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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _______________.
Commission file number 0-21637
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 95-4592204
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Executive Offices)
(818) 615-1500
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, par value
$0.001, 11,546,884 shares issued and outstanding as of May 12, 1999.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION........................................... 3
Item 1. Financial Statements............................................ 3
Condensed Consolidated Balance Sheet as of March 31, 1999....... 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and March 31, l998.......... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and March 31, 1998.......... 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
PART II OTHER INFORMATION............................................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
MARCH 31,
1999
-----------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents..................................... $ 1,632
Accounts receivable, net...................................... 2,084
Other current assets, net..................................... 258
---------
Total current assets............................................. 3,974
Property, plant and equipment, net............................... 684
Movie software costs............................................. 491
Other assets..................................................... 426
---------
Total assets..................................................... $ 5,575
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 264
Accrued expenses.............................................. 1,148
Current portion of notes payable.............................. 172
---------
Total current liabilities........................................ 1,584
Notes payable, less current portion.............................. 91
Convertible debenture............................................ 100
Other long term liabilities...................................... 110
---------
Total liabilities................................................ 1,885
Commitments and contingencies
Stockholders' equity:
Common stock.................................................. 9
Additional paid-in capital.................................... 21,357
Accumulated deficit........................................... (17,575)
Cumulative other comprehensive income (loss).................. (101)
---------
Total stockholders' equity....................................... 3,690
---------
Total liabilities and stockholders' equity....................... $ 5,575
=========
See accompanying notes.
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues ................................................... $ 206 $ 31
Costs and expenses:
Costs of revenues ....................................... 205 266
Sales and marketing ..................................... 222 305
General and administrative .............................. 619 524
Research and development ................................ 981 317
Depreciation ............................................ 130 18
------- -------
2,157 1,430
------- -------
Income (loss) from operations .............................. (1,951) (1,399)
Other income (expense):
Gain (loss) on foreign exchange transactions ............ -- (8)
Export market development grant ......................... 37 --
Interest income (expense), net .......................... 24 140
------- -------
Total other income (expense) ............................ 61 132
------- -------
Income (loss) before income taxes .......................... (1,890) (1,267)
Provision for income taxes ................................. -- --
------- -------
Net income (loss) .......................................... (1,890) (1,267)
Foreign currency translation adjustment
(net of tax effects) ..................................... 22 62
------- -------
Comprehensive income (loss) ................................ $(1,868) $(1,205)
======= =======
Basic and diluted net income (loss) per share .............. $ (0.20) $ (0.13)
======= =======
Weighted average number of shares used in computing
basic and diluted net income (loss) per share ........... 9,409 9,403
======= =======
</TABLE>
See accompanying notes.
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................ $ (1,890) $ (1,267)
Adjustments to reconcile net income (loss) to the net
cash provided by (used in) operating activities:
Depreciation and amortization........................... 186 109
Amortization of movie software costs.................... 160 220
Effect of warrants granted.............................. 32 --
Changes in operating assets and liabilities:
Accounts receivable.................................. 55 15
Movie software costs................................. -- (841)
Other assets......................................... (22) (21)
Accounts payable and accruals........................ 6 (356)
Long-term liabilities................................ (36) --
-------- ---------
Net cash provided by (used in) operating activities.......... (1,509) (2,141)
INVESTING ACTIVITIES
Purchases of equipment....................................... (37) (184)
-------- ---------
Net cash used in investing activities........................ (37) (184)
FINANCING ACTIVITIES
Repayment of notes........................................... (8) --
-------- ---------
Net cash provided by financing activities ................... (8) --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (1,554) (2,325)
Translation adjustments...................................... (1) 51
Cash and cash equivalents at beginning of period............. 3,187 12,338
-------- ---------
Cash and cash equivalents at end of period.................. $ 1,632 $ 10,064
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................ $ 4 $ --
======== =========
Income taxes......................................... $ 1 $ --
</TABLE>
See accompanying notes.
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BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited condensed
consolidated financial statements reflect all adjustments that, in the opinion
of management, are considered necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period. The
accompanying financial statements should be read in conjunction with the audited
consolidated financial statements of Brilliant Digital Entertainment, Inc. (the
"Company") included in the Company's Form 10-KSB for the fiscal year ended
December 31, 1998.
2. STOCKHOLDERS' EQUITY
Options and warrants representing common shares of 1,458,000 and
2,085,000 were excluded from the average number of common and common equivalent
shares outstanding in the diluted EPS calculation for the three months ended
March 31, 1998 and 1999, respectively, because they were anti-dilutive.
3. COMMITMENTS AND CONTINGENCIES
The Company leases its office and production facilities and certain of
its office equipment. The Company has commitments under its lease agreements for
approximately $755,000 at March 31, 1999. In addition the Company has
obligations of $142,000 under licensing commitments at March 31, 1999. 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.
4. SIGNIFICANT ACCOUNTING POLICIES
CONCENTRATION OF CREDIT RISK
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 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.
5. SUBSEQUENT EVENTS
On April 27,1999, the Company 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 Group, Ltd. into shares of the Company'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
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maturity date. Market Price is defined as the lowest volume weight adjusted
price of the 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 Company. In connection with the transaction,
the Company paid to Roseworth a fee of $30,000 and issued to Roseworth 5,883
shares of Common Stock.
On March 30, 1999, the Company entered into agreements for the sale of
2,132,000 shares of its 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 the Company's Common Stock was
$2.25 per share, and the lowest sales price of the 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read together with the
Consolidated Financial Statements of Brilliant and the notes to the Consolidated
Financial Statements included elsewhere in this Form 10-QSB.
THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT 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 BELOW UNDER
THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."
OVERVIEW
Brilliant is a production and development studio producing a new
generation of digital entertainment that 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 "Cautionary Statements and
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
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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, 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 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.
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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 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 reducing 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 "Cautionary Statements and Risk
Factors - We may experience risks associated with acquisitions."
RESULTS OF OPERATIONS
REVENUES. Revenues from the sale of Multipath Movies through retail
outlets are recognized when the product is shipped. Product returns or price
protection concessions that exceed our reserves could materially adversely
affect our business and operating results and could increase the magnitude of
quarterly fluctuations in our operating and financial results. See "Cautionary
Statements and Risk Factors - Our products may be returned."
We enter into distribution contracts under which we are entitled to
fixed minimum guaranteed payments. The minimum guaranteed payments are
recognized as revenue when the CD-ROM master is delivered to the distributor and
the terms of the sale are considered fixed. Revenues from the sale of electronic
tickets to view Multipath Movies over the Internet are recognized when the
tickets are sold.
Historically, we have derived our revenues from royalties, development
fees and software sales. We license our traditional CD-ROM products to
publishers and distributors in exchange for non-refundable advances and
royalties based on product sales. Royalties based on product sales are due only
to the extent revenues exceed any associated non-refundable royalty advance.
