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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-22250
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Name of Small Business Issuer In Its Charter)
DELAWARE 95-4592204
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices and Zip Code)
(818) 615-1500
(Issuer's telephone Number, Including Area Code)
Securities registered under to Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------- -----------------------
COMMON STOCK, $.001 PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered under to Section 12(g) of the Exchange Act:
NONE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]
The issuer's revenues for the fiscal year ended December 31, 1998 were
$431,000.
At March 19, 1999 the aggregate market value of the voting stock held by
non-affiliates of the issuer was $20,104,667.
At March 19, 1999 the issuer had 9,409,001 shares of Common Stock,
$0.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement with respect to its 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORY AND PRIOR ACTIVITIES
Brilliant is a production and development studio offering a new method
for the production of digital entertainment for distribution over the Internet,
on CD-ROM and DVD, as television programming and for home video. We are
headquartered in the United States and were incorporated during July 1996. We
were formed through the combination of two businesses: Brilliant Interactive
Ideas, Pty. Ltd. ("BII Australia"), an entertainment software developer and
producer; and Sega Australia New Developments ("SAND"), a research and
development operation for leading edge software tools.
BII Australia became our wholly-owned subsidiary in August 1996 through
the exchange of all 100,000 outstanding shares of BII Australia for 1,000,000
shares of our Common Stock. On September 30, 1996 we acquired SAND. SAND was
established during the second quarter of 1994 by Sega Ozisoft Pty., Limited, one
of the largest publishers and distributors of entertainment software products in
Australia and New Zealand. Sega Ozisoft and BII Australia began working together
during November of 1994 to jointly continue the development of SAND's software
tools. BII Australia provided consulting advice regarding integration of
individual tool components, the required functionality of the tool suite and
technical issues impacting the use of text, sound, graphics and other special
effects in the development of an interactive digital entertainment product. BII
Australia and Sega Ozisoft formalized their relationship on January 17, 1996
with an agreement through which BII Australia provided continued technical
assistance for the enhancement of SAND's software tools and in the development
of the first Multipath Movie product, which is based on the Australian comic
strip character "Cyberswine."
GENERAL
Using our proprietary state-of-the-art software tools, we produce
Multipath(TM) Movies. Multipath Movies are three-dimensional digitally animated
stories each with up to hundreds of plot alternatives, or paths, leading to
multiple distinct conclusions that are influenced by the user. Our Multipath
Movies feature seamless interactivity ensuring that the plot and graphical
presentation of the story are uninterrupted by the user's decisions. We utilize
a single cost-efficient production process to produce multiple formats of a
particular Multipath Movie title for different distribution channels, such as
the Internet, CD-ROM or, in the future, television programming. In addition, we
have developed a system that permits real time distribution of, and user
interaction with, our Multipath Movies over the Internet.
As a part of our marketing strategy, we have secured content and
characters for our Multipath Movies from a number of sources, including SUPERMAN
from D.C. Comics (a subsidiary of Warner Bros.), XENA: WARRIOR PRINCESS and
HERCULES & XENA THE ANIMATED MOVIE, each from Universal Studios, ACE VENTURA
from Morgan Creek, POPEYE from King Features Syndicate, the CHOOSE YOUR OWN
NIGHTMARE series for kids from Bantam Doubleday Dell Books and content from the
rock group, KISS. We also develop Multipath Movies based on internally-developed
content. Further to our strategy, we have entered into distribution agreements
with industry participants including Packard Bell NEC, CompuServe, @Home, DVD
Express, Kesmai's Gamestorm and Slingshot.
Our first Multipath Movie title, CYBERSWINE, together with two titles in
the CHOOSE YOUR OWN NIGHTMARE series and one POPEYE title, were completed and
released at the end of 1997. During 1998, an additional 11 titles were
completed, including episodes of XENA, ACE VENTURA, POPEYE and GRAVITY ANGELS,
our internally developed title. During the last quarter of 1998 and the first
quarter of 1999, we launched licensed properties, led by XENA, in retail stores
in domestic and international markets. Many of these titles also are available
online at www.multipathmovies.com as previews, webisodes (serialized episodes we
offer through subscription) and/or CD-ROM's. We also have agreements with @Home,
DVD Express and Kesmai's Gamestorm to offer Multipath Movies to their online
users. In addition, Slingshot also has agreed to develop certain technologies
required to play Hi-Fidelity Multipath Movies on the DVD platform. Slingshot has
agreed to publish and distribute on DVD up to 20 titles to retailers worldwide.
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We have progressed with our plans to release some of our Multipath
Movies in non-interactive format as television broadcast/cable programming and
home video features. In January 1999, we entered into an agreement with
Kaleidoscope Media Group for the distribution of GRAVITY ANGELS, a two hour 3D
animated science fiction thriller, to the television broadcast/cable and home
video markets. We intend to segment Multipath Movies into 30-minute episodes and
package together multiple episodes to create a season-length series for the
television market. Similarly, we intend to produce 80- to 120-minute animated
features for the home video market. We believe that we can produce Multipath
Movies for television programming and home video features at costs substantially
below typical industry costs. We intend to enter into joint ventures or
partnerships with film and television production companies to jointly develop
and release digital entertainment for the television broadcast/cable and home
video markets. Utilizing our proprietary tools we can convert this content for
distribution on the Internet, DVD and CD-ROM, at a nominal cost, thereby
increasing our revenue opportunities. Although, as described above, we are
presently implementing our plans to release some of the Multipath Movies in
non-interactive format as television broadcast/cable programming and home video
features, we note that we cannot guarantee that our efforts will be successful.
Using our proprietary software tools in conjunction with our digital
production and lay up skills, we develop Multipath Movies in a single production
process. We have five proprietary software tools:
o SCRIPNAV -- a software tool that enables a script writer to
write, review and correct branching multipath scripts;
o TALKTRACK -- a software tool used to synchronize facial
expressions and mouth movements to voice soundtracks
automatically;
o SCUD ENGINE -- a software system which collects and integrates
the output from all of the component tools to produce the
Multipath Movie;
o MR. COPY -- a software tool that arranges, reorders and, using
licensed technology, compresses and decompresses audio and bit
map files created during the production of a Multipath Movie and
optimally organizes the files for use in playing the Multipath
Movie; and
o DIGITAL PROJECTOR -- which contains all the necessary elements
to load and play a Multipath Movie.
Our proprietary software tools allow us to produce each title in
multiple formats in a single cost-efficient production process. This enables us
to amortize our production costs across the revenue streams we realize from each
format. In addition, our TalkTrack tool allows for low-cost modification of
Multipath Movies to other languages without the awkward appearance of dubbed
movies. Our proprietary software tools and production process are designed to
emulate traditional film writing and production techniques and allow
screenwriters, directors and producers to develop Multipath Movies without any
detailed knowledge of computer programming or significant assistance from
expensive programming teams. We believe that by utilizing existing entertainment
resources we will be able to generate high-quality digital entertainment at a
low cost.
We continually consider methods of enhancing shareholder value,
including possible acquisitions, joint ventures and licensing agreements as well
as methods of enhancing the value of our technology and research and development
capabilities. We believe that acquisitions, joint ventures and licensing
agreements present an effective means of obtaining technical personnel and
obtaining or expanding technologies, products and markets. We continually
evaluate opportunities for acquisitions. We currently are in discussions and
performing due diligence relating to a possible acquisition. There can be no
assurance, however, that our discussions will lead to any acquisition or that
any acquisition, if consummated, will be beneficial to us. See "Cautionary
Statements and Risk Factors - WE MAY EXPERIENCE RISKS ASSOCIATED WITH
ACQUISITIONS."
THE DIGITAL ENTERTAINMENT MARKET
Digital entertainment is created and stored and can be distributed
electronically. Examples of current digital entertainment products include
high-end computer games, virtual reality attractions and computer-animated
television programs and feature films. Traditionally, digital entertainment has
been distributed on CD-ROM and game console cartridges. Leading edge digital
entertainment products are now also being released online to capitalize on the
current interest in the Internet and the World Wide Web. In addition, digital
entertainment products have recently been released as broadcast television and
cable programming, home videos, and even full length feature movies, although on
a limited basis.
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THE MULTIPATH MOVIE
Multipath Movies are unlike any other entertainment product known to us.
In contrast to existing compressed video interactive movies, the action of a
Multipath Movie does not stop while a user makes decisions. A user's decisions
are implemented seamlessly because our proprietary Digital Projector has the
technical ability to form and manipulate streams of complex three-dimensional
animated images in real time, sequentially, for the duration of the movie. A
Multipath Movie provides the user with up to hundreds of plot branches leading
to a number of different conclusions. The opening scenes of each Multipath Movie
typically require limited interaction, which is intended to introduce users to
the story in a manner that builds user empathy with the lead characters and
teaches the user how to interact with a Multipath Movie. Further into a
Multipath Movie, the level of prompted interactivity may increase. Users
interact with Multipath Movies by responding with a mouse, keyboard or remote
control device to decision points which affect the plot of a Multipath Movie.
Decision points are identified by icons appearing at pre-scripted points, where
there is tension between two characters or where characters have differing
opinions about an issue, requiring the viewer to make a supportive selection.
The Multipath Movie allows the user to jump forward or reverse to previously
viewed scenes and, if desired, to select a different decision path. The user can
view the Multipath Movie from the perspective chosen by the director or elect an
almost infinite number of alternative camera angles.
We are targeting a larger market than users of traditional computer
games for our Multipath Movie products. Multipath Movies are approximately 20 to
30 minutes in length so that users can enjoy them within a single sitting. The
content of our Multipath Movies is designed to appeal to a wide variety of
audiences.
MULTIPATH MOVIE DISTRIBUTION FORMATS
In 1999, we intend to release Multipath Movies in the following formats:
o RETAIL CD-ROM AND DVD TITLES. We offer Multipath Movies in stand
alone CD-ROM format for retail distribution. These CD-ROM's
contain previews of all previously released titles that can be
unlocked by the user. In addition, we expect to offer DVD
Multipath Movies for retail distribution in the second half of
1999.
o BUNDLED TITLES WITH ONLINE CAPABILITY. Multipath Movie titles
are bundled on a variety of hardware systems. Typically, only
the preview of the title is offered for viewing by the user
without the need to connect to the Internet. If the user wishes
to view the full title, the user can connect to the Internet and
"pay to view" the title on our website at
www.multipathmovies.com.
o WEBISODES AND PREVIEWS. Webisodes and previews are offered on
our website at www.multipathmovies.com. Webisodes are serialized
episodes that we offer through subscription. Users receive an
e-mail, usually weekly, indicating the availability of a new
webisode. Typically, webisodes are available over a 12 week
period. Previews of selected titles are available to users at no
charge on our website.
o TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO. We are
developing selected Multipath Movie titles in non-interactive
format as television broadcast/cable programming and as home
video features. We intend to segment these Multipath Movies into
episodes for sale into the broadcast and cable series markets.
By packaging together multiple episodes, we can create a
season-length series. In January 1999, we entered into an
agreement with Kaleidoscope Media Group for the distribution of
GRAVITY ANGELS, a two hour 3D animated science fiction thriller,
to the broadcast and home video markets.
MULTIPATH MOVIE CONTENT CATEGORIES
We are developing a broad range of Multipath Movie titles designed to
appeal to viewers of varying ages and tastes. Much of the PC-based digital
entertainment developed to date has been designed for the dedicated computer
game player, typically an eight to 21-year-old male with substantial free time
and spending money who appreciates game playing complexities. Our strategy is to
develop and produce Multipath Movie titles based upon various types of
compelling content directed at discrete consumer categories. Because
internally-developed titles require significant time and expertise, we place
greater emphasis on licensed content. We currently are developing titles
according to the following categories:
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MULTIPATH MOVIE FEATURES. Our first Multipath Movie, CYBERSWINE, was
produced from original scripts developed by us, and is loosely based on an
Australian science fiction comic strip series. We also have developed various
other titles for this category including our original series, GRAVITY ANGELS, as
well as titles based on licensed content including ACE VENTURA, XENA: WARRIOR
PRINCESS and the upcoming SUPERMAN and KISS titles.
CHOOSE YOUR OWN NIGHTMARE SERIES. We are continuing to develop the
CHOOSE YOUR OWN NIGHTMARE series, which is a series of Multipath Movies
targeting children eight to twelve years of age. Initial titles in the series
include NIGHT OF THE WEREWOLF and HALLOWEEN PARTY, and more recent titles
include HOW I BECAME A FREAK, THE EVIL PENPAL, THE CURSE OF THE MUMMY and THE
BITE OF THE VAMPIRE. All of these titles are based upon Bantam Doubleday Dell's
popular children's series, CHOOSE YOUR OWN NIGHTMARE. Each of the books in this
series is written in a branching format, where the reader skips to different
pages or chapters of the book depending upon responses to questions posed in the
story. Because of the branching nature of the series, these stories are ideally
suited to the Multipath Movie format.
MULTIPATH MOVIES FOR KIDS. Multipath Movies for Kids are targeted at
children three to twelve years of age. These titles are specifically designed to
appeal to this age group by including more comic-like characters and engaging
music and sound effects. The first title we developed was QUEST FOR THE WOOLLY
MAMMOTH, followed by THE SUNKEN TREASURE and THE RESCUE, all featuring POPEYE.
INTERNET TICKETING AND E-COMMERCE
We have developed our own proprietary ticketing system to collect
revenue from online users of our products. Our ticketing system is designed for
compatibility with a wide variety of data storage and content billing
arrangements and to allow customers to be billed more easily under a variety of
charging options. Our ticketing system allows a viewer to purchase a "Movie
Ticket." The ticketing system and our multipath serving software currently
reside on restricted access servers at the facilities of Worldsite Networks and
are maintained, upgraded and queried for reports by us via remote access.
Through the facilities of Worldsite, we:
o receive requests from customers to purchase Movie Tickets;
o receive, process and transmit credit card or other payment
authorizations sufficient to allow us to receive payment of the
price of each Movie Ticket from the customer's credit card
processor;
o deliver Movie Tickets to customers;
o provide Multipath Movie instructions after receipt, verification
and cancellation of the customer's Movie Ticket; and
o collect and process information relating to customers.
THE PRODUCTION OF MULTIPATH MOVIES
The Multipath Movie production process consists of eight phases:
o scripting;
o creative design;
o voice and sound;
o model and world building;
o texturing and lighting;
o blocking/camera editing;
o special effects animation; and
o the generation of rendered output.
The production of a Multipath Movie is very similar to the production of
a traditional film. Just as the traditional film director identifies locations,
builds sets and chooses actors, the digital Multipath Movie director builds
"worlds" and "models." In the same way that traditional filmed entertainment
directors give actors wardrobes and props, the Multipath Movie director
"textures" the models.
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The Multipath Movie production process, however, differs from the
traditional movie process in three important ways. First, the traditional
process is substantially more labor intensive, requiring large crews, artisans
and technicians to produce a final product. Once scenes are filmed and edited,
any reshoots require the re-assembling of actors and crews, which is not only
costly but often not feasible. Second, filming and editing in the traditional
film process are two separate functions that cannot be performed simultaneously.
Through digital production, a scene, or group of scenes, can be blocked,
animated and edited at the same time. As a result, the producer can immediately
view the scene and make any necessary changes while avoiding substantial costs
and logistical problems. Finally, the digital Multipath Movie process allows the
producer to easily substitute models and worlds, alter texturing and lighting,
alter the blocking and editing process and alter special effects. By clicking
the mouse, the director/scriptwriter can preview entire scenes, add/delete
characters and plots and automatically change the appearance of a character or
object. Characters and sets are all digitally produced and then animated using
our software tools. Set components (such as language on storefronts and
vehicles) and personal features (such as skin tone and hair color) need to be
changed only once to effect the desired change throughout the Multipath Movie.
BRILLIANT'S SOFTWARE TOOLS AND PRODUCTION CAPABILITIES
We have developed five proprietary software tools that enable us to
produce high-quality Multipath Movies.
SCRIPNAV. ScripNav was developed specifically for the writing of complex
Multipath Movie scripts. A scriptwriter will use ScripNav to compose, edit and
finalize a script using a commercially available word processing package. Then,
the scriptwriter will insert various subplots into scenes in order to adapt the
script to the Multipath Movie format. The alternative subplots, or paths, are
based upon different temperaments of the lead character. For example, if the
character is angry, the character will approach the other characters and the
events in the scene in a much more aggressive and hostile manner, which will, in
turn, send the plot in the appropriate direction. By inserting directional
guides throughout the script, the scriptwriter is able to create a script with
multiple paths and endings based on a character's moods and his or her
interactions with the other characters. Once the script has been developed in
the Multipath Movie style, ScripNav enables the scriptwriter to read, review and
correct the script. ScripNav then corrects for syntax and branching errors and
allows the scriptwriter to review the multiple plots produced. Lastly, ScripNav
produces statistics that allow the scriptwriter to identify scenes that either
cannot or are unlikely to be reached through the plot's development and,
therefore, should be excluded from the final Multipath Movie product.
TALKTRACK. TalkTrack automatically synchronizes a character's lip
movements with corresponding dialogue tracks. Talk Track does this by examining
wave files and generating output files that contain references to the
appropriate mouth shapes. The tool samples sounds and matches them to the most
appropriate mouth shape and, in the process, builds a library of correct sound
samples with a direct relationship to a correct mouth shape. As we create more
content, we will build a library of improving sound and mouth shape matches. We
believe that TalkTrack is a more efficient and cost effective way to incorporate
voice into Multipath Movies than other existing sound tools. In addition,
TalkTrack allows for low cost modification of the Multipath Movies to any
language without the awkward appearance of dubbed movies. The sophistication of
this tool was significantly enhanced during 1997 by incorporation of improved
voice sampling techniques and database applications and by incorporation of
licensed lip synchronization technology.
SCUD ENGINE. SCuD Engine is the centerpiece of the Multipath Movie
development and production process. SCuD Engine is an object-oriented
environment that collects and integrates source files from ScripNav, graphics,
sound and TalkTrack tools and makes them available for layup and editing. SCuD
Engine provides a multi-window editing environment in which the developer can
preview, analyze and edit the final product. When a previously unedited scene is
opened, SCuD Engine retrieves the text for the scene from the script text file
of ScripNav and places the text in on-screen blocks or slots. The layup artist
can then view the descriptive or dialogue text while attaching imported
graphics, sound and other source material to that line of script. SCuD Engine
also includes a Shot Based Editing System that enables multiple sets and props
to be incorporated into one scene to allow cuts and edits to take place in line
with a traditional film environment. For example, in CYBERSWINE the specific
scene data (sets and props) could be loaded into memory and then shown through
different camera positions. In GRAVITY ANGELS, data from a number of different
scenes (multiple scene sets and props) can be loaded into memory residing in an
"off" state until it needs to be used by the camera or editor at which it
returns to an "on" state. This substantially improves the visual richness of
scenes.
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MR. COPY. Mr. Copy builds, integrates and allocates the final data files
in composing a Multipath Movie to be played on the Digital Projector. Mr. Copy
arranges, assembles and, using licensed technology, compresses and decompresses
thousands of audio and bit map files that are created during the development of
a Multipath Movie in a manner that optimizes the playing of the title. Mr. Copy
compresses files allowing up to five hours of branching content to be captured
in as little as 60 megabytes of disk space, as compared with conventional
technologies which presently would require at least one gigabyte of storage.
DIGITAL PROJECTOR. Digital Projector contains all the necessary
components to load and play the final Multipath Movie products or any animation
files that have been designed to take advantage of our b3d file format.
Digital Projector is the software engine for any system that is being used to
play the Multipath Movie and is generally the only software tool that we must
modify to permit the Multipath Movie to be adapted to new platforms. We have
developed Digital Projector for IBM-compatible PCs, and may develop
Digital Projector for other platforms.
In addition to our proprietary software tools and engines, we use
certain commercially available sound and graphics tools in the Multipath Movie
production process. Our proprietary tools used in conjunction with commercially
available tools allow the developer to produce a high-quality Multipath Movie
from the initial scripting stage to the generation of title output.
In 1999, we plan to release our first commercially available tool, B3D -
Minimize for Max. This tool contains a limited sub-set of our multipath
technology and is designed to work with 3D Studio Max animation software. B3D -
Minimize for Max enables animators to convert and compress 3D models and
animation into web-enabled files for fast download and playback with the
Digital Projector plug-in or mini-viewer, available free of charge from our web
site. A b3d file contains everything needed to view online interactive
animation, including 3D graphics, textures, sound and motion. All data is highly
compressed, including advanced polygon data compression for 3D models,
sophisticated key-frame reduction, data scaling algorithms for animation, and
Voxware sound compression. For example, the well known "Dancing Baby" AVI
animation, with sound, is a large download of typically 2 to 4MB. "Dancing
Baby.b3d" with sound and animation data plays back at full screen and is under
200K. Three dimensional animated content created by B3D - Minimize for Max can
be saved in "streaming" or "self-contained" files. Streaming b3d files download
only the texture and geometry assets onto the viewer's desktop, with motion and
sound data streamed over the Internet while the movie is played. Self-contained
b3d files download all components to the client computer, so they can be
e-mailed or embedded in documents.
In order to further promote our multipath production processes and
technology, we intend to release on a limited basis object code versions of our
software tools to selected entertainment production companies and other
entertainment professionals. We intend to release these software tool sets
through joint venture arrangements in which we can control the proprietary value
of the software tools and their dissemination. As part of these joint venture
arrangements, we will provide certain technical and production assistance, while
deriving revenue from a retained ownership interest in the titles produced by
the joint venture. The availability and use of our software tools by the
entertainment community at large is expected by us to stimulate the overall
level of interest in the multipath and b3d format and will increase the number
of available properties, thereby helping to establish the format as a de facto
standard. Additionally, we intend to selectively adapt and enhance our tools to
include features suggested by entertainment production professionals. We
currently are in negotiations contemplating these types of joint ventures but do
not guarantee that any such negotiations will be successfully concluded or prove
to be beneficial to us if consummated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Cautionary
Statements and Risk Factors -- We Substantially Depend Upon Third Parties For
Many Elements of Our Business" and "We May Experience Problems with Our Software
Tools and Products."
SALES AND MARKETING
Our sales and marketing program is designed to achieve revenue growth,
create and continue capturing new customers and promote the ongoing growth of
the Multipath Movie genre through various distribution methods and promotional
initiatives. To facilitate the broad acceptance of Multipath Movies, we are
pursuing a broad distribution strategy. We are focusing on three primary
channels in building broad distribution of our consumer products.
CD-ROM RETAIL CHANNELS AND DIRECT-TO-RETAIL. We are continuing to
establish a retail distribution program in which Multipath Movies are marketed
through traditional software publishers and distributors nationwide. In
addition, we will seek to substantially broaden distribution in retail and mass
market outlets, including video retailers, during 1999. We outsource the
logistical, shipping and warehousing needs for our direct-to-retail program.
Progress is being
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made in the retail channel through our relationship with GT Interactive, who is
representing selected titles on CD-ROM through their mass market outlets.
Certain titles are now available in stores such as Wal-Mart, Target and other
mass merchant retailers. There are, however, numerous obstacles and
uncertainties involved in developing a retail distribution channel. In the past,
we have experienced significant delays in our introduction of titles in the
retail channel. For instance, delays in duplication, packaging and distribution
caused our first Multipath Movies, CYBERSWINE, POPEYE AND THE QUEST FOR THE
WOOLLY MAMMOTH, NIGHT OF THE WEREWOLF and the HALLOWEEN PARTY to begin arriving
at retailers at the end of December 1997, after the holiday selling season.
Similarly, we experienced distribution delays in the fourth quarter of 1998 that
caused our products to reach retail shelves only at the end of December. We
cannot guarantee that similar delays will not occur in the future.
Further, we intend to release Multipath Movie titles to the DVD market
for distribution commencing in 1999. We believe that distributing our titles on
DVD will increase the awareness of Multipath Movies in the retail market.
INTERNET AND ONLINE SERVICES. Given the importance of Internet and
online delivery in the overall success of the Multipath Movie format, we believe
that it is critical to make Multipath Movies available to as many Internet and
online service users as possible. Consequently, we seek to bundle our titles
through various OEM manufacturers. Selected Multipath Movie titles may continue
to be distributed to CompuServe users on CD-ROM, which will allow them to
purchase Multipath Movies through our website. In addition, we have participated
in online marketing campaigns with well known sites such as Disney's and
Microsoft's and have entered into content and distribution arrangements with DVD
Express, Mediadome, Gamestorm, and @Home. Relationships with other on-line
business partners are currently being pursued but cannot be guaranteed.
We have been disappointed and adversely affected by the performance of
Packard Bell NEC of its obligation to ship our products with 6 million Packard
Bell NEC personal computers. Due to delays by Packard Bell NEC in the shipment
of some of our titles beyond their initially anticipated launch dates, and the
decision by Packard Bell NEC to distribute our titles with only its middle- to
high-end computers, we do not believe Packard Bell NEC will ship the required
number of units under our agreement. See "-- STRATEGIC, CONTENT AND DISTRIBUTION
RELATIONSHIPS -- PACKARD BELL NEC."
We also have experienced delays in the development of compression
technologies designed to reduce the time it takes a user to download from our
website the data necessary to view a Multipath Movie. We believe that the time
required to download Multipath Movies and Webisodes have deterred potential
users of our products and have reduced the effectiveness of our marketing
campaigns with Microsoft and Disney. The development of these technologies
continues to be a significant component of our business strategy and a primary
focus of our research and development efforts. We believe that reductions in the
time to download Multipath Movie content over the Internet will lead to an
increase in online sales of our products. However, we are not certain that we
will be able to sufficiently shrink download time to the degree that may be
required to satisfy consumer demands for downloads over non-broadband delivery
systems.
TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO. We have begun to
market our Multipath Movies as television programming and home video features.
Due to the episodic and serial nature of our Multipath Movies, our titles are
easily adaptable to the episodic television market. In addition, by grouping
multiple episodes together, we also can produce titles for the cable and direct
to video markets. In January 1999, we entered into an agreement with
Kaleidoscope Media Group for the distribution of GRAVITY ANGELS, a two hour 3D
animated science fiction thriller, to the television broadcast/cable and home
video markets. We believe the convergence of television programming and Internet
content can create opportunities for more content to be produced using our
technology.
B3D SALES AND MARKETING. In addition to consumer product sales and
marketing, we are pursuing a strategy designed to encourage active use of our
tools and technology by a broad market of animators who are currently using 3D
Studio Max, an animation and 3D design software package developed and marketed
by Kinetix, a division of Autodesk. Our B3D - Minimize for Max tool is a plug-in
to 3D Studio Max. It enables animators to output their animation to be played
back in real time on the Internet using our Digital Projector playback system.
