As filed with the Securities and Exchange Commission on May 19, 1999
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 7372 95-4592204
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(Address and Telephone Number of Principal Executive Offices)
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6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Place of Business or Intended Principal Place of Business)
---------------
MARK DYNE, CHIEF EXECUTIVE OFFICER
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(Name, Address and Telephone Number of Agent for Service)
COPIES TO:
Murray Markiles, Esq.
John J. McIlvery, Esq.
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East
Los Angeles, California 90067
(310) 728-3200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. | |
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------
Proposed
Maximum Proposed Maximum Amount Of
Title of Each Class of Securities Amount To Be Offering Price Aggregate Registration
To Be Registered Registered(1) Per Unit Offering Price Fee
- --------------------------------- ------------- -------------- ---------------- ============
<S> <C> <C> <C> <C>
Common Stock, par value $.001
per share 2,040,000 $6.66(2) $13,586,400 $3,778
- --------------------------------- ------------- -------------- ---------------- ============
</TABLE>
(1) In the event of a stock split, stock dividend, or similar transaction
involving the Registrant's common stock, in order to prevent dilution, the
number of shares registered shall automatically be increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average high and low prices of
the Registrant's common stock reported on the American Stock Exchange on May
17, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION - MAY 19, 1999
________ Shares PROSPECTUS
BRILLIANT DIGITAL ENTERTAINMENT, INC.
Common Stock
BRILLIANT DIGITAL ENTERTAINMENT is selling _________ shares of its common
stock, and issuing ______ shares of its common stock as a financial advisory
fee, pursuant to a securities purchase agreement with St. Annes Investment, Ltd.
("St. Annes").
This prospectus may be used only in connection with the resale by St. Annes
or its assigns and Trinity Capital Advisors, Inc. ("Trinity") of shares of the
common stock of BRILLIANT, as follows:
o Up to 2,000,000 shares of common stock which we will have the right to
issue to St. Annes, subject to certain conditions, pursuant to the
securities purchase agreement (of this amount, we may sell _____
shares in the future); and
o Up to 40,000 shares of common stock which we may issue to Trinity as a
financial advisory fee pursuant to the securities purchase agreement
(of this amount, we may issue _____ shares in the future).
We will issue the shares of common stock to St. Annes at a discount to the
then current market price of the common stock, as defined in the securities
purchase agreement, as follows:
o If the market price is $4.00 or less, then the price for the shares
shall be 86% of the market price; and
o If the market price is greater than $4.00, then the price shall be 88%
of the market price.
The ____ shares of common stock offered by St. Annes pursuant to this
prospectus are being sold by BRILLIANT to St. Annes under the securities
purchase agreement at a price of $____ per share, which price was 86% of $____
per share, the market price of BRILLIANT'S common stock as determined pursuant
to the securities purchase agreement.
The shares of common stock offered hereby may be resold from time to time
by St. Annes and Trinity (collectively, the "Selling Stockholders"). We will not
receive any of the proceeds from the sale of the shares by the Selling
Stockholders.
The Selling Stockholders may, without limitation, offer pursuant to this
prospectus shares of common stock to purchasers from time to time in
transactions on the American Stock Exchange, in negotiated transactions, or
otherwise, or by a combination of these methods, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices. Sales of the shares may be effected
through broker-dealers, who may receive compensation from the Selling
Stockholders in the form of discounts or commissions. St. Annes is an
"underwriter" within the meaning of the Securities Act of 1933, as amended, in
connection with its sales of common stock hereunder. See "Plan of Distribution."
BRILLIANT'S common stock is traded on the American Stock Exchange under the
symbol "BDE." On May 13, 1999, the closing sale price of the common stock on the
American Stock Exchange was $6.75 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
This prospectus is dated _____, 1999
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
OUR COMPANY
BRILLIANT DIGITAL ENTERTAINMENT 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. 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.
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.
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.
OUR SOFTWARE TOOLS
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:
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<PAGE>
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.
CORPORATE INFORMATION
We are a Delaware corporation that was 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 research and development
operation for leading edge software tools. Our executive offices are located at
6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, California 91367, and
our telephone number is (818) 346-3653. Information on our Web site,
www.multipathmovies.com, does not constitute part of this prospectus.
THE OFFERING
We entered into a securities purchase agreement with St. Annes on March 29,
1999 (the "Securities Purchase Agreement"). This agreement entitles us to sell,
from time to time during the three year term of the agreement, up to $6,000,000
(priced as provided in the Securities Purchase Agreement) of our common stock to
St. Annes. Pursuant to the agreement, we have:
o Filed a registration statement with respect to 2,000,000 shares of
common stock that we may sell from time to time to St. Annes or its
assigns pursuant to the Securities Purchase Agreement, which St. Annes
or its assigns may offer to resell to the public through this
prospectus;
o Agreed to pay to our financial advisor, Trinity Capital Advisors a
financial advisory fee in cash equal to 3% of the purchase price of
the shares of common stock that are issued and sold to St. Annes or
its assigns at each closing under the Securities Purchase Agreement;
and
o Agreed to issue to Trinity shares of common stock having an aggregate
market price equal to 2% of the purchase price of the shares of common
stock that are issued and sold to St. Annes or its assigns at each
closing under the Securities Purchase Agreement. 40,000 of the shares
issuable to Trinity were included in the registration statement and
may be offered for sale by Trinity to the public through this
prospectus.
Pursuant to the Securities Purchase Agreement, on _________, 1999 BRILLIANT
sold _______ shares of its common stock to St. Annes at a price of $_______ per
share and issued ____ shares of its common stock to Trinity as a financial
advisory fee in connection with such sale.
Pursuant to this prospectus, the Selling Stockholders may offer to the
public the common stock acquired under the Securities Purchase Agreement.
Page 3
<PAGE>
<TABLE>
<S> <C>
Shares offered by ST. ANNES........................ Up to 2,000,000 shares.
Shares offered by TRINITY.......................... Up to 40,000 shares.
Offering Price..................................... Determined at the time of sale by the Selling
Stockholder.
Total Shares outstanding as of May 3, 1999......... 11,546,884 Shares.(1)
Use of proceeds by BRILLIANT....................... We will not receive any proceeds from the sale
of shares by the Selling Stockholders in this
offering. Any proceeds we receive from the
sale of common stock pursuant to the
Securities Purchase Agreement will be used for
working capital and general corporate purposes.
Dividend Policy.................................... We currently intend to retain any future
earnings to fund the development and growth of
our business. Therefore, we do not anticipate
currently paying dividends. See "Dividend
Policy."
American Stock Exchange Symbol..................... BDE
<FN>
- ----------
(1) Does not include (i) shares of common stock issuable to the Selling
Stockholders pursuant to the Securities Purchase Agreement, (ii) 1,077,000
shares of common stock issuable upon exercise of options granted or
available for future grant under the 1996 Stock Option Plan, and (iii)
1,040,262 shares of common stock issuable upon exercise of outstanding
warrants.
</FN>
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------- --------------------
1997 1998 1998 1999
---------- --------- ---------- --------
STATEMENT OF OPERATIONS DATA: (unaudited)
<S> <C> <C> <C> <C>
Total revenues........................................ $ 2,481 $ 431 $ 31 $ 206
Gross profit (loss)................................... 2,437 (952) (235) 1
Total operating expenses.............................. 5,230 8,909 1,164 1,952
Income (loss) from operations......................... (2,793) (9,861) (1,399) (1,951)
Net income (loss)..................................... (2,305) (9,425) (1,267) (1,890)
Comprehensive income (loss)........................... (2,473) (9,353) (1,205) (1,868)
Basic and diluted net income (loss) per share......... $ (0.31) $ (1.00) $ (0.13) $ (0.20)
Weighted average number of shares used in computing
basic and diluted net income (loss) per share........ 7,384 9,403 9,403 9,409
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1999
-------------
BALANCE SHEET DATA: (unaudited)
<S> <C>
Cash and cash equivalents........................... $ 1,632
Total current assets................................ 3,974
Total assets........................................ 5,575
Total current liabilities........................... 1,584
Total stockholders' equity.......................... 3,690
</TABLE>
Page 4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO ADVERSELY
IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER.
IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE FORWARD-LOOKING STATEMENTS ADDRESS, AMONG OTHER
THINGS, OUR STRATEGIES AND OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
THESE FORWARD-LOOKING STATEMENTS MAY BE FOUND IN "PROSPECTUS SUMMARY," "RISK
FACTORS," "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS. IN SOME CASES YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "ESTIMATES," "MAY,"
"WILL," "SHOULD," "COULD," "PLANS," "PREDICTS," "POTENTIAL," "CONTINUE" OR
SIMILAR TERMS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM
ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FACTORS INCLUDE THOSE LISTED UNDER THIS SECTION "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS.
IF WE DO NOT ACHIEVE COMMERCIAL ACCEPTANCE OF OUR MULTIPATH MOVIES OUR BUSINESS
WILL BE ADVERSELY AFFECTED.
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.
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, and delays in the retail distribution of our
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
WE MAY EXPERIENCE DELAYS IN THE INTRODUCTION AND DISTRIBUTION OF OUR PRODUCTS
WHICH MAY RESULT IN REDUCED REVENUES AND INCREASED LOSSES.
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 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
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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 WHICH
PROVIDES A LIMITED PERIOD FOR INVESTORS TO EVALUATE OUR BUSINESS MODEL.
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.
IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
We believe that our existing funds, cash generated from operations and
proceeds from our sale of common stock under the securities purchase agreement
we entered into 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 at the
time we need additional funds 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.
Page 6
<PAGE>
One delay has already occurred. Packard Bell NEC, which 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-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 DEPEND ON THE INTERNET TO DISTRIBUTE SOME OF OUR PRODUCTS.
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 MAY EXPERIENCE PROBLEMS IN DISTRIBUTING OUR PRODUCTS THROUGH TRADITIONAL
RETAILERS.
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,
Page 7
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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.
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. 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 creditworthiness 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.
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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. During fiscal 1998, we 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.
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 us 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.
IF WE EXPERIENCE PROBLEMS WITH OUR SOFTWARE TOOLS AND PRODUCTS, ARE ABILITY TO
GENERATE REVENUE WILL BE ADVERSELY AFFECTED.
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 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 arrangements;
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
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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;
o amortization and/or impairment of goodwill and other intangible
assets; and
o risks associated with unanticipated problems or legal liabilities.
WE MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL DEVELOPMENTS AND
CHANGING PRODUCT PLATFORMS THAT ARE TYPICAL IN OUR INDUSTRY.
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 CERTAIN KEY PERSONNEL TO OPERATE OUR BUSINESS.
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 in executive and director positions with other
businesses. 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 Brilliant Digital Entertainment, on
the one hand, and
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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 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 when it was 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 FLUCTUATES WIDELY.
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;
o recommendations by securities industry analysts;
o dilution to existing stockholders resulting from the issuance of
additional shares of common stock; and
o short sales and hedging of our common stock.
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.
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OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
As of May 14, 1999, our officers and directors owned, in total,
approximately 18.2% 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 our common stock, which might depress the price of our
common stock.
WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES WHICH MAY DEPRESS THE PRICE
OF OUR COMMON STOCK.
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 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.
THE SECURITIES PURCHASE AGREEMENT WILL HAVE A DILUTIVE IMPACT ON OUR
STOCKHOLDERS.
The sale of shares pursuant to the Securities Purchase Agreement will have
a dilutive impact on our stockholders. As a result, our net income per share or
net loss per share could be materially decreased in future periods, and the
market price of our common stock could be materially and adversely affected. In
addition, the common stock to be issued under the Securities Purchase Agreement
will be issued at a discount to the then-prevailing market price of the common
stock. These discounted sales could have an immediate adverse effect on the
market price of the common stock. We also have agreed to issue to Trinity a fee
in shares of common stock having an aggregate market price equal to 2% of the
purchase price of the shares of common stock to be issued and sold under the
Securities Purchase Agreement. The issuance or resale of these shares would have
a further dilutive effect on our common stock and could adversely affect its
price. Downward pressure on the market price of our common stock may result from
sales of common stock issued under the Securities Purchase Agreement. This
downward pressure could encourage short sales of common stock by St. Annes (to
the extent permitted by, and pursuant to, the Securities Purchase Agreement) or
others. A "short sale" is a sale of common stock by an 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. Material amounts
of such short selling could place further downward pressure on the market price
of the common stock.
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THE SECURITIES PURCHASE AGREEMENT
On March 29, 1999, we entered into the Securities Purchase Agreement with
St. Annes pursuant to which, subject to the satisfaction of certain conditions,
we may issue and sell, from time to time, up to an aggregate of $6,000,000 of
our common stock.