Royalties related to non-refundable advances are recognized when the CD-ROM
master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned by us. Development fees are paid by customers in
exchange for our development of software
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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.
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
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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.
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.
ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES
Our accounting policy follows SFAS No. 86, which provides for the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life or on a ratio of current
revenues to total projected product revenues, whichever results in the greater
amortization amount. Prior to the establishment of technological feasibility,
these costs are expensed as incurred. Historically, we have expensed all costs
related to the development of both our software tools and Multipath Movie
titles. We achieved technological feasibility of our original Digital Projector
during the third quarter of 1997. Since the date of achieving technological
feasibility, the costs of developing Multipath Movies intended to be viewed on
the original projector have been capitalized in accordance with SFAS No. 86. 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.
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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. Each sale of shares under the agreement is subject to certain minimum
and maximum dollar amounts and certain other conditions, including that the
"Market Price" of our Common Stock at the time we give a sale notice is at least
$1 per share and that a registration statement under the Securities Act of 1933,
as amended, covering St. Annes' resale of the shares is in effect at the closing
of the sale. "Market Price" is defined as the lowest daily volume weight
adjusted price of our Common Stock (as reported on Bloomberg) for any trading
day during the 10-trading day period ending on the day before the day that we
give a sale notice to St. Annes. The purchase price that we will receive for our
shares in each sale will be 88% of the Market Price of our Common Stock if the
Market Price is more than $4 per share, and 86% of the Market Price if the
Market Price is $4 per share or less. We have agreed to pay to Trinity Capital
Advisors, Inc. an amount equal to 3% of the purchase price, and to issue to
Trinity Capital Advisors shares of Common Stock having an aggregate value equal
to 2% of the purchase price of the shares of Common Stock to be issued and sold
to St. Annes under the 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
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.
In May 1999, we closed a private placement of 2,132,000 shares of our
Common Stock, which were issued to seven investors. 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.
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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 "Cautionary
Statements and 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:
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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CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties. Factors associated with
the forward looking statements which could cause actual results to differ
materially from those projected or forecast appear in the statements below. In
addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risks factors:
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 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 for many
elements of our business--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
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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.
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
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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, 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
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party vendors in accordance with our specifications and forecasts. Currently, we
use primarily one vendor for these services. While these services currently are
available from multiple vendors and at multiple sites, we cannot be certain that
an interruption in the manufacture of our products could be remedied without
undue delay and without materially affecting our operations. We do not have
contractual agreements with any of our third party vendors, which may result in
our inability to secure adequate services in a timely manner. Demand for these
manufacturing services is seasonal, with peak demand and service and production
backlogs and delays occurring in September, October and November of each year.
We must compete for capacity and priority with the CD-ROM products of many much
larger competitors with substantially greater influence with our vendors. If we
fail to secure adequate manufacturing services to timely produce and deliver our
products, our business and financial condition would be materially and adversely
affected.
WE ARE SUBJECT TO FLUCTUATING OPERATING RESULTS AND SEASONAL BUYING
PATTERNS. We operate in an industry which is subject to significant fluctuations
in operating results from quarter to quarter. Factors that may influence our
quarterly operating results include:
o customer demand for our products;
o shipping schedules for PC hardware with which Multipath Movies are
bundled;
o introduction or enhancement of products by us and our competitors;
o our ability to produce and distribute retail packaged versions of
Multipath Movies in advance of peak retail selling seasons;
o introduction or availability of new hardware;
o market acceptance of the Multipath Movies and other new products;
o reviews in the industry press concerning our products or those of
our competitors;
o changes or anticipated changes in pricing by us or our
competitors;
o mix of distribution channels through which products are sold;
o product returns and order cancellations;
o the timing of orders from major customers;
o management's evaluation and judgment regarding a title's
acceptance; and
o unanticipated operating expenses and general economic conditions.
Additionally, a majority of the unit sales for a product typically
occurs in the quarter in which the product is introduced. As a result, our
revenues may increase significantly in a quarter in which a major product
introduction occurs and may decline in following quarters.
Our expense levels are, to a large extent, fixed. We may be unable to
adjust spending in a timely manner to compensate for any revenue shortfall. As a
result, any significant shortfall in revenue from our Multipath Movies would
have an immediate material adverse effect on our business, operating results and
financial condition. We have increased our operating expenses to fund greater
levels of Multipath Movie production and research and development, increased
marketing operations and expanded distribution channels. As was the case during
1997 and 1998, to the extent that these expenses precede or are not subsequently
followed by increased revenues, our business, operating results and financial
condition will be materially adversely affected.
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
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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 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.
18
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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 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, 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.
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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.
OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
As of May 15, 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.
OUR SALE OF SHARES AT A PRICE BELOW THE MARKET PRICE OF OUR COMMON STOCK
WILL HAVE A DILUTIVE IMPACT ON OUR STOCKHOLDERS. We have entered into a
securities purchase agreement with an investor that allows us to sell to the
investor shares of our common stock at a discount to the then-prevailing market
price of our common stock. Additionally, we have issued a debenture that
entitles the holder to convert the debenture into common stock at a discount to
the then-prevailing market price of our common stock. Accordingly, the issuance
of shares under the securities purchase agreement and the debenture will have a
dilutive impact on our stockholders. As a result, our net income or loss per
share could be materially decreased in future periods, and the market price of
our common stock could be materially and adversely affected. These discounted
sales could have an immediate adverse effect on the market price of the common
stock. We also have agreed to issue to our financial advisor 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
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common stock issued under the securities purchase agreement. This downward
pressure could encourage short sales of common stock by the investor (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.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Debenture and Warrant Purchase Agreement, dated as of
April 21, 1999, between the Registrant and Roseworth
Group, Ltd.
10.2 4% Convertible Debenture Due April 27, 2000 of the
Registrant, in the principal amount of $1,000,000, dated
as of April 27, 1999.
10.3 Registration Rights Agreement, dated as of April 21, 1999,
between the Registrant and Roseworth Group, Ltd.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
Date: May 12,1999 /S/ MICHAEL OZEN
-------------------------------------
By: Michael Ozen
Its: Chief Financial Officer
(Principal Financial and
Accounting Officer) and
Secretary
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EXHIBIT 10.1
DEBENTURE AND WARRANT PURCHASE AGREEMENT
BETWEEN
BRILLIANT DIGITAL ENTERTAINMENT, INC.
AND
ROSEWORTH GROUP, LTD.
DEBENTURE AND WARRANT PURCHASE AGREEMENT dated as of April 21, 1999 (the
"Agreement"), between Roseworth Group, Ltd. (the "Investor") and Brilliant
Digital Entertainment, Inc., a corporation organized and existing under the laws
of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
and the Investor shall purchase, one or more Convertible Debentures (as defined)
in the aggregate principal balance of $1,000,000.