B3D - Minimize for Max will be distributed by Digimation Inc., an authorized
distributor of 3D Studio Max plug-ins, and by us directly to the market. The
marketing program is designed to encourage content creation and distribution on
the Internet of B3D - Minimize for Max to further encourage use of the
Digital Projector, and through this, to establish broader demand for our other
tools and technology that we intend to continue to release to the market.
Animation content generated using B3D - Minimize
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for Max can be of any type. The tool is not limited to the production of
entertainment content. It can be applied to the production of artistic
renderings, education, architecture, engineering, e-commerce and other solutions
that require animation.
INTERNATIONAL SALES AND MARKETING
Our international sales and marketing strategy is managed from the
United States and executed through a combination of domestic and offshore
efforts. Our strategy for international distribution is to utilize exclusive
arrangements for specific countries or dedicated territories with distributors
that, in management's opinion, are best suited to direct the commercial launch
and ongoing marketing support of products in that country or territory. We
believe that we will be able to continue to capitalize on management's extensive
network of international relationships and background in the international
distribution of CD-ROM products. In 1997, we retained a managing director for
Europe, based in the United Kingdom. We are actively exploring distribution,
joint venture and strategic relationship opportunities in Europe. We believe
that product distribution in Europe will require implementation of localized
distribution strategies and methods through established regional distributors.
In addition, we believe that greater emphasis on traditional retail distribution
methods will be required in Europe initially because of lower Internet usage in
this region.
We are actively pursuing relationships in the Asia-Pacific region for
distribution of selected Multipath Movie titles. In addition, we are focusing on
the Latin American market and have recently entered into a relationship with a
Panamanian company for the localization and distribution of selected titles in
parts of Latin America.
Given the global nature of the World Wide Web, we believe that
international markets represent a significant incremental opportunity for our
Multipath Movies delivered over the Internet. Utilizing our proprietary
TalkTrack technology, we can deliver Multipath Movies in foreign languages
without significant logistical or cost issues.
STRATEGIC, CONTENT AND DISTRIBUTION RELATIONSHIPS
We have entered into various strategic relationships and other
arrangements to assist in the development, production and distribution of
Multipath Movies. These strategic relationships will be an integral element in
the execution of our business strategy.
@HOME NETWORK. We entered into a content and distribution agreement
with @Home Network, the leading provider of high-speed Internet services via
cable infrastructure, in December 1998. This revenue sharing agreement
represents the first large-scale animated content distribution relationship to
tap the rapidly growing broadband market. Under the agreement, our Multipath
Movie titles will be offered to @Home subscribers, enabling them to access our
interactive digital webisodes via our website at www.multipathmovies.com.
@Home's high-speed network allows subscribers to download our content at faster
speeds than can users connected to the Internet via standard modems. The
agreement also provides @Home with an exclusive worldwide license to certain
scaleable content that has been designed to take advantage of the capabilities
of high performance Intel Architecture-based microprocessors. Multipath Movie
titles and our Digital Projector technology will be prominently featured on the
@Home Showcase. Showcase is a high traffic area on the @Home service that
resides only a single click off the @Home home page. We expect that our
Multipath Movie titles will become available to @Home subscribers during the
first half of 1999.
SLINGSHOT. We entered into an agreement with Slingshot, a special
purpose DVD publisher and distributor, in March 1999. We granted to Slingshot
exclusive worldwide rights to distribute 20 of our Multipath Movies in DVD
format. Under the agreement, Slingshot has made an up-front, non-refundable cash
advance and provided a minimum guarantee in exchange for its exclusive retail
DVD distribution rights. OEM and bundled sales of DVD products will be managed
jointly by us and Slingshot. Slingshot will also use a DVD version of our
Digital Projector to drive traffic to our web site. Initial DVD titles are
expected to be available in retail outlets in the second half of 1999.
KESMAI CORPORATION. We entered into a content marketing and distribution
agreement with Kesmai Corporation, a subsidiary of News Corporation, which is a
world leader in online multiplayer games, in March 1999. Marketing and
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distribution will occur though Kesmai's popular online games service, GameStorm.
Through this relationship, GameStorm will offer direct access to our webisodes.
We expect to launch our relationship with a co-branded page on the GameStorm
service.
PACKARD BELL NEC. We entered into an agreement with Packard Bell NEC in
September 1996 for Packard Bell NEC to bundle software for a Multipath Movie
title with up to 80% of the first 7.4 million (i.e., up to 6 million) multimedia
equipped personal computers shipped by Packard Bell NEC in the United States,
the United Kingdom, Australia, New Zealand and South Africa over a three-year
period that ends in December 2000. The bundled software allows the user to
access Multipath Movies from an Internet site established by us. We have the
ability to periodically substitute our most current Multipath Movie titles for
the title initially bundled by Packard Bell NEC. For a period ending two years
following the expiration of the three year shipping period, Packard Bell NEC
committed to provide point of sale retail advertising for the Multipath Movies
distributed through Packard Bell NEC, and to create a prominently displayed icon
on the Packard Bell NEC screen display which, when clicked, will enable the user
to view a preview of the Multipath Movie and purchase the entire Multipath
Movie. Packard Bell NEC received warrants to purchase 600,000 shares of our
Common Stock upon execution of the agreement. The warrants are exercisable at $5
per share. None of the warrants have been exercised to date.
Under the terms of a September 1997 agreement, we granted Packard Bell
NEC the additional rights to bundle Multipath Movies loaded on the hard drives
of Packard Bell NEC computers. We also granted Packard Bell NEC distribution
rights to Multipath Movie titles which became available during the 12 month
period following the date the first bundled Multipath Movie was shipped on the
hard drives of Packard Bell NEC computers. Packard Bell agreed to ship our
Multipath Movies with at least one third of the 6 million computers required to
be shipped by it under the September 1996 agreement, and to pay us a fixed fee
of $1.00 for each computer shipped with a Multipath Movie, during the 12 month
period. In addition, under the September 1997 agreement, Packard Bell is
entitled to receive 40% of net revenues received by us from online end users
during the 12 month period. The agreement provides that if Packard Bell NEC has
not shipped the required minimum number of computers during the 12 month period,
the period will be extended for up to an additional six months. In connection
with this agreement, we granted to Packard Bell NEC warrants to purchase an
additional 200,000 shares of our Common Stock, which warrants expired in
February 1999. The warrants were exercisable at $10 per share. None of the
warrants were exercised prior to their expiration. During 1997, we recognized
revenues and establised a receivable of $2 million in connection with Packard
Bell NEC's requirement to ship at least 2 million computers with our bundled
titles.
We have been disappointed in the performance by Packard Bell NEC of its
obligations under our agreements. The first international shipment of Packard
Bell NEC computers with our bundled titles occurred in December 1997, and the
first shipments in the U.S. occurred in July 1998, well after our initially
anticipated launch dates. This delay was the result of internal issues of
Packard Bell NEC. In addition, Packard Bell NEC has decided to distribute our
titles with only its middle- to high-end computers, which limits the number of
available computers that can be bundled with our titles. For the six months
ended December 31, 1998, we have received $98,000 under our agreements with
Packard Bell NEC. Under the terms of the September 1997 agreement, Packard Bell
NEC is obligated to continue to make fixed payments to us of $1.00 for each
computer shipped with our bundled titles through the end of the shipping period,
by which time Packard Bell NEC is required to have paid us $2 million under the
September 1997 agreement. Based on the level of fixed payments made to us for
the six months ended December 31, 1998, we do not believe Packard Bell NEC will
satisfy its obligations to us to ship 2 million computers with our titles by the
end of the shipping period, and we believe that Packard Bell NEC is not bundling
our titles with all of its middle- to high-end computers. We also do not believe
Packard Bell NEC will ship the required 6 million computers with our titles
under our agreement within the required time period. Furthermore, as a result of
the delay in, and reduced number of, computers shipped by Packard Bell NEC with
our bundled titles, our Internet revenues have been significantly lower than
anticipated.
MORGAN CREEK PRODUCTIONS. We have entered into a joint venture with
Morgan Creek Interactive, a subsidiary of Morgan Creek Productions. Morgan Creek
is a principal developer and distributor of feature films. Morgan Creek's past
features include ACE VENTURA: PET DETECTIVE and ACE VENTURA: WHEN NATURE CALLS.
Our agreement provides that Morgan Creek will contribute to the joint venture a
nonexclusive license for two motion picture scripts for use in the development
of Multipath Movies to be distributed on CD-ROM and DVD platforms. We are
responsible for all development costs of the Multipath Movies but will be
entitled to recover these costs before Morgan Creek will participate in any
revenues generated from the Multipath Movies created by the joint venture. We
will also contribute to the joint venture a nonexclusive license to our
Digital Projector software tool solely for use in connection with two
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Multipath Movies to be produced by the joint venture. In exchange for the
contribution of development content, Morgan Creek will receive, following our
recovery of production costs and recovery of our investment in the joint
venture, a designated percentage of the joint venture's revenues. Morgan Creek
also received warrants to purchase 85,000 shares of our Common Stock. The
agreement provides that Morgan Creek will own all intellectual property related
to the content used in the Multipath Movies created by the joint venture and
will have the right to exploit such content for other uses without any royalty
obligation to the joint venture or to us, although we will retain all rights to
the licensed software tool. ACE VENTURA, THE CASE OF THE SERIAL SHAVER is the
first title that has been released under this agreement and production of a
second title is nearing completion.
BANTAM DOUBLEDAY DELL BOOKS FOR YOUNG READERS. We have an agreement with
Bantam Doubleday Dell that provides us with an option to acquire exclusive
worldwide interactive rights to Bantam Doubleday Dell's CHOOSE YOUR OWN
NIGHTMARE and CHOOSE YOUR OWN ADVENTURE series of interactive books. Our option
covers over 185 titles, plus any additional titles in each series published by
Bantam Doubleday Dell. Our rights include rights to adapt the licensed titles to
interactive format only and to deliver the products on CD-ROM, DVD and via the
Internet. By exercising our option, we will be required to acquire no less than
18 titles during the seven-year term of the Bantam agreement. Bantam Doubleday
Dell will be entitled to receive a portion of the net proceeds from sales of the
licensed titles. Upon our election of each of the first 16 titles, in batches of
four titles, we are required to pay Bantam Doubleday Dell a nonrefundable
advance against which royalties will be applied. To date, we have exercised our
option on 10 titles. We completed production of six titles as of December 31,
1998.
KING FEATURES SYNDICATE. Our agreement with King Features Syndicate
provides us with the rights to use the character POPEYE and related story
characters in Multipath Movies for play on PC-based CD-ROM products and over the
Internet in countries where English is the predominantly spoken language. We
have the right to adapt licensed titles for a number of Multipath Movies. We
have paid King Features Syndicate a cash advance against future royalties. If we
meet certain minimum earned royalty levels, we will have the option to extend
the agreement for two years beyond its original three-year term which continues
until December 31, 1999. We have released three POPEYE titles as of December 31,
1998.
UNIVERSAL STUDIOS. Our agreement with Universal provides us with the
rights to use certain story scripts from the live action television series XENA:
WARRIOR PRINCESS and animated character designs from the direct-to-video motion
picture HERCULES & XENA THE ANIMATED MOVIE for use in the production of
Multipath Movies. The Multipath Movie titles based on the original plots can be
made for the CD-ROM and DVD platforms, and can be distributed and sold via the
Internet. We have paid Universal Studios part of an advance against future
royalty payments and guaranteed minimum royalties. The initial term of this
agreement continues until January 31, 2002. The first Multipath Movie title,
GIRLS JUST WANNA HAVE FUN, has been released and production of an additional
title is nearing completion.
D.C. COMICS (WARNER BROS.). Our agreement with D.C. Comics provides us
with the rights to use the comic strip character SUPERMAN in Multipath Movies
which can be distributed on CD-ROM and DVD platforms, or via the Internet. We
have paid D.C. Comics a guaranteed advance against royalties. We also are
obligated to pay D.C. Comics a certain percentage of net advertising proceeds
received from the sale of Multipath Movies based on the SUPERMAN character. The
initial term of the agreement continues until September 1, 2001. Production on
the first SUPERMAN title, MENACE OF METALLO, is nearing completion.
COMPUSERVE. We expect CompuServe to continue to distribute enabling
software and digital assets for our Multipath Movies on CD-ROMs sent by
CompuServe to its members and prospective members. In addition, links to our
website at www.multipathmovies.com continue to appear in select areas on the
CompuServe website.
OTHERS. DVD Express has agreed to distribute our content on their
DVD.com website and Mediadome, an Intel website, continues to feature XENA. In
addition, Digimation will offer distribution of the B3D - Minimize for Max
plug-in, on a non-exclusive basis. We also are actively pursuing additional
bundling, distribution and licensing arrangements pursuant to which Multipath
Movies will be distributed through original equipment manufacturers and through
specialty software and mass merchandise retail channels.
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RESEARCH AND DEVELOPMENT
Our research and development efforts are principally focused on the
following tasks:
o Completing the B3D - Minimize for Max tool, documentation and
mini-viewer version of the Digital Projector;
o Implementing our relationships with @Home and other technology
partners;
o Completing our ScuD II advanced animation production
environment;
o Developing enhanced Internet delivery capabilities of our
Multipath Movies, including reduction of content file sizes
though new compression technology and streaming of animation
data;
o Increasing the efficiency of our object-oriented production
process;
o Enhancing our software tools to continually add features
identified by, and of value to, the creative and production
entertainment communities; and
o Improving our proprietary object-oriented database to enhance
facial expressions and mouth movements of Multipath Movie
characters.
In 1998, we made substantial improvements in the reduction in the size
of files required to view 3D animation on-line through the streaming of
animation data. Reduced file sizes will enable users with low bandwidth
connections to the Internet to view Multipath Movies without the need to
download very large computer files. In addition, we also continued to develop a
proprietary object-oriented database that we believe will increase production
efficiencies by giving Multipath Movie producers ready access to a database of
objects, such as sets, props and characters. We are expending substantial
resources at our research and development facility in Australia, where we
maintain a staff of fourteen engineers. Research and development expenses for
the years ended December 31, 1997 and 1998 were $1,709,000 and $3,798,000,
respectively.
COMPETITION
The markets for our digital entertainment products are intensely
competitive, subject to rapid change and characterized by constant demand for
new product features at reduced prices and pressure to accelerate the release of
new products and product enhancements. We expect to compete with computer
graphics special effects firms, including Pixar, ILM, Digital Domain, Sony
ImageWorks, Pacific Data Images and Rhythm & Hues. We also expect to compete
with firms producing CD-ROM products such as GT Interactive, Electronic Arts,
Learning Company and large corporations, such as Disney and Microsoft, with
substantial bases of intellectual property content and substantial financial
resources, who have entered or announced their intention to enter the market for
CD-ROM entertainment products. Finally, our Multipath Movies will compete with
traditional feature films and television programming produced by major movie
studios, including Disney, Warner Bros., Twentieth Century Fox, Paramount, Sony,
Lucasfilm, MCA Universal and MGM/UA, as well as numerous other independent
motion picture and television production companies. Several movie studios
already have developed their own internal computer animation capability and have
developed and released animated feature films or created computer animation for
special effects in animated films. We expect additional competition in the
animated feature film market from these and other movie studios. We will also
compete with movie studios for the acquisition of literary properties,
production financing, the services of performing artists, and the services of
other creative and technical personnel, particularly in the fields of animation
and technical direction.
EMPLOYEES
At December 31, 1998, we had 98 full-time employees: 14 engaged in
research and development, 74 in production, eight in general administration and
finance and two in sales and marketing. None of our employees is covered by a
collective bargaining agreement. We consider our relationship with our employees
to be good. We currently utilize the services of seven independent software
developers pursuant to contractual relationships. Eight of our employees,
including the Chairman and CEO, the President, the CFO and the Director of
Licensing, are based in Los Angeles, California. All other employees operate out
of facilities located in Bondi Junction, a suburb of Sydney, Australia. In 1997,
we retained a consultant as a managing director for Europe, based in the United
Kingdom. During 1999, we anticipate reducing the number of employees working in
our production studio and research and development facilities.
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ITEM 2. DESCRIPTION OF PROPERTIES.
PROPERTIES
During January 1998, we expanded our production facilities in Bondi
Junction, Australia to approximately 12,800 square feet, and moved and expanded
our research and development facilities consisting of approximately 3,300 square
feet to Double Bay, Australia. The current annual rental under the Bondi
Junction lease is $163,000 and under the Double Bay lease is $59,000. During
January 1999, we merged our research and development facilities into our
development facilities in Bondi Junction. Our lease for our Double Bay premises
expires in January 2000. We have sub-let these premises, offsetting our lease
commitment through January 2000. We also lease an office in Woodland Hills,
California for rent of approximately $69,000 per annum.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any litigation.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITYHOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED MATTERS.
COMMON STOCK
Brilliant's Common Stock commenced trading on the American Stock
Exchange on November 22, 1996 under the symbol "BDE." Prior to that time, there
was no public market for our Common Stock. The following table sets forth, for
the periods indicated, the high and low sales prices for the Common Stock as
reported by the American Stock Exchange.
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 1997
First Quarter ................................... $ 6.00 $ 3.88
Second Quarter .................................. 8.38 4.50
Third Quarter ................................... 9.88 6.25
Fourth Quarter .................................. 9.38 4.00
YEAR ENDED DECEMBER 31, 1998
First Quarter ................................... $ 6.38 $ 2.13
Second Quarter .................................. 4.63 2.06
Third Quarter ................................... 3.69 1.25
Fourth Quarter .................................. 3.50 1.06
On March 19, 1999, the closing sales price of the Common Stock as
reported on the American Stock Exchange was $2.75 per share. As of March 19,
1999, there were 52 holders of record of our Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
On December 3, 1998, we issued to AMRO International, S.A. a $100,000
convertible debenture due December 1, 2000 and a Common Stock purchase warrant
expiring on November 30, 2001. AMRO paid $100,000 for the debenture and $5,000
for the warrant. We issued the securities in reliance on Section 4(2) of the
Securities Act as a transaction not involving any public offering. As
compensation for financial advisory services rendered by Trinity Capital
Advisors, Inc. in connection with our issuance of the debenture and the warrant,
we issued to Trinity Capital 6,000 shares of our Common Stock and paid to
Trinity Capital a fee of $3,150. We issued the shares of Common Stock in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
In March 1999, we redeemed from AMRO the debenture for $100,000 plus
accrued interest and the warrant for $5,000, and entered into an alternative
financing arrangement with a private investor. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND
CAPITAL RESOURCES."
DIVIDENDS
We have never paid any dividends on our Common Stock. We intend to
retain any earnings for use in our business and do not intend to pay any cash
dividends on our Common Stock in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read together with the
Consolidated Financial Statements of Brilliant and the notes to the Consolidated
Financial Statements included elsewhere in this Form 10-KSB.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997.
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED
UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING
STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS DESCRIBED BELOW UNDER
THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."
OVERVIEW
Brilliant is a production and development studio producing a new
generation of digital entertainment that currently is being distributed over the
Internet and on CD-ROM. We are headquartered in the United States and were
incorporated in July 1996. We were formed through the combination of two
businesses: Brilliant Interactive Ideas, Pty. Ltd. ("BII Australia"), an
entertainment software developer and producer; and Sega Australia New
Developments ("SAND"), a "skunk works" research and development operation for
leading edge software tools. BII Australia became our wholly-owned subsidiary in
August 1996, and we acquired SAND in September 1996. SAND was established during
the second quarter of 1994 by Sega Ozisoft Pty., Limited, 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.
Our annual and quarterly revenue will depend upon the successful
development, distribution, timing and market acceptance of our interactive
products and upon the costs to distribute and promote these products.
Specifically, the revenues derived from the production and distribution of our
Multipath Movies will depend primarily on the acceptance by the market of the
Multipath Movie concept and the underlying content of the Multipath Movie,
neither of which can be predicted nor necessarily bear a direct correlation to
the production or distribution costs incurred. See "Cautionary Statements and
Risk Factors - Our Success Depends on the Commercial Acceptance of Our Multipath
Movies." The commercial success of a Multipath Movie is also expected to depend
upon promotion and marketing, production costs, impact of competition and other
factors. Accordingly, our annual and quarterly revenues are, and will continue
to be extremely difficult to forecast.
The market's acceptance of our Multipath Movies has taken longer than we
initially anticipated. This is due, in part, to the disappointing performance by
Packard Bell NEC of its obligations under our agreement to bundle our titles
with Packard Bell NEC computers. The first shipment of Packard Bell NEC
computers with our bundled titles occurred internationally in December 1997 and
in July 1998 in the U.S., well after our initially anticipated launch dates. At
March 1, 1999, the total number of Packard Bell NEC computers bundled with our
titles was significantly below the level we expected. As a result, at this time
there are fewer users equipped to view and purchase online episodes of our
Multipath Movies than we originally projected. See "BUSINESS -- STRATEGIC,
CONTENT AND DISTRIBUTION RELATIONSHIPS -- PACKARD BELL NEC."
We also experienced few retail sales in 1998. Following the
disappointing performance of our initial launch of four Multipath Movie titles
in the retail channel in December 1997, we delayed the release of additional
titles in the retail channel until the completion of our more recognized
licensed properties, such as XENA, ACE VENTURA and SUPERMAN. This decision also
was the result of our inability to obtain retail shelf space for our less
recognized titles. XENA and ACE VENTURA only obtained retail shelf space after
the 1998 Christmas season. We also decided to limit the retail promotion of our
products during 1998 until we achieved broader distribution of Multipath Movie
titles into the retail and online markets. We believe that these factors
contributed to lower than anticipated retail sales of our products in 1998.
During 1999, we anticipate reducing the number of employees working in
our production studio and research and development facilities.
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We continue to carefully consider new business opportunities that could
be strategic to the development of the Company. We currently are in discussions
and performing due diligence relating to a possible acquisition. There can be no
assurance, however, that our discussions will lead to any acquisition or that
any acquisition, if consummated, will be beneficial to us. See "-- CAUTIONARY
STATEMENTS AND RISK FACTORS - WE MAY EXPERIENCE RISKS ASSOCIATED WITH
ACQUISITIONS."
Commencing in 1999, we intend to release our first commercially
available tool, B3D - Minimize for Max. We initially intend to distribute
limited 30-day trial versions of the tool for free to animators worldwide. Other
versions of the tool will be sold or will be the subject of joint venture
arrangements. Availability of the B3D tool to animators and the entertainment
community at large is part of our strategy to attempt to to establish B3D as a
standard for the delivery of online, real-time, 3D animation. We also believe
that there are opportunities to leverage our animation production processes to
generate revenue. We also intend to pursue arrangements with other, more
established animation studios to co-produce animated content for the television
broadcast/cable and home video markets, but cannot assure success in this
effort.
RESULTS OF OPERATIONS
REVENUES. Revenues from the sale of Multipath Movies through retail
outlets are recognized when the product is shipped. Product returns or price
protection concessions that exceed our reserves could materially adversely
affect our business and operating results and could increase the magnitude of
quarterly fluctuations in our operating and financial results. See "Cautionary
Statements and Risk Factors -- Our Products May Be Returned."
We enter into distribution contracts under which we are entitled to
fixed minimum guaranteed payments. The minimum guaranteed payments are
recognized as revenue when the CD-ROM master is delivered to the distributor and
the terms of the sale are considered fixed. Revenues from the sale of electronic
tickets to view Multipath Movies over the Internet are recognized when the
tickets are sold.
Historically, we have derived our revenues from royalties, development
fees and software sales. We license our traditional CD-ROM products to
publishers and distributors in exchange for non-refundable advances and
royalties based on product sales. Royalties based on product sales are due only
to the extent revenues exceed any associated non-refundable royalty advance.
Royalties related to non-refundable advances are recognized when the CD-ROM
master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned by us. Development fees are paid by customers in
exchange for our 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, we recognize the portion of the development fee
allocated to each milestone. Software sales revenues are recognized upon
shipment of product.
Revenues decreased from $2,481,000 for the year ended December 31, 1997
to $431,000 for the year ended December 31, 1998. This represents a decrease of
$2,050,000. Revenues for year ended December 31, 1998 reflect $210,000 earned
under a Multipath Movie technology and content development agreement and
Multipath Movie retail sales of $221,000. Revenues for the prior year were
primarily the result of $1,973,000 in revenue from a software bundling agreement
with Packard Bell NEC. See Note 2 of Notes to Consolidated Financial Statements.
During 1998, users were not equipped to purchase on-line episodes of our
Multipath Movies over the Internet as early as expected. This is due, in part,
to delays in the shipment by Packard Bell NEC of personal computers bundled with
our products, and the decision by Packard Bell NEC to include our products only
on middle- and high-end computers. This has had a significant negative impact on
our 1998 revenues and earnings and is expected to have a similar impact in 1999.
We do not believe Packard Bell NEC will ship the required number of units under
our agreement. See "BUSINESS -- STRATEGIC, CONTENT AND DISTRIBUTION
RELATIONSHIPS -- PACKARD BELL NEC."
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To address our slower than anticipated revenue growth and resulting
losses, we have taken steps to reduce overhead expenditures at our production
studio in Bondi Junction, Australia and will consider further reductions.
COST OF REVENUES. Cost of revenues consists primarily of the
amortization and write-down of capitalized movie software costs for previously
released titles, royalties to third parties and the direct costs and
manufacturing overhead required to reproduce and package software products. Cost
of revenues increased from $44,000 for the year ended December 31, 1997 to
$1,383,000 for the year ended December 31, 1998. This represents an increase of
$1,339,000. Cost of revenues in 1997 include costs associated with software
sales. The increase in costs of revenues in the 1998 period is primarily a
result of amortization ($312,000) and write down ($834,000) of capitalized movie
software costs for previously released titles. To the extent capitalized
Multipath Movie software costs are attributable to titles that we have begun to
ship, these costs are subject to amortization. To the extent the software costs
are estimated to exceed the total anticipated revenues, charges are made to
operations to reduce these costs to net realizable value. We will monitor the
level of commercial success of our Multipath Movies and, depending upon results,
may write down additional capitalized movie software costs in subsequent periods
in accordance with Statement of Financial Accounting Standards No. 86 ("SFAS No.
86"). See "-Accounting Treatment for Development Costs and Research
Expenditures."
SALES AND MARKETING. Sales and marketing expenses include primarily
costs for salaries, advertising, promotions, brochures, travel and trade shows.