For a period of up to 36 months after the registration statement that
contains this prospectus is declared effective by the Securities and Exchange
Commission (the "Commission"), we may from time to time, in our sole discretion,
sell ("put") shares of our common stock to St. Annes. The price that St. Annes
will pay for our stock will be at a discount to the market price of our common
stock on the date we deliver a put notice to St. Annes, as follows:
o If the market price is $4.00 or less, then the price for the shares
shall be 86% of the market price; and
o If the market price is greater than $4.00, then the price shall be 88%
of the market price.
The market price (the "Market Price") of our common stock, for purposes of
calculating the purchase price is the lowest volume adjusted price during the
ten trading days immediately preceding the date that we deliver a put notice to
St. Annes. The volume adjusted price on a trading day is equal to (i) the total
dollar value of all shares of our common stock traded on the American Stock
Exchange on such trading day, divided by (ii) the total volume of our common
stock traded on the American Stock Exchange on such trading day.
Certain conditions must be satisfied before we can put shares to St. Annes,
including, but not limited to, the following:
o The registration statement of which this prospectus forms a part must
be effective;
o The Market Price of our common stock may not be less than $1.00 on the
date we deliver a put notice to St. Annes;
o We must sell at least $100,000 of our common stock to St. Annes upon
each put of shares;
o The closing date with respect to any put of shares shall not occur
within 15 business days of any other put closing date;
o Our representations and warranties to St. Annes set forth in the
Securities Purchase Agreement must be accurate as of the date of each
put and we must not be in breach of any of our obligations under the
Securities Purchase Agreement;
o The number of shares of common stock that we put, when added to all
other shares of common stock previously acquired by St. Annes pursuant
to the Securities Purchase Agreement and still owned by St. Annes at
the time of the put, shall not exceed 9.99% of our common stock
outstanding on the date of the put notice;
o The aggregate number of shares of common stock that we may issue and
sell to St. Annes may not exceed 19.99% of the shares of common stock
outstanding as of March 29, 1999 if the rules of the American Stock
Exchange require the issuance of shares of our common stock to St.
Annes in excess of such amount to first be approved by our
stockholders, unless we obtain such stockholder approval.
We have agreed to put to St. Annes at least $1,000,000 of our common stock
during the 36 month term of the Securities Purchase Agreement.
We have agreed to register the resale by St. Annes of the shares of common
stock we put to St. Annes under the Securities Purchase Agreement. We have filed
a registration statement, of which this prospectus forms a part, to satisfy our
registration obligation. If the 2,000,000 shares of common stock included in the
registration statement are less than the total number of shares we actually put
to St. Annes under the Securities Purchase Agreement, we will amend the
registration statement or file another registration statement to include such
additional shares. We have agreed to prepare and file amendments and supplements
to the registration statement as necessary to keep it effective as long as
registrable securities are outstanding. We have agreed to bear certain expenses
(other than any broker discounts and commissions of the Selling Stockholders) in
connection with the registration statement.
St. Annes and its representatives have the right to review the registration
statement and our records and properties to obtain information about us and the
accuracy of the registration statement and this prospectus.
We have agreed to pay to Trinity Capital Advisors, as compensation for
services rendered in connection with the Securities Purchase Agreement, a cash
fee equal to 3% of the purchase price paid to us by St. Annes at any put
closing,
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and issue to Trinity shares of common stock having an aggregate Market Price
equal to 2% of the purchase price paid to us by St. Annes at any put closing.
The Securities Purchase Agreement will automatically terminate on the
earliest of (i) the date on which St. Annes has purchased an aggregate of
$6,000,000 of our common stock under the Securities Purchase Agreement, (ii) 36
months after the effective date of the initial registration statement filed
pursuant to the Securities Purchase Agreement, or (iii) June 29, 2002. The
Securities Purchase Agreement also can be terminated earlier by St. Annes under
certain circumstances.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock offered by the Selling Stockholders under this prospectus. We will,
however, receive from St. Annes the purchase price for the shares of common
stock that we sell to St. Annes under the Securities Purchase Agreement. If the
"market price" of our common stock, as determined under the Securities Purchase
Agreement, is $4.00 or less, the purchase price is equal to 86% of the market
price. If the market price of our common stock is greater than $4.00, the
purchase price is equal to 88% of the market price. See "Securities Purchase
Agreement." We intend to use all proceeds from the sale of common stock under
the Securities Purchase Agreement for working capital and general corporate
purposes.
DIVIDEND POLICY
We have never paid any dividends on our common stock. We intend to retain
earnings for use in our business and do not intend to pay any dividends on our
common stock in the foreseeable future.
DETERMINATION OF THE OFFERING PRICE
The Selling Stockholders may from time to time sell all or a portion of the
shares of common stock offered by them under this prospectus in routine
brokerage transactions on the American Stock Exchange, in negotiated
transactions, or otherwise, at fixed prices which may be changed, at market
prices prevailing at the time of sale, at prices related to market prices or at
negotiated prices. The Selling Stockholders also may make private sales directly
or through brokers. As such, the offering price cannot be determined as of the
date of this prospectus. See "Plan of Distribution."
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PRICE RANGE OF COMMON STOCK
Our 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, certain high and low prices for our common stock as reported
by the American Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
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
YEAR ENDED DECEMBER 31, 1999
First Quarter ................................... $ 5.25 $ 1.75
Second Quarter (through May 13, 1999) .......... 7.94 2.50
</TABLE>
On May 13, 1999, the closing sale price of the common stock as reported on
the American Stock Exchange was $6.75 per share. As of May 13, 1999, there were
approximately 60 holders of record of our common stock.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999.
This table should be read in conjunction with the Consolidated Financial
Statements and related notes contained therein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------
(unaudited)
Stockholders' equity:
<S> <C>
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 (1) ......................................... 9
Additional paid-in capital ................................ 21,357
Accumulated deficit ....................................... (17,575)
Accumulated other comprehensive income (loss) ............. (101)
--------
Total stockholders' equity .................................... 3,690
========
Total capitalization ...................................... $ 3,690
========
<FN>
- ----------
(1) Does not include (i) shares of common stock issuable to St. Annes pursuant
to the stock purchase agreement, (ii) 1,077,000 shares of common stock
issuable upon exercise of options granted or available for future grant
under the 1996 Stock Option Plan, (iii) 1,040,262 shares of common stock
issuable upon exercise of outstanding warrants, and (iv) 2,137,883 shares
of common stock issued between April 1, 1999 and May 14, 1999.
</FN>
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of our business for
the periods indicated. The statement of operations data set forth below with
respect to the years ended December 31, 1997 and 1998, and the balance sheet
data as of December 31, 1997 and 1998 are derived from our audited consolidated
financial statements and the notes thereto appearing elsewhere in the
prospectus. The statement of operations date for the three months ended March
31, 1998 and 1999, and the balance sheet data as of March 31, 1998 and 1998 are
derived from our unaudited consolidated financial statements and the notes
thereto appearing elsewhere in the prospectus. The following data should be read
in conjunction with our financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in the prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- ---------------------------
1997 1998 1998 1999
------------ ------------- -------------- ------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software sales......................... $ 2,246 $ 221 $ 24 $ 152
Development fees....................... 235 210 7 54
-------- -------- -------- --------
Total revenues.................... 2,481 431 31 206
Cost of revenues.......................... 44 1,383 266 205
-------- -------- -------- --------
Gross profit (loss)....................... 2,437 (952) (235) 1
Operating expenses:
Sales and marketing.................... 1,090 1,785 305 222
General and administrative............. 2,217 2,936 524 619
Research and development............... 1,709 3,798 317 981
Depreciation........................... 214 390 18 130
-------- -------- -------- --------
Total operating expenses.......... 5,230 8,909 1,430 2,157
-------- -------- -------- --------
Income (loss) from operations............. (2,793) (9,861) (1,399) (1,951)
Other income (expense), net............... 488 436 132 61
-------- -------- -------- --------
Income (loss) before income taxes......... (2,305) (9,425) (1,267) (1,890)
Income taxes.............................. -- -- -- --
-------- -------- -------- --------
Net income (loss)......................... $ (2,305) $ (9,425) $ (1,267) $ (1,890)
======== ======== ======== ========
Other comprehensive income:
Foreign currency translation adjustment
(net of tax effects of $ 0).......... (168) 72 62 22
-------- -------- -------- --------
Comprehensive income (loss)............... (2,473) $ (9,353) (1,205) (1,868)
======== ======== ======== ========
Basic and diluted net income (loss) per
share.................................. $ (0.31) $ (1.00) $ (0.13) $ (0.20)
======== ======== ======== ========
Weighted average number of shares used
in computing basic and diluted net
income (loss) per share................ 7,384 9,403 9,403 9,409
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
----------------------- -------------
1997 1998 1999
----------- ----------- -------------
(in thousands) (unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 12,338 $ 3,187 $ 1,632
Total current assets.......................................... 14,722 5,636 3,974
Total assets.................................................. 16,843 7,453 5,575
Total current liabilities..................................... 2,021 1,552 1,584
Total stockholders' equity.................................... 14,822 5,558 3,690
</TABLE>
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<PAGE>
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 DIGITAL ENTERTAINMENT AND THE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL ENTERTAINMENT FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998
AND DECEMBER 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH
31, 1998. 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 IN "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Brilliant is a production and development studio producing a new generation
of digital entertainment that is currently 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., Ltd., 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 "Risk Factors - If we do not
achieve commercial acceptance of our Multipath Movies our business will be
adversely affected." 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.
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. Progress is being made in the retail channel through our
relationship with GT Interactive, who is representing selected titles sold in
jewel case CD-ROM formats. Certain titles are now available in stores such as
Wal-Mart, Target and other mass merchant retailers. In addition to distribution
through GT Interactive, we have entered into a distribution agreement with The
Learning Company to sell 4 boxed titles, including Superman and Gravity Angels,
into computer retail stores and to expand distribution based upon the success of
the initial title launch. 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 movies 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. However, since December 1998, GT Interactive has
placed additional orders for Xena and Ace Ventura.
DVD MARKET
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. We entered
into an agreement with SlingShot, a special purpose DVD publisher and
distributor, in March 1999. We granted to SlingShot
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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 SlingShot and us. SlingShot will also use a DVD version of our
Digital Projector to drive traffic to our web site. We have begun delivery of
titles to SlingShot for conversion to the DVD format and have developed a
release plan to ensure timely delivery of DVD titles into the retail channel.
DVD titles are expected to be available in retail outlets in the second half of
1999.
INTERNET AND ONLINE SERVICES
We continue to seek distribution of our Multipath Movies through bundling
arrangements which allow the user to purchase and unlock titles through our
website. In addition to our existing relationships, we have signed an agreement
to distribute certain title previews through Midas Interactive Entertainment BV,
a Netherlands-based publisher and distributor of PC CD-ROM software. In
addition, we have entered into online content and distribution arrangements to
promote and sell Multipath Movies. These include arrangements with @Home
Networks, @Home Benelux, DVD Express, Mediadome and Gamestorm. We currently are
pursuing relationships with other on-line partners but cannot be certain that
they will be concluded. We will continue our efforts to deliver content to both
the narrowband and broadband markets, and we are pursuing opportunities to
syndicate and license our content to these markets. We have made significant
progress in reducing the file sizes of our content and expect this to be a major
advantage in our ability to exploit the narrowband marketplace.
B3D - MINIMIZE FOR MAX
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 using
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 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. A limited 30-day trial version of the tool has
been released on various Internet sites for use by animators worldwide. The
complete license version is available at $495.00 per user. Other versions of the
tool, to be released at a later date, will be sold or will be the subject of
joint venture arrangements.
NON-INTERACTIVE FORMAT FOR TELEVISION, CABLE AND VIDEO
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. In April 1999, we attended Mipcom in Cannes (France) where several TV
Broadcasters expressed interest in the rights for their individual territories.
The final rendered property is due for completion in May, at which time we
expect agreements currently under negotiation to be concluded. However, we do
not guarantee that such agreements will be concluded or that the terms of such
agreements, if concluded, will be favorable to us.
PACKARD BELL
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 up to 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
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<PAGE>
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.
PRODUCTION
During the first quarter of 1999, we have begun to reduce the number of
employees working in our production studio and research and development
facilities. Reduction in staff numbers is based upon production demands at any
point in time.