WHEREAS, such investment will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") of the United States Securities Act of 1933, as
amended, and Regulation D ("Regulation D") and the other rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to the investment to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "CAPITAL SHARES" shall mean the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.2. "CAPITAL SHARES EQUIVALENTS" shall mean any securities, rights, or
obligations that are convertible into or exchangeable for or give any right to
subscribe for any Capital Shares of the Company or any warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 1.3. "CLOSING" shall mean the closing of the purchase and sale of the
Convertible Debenture pursuant to Section 2.1.
Section 1.4. "CLOSING DATE" shall mean the date on which all conditions to the
Closing have been satisfied (as defined in Section 2.1 (a) hereto) and the
Closing shall have occurred.
Section 1.5. "COMMON STOCK" shall mean the Company's common stock, par value
$.001 per share.
Section 1.6. "CONVERSION SHARES" shall mean the shares of Common Stock issuable
upon conversion of the Convertible Debenture.
<PAGE>
Section 1.7. "CONVERTIBLE DEBENTURE" shall mean one or more convertible
debentures in the aggregate principal amount of $1,000,000, each in the form of
EXHIBIT A hereto, to be issued to the Investor pursuant to this Agreement.
Section 1.8. "DAMAGES" shall mean any loss, claim, damage, liability, costs and
expenses (including, without limitation, reasonable attorney's fees and
disbursements and reasonable costs and expenses of expert witnesses and
investigation).
Section 1.9. "EFFECTIVE DATE" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.
Section 1.10. "ESCROW AGENT" shall have the meaning set forth in the Escrow
Agreement.
Section 1.11. "ESCROW AGREEMENT" shall mean the Escrow Agreement in
substantially the form of Exhibit C hereto executed and delivered
contemporaneously with this Agreement.
Section 1.12. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
Section 1.13. "LEGEND" shall mean the legend set forth in Section 9.1.
Section 1.14. "MARKET PRICE" on any given date of determination shall mean the
lowest Volume Adjusted Price for any Trading Day during the ten (10) Trading
Days immediately preceding such date of determination.
Section 1.15. "MATERIAL ADVERSE EFFECT" shall mean any effect on the business,
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole, and/or any condition, circumstance, or situation that would prohibit
or otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement, the Registration Rights Agreement,
the Escrow Agreement or the Convertible Debenture in any material respect.
Section 1.16. "OUTSTANDING" when used with reference to shares of Common Stock
or Capital Shares (collectively the "Shares"), shall mean, at any date as of
which the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
PROVIDED, HOWEVER, that "Outstanding" shall not mean any such Shares then
directly or indirectly owned or held by or for the account of the Company.
Section 1.17. "PERSON" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
Section 1.18. "PRINCIPAL MARKET" shall mean the American Stock Exchange, the New
York Stock Exchange, the NASDAQ National Market, or the NASDAQ Small-Cap Market,
whichever is at the time the principal trading exchange or market for the Common
Stock.
Section 1.19. "PURCHASE PRICE" shall mean one million dollars ($1,000,000).
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Section 1.20. "REGISTRABLE SECURITIES" shall mean the Conversion Shares until
(i) the Registration Statement has been declared effective by the SEC, and all
Conversion Shares have been disposed of pursuant to the Registration Statement,
(ii) all Conversion Shares have been sold under circumstances under which all of
the applicable conditions of Rule 144 (or any similar provision then in force)
under the Securities Act ("Rule 144") are met, (iii) all Conversion Shares have
been otherwise transferred to holders who may trade such shares without
restriction under the Securities Act, and the Company has delivered a new
certificate or other evidence of ownership for such securities not bearing a
restrictive legend or (iv) such time as, in the opinion of counsel to the
Company, all Conversion Shares may be sold without any time, volume or manner
limitations pursuant to Rule 144(k) (or any similar provision then in effect)
under the Securities Act.
Section 1.21. "REGISTRATION RIGHTS AGREEMENT" shall mean the agreement regarding
the filing of the Registration Statement for the resale of the Registrable
Securities, entered into between the Company and the Investor as of the Closing
Date in the form annexed hereto as Exhibit B.
Section 1.22. "REGISTRATION STATEMENT" shall mean a registration statement on
Form S-3 (if use of such form is then available to the Company pursuant to the
rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate, and which form shall be available for the resale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement and in accordance with the intended
method of distribution of such securities), for the registration of the resale
by the Investor of the Registrable Securities under the Securities Act.
Section 1.23. "REGULATION D" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.24. "SEC" shall mean the Securities and Exchange Commission.
Section 1.25. "SECTION 4(2)" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.26. "SECURITIES ACT" shall have the meaning set forth in the recitals
of this Agreement.
Section 1.27. "SEC DOCUMENTS" shall mean the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1998 and each report, proxy
statement or registration statement filed by the Company with the SEC pursuant
to the Exchange Act or the Securities Act since the filing of such Annual Report
through the date hereof.
Section 1.28. "SHARES" shall have the meaning set forth in Section 1.16.
Section 1.29. "TRADING DAY" shall mean any day during which the Principal Market
at such day shall be open for business.
Section 1.30. "VOLUME ADJUSTED PRICE" shall mean, on any Trading Day of
determination, the quotient obtained by dividing (1) the total dollar value of
all shares of Common Stock traded on the Principal Market on such Trading Day,
by (2) the total number of shares of the Common Stock traded on the Principal
Market on such Trading Day.
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<PAGE>
ARTICLE II
PURCHASE AND SALE OF THE CONVERTIBLE DEBENTURE
Section 2.1. Investment.
(a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investor agrees to purchase the Convertible
Debenture at the Purchase Price on the Closing Date as follows:
(i) Upon execution and delivery of this Agreement, the Investor
shall deliver to the Escrow Agent immediately available
funds in the amount of the Purchase Price, and the Company
shall deliver the Convertible Debenture to the Escrow Agent,
in each case to be held by the Escrow Agent pursuant to the
Escrow Agreement.
(ii) Upon satisfaction of the conditions set forth in Section
2.1(b), the Closing ("Closing") shall occur at the offices
of the Escrow Agent at which the Escrow Agent (x) shall
release the Convertible Debenture to the Investor and (y)
shall release the Purchase Price (after all fees have been
paid as set forth in the Escrow Agreement) to the Company,
pursuant to the terms of the Escrow Agreement.