Sales and marketing expenses increased from $1,090,000 for the year ended
December 31, 1997 to $1,785,000 for the year ended December 31, 1998. The
increase is primarily attributable to increased costs associated with our
promotional efforts. Sales and marketing expenses are expected to increase in
future periods due to the expansion of our sales force and marketing efforts. We
implemented an online marketing program in connection with the release of
Multipath Movies in the fourth quarter which resulted in a significant increase
in marketing expense for the fourth quarter.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
primarily salaries and benefits of management and administrative personnel,
rent, insurance costs and professional fees. General and administrative expenses
increased from $2,217,000 for the year ended December 31, 1997 to $2,936,000 for
the year ended December 31, 1998. The increase is attributable to increased
employment costs associated with the development of internal management and the
addition of 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 our traditional CD-ROM software tools and the software tools used
to develop Multipath Movies. Research and development expenses increased from
$1,709,000 for the year ended December 31, 1997 to $3,798,000 for the year ended
December 31, 1998. In accordance with SFAS No. 86, the results of operations for
the year ended December 31, 1998 include Multipath Movie software development
costs and research and development expenses. Technological feasibility of our
original Digital Projector software tool 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 us during the second quarter of
1998 are intended to be viewed on our new Internet Digital Projector, which we
released in the fourth quarter of 1998. To the extent capitalized Multipath
Movie software costs are attributable to titles that we have begun to ship,
these costs are subject to amortization. We have written off amounts incurred
subsequent to the first quarter of 1998 in the development and production of
Multipath Movies designed to be viewed on the new Digital Projector. As the
technology on which our product is designed to operate is continuously changing,
a reserve against capitalized costs is necessary until shortly before the
release of the title. Therefore, no additional movie development costs are
anticipated to be capitalized in the future.
We have chosen to focus our development of Multipath Movies for the PC.
We have deferred development of Multipath Movies for other platforms, including
game consoles, until warranted by market conditions. This focus allows us to
devote more of our resources to development of Multipath Movie technology and
development of additional titles. We believe that our decision will have no
adverse impact on revenues in the near or medium term.
DEPRECIATION. Depreciation expense relates to depreciation of fixed
assets such as computer equipment and cabling, furniture and fixtures and
leasehold improvements. These fixed assets are depreciated over their estimated
useful lives (up to five years) using the straight-line method. Depreciation
expense increased from $214,000 for the year ended December 31, 1997 to $390,000
for the year ended December 31, 1998. The increase is attributable to the
increase in depreciable assets resulting from the growth of our operations,
primarily from production and general overhead activities.
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OTHER INCOME AND EXPENSE. Other income includes interest income and
expenses, gains and losses on foreign exchange transactions and export
development grants paid to BII Australia by the Australian Trade Commission for
BII Australia's participation in certain export activities. Trade grant revenue
earned was $148,000 and $73,000 for the years ended December 31, 1997 and
December 31, 1998, respectively. Interest income increased from $313,000 for the
year ended December 31, 1997 to $368,000 for the year ended December 31, 1998.
This increase is due to the higher cash balances as a result of our public
offering of Common Stock in December 1997.
ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES
Our accounting policy follows SFAS No. 86, which provides for the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life or on a ratio of current
revenues to total projected product revenues, whichever results in the greater
amortization amount. Prior to the establishment of technological feasibility,
these costs are expensed as incurred. Historically, we have expensed all costs
related to the development of both our software tools and Multipath Movie
titles. We achieved technological feasibility of our original Digital Projector
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 in accordance with SFAS No. 86.
Multipath Movies developed by us subsequent to the first quarter of 1998 are
intended to be viewed on our new Internet Digital Projector, which we released
in the fourth quarter of 1998. We have written off amounts incurred subsequent
to the first quarter of 1998 in the production of Multipath Movies designed to
be viewed on our new projector. As the technology on which our product is
designed to operate is continuously changing, management considers that a
reserve against capitalized costs is necessary until shorthly before the release
of the title. Therefore, no additional movie development costs are anticipated
to be capitalized in the future. 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.
In the future, if we incur costs to develop digital entertainment
products for distribution as home video features or television programming, such
discrete costs may be capitalized and amortized in the proportion that gross
revenues realized bear to management's estimate of the total gross revenues
expected to be received, in accordance with Statement of Financial Accounting
Standards No. 53, "Financial Reporting by Producers and Distributors of Motion
Picture Films."
ACCOUNTING GUIDANCE FOR REVENUE RECOGNITION FOR SOFTWARE TRANSACTIONS
Software sales entered into prior to December 15, 1997 were accounted
for in accordance with AICPA Statement of Position ("SOP") 91-1, "Software
Revenue Recognition." For transactions entered into after December 15, 1997 the
Company recognizes revenue from the sale of software in accordance with SOP
97-2, "Software Revenue Recognition". SOP 97-2 provides guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software.
LIQUIDITY AND CAPITAL RESOURCES
On December 10, 1997, we closed a public offering of 2,500,000 shares of
Common Stock at $5 per share, 2,200,000 of which were sold by us. The public
offering resulted in gross proceeds of approximately $9,800,000 in cash after
underwriters' discounts and commissions and offering expenses. As of December
31, 1998, approximately $3,187,000 of the net proceeds of the public offering
remain available for product development and working capital and general
corporate purposes.
Net cash used in operating activities during the year ended December 31,
1998 was primarily attributable to a net loss of $9,425,000. Net cash used in
investing activities in the year ended December 31, 1998 was due primarily to
the purchase of computer equipment. Cash provided by financing activities for
the year ended December 31, 1998 was attributable to $105,000 raised through the
issuance of a convertible debenture and warrants and $104,000 through the
financing of office furniture and computer equipment. In March 1999, we redeemed
the debenture for $100,000 plus accrued interest and the warrant for $5,000, and
entered into an alternative financing arrangement with a private investor
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described below. Cash provided by financing activities for the year ended
December 31, 1997 was attributable to the issuance of shares of Common Stock in
the public offering.
We have an obligation under our agreement with Morgan Creek to fund
entirely the development of two Multipath Movies, the first of which, ACE
VENTURA, was developed and shipped in the fourth quarter of 1998. We have an
obligation under our joint venture agreement with Crawford to jointly fund two
Multipath Movies. No projects have been identified for development by the
parties and we are doubtful that we will ever develop a project with Crawford
under our agreement. We have an obligation under our joint venture agreement
with KISS Digital, LLC to fund 75% of the development of a Multipath Movie up to
$900,000. This project currently is in development. We also are required as of
December 31, 1998 to make minimum payments of $142,000 under various licensing
agreements. At December 31, 1998, we had rental commitments for our offices and
production facilities of $809,000 and a promissory note for the financing of
fixed assets in the amount of $125,000 payable over the next 5 years.
In March 1999 we entered into a securities purchase agreement with a
private investor. The agreement gives us the right at our election to sell to
the investor up to a total of $6 million of our Common Stock at a discount to
its "market price" from time to time during the three year term of the
agreement. Each sale of shares under the agreement is subject to certain minimum
and maximum dollar amounts and certain other conditions, including that the
"market price" of our Common Stock at the time we give a sale notice is at least
$1 per share and that a registration statement under the Securities Act covering
the investor's resale of the shares is in effect at the closing of the sale.
"Market price" is defined as the lowest daily volume adjusted price of our
Common Stock (as reported on Bloomberg) for any trading day during the
10-trading day period ending on the date that we give a sale notice to the
investor. The purchase price that we will receive for our shares in each sale
will be 88% of the market price of our Common Stock if the market price is more
than $4 per share, and 86% of the market price if the market price is $4 per
share or less.
In April 1999 we received a loan commitment from a private investor,
which is subject to our acceptance. Under the commitment, the investor has
agreed to lend to us $1,000,000 no later than April 21, 1999 pursuant to a
$1,000,000 convertible debenture which will be due on the first anniversary of
the debenture. The investor will have the right to convert the debenture into
shares of our Common Stock. The conversion price will be equal to the lower of
95% of the "market price" of our Common Stock at the time the holder delivers a
conversion notice to us or $6.00 per share. On the maturity date of the
debenture, the unpaid balance of the debenture and any accrued and unpaid
interest will convert automatically into shares of Common Stock valued at the
conversion price on the maturity date. "Market price" is defined as the lowest
volume weighted adjusted price of our Common Stock on the Principal Market (as
reported on Bloomberg) during the 10 business days prior to the business day on
which the conversion notice is sent to us. We will be required to register the
shares of Common Stock underlying the debenture with the Securities and Exchange
Commission. In connection with the loan, we will be required to pay Curzon
Capital Corp., the placement agent, a fee of 3% and issue to Curzon Capital
shares of our Common Stock with a market price of 2% of the amount of the loan.
We believe that our existing funds, cash generated from operations and
proceeds from the line of credit and convertible debenture will be sufficient to
fund our working capital requirements for at least the next twelve months. See
"Cautionary Statements and Risk Factors - We Need to Raise Additional Funds."
YEAR 2000
We have begun a project to address the potential impact of the Year 2000
problem on the processing of date-sensitive information by our information
technology systems and the information technology systems used by our
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 "0" as the
year 1900 rather than 2000, which could cause miscalculations or system
failures. The objectives of our 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.
We are dependent upon both internally developed and vendor supplied
information systems. Our 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. We have already
contacted our key 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 us in our operations.
We also are in the process of evaluating our internally developed
information technology systems to determine their Year 2000 compliance. This
process is being coordinated by our Vice President of Technology. We do not
presently anticipate any material Year 2000 issues or significant expenses from
the conversion of our own information systems, databases or programs. However,
if our 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.
We intend to communicate with our significant customers and vendors to
understand their Year 2000 issues and how they may affect us and to determine
what steps these customers and vendors have taken to prepare and manage their
Year 2000 issues as they relate to us. These customers and vendors include the
host of our web site and significant distributors of our products. At this time,
we do not know what measures our customers and vendors have taken to address the
Year 2000 problem or how that problem's effect on our customers and vendors will
impact us. 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 our
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products, either of which would have a material adverse effect on our business,
financial condition and results of operations. We plan 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 we
believe the Year 2000 project will be completed are based upon management's best
estimates. These estimates were derived utilizing numerous assumptions of future
events, including the availability of certain resources, third-party
modification plans and other factors. There can be no guarantee, however, that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of our 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:
o the availability and cost of personnel trained in these areas;
o the ability of locating and correcting all relevant computer
code;
o timely responses to and corrections by third parties and
suppliers; and
o the ability to implement interfaces between any new systems and
systems not being replaced.
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, we
cannot ensure that we will be able to timely and cost effectively resolve
problems associated with the Year 2000 issue, which may effect our operations
and business, or expose us 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 that could cause actual results
to differ from those projected or forecast are included in the statements below.
In addition to other information contained in this report, readers should
carefully consider the following cautionary statements and risks factors.
OUR SUCCESS DEPENDS ON THE COMMERCIAL ACCEPTANCE OF OUR MULTIPATH
MOVIES. Our success will depend largely upon the market's acceptance of the
Multipath Movie concept. The entertainment software market is emerging and
depends upon a number of factors, including:
o consumer preferences;
o the installed base of personal computers; and
o the existence of recognizable titles to interest consumers and
stimulate market development.
The market for entertainment software is relatively small in comparison
to the overall market for consumer software products. This makes it impossible
to predict with any degree of certainty the future rate of growth, if any, and
the size of the market for our products.
Each Multipath Movie will be an individual artistic work, and its
commercial success primarily will be determined by consumer reaction, which is
unpredictable. To be successful, we will need to develop stories and characters
that capture the attention and imagination of consumers and to license
recognized characters and properties from third parties for use in our Multipath
Movies. We cannot be certain that we will be able to do so. Other factors that
influence the commercial success of our Multipath Movies include:
o our marketing strategies;
o the quality of our products and competing products;
o critical reviews;
o the availability of alternative forms of entertainment and
leisure time activities; and
o general economic conditions.
WE MAY EXPERIENCE DELAYS IN THE INTRODUCTION AND DISTRIBUTION OF OUR
PRODUCTS. We plan to release a number of new Multipath Movies in 1999. Due to
the numerous obstacles and uncertainties involved in developing and distributing
software to the market, however, we cannot be certain that we will be able to
meet our planned release dates for our new
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Multipath Movies. If we are unable to begin shipping an important new product
during the scheduled quarter, our revenue and earnings would likely be
materially and adversely affected in that quarter. In the past, we have
experienced significant delays in our introduction of certain new products. For
instance, delays in duplication, packaging and distribution caused our first
Multipath Movies, CYBERSWINE, POPEYE and the QUEST FOR THE WOOLLY MAMMOTH, NIGHT
OF THE WEREWOLF and the HALLOWEEN PARTY to begin arriving at retailers at the
end of December 1997, after the holiday selling season. Similarly, we
experienced distribution delays in the fourth quarter of 1998 that caused our
products to reach retail shelves only at the end of December. Our dependence
upon certain strategic partners has also caused delays in the release of our
products (see " -- We Substantially Depend Upon Third Parties - Dependence Upon
Strategic Relationships"). It is likely in the future that delays will continue
to occur and that certain new products will not be released in accordance with
our internal development schedule or the expectations of public market analysts
and investors.
WE HAVE ONLY BEEN OPERATING OUR CURRENT BUSINESS SINCE AUGUST 1996. We
were founded in September 1993 and shipped our initial traditional CD-ROM
product in November 1994. In 1996, we substantially reduced this aspect of our
business to begin producing and distributing Multipath Movies. We acquired the
software tools necessary to produce Multipath Movies in August 1996 and
introduced our first Multipath Movie in December 1997. We have a limited
operating history upon which to evaluate our future prospects. You must consider
our prospects in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as entertainment software.
These risks include, but are not limited to, the inability to respond promptly
to changes in a rapidly evolving and unpredictable business environment and the
inability to manage growth. To address these risks, we must, among other things:
o expand our customer base;
o enter into distribution and revenue generating arrangements and
arrangements with Internet service providers, traditional CD-ROM
publishers and retailers;
o successfully implement our business and marketing strategies;
o continue to develop Multipath Movies with appealing content;
o respond to competitive developments; and
o attract and retain qualified personnel.
WE NEED TO RAISE ADDITIONAL FUNDS. We believe that our existing funds,
cash generated from operations and proceeds from the equity line of credit we
secured in March 1999 will be sufficient to fund our working capital
requirements for at least the next twelve months. Following fiscal 1999, we may
need to raise additional funds through debt or equity financing or by other
means. We cannot be certain that additional financing will be available or that,
if available, it can be obtained on terms that we deem favorable. If necessary
funds are not available, we may be required to defer completion of Multipath
Movie titles and reduce overhead significantly, which could have a material
adverse effect on our business. Additionally, our stockholders may be diluted if
we raise additional funds through the sale of our stock.
WE SUBSTANTIALLY DEPEND UPON THIRD PARTIES FOR MANY ELEMENTS OF OUR
BUSINESS. We substantially depend upon third parties for several critical
elements of our business, including our development and licensing of content and
the distribution of our products.
o DEPENDENCE UPON STRATEGIC RELATIONSHIPS. We have entered into
strategic relationships with software distributors and publishers and OEM
providers, as well as licensing arrangements with numerous companies that own
the stories or characters used in many of our Multipath Movies. Our business
strategy is based largely on our strategic and licensing relationships and our
ability to continue to enter into similar relationships in the future. These
relationships may affect our ability to release our products for a number of
reasons, such as:
o A strategic partner or content licensor may, in the exercise
of its product approval rights, arbitrarily reject our
products, require expensive and time consuming changes to
the products or otherwise delay their introduction; and
o An OEM provider could change the shipping schedule of the
equipment with which our products are bundled and thereby
affect their distribution.
One delay has already occurred. Packard Bell NEC, who agreed to
distribute some of our Multipath Movie titles bundled with Packard Bell
computers, has significantly delayed the introduction of some titles beyond the
initially anticipated launch dates. Additionally, we believe that because
Packard Bell NEC is distributing our titles with only its middle- to high-
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end machines, Packard Bell NEC will not comply with its commitment to ship our
products with 6 million computers during the term of our agreement. We cannot be
certain that we will resolve these issues with Packard Bell NEC, that Packard
Bell NEC will achieve its committed shipment level or that adequate remedies
will be available to us to compensate for Packard Bell NEC's failure to perform
under our agreement.
Delays resulting from disagreements with licensors or joint venture
partners or our failure to renew or extend a key license, maintain any of our
strategic relationships or enter into new licenses and strategic relationships
on sound financial terms could materially adversely affect our business,
operating results and financial condition.
o USE OF INDEPENDENT SOFTWARE DEVELOPERS. In addition to
internally developing software, we use entertainment software created by
independent software developers. We have less control over the scheduling and
the quality of the software generated by independent contractors than over that
developed by our own employees. Our success will depend in part on our continued
ability to maintain relationships with skilled independent software developers,
and to enter into and renew product development agreements with such developers.
There can be no assurance that we will be able to maintain such relationships or
enter into and renew such agreements.
o USE OF INDEPENDENT CONTENT PROVIDERS. We use content developed
by third parties in our Multipath Movies. To be successful, we will need to
continue to develop new relationships and maintain existing relationships with
content providers. Many content providers are reluctant to grant broad licenses
for their properties covering multiple formats (e.g., a license covering both
Internet and television distribution rights) to companies without a proven track
record in the particular industry. When rights are available, there is often
significant competition for licenses. We may not be able to acquire licensed
content at prices or upon terms or conditions that we consider acceptable. Some
content licenses may require us to make advance payments of royalties and
guarantee minimum royalty payments. If our product sales are not sufficient to
recover these advances and guarantees, we will be required to write-off the
unrecovered portions of these payments, which could materially affect our
financial condition.
o USE OF A SINGLE VENDOR. We presently use a single vendor to
deliver our Multipath Movies through our Internet site. Any significant
interruption in service provided by this vendor could interrupt sales and
delivery of Multipath Movies and adversely affect our ability to conduct our
business and maintain customer satisfaction.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH DISTRIBUTION OF OUR PRODUCTS
OVER THE INTERNET. We distribute some of our Multipath Movies through our
Internet site and through a site on the CompuServe on-line service. In 1999, we
also intend to distribute some of our products through the @Home Network and
Kesmai Corporation's popular online games service, GameStorm. Our success
depends in part upon the widespread consumer acceptance and use of the Internet
as a medium of commerce. We have experienced delays in the development of
compression technologies designed to reduce the time it takes a user to download
from our website the data necessary to view a Multipath Movie. We believe that
large, time-consuming downloads have deterred potential users of our products
and have reduced the effectiveness of our marketing campaigns with Microsoft and
Disney. The development of these technologies continues to be a significant
component of our business strategy and a primary focus of our research and
development efforts. We believe that reductions in the time to download
Multipath Movie content over the Internet may be a requirement to any increase
in online sales of our products. However, we are not certain that we will be
able to sufficiently shrink download time to the degree that may be required to
satisfy consumer demands for downloads over non-broadband delivery systems and
such a failure would adversely affect marketing of our products over the
Internet.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE RETAIL DISTRIBUTION OF OUR
PRODUCTS. We anticipate that a significant amount of sales of Multipath Movies
will be made through distributors to traditional retailers. We are currently
expending significant resources to develop a retail sales channel. We will
likely be required to make these expenditures before we realize any significant
sales through a retail sales channel. We have no prior experience in the
development or management of a retail sales channel or sales through retail
stores. The competition for shelf space in retail stores is intense. Our
products are expected to constitute a small percentage of a retailer's sales
volume, and we cannot be certain that retailers will provide our products with
adequate levels of shelf space and promotional support. Due to the increased
competition for limited retail shelf space and promotional resources, retailers
and distributors are increasingly in a better position to negotiate favorable
terms of sale, including terms relating to price discounts, product return
rights and cooperative market development funds. Increased competition could
result in loss of shelf space for our products at retail stores, as well as
significant price competition, any of which could adversely affect our business
and financial condition.
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OUR PRODUCTS MAY BE RETURNED. At the time we ship our products to
retailers, we will establish reserves, including reserves which estimate the
potential for future product returns. We will base these reserves on seasonal
terms of sale and distributor and retailer inventories of our products, as well
as on other factors. We intend to recognize revenue from the sale of our
products upon shipment except for sales made to certain distributors where the
right of ownership does not pass at delivery. Product returns or price
protection concessions that exceed our reserves could materially and adversely
affect our business and financial condition, and could increase the magnitude of
quarterly fluctuations in our operating and financial results. Furthermore, if
we incorrectly assess the credit worthiness of customers who receive our
products on credit, we could be required to significantly increase the reserves
previously established. We cannot be certain that such future write-offs will
not occur or that amounts written off will not have a material adverse effect on
our business and financial condition.
WE RELY ON OTHERS TO MANUFACTURE OUR PRODUCTS FOR RETAIL DISTRIBUTION.
The production of 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. This process
will be performed for us by third party vendors in accordance with our
specifications and forecasts. Currently, we use primarily one vendor for these
services. While these services currently are available from multiple vendors and
at multiple sites, we cannot be certain that an interruption in the manufacture
of our products could be remedied without undue delay and without materially
affecting our operations. We do not have contractual agreements with any of our
third party vendors, which may result in our inability to secure adequate
services in a timely manner. Demand for these manufacturing services is
seasonal, with peak demand and service and production backlogs and delays
occurring in September, October and November of each year. We must compete for
capacity and priority with the CD-ROM products of many much larger competitors
with substantially greater influence with our vendors. If we fail to secure
adequate manufacturing services to timely produce and deliver our products, our
business and financial condition would be materially and adversely affected.
WE ARE SUBJECT TO FLUCTUATING OPERATING RESULTS AND SEASONAL BUYING
PATTERNS. We operate in an industry which is subject to significant fluctuations
in operating results from quarter to quarter. Factors that may influence our
quarterly operating results include:
o customer demand for our products;
o shipping schedules for PC hardware with which Multipath Movies
are bundled;
o introduction or enhancement of products by us and our
competitors;
o our ability to produce and distribute retail packaged versions
of Multipath Movies in advance of peak retail selling seasons;
o introduction or availability of new hardware;
o market acceptance of the Multipath Movies and other new
products;
o reviews in the industry press concerning our products or those
of our competitors;
o changes or anticipated changes in pricing by us or our
competitors;
o mix of distribution channels through which products are sold;
o product returns and order cancellations;
o the timing of orders from major customers;
o management's evaluation and judgment regarding a title's
acceptance; and
o unanticipated operating expenses and general economic
conditions.
Additionally, a majority of the unit sales for a product typically
occurs in the quarter in which the product is introduced. As a result, our
revenues may increase significantly in a quarter in which a major product
introduction occurs and may decline in following quarters.
Our expense levels are, to a large extent, fixed. We 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 our Multipath Movies would
have an immediate material adverse effect on our business, operating results and
financial condition. We have increased our 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 1998, to the extent that these expenses precede or are not subsequently
followed by increased revenues, our business, operating results and financial
condition will be materially adversely affected.
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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 our net revenues
historically have been generated in the fourth quarter of our fiscal year. We
expect our revenues and operating results will continue to reflect these
seasonal factors.
THE CARRYING AMOUNT OF CERTAIN CAPITALIZED MOVIE SOFTWARE COSTS AND
LICENSING ADVANCES MAY BE MATERIALLY REDUCED. Our accounting policy follows
Statement of Financial Accounting Standards No. 86 ("SFAS No. 86"), which
statement provides for the capitalization of software development costs once
technological feasibility is established. The capitalized costs are amortized
beginning on the date the product is made available for sale either on a
straight-line basis over the product's estimated revenue or on a ratio of
current revenues to total projected product revenues, whichever results in the
greater amortization amount. Prior to establishing technological feasibility,
software development costs are expensed as incurred. In accordance with SFAS No.
86, we capitalized certain development costs related to the production of
Multipath Movies during the third and fourth quarters of 1997 and the first
quarter of 1998. It is possible that our estimates of anticipated future gross
revenues or the remaining estimated economic life of these products, or both,
will be reduced significantly in the near term due to the actual performance of
our new products as compared to anticipated sales revenues for those products.
As a result, the carrying amount of the capitalized movie software costs and
licensing advances may be materially reduced in the short term. Multipath Movies
developed by the Company after the first quarter of 1998 are intended to be
viewed on our new Internet Digital Projector. We have written off amounts
incurred in the production of these Multipath Movies.
WE MAY EXPERIENCE PROBLEMS WITH OUR SOFTWARE TOOLS AND PRODUCTS. The
software tools that enable us to create Multipath Movies have been developed
over the past three years. Additional refinement of these tools may be necessary
to continue to enhance the Multipath Movie format. We cannot be certain that we
will be able to successfully develop improvements to these software tools. Also,
our products are complex and may contain undetected errors or defects when first
introduced or as new versions are released. In the past, we have discovered
software errors in certain of our new products and enhancements after their
introduction into the market. Because our products are complex, we anticipate
that software errors and defects will be present in new products or releases in
the future. While to date these errors have not been material, future errors and
defects could result in adverse product reviews and a loss of or delay in market
acceptance of our products.
WE MAY NOT BE ABLE TO MANAGE OUR RAPID EXPANSION AND GROWTH. We have
experienced a significant expansion due to the implementation of our business
plan, which includes:
o the introduction and marketing of our Multipath Movies;
o the management of our joint venture with Morgan Creek;
o the negotiation of additional content licensing and distribution
agreements;
o the management of Internet service providers; and
o the prior expansion of our prior Multipath Movie production
studio in Australia.
The growth of our operations and activities has placed and will continue
to place a significant strain on our management, operational, financial and
accounting resources. To successfully manage our operations, we will need to
continue to implement and improve our financial and management information
systems. Our ability to manage future growth, if any, and to increase production
levels and continue to market and distribute our products also will require us
to hire and train new employees, including management and technical personnel.
Our failure to successfully manage the continued implementation of our business
plan could have a material adverse effect on our business and financial
condition.
WE MAY EXPERIENCE RISKS ASSOCIATED WITH ACQUISITIONS. In the future, we
may acquire products, technologies or companies that are complimentary to our
business or that add new lines of business. The acquisitions involve numerous
risks, including:
o adverse short-term effects on the combined business' reported
operating results;
o diversion of management's attention;
o dependence on retention, hiring and training of key personnel;
24
<PAGE>
o amortization and/or impairment of goodwill and other intangible
assets; and
o risks associated with unanticipated problems or legal
liabilities.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL DEVELOPMENTS AND CHANGING
PRODUCT PLATFORMS. The entertainment software market and the PC industry is
subject to rapid technological developments and frequent changes in computer
operating environments. To compete successfully, we must continually improve and
enhance our existing products and technologies and develop new products and
technologies that incorporate technological advances. We must make these
improvements while remaining competitive in terms of performance and price. Our
success also will depend substantially upon our ability to anticipate the
emergence of, and adapt our products to, popular platforms for consumer
software.
