a written request given within twenty (20) days after the
Company provides the notice contemplated by Section 1.4(a);
PROVIDED, HOWEVER, that the Company shall not be obligated to
effect any such registration, qualification or compliance
pursuant to this Section 1.4:
(1) if Form S-3 is not available for such offering by the
Holders:
(2) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and
such other securities (if any) at an aggregate price to the
public of less than $1,000,000;
(3) if the Company shall furnish to the Holders a certificate
signed by the President or Chief Executive Officer of the
Company stating that in the good faith judgment of the Board
of Directors of the Company, it would be materially
detrimental to the Company and its shareholders for such
Form S-3 Registration to be effected at such time, in which
event the Company shall have the right to defer the filing
of the Form S-3 registration statement no more than once
during any twelve month period for a period of not more than
ninety (90) days after receipt of the request of the Holder
or Holders under this Section 1.4;
(4) if the Company has, within the six (6) month period
preceding the date of such request, already effected a
registration under the Securities Act other than a
registration from which the Registrable Securities of
Holders have been excluded (with respect to all or any
portion of the Registrable Securities the Holders requested
be
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included in such registration) pursuant to the provisions of
Section 1.3(a); or
(5) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general
consent to service of process in effecting such
registration, qualification or compliance.
(c) EXPENSES. The Company shall pay all expenses incurred in
connection with each registration requested pursuant to this
Section 1.4, (excluding underwriters' or brokers' discounts and
commissions relating to shares sold by the Holders and legal fees
of counsel for the Holders and excluding expenses required to be
paid by a Holder pursuant to Section 1.5(g) below), including
without limitation federal and "blue sky" registration, filing
and qualification fees, printers' and accounting fees, and fees
and disbursements of counsel.
(d) DEFERRAL. Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting the filing of a registration
statement pursuant to this Section 1.4, a certificate signed by
the President or Chief Executive Officer of the Company stating
that in the good faith judgment of the Board, it would be
materially detrimental to the Company and its stockholders for
such registration statement to be filed, then the Company shall
have the right to defer such filing for a period of not more than
ninety (90) days after receipt of the request of the initiating
Holders; PROVIDED, HOWEVER, that the Company may not utilize this
right more than once in any twelve (12) month period.
(e) NO LIMIT ON REGISTRATIONS. Except as otherwise provided herein,
there shall be no limit on the number of times the Holders may
request registration of Registrable Securities under this Section
1.4.
1.5 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement the
Company shall, as expeditiously as reasonably possible:
(a) REGISTRATION STATEMENT. Prepare and file with the SEC a
registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration
statement to become effective, PROVIDED, HOWEVER, that the
Company shall not be required to keep any such registration
statement effective for more than ninety (90) days.
(b) AMENDMENTS AND SUPPLEMENTS. Prepare and file with the SEC such
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as
may be
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necessary to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration statement.
(c) PROSPECTUSES. Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity
with the requirements of the Securities Act, and such other
documents as they may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by them that
are included in such registration.
(d) BLUE SKY. Use its best efforts to register and qualify the
securities covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall
be reasonably requested by the Holders, provided that the Company
shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) UNDERWRITING. In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting
agreement in usual and customary form, with the managing
underwriter(s) of such offering. Each Holder participating in
such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) NOTIFICATION. Notify each Holder of Registrable Securities
covered by such registration statement at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act of the happening of any event as a result of which
the prospectus included in such 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.
(g) OPINION AND COMFORT LETTER. Furnish, at the request of any Holder
requesting registration of Registrable Securities, on the date
that such Registrable Securities are delivered to the
underwriters for sale, if such securities are being sold through
underwriters, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to
underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and
(ii) a "comfort" letter dated as of such date, from the
independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of
the Holders requesting registration, addressed to the
underwriters, if any, and to the Holders
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requesting registration of Registrable Securities. If such
securities are not being sold through underwriters, then the
Company shall furnish, at the request and at the sole expense of
any Holder requesting registration of Registrable Securities, on
the date that the registration statement with respect to such
securities becomes effective, an opinion, dated as of such date,
of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to
underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities.
1.6 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 1.3
or 1.4 that the selling Holders shall furnish to the Company such
information regarding themselves, the Registrable Securities held by
them, and the intended method of disposition of such securities as
shall be required to timely effect the Registration of their
Registrable Securities.
1.7 INDEMNIFICATION. In the event any Registrable Securities are included
in a registration statement under Sections 1.3 or 1.4:
(a) BY THE COMPANY. To the extent permitted by law; the Company will
indemnify and hold harmless each Holder, the partners, officers
and directors of each Holder, any underwriter (as determined in
the Securities Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the
Securities Act or the Securities Exchange Act of 1934, as
amended, (the "1934 ACT"), against any losses, claims, damages,
or Liabilities (joint or several) to which they may become
subject under the Securities Act, the 1934 Act or other federal
or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or
violations (collectively a "VIOLATION"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement,
including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto;
(ii) 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, or
(iii)any violation or alleged violation by the Company of the
Securities Act, the 1934 Act, any federal or state
securities law or any rule or regulation promulgated under
the Securities Act, the 1934 Act or
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any federal or state securities law in connection with the
offering covered by such registration statement;
and the Company will reimburse each such Holder, partner, officer
or director, underwriter or controlling person for any legal or
other expenses reasonably incurred by them, as incurred, in
connection with investigating or defending any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subsection 1.7(a) shall not
apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected
without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any
such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by such Holder, partner, officer, director,
underwriter or controlling person of such Holder.