(b) The Closing is subject to the satisfaction of the following
conditions:
(i) acceptance and execution by the Company and by the Investor,
of this Agreement and all Exhibits hereto;
(ii) delivery into escrow by Investor of immediately available
funds in the amount of the Purchase Price of the Convertible
Debenture, as more fully set forth in the Escrow Agreement;
(iii) all representations and warranties of the Investor
contained herein shall remain true and correct as of the
Closing Date (as a condition to the Company's obligations);
(iv) all representations and warranties of the Company contained
herein shall remain true and correct as of the Closing Date
(as a condition to the Investor's obligations);
(v) the Company shall have obtained all permits and
qualifications required by any state for the offer and sale
of the Convertible Debenture, or shall have the availability
of exemptions therefrom;
(vi) the sale and issuance of the Convertible Debenture
hereunder, and the proposed issuance by the Company to the
Investor of the Common Stock underlying the Convertible
Debenture upon the conversion or exercise thereof shall be
legally permitted by all laws and regulations to which the
Investor and the Company are subject and there shall be no
ruling, judgment or writ of any court prohibiting the
transactions contemplated by this Agreement;
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<PAGE>
(vii) delivery of the original fully executed Convertible
Debenture certificates to the Escrow Agent;
(viii) receipt by the Investor of an opinion of Troop Steuber
Pasich Reddick & Tobey, LLP, counsel to the Company, in the
form of Exhibit D hereto;
(ix) delivery to the Investor of the Irrevocable Instructions to
Transfer Agent in the form attached hereto as Exhibit E;
and
(x) delivery to the Investor of the Registration Rights
Agreement.
Section 2.2. LIQUIDATED DAMAGES. The parties hereto acknowledge and agree that
the sum payable pursuant to the Registration Rights Agreement shall constitute
liquidated damages and not penalties. The parties further acknowledge that (a)
the amount of loss or damages likely to be incurred is incapable or is difficult
to precisely estimate, (b) the amounts specified in such Sections bear a
reasonable proportion and are not plainly or grossly disproportionate to the
probable loss likely to be incurred by the Investor in connection with the
failure by the Company to timely cause the registration of the Registrable
Securities and (c) the parties are sophisticated business parties and have been
represented by sophisticated and able legal and financial counsel and negotiated
this Agreement at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1. INTENT. The Investor is entering into this Agreement for its own
account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Convertible Debenture or any Conversion Shares
to or through any person or entity; provided, however, that by making the
representations herein, the Investor does not agree to hold such securities for
any minimum or other specific term and reserves the right to dispose of the
Conversion Shares at any time in accordance with federal and state securities
laws applicable to such disposition.
Section 3.2. SOPHISTICATED INVESTOR. The Investor is a sophisticated investor
(as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it is capable of evaluating the merits and
risks of an investment in the Convertible Debenture and the underlying
Conversion Shares. The Investor acknowledges that an investment in the
Convertible Debenture and the underlying Conversion Shares is speculative and
involves a high degree of risk.
Section 3.3. AUTHORITY. This Agreement and each agreement attached as an Exhibit
hereto which is required to be executed by Investor has been duly authorized and
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
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Section 3.4. NOT AN AFFILIATE. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 3.5. ABSENCE OF CONFLICTS. The execution and delivery of this Agreement
and the agreements the forms of which are attached as Exhibits hereto and
executed in connection herewith, and the consummation of the transactions
contemplated thereby, and compliance with the requirements thereof, will not
violate any law, rule, regulation, order, writ, judgment, injunction, decree or
award binding on Investor or (a) violate any provision of any indenture,
instrument or agreement to which Investor is a party or is subject, or by which
Investor or any of its assets is bound; (b) conflict with or constitute a
material default thereunder; (c) result in the creation or imposition of any
lien pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by Investor to any third party;
or (d) require the approval of any third-party (which has not been obtained)
pursuant to any material contract, agreement, instrument, relationship or legal
obligation to which Investor is subject or to which any of its assets,
operations or management may be subject.
Section 3.6. DISCLOSURE; ACCESS TO INFORMATION. The Investor has received all
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed or received copies of all SEC Documents that
have been requested by it.
Section 3.7. MANNER OF SALE. At no time was Investor presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1. ORGANIZATION OF THE COMPANY. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted. The Company does not have any
subsidiaries and does not own more that fifty percent (50%) of or control any
other business entity except as set forth in the SEC Documents other than
Brilliant Digital Filmed Entertainment, a Delaware corporation, and Brilliant
Interactive Ideas, Pty. Ltd., a company incorporated in New South Wales,
Australia, each of which is a wholly-owned subsidiary of the Company. The
Company is duly qualified and is in good standing as a foreign corporation to do
business in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other than those in
which the failure so to qualify would not have a Material Adverse Effect.
Section 4.2. AUTHORITY. The Company has the requisite corporate power and
corporate authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement and the Escrow Agreement and to
issue the Convertible Debenture and the Conversion Shares pursuant to their
respective terms, (ii) the execution, issuance and delivery of this Agreement,
the Registration Rights Agreement, the Escrow Agreement and the Convertible
Debenture by the Company and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
and no further consent or authorization of the Company or its Board of Directors
or stockholders is required, and (iii) this Agreement, the Registration Rights
Agreement, the Escrow Agreement and the Convertible Debenture have
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been duly executed and delivered by the Company and at the Closing shall
constitute valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. The Company has duly and
validly authorized and reserved for issuance shares of Common Stock sufficient
in number for the conversion of the Convertible Debenture (assuming a Market
Price of $1.00). The Company understands and acknowledges the potentially
dilutive effect to the Common Stock of the issuance of the Conversion Shares.
The Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Convertible Debenture in accordance with this Agreement
and the Convertible Debenture is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company and notwithstanding the commencement of any case
under 11 U.S.C. ss. 101 et seq. (the "Bankruptcy Code"). The Company shall not
seek judicial relief from its obligations hereunder except pursuant to the
Bankruptcy Code. In the event the Company is a debtor under the Bankruptcy Code,
the Company hereby waives to the fullest extent permitted any rights to relief
it may have under 11 U.S.C. ss. 362 in respect of the conversion of the
Convertible Debenture. The Company agrees, without cost or expense to the
Investor, to take or consent to any and all action necessary to effectuate
relief under 11 U.S.C. ss. 362.
Section 4.3. CAPITALIZATION. The authorized capital stock of the Company
consists of 30,000,000 shares of Common Stock, par value $0.001, of which
9,409,001 shares are issued and outstanding as of April 19, 1999 and 1,000,000
shares of preferred stock, par value $0.001 per share, of which no shares are
issues and outstanding. Except for outstanding options and warrants to acquire a
total of 1,636,262 shares of Common Stock, there are no outstanding Capital
Shares Equivalents. All of the outstanding shares of Common Stock of the Company
have been duly and validly authorized and issued and are fully paid and
non-assessable.
Section 4.4. COMMON STOCK. The Company has registered its Common Stock pursuant
to Section 12(b) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and the Company is in compliance
with all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the American Stock
Exchange and the Company has not received any notice regarding, and to its
knowledge there is no threat, of the termination or discontinuance of the
eligibility of the Common Stock for such listing.