We intend to design future products for use with new platforms. To
coordinate the release of our products with the release of a new platform, we
will need to make substantial investments in research and development at least
one to two years in advance of the widespread release of the platform in the
market. We cannot be certain that we will have the financial and technical
resources available to make these substantial expenditures. Additionally, a new
platform for which we develop products may not achieve market acceptance. As a
result, we may incur substantial research and development expenses in developing
products that do not sell well in the market. Our failure to anticipate the
emergence of widely accepted product platforms and to timely develop products
for use on these new platforms would have a material adverse effect on our
business and financial condition.
WE DEPEND ON KEY PERSONNEL. Our success has and will continue to depend
to a large extent upon certain key management, product development and technical
personnel, many of whom would be difficult to replace, particularly Mark Dyne,
our Chairman and Chief Executive Officer, and Kevin Bermeister, our President.
Although we have entered into employment agreements with certain officers, they
can terminate their employment agreements upon 30 days notice. Accordingly, we
cannot be certain that these employees will continue to be available to us. The
loss of the services of one or more of these key employees could have a material
adverse effect on our business. Our future success will depend in large part
upon our ability to attract, retain and motivate personnel with a variety of
technical and managerial skills, including software development and programming
expertise. Additionally, there is currently an industry-wide shortage of
technical personnel which makes it more difficult to attract and retain this
personnel. We cannot be certain that we will be able to retain and motivate our
managerial and technical personnel or attract additional qualified members to
our management or technical staff.
OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT HAVE OTHER EMPLOYMENT
COMMITMENTS. Our Chief Executive Officer and Chairman, Mark Dyne, and our
President, Kevin Bermeister, also serve as joint managing directors of Sega
Ozisoft Pty., Limited and other businesses. Mark Dyne also serves as Chairman of
the Board of Tag-It Pacific, Inc., a publicly held corporation. Kevin Bermeister
also serves as managing director of Sega Enterprises (Australia) Pty., Ltd.
Although Messrs. Dyne and Bermeister are active in our management, they are not
required to spend a specified amount of time with us nor are they able to devote
all of their time and resources to us. Further, we do not have employment
agreements with either Mr. Dyne or Mr. Bermeister.
WE MAY EXPERIENCE CONFLICTS OF INTERESTS WITH SOME OF OUR DIRECTORS AND
OFFICERS. Some of our directors and officers are directors or officers of our
potential competitors and/or strategic partners. These relationships may give
rise to conflicts of interest between the Company, on the one hand, and one or
more of our directors, officers and/or their affiliates, on the other hand. Our
Certificate of Incorporation provides that Mark Dyne and Kevin Bermeister are
required to present to us any corporate opportunities for the development of any
type of digital entertainment with the exception of opportunities for (i)
minority participation in the development of digital entertainment and (ii)
participation in the development by others of digital entertainment where
publishing and distribution rights for the product to be developed are offered
to Mr. Dyne and/or Mr. Bermeister solely for Australia, New Zealand and/or
Southern Africa. Our Certificate of Incorporation provides that Mr. Dyne and Mr.
Bermeister are not required to present to us any other opportunities that may
potentially be of benefit to us.
THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED. Our future
success and ability to compete depends in part upon our proprietary technology.
We rely on trademark, trade secret and copyright laws to protect our technology,
and require all employees and third-party developers to sign nondisclosure
agreements. We cannot be certain, however, that such precautions will provide
meaningful protection from competition or that competitors will not be able to
develop similar or superior technology independently. We do not copy-protect our
software, so it may be possible for unauthorized third parties to copy our
products or to reverse engineer or otherwise obtain and use information that we
regard as
25
<PAGE>
proprietary. Our customers may take inadequate precautions to protect our
proprietary information. If we must pursue litigation in the future to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others, we may not prevail
and will likely make substantial expenditures and divert valuable resources. In
addition, many foreign countries' laws may not protect us from improper use of
our proprietary technologies overseas. We may not have adequate remedies if our
proprietary rights are breached or our trade secrets are disclosed.
We believe that our products, including our software tools, do not
infringe any valid existing proprietary rights of third parties. The software
tools used to create Multipath Movies were developed by SAND, a division of Sega
Ozisoft. In connection with our acquisition of the software tools, Sega Ozisoft
represented to us that, to its best knowledge, the SAND technology and software
acquired by us does not infringe the proprietary rights of others. We rely
entirely on these representations of Sega Ozisoft. Additionally, although we
have received no communication from third parties alleging infringement of any
of their proprietary rights, we cannot be certain that any infringement claims
will not be made in the future. Any infringement claims, whether or not
meritorious, could result in costly litigation or require us to enter into
royalty or licensing agreements. If we are found to have infringed the
proprietary rights of others, we could be required to pay damages, cease sales
of the infringing products and redesign the products or discontinue their sale.
Any of these outcomes, individually or collectively, could have a material
adverse effect on our business and financial condition.
OUR STOCK PRICE IS VOLATILE. Our Common Stock is traded on the American
Stock Exchange. The market price of our Common Stock has been subject to
substantial volatility, and is likely to continue to be subject to significant
fluctuations due to many factors, including:
o variations in quarterly operating results;
o the gain or loss of significant contracts;
o changes in management;
o announcements of technological innovations or new products by us
or our competitors;
o legislative or regulatory changes;
o general trends in the industry; and
o recommendations by securities industry analysts.
Additionally, the stock market has experienced extreme price and trading
volume fluctuations that have affected the market price of securities of many
technology companies. These fluctuations have, at times, been unrelated to the
operating performances of the specific companies whose stock is affected. In the
past, our Common Stock has not experienced significant trading volume, has not
been actively followed by stock market analysts and has had limited
market-making support from broker-dealers. If market-making support and analyst
coverage does not continue at present or greater levels, the average trading
volume in our Common Stock may not increase or even sustain its current levels.
We cannot be certain that an adequate trading market will exist to sell large
positions in our Common Stock.
OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
As of December 31, 1998, our officers and directors owned, in total,
approximately 22.3% of the outstanding shares of our Common Stock. As a result,
our officers and directors are able to exert influence over the outcome of all
matters submitted to a vote of the holders of our Common Stock, including the
election of our Board of Directors. The voting power of these officers and
directors could also discourage others from seeking to acquire control of us
through the purchase of the Common Stock, which might depress the price of our
Common Stock.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES. Our Board of
Directors can issue up to 1,000,000 shares of Preferred Stock and determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by our stockholders.
Our Board of Directors could issue the Preferred Stock with voting, liquidation,
dividend and other rights superior to the rights of our Common Stock. In March
1998, we adopted a stockholder's rights plan. Under the rights plan we
distributed one preferred share purchase right for each outstanding share of our
Common Stock outstanding on April 2, 1998. Upon the occurrence of certain
triggering events related to an unsolicited takeover attempt of us, each
purchase right not owned by the party or parties making the unsolicited takeover
attempt will entitle its holder to purchase shares of our Series A Preferred
Stock at a value below the then market value of the Series A Preferred Stock.
The rights of holders of our Common Stock will be subject to, and may be
adversely affected by, the rights of 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
26
<PAGE>
corporate purposes, could make it more difficult for a third party to acquire a
majority of our outstanding voting stock. Further, certain provisions of our
Certificate of Incorporation and Bylaws and of Delaware law could delay or make
more difficult a merger, tender offer or proxy contest involving us.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT, INC.
Report of Independent Accountants........................................... 29
Consolidated Balance Sheet as of December 31, 1998......................... 30
Consolidated Statements of Operations for the years ended
December 31, 1997 and December 31, 1998................................... 31
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and December 31, 1998....................... 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and December 31, 1998................................... 33
Notes to Consolidated Financial Statements.................................. 35
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brilliant Digital Entertainment, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations and stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Brilliant Digital Entertainment, Inc. (the "Company") and its subsidiary at
December 31, 1998, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
March 29, 1999, except for the third paragraph of Note 11, as to which the date
is April 14, 1999
Los Angeles, California
29
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 3,187
Accounts receivable .......................................... 2,139
Other assets ................................................. 310
--------
Total current assets ............................................. 5,636
Property, plant and equipment, net ............................... 754
Movie software costs ............................................. 626
Other assets, net ................................................ 437
--------
Total assets ..................................................... $ 7,453
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 274
Accrued expenses ............................................. 1,250
Current portion of note payable .............................. 28
--------
Total current liabilities ........................................ 1,552
Note payable, less current portion ............................... 97
Convertible debenture ............................................ 100
Other long term liabilities ...................................... 146
--------
Total liabilities ................................................ 1,895
Commitments and contingencies
Stockholders' equity:
Preferred Stock ($0.001 par value; 1,000,000 shares
authorized; no shares issued or outstanding) ............. --
Common Stock ($0.001 par value; 30,000,000 shares
authorized; 9,409,001 shares issued and outstanding) .... 9
Additional paid-in capital ................................... 21,357
Accumulated deficit .......................................... (15,685)
Accumulated other comprehensive income (loss) ................ (123)
--------
Total stockholders' equity ....................................... 5,558
========
Total liabilities and stockholders' equity ....................... $ 7,453
========
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED
DECEMBER 31,
---------------------
1997 1998
------- -------
Revenues:
Software sales .................................... $ 2,246 $ 221
Development fees .................................. 235 210
------- -------
Total revenues ............................... 2,481 431
Cost of revenues ..................................... 44 1,383
------- -------
Gross profit (loss) .................................. 2,437 (952)
Operating expenses:
Sales and marketing ............................... 1,090 1,785
General and administrative ........................ 2,217 2,936
Research and development .......................... 1,709 3,798
Depreciation ...................................... 214 390
------- -------
Total operating expenses ..................... 5,230 8,909
------- -------
Income (loss) from operations ........................ (2,793) (9,861)
Other income (expense):
Export market development grant ................... 148 73
Gain (loss) on foreign exchange
transactions .................................. 27 (5)
Interest income ................................... 313 399
Interest expense .................................. -- (31)
------- -------
Total other income (expense) ................. 488 436
------- -------
Income (loss) before income taxes .................... (2,305) (9,425)
Income taxes ......................................... -- --
------- -------
Net income (loss) .................................... $(2,305) $(9,425)
======= =======
Other comprehensive income:
Foreign currency translation adjustment
(net of tax effects of $ 0) ..................... (168) 72
------- -------
Comprehensive income (loss) .......................... $(2,473) $(9,353)
======= =======
Basic and diluted net income (loss) per share ........ $ (0.31) $ (1.00)
======= =======
Weighted average number of shares
used in computing basic and diluted
net income (loss) per share ....................... 7,384 9,403
======= =======
See Notes to Consolidated Financial Statements.
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<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED ACCUMULATED
--------------------- ADDITIONAL EARNINGS OTHER
NO. OF PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) INCOME TOTAL
-------- ------ --------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .. 7,200,001 $ 7 $11,320 $ (3,955) $ (27) $ 7,345
Grant of warrants .......... -- -- 140 -- -- 140
Grant of stock options ..... -- -- 12 -- -- 12
Exercise of stock options .. 3,000 -- -- -- -- --
Public offering, net of
expenses of $1,202 ....... 2,200,000 2 9,796 -- -- 9,798
Foreign exchange translation -- -- -- --
(net of tax of $0) ..... (168) (168)
Net loss ................... -- -- -- (2,305) -- (2,305)
--------- ---- ------- -------- ---- -----
Balance at December 31, 1997 .. 9,403,001 9 21,268 (6,260) (195) 14,822
Grant of warrants .......... -- -- 80 -- -- 80
Grant of stock options ..... -- -- 9 -- -- 9
Issuance of shares ......... 6,000 -- -- -- -- --
Foreign exchange translation
(net of tax of $0) ....... -- -- -- -- 72 72
Net loss ................... -- -- -- (9,425) -- (9,425)
--------- ---- ------- -------- ---- -----
Balance at December 31, 1998 .. 9,409,001 $ 9 $21,357 $(15,685) $(123) $ 5,558
========= ==== ======= ======== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................................... $ (2,305) $ (9,425)
Adjustments to reconcile net income (loss)
to the net cash provided by (used in)
operating activities:
Depreciation and other amortization .............................. 473 691
Amortization of movie software costs ............................. -- 1,146
Effect of warrants granted ....................................... 140 64
Effect of stock options granted .................................. 12 9
Changes in operating assets and liabilities:
Accounts receivable ............................................ (1,986) (51)
Movie software costs ........................................... (1,284) (795)
Other assets ................................................... (478) (80)
Accounts payable and accruals .................................. 1,225 (487)
Deferred revenue ............................................... (154) --
-------- --------
Net cash provided by (used in) operating
activities ......................................................... (4,357) (8,928)
INVESTING ACTIVITIES
Purchases of equipment ............................................... (599) (549)
-------- --------
Net cash used in investing activities ................................ (599) (549)
FINANCING ACTIVITIES
Proceeds from issuance of shares ..................................... 9,798 --
Proceeds from issuance of convertible debenture and warrants,
net of costs ............................................. ......... -- 83
Proceeds from issuance of note ....................................... -- 104
Repayments of notes .................................................. -- (13)
Repayment of amounts payable to related parties ...................... (78) --
-------- --------
Net cash provided by financing activities ............................ 9,720 174
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................................... 4,764 (9,303)
Translation adjustments .............................................. (17) 152
Cash and cash equivalents at beginning
of period .......................................................... 7,591 12,338
-------- --------
Cash and cash equivalents at end of
period ............................................................. $ 12,338 $ 3,187
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest ......................................................... $ -- $ 26
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
The Company has an insurance policy with a term extending to November 2000.
Insurance premiums of $240,179 for coverage after December 31, 1998 are included
in Other Assets, current and long term, and Liabilities, current and long term,
and represent a non cash financing activity.
34
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Brilliant Digital Entertainment, Inc. ("Brilliant" or the "Company") is
a production and development studio producing digital entertainment for
distribution over the Internet and on CD-ROM and DVD. In July 1996, the Company
incorporated in the State of Delaware and, in August 1996, issued an aggregate
of 1,000,000 shares of its Common Stock in exchange for all of the capital stock
of Brilliant Interactive Ideas, Pty. Ltd., a company incorporated in the State
of New South Wales, Australia ("BII Australia"). Historically, BII Australia
developed, produced and marketed interactive multimedia titles for the education
and entertainment markets. BII Australia has one subsidiary, Sega Australia New
Development ("SAND"), which the Company acquired in September 1996. SAND owns
the rights to proprietary software tools which are designed to allow the Company
to both develop a new genre of digital entertainment products, and to cost
effectively produce ancillary products. The Company operates principally in the
computer software industry.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of Brilliant and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
Software sales entered into prior to December 15, 1997 were accounted
for in accordance with AICPA Statement of Position ("SOP") 91-1, "Software
Revenue Recognition." For transactions entered into after December 15, 1997 the
Company recognizes revenue from the sale of software in accordance with SOP
97-2, "Software Revenue Recognition". SOP 97-2 provides guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software.
SOFTWARE SALES: The Company grants distribution rights to its CD-ROM
products to distributors in exchange for a non-refundable minimum fixed fee and
a percentage of sales of the products. Revenue related to the non-refundable
minimum fixed fee is recognized when the CD-ROM master is delivered to the
customer and the other criteria of SOP 97-2 are met. Revenue related to a
percentage of sales is recognized upon notification by the distributor that a
royalty has been earned by the Company. Software sales resulting from the
Company selling completed software products are recognized upon shipment of
product. It is the Company's policy to provide for estimated returns at the time
software sales revenue is recognized. At December 31, 1998 the Company had a
provision for returns of $125,000.
DEVELOPMENT FEES: The Company receives development fees in exchange for
the development of CD-ROM products pursuant to agreements with customers. 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. Generally, the customers will recoup the development fees from
royalties paid from the revenues generated by the products.
COST OF REVENUES
Cost of revenues consists primarily of royalties to third parties,
amortization of capitalized movie software costs, and the direct costs required
to reproduce and package software products.
35
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
RESEARCH AND DEVELOPMENT COSTS
The Company incurs research and development costs relating to the
development of traditional CD-ROM software tools which provide the technical
infrastructure for production of CD-ROM titles produced by the Company. The
Company incurred research and development costs of $1,709,000 and $3,798,000 for
the year ended December 31, 1997 and the year ended December 31, 1998,
respectively.
MOVIE SOFTWARE COSTS
Movie software costs consist of the costs of development and production
of digitally animated Multipath Movies including labor, material and production
overhead.
The Company's accounting policy follows Statement of Financial
Accounting Standards No. 86 ("SFAS No. 86"), which provides for the
capitalization of software development costs once technological feasibility is
established. The capitalized costs are then amortized beginning on the date the
product is made available for sale either on a straight-line basis over the
estimated product life or on a ratio of current revenues to total projected
product revenues, whichever results in the greater amortization amount. Prior to
reaching technological feasibility, the Company expenses all costs related to
the development of both its software tools and Multipath Movie titles. The
Company achieved technological feasibility of its original Digital Projector
during the third quarter of 1997 and began capitalizing certain development
costs related to the production of Multipath Movies in accordance with SFAS No.
86. Since the date of achieving technological feasibility, the costs of
developing Multipath Movies intended to be viewed on the original projector have
been capitalized in accordance with SFAS No. 86. Multipath Movies developed by
the Company subsequent to the first quarter of 1998 are intended to be viewed on
a new Digital Projector, which was released in the fourth quarter of 1998. The
Company has written off amounts incurred subsequent to the first quarter of 1998
in the development and production of Multipath Movies designed to be viewed on
the new Digital Projector. As the technology on which the Company's product is
designed to operate is continuously changing, management considers that a
reserve against capitalized costs is necessary. Therefore no additional movie
development costs are anticipated to be capitalized in the future. To the extent
capitalized movie software costs are attributable to titles which have begun to
ship, they are subject to amortization. Amortized amounts of $312,000 have been
included in costs of revenues for the year ended December 31, 1998.
Movie software costs are stated at the lower of unamortized cost or
estimated net realizable value. To the extent that unamortized movie software
costs exceed anticipated revenues, an additional amortization charge is made to
current operations to reduce the capitalized costs to net realizable value. For
the year ended December 31, 1998, the Company expensed $834,000 to reduce the
capitalized costs to net realizable value.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when acquired to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated useful
lives or lease life ranging up to five years.
INCOME TAXES
The Company uses the asset and liability method to account for income
taxes as required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rules and laws that will be in effect when the differences are expected to
reverse.
36
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
FOREIGN CURRENCY TRANSLATION
The functional currency of BII Australia is its local currency,
Australian dollars. Assets and liabilities of BII Australia are translated into
U.S. dollars (the reporting currency) using current exchange rates ($0.6123 at
December 31, 1998), and revenues and expenses are translated into U.S. dollars
using average exchange rates ($0.7424 for the year ended December 31, 1997 and
$0.6322 for the year ended December 31, 1998). The effects of foreign currency
translation adjustments are deferred and included as a component of
stockholders' equity.
Foreign currency transaction gains and losses result from the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Foreign currency transaction gains (losses) are included in
the statements of operations.
NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"). SFAS No. 128, effective for periods ending after December 15, 1997,
revised the computation, presentation, and disclosure requirements of earnings
per share. Principal among computation revisions is the replacement of primary
earnings per share with basic earnings per share, which does not consider common
stock equivalents. In addition, SFAS No. 128 modifies certain dilutive
computations and replaces fully diluted earnings per share with diluted earnings
per share. Common equivalent shares from stock options and warrants (using the
treasury stock method) have been included in this computation when dilutive.
Options and warrants representing common shares of 1,223,262 and 2,166,262
shares were excluded from the average number of common and common equivalent
shares outstanding in the diluted EPS calculation for the years ended December
31, 1997 and 1998, respectively, because they were anti-dilutive.
STOCK OPTIONS
The Company accounts for employee stock options or similar equity
instruments in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS
No. 123 defines a fair-value-based method of accounting for employee stock
options or similar equity instruments. This statement gives entities a choice to
recognize related compensation expense by adopting the new fair-value method or
to measure compensation using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, the former standard. If the former
standard for measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effect of using the new measurement criteria. The Company
has used the intrinsic value method prescribed by APB Opinion No. 25. See Note 5
for supplemental disclosure.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company has investment policies that limit investments
to short-term investment grade securities. Accounts receivable are principally
from distributors and retailers of the Company's products. The Company performs
credit evaluations and generally does not require collateral. At December 31,
1998, 88% of the Company's accounts receivable arose from a non-exclusive CD-ROM
Distribution Agreement (the "Distribution Agreement") with one customer, Packard
Bell NEC. Management is aware that Packard Bell NEC has significantly delayed
distribution of the Company's titles bundled with Packard Bell NEC's computers.
In addition to the delay, Packard Bell NEC has bundled the Company's software on
significantly fewer computers than required. As a result of these factors
management believes that Packard Bell NEC will not be able to comply with the
terms of the Distribution Agreement, specifically Packard Bell NEC's commitment
to ship the Company's software with 6 million computers with at least 2 million
of such computers being shipped within 12 months of the commencement of such
shipment, subject to an extension not to exceed 6 months (the "shipment
period"). Such shipment triggers Packard Bell NEC's obligation to pay a minimum
royalty of $1,973,333 at the rate of $1 for each Packard Bell NEC computer
shipped with the Company's product. The full minimum royalty amount is
contractually due by no later than the end of the shipment period, regardless of
actual shipments by Packard Bell NEC of personal computers containing the
Company's product. Management believes that it has a contractual right to
payment by Packard Bell NEC of the minimum guaranteed amount no later than the
end of the shipment period.
The Company analyzes customer receivables to determine the necessity of
an allowance for doubtful accounts. For the year ended December 31, 1998 a
provision of $15,000 was considered necessary.
37
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for prior years have been reclassified to conform with
the 1998 financial statement presentation.
3. RELATED PARTY TRANSACTIONS
Mark Miller, Brilliant's Vice President, Operations and Production and
Director, is a shareholder and director of Pacific Interactive Education Pty.
Ltd. ("PIE"). BII Australia periodically purchases certain computer equipment
from PIE. For the year ended December 31, 1998, BII Australia's purchases
totaled $41,000 in computer equipment and $9,000 in software.
Mark Miller is a shareholder of Multimedia Connexion Pty. Ltd. BII
Australia periodically purchases hardware and software from Multimedia Connexion
Pty. Ltd. For the year ended December 31, 1997 and the year ended December 31,
1998, BII Australia purchased computer equipment totaling $121,000 and $57,000,
respectively. Additionally, Mrs. S. Miller received $27,000 from BII Australia
for administrative services during the year ended December 31, 1998.
Mark Dyne, Brilliant's Chairman and Chief Executive Officer and
Director, is a director of Monto Holdings Pty. Ltd. ("Monto"). In 1995 Monto
entered into a multimedia production agreement with BII Australia and paid BII
for the production of completed software packages. BII Australia has arranged
for publication and distribution of completed software packages and is obligated
to pay to Monto 50% of the net receipts from the sale of the software packages.
At December 31, 1997 and at December 31, 1998 the liability to Monto was $4,000.
There were no transactions during 1998.
Mark Dyne and Kevin Bermeister, Brilliant's President and Director, are
directors and shareholders of Sega Ozisoft Pty. Ltd. ("Sega Ozisoft"). Sega
Ozisoft purchased $26,000 of product from the Company during the year ended
December 31, 1998.
Kevin Bermeister and his personal assistant received payment from BII
Australia for management services through Bassac Holdings P/L, a company
controlled by Kevin Bermeister, in the amount of $27,000 for the year ended
December 31, 1998.
Kevin Bermeister and Mark Dyne are both directors and shareholders of
Packard Bell Pty. Ltd. BII Australia purchased an aggregate of approximately
$7,000 and $13,000 in goods from Packard Bell Pty. Ltd. during the year ended
December 31, 1997 and the year ended December 31, 1998, respectively.
Averil Associates, Inc. ("Averil Associates"), a financial advisory firm
founded and controlled by Diana Maranon, a director of the Company, has
performed services for the Company including investigation of strategic
alternatives and assistance with the Company's common stock offerings. As
consideration for such services, the Company paid to Averil Associates $22,000
for the year ended December 31, 1997, and $30,000 for the year ended December
31, 1998, plus out of pocket expenses. In 1996 the Company granted to Chloe
Holding, Inc. ("Chloe"), an affiliate of Averil Associates, currently
exercisable warrants to purchase 40,222 shares of Common Stock with an exercise
price of $0.0326 per share. In connection with the Company's December 1997
offering of Common Stock, the Company made a cash payment to Averil Associates
of $180,000 and granted to Chloe warrants to purchase 15,040 shares of Common
Stock at an exercise price of 110% of the offering price.
Gary Barber was a shareholder of Morgan Creek Productions, Inc. and a
director of the Company from October 1996 until November 1998 at which time he
tendered his resignation from the Company's Board of Directors. From May 1989
until July 1997, Mr. Barber was employed by Morgan Creek Productions, Inc. From
January 1995 until July 1997, he was Vice Chairman and Chief
38
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Operating Officer of Morgan Creek Productions, Inc. In September 1996, the
Company entered into a strategic relationship with Morgan Creek Interactive,
Inc. ("Morgan Creek"), an affiliate of Morgan Creek Productions, Inc., to
provide creative product for the Company's Multipath Movies. Pursuant to the
agreement between the Company and Morgan Creek, the Company is obligated to fund
entirely the development of two Multipath Movies. The first project commenced
under this agreement is a thirteen episode comedy adventure series featuring the
Ace Ventura character.
4. NOTES PAYABLE
On July 17, 1998 the Company entered into a Senior Secured Promissory
Note (the "Note"). The original principal amount of $103,893 plus interest at a
rate of 15.18% is due in 60 equal monthly payments plus one final payment equal
to 10% of the original principal amount. The Note is collateralized by office
furniture and equipment.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held
of record on all matters on which the holders of Common Stock are entitled to
vote. The holders of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors out of funds legally available therefore.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled subject to the rights of holders of
Preferred Stock issued by the Company, if any, to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision is made for each class of stock, if any, having preference over
the Common Stock.
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, which is convertible into Common Stock, at a value
below the then current market value of the preferred stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the share purchase rights and of any Preferred
Stock that may be issued in the future.
The holders of Common Stock have no preemptive or conversion rights and
they are not subject to further calls or assessments by the Company. There are
no redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock,
par value $0.001 per share. As of December 31, 1998 no shares were issued or
outstanding. The Board of Directors has the authority to issue the authorized
and unissued Preferred Stock in one or more series with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock.