NEW BUSINESS OPPORTUNITIES
We continue to carefully consider new business opportunities that could be
strategic to the development of the Company. We have acquired an option to
purchase a business for consideration of 500,000 to 1.5 million shares of our
common stock and warrants to purchase up to an additional 400,000 shares of our
common stock. We currently are in discussions and performing due diligence
relating to this possible acquisition. There can be no assurance, however, that
our discussions will lead to any acquisition or that the acquisition, if
consummated, will be beneficial to us. See "Risk Factors - We may experience
risks associated with acquisitions."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
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 "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 increased from $31,000 for the three months ended March 31, 1998
to $206,000 for the three months ended March 31, 1999. This represents an
increase of $175,000. Revenues for the three months ended March 31, 1999 reflect
$54,000 earned under a Multipath Movie technology and content development
agreement and Multipath Movie retail sales of $152,000. Revenues for the prior
year's first quarter, ended March 31, 1998, were primarily the result of $31,000
in Multipath Movie retail sales.
During the three months ended March 31, 1999, we received $25,000 and
$73,000 in royalty payments from Packard Bell for the quarters ended September
30, 1998 and December 31, 1998, respectively. We have not received the royalty
statement and payment due for the three months ended March 31, 1999.
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.
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COST OF REVENUES. Cost of revenues consists primarily of the amortization
and writedown 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
decreased from $266,000 for the three months ended March 31, 1998 to $205,000
for the three months ended March 31, 1999. This represents a decrease of
$61,000. The primary reason for the decrease is the fact that in the first
quarter of 1998 a $145,000 writedown of the development costs occurred. Costs of
revenues in 1999 include costs of $45,000 associated with software sales and
amortization of capitalized movie software costs of $160,000. For the first
quarter of 1998, costs of $89,000 are attributable to the amortization of
capitalized movie software costs. 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 decreased from $305,000 for the three months ended March
31, 1998 to $222,000 for the three months ended March 31, 1999. The decrease is
primarily attributable to a change in 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 of 1998 and continued the program into the first quarter of 1999.
The marketing expense for the three months ended March 31, 1999 is primarily
attributable to the online marketing program.
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 $524,000 for the three months ended March 31, 1998 to $619,000
for the three months ended March 31, 1999. This represents an increase of
$95,000 that 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
$317,000 for the three months ended March 31, 1998 to $981,000 for the three
months ended March 31, 1999. In accordance with SFAS No. 86, the results of
operations for the three months March 31, 1999 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
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. 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 $18,000 for the three months ended March 31, 1998 to $130,000 for
the three months ended March 31, 1999. The increase is attributable to the
increase in depreciable assets resulting from the growth of our operations,
primarily from production and general overhead activities. Additionally, in the
first quarter 1998, a large portion of BII's depreciation was considered
production overhead, which was capitalized into movie software costs.
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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 $37,000 for the three months ended March 31, 1999. Net interest
income decreased from $140,000 for the three months ended March 31, 1998 to
$24,000 for the three months ended March 31, 1999. This decrease is due to the
lower cash balances during the first quarter of 1999.
FISCAL YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997
REVENUES. 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."
COST OF REVENUES. 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.
SALES AND MARKETING. 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. The increase in marketing expense for the fourth quarter of 1998 was
due to implementation of our online marketing program.
GENERAL AND ADMINISTRATIVE. 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 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.
DEPRECIATION. 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.
OTHER INCOME AND EXPENSE. Other income includes trade grant revenue of
$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.
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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. 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. 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 shortly before the
release of the title. Therefore, no additional movie development costs are
anticipated to be capitalized in the future.
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 we recognize
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 March 31,
1999, approximately $1,632,000 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 three months ended March
31, 1999 was primarily attributable to a net loss of $1,890,000. Net cash used
in investing activities in the three months ended March 31, 1999 was due
primarily to the purchase of computer equipment. Cash used in financing
activities for the three months ended March 31, 1999 was for the repayment of
notes for the financing of office furniture and computer equipment. In April
1999, we redeemed a convertible debenture we issued in December 1998 for
$100,000 plus accrued interest, and we redeemed a related warrant for $5,000,
and entered into an alternative financing arrangement with St. Annes Investment,
Ltd. as described below.
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 Crawfords 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
March 31, 1999 to make minimum payments of $142,000 under various licensing
agreements. At March 31, 1999, we had rental commitments for our offices and
production facilities of $755,000 and a promissory note for the financing of
fixed assets in the amount of $118,000 payable over the next 5 years.
In March 1999, we entered into a securities purchase agreement with St.
Annes Investment, Ltd. 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. See "Securities Purchase Agreement."
On April 27,1999, we issued to Roseworth Group, Ltd. a 4% convertible
debenture in the principal amount of $1,000,000 due on the later of April 27,
2000 or six months following the date the Securities and Exchange Commission
declares effective a registration statement with respect to the resale of the
shares of common stock underlying the debenture. The debenture may be converted
by Roseworth into shares of our Common Stock at a conversion price for each
share of Common Stock equal to the lower of 95% of its Market Price at the
conversion date or $6.00. 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 at the conversion price on the
maturity date. Market Price is defined as the lowest volume weight adjusted
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price of our Common Stock on the American Stock Exchange (as reported on
Bloomberg) during the 10 business days prior to the business day on which the
conversion notice is sent to us. In connection with the loan, we paid to
Roseworth a fee of $30,000 and issued to Roseworth 5,883 shares of our Common
Stock.
On March 30, 1999, we entered into agreements, contingent on certain
events, for the sale of 2,132,000 shares of our Common Stock to seven investors.
The sales of the shares closed in May 1999 and raised aggregate proceeds of
$4,311,250. Of the 2,132,000 shares of Common Stock, 1,880,000 shares were
issued to five investors at $2.00 per share and 252,000 shares were issued to
two investors at $2.1875 per share. The purchase prices for the shares were
negotiated with each of the investors. On March 29, 1999, the closing sales
price of our Common Stock was $2.25 per share, and the lowest sales price of our
Common Stock was $2.1875 per share. The 1,880,000 shares were issued at a
discount to the sales prices of the Common Stock to reflect the illiquidity risk
associated with the shares. All of the shares constitute restricted stock that
cannot be sold in the public market until such shares are registered or until an
exemption from registration is available. We have agreed to register all
2,132,000 shares for resale by the investors.
We believe that our existing funds, cash generated from operations and
proceeds from the securities purchase agreement with St. Annes, the convertible
debenture and the private placement will be sufficient to fund our working
capital requirements for at least the next twelve months. See "Risk Factors If
we are unable to raise additional funds our business will be adversely
affected."
YEAR 2000
We are continuing our 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 an 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. Our Vice
President of Technology is coordinating this process. 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 have communicated 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
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:
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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.
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BUSINESS
GENERAL
We are 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. 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.
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;
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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 "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.
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.
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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:
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
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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.
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
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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.
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.
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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 -- 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 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
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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 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 are
offered to @Home subscribers, enabling them to access our
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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 are 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.
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
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 established 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
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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 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.
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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.
RESEARCH AND DEVELOPMENT
Our research and development efforts are principally focused on the
following tasks:
o Completing and enhancing 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
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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.
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.
LEGAL PROCEEDINGS
We are not involved in any material litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
directors and executive officers as of April 15, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mark Dyne....................... 38 Chairman of the Board of Directors
and Chief Executive Officer
Kevin Bermeister................ 38 President and Director
Michael Ozen.................... 44 Chief Financial Officer and Secretary
Mark Miller..................... 39 Vice President, Production and
Operations and Director
Anthony Rose.................... 34 Vice President, Technology
Diana Maranon (1)............... 40 Director
Ray Musci (1)(2)................ 38 Director
Garth Saloner (2)............... 44 Director
Jeff Scheinrock (1)(2).......... 48 Director
<FN>
- ----------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
</TABLE>
MARK DYNE has served as our Chairman of the Board of Directors and Chief
Executive Officer since October 1996. Mr. Dyne currently is Chairman of the
Board of Directors of Tag-It Pacific, Inc., a position he has held since
September 1997. Mr. Dyne is a director and equity owner of Sega Ozisoft Pty.
Ltd. and previously served as its Co-Chief Executive Officer. Mr. Dyne helped
found Sega Ozisoft in 1982 with Mr. Bermeister. Sega Ozisoft, now a majority
owned subsidiary of Infogrames Entertainment (France), is a computer software
distributor for many leading publishers including, among others, Virgin
Interactive, Accolade, Access, Codemasters and Eidos. Mr. Dyne currently is a
director of Monto Holdings Pty. Ltd. and a co-owner of Packard Bell NEC
Australia Pty. Ltd. Monto is a private investment holding company and Packard
Bell NEC Australia is one of the leading manufacturers and distributors of
personal computers through the Australian mass merchant channel. From June 1995
through May 1997, Mr. Dyne served as a Co-Chief Executive Officer of Sega
Enterprises (Australia) Pty. Ltd., a theme park developer. Sega Enterprises is
owned jointly by Mr. Dyne, Mr. Bermeister, Sega Enterprises Japan, Mitsubishi
Corp. and Mitsui Corp. Mr. Dyne also serves on the Board of Directors of Virgin
Interactive Entertainment Limited, a distributor of computer software programs
and video games, and has an equity interest therein. Mr. Dyne is a member of the
Board of Directors of Sega Gaming Technologies, Inc., a Nevada company in the
business of producing multiplayer casino equipment.
KEVIN BERMEISTER has served as our President since October 1996 and as a
Director since August 1996. Mr. Bermeister is a director and equity owner of
Sega Ozisoft Pty. Ltd. and previously served as its Co-Chief Executive Officer.
Mr. Bermeister helped found Sega Ozisoft in 1982 with Mr. Dyne. Mr. Bermeister
also is a director of Packard Bell NEC Australia Pty. Ltd., Jacfun Pty. Ltd. and
Virgin Interactive Entertainment Limited. Jacfun owns the Darling Harbour
property occupied by the Sega Enterprises (Australia) Pty. Ltd. indoor theme
park in Sydney, Australia.
MICHAEL OZEN has served as our Chief Financial Officer since October 1996
and Secretary since March 1997. Mr. Ozen also serves as a director of both the
Clubhouse Children's Museum and the New Museum for Children. From May 1991
through June 1996, Mr. Ozen served as Manager -- International Taxes at Coopers
& Lybrand, LLP. In July 1996, Mr. Ozen became Director -- International Taxes at
Coopers & Lybrand, LLP, a position he held until October 1996.
MARK MILLER has served as our Vice President, Production and Operations
since October 1996 and as a Director since August 1996. Mr. Miller served as our
President and Chief Financial Officer from August 1996 through September 1996.
Mr. Miller also is Managing Director of BII Australia, a position he has held
since March 1994. From February 1993 through December 1994, Mr. Miller was
Managing Director of Pacific Interactive Education Pty. Limited ("PIE"), where
he was primarily engaged in the development and maintenance of educational and
multimedia software for use by schools and other educational institutions. Mr.
Miller currently is a director of PIE. From 1989 through 1992, Mr. Miller
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was Director of Sales and Marketing of Dealing Information Systems Pty. Ltd., a
developer of proprietary modular software treasury systems for managing
financial transactions.
ANTHONY ROSE has served as a consultant to BII Australia since April 1994
and currently serves as our Vice President, Technology. Mr. Rose also is the
owner and director of and, prior to April 1994, was employed by, A.R. Technology
Pty. Ltd. ("A.R. Technology"), an Australian company founded by Mr. Rose in 1988
which is involved in the design and manufacture of digital electronics hardware
and software. A.R. Technology has completed design assignments for Apple, Epson,
Panasonic and other corporations and government institutions. Mr. Rose holds
several international patents relating to anti-virus hardware circuits for
personal computers.
DIANA MARANON has served as a Director since October 1996, and served as
our Secretary from August 1996 until March 1997. Ms. Maranon is the President
and Managing Director of Averil Capital Markets Group, Inc. ("Averil"), a
financial advisory firm, and a member of the National Association of Securities
Dealers. Ms. Maranon serves as a director of Virgin Interactive Entertainment
Limited and Tag-It Pacific, Inc. Prior to founding Averil in 1994, Ms. Maranon
was a Vice President with Wasserstein Perella & Co., Inc. ("Wasserstein"), an
investment banking firm, with whom she started in 1988. At Wasserstein, Ms.
Maranon was responsible for covering companies headquartered in the Western
United States. From 1985 to 1988, Ms. Maranon practiced securities law with
Skadden Arps Slate Meagher & Flom. Ms. Maranon is a member of the California
Bar.
RAY MUSCI has served as a Director since October 1996. From May 1990 to the
present, Mr. Musci has served as the President, Chief Executive Officer and as a
director of Infogrames Entertainment, Inc. (formerly Ocean of America, Inc.), a
company that develops, publishes and distributes software products. From
September 1994 to July 1996, Mr. Musci served as a director of Ocean
International, Ltd., the holding company of Infogrames Entertainment, Inc. From
August 1985 to March 1990, Mr. Musci was Executive Vice President/General
Manager of Data East USA, Inc., a subsidiary of Data East Corp., a Japanese
company, where he established a consumer division to develop, manufacture,
market and distribute consumer video games, entertainment software and
coin-operated video arcade games and pinball machines.