Section 4.5. SEC DOCUMENTS. The Company has delivered or made available to the
Investor true and complete copies of the SEC Documents. The Company has not
provided to the Investor any information that, according to applicable law, rule
or regulation, should have been disclosed publicly prior to the date hereof by
the Company, but which has not been so disclosed. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Exchange Act, and rules and regulations of the SEC promulgated thereunder and
the SEC Documents did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents complied in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto at the time of such
inclusion. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the
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Company as of the dates thereof and the results of operations and cash flows for
the periods then ended (subject, in the case of unaudited interim statements, to
normal year-end audit adjustments). Neither the Company nor any of its
subsidiaries has any material indebtedness, obligations or liabilities of any
kind (whether accrued, absolute, contingent or otherwise, and whether due or to
become due) that would have been required to be reflected in, reserved against
or otherwise described in the financial statements or in the notes thereto in
accordance with GAAP, which was not fully reflected in, reserved against or
otherwise described in the financial statements or the notes thereto included in
the SEC Documents or was not incurred in the ordinary course of business
consistent with the Company's past practices since the last date of such
financial statements.
Section 4.6. EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject to the
accuracy of the Investor's representations in Article III, the sale of the
Convertible Debenture and the Conversion Shares will not require registration
under the Securities Act and/or any applicable state securities law. When issued
in accordance with the Convertible Debenture, the Conversion Shares will be duly
and validly issued, fully paid, and non-assessable. Neither the sales of the
Convertible Debenture or the Conversion Shares pursuant to, nor the Company's
performance of its obligations under, this Agreement, the Registration Rights
Agreement, the Escrow Agreement or the Convertible Debenture will (i) result in
the creation or imposition by the Company of any liens, charges, claims or other
encumbrances upon the Convertible Debenture or the Conversion Shares or, except
as contemplated herein, any of the assets of the Company, or (ii) entitle the
holders of Outstanding Capital Shares to preemptive or other rights to subscribe
to or acquire the Capital Shares or other securities of the Company. The
Convertible Debenture and the Conversion Shares shall not subject the Investor
to personal liability to the Company or its creditors by reason of the
possession thereof.
Section 4.7. NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor any of its affiliates nor any person acting
on its or their behalf (i) has conducted or will conduct any general
solicitation (as that term is used in Rule 502(c) of Regulation D) or general
advertising with respect to the Convertible Debenture or the Conversion Shares
or (ii) made any offers or sales of any security or solicited any offers to buy
any security under any circumstances that would require registration of the
Convertible Debenture or the Conversion Shares under the Securities Act;
provided, that the Company makes no representation or warranty with respect to
the Investor or Curzon Capital Corp.
Section 4.8. CORPORATE DOCUMENTS. The Company has furnished or made available to
the Investor true and correct copies of the Company's Certificate of
Incorporation, as amended and in effect on the date hereof (the "Certificate"),
and the Company's By-Laws, as amended and in effect on the date hereof (the
"By-Laws").
Section 4.9. NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the
Convertible Debenture and the Conversion Shares , do not and will not (i) result
in a violation of the Company's Certificate of Incorporation or By-Laws or (ii)
conflict with, or constitute a material default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument, or any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company is a party, or (iii)
result in a violation of any federal, state or local law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or by which any material property or
asset of the Company is bound or affected, nor is the Company otherwise in
violation of, conflict with or default under any of the foregoing (except in
each case for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations
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as would not have, individually or in the aggregate, a Material Adverse Effect).
The business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a Material
Adverse Effect. The Company is not required under federal, state or local law,
rule or regulation to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement or issue
and sell the Convertible Debenture in accordance with the terms hereof (other
than any SEC, American Stock Exchange or state securities filings that may be
required to be made by the Company subsequent to Closing, any registration
statement that may be filed pursuant hereto, and any shareholder approval
required by the rules applicable to companies whose common stock trades on the
American Stock Exchange); provided that, for purposes of the representation made
in this sentence, the Company is assuming and relying upon the accuracy of the
relevant representations and agreements of the Investor herein.
Section 4.10. NO MATERIAL ADVERSE CHANGE. Since December 31, 1998, no Material
Adverse Effect has occurred or exists with respect to the Company, except as
disclosed in the SEC Documents.
Section 4.11. NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since December 31, 1998,
no event or circumstance has occurred or exists with respect to the Company or
its businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
Section 4.12. NO INTEGRATED OFFERING. Other than pursuant to an effective
registration statement under the Securities Act, or pursuant to the issuance or
exercise of employee stock options, or pursuant to its discussion with the
Investor and Curzon Capital Corp. in connection with the transactions
contemplated hereby, the Company has not issued, offered or sold the Convertible
Debenture or any shares of Common Stock (including for this purpose any
securities of the same or a similar class as the Convertible Debenture, or
Common Stock or any securities convertible into a exchangeable or exercisable
for the Convertible Debenture or Common Stock or any such other securities)
within the six-month period next preceding the date hereof, and the Company
shall not permit any of its directors, officers or Affiliates directly or
indirectly to take, any action (including, without limitation, any offering or
sale to any person or entity of the Convertible Debenture or shares of Common
Stock), so as to make unavailable the exemption from Securities Act registration
being relied upon by the Company for the offer and sale to Investor of the
Convertible Debenture (and the Conversion Shares) as contemplated by this
Agreement.
Section 4.13. LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the SEC
Documents, there are no lawsuits or proceedings pending or, to the knowledge of
the Company, threatened, against the Company, nor has the Company received any
written or oral notice of any such action, suit, proceeding or investigation,
which could reasonably be expected to have a Material Adverse Effect. Except as
set forth in the SEC Documents, no judgment, order, writ, injunction or decree
or award has been issued by or, to the knowledge of the Company, requested of
any court, arbitrator or governmental agency which could result in a Material
Adverse Effect.
Section 4.14. NO MISLEADING OR UNTRUE COMMUNICATION. The Company and, to the
knowledge of the Company, any person representing the Company, or any other
person selling or offering to sell the Convertible Debenture in connection with
the transaction contemplated by this Agreement, have not made, at any time, any
oral communication in connection with the offer or sale of the same which
contained any
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untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading.
Section 4.15. MATERIAL NON-PUBLIC INFORMATION. The Company has not disclosed to
the Investor any material non-public information that (i) if disclosed, would,
or could reasonably be expected to have, a material effect on the price of the
Common Stock or (ii) according to applicable law, rule or regulation, should
have been disclosed publicly by the Company prior to the date hereof but which
has not been so disclosed.
Section 4.16. INSURANCE. The Company maintains property and casualty, general
liability, workers' compensation, environmental hazard, personal injury and
other similar types of insurance with financially sound and reputable insurers
that is adequate, consistent with industry standards and the Company's
historical claims experience. The Company has not received notice from, and has
no knowledge of any threat by, any insurer (that has issued any insurance policy
to the Company) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any insurance policy presently in force.
Section 4.17. TAX MATTERS.