WARRANTS
In September 1997, the Company issued warrants to purchase 200,000
shares of the Company's Common Stock, exercisable at $10.00, in connection with
a distribution agreement. The warrants expired in February 1999. The value of
the warrants is calculated to be $140,000 which has been recorded as an expense
charge to operations with a corresponding credit to stockholders' equity.
39
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
In July 1998, the Company issued warrants to purchase 300,000 shares of
the Company's Common Stock exercisable at $4.00 per share to a computer chip
manufacturer. The warrants were issued as partial consideration for the computer
chip manufacturers' obligations under that certain Software Development
Agreement, dated as of July 14, 1998, between the Company and the partner. The
warrants are currently exercisable and expire in July 2001. In association with
the warrants, the Company recognized $64,000 of consulting expense with the
balance of the value recorded in Other Assets at December 31, 1998.
On December 3, 1998, the Company issued a $100,000 convertible debenture
due December 1, 2000 and a Common Stock purchase warrant to purchase up to
1,800,000 shares of Common Stock expiring on November 30, 2001. The convertible
debenture bears interest at a rate of 4% payable quarterly in arrears.
The debenture holder may convert the debenture into shares of Common
Stock at any time. The conversion price is 86% of the market price (as described
below) on the date that the holder delivers a conversion notice. On the maturity
date of the debenture, the unpaid balance of the debenture and any accrued and
unpaid interest will convert automatically into shares of Common Stock valued at
the conversion price on the maturity date. The Company can, at any time, prepay
all or any portion of the outstanding balance plus accrued interest in cash or
in common shares at the conversion price.
The holder of the warrant may exercise the warrant in full at an
exercise price of $25 per share from October 1, 2001 until the warrant expires.
The Company can elect to cancel the warrant in full upon 30 days written notice.
The Company may call a portion of the warrant for redemption at any time,
subject to minimum and maximum limits and provided that the "market price" of
the Common Stock is at least $1.00 per share and that a registration statement
covering the shares underlying the warrant is effective. Upon any call, the
warrant holder may acquire shares by exercising the portion of the warrant
called. The exercise price will be 88% of the "market price," defined as the
lowest trade price of Brilliant's Common Stock on the American Stock Exchange
over the last ten trading days prior to the redemption notice date. If the
market price is $4.00 or less, the exercise price will be reduced to 86% of the
market price. The holder may elect not to exercise shares upon a call. In this
case the holder must issue the Company a convertible debenture similar to that
described above, equal to the value of the shares not exercised at the
conversion price. In addition warrants not exercised upon call by the Company
are canceled. See Note 11 to the Consolidated Financial Statements for a
description of the rescision of this convertible debentures and warrant
subsequent to year end.
As compensation for financial advisory services in connection with the
issuance of the debenture and the warrant, the Company issued 6,000 shares of
the Common Stock to its financial advisor the value of which has been recorded
as a cost of raising capital. A registration statement covering the shares
underlying the convertible debenture and the warrant has not been declared
effective by the governing authoritative body. The Company has issued the shares
of Common Stock in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
1996 STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "1996 Plan") which became
effective on September 13, 1996. Each director, officer, employee or consultant
of the Company or any of its subsidiaries is eligible to be considered for the
grant of awards under the 1996 Plan. The maximum number of shares of Common
Stock that may be issued pursuant to awards granted under the 1996 Plan is
1,080,000, subject to certain adjustments to prevent dilution. Any shares of
Common Stock subject to an award which for any reason expires or terminates
unexercised are again available for issuance under the 1996 Plan. The maximum
number of shares of Common Stock with respect to which options or rights may be
granted under the 1996 Plan to any executive or other employee during any fiscal
year is 100,000, subject to certain adjustments to prevent dilution. Although
any award that was duly granted may thereafter be exercised or settled in
accordance with its terms, no shares of Common Stock may be issued pursuant to
any award made after September 13, 2006. Options granted generally have a term
of 10 years and usually vest over 4 years at the rate of 25% per year beginning
on the first day in the year subsequent to the year of the grant.
During 1996 the Board had granted options covering an aggregate of
185,000 shares of Common Stock to certain directors (125,000 shares) and
employees (60,000 shares) of the Company, with an exercise price of $10 per
share. In November 1996, the exercise price of the options was repriced to $4.00
per share. The directors options were granted effective as each director joined
the Board of Directors and were immediately fully vested. The options granted to
employees vest over a four-year period. In connection with these employee stock
options, $15,000 was recognized as compensation
40
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
expense in each of the years ended December 31, 1997 and December 31, 1998, and
deferred compensation of $31,000 is included in other assets at December 31,
1998.
During 1997 the Company granted additional options covering 101,000
shares of Common Stock to certain employees of the Company with a weighted
average exercise price of $5.19 per share, and vesting over a 4 year period. In
connection with these employee stock options, compensation expense of $12,000
was recognized in 1997.
During April 1998 the Company authorized the issuance of an additional
527,000 options to employees pursuant to the 1996 Plan, of which 502,000 had an
exercise price of $2.75 per share and 25,000 had an exercise price of $2.31 per
share. The options vest over a four year period. 65,000 options were forfeited
with the separation of seven employees from the Company.
In October 1998 all of the outstanding stock options were repriced at
$1.50 per share. As a term of this repricing, all repriced options which had
already vested were not exercisable for a period of 120 days from the date of
the repricing. In addition, those repriced options which were scheduled to vest
on January 1, 1999 would now vest on April 1, 1999.
In October 1998 the Company granted 100,000 options to an outside
consultant. These options have a strike price of $1 13/16 per share which was
equal to the market price of the Company's Common Stock on the date of grant.
10,000 of the options vested immediately with the balance vesting upon the
achievement by the outside consultant of certain performance criteria by no
later than April 30, 1999. The Company has recorded consulting expense of
$9,000 during the year ended December 31, 1998 which is equal to the value of
the options which vested immediately.
The following table summarizes stock option activity:
NUMBER
OF
SHARES OPTION PRICE
--------- ------------
Outstanding at December 31, 1996 ......... 185,000 $4.00
Granted .................................. 101,000 $0.01-$6.38
Exercised ................................ (3,000) $0.01
---------------------------------------------------------------------
Outstanding at December 31, 1997 ......... 283,000 $4.00-$6.38
Granted .................................. 627,000 $1.50-$2.75
Forfeited ................................ (65,000) $1.50-$5.875
---------------------------------------------------------------------
Outstanding at December 31, 1998 ......... 845,000 $1.50
Exercisable at December 31, 1998 ......... 0
As discussed in Note 2, the Company has adopted the disclosure-only
provisions of SFAS No. 123 which requires the use of option valuation models to
provide supplemental information regarding options granted after 1994. Pro forma
information regarding net loss and loss per share shown below was determined as
if the Company had accounted for its employee stock options using the fair value
method pursuant to SFAS No. 123.
The fair value of the options as examined at the date of grant is based
on a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1998, respectively: interest rates of 6.0% and 5.5%;
dividend yields of 0% for both years; volatility factors of the expected market
price of the Company's common stock of 45.0% and 65.0%; and expected life of the
options of 3 years for both years. These assumptions resulted in a weighted
average fair value of $2.03 and $1.12 per share for stock options granted in
1997 and 1998, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have not been traded. In addition, the assumptions used in option
valuation models are highly subjective, particularly the expected stock price
volatility of the underlying stock. Because changes in these subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.
41
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
These pro forma amounts may not be representive of future disclosures
since the estimated fair value of the options is amortized to expense over the
options' vesting periods. The pro forma effect on net loss for 1997 and 1998 is
not representative of the pro forma effect on net income (loss) in future years
because it reflects expense for only one year's vesting. Pro forma information
in future years will also reflect the amortization of any stock options granted
in succeeding years. The Company's pro forma information is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------- -------------
Net loss, as reported........................... $(2,305,000) $(9,425,000)
Net loss, pro forma............................. $(2,409,000) $(9,606,000)
Basic and diluted loss per share, as reported... $(0.31) $(1.00)
Basic and diluted loss per share, pro forma..... $(0.33) $(1.02)
6. COMMITMENTS AND CONTINGENCIES
In 1995, Pick Two Limited ("Pick Two"), made a $193,000 non-refundable
advance to BII Australia to develop certain software. In 1996, Pick Two made an
additional $19,000 non-refundable advance to BII Australia. These advances were
non-interest bearing, and were to be repaid from proceeds from the sales of the
completed software. During the six months ended December 31, 1996, approximately
$48,000 of the advances were repaid out of proceeds received from the sale of
certain research materials. During the year ended December 31, 1997 the balance
of the advances were recognized as revenue. During 1998 there were no further
advances or revenue recognition.
In September 1996, the Company entered into a strategic relationship
with Crawford Productions Pty., Ltd. ("Crawford") to provide creative product
for the Company's Multipath Movies. Pursuant to the agreement between the
Company and Crawford, the Company is obligated to contribute up to one half of
the costs incurred to develop and produce each project selected by the parties,
if any, for development into Multipath Movie titles, which cost per film is
anticipated to be approximately $790,000. To date, no projects have been
identified for development by the parties and it is unlikely that any project
will be identified in the future.
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.
At December 31, 1998, the Company was obligated under certain licensing
agreements to make minimum payments totaling $142,000 for use of certain
properties and characters in development of its products.
The Company leases its facilities under operating lease agreements
expiring through 2003. Future minimum payments as of December 31, 1998 under
these leases are as follows:
1999 $ 321,000
2000 283,000
2001 128,000
2002 71,000
2003 6,000
===========
$ 809,000
===========
Rent expense was $166,000 and $273,000 for the year ended December 31,
1997 and the year ended December 31, 1998, respectively.
42
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
7. INCOME TAXES
The Company has adopted the asset and liability method of accounting for
income taxes. Income tax expense shown in the statements of operations is
calculated on the operating profit before tax, adjusted for items which, due to
treatment under income tax legislation, create permanent differences between
accounting profit and taxable income. Deferred income taxes under FAS No. 109
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
BII Australia has NOL's of approximately $371,000 at December 31, 1998,
which are available for offset against Australian taxable income in the future.
These NOL's may be carried forward indefinitely. At December 31, 1998 the
Company's U.S. parent has cumulative tax losses resulting in NOL carry forwards
of approximately $14,312,000. The losses will begin to expire in the year 2011.
No tax benefit has been recorded for these NOL's.
The significant components of the net deferred tax assets and
liabilities recorded in the accompanying consolidated balance sheet as of
December 31, 1998 are as follows:
DECEMBER 31,
1998
------------
Deferred tax assets:
Acquired in-process research and development............. $270,000
Stock options............................................ 62,000
Warrants issued.......................................... 523,000
Accruals and reserves ................................... 219,000
Net operating loss carry forward......................... 5,863,000
Other deferred tax assets................................ 4,000
------------
Total deferred tax assets................................ 6,941,000
Valuation allowance...................................... 6,623,000
------------
Net deferred tax assets..................................... 318,000
Deferred tax liabilities:
Deferred movie software costs............................ 318,000
============
Net deferred tax assets (liabilities) ...................... --
============
The net change in the total valuation allowance for the year ended
December 31, 1998 was an increase of $4,275,000.
43
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
----------- ------------
Federal income tax rate ......................... 34 34
Foreign and U. S. tax effect attributable
to foreign operations ........................ -- --
Effect of net operating loss and net
operating loss carry forward ................. (34) (34)
---- -----
Effective income tax rate ....................... 0 0
==== =====
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
1998
----------
Computers and equipment................... $1,315,000
Leasehold improvements.................... 191,000
Furniture and fixtures.................... 124,000
----------
1,630,000
Less accumulated depreciation............. (876,000)
----------
$ 754,000
==========
9. ACCRUED EXPENSES
Accrued Expenses consist of the following:
DECEMBER 31,
1998
-----------
Employee compensation.............. $ 873,000
Insurance.......................... 144,000
Advertising........................ 88,000
Legal and accounting............... 71,000
Other.............................. 74,000
-------------
$ 1,250,000
===========
44
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company's operations consist of the operations of BII in Australia
and of Brilliant in the United States and the United Kingdom. The following
schedule sets forth the revenues and accounts receivable of the Company by
geographic area:
<TABLE>
<CAPTION>
UNITED
STATES AUSTRALIA OTHER
------------ ------------ -----------
<S> <C> <C> <C>
Year ended December 31, 1997:
Revenues from unaffiliated customers....... $2,229,000 $196,000 $56,000
Revenues from affiliated customers......... -- -- --
------------ ------------ -----------
Total revenues............................. $2,229,000 $196,000 $56,000
============ ============ ===========
Year ended December 31, 1998:
Revenues from unaffiliated customers....... $303,000 $25,000 $77,000
Revenues from affiliated customers......... -- 26,000 --
------------ ------------ -----------
Total revenues............................. $303,000 $51,000 $77,000
============ ============ ===========
Accounts Receivable as of:
December 31, 1998......................... $2,025,000 $37,000 $77,000
============ ============ ===========
</TABLE>
For each of the periods shown above, the movie software costs, a portion
of the operating expenses and most of the research and development costs of the
Company were incurred and paid in Australia. The production costs associated
with the duplication and packaging, royalties due to third parties, a major
portion of the sales and marketing costs, and certain corporate expenses are
incurred and paid in the United States. The identifiable assets of the Company,
other than accounts receivable and corporate assets, are predominantly related
to the operations in Australia.
For the year ended December 31, 1997, one customer accounted for more
than 10% of total revenues (Packard Bell NEC, 80% or $1,973,000). For the year
ended December 31, 1998 a computer chip manufacturer accounted for 51%
($201,000) of the reported revenue, and GT Interactive and One Stop accounted
for 28% ($112,000) and 10%($44,000) of revenues, respectively.
11. SUBSEQUENT EVENT
In March 1999 the Company entered into a securities purchase agreement
(the "Agreement") with a private investor. The Agreement replaced the equity
financing arrangement the Company entered into with AMRO International, S.A. in
December 1998, which provided for a convertible debenture and a warrant as
described in Note 5 to the Consolidated Financial Statements. This equity
financing arrangement was rescinded concurrently with the execution of the
Agreement.
45
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The Agreement gives the Company the right at its election to sell to the
investor up to a total of $6 million of the Company's Common Stock at a discount
to its "market price" from time to time during the three year term of the
agreement. Each sale of shares under the agreement is subject to certain minimum
and maximum dollar amounts and certain other conditions, including that the
"market price" of the Common Stock at the time the Company gives a sale notice
is at least $1 per share and that a registration statement under the Securities
Act covering the investor's resale of the shares is in effect at the closing of
the sale. "Market price" is defined as the lowest daily volume adjusted price of
the Company's Common Stock (as reported on Bloomberg) for any trading day during
the 10-trading day period ending on the date that the Company gives a sale
notice to the investor. The purchase price that the Company will receive for its
shares in each sale will be 88% of the market price of the Common Stock if the
market price is more than $4 per share, and 86% of the market price if the
market price is $4 per share or less.
In April 1999, the Company received a loan commitment (the "Commitment")
from a private investor which is subject to the Company's acceptance. Under the
Commitment, the investor has undertaken to lend to the Company $1,000,000 no
later than April 21, 1999 pursuant to a $1,000,000 convertible debenture which
will be due on the first anniversary of the debenture. The investor will have
the right to convert the debenture into shares of the Company's Common Stock.
The conversion price will be equal to the lower of 95% of the "market price" of
the Common Stock at the time the holder delivers a conversion notice to the
Company or $6.00 per share. On the maturity date of the debenture, the unpaid
balance of the debenture and any accrued and unpaid interest will convert
automatically into shares of Common Stock valued at the conversion price on the
maturity date. "Market price" is defined as the lowest volume weighted adjusted
price of the Company's Common Stock on the Principal Market (as reported on
Bloomberg) during the 10 business days prior to the business day on the which
the conversion notice is sent to the Company.
46
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information required by this Item 9 will appear in the proxy statement
for the 1999 Annual Meeting of Stockholders, and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear in the proxy
statement for the 1999 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management will appear in the proxy statement for the 1999 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions
will appear in the proxy statement for the 1999 Annual Meeting of Stockholders,
and is incorporated by this reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits:
See attached Exhibit List.
(b) Reports on Form 8-K.
Report on Form 8-K, dated December 10, 1998, reporting under Item
5 thereof Registrant's press release dated December 10, 1998,
disclosing the Registrant's standby financing package with AMRO
International, S.A.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
/S/ MICHAEL OZEN
-------------------------------------
By: Michael Ozen
Its: Chief Financial Officer
(Principal Financial
and Accounting Officer)
and Secretary
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mark
Dyne and Michael Ozen, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments to this Annual Report on Form 10-KSB and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ MARK DYNE Chief Executive Officer and March 30, 1999
- ------------------------- Chairman of the Board
Mark Dyne of Directors
/S/ KEVIN BERMEISTER President and Director March 30, 1999
- -------------------------
Kevin Bermeister
/S/ MICHAEL OZEN Chief Financial Officer March 30, 1999
- ------------------------- (Principal Financial
Michael Ozen and Accounting Officer)
and Secretary
/S/ MARK MILLER Vice President, Operations March 30, 1999
- ------------------------- and Production and Director
Mark Miller
/S/ DIANA MARANON Director March 30, 1999
- -------------------------
Diana Maranon
/S/ RAY MUSCI Director March 30, 1999
- -------------------------
Ray Musci
/S/ GARTH SALONER Director March 30, 1999
- -------------------------
Garth Saloner
/S/ JEFF SCHEINROCK Director March 30, 1999
- -------------------------
Jeff Scheinrock
48
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
2.1 Exchange Agreement, dated August 20, 1996, by and among the Registrant,
Brilliant Interactive Ideas Pty. Ltd. ("BII Australia"), Reefknot
Limited and Pacific Interactive Education Pty. Limited. Incorporated by
reference to Exhibit 2.1 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
2.2 Asset Purchase Agreement, dated September 12, 1996, by and between the
Registrant and Sega Ozisoft Pty. Ltd. Incorporated by reference to
Exhibit 2.2 to Form S-1 filed on September 17, 1996, and the amendments
thereto.
3.1 Amended and Restated Certificate of Incorporation of Registrant.
Incorporated by reference to Exhibit 3.1 to Form S-1 filed on September
17, 1996, and the amendments thereto.
3.2 Amended and Restated Bylaws of Registrant. Incorporated by reference to
Exhibit 3.2 to Form S-1 filed on September 17, 1996, and the amendments
thereto.
3.3 Certificate of Designation of Rights, Preferences and Privileges of
Preferred Stock. Incorporated by reference to Exhibit A to the Rights
Agreement filed as Exhibit 4.1 to Current Report on Form 8-K filed as of
April 6, 1998.
4.1 Specimen Stock Certificate of Common Stock of Registrant. Incorporated
by reference to Exhibit 4.1 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
4.2 Rights Agreement, dated as of March 30, 1998, between Registrant and
U.S. Stock Transfer Corporation as Rights Agent. Incorporated by
reference to Exhibit 4.1 to Current Report on Form 8-K filed as of April
6, 1998.
4.3 Form of Rights Certificate. Incorporated by reference to Exhibit B to
the Rights Agreement filed as Exhibit 4.1 to Current Report on Form 8-K
filed as of April 6, 1998.
10.1 Registrant's 1996 Stock Option Plan. Incorporated by reference to
Exhibit 10.1 to Form S-1 filed on September 17, 1996, and the amendments
thereto.
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock
Option). Incorporated by reference to Exhibit 10.2 to Form S-1 filed on
September 17, 1996, and the amendments thereto.
10.3 Form of Registrant's Stock Option Agreement (Incentive Stock Option).
Incorporated by reference to Exhibit 10.3 to Form S-1 filed on September
17, 1996, and the amendments thereto.
10.4 Intentionally Omitted.
10.5 CD-ROM Distribution Agreement, dated September 14, 1996 by and between
the Registrant and Packard Bell NEC. Incorporated by reference to
Exhibit 10.5 to Form S-1 filed on September 17, 1996, and the amendments
thereto. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
grant of Confidential Treatment.]
10.6 Intentionally Omitted.
10.7 Intentionally Omitted.
10.8 Intentionally Omitted.
10.9 Memorandum of Agreement, dated September 5, 1996, by and between the
Registrant and
49
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
Bantam Doubleday Dell Books For Young Readers. Incorporated by reference
to Exhibit 10.9 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant to
a grant of Confidential Treatment.]
10.10 Production Agreement, dated March 18, 1994, by and between Pick Two Ltd.
and BII Australia. Incorporated by reference to Exhibit 10.10 to Form
S-1 filed on September 17, 1996, and the amendments thereto. [Portions
of this Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.11 Assistant Multimedia Software Development & Production Agreement, dated
January 17, 1996, by and between Sega Ozisoft Pty. Limited and BII
Australia. Incorporated by reference to Exhibit 10.11 to Form S-1 filed
on September 17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.12 Licensing Agreement for "Cyberswine" Story Concept & Characters, dated
July 19, 1995, by and between Eat Cyberfist Pty. Limited and Sega
Ozisoft Pty Limited. Incorporated by reference to Exhibit 10.12 to Form
S-1 filed on September 17, 1996, and the amendments thereto. [Portions
of this Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.13 Intentionally Omitted.
10.14 Publishing Agreement, dated March 9, 1994, by and between Shortland
Publications Limited and BII Australia. Incorporated by reference to
Exhibit 10.14 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant to
a grant of Confidential Treatment.]
10.15 Intentionally Omitted.
10.16 Publishing Agreement, dated December 1, 1994, by and between Shortland
Publications Limited and BII Australia. Incorporated by reference to
Exhibit 10.16 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant to
a grant of Confidential Treatment.]
10.17 Distribution Agreement, dated July 1, 1996, by and between BII Australia
and Fujitsu Basic Software Corporation. Incorporated by reference to
Exhibit 10.7 to Form S-1 filed on September 17, 1996, and the amendments
thereto. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
grant of Confidential Treatment.]
10.18 License Agreement -- Domestic, dated July 31, 1996, between the Hearst
Corporation, King Features Syndicate Division and the Registrant.
Incorporated by reference to Exhibit 10.18 to Form S-1 filed on
September 17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.19 Intentionally Omitted.
10.20 Distribution Agreement, dated February 22, 1996, by and between BII
Australia and Shortland Publications Limited. Incorporated by reference
to Exhibit 10.20 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been deleted
50
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
and filed separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.]
10.21 Heads of Agreement, dated November 25, 1994, by and between SAND and Eat
Cyberfist Pty. Limited. Incorporated by reference to Exhibit 10.21 to
Form S-1 filed on September 17, 1996, and the amendments thereto.
[Portions of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.22 Intentionally Omitted.
10.23 Memorandum of Understanding, dated September 14, 1996, by and between
the Registrant and Morgan Creek Interactive, Inc. Incorporated by
reference to Exhibit 10.23 to Form S-1 filed on September 17, 1996, and
the amendments thereto. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant to
a grant of Confidential Treatment.]
10.24 Intentionally Omitted.
10.25 Nontransferable Redeemable Warrant Agreement, dated September 14, 1996,
by and between the Registrant and Packard Bell NEC. Incorporated by
reference to Exhibit 10.25 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
10.26 Intentionally Omitted.
10.27 Registrant's Promissory Note, dated September 10, 1996. Incorporated by
reference to Exhibit 10.27 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
10.28 Form of Registrant's Indemnification Agreement. Incorporated by
reference to Exhibit 10.28 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
10.29 Form of Registrant's Employee Confidential Information and
Non-Solicitation Agreement. Incorporated by reference to Exhibit 10.29
to Form S-1 filed on September 17, 1996, and the amendments thereto.
10.30 Intentionally Omitted.
10.31 Intentionally Omitted.
10.32 Commercial Lease, dated August 8, 1994, by and between PW Securities
Pty. Ltd. and Sega Ozisoft. Incorporated by reference to Exhibit 10.32
to Form S-1 filed on September 17, 1996, and the amendments thereto.
10.33 Intentionally Omitted.
10.34 Intentionally Omitted.
10.35 Engagement Letter, dated May 1, 1996, by and between Averil Associates,
Inc. and the Registrant. Incorporated by reference to Exhibit 10.35 to
Form S-1 filed on September 17, 1996, and the amendments thereto.
10.36 Warrant Agreement by and between Chloe Holdings, Inc. and the
Registrant. Incorporated by reference to Exhibit 10.36 to Form S-1 filed
on September 17, 1996, and the amendments thereto.
10.37 Intentionally Omitted.
10.38 Standard Form Lease Agreement, dated May 16, 1997, between Topanga &
Victory Partners L.P. and the Registrant. Incorporated by reference to
Exhibit 10.1 to Quarterly Report on
51
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
Form 10-QSB for the quarter ended June 30, 1997. [Portions of this
Exhibit have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.39 Site Management Agreement, dated August 1, 1997, between CompuServe
Incorporated and the Registrant. Incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
grant of Confidential Treatment.]
10.40 Redeemable Warrant Agreement, dated September 1, 1997, between Packard
Bell NEC and the Registrant. Incorporated by reference to Exhibit 10.40
to Form SB-2 filed on November 5, 1997, and the amendments thereto.
10.41 Engagement Letter, dated August 1, 1997, between Averil Associates, Inc.
and the Registrant. Incorporated by reference to Exhibit 10.41 to Form
SB-2 filed on November 5, 1997, and the amendments thereto.
10.42 CD-ROM Distribution Agreement, dated September 22, 1997, between Packard
Bell NEC and the Registrant. Incorporated by reference to Exhibit 10.2
to Quarterly Report on Form 10-QSB for the quarter ended September 30,
1997. [Portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.43 Warrant Agreement, dated November 4, 1997, between Chloe Holdings, Inc.
and the Registrant. Incorporated by reference to Exhibit 10.43 to Form
SB-2 filed on November 5, 1997, and the amendments thereto.
10.44 Lease Agreement, dated January 12, 1998, between Capital Credit Company
Pty. Limited and Winmor Pty. Limited and BII Australia.
10.45 Lease Agreement between Daiwa Real Estate Co. Ltd. and BII Australia.
10.46 Architectural Development and Assistance Agreement, dated July 14, 1998.
Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form
10-QSB for the quarter ended September 30, 1998. [Portions of this
Exhibit have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.47 Warrant, dated July 16, 1998. Incorporated by reference to Exhibit 10.2
to Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998. [Portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.48 Debenture and Warrant Purchase Agreement, dated as of November 20, 1998,
between the Registrant and AMRO International, S.A. Incorporated by
reference to Exhibit 10.1 to Form S-3 filed on December 31, 1998.