GARTH SALONER has served as a Director since October 1996. From 1990 to the
present, Mr. Saloner has served as the Robert A. Magowan Professor of Strategic
Management and Economics at the Graduate School of Business at Stanford
University. He also has served as Associate Dean for Academic Affairs and
Director of Research and Course Development at the Stanford Graduate School of
Business. From 1982 to 1990 Mr. Saloner taught as a professor in the Economics
Department of the Massachusetts Institute of Technology. Mr. Saloner also is a
director and a member of the audit and compensation committees of Quick Response
Services, Inc., a corporation that provides electronic data interchange services
in the retail market, a director of Charles River Associates, a corporation that
provides economic consulting services, and a director of NextStage
Entertainment, a corporation involved in the construction and management of live
entertainment theatres.
JEFF SCHEINROCK has served as a Director since October 1996. Since May
1997, Mr. Scheinrock has been Chief Executive Officer of Scheinrock Advisory
Group, Inc. From July 1, 1996 until May 2, 1997, Mr. Scheinrock served as Vice
Chairman, Chief Financial Officer and Assistant Secretary of Kistler Aerospace
Corporation, a company involved in the development, marketing and manufacture of
reusable satellite launch vehicles. From March 1, 1989 to July 1, 1996, Mr.
Scheinrock was the Vice Chairman of Finance and Strategic Planning of Packard
Bell NEC. Mr. Scheinrock is a director of SRS Labs, Inc., a corporation listed
on the Nasdaq Stock Market's National Market. Mr. Scheinrock also is a director
of various other private companies.
Our Board of Directors is divided into three classes, designated Class I,
Class II and Class III. Garth Saloner currently is the Class I director who will
stand for election at the 2000 annual stockholders meeting. Mark Miller, Ray
Musci and Jeff Scheinrock currently are the Class II directors who will stand
for election at the 2001 annual stockholders meeting. Mark Dyne, Kevin
Bermeister and Diana Maranon currently are the Class III directors who will
stand for election at the 1999 annual stockholders meeting and, if elected, are
expected to serve until the 2002 annual stockholders meeting. At each annual
meeting of stockholders, successors of the class of directors whose term expires
at that annual meeting are elected for a three-year term or until their
successors have been elected and qualified. If the number of directors is
changed, an increase or decrease is to be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible. The
authorized number of members of our Board of Directors currently is eight.
Directors may be removed from office only for cause by the affirmative vote of a
majority of the outstanding shares of our common stock. Vacancies on our Board
of Directors may be filled only by a majority of the directors then in office.
There currently is one vacancy in the Class I directors.
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AGREEMENT TO NOMINATE DIRECTORS
Pursuant to a stock purchase agreement we entered into with Prince Ahmad
Bin Khalid Al-Saud, we have agreed to elect Prince Al-Saud or his designee as a
Class I director for a term ending in 2000. Additionally, we have agreed that so
long as Prince Al-Saud maintains ownership of at least 5% of our outstanding
equity securities, we will use our best efforts to continue to cause the Prince
Al-Saud or his designee to be nominated for election as a director.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee currently consists of Messrs. Musci, Saloner and Scheinrock.
The Audit Committee recommends the engagement of our independent public
accountants, reviews the scope of the audit to be conducted by the independent
public accountants and meets with the independent public accountants and our
Chief Financial Officer to review matters relating to our financial statements,
our accounting principles and our system of internal accounting controls, and
the committee reports its recommendations as to the approval of our financial
statements to the Board of Directors.
The Compensation Committee currently consists of Ms. Maranon and Messrs.
Musci and Scheinrock. The Compensation Committee is responsible for considering
and making recommendations to the Board of Directors regarding executive
compensation and is responsible for administering our stock option and executive
incentive compensation plans.
COMPENSATION OF DIRECTORS
Our nonemployee directors currently are paid $1,500 for their personal
attendance at any meeting of the Board of Directors and $500 for attendance at
any telephonic meeting of the Board of Directors or at any meeting of a
committee of the Board of Directors. Nonemployee directors also received options
to purchase 15,000 shares of common stock in fiscal 1998. Directors also are
reimbursed for their reasonable travel expenses incurred in attending Board or
committee meetings.
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EXECUTIVE COMPENSATION
The following table sets forth, as to our Chief Executive Officer and as to
each of the other four most highly compensated officers whose compensation
exceeded $100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to us in all
capacities during the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NUMBER OF
OTHER SECURITIES
FISCAL YEAR ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION (1) ENDED(2) SALARY COMPENSATION OPTIONS(3)
------------------------------- ----------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Mark Dyne....................... December 31, 1998 $ 225,000 -- 100,000 (4)
Chief Executive Officer December 31, 1997 $ 225,000 -- --
December 31, 1996 $ 56,250 -- --
June 30, 1996 -- -- --
Kevin Bermeister................ December 31, 1998 $ 225,000 -- 100,000 (4)
President December 31, 1997 $ 225,000 -- --
December 31, 1996 $ 56,250 -- --
June 30, 1996 -- -- --
Michael Ozen.................... December 31, 1998 $ 165,000 -- 50,000 (5)
Chief Financial Officer December 31, 1997 $ 165,000 -- --
And Secretary December 31, 1996 $ 41,000 -- 30,000 (6)
June 30, 1996 -- -- --
Mark Miller..................... December 31, 1998 $ 126,000 20,000 (4)
Vice President, Production December 31, 1997 $ 89,000 $ 15,000 (7) --
And Operations December 31, 1996 $ 23,000 -- --
June 30, 1996 $ 69,000 -- --
Anthony Rose.................... December 31, 1998 $ 107,000 -- 50,000 (5)
Vice President, Technology December 31, 1997 $ 126,000 -- --
December 31, 1996 $ 37,000 -- 30,000 (6)
June 30, 1996 -- -- --
<FN>
- ----------------------
(1) For a description of employment agreements between us and certain executive
officers, see "Employment Agreements with Executive Officers" below.
(2) We changed our fiscal year end from June 30 to December 31, effective
December 31, 1996. (3) In October 1998, all of our then outstanding stock
options were repriced under an option repricing program. For a description
of the terms of the option repricing program, see "Report of the
Compensation Committee on Repricing of Stock Options" below.
(4) These options, which were initially granted in March 1998, were repriced in
October 1998 under our option repricing program.
(5) Consists of options to purchase 30,000 shares and 20,000 shares of common
stock granted in October 1996 and March 1998, respectively, all of which
were repriced in October 1998 under our option repricing program.
(6) These options were cancelled in October 1998 in connection with the grant
of a repriced option under our option repricing program.
(7) Consists of motor vehicle and income protection insurance premiums.
</FN>
</TABLE>
Page 39
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding the grant of
stock options made during the fiscal year ended December 31, 1998 to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR
OPTION IN FISCAL BASE EXPIRATION
NAME GRANTED YEAR(1) PRICE(2) DATE
---- ---------- ------- --------- ----------
<S> <C> <C> <C> <C>
Mark Dyne.......................... 100,000(3) -- $ 2.75 3/19/08
100,000(4)(5) 22.1% $ 1.50 3/19/08
Kevin Bermeister................... 100,000(3) -- $ 2.75 3/19/08
100,000(4)(5) 22.1% $ 1.50 3/19/08
Michael Ozen....................... 30,000(4)(6) -- $ 1.50 9/30/06
20,000(3) -- $ 2.75 3/19/08
20,000(4)(5) 4.4% $ 1.50 3/19/08
Mark Miller........................ 20,000(3) -- $ 2.75 3/19/08
20,000(4)(5) 3.4% $ 1.50 3/19/08
Anthony Rose....................... 30,000(4)(7) -- $ 1.50 9/11/06
20,000(3) -- $ 2.75 3/19/08
20,000(4)(5) 4.4% $ 1.50 3/19/08
<FN>
- ------------------------
(1) Options covering an aggregate of 452,000 shares of common stock were
granted to employees during the fiscal year ended December 31, 1998. In
October 1998, options covering an aggregate of 747,000 shares of common
stock, including options to purchase the 452,000 shares granted earlier in
the year, were repriced under our option repricing program. The percentages
are based only on options to purchase 452,000 shares initially granted to
employees in fiscal 1998, and do not account for replacement options
granted in fiscal 1998 in connection with our option repricing program.
(2) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares, subject to certain conditions.
(3) This option, which was granted in March 1998, was cancelled in October 1998
in connection with the grant of a repriced option under our option
repricing program. Prior to its cancellation, this option would have vested
and become exercisable in four equal annual installments, commencing on
January 1, 1999.
(4) This option consists of a repriced option granted in October 1998 under our
option repricing program to replace an existing option to purchase the same
number of shares of common stock at a higher exercise price.
(5) This option vests and becomes exercisable as follows: 25% vested on April
1, 1999, and 25% vests on each of January 1, 2000, 2001, and 2002.
(6) This option vests and becomes exercisable as follows: 22,500 shares vested
on March 16, 1999, and 7,500 shares vest on October 1, 1999.
(7) This option vests and becomes exercisable as follows: 18,125 shares vested
on March 17, 1999, and 11,875 shares vest in 19 equal monthly installments
of 625 shares commencing on April 1, 1999.
</FN>
</TABLE>
Page 40
<PAGE>
STOCK OPTIONS HELD AT FISCAL YEAR END
The following table sets forth, for those Named Executive Officers who held
stock options at fiscal year end, certain information regarding the number of
shares of common stock underlying stock options held at fiscal year end and the
value of options held at fiscal year end based upon the last reported sales
price of the common stock on the American Stock Exchange on December 31, 1998
($1.75 per share). No stock options were exercised by any Named Executive
Officer during fiscal 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
- ---- ----------------- ---------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark Dyne....................... -0- 100,000 -0- $ 25,000
Kevin Bermeister................ -0- 100,000 -0- $ 25,000
Michael Ozen.................... -0- 50,000 -0- $ 12,500
Mark Miller..................... -0- 20,000 -0- $ 5,000
Anthony Rose.................... -0- 50,000 -0- $ 12,500
<FN>
- ----------
(1) Based on a closing price of $1.75 per share of common stock on December 31,
1998, all options were in-the-money at fiscal year end.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Effective October 1, 1996, we entered into an employment agreement with
Michael Ozen pursuant to which Mr. Ozen serves as our Chief Financial Officer at
a base salary of $165,000 per year. Mr. Ozen received options to purchase an
aggregate of 30,000 shares of common stock which vest in four equal annual
installments commencing on the date of grant. In October 1998, Mr. Ozen's
options were repriced under our option repricing program. Mr. Ozen's employment
is terminable by us at will. In the event we terminate Mr. Ozen's employment
without cause, Mr. Ozen is entitled to three months severance payment (the
"Initial Payment") if termination occurs during the first or second year of
employment (the "Initial Period"), and in addition to the Initial Payment, one
month severance payment for each year served after the Initial Period, not to
exceed an aggregate of 12 months severance payment, if termination occurs after
the Initial Period. For purposes of the agreement, "cause" means the willful
disregard of, or failure to perform, duties where such willful disregard or
failure is not discontinued within a reasonable period of time from receipt of
written notice relating thereto.
A.R. Technology Limited, an Australian corporation of which Anthony Rose is
the sole stockholder, provides the services of Anthony Rose to BII Australia in
exchange for approximately $107,000 per year. The arrangement is terminable at
will by either party upon 30 days prior written notice.
Pacific Interactive Education Pty. Limited ("PIE") provides the services of
Mark Miller to BII Australia. PIE was paid $0, $37,000 and $90,000 during the
period from September 2, 1993 to June 30, 1994, and the years ended June 30,
1995 and 1996, respectively. For the period from July 1, 1996 to December 31,
1996, BII Australia paid PIE $18,000 for the services of Mark Miller. These
amounts include auto allowances, contributions to retirement benefits and profit
included in payments to PIE for purchases of computer equipment. No amounts were
paid to PIE for the services of Mark Miller during fiscal 1997. For fiscal 1998,
BII Australia paid PIE $52,000 for the services of Mark Miller. This amount
represented profit in payments to PIE for purchases of computer equipment. This
arrangement is terminable at will by either party upon 30 days prior written
notice.
STOCK OPTION PLAN
We adopted the Brilliant Digital Entertainment, Inc. 1996 Stock Option Plan
(the "1996 Plan") in September 1996. The purpose of the 1996 Plan is to attract,
retain and motivate certain of our key employees and employees of our
subsidiaries by giving them incentives which are linked directly to increases in
the value of our common stock. Each director, officer, employee or consultant of
Brilliant Digital Entertainment or any of our 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.