(a) The Company has filed all Tax Returns which it is required to file
under applicable laws; all such Tax Returns are true and accurate and have been
prepared in compliance with all applicable laws; the Company has paid all Taxes
due and owing by it (whether or not such Taxes are required to be shown on a Tax
Return) and have withheld and paid over to the appropriate taxing authorities
all Taxes which it is required to withhold from amounts paid or owing to any
employee, stockholder, creditor or other third parties; and since December 31,
1998, the charges, accruals and reserves for Taxes with respect to the Company
(including any provisions for deferred income taxes) reflected on the books of
the Company are adequate to cover any Tax liabilities of the Company if its
current tax year were treated as ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction where
the Company does not file tax returns that such corporation is or may be subject
to taxation by that jurisdiction. There are no foreign, federal, state or local
tax audits or administrative or judicial proceedings pending or being conducted
with respect to the Company; no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority; and, except
as disclosed above, no written notice indicating an intent to open an audit or
other review has been received by the Company from any foreign, federal, state
or local taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to ss. 7121 of the Internal Revenue
Code or any predecessor provision thereof or any similar provision of state,
local or foreign law; or (B) has not agreed to or is required to make any
adjustments pursuant to ss. 481 (a) of the Internal Revenue Code or any similar
provision of state, local or foreign law by reason of a change in accounting
method initiated by the Company or any of its subsidiaries or has any knowledge
that the IRS has proposed any such adjustment or change in accounting method, or
has any application pending with any taxing authority requesting permission for
any changes in accounting methods that relate to the business or operations of
the Company. The Company has not been a United States real property holding
corporation within the meaning of ss. 897(c)(2) of the Internal Revenue Code
during the applicable period specified in ss. 897(c)(1)(A)(ii) of the Internal
Revenue Code.
(c) The Company has not made an election under ss. 341(f) of the Internal
Revenue Code. The Company is not liable for the Taxes of another person that is
not a subsidiary of the Company under (A)
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Treas. Reg. ss. 1.1502-6 (or comparable provisions of state, local or foreign
law), (B) as a transferee or successor, (C) by contract or indemnity or (D)
otherwise. The Company is not a party to any tax sharing agreement. The Company
has not made any payments, is obligated to make payments or is a party to an
agreement that could obligate it to make any payments that would not be
deductible under ss. 280G of the Internal Revenue Code.
(d) For purposes of this Section 4.18:
"IRS" means the United States Internal Revenue Service.
"TAX" or "TAXES" means federal, state, county, local, foreign, or
other income, gross receipts, ad valorem, franchise, profits,
sales or use, transfer, registration, excise, utility,
environmental, communications, real or personal property, capital
stock, license, payroll, wage or other withholding, employment,
social security, severance, stamp, occupation, alternative or
add-on minimum, estimated and other taxes of any kind whatsoever
(including, without limitation, deficiencies, penalties,
additions to tax, and interest attributable thereto) whether
disputed or not.
"TAX RETURN" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and
including any amendment thereof.
Section 4.18. PROPERTY. Neither the Company nor either of its subsidiaries owns
any real property. Each of the Company and its subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects (other than certain liens on the Company's
personal property in the U.S. securing indebtedness not in excess of $100,000)
except such as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company; and to the Company's knowledge any real property and buildings
held under lease by the Company as tenant are held by it under valid, subsisting
and enforceable leases with such exceptions as are not material and do not
interfere with the use made and intended to be made of such property and
buildings by the Company.
Section 4.19. INTELLECTUAL PROPERTY. Each of the Company and its subsidiaries
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, except as disclosed
in the SEC Documents neither the Company nor any of its subsidiaries is
infringing upon or in conflict with any right of any other person with respect
to any Intangibles. Except as disclosed in the SEC Documents, no claims have
been asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.
Section 4.20. INTERNAL CONTROLS AND PROCEDURES. The Company maintains books and
records and internal accounting controls which provide reasonable assurance that
(i) all transactions to which the Company is a party or by which its properties
are bound are executed with management's authorization; (ii) the recorded
accountability of the Company's assets is compared with existing assets at
regular intervals; (iii) access to the Company's assets is permitted only in
accordance with management's authorization; and (iv) all transactions to which
the Company is a party or by which its properties are bound are recorded as
necessary to permit
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preparation of the financial statements of the Company in accordance with U.S.
generally accepted accounting principles.
Section 4.21. PAYMENTS AND CONTRIBUTIONS. Neither the Company nor any of its
directors, officers or, to its knowledge, other employees has (i) used any
Company funds for any unlawful contribution, endorsement, gift, entertainment or
other unlawful expense relating to political activity; (ii) made any direct or
indirect unlawful payment of Company funds to any foreign or domestic government
official or employee; (iii) violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe,
rebate, payoff, influence payment, kickback or other similar payment to any
person with respect to Company matters.
Section 4.22. NO MISREPRESENTATION. No representation or warranty of the Company
contained in this Agreement, any schedule, annex or exhibit hereto or any
agreement, instrument or certificate furnished by the Company to the Investor
pursuant to this Agreement, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading.
ARTICLE V
COVENANTS OF THE INVESTOR
Section 5.1. COMPLIANCE WITH LAW. The Investor's trading activities with respect
to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and rules
and regulations of the Principal Market on which the Company's Common Stock is
listed.
Section 5.2. SHORT SALES. The Investor and its affiliates shall not engage in
short sales of the Company's Common Stock; provided, however, that the Investor
may enter into any short sale or other hedging or similar arrangement it deems
appropriate with respect to Conversion Shares on the Trading Day it delivers a
Conversion Notice with respect to such Conversion Shares so long as such
arrangements do not involve more than the number of such Conversion Shares
(determined as of the date of such Conversion Notice, as applicable).
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. REGISTRATION RIGHTS. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.
Section 6.2. RESERVATION OF COMMON STOCK. As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to issue the Conversion Shares pursuant to any conversion
of the Convertible Debenture; such amount of shares of Common Stock to be
reserved shall be calculated based upon a Market Price for the Common Stock
under the terms of the Convertible Debenture of $1.00. The number of shares so
reserved from time to time, as theretofore increased or reduced as
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hereinafter provided, may be reduced by the number of shares actually delivered
pursuant to any conversion of the Convertible Debenture.
Section 6.3. LISTING OF COMMON STOCK. The Company hereby agrees to maintain the
listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing (but in any event prior to the effective date
of the Registration Statement) to list the Conversion Shares on the Principal
Market. The Company further agrees, if the Company applies to have the Common
Stock traded on any other Principal Market, it will include in such application
the Conversion Shares, and will take such other action as is necessary or
desirable in the opinion of the Investor to cause the Common Stock to be listed
on such other Principal Market as promptly as possible. The Company will take
all action to continue the listing and trading of its Common Stock on a
Principal Market (including, without limitation, maintaining sufficient net
tangible assets) and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal Market
and shall provide Investor with copies of any correspondence to or from such
Principal Market which questions or threatens delisting of the Common Stock,
within three (3) Business Days of the Company's receipt thereof, until the
Investor has disposed of all of its Registrable Securities. If at any time
during the term of the Convertible Debenture the aggregate number of outstanding
shares of Common Stock that were issued upon conversions of the Convertible
Debenture exceeds 17.5% of the Company's issued and outstanding Common Stock as
of the Closing Date, the Company shall call and convene a meeting or solicit the
written consent of its stockholders within 90 days after the request of the
Investor for the purpose of seeking stockholder approval of the issuance of
Common Stock upon conversion of the Convertible Debenture, with a recommendation
of the Board of Directors of the Company that such proposal be approved.