10.50 4% Convertible Debenture of the Registrant due December 1, 2000, in the
principal amount of $100,000, dated as of November 30, 1998.
Incorporated by reference to Exhibit 10.3 to Form S-3 filed on December
31, 1998.
10.51 Stock Purchase Warrant to purchase 1,800,000 Shares of the Registrant's
Common Stock, dated as of November 30, 1998. Incorporated by reference
to Exhibit 10.4 to Form S-3 filed on December 31, 1998.
10.52 Securities Purchase Agreement, dated as of March 29, 1999, between the
Registrant and St. Annes Investments, Ltd.
10.53 Registration Rights Agreement, dated as of March 29, 1999, between the
Registrant and St. Annes Investments, Ltd.
10.54 Letter Agreement, dated April 14, 1999, between Registrant and Roseworth
Group, Ltd.
21.1 List of Subsidiaries. Incorporated by reference to Exhibit 21.1 to Form
S-1 filed on September
52
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
17, 1996, and the amendments thereto.
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
53
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of
March 29, 1999, between Brilliant Digital Entertainment, Inc., a Delaware
corporation (the "COMPANY"), and St. Annes Investments, Ltd., a British Virgin
Islands corporation (together with its successors in interest and permitted
assigns or designees, the "INVESTOR").
WHEREAS:
A. The Company and the Investor are executing and delivering
this Agreement in reliance upon the exemption from securities registration
afforded by Section 4(2) under the Securities Act of 1933, as amended (the
"SECURITIES ACT").
B. The parties desire that, upon the terms and subject to the
conditions contained herein, the Investor shall purchase up to $6,000,000 of
shares (the "SHARES") of the Company's common stock, par value $.001 per share
(the "COMMON STOCK").
C. Contemporaneously with the execution and delivery of this
Agreement, the Company and the Investor are executing and delivering a
Registration Rights Agreement in the form attached hereto as EXHIBIT A (the
"REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to
provide to the Investor certain registration rights under the Securities Act and
the rules and regulations promulgated thereunder.
NOW THEREFORE, the Company and the Investor hereby agree as
follows:
For purposes of this Agreement, "AVERAGE STOCK PRICE,""AVERAGE TRADING
VOLUME,""BUSINESS DAY," "CAP AMOUNT," "CAPITAL SHARES," "CAPITAL SHARES
EQUIVALENTS,""MAJOR TRANSACTION,""MARKET PRICE," "PRINCIPAL MARKET," "SEC
DOCUMENTS," "TAX," "TAXES," "TAX RETURN," "TRADING DAY," and "TRANSACTION
DOCUMENTS" shall have the respective meanings set forth in ANNEX A.
1. PURCHASE AND SALE OF COMMON STOCK.
(a) PURCHASE AND SALE OF COMMON STOCK. Upon the
terms and conditions set forth herein, the Company may, at its sole discretion,
issue and sell to the Investor, and the Investor shall purchase from the
Company, up to those number of Shares having an aggregate Purchase Price (as
defined herein) of $6,000,000.
-1-
<PAGE>
(b) DELIVERY OF PUT NOTICES.
(i) Subject to the satisfaction of the conditions
set forth in this Agreement, at any time and from time to time during the period
beginning on and including the date on which a Registration Statement (as
defined in the Registration Rights Agreement) filed pursuant to the Registration
Rights Agreement is first declared effective (such date, the "EFFECTIVE DATE")
by the Securities and Exchange Commission (the "SEC") and ending on the earlier
of the (i) date which is 36 months after the Effective Date and (ii) termination
of this Agreement in accordance with the terms hereof (the "OPEN PERIOD"), the
Company may, in its sole discretion, deliver a written notice to the Investor
(each such notice, a "PUT NOTICE") stating a dollar amount (the "DOLLAR AMOUNT")
of Shares which the Company intends to sell to the Investor at a Closing (as
hereinafter defined) pursuant to such Put Notice. The "PUT NOTICE DATE" with
respect to a Put Notice shall be the Business Day on which the Investor receives
such Put Notice by facsimile transmission prior to 4:30 p.m. Eastern Time (and,
if the time of receipt is after 4:30 p.m. Eastern Time, the Put Notice Date
shall be the following Business Day).
(ii) During the Open Period, the Company shall
deliver such number of Put Notices as requires the Investor to purchase Shares
having an aggregate Purchase Price of at least $1,000,000. Such requirement
shall not have been satisfied if the conditions precedent set forth in this
Agreement to (x) the delivery of such Put Notices, (y) the Dollar Amount
required pursuant thereto to be purchased, or (z) the purchase of Shares
pursuant to such Put Notices, are not satisfied or waived by the appropriate
party. If the Company fails to deliver such number of Put Notices as requires
the Investor to purchase at least $1,000,000 of Shares prior to the expiration
of the Open Period, the Company shall deliver to the Investor on such expiration
date an amount equal to $145,000 multiplied by (1-x), where x is equal to the
fraction of $1,000,000 represented by the aggregate Purchase Price of Shares
sold by the Company to the Investor hereunder prior to the expiration of the
Open Period. The Company shall deliver such amount by wire transfer of
immediately available funds as compensation to the Investor for making the
commitment to purchase Shares pursuant to this Agreement, which amount shall be
Investor's sole remedy for the Company's failure to deliver such number of Put
Notices. If the Company fails to pay to the Investor such amount when due, the
Company shall pay to the Investor, on the first Business Day following the date
such payment was due (in addition to, and not in lieu of, any remedy the
Investor may have in law or equity) an amount equal to $3,000, in cash by wire
transfer, plus compounded annual interest of 18% on such amount during the
period, beginning on the Business Day after such amount was due, during which
such amount, or any portion thereof, is outstanding.
(c) INVESTOR OBLIGATION TO PURCHASE SHARES.
Subject to the terms and conditions set forth in this Agreement, following the
Investor's receipt of a valid Put Notice, the Investor shall be required to
purchase from the Company at the related Closing a number of Shares having an
aggregate Purchase Price equal to the lesser of (i) the Dollar Amount set forth
in the Put Notice and (ii) the Cap Amount (the lesser of (i) or (ii) above is
referred to herein as the "REQUIRED DOLLAR AMOUNT"). Notwithstanding anything to
the contrary contained herein, the Investor shall in
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<PAGE>
no event be required to purchase pursuant to this Agreement a number of Shares
having an aggregate Purchase Price which is greater than $6,000,000.
(d) LIMITATION ON INVESTOR'S OBLIGATION TO
PURCHASE SHARES. Notwithstanding anything to the contrary in this Agreement, in
no event shall the Investor be required to purchase a number of Shares, and a
Required Dollar Amount may not include an amount which, when added to all other
Shares previously acquired by the Investor pursuant to this Agreement and still
owned by the Investor, would exceed 9.99% of the number of shares of Common
Stock outstanding on the applicable Put Notice Date, as determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), and inclusive of all Shares that such Investor would be
required to purchase pursuant to such Put Notice. Each Put Notice shall include
a representation of the Company as to the number of shares of Common Stock
outstanding on the related Put Notice Date as determined in accordance with
Section 13(d) of the Exchange Act. In the event of any dispute as to whether the
Investor may be deemed to be deemed to be the beneficial owner of more than
9.99% of the Common Stock for purposes of Section 16(b) of the Exchange Act, the
Investor shall be entitled to receive an unqualified opinion of counsel for the
Company that such proposed purchase will not cause the Investor to be deemed to
be the beneficial owner of more than 9.99% of the Common Stock for purposes of
Section 16(b). The Investor shall provide such counsel with such information
about the Investor's interests in the Company as shall be reasonably necessary
for counsel to render such opinion. The cost of such opinion shall be the sole
responsibility of the Company.
(e) OVERALL LIMIT ON COMMON STOCK ISSUABLE.
Notwithstanding anything contained herein to the contrary, the aggregate number
of Shares that the Company may issue and sell to the Investor pursuant to this
Agreement shall not exceed 19.99% of the shares of Common Stock outstanding as
of the date of this Agreement (the "MAXIMUM COMMON STOCK ISSUANCE") if the rules
or regulations of the Principal Market on which the Common Stock is then listed
or traded requires the issuance of Shares hereunder in excess of the Maximum
Common Stock Issuance to first be approved by the Company's stockholders unless
(x) such stockholder approval shall have been obtained and (y) such issuance is
permitted pursuant to the By-laws and Certificate of Incorporation of the
Company and applicable law. In the event a Put Notice would result in the
issuance of shares of Common Stock hereunder in excess of the Maximum Common
Stock Issuance, then the Required Dollar Amount for such Put Notice shall be
adjusted so that such limit is not exceeded. The parties understand and agree
that the Company's failure to seek or obtain such stockholder approval shall in
no way adversely affect the validity and due authorization of the issuance and
sale of Shares hereunder or the Investor's obligation in accordance with the
terms and conditions hereof to purchase a number of Shares in the aggregate up
to the Maximum Common Stock Issuance and that such approval pertains only to the
applicability of the Maximum Common Stock Issuance limitation provided in this
Section.
(f) CONDITIONS TO INVESTOR'S OBLIGATION TO
PURCHASE SHARES. Notwithstanding anything to the contrary in this Agreement, in
addition to the conditions set forth
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<PAGE>
in Section 6 hereof, the Company shall not be entitled to deliver a Put Notice
or require the Investor to purchase any Shares at a Closing unless each of the
following conditions have been satisfied:
(i) The Market Price on the Put Notice Date shall not
be less than $1.00 (in each case, equitably adjusted for stock
splits, stock dividends, combinations and similar
transactions).
(ii) The Required Dollar Amount shall be at least
$100,000.7
(iii) A Registration Statement shall have been
declared effective and shall remain effective and available
for sale of all Registrable Securities (as defined in the
Registration Rights Agreement) at all times during the period
beginning on the Put Notice Date and ending on and including
the related Closing Date (as defined herein).
(iv) At all times during the period beginning on the
Put Notice Date and ending on and including the related
Closing Date, the Common Stock shall have been listed for
trading on the Principal Market and shall not have been
suspended from trading thereon and the Company shall not have
been notified of any pending or threatened proceeding or other
action to delist or suspend the Common Stock.
(v) The Closing Date with respect to any Put Notice
shall not occur within 15 Business Days of any other Closing
Date.
(vi) The Company has complied with its obligations
under and is otherwise not in breach of, or in default under,
the Transaction Documents.
If any of the events described in clause (i) with respect to
the Purchase Price floor, or in any of clauses (iii) through (vi) above occurs
after an effective Put Notice is so delivered and prior to the applicable
Closing, then the Investor shall have no further obligation to purchase the
Required Dollar Amount of Common Stock at such Closing. In addition to the other
conditions specified in the this Agreement, the Company agrees that in no event
shall the Investor be required to purchase Shares during any single month with
an aggregate Purchase Price of more than $1,500,000.
(g) PURCHASE PRICE PER SHARE. For purposes of
this Agreement, the "PURCHASE PRICE" for each Share purchased by the Investor
shall equal (1) if the Market Price on the Put Notice Date relating to a Closing
is less than or equal to $4.00, 86% of the Market Price on such Put Notice Date
or (2) if the Market Price on the Put Notice Date relating to a Closing is
greater than $4.00, 88% of the Market Price on such Put Notice Date. The number
of Shares to be purchased pursuant to each Put Notice shall be rounded to the
nearest whole number so as to avoid the issuance of fractional shares.
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<PAGE>
(h) CLOSING MECHANICS. Subject to the
satisfaction of the conditions set forth in this Agreement, the closing of the
purchase by the Investor of Shares (a "CLOSING") shall occur on the date which
is five (5) Business Days following the applicable Put Notice Date (or such
other date as is mutually agreed to by the Company and the Investor) (a "CLOSING
DATE") at the offices of Troop Steuber Pasich Reddick & Tobey LLP, 2029 Century
Park East, 24th Floor, Los Angeles, CA 90067 ("TROOP STEUBER"). At least one
Business Day prior to each Closing, the Company shall deliver (or cause to be
delivered) into escrow with Troop Steuber (1) the certificates, registered in
the name of the Investor, representing the Shares to be issued and sold to the
Investor at such Closing and meeting the requirements of Section 4 hereof; (2)
the certificate contemplated by Section 6(c) hereof; (3) the legal opinion
contemplated by Section 6(d) hereof; (4) all other documents, instruments and
writings required to be delivered by it pursuant to the Transaction Documents in
order to effect a Closing hereunder; (5) the Trinity Certificates (as defined
below); and (6) a writing, executed by each of the Investor and the Company as
to the number of Shares to be issued and sold at such Closing and the Purchase
Price to be paid therefor by the Investor (the items contemplated by clauses (1)
through (6) above are collectively referred to as the "COMPANY REQUIRED ITEMS").
Troop Steuber shall notify each of the Company, the Investor and Trinity Capital
Advisors, Inc. ("TRINITY") on the Business Day it receives all of the Company
Required Items relating to such Closing. If Troop Steuber shall have provided
such notice by the Closing, then, provided that the other conditions to the
Investor's obligation to purchase Shares hereunder shall have been satisfied or
appropriately waived, the Investor shall deliver (or cause to be delivered) (x)
to the Company, the Purchase Price for the Shares to be issued and sold at such
Closing, less the amounts contemplated by clauses (y) and (z) following this
clause (x); (y) to Trinity, (A) an amount equal to 3% of the Purchase Price for
the Shares to be issued and sold at such Closing and (B) certificates,
registered in the name of Trinity, representing a number of shares of Common
Stock having an aggregate Market Price as of the Put Notice Date equal to 2% of
the aggregate Purchase Price of the Shares to be issued and sold at such
Closing, which certificates shall meet the requirements of Section 4 hereof (the
"TRINITY CERTIFICATES"); and (z) to Troop Steuber, $500.00. Notwithstanding the
foregoing, if the Company is requested by the Investor to deliver Shares via
electronic book-entry through The Depository Trust Company ("DTC"), then the
parties hereto shall cooperate with one another and with DTC in order to
facilitate such delivery and to amend the provisions of this Section in order to
facilitate a smooth Closing whereby the risk of loss as to delivery of Purchase
Price and Shares in a Closing is not materially adjusted. The parties hereto
understand and agree that Troop Steuber will not release the Company Required
Items to the Investor prior to its receipt of written confirmation from the
Company that the Company has received the net proceeds from the sale of the
Shares to have been sold at such Closing; provided, however, if the Company does
not confirm such receipt by 5:00 p.m. Eastern Time on the Business Day following
the Closing Date, the parties hereby direct Troop Steuber to deliver the Company
Required Items to the Investor at such time as Troop Steuber receives written
evidence from the institution from which the Purchase Price was delivered on
behalf of the Investor that funds equal to the amount required hereunder to be
delivered to the Company as payment of the Shares to have been sold at such
Closing were delivered in accordance with the wire instructions provided by the
Company for such purpose (a federal wire number for the correct amount and in
accordance with the wire instructions provided by the Company for such purpose
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shall be conclusive evidence of the Company's receipt). Each of the parties
hereto hereby agrees jointly and severally to indemnify and hold harmless Troop
Steuber and its members, employees, agents and representatives from any and all
claims, liabilities, costs or expenses in any way arising from or relating to
the performance of its duties hereunder and agrees that Troop Steuber shall not
have any liability hereunder other than as arising solely from its willful
misconduct in performing its duties hereunder. The parties hereto understand and
agree that Troop Steuber may, at any time upon two Business Days prior written
notice to the parties hereto, resign from its duties and obligations hereunder
without recourse to any party. The Investor further understands and agrees that
Troop Steuber acts as legal counsel to the Company in connection with the
transactions contemplated hereby and may, from time to time, represent the
Company in other matters, including such matters as may directly or indirectly
be adverse to the interests of the Investor. The Investor consents to such
representation and waives any claim that such representation represents a
conflict of interest on the part of Troop Steuber. The Investor understands that
the Company and Troop Steuber are relying explicitly on the foregoing provision
in connection with the Company entering into this Agreement.
(i) EFFECT OF FAILURE TO SATISFY CLOSING
OBLIGATIONS. Subject to the Company's compliance with all of the terms and
conditions of this Agreement, with respect to each Put Notice, if all of the
conditions applicable to the requirement of the Investor to purchase the
Required Dollar Amount as a result of such Put Notice have been met and (subject
to the limitations and restrictions of Shares issuance and Investor ownership
set forth in this Agreement), and the Investor shall fail to purchase the entire
Required Dollar Amount on the applicable Closing Date, then the Investor shall,
in addition to any other remedies under this Agreement, pay as additional
damages in cash to the Company, on the eighth Business Day following the
applicable Closing Date and on each succeeding fifth Business Day thereafter
until the Required Dollar Amount is paid, an amount equal to one percent (1%) of
the balance of the Required Dollar Amount that was not paid to the Company for
such Put Notice.
(j) DELISTING; SUSPENSION. If at any time
during the Open Period or within 30 days after the end of the Open Period, the
Common Stock shall not be listed on the Principal Market or shall have been
suspended from trading thereon (excluding suspensions of not more than one
Trading Day resulting from business announcements by the Company) or the Company
shall have been notified of any pending or threatened proceeding or other action
to delist or suspend the Common Stock (each of the foregoing, a "REPURCHASE
EVENT"), the Investor shall have the right (the "REPURCHASE OPTION"), as partial
relief for the damages to the Investor by reason of the occurrence of a
Repurchase Event (which remedy shall not be exclusive of any other remedies
available at law or equity), in its sole discretion, which right shall be
exercised within 30 days of a Repurchase Event, to sell to the Company, and the
Company agrees to buy, promptly upon the exercise of such right by the Investor,
but in any event within 10 calendar days of the exercise of such right all or
any part of the Shares issued to the Investor within the 30 Business Days
preceding the Investor's exercise of the Repurchase Option and then held by the
Investor at a price per Share equal to the Purchase Price paid by the Investor
for such Shares (the "PAYMENT AMOUNT"). If the Company fails to pay to
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the Investor the full aggregate Payment Amount within 10 calendar days of the
Investor's exercise of the Repurchase Option hereunder, the Company shall pay to
the Investor, on the first Business Day following such tenth calendar day, in
addition to and not in lieu of the Payment Amount payable by the Company to the
Investor upon exercise of the Repurchase Option, an amount equal to 2% of the
aggregate Payment Amount then due and payable to the Investor, in cash by wire
transfer, plus compounded annual interest of 18% on such Payment Amount during
the period, beginning on the day following such tenth calendar day, during which
such Payment Amount, or any portion thereof, is outstanding.
(k) LIMITATIONS ON SHORT SALES. The Investor
will not enter into any Short Sales (as hereinafter defined) from the period
commencing on the date the Registration Statement is first declared effective by
the SEC and ending on the expiration of the Open Period (or such earlier time as
this Agreement is terminated in accordance with its terms); provided, that, the
Company may from time to time notify the Investor that the provisions of this
Section will not apply for periods of time to be determined by the Company. For
purposes of this Section, a "Short Sale" by the Investor shall mean a sale of
Common Stock by the Investor that is marked as a short sale and that is made at
a time when there is no equivalent offsetting long position in Common Stock held
by the Investor. For purposes of determining whether there is an equivalent
offsetting long position in Common Stock held by the Investor, the number of
Shares issuable in respect of delivered Put Notices for which the Closing
therefor has not yet occurred shall be deemed to be held long by the Investor.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Investor that:
(a) ORGANIZATION OF THE COMPANY. The Company is a
corporation duly incorporated and existing in good standing under the laws of
the State of Delaware and has all requisite corporate authority to own its
properties and to carry on its business as now being conducted. The Company does
not have any subsidiaries and does not own more than fifty percent (50%) of or
control any other business entity except as set forth in the SEC Documents other
than Brilliant Digital Filmed Entertainment, a Delaware corporation, and
Brilliant Interactive Ideas, Pty. Ltd., a company incorporated in New South
Wales, Australia, each of which is a wholly-owned subsidiary of the Company. The
Company is duly qualified and is in good standing as a foreign corporation to do
business in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other than those in
which the failure so to qualify would not have any effect on the business,
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole, and/or any condition, circumstance, or situation that would prohibit
or otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under the Transaction Documents in any material respect
(a "MATERIAL ADVERSE EFFECT").
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(b) AUTHORITY. (i) The Company has the requisite
corporate power and corporate authority to enter into and perform its
obligations under this Agreement and to issue the Shares pursuant to the terms
hereunder, (ii) the execution, issuance and delivery of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
and no further consent or authorization of the Company or its Board of Directors
or stockholders is required, and (iii) the Transaction Documents have been duly
executed and delivered by the Company and, at each Closing, shall constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock sufficient in number
for the issuance of Shares hereunder. The Company further acknowledges that its
obligation to issue Shares in accordance with this Agreement is absolute and
unconditional regardless of any dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company and notwithstanding
the commencement of any case under 11 U.S.C. ss. 101 et seq. (the "BANKRUPTCY
CODE"). The Company shall not seek judicial relief from its obligations
hereunder except pursuant to the Bankruptcy Code. In the event the Company is a
debtor under the Bankruptcy Code, the Company hereby waives to the fullest
extent permitted any rights to relief it may have under 11 U.S.C. ss. 362 in
respect of the issuance of shares. The Company agrees, without cost or expense
to the Investor, to take or consent to any and all action necessary to
effectuate relief under 11 U.S.C. ss. 362.
(c) CAPITALIZATION. The authorized capital stock of the
Company consists of 30,000,000 shares of Common Stock of which 9,409,001 shares
are issued and outstanding as of March 19, 1999 and 1,000,000 shares of
preferred stock, par value $0.001 per share, of which no shares are issues and
outstanding. Except for outstanding options and warrants to acquire a total of
1,636,262 shares of Common Stock as of March 19, 1999, there are no outstanding
Capital Shares Equivalents. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
non-assessable.
(d) COMMON STOCK. The Company has registered its Common
Stock pursuant to Section 12(b) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company is in
compliance with all requirements for the continued listing or quotation of its
Common Stock, and such Common Stock is currently listed or quoted on the
Principal Market. As of the date of this Agreement, the Principal Market is the
American Stock Exchange and the Company has not received any notice regarding,
and to its knowledge there is no threat, of the termination or discontinuance of
the eligibility of the Common Stock for such listing.
(e) SEC DOCUMENTS. The Company has delivered or made
available to the Investor true and complete copies of the SEC Documents. The
Company has not provided to the Investor any information that, according to
applicable law, rule or regulation, should have been
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disclosed publicly prior to the date hereof by the Company, but which has not
been so disclosed. As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and rules and
regulations of the SEC promulgated thereunder and the SEC Documents did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC
Documents complied in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto at the time of such
inclusion. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company nor any
of its subsidiaries has any material indebtedness, obligations or liabilities of
any kind (whether accrued, absolute, contingent or otherwise, and whether due or
to become due) that would have been required to be reflected in, reserved
against or otherwise described in the financial statements or in the notes
thereto in accordance with GAAP, which was not fully reflected in, reserved
against or otherwise described in the financial statements or the notes thereto
included in the SEC Documents or was not incurred in the ordinary course of
business consistent with the Company's past practices since the last date of
such financial statements.
(f) EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject
to the accuracy of the Investor's representations in Section 3, the sale of the
Shares to the Investor will not require registration under the Securities Act
and/or any applicable state securities law. When issued and paid for in
accordance herewith, the Shares will be duly and validly issued, fully paid, and
non-assessable. Neither the sale of the Shares nor the Company's performance of
its obligations under the Transaction Documents, will (i) result in the creation
or imposition by the Company of any liens, charges, claims or other encumbrances
upon the Shares, or (ii) entitle the holders of outstanding Capital Shares to
preemptive or other rights to subscribe to or acquire the Capital Shares or
other securities of the Company. Ownership of the Shares shall not subject the
Investor to personal liability to the Company or its creditors by reason of the
possession thereof.
(g) NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO
THIS TRANSACTION. Neither the Company nor any of its affiliates nor any person
acting on its or their behalf has (i) conducted or will conduct any general
solicitation (as that term is used in Rule 502(c) of Regulation D) or general
advertising with respect to the sale hereunder of any of the Shares to the
Investor, or (ii) made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would, other than
pursuant to the Registration Rights Agreement, require
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registration of the Shares under the Securities Act; provided, that the Company
makes no representation or warranty with respect to the Investor or Trinity
Capital Advisors, Inc.
(h) CORPORATE DOCUMENTS. The Company has furnished or
made available to the Investor true and correct copies of the Company's
Certificate of Incorporation, as amended and in effect on the date hereof (the
"CERTIFICATE"), and the Company's By-Laws, as amended and in effect on the date
hereof (the "BY-LAWS").
(i) NO CONFLICTS. The execution, delivery and performance
of this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Shares, do not and will not (i) result in a violation of the Company's
Certificate of Incorporation or By-Laws or (ii) conflict with, or constitute a
material default (or an event that with notice or lapse of time or both would
become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or
instrument, or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state or local law, rule, regulation, order, judgment or decree
(subject to the effectiveness of the Registration Statement, including federal
and state securities laws and regulations) applicable to the Company or by which
any material property or asset of the Company is bound or affected, nor is the
Company otherwise in violation of, conflict with or default under any of the
foregoing (except in each case for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not have,
individually or in the aggregate, a Material Adverse Effect). The business of
the Company is not being conducted in violation of any law, ordinance or
regulation of any governmental entity, except for possible violations that
either singly or in the aggregate would not have a Material Adverse Effect. The
Company is not required under federal, state or local law, rule or regulation to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or issue and sell
the Shares in accordance with the terms hereof (other than any SEC, American
Stock Exchange or state securities filings that may be required to be made by
the Company subsequent to Closing, any registration statement that may be filed
pursuant hereto, and any shareholder approval required by the rules applicable
to companies whose common stock trades on the American Stock Exchange); provided
that, for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Investor herein.
(j) NO MATERIAL ADVERSE CHANGE. Since September 30, 1998,
no Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents.
(k) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since
September 30, 1998, no event or circumstance has occurred or exists with respect
to the Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation,
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requires public disclosure or announcement prior to the date hereof by the
Company but which has not been so publicly announced or disclosed in the SEC
Documents.
(l) NO INTEGRATED OFFERING. The Company will not take,
and the Company shall not permit any of its directors, officers or Affiliates
directly or indirectly to take, any action, so as to make unavailable the
exemption from Securities Act registration being relied upon by the Company for
the offer and sale to Investor of the Shares as contemplated by this Agreement.