Page 41
<PAGE>
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
Board of Directors has approved an amendment to the 1996 Plan to increase the
maximum number of shares of common stock that may be issued pursuant to awards
granted under the plan to 2,500,000 shares, which amendment is subject to our
stockholders' approval and is being submitted to our stockholders for approval
at our 1999 Annual Meeting.
The 1996 Plan authorizes its administrator to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of (1) shares of common stock, (2) an option, warrant,
convertible security, stock appreciation right or similar right with an exercise
or conversion privilege at a price related to the common stock, or (3) any other
security or benefit with a value derived from the value of the common stock. Any
stock option granted may be an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or a
nonqualified stock option. The 1996 Plan currently is administered by the
Compensation Committee of the Board of Directors. Subject to the provisions of
the 1996 Plan, the Compensation Committee will have full and final authority to
select the executives and other employees to whom awards will be granted
thereunder, to grant the awards and to determine the terms and conditions of the
awards and the number of shares to be issued pursuant thereto. The maximum
number of shares of common stock with respect to which awards may be granted
under the 1996 Plan to any executive or employee during any fiscal year is
100,000, subject to adjustment to prevent dilution.
As of December 31, 1998, 232,000 shares of common stock remained available
for grant of awards to eligible participants under the 1996 Plan.
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF STOCK OPTIONS
During October 1998, the Compensation Committee of the Board of Directors
approved a stock option repricing program. Under the program, each holder of
stock options granted under the Brilliant Digital Entertainment 1996 Stock
Option Plan, including directors and Named Executive Officers, was entitled to
exchange their existing stock option for a repriced stock option to purchase the
same number of shares at an exercise price of $1.50 per share. The new exercise
price was lower than the exercise price under all of the existing stock options
and was higher than the then market price of $1.125 per share of common stock.
As a condition to receiving this more favorable exercise price, each option
holder who elected to participate in the program was required to agree to a less
favorable vesting schedule. Under the repriced options, any shares of common
stock which had already vested under the existing stock option could not be
exercised for a period of 120 days from date the option holder elected to
exchange his or her stock option. In addition, any shares under an existing
stock option which were scheduled to vest on January 1, 1999 did not vest under
the repriced option until April 1, 1999. Other than the lower exercise price and
the changes to the vesting schedule, each new stock option issued under the
repricing program has terms substantially equivalent to the terms of the
surrendered option, including the same number of shares and expiration date.
Options to purchase a total of 747,000 shares of common stock were eligible to
participate in the program, all of which were exchanged by the holders thereof
for repriced stock options.
The Compensation Committee approved the stock option repricing program as a
result of the significant reduction in the price of our common stock in fiscal
1998. The Committee determined that our existing stock options no longer
provided meaningful incentive to the option holders to remain in our employ and
to maximize shareholder value. The existing stock options had exercise prices of
between $2.31 per share and $6.38 per share, which exercise prices exceeded the
trading prices of our common stock for a substantial majority of the time from
June 1998 until the date the option repricing program was approved. The
Committee determined that the exchange of new stock options with a lower
exercise price for our existing stock options would once again provide incentive
to our officers, directors and employees to continue to provide services to us
and to maximize shareholder value.
COMPENSATION COMMITTEE
Diana Maranon
Ray Musci
Jeff Scheinrock
Page 42
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation and our Bylaws provide that we shall
indemnify our directors, officers and employees to the fullest extent permitted
by the Delaware General Corporation Law ("Delaware Law"), as the same exists or
may hereafter be amended. Section 145 of the Delaware Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may otherwise
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
Our Certificate of Incorporation also provides that each of our directors
shall not be liable to us or to our stockholders for monetary damages for breach
of fiduciary duty as a director. Section 102(b)(7) of the Delaware Law provides
that a provision so limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other things (i)
breach of the duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) unlawful
payment of dividends, (iv) transactions from which the director derived an
improper personal benefit.
We have entered into separate but identical indemnity agreements with each
of our directors and certain of our officers. Under the indemnity agreements, we
have agreed to indemnify each director or officer against any amounts which he
becomes legally obligated to pay in connection with any claim against him based
upon any action or inaction which he may commit, omit or suffer while acting in
his capacity as our director or officer or as a director or officer of one of
our subsidiaries. The director or officer, however, must have acted in good
faith and in a manner he reasonably believed to be in or not opposed to our best
interests and, with respect to any criminal action, had no reasonable cause to
believe his conduct was unlawful.
Page 43
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mark Miller, an officer and director of Brilliant Digital Entertainment, is
a shareholder of Multimedia Connexion Pty., Ltd. BII Australia periodically
purchases hardware and software from Multimedia Connexion Pty. Ltd. For the
fiscal years ended December 31, 1997 and 1998, BII Australia purchased computer
equipment totaling $121,000 and $59,000, respectively.
On September 13, 1996, we entered into the SAND Acquisition Agreement with
Sega Ozisoft. Mark Dyne and Kevin Bermeister both currently serve as directors
of Sega Ozisoft and are significant minority shareholders of Sega Ozisoft.
Pursuant to the SAND Acquisition Agreement, we acquired SAND and in
consideration therefor issued a $1,500,000 mandatorily convertible note which,
upon the completion of our initial public offering, was automatically converted
into 780,001 shares of common stock. The terms of the SAND Acquisition were
determined by negotiations between Messrs. Dyne and Bermeister and Averil
Capital Markets Group, Inc. on our behalf and by the Board of Directors of Sega
Ozisoft, with Messrs. Dyne and Bermeister abstaining, on behalf of Sega Ozisoft.
The Sand Acquisition Agreement also provides that we shall pay to Sega
Ozisoft a royalty of 12.5% of "Adjusted Gross Receipts" on the CYBERSWINE
multipath movie. "Adjusted Gross Receipts" is defined as the gross receipts
received by us on the CYBERSWINE multipath movie after deducting any royalties
and fees payable to CYBERSWINE licensors. Pursuant to an agreement between Sega
Ozisoft and the licensor of the characters and content of Cyberswine, we will be
required to pay to the CYBERSWINE licensor a royalty of 2% of gross revenues
less cost of goods on all sales of CYBERSWINE products.
Diana Maranon is a director of Brilliant Digital Entertainment. Averil
Capital Markets Group, Inc. ("Averil"), a financial advisory firm founded and
controlled by Ms. Maranon, has, since November 1995, performed services for us
including investigation of strategic alternatives and assistance with our common
stock offerings. As consideration for such services, we paid to Averil $25,000
as of June 30, 1996, $200,000 during the six months ended December 31, 1996,
$22,000 for the year ended December 31, 1997, $30,000 for the year ended
December 31, 1998 and $18,750 during the three months ended March 31, 1999, plus
out of pocket expenses, and granted to Chloe Holding, Inc. ("Chloe"), an
affiliate of Averil, currently exercisable warrants to purchase 40,222 shares of
common stock with an exercise price of $0.0326 per share. In connection with our
December 1997 offering of common stock, we made an additional cash payment to
Averil of $180,000 and granted to Chloe warrants to purchase 15,040 shares of
common stock at an exercise price of $5.50 per share.
Certain of our directors and officers, including Mark Dyne and Kevin
Bermeister, are also directors or officers of our potential competitors and/or
strategic partners. These relationships may give rise to conflicts of interest
between us, on the one hand, and one or more of the 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 interactive digital
entertainment with the exception of opportunities for participation in the
development by others of interactive digital entertainment where publishing
and/or distribution rights for the product to be developed are offered to
Messrs. Dyne and/or Bermeister solely for Australia, New Zealand and/or Southern
Africa.
Page 44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of May 14, 1999 certain information
relating to the ownership of the common stock by (i) each person known by us to
be the beneficial owner of more than five percent of the outstanding shares of
our common stock, (ii) each of our directors, (iii) each of the Named Executive
Officers, (iv) each of the Selling Stockholders named in this prospectus, and
(v) all of our executive officers and directors as a group. Except as may be
indicated in the footnotes to the table and subject to applicable community
property laws, each such person has the sole voting and investment power with
respect to the shares owned. The address of each person listed is in care of
Brilliant Digital Entertainment, Inc., 6355 Topanga Canyon Boulevard, Suite 120,
Woodland Hills, California 91367, unless otherwise set forth below such person's
name.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING (1) THE OFFERING (1)(2)
---------------- -------------------
NUMBER OF
NAME AND ADDRESS NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
- ---------------- ------ ------- -------------- ------ -------
<S> <C> <C> <C> <C> <C>
St. Annes Investments, Ltd.(3)............ 0 -- % 2,000,000 0 -- %
c/o Ultrafinance
Gross Muenster Platz 26
Zurich, Switzerland CH-8022
Trinity Capital Advisors, Inc............. 6,000 * 40,000 6,000 *
211 Sutter Street, Second Floor
San Francisco, CA 94104
Insinger Group, as manager of
Reefknot Limited (4)...................... 1,200,118 10.4 -- 1,200,118 8.8
One Stokes Place
St. Stephens Green
Dublin 2
Republic of Ireland
Prince Ahmad Bin Khalid Al-Saud........... 1,000,000 8.7 -- 1,000,000 7.4
P. O. Box 1011
Riyadh, Saudi Arabia 11431
Kevin Bermeister (5)...................... 817,600 7.1 -- 817,600 6.0
Mark Dyne (5)............................. 810,600 7.0 -- 810,600 6.0
Sega Enterprises Limited.................. 780,001 6.8 -- 780,001 5.7
2-12 Haneda 1-Chome
Ohta-Ku, Tokyo 144
Japan
Mark Miller (6)........................... 505,013 4.4 -- 505,013 3.7
Diana Maranon (7)......................... 84,012 * -- 84,012 *
Anthony Rose (8).......................... 39,375 * -- 39,375 *
Ray Musci (9)............................. 28,750 * -- 28,750 *
Garth Saloner (9)......................... 28,750 * -- 28,750 *
Jeff Scheinrock (9)....................... 28,750 * -- 28,750 *
Michael Ozen (10)......................... 27,500 * -- 27,500 *
Directors and executive officers
as a group (9 persons) (11)............... 2,370,350 20.1 % -- 2,370,350 17.2 %
<FN>
- ------------------------------
* Less than one percent.
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or
the power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the date
as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares
</FN>
</TABLE>
Page 45
<PAGE>
of any person as shown in this table does not necessarily reflect the
person's actual ownership or voting power with respect to the number of
shares of common stock actually outstanding at May 14, 1999.
(2) Assumes that all of the shares of common stock offered by this prospectus
are issued to the Selling Stockholders pursuant to the Securities Purchase
Agreement and are sold using this prospectus.
(3) Pursuant to the Securities Purchase Agreement, St. Annes will not be
required to purchase a number of shares of our common stock which, when
added to all other shares previously acquired by St. Annes and still owned
by St. Annes would exceed 9.99% of the number of shares of our common stock
outstanding on the applicable purchase date.
(4) Insinger Group is the manager of Reefknot Limited, and as such, controls
the disposition and voting of the shares of common stock held by Reefknot.
(5) Includes 25,000 shares of common stock reserved for issuance upon exercise
of stock options which currently are exercisable.
(6) Consists of (i) 430,013 shares of common stock held by Pacific Interactive
Education Pty. Limited, (ii) 70,000 shares of common stock held by the Mark
Miller Family Trust, of which Pacific Interactive Pty. Limited is trustee,
and (iii) 5,000 shares of common stock reserved for issuance upon exercise
of stock options which currently are exercisable. Mark Miller and his wife
are the sole stockholders of Pacific Interactive Education Pty. Limited and
Pacific Interactive Pty. Limited.
(7) Consists of (i) 28,750 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable, and (ii) 55,262
shares of common stock underlying warrants which currently are exercisable.
(8) Consists of (i) 20,000 shares of common stock held by HiTech Corporation
Limited over which Mr. Rose has exclusive voting and investment power, and
(ii) 19,375 shares of common stock reserved for issuance upon exercise of
stock options which currently are exercisable or will become exercisable on
or before July 13, 1999.
(9) Consists of 28,750 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable.
(10) Consists of 27,500 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable.
(11) Includes (i) 216,875 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable or will become
exercisable on or before July 13, 1999, and (ii) 55,262 shares of common
stock underlying warrants which currently are exercisable.
Page 46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue a total of 30,000,000 shares of common stock,
par value $0.001 per share, and 1,000,000 shares of Preferred Stock, par value
$0.001 per share. The following statements are brief summaries of certain
provisions relating to our capital stock.