(b) BY SELLING HOLDERS. To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration
statement, each person, if any, who controls the Company within
the meaning of the Securities Act, any underwriter and any other
Holder selling securities under such registration statement or
any of such other Holder's partners, directors or officers or any
person who controls such Holder within the meaning of the
Securities Act or the 1934 Act, against any losses, claims,
damages or liabilities (joint or several) to which the Company or
any such director, officer, controlling person, underwriter or
other such Holder, partner or director, officer or controlling
person of such other Holder may become subject under the
Securities Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity
with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder
will reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer, controlling person,
underwriter or other Holder, partner, officer, director or
controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage,
liability or action: PROVIDED, HOWEVER, that the indemnity
agreement contained in this subsection 1.7(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably
withheld; and PROVIDED, FURTHER, that the total amounts payable
in indemnity by a Holder under this Section 1.7(b)
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ENTERTAINMENT, INC. CONFIDENTIAL
in respect of any Violation shall not exceed the net proceeds
received by such Holder in the registered offering out of which
such Violation arises.
(c) NOTICE. Promptly after receipt by an indemnified party under this
Section 1.7 of notice of the commencement of any action
(including any governmental action), such indemnified party will,
if a claim in respect thereof is to be made against any
indemnifying party under this Section 1.7, deliver to the
indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate
in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the
parties; PROVIDED, HOWEVER, that an indemnified party shall have
the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying
party would be inappropriate due to actual or potential conflict
of interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall
relieve such indemnifying party of liability to the indemnified
party under this Section 1.7 to the extent the indemnifying party
is prejudiced as a result thereof, but the omission so to deliver
written notice to the indemnified party will not relieve it of
any liability that it may have to any indemnified party otherwise
than under this Section 1.7.
(d) DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing indemnity
agreements of the Company and Holders are subject to the
condition that, insofar as they relate to any Violation made in a
preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration
statement in question becomes effective or the amended prospectus
filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL
PROSPECTUS"), such indemnity agreement shall not inure to the
benefit of any person if a copy of the Final Prospectus was
timely furnished to the indemnified party and was not furnished
to the person asserting the loss, liability, claim or damage at
or prior to the time such action is required by the Securities
Act.
(e) CONTRIBUTION. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any
case in which either (i) any Holder exercising rights under this
Agreement, or any controlling person of any such Holder, makes a
claim for indemnification pursuant to this Section 1.7 but it 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
PAGE 25
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may not be enforced in such case notwithstanding the fact that
this Section 1.7 provides for indemnification in such case, or
(ii) contribution under the Securities Act may be required on the
part of any such selling Holder or any such controlling person in
circumstances for which indemnification is provided under this
Section 1.7; then, and in each such case, the Company and such
Holder will contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after contribution
from others) in such proportion so that such Holder is
responsible for the portion represented by the percentage that
the public offering price of its Registrable Securities offered
by and sold under the registration statement bears to the public
offering price of all securities offered by and sold under such
registration statement, and the Company and other selling Holders
are responsible for the remaining portion; PROVIDED, HOWEVER,
that, in any such case: (A) no such Holder will be required to
contribute any amount in excess of the public offering price of
all such Registrable Securities offered and sold by such Holder
pursuant to such registration statement; and (B) no person or
entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
(f) SURVIVAL. The obligations of the Company and Holders under this
Section 1.7 shall survive until the fifth anniversary of the
completion of any offering of Registrable Securities in a
registration statement, regardless of the expiration of any
statutes of limitation or extensions of such statutes.
1.8 TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company shall have no
obligations pursuant to Sections 1.3 and 1.4 with respect to any
Registrable Securities proposed to be sold by a Holder in a
registration pursuant to Section 1.3 or 1.4 more than seven (7) years
after the date of this Agreement, or, if, in the opinion of counsel to
the Company, all such Registrable Securities proposed to be sold by a
Holder may then be sold under Rule 144 in one transaction without
exceeding the volume limitations thereunder.
PAGE 26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-QSB OF BRILLIANT DIGITAL
ENTERTAINMENT, INC. TO WHICH THIS EXHIBIT IS A PART AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER
SHARE DATA).
</LEGEND>
<CIK> 0001022844
<NAME> BRILLIANT DIGITAL ENTERTAINMENT
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,353
<SECURITIES> 0
<RECEIVABLES> 1,976
<ALLOWANCES> 0
<INVENTORY> 113
<CURRENT-ASSETS> 7,596
<PP&E> 837
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,241
<CURRENT-LIABILITIES> 1,553
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 8,525
<TOTAL-LIABILITY-AND-EQUITY> 10,241
<SALES> 207
<TOTAL-REVENUES> 207
<CGS> 390
<TOTAL-COSTS> 6,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,312)
<INCOME-TAX> (19)
<INCOME-CONTINUING> (6,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,331)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
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