(m) LITIGATION AND OTHER PROCEEDINGS. There are no
lawsuits or proceedings pending or, to the knowledge of the Company, threatened,
against the Company, nor has the Company received any written or oral notice of
any such action, suit, proceeding or investigation, which could reasonably be
expected to have a Material Adverse Effect. Except as set forth in the SEC
Documents, no judgment, order, writ, injunction or decree or award has been
issued by or, to the knowledge of the Company, requested of any court,
arbitrator or governmental agency which could result in a Material Adverse
Effect.
(n) NO MISLEADING OR UNTRUE COMMUNICATION. The Company
and, to the knowledge of the Company, any person representing the Company, have
not made, at any time, any oral communication in connection with the offer or
sale of the Shares to the Investor which contained any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements, in the light of the circumstances under which they were made,
not misleading provided that the Company makes no representation or warranty
with respect to Trinity.
(o) NON-PUBLIC INFORMATION. The Company has not disclosed
to the Investor any non-public information that (i) if disclosed, would, or
could reasonably be expected to have, a material effect on the price of the
Common Stock or (ii) according to applicable law, rule or regulation, should
have been disclosed publicly by the Company prior to the date hereof but which
has not been so disclosed.
(p) INSURANCE. The Company maintains property and
casualty, general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance with financially sound and
reputable insurers that is adequate, consistent with industry standards and the
Company's historical claims experience. The Company has not received notice
from, and has no knowledge of any threat by, any insurer (that has issued any
insurance policy to the Company) that such insurer intends to deny coverage
under or cancel, discontinue or not renew any insurance policy presently in
force.
(q) TAX MATTERS. (i) The Company has filed all Tax
Returns which it is required to file under applicable laws; all such Tax Returns
are true and accurate and have been prepared in compliance with all applicable
laws; the Company has paid all Taxes due and owing by it (whether or not such
Taxes are required to be shown on a Tax Return) and have withheld and paid over
to the appropriate taxing authorities all Taxes which it is required to withhold
from amounts paid or owing
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to any employee, stockholder, creditor or other third parties; and since
December 31, 1997, the charges, accruals and reserves for Taxes with respect to
the Company (including any provisions for deferred income taxes) reflected on
the books of the Company are adequate to cover any Tax liabilities of the
Company if its current tax year were treated as ending on the date hereof.
(ii) No claim has been made by a taxing authority
in a jurisdiction where the Company does not file tax returns that such
corporation is or may be subject to taxation by that jurisdiction. There are no
foreign, federal, state or local tax audits or administrative or judicial
proceedings pending or being conducted with respect to the Company; no
information related to Tax matters has been requested by any foreign, federal,
state or local taxing authority; and, except as disclosed above, no written
notice indicating an intent to open an audit or other review has been received
by the Company from any foreign, federal, state or local taxing authority. There
are no material unresolved questions or claims concerning the Company's Tax
liability. The Company (A) has not executed or entered into a closing agreement
pursuant to ss. 7121 of the Internal Revenue Code or any predecessor provision
thereof or any similar provision of state, local or foreign law; or (B) has not
agreed to or is required to make any adjustments pursuant to ss. 481 (a) of the
Internal Revenue Code or any similar provision of state, local or foreign law by
reason of a change in accounting method initiated by the Company or any of its
subsidiaries or has any knowledge that the Internal Revenue Service (the "IRS")
has proposed any such adjustment or change in accounting method, or has any
application pending with any taxing authority requesting permission for any
changes in accounting methods that relate to the business or operations of the
Company. The Company has not been a United States real property holding
corporation within the meaning of ss. 897(c)(2) of the Internal Revenue Code
during the applicable period specified in ss. 897(c)(1)(A)(ii) of the Internal
Revenue Code.
(iii) The Company has not made an election under
ss. 341(f) of the Internal Revenue Code. The Company is not liable for the Taxes
of another person that is not a subsidiary of the Company under (A) Treas. Reg.
ss. 1.1502-6 (or comparable provisions of state, local or foreign law), (B) as a
transferee or successor, (C) by contract or indemnity or (D) otherwise. The
Company is not a party to any tax sharing agreement. The Company has not made
any payments, is obligated to make payments or is a party to an agreement that
could obligate it to make any payments that would not be deductible under ss.
280G of the Internal Revenue Code.
(r) PROPERTY. Neither the Company nor either of its
subsidiaries owns any real property. Each of the Company and its subsidiaries
has good and marketable title to all personal property owned by it, free and
clear of all liens, encumbrances and defects (other than certain liens on the
Company's personal property in the U.S. securing indebtedness not in excess of
$100,000) except such as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company; and to the Company's knowledge any real property and
buildings held under lease by the Company as tenant are held by it under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and intended to be made of such property and
buildings by the Company.
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(s) INTELLECTUAL PROPERTY. Each of the Company and its
subsidiaries owns or possesses adequate and enforceable rights to use all
patents, patent applications, trademarks, trademark applications, trade names,
service marks, copyrights, copyright applications, licenses, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) and other similar rights and
proprietary knowledge (collectively, "INTANGIBLES") necessary for the conduct of
its business as now being conducted. To the Company's knowledge, except as
disclosed in the SEC Documents neither the Company nor any of its subsidiaries
is infringing upon or in conflict with any right of any other person with
respect to any Intangibles. Except as disclosed in the SEC Documents, no claims
have been asserted by any person to the ownership or use of any Intangibles and
the Company has no knowledge of any basis for such claim.
(t) INTERNAL CONTROLS AND PROCEDURES. The Company
maintains books and records and internal accounting controls which provide
reasonable assurance that (i) all transactions to which the Company is a party
or by which its properties are bound are executed with management's
authorization; (ii) the recorded accountability of the Company's assets is
compared with existing assets at regular intervals; (iii) access to the
Company's assets is permitted only in accordance with management's
authorization; and (iv) all transactions to which the Company is a party or by
which its properties are bound are recorded as necessary to permit preparation
of the financial statements of the Company in accordance with GAAP.
(u) PAYMENTS AND CONTRIBUTIONS. Neither the Company nor
any of its directors, officers or, to its knowledge, other employees has (i)
used any Company funds for any unlawful contribution, endorsement, gift,
entertainment or other unlawful expense relating to political activity; (ii)
made any direct or indirect unlawful payment of Company funds to any foreign or
domestic government official or employee; (iii) violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any bribe, rebate, payoff, influence payment, kickback or other similar
payment to any person with respect to Company matters.
(v) NO MISREPRESENTATION. No representation or warranty
of the Company contained in this Agreement, any schedule, annex or exhibit
hereto or any agreement, instrument or certificate furnished by the Company to
the Investor pursuant to this Agreement, contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, not misleading.
3. INVESTOR'S REPRESENTATIONS AND WARRANTIES.
The Investor represents and warrants to the Company that:
(a) INTENT. The Investor is entering into this Agreement
for its own account; provided, however, that by making the representations
herein, the Investor does not agree to hold
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such securities for any minimum or other specific term and reserves the right to
dispose of the Shares at any time in accordance with federal and state
securities laws applicable to such disposition.
(b) SOPHISTICATED INVESTOR. The Investor is a
sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and
an accredited investor (as defined in Rule 501 of Regulation D), and Investor
has such experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in the Shares. The Investor
acknowledges that an investment in the Shares is speculative and involves a high
degree of risk.
(c) AUTHORITY. The Transaction Documents have been duly
authorized and validly executed and delivered by the Investor and each
Transaction Document is a valid and binding agreement of the Investor
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application.
(d) NOT AN AFFILIATE. The Investor is not an officer,
director or "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company.
(e) ABSENCE OF CONFLICTS. The execution and delivery of
the Transaction Documents, and the consummation of the transactions contemplated
thereby, and compliance with the requirements thereof, will not violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
Investor or (a) violate any provision of any indenture, instrument or agreement
to which Investor is a party or is subject, or by which Investor or any of its
assets is bound; (b) conflict with or constitute a material default thereunder;
(c) result in the creation or imposition of any lien pursuant to the terms of
any such indenture, instrument or agreement, or constitute a breach of any
fiduciary duty owed by Investor to any third party; or (d) require the approval
of any third-party (which has not been obtained) pursuant to any material
contract, agreement, instrument, relationship or legal obligation to which
Investor is subject or to which any of its assets, operations or management may
be subject.
(f) DISCLOSURE; ACCESS TO INFORMATION. The Investor has
received all documents, records, books and other publicly available information
pertaining to Investor's investment in the Company that have been requested by
the Investor. The Investor has reviewed or received copies of all SEC Documents
that have been requested by it.
(g) MANNER OF SALE. At no time was Investor presented
with or solicited by or through any leaflet, public promotional meeting,
television advertisement or any other form of general solicitation or
advertising.
4. LEGENDS AND TRANSFER AGENT INSTRUCTIONS.
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(a) LEGENDS. Stock certificates evidencing ownership of
the Shares shall be issued free of any and all restrictive legends and the
Company may not place any stop-transfer order against transfer of such stock
certificates. The Investor covenants that, in connection with any transfer of
Shares by it pursuant to an effective registration statement under the
Securities Act, it will (i) comply with the applicable prospectus delivery
requirements of the Securities Act, provided that copies of a current prospectus
relating to such effective registration statement are or have been supplied to
the Investor, and (ii) comply with the "Plan of Distribution" section of the
current prospectus relating to such effective registration statement.
(b) TRANSFER AGENT INSTRUCTIONS. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of the Investor or its
respective nominee(s), for the Shares in such amounts as specified from time to
time by the Investor to the Company in connection with a Closing hereunder, in
the form of EXHIBIT A, attached hereto (the "IRREVOCABLE TRANSFER AGENT
INSTRUCTIONS"). The Irrevocable Transfer Agent Instructions shall have been
delivered by the Company to, and acknowledged in writing by, the Company's
transfer agent prior to the Company's delivery of a Put Notice hereunder. The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section will be given by the Company to its
transfer agent with respect to the Shares and that the Shares shall be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement. Nothing in this Section shall affect in any way the
Investor's obligations and agreements to comply with all applicable prospectus
delivery requirements, if any, upon resale of the Shares. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Investor by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section, that the Investor shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
5. CONDITIONS OF THE COMPANY'S OBLIGATION TO SELL.
The obligation hereunder of the Company to issue and sell the
Shares to the Investor is further subject to the satisfaction, at or before each
Closing, of each of the following conditions set forth below. These conditions
are for the Company's sole benefit and may be waived by the Company at any time
in its sole discretion.
(a) The Investor shall have executed each of the
Transaction Documents and delivered the same to the Company.
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(b) The Investor shall have delivered to the
Company the Purchase Price for the Shares being purchased by the Investor at the
applicable Closing in accordance with and subject to Section 1(h) hereof.
(c) The representations and warranties of the
Investor shall be true and correct as of the date when made and as of the
applicable Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date, which shall be true and correct
as of such date), and the Investor shall have performed, satisfied and complied
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Investor at or prior to such
Closing Date.
(d) No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.
(e) The Registration Statement shall be
effective at the time of each Closing and no stop order suspending the
effectiveness of the Registration Statement shall be in effect or shall be
pending or threatened.
(f) At the time of each Closing, the
Registration Statement (including information or documents incorporated by
reference therein) and any amendments or supplements thereto shall not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(g) If applicable, the shareholders of the
Company shall have approved the issuance of any Shares in excess of the Maximum
Common Stock Issuance in accordance with Section 1.
6. CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE.
The obligation of the Investor hereunder to purchase Shares is
subject to the satisfaction, at or before each Closing, of each of the following
conditions set forth below. These conditions are for the Investor's sole benefit
and may be waived by the Investor at any time in its sole discretion.
(a) The Company shall have executed each of the
Transaction Documents and delivered the same to the Investor.
(b) The Common Stock shall be authorized for
trading or quotation on the Principal Market and trading in the Common Stock
shall not have been suspended by the Principal
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<PAGE>
Market or the SEC, at any time beginning on the applicable Put Notice Date and
through and including the respective Closing Date.
(c) The representations and warranties of the
Company shall be true and correct as of the date when made and as of the
applicable Closing Date as though made at that time (except for (i)
representations and warranties that speak as of a specific date and (ii) with
respect to the representations made in Sections 2(k) and (m), events which occur
on or after the date of this Agreement and are disclosed in SEC filings made by
the Company at least ten Business Days prior to the applicable Put Notice Date)
and the Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to such Closing Date. The
Investor shall have received (or receipt shall have been confirmed on its behalf
of) a certificate, executed by the Chief Executive Officer and Chief Financial
Officer of the Company, dated as of the applicable Closing Date to the foregoing
effect and as to such other matters as may be reasonably requested by the
Investor including, without limitation, an update as of such Closing Date
regarding any changes in the Company's Certificate of Incorporation and bylaws
since the immediately preceding Closing Date.
(d) Such Investor shall have received (or
receipt shall have been confirmed on its behalf of) the opinion of the Company's
outside counsel dated as of the applicable Closing Date, as to the continued
accuracy of the legal opinion provided on the date of this Agreement and as to
the continued effectiveness of the Registration Statement.
(e) The Irrevocable Transfer Agent Instructions
shall have been delivered to, and acknowledged in writing by the Company's
transfer agent.
(f) No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.
(g) The Registration Statement shall be
effective at the time of each Closing and no stop order suspending the
effectiveness of the Registration Statement shall be in effect or shall be
pending or threatened.
(h) At the time of each Closing, the
Registration Statement (including information or documents incorporated by
reference therein) and any amendments or supplements thereto shall not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(i) There shall have been no filing of a
petition in bankruptcy, either voluntarily or involuntarily, with respect to the
Company and there shall not have been commenced
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any proceedings under any bankruptcy or insolvency laws, or any laws relating to
the relief of debtors, readjustment of indebtedness or reorganization of
debtors, and there shall have been no calling of a meeting of creditors of the
Company or appointment of a committee of creditors or liquidating agents or
offering of a composition or extension to creditors by, for, with or without the
consent or acquiescence of the Company.
(j) If applicable, the shareholders of the
Company shall have approved the issuance of any Shares in excess of the Maximum
Common Stock Issuance in accordance with Section 1.
(k) The conditions to such Closing set forth in
Section l shall have been satisfied on or before such Closing Date.
(l) The Investor shall have received (or receipt
shall have been confirmed on its behalf of) the stock certificates representing
the Shares to be purchased at such Closing, which Shares shall meet the
requirements set forth in this Agreement.
7. TERMINATION.
(a) TERMINATION BY MUTUAL CONSENT. This
Agreement may be terminated at any time by the mutual written consent of the
Company and the Investor. The representations, warranties and covenants
contained in or incorporated into this Agreement, insofar as applicable to the
transactions consummated hereunder prior to such termination, shall survive its
termination for the period of any applicable statute of limitations.
(b) AUTOMATIC TERMINATION. This Agreement shall
automatically terminate without any further action of either party hereto upon
the earlier of the date on which (i) the Investor has purchased an aggregate of
$6,000,000 of Shares pursuant to this Agreement, (ii) 36 months after the
Effective Date or (iii) 39 months after the date hereof.
(c) TERMINATION AT THE OPTION OF INVESTOR. This
Agreement may be terminated by the Investor within ten (10) Business Days after
notice from the Company of any Major Transaction (which notice shall include
copies of the executed final agreements in connection therewith, if applicable).
If the Investor receives proper notice of a Material Transaction and fails to
terminate this Agreement by the expiration of the ten (10) Business Day period
set forth in the immediately preceding sentence, then the Investor shall be
deemed to have permanently waived its right of termination as to such Major
Transaction (but not as to any subsequent Major Transaction). If this Agreement
is terminated in accordance with this Section 7(c), the Company shall be
relieved of its obligations under Section 1(b)(ii) hereof.
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All representations, warranties and covenants shall survive
the termination of this Agreement.
8. INDEMNIFICATION.
(a) GENERAL. (i) The Company hereby agrees to indemnify
and hold harmless the Investor, its Affiliates and their respective officers,
directors, partners and members (collectively, the "INVESTOR INDEMNITEES"), from
and against any and all losses, claims, damages, judgments, penalties, expenses,
liabilities and deficiencies (collectively, "LOSSES"), and agrees to reimburse
the Investor Indemnitees for all reasonable out-of-pocket expenses (including
the reasonable fees and expenses of legal counsel), in each case promptly as
incurred by the Investor Indemnitees and to the extent arising out of or in
connection with (A) any misrepresentation, omission of fact or breach of any of
the Company's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this Agreement;
or (B) any failure by the Company to perform in any material respect any of its
covenants, agreements, undertakings or obligations set forth in this Agreement,
the annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this Agreement;
or (C) the status of the Investor or holder of the Shares as an investor in the
Company (but not in case of Losses arising solely as a result of actions or
events that are wholly internal to the Investor).
(ii) The Investor hereby agrees to indemnify and
hold harmless the Company, its Affiliates and their respective officers,
directors, partners and members (collectively, the "COMPANY INDEMNITEES"), from
and against any and all Losses, and agrees to reimburse the Company Indemnitees
for reasonable all out-of-pocket expenses (including the reasonable fees and
expenses of legal counsel), in each case promptly as incurred by the Company
Indemnitees and to the extent arising out of or in connection with (A) any
misrepresentation, omission of fact, or breach of any of the Investor's
representations or warranties contained in this Agreement, the annexes,
schedules or exhibits hereto or any instrument, agreement or certificate entered
into or delivered by the Investor pursuant to this Agreement; or (B) any failure
by the Investor to perform in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Agreement or any
instrument, certificate or agreement entered into or delivered by the Investor
pursuant to this Agreement.
(b) NOTICE. Promptly after receipt by either party hereto
seeking indemnification pursuant to Section 7(a) (an "INDEMNIFIED PARTY") of
written notice of any investigation, claim, proceeding or other action in
respect of which indemnification is being sought (each, a "CLAIM"), the
Indemnified Party promptly shall notify the party against whom indemnification
pursuant to Section 7(a) is being sought (the "INDEMNIFYING PARTY") of the
commencement thereof; but the omission to so notify the Indemnifying Party shall
not relieve it from any liability that it otherwise may have to the Indemnified
Party, except to the extent that the Indemnifying Party is materially prejudiced
and forfeits substantive rights and defenses by reason of such failure. In
connection with
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any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and
expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall
have concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in
clauses (x), (y) or (z) above, the fees, costs and expenses of such legal
counsel shall be borne exclusively by the Indemnified Party. Except as provided
above, the Indemnifying Party shall not, in connection with any Claim in the
same jurisdiction, be liable for the fees and expenses of more than one firm of
legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
(c) DIRECT CLAIMS. In the event one party hereunder
should have a claim for indemnification that does not involve a claim or demand
being asserted by a third party, the Indemnified Party promptly shall deliver
notice of such claim to the Indemnifying Party. If the Indemnified Party
disputes the claim, such dispute shall be resolved by mutual agreement of the
Indemnified Party and the Indemnifying Party or by binding arbitration conducted
in accordance with the procedures and rules of the American Arbitration
Association as set forth in Section 8. Judgment upon any award rendered by any
arbitrators may be entered in any court having competent jurisdiction thereof.
9. GOVERNING LAW; MISCELLANEOUS.
(a) GOVERNING LAW; ARBITRATION. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made in New York by persons domiciled in New York City
and without regard to its principles of conflicts of laws. Any dispute under
this Agreement or any Exhibit attached hereto shall be submitted to arbitration
under the American Arbitration Association (the "AAA") in New York City, New
York, and shall be finally and conclusively determined by the decision of a
board of arbitration consisting
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of three (3) members (hereinafter referred to as the "Board of Arbitration")
selected as according to the rules governing the AAA. The Board of Arbitration
shall meet on consecutive business days in New York City, New York, and shall
reach and render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to the amount, if any, which
the losing party is required to pay to the other party in respect of a claim
filed. In connection with rendering its decisions, the Board of Arbitration
shall adopt and follow the laws of the State of New York. To the extent
practical, decisions of the Board of Arbitration shall be rendered no more than
thirty (30) calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the Board
of Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the parties to
the dispute, and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. The non-prevailing party to
any arbitration (as determined by the Board of Arbitration) shall pay the
expenses of the prevailing party including reasonable attorney's fees, in
connection with such arbitration.
(b) NOTICES. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, CA 91367
Attention: Mark Dyne
Telephone: (818) 615-1500
Facsimile: (818) 615-0995
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<PAGE>
with a copy to:
(shall not constitute notice) Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, 24th Floor
Los Angeles, CA 90067
Attention: Murray Markiles, Esq.
Stanley Yukevich, Esq.
Telephone: (310) 728-3233
Facsimile: (310) 728-2233
If to the Investor: St. Annes Investments, Ltd.
c/o ULTRAFINANCE
Gross Muenster Platz 26
Zurich, Switzerland
CH-8022
with a copy to:
(shall not constitute notice) Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, New York 10104
Attention: Eric L. Cohen, Esq.
Telephone: (212) 541-2000
Facsimile: (212) 541- 4630
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 8 by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
(c) COUNTERPARTS/ FACSIMILE/ AMENDMENTS. This Agreement
may be executed in multiple counterparts, each of which may be executed by less
than all of the parties and shall be deemed to be an original instrument which
shall be enforceable against the parties actually executing such counterparts
and all of which together shall constitute one and the same instrument. Except
as otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
(d) ENTIRE AGREEMENT. This Agreement, the agreements
attached as Exhibits hereto, which include, but are not limited to, the
Registration Rights Agreement, set forth the entire agreement and understanding
of the parties relating to the subject matter hereof and supersedes all prior
and contemporaneous agreements, negotiations and understandings between the
parties, both oral and written relating to the subject matter hereof. The terms
and conditions of all Exhibits to this
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<PAGE>
Agreement are incorporated herein by this reference and shall constitute part of
this Agreement as is fully set forth herein.
(e) SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
(f) HEADINGS. The headings used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.
(g) REPORTING ENTITY FOR THE COMMON STOCK. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of
the Investor and the Company shall be required to employ any other reporting
entity.
(h) REPLACEMENT OF CERTIFICATES. Upon (i) receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of a certificate representing the Shares and (ii) in the case of
any such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form and amount to
the Company (which shall not exceed that required by the Company's transfer
agent in the ordinary course) or (iii) in the case of any such mutilation, on
surrender and cancellation of such certificate, the Company at its expense will
execute and deliver, in lieu thereof, a new certificate of like tenor.
(i) FEES AND EXPENSES. Each of the Company and the
Investor agrees to pay its own expenses incident to the performance of its
obligations hereunder, except that the Company shall pay to Robinson Silverman
Pearce Aronsohn & Berman LLP, 1290 Avenue of the Americas, New York, NY 10104,
up to $7,500 of which $5,000 is to be paid upon execution of this Agreement in
connection with fees incurred on behalf of the Investor in connection with the
transactions contemplated hereby as contemplated by the Registration Rights
Agreement.
(j) BROKERAGE. Each of the parties hereto represents that
it has had no dealings in connection with this transaction with any finder or
broker who will demand payment of any fee or commission from the other party
except for Trinity, whose fee shall be paid by the Company. The Company on the
one hand, and the Investor, on the other hand, agree to indemnify the other
against and hold the other harmless from any and all liabilities to any person
claiming brokerage commissions or finder's fees on account of services purported
to have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby.
(k) ASSIGNMENT. Neither this Agreement nor any rights of
the Investor or the Company hereunder may be assigned by either party to any
other person. Notwithstanding the foregoing, (a) the provisions of this
Agreement shall inure to the benefit of, and be enforceable by,
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<PAGE>
any permitted transferee of any of the Shares purchased by the Investor
hereunder, and (b) upon the prior written consent of the Company, which consent
shall not unreasonably be withheld or delayed, the Investor's interest in this
Agreement may be assigned at any time, in whole or in part, to any other person
or entity (including any affiliate of the Investor) who agrees to make the
representations and warranties contained in Section 3 and who agrees to be bound
by the conditions of Section 5. Such permitted assignment shall not relieve the
Investor of its obligations hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this
Securities Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE, CHIEF EXECUTIVE OFFICER
--------------------------------------
ST. ANNES INVESTMENTS, LTD.
By: /S/ M. KLEE, DIRECTOR
--------------------------------------
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<PAGE>
ANNEX A
"AVERAGE STOCK PRICE" means the average of the closing prices (as
reported by Bloomberg) on the Principal Market or, if the Common Stock is not
then traded or quoted on a Principal Market, such other trading or quotation
facility on which the Common Stock is then listed or quoted for trading for the
five (5) consecutive Trading Days immediately prior to the Put Notice Date.
"AVERAGE TRADING VOLUME" means the average daily trading volume for the
Common Stock on all markets during the 20 consecutive Trading Days immediately
prior to the Put Notice Date.
"BUSINESS DAY" means any day other than a Saturday, Sunday or a day on
which commercial banks in the City of New York are authorized or required by law
or executive order to remain closed or on which the Principal Market for the
Common Stock is not open for trading.
"CAP AMOUNT" means 20% of (Average Stock Price* (Average Trading
Volume* 22)).
"CAPITAL SHARES" shall mean the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
"CAPITAL SHARES EQUIVALENTS" shall mean any securities, rights, or
obligations that are convertible into or exchangeable for or give any right to
subscribe for any Capital Shares of the Company or any warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
"MAJOR TRANSACTION" means any of the following transactions or series
of related transactions: (i) the consolidation, merger or other business
combination of the Company with or into another person (other than pursuant to a
migratory merger effected solely for the purposes of changing the jurisdiction
of incorporation of the Company or a merger in which the Company is the
surviving entity and (x) shareholders of the Company immediately prior to the
closing of such merger continue to own in excess of 50% of the voting power of
the Company after the merger and (y) a majority of the directors comprising the
board of directors of the Company after the closing of the merger were directors
of the Company immediately prior to the merger); (ii) the sale or transfer of
all or substantially all of the Company's assets; or (iii) the consummation of a
purchase, tender or exchange offer made to, and accepted by, the holders of more
than 50% of the economic interest in, or the combined voting power of all
classes of voting stock of, the Company.
"MARKET PRICE" shall mean, for any Trading Day of determination, the
lowest Volume Adjusted Price for any Trading Day during the ten (10) Trading
Days immediately preceding such Trading Day of determination.
"PRINCIPAL MARKET" means the national stock market or trading facility
on which the Common Stock is listed or quoted for trading.
"SEC DOCUMENTS" means the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997 and each report, proxy statement or
registration statement filed by the
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Company with the SEC pursuant to the Exchange Act or the Securities Act since
the filing of such Annual Report through the date hereof or any Closing Date, as
applicable.
"TAX" or "TAXES" means federal, state, county, local, foreign, or other
income, gross receipts, ad valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including any
amendment thereof.
"TRADING DAY" means any day during which the then Principal Market
shall be open for business.
"TRANSACTION DOCUMENTS" means the Purchase Agreement and the
Registration Rights Agreement.