COMMON STOCK
At May 14, 1999, we had 11,546,884 shares of common stock outstanding
held by approximately 60 holders of record. The holders of common stock are
entitled to one vote for each share of common stock on all matters on which the
holders of common stock are entitled to vote. The holders of common stock are
entitled to receive ratably dividends when, as and if declared by our Board of
Directors out of funds legally available for the payment of dividends. In the
event that we liquidate, dissolve or wind up our business, the holders of common
stock are entitled, subject to the rights of holders of our Preferred Stock, if
any, to share ratably in all assets remaining available for distribution after
payment of liabilities and after provision is made for each class of stock, if
any, having preference over the common stock.
The holders of common stock have no preemptive or conversion rights, and
we may not subject them to further calls or assessments. 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
Our 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 our Board of
Directors. Accordingly, our 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 our common stock. In the event of issuance, the Preferred
Stock could be utilized, under certain circumstances, as a way of discouraging,
delaying or preventing anyone from acquiring or effecting a change of control of
BRILLIANT. Other than as may be necessitated by our stockholders' rights plan,
currently we do not intend to issue any shares of our Preferred Stock.
In March 1998, we adopted a stockholders' rights plan. Under the rights
plan we designated 300,000 shares of our Preferred Stock as Series A Preferred
Stock, par value $.001 per share, and distributed one preferred share purchase
right for each share of our common stock outstanding on April 2, 1998. Subject
to certain exceptions, each share of common stock issued after April 2, 1998
also will receive one preferred share purchase right. Upon the occurrence of
certain triggering events related to an unsolicited takeover attempt of
BRILLIANT, each purchase right not owned by the party or parties making the
unsolicited takeover attempt will entitle its holder to purchase from us one
one-hundredth of a share of the Series A Preferred Stock at a purchase price of
$15.00, subject to certain adjustments, which purchase price will be below the
then market value of the Series A Preferred Stock.
WARRANTS
In connection with our strategic relationships with Packard Bell NEC and
Morgan Creek, on September 14, 1996, we issued to each of Packard Bell NEC and
Morgan Creek warrants to purchase 600,000 shares and 85,000 shares of our common
stock, respectively. See "Business--Strategic, Content and Distribution
Relationships."
The warrants we issued to Packard Bell NEC on September 14, 1996 were
purchased in the aggregate for $100.00. The warrants currently are exercisable
in full at an exercise price of $5.00 per share and expire three years from the
date of grant. On or after November 27, 1997, we have the right to redeem all,
but not less than all, of the warrants at a price of $0.001 per share by written
notice mailed 30 days prior to the redemption date. We may give such notice
within 20 days following any period of 15 consecutive trading days during which
the shares to be issued to Packard Bell NEC are publicly tradeable and the high
closing bid of the shares of our common stock on the American Stock Exchange
exceeds a per share price of $6.25. In June 1998, we registered with the
Securities and Exchange Commission the resale by Packard Bell NEC of the 600,000
shares of common stock underlying the warrants.
The warrants we issued to Morgan Creek were purchased in the aggregate
for $100.00. Warrants to purchase 35,000 shares of common stock currently are
exercisable at $4.00 per share, and warrants to purchase the additional 50,000
shares of common stock currently are exercisable at $5.20 per share. All of the
warrants expire three years from
Page 47
<PAGE>
the date of grant. We have the right to redeem all, but not less than all, of
the warrants at a price of $0.001 per share by written notice mailed 30 days
prior to the redemption date. We may give such notice within 20 days following
any period of 15 consecutive trading days during which the shares to be issued
to Morgan Creek are publicly tradable and the closing sale price of the shares
of our common stock on the American Stock Exchange exceeds a per share price
equal to 125% of the respective warrant exercise prices. In June 1998, we
registered with the Securities and Exchange Commission the resale by Morgan
Creek of the 85,000 shares of common stock underlying the warrants.
In 1996, we granted to Chloe Holding, Inc., an affiliate of Averil
Capital Markets Group, Inc., warrants to purchase 40,222 shares of common stock
with an exercise price of $0.0326 per share. The warrants were granted to Chloe
as consideration for services performed for us by Averil, including
investigation of strategic alternatives and assistance with our 1996 initial
public offering. These warrants currently are exercisable and expire on
September 14, 1999. In connection with our December 1997 common stock offering,
we granted to Chloe warrants to purchase 15,040 shares of common stock at an
exercise price of $5.50 per share. These warrants currently are exercisable and
expire on November 4, 2000. In June 1998, we registered with the Securities and
Exchange Commission the resale by Chloe of the 55,262 shares of common stock
underlying the warrants.
In July 1998, we entered into a strategic alliance with a computer chip
manufacturer and granted the manufacturer warrants to purchase 300,000 shares of
common stock. The warrants currently are exercisable at an exercise price of
$4.00 per share and expire in July 2001. The warrants provide for piggyback
registration rights and for demand registration rights. If we propose to
register any of our securities under the Securities Act, the holder of the
warrants or the shares of common stock underlying the warrants are entitled to
notice of such registration and may include their respective shares in the
registration, provided, among other conditions, that the underwriters of any
offering have the right to limit the number of shares included in the
registration. In addition, the holder or holders of a majority of the warrants
or shares of common stock underlying the warrants have the right, at any time
after the first anniversary of the date of the warrants, to require us to
register under the Securities Act the shares of common stock underlying the
warrants on a registration statement on Form S-3.
All of the warrants granted to Packard Bell NEC, Morgan Creek, Chloe and
the computer chip manufacturer are entitled to equitable adjustments in the
purchase price and in the number of shares of common stock and/or other
securities deliverable upon exercise thereof in the event of a stock dividend,
stock split, reclassification, reorganization, consolidation or merger.
ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation provides that our Board of Directors is
classified into three classes of directors. Our Certificate of Incorporation
also provides that all stockholder action must be effected at a duly called
meeting of stockholders and not by a consent in writing. In addition, our
Certificate of Incorporation and our Bylaws provide that only our Chief
Executive Officer, our President or a majority of the members of our Board of
Directors may call a special meeting of stockholders. In addition, our directors
may not be removed without cause. We also have the authority to issue one or
more series of "blank check" preferred stock, and we have reserved 300,000
shares of our preferred stock for issuance in connection with our stockholders'
rights plan. See "--Preferred Stock." These provisions of our Certificate of
Incorporation and our Bylaws and our stockholders' rights plan could discourage
potential acquisition proposals and could delay or prevent a change in control
of Brilliant Digital Entertainment. Such provisions also may have the effect of
preventing changes in our management. See "Risk Factors--We Have Adopted a
Number of Anti-Takeover Measures."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the
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<PAGE>
corporation or (b) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
TRANSFER AGENT
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991.
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
St. Annes is an "underwriter" within the meaning of the Securities Act
of 1933 in connection with its sale of our common stock pursuant to this
prospectus. Broker-dealers who act in connection with the sale of the common
stock may also be deemed to be underwriters. Profits on any resale of the common
stock as a principal by such broker-dealers and any commissions received by the
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act of 1933.
If required, the following information will be disclosed in a prospectus
supplement or, if necessary, an amendment to the registration statement:
o the names of any of agent, dealer or underwriter;
o the price at which the common stock is to be sold;
o the number of shares of common stock involved;
o any applicable commissions or discounts; and
o other facts material to the transaction.
Under applicable rules and regulations under the Securities Exchange Act
of 1934, any person engaged in a distribution of our common stock may not
simultaneously engage in market making activities with respect to the common
stock for a period beginning when such person becomes a distribution participant
and ending upon the person's completion of participation in a distribution,
including stabilization activities in the common stock to effect covering
transactions, to impose penalty bids or to effect passive market making bids. In
addition and without limiting the foregoing, in connection with transactions in
our common stock, we and the Selling Stockholders will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder, including, without limitation, Rule 10b-5 and, insofar as we and the
Selling Stockholders are distribution participants, Regulation M and Rules 100,
101, 102, 103, 104 and 105 thereof. All of the foregoing may affect the
marketability of our common stock.
St. Annes has agreed that it will not engage in short sales of our
common stock except during periods of time determined by us when the prohibition
on short sales will not apply.
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<PAGE>
The Selling Stockholders will pay all commissions and certain other
expenses associated with their sale of our common stock. We are registering the
common stock issued hereby pursuant to our contractual obligations under the
Securities Purchase Agreement, and we have agreed to pay the costs of
registering the shares hereunder. We have also agreed to pay legal fees incurred
by St. Annes up to a maximum of $7,500. We have agreed to indemnify St. Annes
with respect to the common stock offered hereby against certain liabilities,
including, without limitation, certain liabilities under the Securities Act of
1933, or, if such indemnity is unavailable, to contribute toward amounts
required to be paid in respect of such liabilities.
Trinity Capital Advisors acted as a financial advisor in connection with
the Securities Purchase Agreement and this offering. In exchange for such
services, we will pay Trinity at each put closing under the Securities Purchase
Agreement cash equal to 3% of the purchase price we receive from St. Annes at
such put closing, and we will issue to Trinity common stock with an aggregate
market price equal to 2% of the purchase price paid to St. Annes at such put
closing. See "Securities Purchase Agreement."
We will issue the shares of common stock to St. Annes at a discount to
the then current market price of the common stock, as defined in the Securities
Purchase Agreement, as follows:
o If the market price is $4.00 or less, then the price for the
shares shall be 86% of the market price; and
o If the market price is greater than $4.00, then the price shall
be 88% of the market price.
The market price of our common stock, for purposes of calculating the
purchase price under the Securities Purchase Agreement, is the lowest volume
adjusted price during the ten trading days immediately preceding the date that
we deliver a put notice to St. Annes. The volume adjusted price on a trading day
is equal to (i) the total dollar value of all shares of our common stock traded
on the American Stock Exchange on such trading day, divided by (ii) the total
volume of our common stock traded on the American Stock Exchange on such trading
day.
Based on the closing sale price of $____ per share as reported by the
American Stock Exchange on ______, 1999, under the Securities Purchase Agreement
the market price of our common stock would be $______ per share and St. Annes
would receive an aggregate discount of $_________ for the 2,000,000 shares of
common stock offered by St. Annes pursuant to this prospectus.
Pursuant to the Securities Purchase Agreement, we sold _______ shares of
our common stock to St. Annes on ___________, 1999 at a price of $__________ per
share. The purchase price of $______ represents ___% of the market price of the
common stock as determined in accordance with the Securities Purchase Agreement,
or a discount of $_____. In connection with this offering, Trinity Capital
Advisors received a cash fee of $______ and _______ shares of our common stock.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles, California,
counsel to BRILLIANT DITIAL ENTERTAINMENT.
EXPERTS
The financial statements as of December 31, 1998 and for each of the two
years in the period ended December 31, 1998 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement under the Securities Act with respect to the
shares offered hereby. This prospectus does not contain all of the information
set forth in such registration statement and the exhibits thereto. Statements
contained in this prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and with respect to any
contract or other document filed as an exhibit to such registration statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference. For further information with respect to us and the shares offered
hereby, reference is hereby made to such registration statement and exhibits
thereto. A copy of such registration statement, including the exhibits thereto,
may be inspected without charge at the Securities and Exchange Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon
payment of certain prescribed rates.
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You can read and
copy these documents at the SEC's Public Reference Room, located at 450 Fifth
Street, NW, Room 1024, Washington, D.C. 20549, upon payment of certain
prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available on the SEC's
Web Site at http://www.sec.gov. You can also read our SEC filings at the
American Stock Exchange, 86 Trinity Plaza, New York, New York. Such reports and
other information concerning us may be inspected and copied at the public
reference facilities referred to above as well as certain regional offices of
the Securities and Exchange Commission.
Page 51
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL
ENTERTAINMENT, INC.
Report of Independent Accountants............................................F-2
Consolidated Balance Sheet as of December 31, 1998 and March 31, 1999
(unaudited).......... .................................... .............F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998, and the three months ended
March 31, 1998 and 1999 (unaudited).....................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1998, and the three months
ended March 31, 1999 (unaudited)........................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998, and the three months ended
March 31, 1998 and 1999 (unaudited).....................................F-6
Notes to Consolidated Financial Statements...................................F-8
F-1
<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
F-2
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
-------------- --------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents....................................... $ 3,187 $ 1,632
Accounts receivable............................................. 2,139 2,084
Other assets.................................................... 310 258
-------------- --------------
Total current assets................................................ 5,636 3,974
Property, plant and equipment, net.................................. 754 684
Movie software costs................................................ 626 491
Other assets, net................................................... 437 426
------------- -------------
Total assets........................................................ $ 7,453 $ 5,575
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 274 $ 264
Accrued expenses................................................ 1,250 1,148
Current portion of note payable................................. 28 172
-------------- --------------
Total current liabilities........................................... 1,552 1,584
Note payable, less current portion.................................. 97 91
Convertible debenture............................................... 100 100
Other long term liabilities......................................... 146 110
-------------- --------------
Total liabilities................................................... 1,895 1,885
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 9
Additional paid-in capital...................................... 21,357 21,357
Accumulated deficit............................................. (15,685) (17,575)
Accumulated other comprehensive income (loss)................... (123) (101)
-------------- --------------
Total stockholders' equity.......................................... 5,558 3,690
-------------- --------------
Total liabilities and stockholders' equity.......................... $ 7,453 $ 5,575
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- ----------------------------
1997 1998 1998 1999
------------ ------------ -------------- -------------
(unaudited)
Revenues:
<S> <C> <C> <C> <C>
Software sales.......................... $ 2,246 $ 221 $ 24 $ 152
Development fees........................ 235 210 7 54
------------ ------------ -------------- -------------
Total revenues..................... 2,481 431 31 206
Cost of revenues........................... 44 1,383 266 205
------------ ------------ -------------- -------------
Gross profit (loss)........................ 2,437 (952) (235) 1
Operating expenses:
Sales and marketing..................... 1,090 1,785 305 222
General and administrative.............. 2,217 2,936 524 619
Research and development................ 1,709 3,798 317 981
Depreciation............................ 214 390 18 130
------------ ------------ -------------- -------------
Total operating expenses........... 5,230 8,909 1,430 2,157
------------ ------------ -------------- -------------
Income (loss) from operations.............. (2,793) (9,861) (1,399) (1,951)
Other income (expense):
Export market development grant......... 148 73 -- 37
Gain (loss) on foreign exchange
transactions........................ 27 (5) (8) --
Interest income......................... 313 399 142 28
Interest expense........................ -- (31) (2) (4)
------------ ------------ -------------- -------------
Total other income (expense)....... 488 436 132 61
------------ ------------ -------------- -------------
Income (loss) before income taxes.......... (2,305) (9,425) (1,267) (1,890)
Income taxes............................... -- -- -- --
------------ ------------ -------------- -------------
Net income (loss).......................... $ (2,305) $ (9,425) $ (1,267) $ (1,890)
============ ============ ============== =============
Other comprehensive income:
Foreign currency translation adjustment
(net of tax effects of $ 0)........... (168) 72 62 22
------------ ------------ -------------- -------------
Comprehensive income (loss)................ $ (2,473) $ (9,353) $ (1,205) $ (1,868)
============ ============ ============== =============
Basic and diluted net income (loss) per
share................................... $ (0.31) $ (1.00) $ (0.13) $ (0.20)
============ ============ ============== =============
Weighted average number of shares
used in computing basic and diluted
net income (loss) per share............... 7,384 9,403 9,403 9,409
============ ============ ============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<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
--------- ---------- ---------- ------------- -------------- --------
Foreign exchange translation
(net of tax of $0)
(unaudited)............ -- -- -- -- 22 22
Net loss (unaudited)........ -- -- -- (1,890) -- (1,890)
========= ========== ========== ============= ============== ========
Balance at March 31, 1999
(unaudited)................. 9,409,001 $ 9 $ 21,357 $ (17,575) $ (101) $3,690
========= ========== ========== ============= ============== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ --------------------------
1997 1998 1998 1999
----------- ------------ ------------ -------------
(unaudited)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss).......................... $ (2,305) $ (9,425) $ (1,267) $ (1,890)
Adjustments to reconcile net income (loss)
to the net cash provided by (used in)
operating activities:
Depreciation and other amortization.... 473 691 109 186
Amortization of movie software costs... -- 1,146 220 160
Effect of warrants granted............. 140 64 -- 32
Effect of stock options granted........ 12 9 -- --
Changes in operating assets and
liabilities:
Accounts receivable.................. (1,986) (51) 15 55
Movie software costs................. (1,284) (795) (841) --
Other assets......................... (478) (80) (21) (22)
Accounts payable and accruals........ 1,225 (487) (356) 6
Deferred revenue..................... (154) -- -- --
Long-term liabilities................ -- -- -- (36)
----------- ------------ ------------ -------------
Net cash provided by (used in) operating
Activities............................... (4,357) (8,928) (2,141) (1,509)
INVESTING ACTIVITIES
Purchases of equipment..................... (599) (549) (184) (37)
----------- ------------ ------------ -------------
Net cash used in investing activities...... (599) (549) (184) (37)
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) -- (8)
Repayment of amounts payable to related
parties.................................. (78) -- -- --
----------- ------------ ------------ -------------
Net cash provided by financing activities.. 9,720 174 -- (8)
----------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................... 4,764 (9,303) (2,325) (1,554)
Translation adjustments.................... (17) 152 51 (1)
Cash and cash equivalents at beginning
of period................................ 7,591 12,338 12,338 3,187
----------- ------------ ------------ -------------
Cash and cash equivalents at end of
Period................................... $ 12,338 $ 3,187 $ 10,064 $ 1,632
=========== ============ ============ =============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................... $ -- $ 26 $ -- $ 4
=========== ============ ============ =============
Income Taxes........................... $ -- $ 19 $ -- $ 1
=========== ============ ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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.
F-7
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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.
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.
F-8
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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.
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.
F-9
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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 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.
F-10
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 Capital Markets Group, Inc. ("Averil"), 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 $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, 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 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 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.,
F-11
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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.
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
F-12
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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 rescission 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 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.
F-13
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 16, 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:
<TABLE>
<CAPTION>
NUMBER
OF OPTION
SHARES PRICE
--------- ------------
<S> <C> <C>
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
</TABLE>
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.
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
F-14
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
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)
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
In 1995, Pick Two Limited ("Pick Two"), made a $193,000 non-refundable
advance to BII Australia to develop certain software. In 1996, Pick Two made an
additional $19,000 non-refundable advance to BII Australia. These advances were
non-interest bearing, and were to be repaid from proceeds from the sales of the
completed software. During the six months ended December 31, 1996, approximately
$48,000 of the advances were repaid out of proceeds received from the sale of
certain research materials. During the year ended December 31, 1997 the balance
of the advances were recognized as revenue. 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.
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.
F-15
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
Deferred tax assets:
<S> <C>
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) ...................... --
==============
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1998 was an increase of $4,275,000.
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
--------------- ---------------
<S> <C> <C>
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%
=============== ===============
</TABLE>
F-16
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
<S> <C>
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
==============
</TABLE>
9. ACCRUED EXPENSES
Accrued Expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
<S> <C>
Employee compensation..................... $ 873,000
Insurance................................. 144,000
Advertising............................... 88,000
Legal and accounting...................... 71,000
Other..................................... 74,000
--------------
$ 1,250,000
==============
</TABLE>
F-17
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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
----------- ------------ -----------
Year ended December 31, 1997:
<S> <C> <C> <C>
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 EVENTS
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.
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
F-18
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998
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.
12. SUBSEQUENT EVENTS (UNAUDITED)
On April 27,1999, the Company issued to Roseworth Group, Ltd. a 4%
convertible debenture in the principal amount of $1,000,000. The debenture is
due on the later of April 27, 2000 or six months following the date the
Securities and Exchange Commission declares effective a registration statement
covering the resale of the shares of common stock underlying the debenture. The
debenture may be converted by Roseworth Group, Ltd. into shares of the Company's
common stock at a conversion price per share equal to the lower of 95% of the
market price of the Company's common stock at the conversion date or $6.00. 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 at the conversion price on the maturity date. Market price is defined as
the lowest volume weighted adjusted price of the common stock on the American
Stock Exchange during the 10 trading days prior to the trading day on which the
conversion notice is sent to the Company.
In May 1999, the Company issued 2,132,000 shares of its common stock to
seven investors in a private placement. The private placement raised aggregate
proceeds of $4,311,250. Of the 2,132,000 shares of common stock, 1,880,000
shares were issued to five investors at $2.00 per share and 252,000 shares were
issued to two investors at $2.1875 per share.
13. BASIS OF PRESENTATION (UNAUDITED)
The accompanying unaudited condensed consolidated financial statements
as of March 31, 1999 reflect all adjustments that, in the opinion of management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cashflows for the period presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
F-19
<PAGE>
--------------------------------------------- ---------------------------------
YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO GIVE YOU INFORMATION
DIFFERENT THAN THAT CONTAINED IN THIS _________ Shares
PROSPECTUS. WE ARE OFFERING TO SELL SHARES Common Stock
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE
OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS
CURRENT ONLY AS OF ITS DATE, REGARDLESS OF
THE TIME YOU RECEIVE THIS PROSPECTUS. BRILLIANT DIGITAL
ENTERTAINMENT, INC.
----------------
TABLE OF CONTENTS
PAGE
---- ________________
Prospectus Summary.....................2 PROSPECTUS
Risk Factors...........................5 ________________
The Securities Purchase Agreement.....13
Use of Proceeds.......................14
Dividend Policy.......................14
Determination of the Offering Price...14
Price Range of Common Stock...........15
Capitalization........................15
Selected Consolidated Financial Data..16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................17
Business..............................25
Management............................36
Certain Relationships and Related , 1999
Transactions........................44
Principal and Selling Stockholders....45
Description of Capital Stock..........47
Plan of Distribution..................49
Legal Matters.........................50
Experts...............................50
Additional Information................51
Index to Consolidated Financial
Statements.........................F-1
--------------------------------------------- ---------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
DOCUMENT EXHIBIT NUMBER
- -------- --------------
Registrant's Amended and Restated Certificate of Incorporation....... 3.1
Registrant's Amended and Restated Bylaws ............................ 3.2
Registrant's Form of Indemnification Agreement....................... 10.28
The Registrant's Certificate of Incorporation and its Bylaws provide for
the indemnification by the Registrant of each director, officer and employee of
the Registrant to the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended. Section 145 of
the Delaware General Corporation Law provides in relevant part that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Registrant's Certificate of Incorporation provides that a director
of the Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(o)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the liability
of a director for, among other things: breach of the duty of loyalty; acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; unlawful payment of dividends; and transactions from which
the director derived an improper personal benefit.
The Registrant has entered into separate but identical indemnity
agreements (the "Indemnity Agreements") with each director of the Registrant and
certain officers of the Registrant (the "Indemnitees"). Pursuant to the terms
and conditions of the Indemnity Agreements, the Registrant indemnified each
Indemnitee against any amounts which he or she becomes legally obligated to pay
in connection with any claim against him or her based upon any action or
inaction which he or she may commit, omit or suffer while acting in his or her
capacity as a director and/or officer of the Registrant or its subsidiaries,
provided, however, that Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be
II-1
<PAGE>
in or not opposed to the best interests of the Registrant and, with respect to
any criminal action, had no reasonable cause to believe Indemnitee's Conduct was
unlawful.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and the
American Stock Exchange fee.
<TABLE>
<CAPTION>
<S> <C>
Registration fee - Securities and Exchange Commission....... $ 3,778
American Stock Exchange fee................................. 17,500
Accounting fees and expenses................................ 5,000
Legal fees and expenses (other than blue sky)............... 15,000
Blue sky fees and expenses, including legal fees............ --
Printing; stock certificates................................ 250
Transfer agent and registrar fees........................... 300
Miscellaneous............................................... 500
--------
Total............................................... $ 42,328
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In September 1996, the Company issued 1,000,000 shares (the "Shares") of
Common Stock in exchange for the 100,000 outstanding shares of Common Stock of
BII Australia owned by Reefknot and PIE. Pursuant to the Exchange Agreement,
Reefknot and PIE each covenanted that (i) it was acquiring the Shares for its
own account with the present intention of holding such securities for investment
purposes only and not with a view to, or for sale in connection with, any
distribution of such securities (other than a distribution in compliance with
all applicable federal and state securities laws); (ii) it is an experienced and
sophisticated investor and has such knowledge and experience in financial and
business matters that it is capable of evaluating the relative merits and the
risks of an investment in the Shares and of protecting its own interests in
connection with this transaction; (iii) it is willing to bear and is capable of
bearing the economic risk of an investment in the Shares; and (iv) it is an
"accredited investor" as that term is defined under Rule 501(a)(8) of Regulation
D promulgated by the Commission under the Securities Act. No brokers,
underwriters or finders were involved in the Exchange. The issuance and sale of
these securities was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act (in accordance with Rule 506 of Regulation D) as a transaction not involving
any public offering.