"VOLUME ADJUSTED PRICE" means on any Trading Date, the quotient
obtained by dividing (1) the total dollar value of all shares of Common Stock
traded on the Principal Market on such Trading Day, by (2) the total volume of
the Common Stock traded on the Principal Market on such Trading Day, each as
reported by Bloomberg.
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REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 29, 1999, between ST.
ANNES INVESTMENTS, LTD., a British Virgin Islands corporation (the "Holder"),
and BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation having its
principal place of business at 6355 Topanga Canyon Blvd., Suite 120, Woodland
Hills, CA 91367 (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Holder and the Company have entered into a Securities
Purchase Agreement dated the date hereof (the "Purchase Agreement") providing
for the purchase by the Investor of up to those number of shares (the "Shares")
of the Company's Common Stock having an aggregate Purchase Price of $6,000,000;
and
WHEREAS, the Company desires to grant to the Holder the
registration rights set forth herein with respect to the Shares.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. REGISTRABLE SECURITIES. As used herein the term
"Registrable Security" means the Shares issued and sold to the Holder pursuant
to the Purchase Agreement, until (i) and all Shares have been disposed of
pursuant to a Registration Statement, (ii) all Shares have been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) all Shares have been otherwise transferred to holders who may trade such
Shares without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such Shares not
bearing a restrictive legend or (iv) such time as, in the opinion of counsel to
the Company, all Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act. The term "Registrable Securities" means any and/or all
of the securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be deemed to be made in the definition of
"Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Agreement.
Section 2. RESTRICTIONS ON TRANSFER. The Holder
acknowledges and understands that prior to the registration of the Shares as
provided herein, the Shares are "restricted securities"
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<PAGE>
as defined in Rule 144. The Holder understands that no disposition or transfer
of the Shares may be made by Holder in the absence of (i) an opinion of counsel
to the Holder that such transfer may be made without registration under the
Securities Act, (ii) such registration or (iii) as permitted by and in
accordance with the Purchase Agreement.
With a view to making available to the Holder the benefits of
Rule 144 or any other similar rule or regulation of the Commission that may at
any time permit the Holder to sell securities of the Company to the public
without registration, the Company agrees to:
(a) comply with the provisions of paragraph (c)(1)
of Rule 144; and
(b) file with the Commission in a timely manner
all reports and other documents required to be filed by the Company pursuant to
Section 13 or 15(d) under the Exchange Act; and, if at any time it is not
required to file such reports but in the past had been required to or did file
such reports, it will, upon the request of any Holder, make available other
information as required by, and so long as necessary to permit sales of, its
Registrable Securities pursuant to Rule 144.
Section 3. REGISTRATION RIGHTS WITH RESPECT TO THE
SECURITIES.
(a) The Company agrees that it will prepare and
file with the Securities and Exchange Commission ("Commission"), within
forty-five (45) days from the date of this Agreement (the "Filing Date"), a
registration statement on Form S-1 under the Securities Act (or primary offering
if requested by the SEC) (the "Registration Statement"), at the sole expense of
the Company (except as otherwise provided in Section 3(c) hereof), in respect of
all Holders, so as to permit a public offering and resale of the Shares under
the Securities Act by the Holders.
The Company shall use its best efforts to cause the
Registration Statement to become effective on the earlier of (i) ninety (90)
days from the date of this Agreement, and within five (5) days of SEC clearance
to request acceleration of effectiveness (such earlier date, the "Target
Effectiveness Date"). The initial Registration Statement to be filed hereunder
shall cover at least 1,000,000 Shares. To the extent that the number of shares
registered in a Registration Statement is less then the number of Registrable
Securities, the Company shall prepare and file one or more additional
Registration Statements as may be required in order that all Registrable
Securities are registered. The provisions of this Section 3 shall apply to such
additional Registration Statements. The Company will notify Holder of the
effectiveness of the Registration Statement within one (1) Business Day of such
event.
(b) The Company will maintain the Registration
Statement or post- effective amendment filed under this Section 3 hereof
effective under the Securities Act until the earlier of (i) the date that all of
the Shares have been sold pursuant to the Registration Statement, (ii) all of
the Shares have been otherwise transferred to Holders who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend, or (iii) all Shares may be sold without any time, volume or
manner limitations pursuant to Rule 144(k) or any similar
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provision then in effect under the Securities Act in the opinion of counsel to
the Company, which opinion shall be reasonably acceptable to the Holder (the
"Effectiveness Period").
(c) All fees, disbursements and out-of-pocket
expenses and costs incurred by the Company in connection with the preparation
and filing of the Registration Statement under subparagraph 3(a) and in
complying with applicable securities and Blue Sky laws (including, without
limitation, all attorneys' fees of the Company) shall be borne by the Company.
The Holder shall bear the cost of underwriting and/or brokerage discounts, fees
and commissions, if any, applicable to the Registrable Securities and the fees
and expenses of its counsel in excess of $7,500. The Holder and its counsel
shall have a reasonable period, not to exceed three (3) Business Days, to review
the proposed Registration Statement or any amendment thereto, prior to filing
with the Commission, and the Company shall provide each Holder with copies of
any comment letters received from the Commission with respect thereto within two
(2) Business Days of receipt thereof. The Company shall make reasonably
available for inspection by Holder, any underwriter participating in any
disposition pursuant to the Registration Statement, and any attorney, accountant
or other agent retained by such Holder or any such underwriter all relevant
financial and other records, pertinent corporate documents and properties of the
Company and its subsidiaries, and cause the Company's officers, directors and
employees to supply all information reasonably requested by such Holder or any
such underwriter, attorney, accountant or agent in connection with the
Registration Statement, in each case, as is customary for similar due diligence
examinations; PROVIDED, HOWEVER, that all records, information and documents
that are designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material non-public information shall be kept
confidential by such Holder and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such Holder or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
promptly to seek a protective order or otherwise limit the scope of the
information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and PROVIDED, FURTHER, that, if the foregoing inspection and information
gathering would otherwise disrupt the Company's conduct of its business, such
inspection and information gathering shall, to the maximum extent possible, be
coordinated on behalf of the Holder and the other parties entitled thereto by
one firm of counsel designed by and on behalf of the majority in interest of
Holder and other parties. The Company shall qualify any of the securities for
sale in such states as such Holder reasonably designates and shall furnish
indemnification in the manner provided in Section 6 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers, or which will
require the Company to qualify to do business in such state or require the
Company to file therein any general consent to service of process. The Company
at its expense will supply the Holder with copies of the Registration Statement
and the prospectus included therein and other related documents in such
quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this
Section 3 to include a Registrable Securities in any Registration Statement if,
in the opinion of counsel for both the Holder
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and the Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holder and
the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in all purchasers or transferees obtaining securities
which are not "restricted securities"(as such term is defined in Rule 144 under
the Securities Act).
(e) In the event that (i) the Registration
Statement to be filed by the Company pursuant to Section 3(a) above is not filed
with the Commission on or prior to the Filing Date, (ii) the Registration
Statement is not declared effective by the Commission on or prior to the Target
Effectiveness Date (or, if the Registration Statement receives a review by the
Commission staff, within one hundred twenty (120) days from the date of this
Agreement), or (iii) at any time the Registration Statement is not maintained as
effective by the Company during the Effectiveness Period (each of the events in
(i), (ii) and (iii), a "Registration Default"), then the Company will, on the
date of the occurrence of the applicable Registration Default and on each
monthly anniversary thereof until such applicable Registration Default is cured,
pay each Holder in cash (pro-rated on a daily basis), as liquidated damages and
not as penalty, one percent (1%) of the aggregate market value of Shares
purchased from the Company under the Purchase Agreement and then held by the
Investor for every seven (7) day period or portion thereof after such
Registration Default, PROVIDED, that the payment of such liquidated damages
shall not relieve the Company from its obligations to register the Registrable
Securities pursuant to this Section. The market value of the Common Stock for
this purpose shall be the closing price (or last trade, if so reported) on the
Principal Market for each day during such Registration Default. Notwithstanding
anything herein to the contrary, no liquidated damages under this Section 3(e)
shall be due for (A) any permitted Blackout Notices (as defined herein)
delivered pursuant to one or more Potential Material Events (as defined in
Section 3(h)) under subsections (i) and (ii) of Section 3(h) pursuant to which
the Registration Statement or the prospectus included therein may not be used by
the Holder to sell or resell Registrable Securities for an aggregate of not more
than twenty (20) days during any twelve month period (which need not be
consecutive days) and (B) any permitted Blackout Notices delivered pursuant to
one or more Potential Material Events under subsections (iii) of Section 3(h)
during the period of time permitted by Section 3(h)(iii). If the Company does
not remit the liquidated damages to the Holder as set forth above, the Company
will pay the Holder reasonable costs of collection, including attorneys fees, in
addition to the liquidated damages. The registration of the Registrable
Securities pursuant to this provision shall not affect or limit Holder's other
rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude
the Company from selling securities pursuant to any Registration Statement in
which it is required to include Registrable Securities pursuant to this Section
3.
(g) If at any time or from time to time after the
effective date of the Registration Statement the Company notifies the Holder in
writing (such writing a "Blackout Notice") of the existence of a Potential
Material Event, the Holder shall not offer or sell any Shares pursuant to a
Registration Statement from the time of its receipt of the Blackout Notice from
the Company with respect to a Potential Material Event until such Holder
receives written notice from
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the Company that such Potential Material Event either has been disclosed to the
public or no longer constitutes a Potential Material Event; provided, however,
that the Company may not so suspend the right to such holders to sell pursuant
to a Registration Statement for more than twenty (20) days in the aggregate
during any twelve month period. If a Potential Material Event shall occur prior
to the date the Registration Statement is filed, then the Company's obligation
to file the Registration Statement shall be delayed without penalty for not more
than twenty (20) days. Notwithstanding anything herein to the contrary, the
Company may not deliver a Blackout Notice pursuant to a Potential Material Event
under subsections (i) or (ii) of Section 3(h) hereunder within twelve (12)
Business Days following a Put Notice Date (as defined in the Purchase Agreement)
and may not deliver a Blackout Notice pursuant to a Potential Material Event
under subsection (iii) of Section 3(h) hereunder within twenty (20) Business
Days following a Put Notice Date.
(h) "Potential Material Event" means any of the
following: (i) the possession by the Company of material information not ripe
for disclosure in a registration statement, as determined in good faith by the
Chief Executive Officer or the Board of Directors of the Company that disclosure
of such information in the Registration Statement would be detrimental to the
business and affairs of the Company; (ii) any material engagement or activity by
the Company which would, in the good faith determination of the Chief Executive
Officer or the Board of Directors of the Company, be adversely affected by
disclosure in a registration statement at such time, which determination shall
be accompanied by a good faith determination by the Chief Executive Officer or
the Board of Directors of the Company that the Registration Statement would be
materially misleading absent the inclusion of such information, or (iii) the
requirement of the Company to update the Company's financial statements
contained or incorporated by reference in the Registration Statement during the
period after 45 days and within 90 days from the end of the Company's fiscal
year end, which requirement arises solely due to the staleness of the Company's
financial statements contained or incorporated by reference in the Registration
Statement pursuant to Regulation S-X promulgated by the Commission.
Section 4. COOPERATION WITH COMPANY. Holder will cooperate
with the Company in all respects in connection with this Agreement, including
timely supplying all information reasonably requested by the Company (which
shall include all information regarding the Holder and proposed manner of sale
of the Registrable Securities required to be disclosed in the Registration
Statement) and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Securities and
entering into and performing its obligations under any underwriting agreement,
if the offering is an underwritten offering, in usual and customary form, with
the managing underwriter or underwriters of such underwritten offering. The
Holder hereby consents to be named as an underwriter in the Registration
Statement.
Section 5. REGISTRATION PROCEDURES. If and whenever the
Company is required by any of the provisions of this Agreement to effect the
registration of any of the Registrable Securities under the Securities Act, the
Company shall (except as otherwise provided in this Agreement), as expeditiously
as possible, subject to the Holder's assistance and cooperation as reasonably
required:
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(a) (i) prepare and file with the Commission such
amendments and supplements to the Registration Statement and the prospectus used
in connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with respect
to the sale or other disposition of all securities covered by such registration
statement whenever the Holder of such Registrable Securities shall desire to
sell or otherwise dispose of the same (including prospectus supplements with
respect to the sales of securities from time to time in connection with a
registration statement pursuant to Rule 415 promulgated under the Securities
Act) and (ii) take all lawful action such that each of (A) the Registration
Statement and any amendment thereto does not, when it becomes effective, contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, not misleading
and (B) the Prospectus forming part of the Registration Statement, and any
amendment or supplement thereto, does not at any time during the Registration
Period include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(b) (i) prior to the filing with the Commission of any
Registration Statement (including any amendments thereto) and the distribution
or delivery of any prospectus (including any supplements thereto), provide draft
copies thereof to the Holders and reflect in such documents all such comments as
the Holders (and their counsel) reasonably may propose respecting the Selling
Shareholders and Plan of Distribution sections (or equivalents) and (ii) furnish
to each Holder such numbers of copies of a prospectus including a preliminary
prospectus or any amendment or supplement to any prospectus, as applicable, in
conformity with the requirements of the Securities Act, and such other
documents, as such Holder may reasonably request in order to facilitate the
public sale or other disposition of the securities owned by such Holder;
(c) register and qualify the Registrable Securities
covered by the Registration Statement under such other securities or blue sky
laws of such jurisdictions as the Holder shall reasonably request (subject to
the limitations set forth in Section 3(d) above), and do any and all other acts
and things which may be necessary or advisable to enable each Holder to
consummate the public sale or other disposition in such jurisdiction of the
securities owned by such Holder, except that the Company shall not for any such
purpose be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
(d) list such Registrable Securities on the
American Stock Exchange and any other national securities exchange or trading
facility on which the Common Stock is then listed or quoted for trading,
including, but not limited to, the NASDAQ National Market and the NASDAQ
Small-Cap Market;
(e) notify each Holder of Registrable Securities
covered by the Registration Statement, at any time when a prospectus relating
thereto covered by the Registration Statement is required to be delivered under
the Securities Act, of the occurrence of any event of
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which it has knowledge as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, and the Company shall prepare and file a curative
amendment under Section 5(a) as quickly as commercially possible;
(f) as promptly as practicable after becoming aware
of such event, notify each Holder who holds Registrable Securities being sold
(or, in the event of an underwritten offering, the managing underwriters) of the
issuance by the Commission of any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time and
take all lawful action to effect the withdrawal, recession or removal of such
stop order or other suspension;
(g) cooperate with the Holders who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates for the Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates for the Registrable
Securities to be in such denominations or amounts, as the case may be, as the
Holders reasonably may request and registered in such names as the Holder may
request; and, within three business days after a Registration Statement which
includes Registrable Securities is declared effective by the Commission, deliver
and cause legal counsel selected by the Company to deliver to the transfer agent
for the Registrable Securities (with copies to the Holders whose Registrable
Securities are included in such Registration Statement) an appropriate
instruction and, to the extent necessary, an opinion of such counsel;
(h) take all such other lawful actions reasonably
necessary to expedite and facilitate the disposition by the Holders of their
Registrable Securities in accordance with the intended methods therefor provided
in the prospectus which are customary for issuers to perform under the
circumstances;
(i) in the event of an underwritten offering,
promptly include or incorporate in a Prospectus supplement or post-effective
amendment to the Registration Statement such information as the managers
reasonably agree should be included therein and to which the Company does not
reasonably object and make all required filings of such Prospectus supplement or
post-effective amendment as soon as practicable after it is notified of the
matters to be included or incorporated in such Prospectus supplement or
post-effective amendment; and
(j) maintain a transfer agent and registrar for its
Common Stock.
Section 6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold
harmless the Holder and each person, if any, who controls the Holder within the
meaning of the Securities Act ("Distributing Holder") against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all reasonable costs of
defense and
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investigation and all reasonable attorneys' fees), to which the Distributing
Holder may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, or any related
preliminary prospectus, final prospectus or amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
preliminary prospectus, final prospectus or amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished to the
Company by the Distributing Holder, specifically for use in the preparation
thereof. This Section 6(a) shall not inure to the benefit of any Distributing
Holder with respect to any person asserting such loss, claim, damage or
liability who purchased the Registrable Securities which are the subject thereof
if the Distributing Holder failed to send or give (in violation of the
Securities Act or the rules and regulations promulgated thereunder) a copy of
the prospectus contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of such Registrable
Securities, where the Distributing Holder was obligated to do so under the
Securities Act or the rules and regulations promulgated thereunder. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Distributing Holder agrees that it will
indemnify and hold harmless the Company, and each officer, director of the
Company or person, if any, who controls the Company within the meaning of the
Securities Act, against any losses, claims, damages or liabilities (which shall,
for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all reasonable attorneys'
fees) to which the Company or any such officer, director or controlling person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, or any related
preliminary prospectus, final prospectus or amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, preliminary prospectus, final prospectus or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Distributing Holder may otherwise
have.
(c) Promptly after receipt by an indemnified party
under this Section 6 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not
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relieve the indemnifying party from any liability which it may have to any
indemnified party except to the extent of actual prejudice demonstrated by the
indemnifying party. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified,
assume the defense thereof, subject to the provisions herein stated and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless the indemnifying
party shall not pursue the action to its final conclusion. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is the
Distributing Holder, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Distributing Holder and the indemnifying party and the Distributing Holder shall
have been advised by such counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the Distributing Holder (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the Distributing Holder, it being understood, however, that the
indemnifying party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 7. CONTRIBUTION. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
indemnified party makes a claim for indemnification pursuant to Section 6 hereof
but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
Section 6 hereof provide for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any indemnified party,
then the Company and the applicable Distributing Holder shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
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information supplied by the Company on the one hand or the applicable
Distributing Holder on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Distributing Holder agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section 7. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section 7 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding any other provision
of this Section 7, in no event shall any (i) Holder be required to undertake
liability to any person under this Section 7 for any amounts in excess of the
dollar amount of the proceeds to be received by such Holder from the sale of
such Holder's Registrable Securities (after deducting any fees, discounts and
commissions applicable thereto) pursuant to any Registration Statement under
which such Registrable Securities are to be registered under the Securities Act
and (ii) underwriter be required to undertake liability to any person hereunder
for any amounts in excess of the aggregate discount, commission or other
compensation payable to such underwriter with respect to the Registrable
Securities underwritten by it and distributed pursuant to the Registration
Statement.
Section 8. NOTICES. All notices, demands, requests,
consents, approvals, and other communications required or permitted hereunder
shall be in writing and, unless otherwise specified herein, shall be (i)
personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier
service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or
facsimile, addressed as set forth below or to such other address as such party
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by reputable courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
If to the Company: BRILLIANT DIGITAL ENTERTAINMENT, INC.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, CA 91367
Telephone: (818) 615-1500
Fax: (818) 615-0995
Attention: Mark Dyne
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with a copy to:
(shall not constitute notice) Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East
24th Floor
Los Angeles, CA 90067
Telephone: (310) 728-3233
Fax: (310) 728-2233
Attention: Murray Markiles, Esq.
Stanley Yukevich, Esq.
If to the Investor: St. Annes Investments, Ltd.
c/o ULTRAFINANCE
Gross Muenster Platz 26
Zurich, Switzerland
CH-8022
with a copy to: Robinson Silverman Pearce Aronsohn
(shall not constitute notice) & Berman LLP
1290 Avenue of the Americas
New York, New York 10104
Telephone: (212) 541-2000
Fax: (212) 541-4630
Attention: Eric L. Cohen, Esq.
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 8 by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 9. ASSIGNMENT. This Agreement is binding upon and
inures to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns. The rights granted the Holder under this
Agreement may be assigned to any purchaser of substantially all of the
Registrable Securities (or the rights thereto) from Holder, as otherwise
permitted by the Purchase Agreement. In the event of a transfer of the rights
granted under this Agreement, the Holder agrees that the Company may require
that the transferee comply with reasonable conditions as determined in the
discretion of the Company.
Section 10. COUNTERPARTS/FACSIMILE. This Agreement may be
executed in two or more counterparts, each of which shall constitute an
original, but all of which, when together shall constitute but one and the same
instrument, and shall become effective when one or more counterparts have been
signed by each party hereto and delivered to the other party. In lieu of the
original, a facsimile transmission or copy of the original shall be as effective
and enforceable as the original.
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Section 11. REMEDIES. The remedies provided in this
Agreement are cumulative and not exclusive of any remedies provided by law. If
any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be affected,
impaired or invalidated, and the parties hereto shall use their best efforts to
find and employ an alternative means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention of the
parties that they would have executed the remaining terms, provisions, covenants
and restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
Section 12. CONFLICTING AGREEMENTS. The Company shall not
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the holders of Registrable Securities in this
Agreement or otherwise prevents the Company from complying with all of its
obligations hereunder.
Section 13. HEADINGS. The headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 14. GOVERNING LAW, ARBITRATION. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York applicable to contracts made in New York by persons domiciled in New
York City and without regard to its principles of conflicts of laws. Any dispute
under this Agreement shall be submitted to arbitration under the American
Arbitration Association (the "AAA") in New York City, New York, and shall be
finally and conclusively determined by the decision of a board of arbitration
consisting of three (3) members (hereinafter referred to as the "Board of
Arbitration") selected as according to the rules governing the AAA. The Board of
Arbitration shall meet on consecutive business days in New York City, New York,
and shall reach and render a decision in writing (concurred in by a majority of
the members of the Board of Arbitration) with respect to the amount, if any,
which the losing party is required to pay to the other party in respect of a
claim filed. In connection with rendering its decisions, the Board of
Arbitration shall adopt and follow the laws of the State of New York. To the
extent practical, decisions of the Board of Arbitration shall be rendered no
more than thirty (30) calendar days following commencement of proceedings with
respect thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the Board
of Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the parties to
the dispute, and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. The non-prevailing party to
any arbitration (as determined by the Board of Arbitration) shall pay the
expenses of the prevailing party, including reasonable attorneys' fees, in
connection with such arbitration.
Section 15. SEVERABILITY. If any provision of this
Agreement shall for any reason be held invalid or unenforceable, such invalidity
or unenforceablity shall not affect any other provision hereof and this
Agreement shall be construed as if such invalid or unenforceable provision
-12-
<PAGE>
had never been contained herein. Terms not otherwise defined herein shall be
defined in accordance with the Agreement.
Section 16. CAPITALIZED TERMS. All capitalized terms not
otherwise defined herein that are defined in the Purchase Agreement shall have
the meaning assigned to them in the Purchase Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed, on the day and year first
above written.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MICHAEL OZEN, CHIEF FINANCIAL OFFICER
------------------------------------------
ST. ANNES INVESTMENTS, LTD
By: /S/ M. KLEE, DIRECTOR
------------------------------------------
-14-
EXHIBIT 10.54
APRIL 14, 1999
BRILLIANT DIGITAL ENTERTAINMENT, INC.
SYMBOL: BDE
EXCHANGE: AMEX
$ 1,000,000 REGULATION D OFFERING OF CONVERTIBLE DEBENTURES
FUNDING: No later than April 21, 1999
DEBENTURES: 4% interest, payable quarterly in cash or stock at the
Company's option. Debentures convert automatically on the
first anniversary of the closing.
CONVERSION: The Investors shall have the right to convert their
Debentures into common stock of the Company at the lower
of:
Conversion Schedule: 95% of the Market Price of the Company's Common Stock,
where Market Price is defined as: the lowest volume
adjusted weighted price on the Principal Market (as
reported by Bloomberg L.P.) during the 10 business days
prior to the business day on which the notice of
conversion is transmitted by the Preferred holder(s) OR
$ 6.00 PER SHARE
Optional Conversion: The Company may, at its sole discretion, honor
any conversions that would occur at $3.00 or less in cash
at "the benefit of the bargain", meaning: # of shares to
be issued from conversion multiplied by the volume
adjusted weighted price on conversion date.
Limitation on issuance
Of common stock: Under no circumstances shall the Company issue more than
19.5% of its outstanding shares of common stock in
connection with this transaction, without obtaining prior
shareholder approval.
REGISTRATION: The Company will agree to file a registration statement
under the Securities Act of 1933 including the shares of
Common Stock underlying the Convertible Debenture by May
15, 1999 and to cause the registration to become effective
on the date (the "SEC Effective Date") which is the
earlier of 90 days after May 15, or within five days of
SEC clearance to request acceleration of effectiveness.
The Company will maintain the effectiveness of such
registration for a minimum of three years.
Registration Penalty: If the registration statement is not effective within the
negotiated time period, the Company will pay investors
2.0% per month, pro rated for periods less that 30 days.
REDEMPTION: If the shares of common stock of the Company close at or
below $ 1.00 per share for 10 or more consecutive trading
days, the Company shall have the right to issue a notice
of redemption to the investors. Upon receipt of such
notice, The investors may choose to
<PAGE>
either have the unconverted portion of their Debenture
redeemed at 120% of face value, or enter into a voluntary
30-day lockup period during which no conversions would be
permitted. If a redemption is agreed upon, the Company
must make payment within 5 business days.
PLACEMENT AGENT: Curzon Capital Corp.
Placement Agent Fees: 5% Commission, (3% cash, 2% stock)
This is a binding commitment by Roseworth Group, Ltd. to proceed on the terms
set forth above
/S/ THOMAS BADIAN
- ----------------------------------
Thomas Badian
President, Curzon Capital Corp.
As attorney-in-fact for Roseworth Group, Ltd.
Agreed and accepted subject to Board approval:
/S/ MICHAEL OZEN
- ----------------------------------
By: Michael Ozen
Brilliant Digital Entertainment, Inc.
CONSENT OF PRICEWATERHOUSECOOPERS, LLP
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-56519) and
the incorporation by reference in the Registration Statement on Form S-8 (No.
333-18411) of Brilliant Digital Entertainment, Inc. of our report dated March
29, 1999 appearing on page 29 of this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers, LLP
Los Angeles, California
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT, INC. AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,187
<SECURITIES> 0
<RECEIVABLES> 2,278
<ALLOWANCES> 139
<INVENTORY> 75
<CURRENT-ASSETS> 5,636
<PP&E> 1,630
<DEPRECIATION> 876
<TOTAL-ASSETS> 7,453
<CURRENT-LIABILITIES> 1,552
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 5,549
<TOTAL-LIABILITY-AND-EQUITY> 7,453
<SALES> 431
<TOTAL-REVENUES> 431
<CGS> 1,383
<TOTAL-COSTS> 8,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,425)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,425)
<EPS-PRIMARY> (1)
<EPS-DILUTED> (1)
</TABLE>