In connection with the Packard Bell NEC Agreement and the Morgan Creek
Agreement executed in September 1996, the Registrant issued warrants to
purchase600,000 and 85,000 shares of Common Stock to Packard Bell NEC and to
Morgan Creek, respectively, each for $100.00, and on September 1, 1997, the
Registrant issued additional warrants to Packard Bell NEC to purchase up to
200,000 shares of Common Stock for $200.00 (collectively, the "Warrants"). Each
of Packard Bell NEC and Morgan Creek covenanted that (i) it acquired the
Warrants for its own account with the present intention of holding such Warrants
for investment purposes only and not with a view to, or for sale in connection
with, any distribution of such Warrants (other than a distribution in compliance
with all applicable federal and state securities laws); (ii) it is an
experienced and sophisticated investor and has such knowledge and experience in
financial and business matters that it is capable of evaluating the relative
merits and the risks of an investment in the Warrants and of protecting its own
interests in connection with the transaction at issue; (iii) it is willing to
bear and is capable of bearing the economic risk of an investment in the
Warrants; and (iv) the Registrant made available, prior to the date of the
Warrant Agreement, to it the opportunity to ask questions of the Registrant and
its officers, and to receive from the Registrant and its officers information
concerning the terms and conditions of the Warrant and the Warrant Agreement and
to obtain any additional information with respect to the Registrant, its
business, operations and prospects, as reasonably requested by it; and (v) it is
an "accredited investor" as that term is defined under Rule 501(a)(8) of
Regulation D promulgated by the Commission under the Securities Act. The
issuance and sale of these securities was exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to Section 4(2)
of the Securities Act (in accordance with Rule 506 of Regulation D) as a
transaction not involving any public offering.
In September 1996, the Registrant issued warrants to purchase 40,222
shares of Common Stock at an exercise price of $.0326 per share to Chloe
Holdings, Inc.("Chloe"), an affiliate of Averil Associates, Inc., as partial
compensation for services rendered. In connection with the Offering, the
Registrant issued to Chloe warrants to purchase a number of
II-2
<PAGE>
shares of Common Stock having a warrant value equal to $20,000 (15,040 shares,
assuming a public offering price of $5.00 per share) and an exercise price equal
to 110% of the price to the public of the shares offered in the Offering. In
each case, Chloe covenanted that (i) it acquired the warrants for its own
account with the present intention of holding such warrants for investment
purposes only and not with a view to, or for sale in connection with, any
distribution of such warrants (other than a distribution in compliance with all
applicable federal and state securities laws); (ii) it is an experienced and
sophisticated investor and has such knowledge and experience in financial and
business matters that it is capable of evaluating the relative merits and the
risks of an investment in the warrants and of protecting its own interests in
connection with the transaction at issue; (iii) it is willing to bear and is
capable of bearing the economic risk of an investment in the warrants; and (iv)
the Registrant made available, prior to the date of the Warrant Agreement, to it
the opportunity to ask questions of the Registrant and its officers, and to
receive from the Registrant and its officers information concerning the terms
and conditions of the warrant and the Warrant Agreement and to obtain any
additional information with respect to the Registrant, its business, operations
and prospects, as reasonably requested by it; and (v) it is an "accredited
investor" as that term is defined under Rule 501(a)(4) of Regulation D
promulgated by the Commission under the Securities Act. The issuance and sale of
these securities was made in reliance on Section 4(2) of the Securities Act(in
accordance with Rule 506 of Regulation D) as a transaction not involving any
public offering and in reliance on Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
In September 1996, the Registrant issued pursuant to its 1996 Stock
Option Plan(the "1996 Plan") non-statutory stock options to purchase an
aggregate of185,000 shares of Common Stock at $10.00 per share to the
non-employee directors and an executive officer. The issuance and sale of these
securities is exempt from the registration requirements of the Securities Act
pursuant to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
In November 1997, the Registrant issued warrants to purchase 15,040
shares of Common Stock at an exercise price of $5.50 per share to Chloe
Holdings, Inc. ("Chloe") as partial consideration valued at $20,000 for services
rendered in connection with the Registrant's public offering in December 1997.
The warrants vest and become exercisable in December 1998 and expire on November
4, 2000.Chloe covenanted that (i) it acquired the warrants for its own account
with the present intention of holding such warrants for investment purposes only
and not with a view to, or for sale in connection with, any distribution of such
warrants (other than a distribution in compliance with all applicable federal
and state securities laws); (ii) it is an experienced and sophisticated investor
and has such knowledge and experience in financial and business matters that it
is capable of evaluating the relative merits and the risks of an investment in
the warrants and of protecting its own interests in connection with the
transaction at issue; (iii) it is willing to bear and is capable of bearing the
economic risk of an investment in the warrants; and (iv) the Registrant made
available to it, prior to the date of the warrant agreement, the opportunity to
ask questions of the Registrant and its officers, and to receive from the
Registrant and its officers information concerning the terms and conditions of
the warrant and the warrant agreement and to obtain any additional information
with respect to the Registrant, its business, operations and prospects, as
reasonably requested by it; and (v) it is an "accredited investor" as that term
is defined under Rule 501(a)(4) of Regulation D promulgated by the Commission
under the Securities Act. The issuance and sale of these securities was exempt
from the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act (in accordance with Rule 506 of
Regulation D) as a transaction not involving any public offering.
In July 1998, the Registrant issued warrants to purchase 300,000 shares
of Common Stock, par value $.001 per share, to a computer chip manufacturer at
an exercise price of $4.00 per share. The warrants were issued as partial
consideration for the manufacturer's obligations under that certain Software
Development Agreement, dated as of July 14, 1998, between the Registrant and the
manufacturer. The warrants are currently exercisable and expire in July 2001. In
connection with the issuance, the manufacturer represented to the Registrant,
and the Registrant believed, that the manufacturer was acquiring the warrants
for investment purposes only and not with a view to, or for sale in connection
with, a distribution of the warrants, and that the manufacturer was capable of
bearing the economic risk of an investment in the Registrant. The warrants
contain appropriate restrictive legends regarding resale and contain
registration rights in connection with resale of the underlying shares of Common
Stock. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.
On December 3, 1998, the Registrant 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. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering. As compensation for financial advisory services
II-3
<PAGE>
rendered by Trinity Capital Advisors, Inc. in connection with the issuance of
the debenture and the warrant, the Registrant issued to Trinity Capital 6,000
shares of Common Stock and paid to Trinity Capital a fee of $3,150. The issuance
and sale of these securities was exempt from the registration and prospectus
delivery requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act (in accordance with Rule 506 of Regulation D) as a transaction
not involving any public offering. In March 1999, the Registrant redeemed from
AMRO the debenture for $100,000 plus accrued interest and the warrant for
$5,000.
On April 27,1999, the Registrant issued to Roseworth Group, Ltd. a 4%
convertible debenture in the principal amount of $1,000,000 due on the later of
April 27, 2000 or six months following the date the Commission declares
effective a registration statement with respect to the resale of the shares of
common stock underlying the debenture. The debenture may be converted by
Roseworth into shares of Registrant's common stock at a conversion price for
each share of common stock equal to the lower of 95% of its market price at the
conversion date or $6.00. 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 at the conversion price on the
maturity date. Market price is defined as the lowest volume weighted adjusted
price of the our common stock on the American Stock Exchange (as reported on
Bloomberg) during the 10 business days prior to the business day on which the
conversion notice is sent to the Registrant. Registrant issued the securities in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering. In connection with the issuance of the debenture,
Registrant paid to Roseworth a fee of $30,000 and issued to Roseworth 5,883
shares of common stock. The issuance and sale of these securities was exempt
from the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act (in accordance with Rule 506 of
Regulation D) as a transaction not involving any public offering.
In May 1999, the Registrant sold an aggregate of 2,132,000 shares of
Common Stock to seven investors for aggregate proceeds of $4,311,250. The
issuance and sale of these securities was exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to Section 4(2)
of the Securities Act (in accordance with Rule 506 of Regulation D) as a
transaction not involving any public offering.
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
1.1 Securities Purchase Agreement, dated as of March 29, 1999, between
the Registrant and St. Annes Investments, Ltd. Incorporated by
reference to Exhibit 10.52 to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
1.2 Registration Rights Agreement, dated as of March 29, 1999, between
the Registrant and St. Annes Investments, Ltd. Incorporated by
reference to Exhibit 10.53 to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
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.
II-4
<PAGE>
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.
5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.
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 Memorandum of Agreement, dated September 5, 1996, by and between the
Registrant and Bantam Doubleday Dell Books For Young Readers.
Incorporated by reference to Exhibit 10.9 to Form S-1 filed on
September 17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the Securities
and Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.7 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.]
10.8 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.]
10.9 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.]
10.10 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.]
10.11 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.]
10.12 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
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<PAGE>
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.13 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.]
10.14 Distribution Agreement, dated February 22, 1996, by and between BII
Australia and Shortland Publications Limited. Incorporated by
reference to Exhibit 10.20 to Form S-1 filed on September 17, 1996,
and the amendments thereto. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.15 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.]
10.16 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.]
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 Standard Form Lease Agreement, dated May 16, 1997, between Topanga &
Victory Partners L.P. and the Registrant. Incorporated by reference
to Exhibit 10.1 to Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.]
10.24 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.]
10.25 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.
10.26 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.
10.27 CD-ROM Distribution Agreement, dated September 22, 1997, between
Packard Bell NEC and the
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<PAGE>
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.]
10.28 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.
10.29 Lease Agreement, dated January 12, 1998, between Capital Credit
Company Pty. Limited and Winmor Pty. Limited and BII Australia.
10.30 Lease Agreement between Daiwa Real Estate Co. Ltd. and BII
Australia.
10.31 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.]
10.32 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.]
10.33 Debenture and Warrant Purchase Agreement, dated as of April 21,
1999, between the Registrant and Roseworth Group, Ltd. Incorporated
by reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1999.
10.34 4% Convertible Debenture Due April 27, 2000 of the Registrant, in
the principal amount of $1,000,000, dated as of April 27, 1999.
Incorporated by reference to Exhibit 10.2 to Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1999.
10.35 Registration Rights Agreement, dated as of April 21, 1999, between
the Registrant and Roseworth Group, Ltd. Incorporated by reference
to Exhibit 10.3 to Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1999.
21.1 List of Subsidiaries. Incorporated by reference to Exhibit 21.1
to Form S-1 filed on September 17, 1996, and the amendments thereto.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales of
securities are being made, a post-effective amendment to this Registration
Statement to (i) include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the Registration Statement, and (iii) include any additional or changed material
information on the plan of distribution;
(2) That, for the purpose of determining liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
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(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Los
Angeles, State of California, on May 17, 1999.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MICHAEL OZEN
-------------------------------------
Michael Ozen, Chief Financial Officer
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 (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933 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.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
/S/ MARK DYNE Chief Executive Officer and Chairman May 17, 1999
- -------------------------- of the Board of Directors
Mark Dyne
/S/ KEVIN BERMEISTER President and Director May 17, 1999
- --------------------------
Kevin Bermeister
/S/ MICHAEL OZEN Chief Financial Officer (Principal May 17, 1999
- -------------------------- Financial and Accounting Officer)
Michael Ozen and Secretary
/S/ MARK MILLER Vice President, Operations and May 17, 1999
- -------------------------- Production and Director
Mark Miller
/S/ DIANA MARANON Director May 17, 1999
- --------------------------
Diana Maranon
/S/ RAY MUSCI Director May 17, 1999
- --------------------------
Ray Musci
/S/ GARTH SALONER Director May 17, 1999
- --------------------------
Garth Saloner
/S/ JEFF SCHEINROCK Director May 17, 1999
- ---------------------------
Jeff Scheinrock
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[GRAPHIC OMITTED]
May 18, 1999
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard, Suite 120
Woodland Hills, CA 91367
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 (the "Registration Statement") to which this letter is attached as Exhibit
5.1 filed by Brilliant Digital Entertainment, Inc., a Delaware corporation (the
"Company"), in order to register under the Securities Act of 1933, as amended
(the "Act"), 2,040,000 shares of Common Stock of the Company and any additional
shares of Common Stock of the Company which may be registered pursuant to Rule
462(b) under the Act (the "Shares").
We are of the opinion that the Shares have been duly authorized and upon
issuance and sale in conformity with and pursuant to the Registration Statement,
and receipt of the purchase price therefor as specified in the Registration
Statement, the Shares will be legally and validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to use of our name in the Prospectus constituting a part thereof.
Respectfully yours,
/s/ Troop Steuber Pasich
Reddick & Tobey, LLP
TROOP STEUBER PASICH
REDDICK & TOBEY, LLP
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated March 29, 1999 except for the third paragraph of Note 11, as to
which the date is April 14, 1999, relating to the financial statements of
Brilliant Digital Entertainment, Inc., which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/S/ PricewaterhouseCoopers LLP.
Los Angeles, California
May 14, 1999