Section 6.4. EXCHANGE ACT REGISTRATION. The Company will cause its Common Stock
to continue to be registered under Section 12(b) or (g) of the Exchange Act,
will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investor has
disposed of all of its Registrable Securities.
Section 6.5. LEGENDS. The certificates evidencing the Registrable Securities
shall be free of legends, except as set forth in Article IX.
Section 6.6. CORPORATE EXISTENCE. The Company will take all steps necessary to
preserve and continue the corporate existence of the Company.
Section 6.7. CONSOLIDATION; MERGER. The Company shall not, at any time after the
date hereof, effect any merger or consolidation of the Company with or into, or
a transfer of all or substantially all of the assets of the Company to, another
entity (a "Consolidation Event") unless the resulting successor or acquiring
entity (if not the Company) assumes by written instrument or by operation of law
the obligation to deliver to the Investor such shares of stock and/or securities
as the Investor is entitled to receive pursuant to this Agreement.
Section 6.8. ISSUANCE OF CONVERTIBLE DEBENTURE AND WARRANT SHARES. The sale of
the Convertible Debenture and the issuance of the Conversion Shares upon
conversion of the Convertible Debenture shall be made in accordance with the
provisions and requirements of Section 4(2) and Regulation D under the
Securities Act (with respect to the issuance of the Convertible Debenture),
Section 3(a)(9) of the Securities Act (with respect to the issuance of the
Conversion Shares) and any applicable state securities law. The
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Company shall make all necessary SEC and "blue sky" filings required to be made
by the Company in connection with the sale of the Securities to the Investor as
required by all applicable Laws, and shall provide a copy thereof to the
Investor promptly after such filing.
Section 6.9 PRO RATA REDEMPTION. If the Company shall redeem any Convertible
Debenture, it shall redeem all Convertible Debentures, unless the Investor
agrees otherwise.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. SURVIVAL. The representations, warranties and covenants made by
each of the Company and the Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive the Closing
and the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it under
the provisions of this Agreement or otherwise, whether at law or in equity,
irrespective of any investigation made by or on behalf of such party on or prior
to the Closing Date.
Section 7.2. INDEMNITY. (a) The Company hereby agrees to indemnify and hold
harmless the Investor, its Affiliates and their respective officers, directors,
partners and members (collectively, the "Investor Indemnitees"), from and
against any and all losses, claims, Damages, judgments, penalties, liabilities
and deficiencies (collectively, "Losses"), and agrees to reimburse the Investor
Indemnitees for all reasonable out-of-pocket expenses (including the reasonable
fees and expenses of legal counsel), in each case promptly as incurred by the
Investor Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any of
the Company's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by the
Company pursuant to this Agreement;
(ii) any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement, the annexes, schedules or exhibits hereto
or any instrument, agreement or certificate entered into or delivered
by the Company pursuant to this Agreement; or
(iii) any claim or legal action brought against any Investor
Indemnitee by a stockholder of the Company (other than the Investor or
its Affiliates) in its own right or in the right of the Company, in
connection with or as a result of the execution and performance of
this Agreement by the Investor Indemnitee; provided, however, that the
Company shall not be obligated to indemnify and hold harmless an
Investor Indemnitee in respect of any such claim or action brought
against an Investor Indemnitee which arises out of the breach of any
representation, warranty or covenant of such Investor Indemnitee
contained in this Agreement.
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(b) The Investor hereby agrees to indemnify and hold harmless the
Company, its Affiliates and their respective officers, directors, partners
and members (collectively, the "Company Indemnitees"), from and against any
and all Losses, and agrees to reimburse the Company Indemnitees for
reasonable all out-of-pocket expenses (including the reasonable fees and
expenses of legal counsel), in each case promptly as incurred by the
Company Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact, or breach of any
of the Investor's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any
instrument, agreement or certificate entered into or delivered by the
Investor pursuant to this Agreement; or
(ii) any failure by the Investor to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement or any instrument, certificate or
agreement entered into or delivered by the Investor pursuant to this
Agreement.
Section 7.3. NOTICE. Promptly after receipt by either party hereto seeking
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to Section
7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is materially prejudiced and forfeits
substantive rights and defenses by reason of such failure. In connection with
any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and
expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall
have concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim. If the Indemnified Party
employs separate legal counsel in circumstances other than as described in
clauses (x), (y) or (z) above, the fees, costs and expenses of such legal
counsel shall be borne exclusively by the Indemnified Party. Except as provided
above, the Indemnifying Party shall not, in connection with any Claim in the
same jurisdiction, be liable for the fees and expenses of more than one firm of
legal counsel for the Indemnified Party (together with appropriate local
counsel). The Indemnifying Party shall not, without the prior written consent of
the Indemnified Party (which consent shall not unreasonably be withheld), settle
or compromise any Claim or consent to the entry of any judgment that does not
include an unconditional release of the Indemnified Party from all liabilities
with respect to such Claim or judgment.
Section 7.4. DIRECT CLAIMS. In the event one party hereunder should have a claim
for indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by
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binding arbitration conducted in accordance with the procedures and rules of the
American Arbitration Association as set forth in Article X. Judgment upon any
award rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
ARTICLE VIII
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
Section 8.1. DUE DILIGENCE REVIEW. Subject to Section 8.2, the Company shall
make available for inspection and review by the Investor, advisors to and
representatives of the Investor (who may or may not be affiliated with the
Investor and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, American Stock Exchange or
other filing, all SEC Documents and other filings with the SEC, and all other
publicly available corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such publicly available
information reasonably requested by the Investor or any such representative,
advisor or underwriter in connection with such Registration Statement
(including, without limitation, in response to all questions and other inquiries
reasonably made or submitted by any of them), prior to and from time to time
after the filing and effectiveness of the Registration Statement for the sole
purpose of enabling the Investor and such representatives, advisors and
underwriters and their respective accountants and attorneys to conduct initial
and ongoing due diligence with respect to the Company and the accuracy of the
Registration Statement.
Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
(a) The Company shall not disclose material non-public information to
the Investor, advisors to or representatives of the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. Other than disclosure of any comment letters
received from the SEC staff with respect to the Registration Statement, the
Company may, as a condition to disclosing any non-public information hereunder,
require the Investor's advisors and representatives to enter into a
confidentiality agreement in form reasonably satisfactory to the Company and the
Investor.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investor or its advisors or representatives, and
the Company represents that it does not disseminate material non-public
information to any investors who purchase stock in the Company in a public
offering, to money managers or to securities analysts, provided, however, that
notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, promptly notify the advisors and representatives of the
Investor and, if any, underwriters, of any event or the existence of any
circumstance (without any obligation to disclose the specific event or
circumstance) of which it becomes aware, constituting material non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein in light
of the circumstances in which they were made, not misleading. Nothing contained
in this Section 8.2 shall be construed to mean that such persons or
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entities other than the Investor (without the written consent of the Investor
prior to disclosure of such information) may not obtain non-public information
in the course of conducting due diligence in accordance with the terms of this
Agreement and nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an untrue
statement of a material fact or omits a material fact required to be stated in
the Registration Statement or necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading.
ARTICLE IX
LEGENDS; TRANSFER AGENT INSTRUCTIONS
Section 9.1. LEGENDS. Unless otherwise provided below, each certificate
representing Registrable Securities will bear the following legend or equivalent
(the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION.
Section 9.2. TRANSFER AGENT INSTRUCTIONS. Upon the execution and delivery
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions in substantially the form of Exhibit E hereto. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be, except as otherwise expressly provided in the Registration
Rights Agreement. It is the intent and purpose of such instructions, as provided
therein, to require the transfer agent for the Common Stock from time to time
upon transfer of Registrable Securities by the Investor to issue certificates
evidencing such Registrable Securities free of the Legend during the following
periods and under the following circumstances and without consultation by the
transfer agent with the Company or its counsel and without the need for any
further advice or instruction or documentation to the transfer agent by or from
the Company or its counsel or the Investor:
(a) at any time after the Effective Date, upon surrender of one or
more certificates evidencing Common Stock that bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered; provided that (i) the Registration
Statement shall then be effective; (ii) the Investor confirms to the transfer
agent that it has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Common Stock in a bona fide transaction to a
third party that is not an affiliate of the Company; and (iii) the Investor
confirms to the transfer agent that the Investor has complied with the
prospectus delivery requirement.
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<PAGE>
(b) at any time upon any surrender of one or more certificates
evidencing Registrable Securities that bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered and containing representations that (i) the
Investor is permitted to dispose of such Registrable Securities without
limitation as to amount or manner of sale pursuant to Rule 144(k) under the
Securities Act or (ii) the Investor has sold, pledged or otherwise transferred
or agreed to sell, pledge or otherwise transfer such Registrable Securities in a
manner other than pursuant to an effective registration statement, to a
transferee who will upon such transfer be entitled to freely tradable
securities.
Any of the notices referred to above in this Section 9.2 may be sent by
facsimile to the Company's transfer agent.
Section 9.3. NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No legend other
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article IX.
Section 9.4. INVESTOR'S COMPLIANCE. Nothing in this Article shall affect in any
way the Investor's obligations under any agreement to comply with all applicable
securities laws upon resale of the Common Stock.
ARTICLE X
CHOICE OF LAW
Section 10.1. GOVERNING LAW/ARBITRATION. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made in New York by persons domiciled in New York City and without
regard to its principles of conflicts of laws. Any dispute under this Agreement
or any Exhibit attached hereto shall be submitted to arbitration under the
American Arbitration Association (the "AAA") in New York City, New York, and
shall be finally and conclusively determined by the decision of a board of
arbitration consisting of three (3) members (hereinafter referred to as the
"Board of Arbitration") selected as according to the rules governing the AAA.
The Board of Arbitration shall meet on consecutive business days in New York
City, New York, and shall reach and render a decision in writing (concurred in
by a majority of the members of the Board of Arbitration) with respect to the
amount, if any, which the losing party is required to pay to the other party in
respect of a claim filed. In connection with rendering its decisions, the Board
of Arbitration shall adopt and follow the laws of the State of New York. To the
extent practical, decisions of the Board of Arbitration shall be rendered no
more than thirty (30) calendar days following commencement of proceedings with
respect thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the Board
of Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the parties to
the dispute, and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. The Board of Arbitration
shall be authorized and is hereby directed to enter a default judgment against
any party failing to participate in any proceeding hereunder within the time
periods set forth in the AAA rules. The non-prevailing party to any arbitration
(as determined by the Board of Arbitration) shall pay the expenses of the
prevailing party including reasonable attorney's fees, in connection with such
arbitration. Any party shall be entitled to obtain injunctive relief from a
court in any case where such relief is available.
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ARTICLE XI
ASSIGNMENT; ENTIRE AGREEMENT
Section 11.1. ASSIGNMENT. Neither this Agreement nor any rights of the Investor
or the Company hereunder may be assigned by either party to any other person.
Notwithstanding the foregoing, (a) the provisions of this Agreement shall inure
to the benefit of, and be enforceable by, any permitted transferee of the
Convertible Debenture purchased or acquired by the Investor hereunder with
respect to the Convertible Debenture held by such person, and (b) upon the prior
written consent of the Company, which consent shall not unreasonably be withheld
or delayed, the Investor's interest in this Agreement may be assigned at any
time, in whole or in part, to any other person or entity (including any
affiliate of the Investor) who agrees to make the representations and warranties
contained in Article III and who agrees to be bound by the covenants of Article
V. Such permitted assignment shall not relieve the Investor of its obligations
under Article V.
ARTICLE XII
NOTICES
Section 12.1. NOTICES. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, California 91367
Attention: Mark Dyne, Chief Executive Officer
Telephone: (818) 615-1500
Facsimile: (818) 615-0995
with a copy to: Troop Steuber Pasich Reddick & Tobey, LLP
(shall not constitute notice) 2029 Century Park East
24th Floor
Los Angeles, CA 90067
Attention: Murray Markiles, Esq.
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Telephone: (310) 728-3233
Facsimile: (310) 728-2233
if to the Investor:
Roseworth Group, Ltd.
c/o Dr. Batliner & Partners
Aeustrasse 74
FI-9490
Vaduz, Liechtenstein
Facsimile: 011-41-75-2360-405
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Facsimile: (212) 661-0989
and
Thomas Badian
Curzon Capital Corp.
48 8th Avenue, Suite 142
New York, New York 10014
Facsimile: (212) 214-0440
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
ARTICLE XIII
MISCELLANEOUS
Section 13.1. COUNTERPARTS/ FACSIMILE/ AMENDMENTS. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 13.2. ENTIRE AGREEMENT. This Agreement, the agreements attached as
Exhibits hereto, which include, but are not limited to the Convertible
Debenture, the Escrow Agreement, and the Registration Rights Agreement, set
forth the entire agreement and understanding of the parties relating to the
subject matter hereof and supersedes all prior and contemporaneous agreements,
negotiations and understandings between the parties, both oral and written
relating to the subject matter hereof. The terms and conditions of all
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<PAGE>
Exhibits to this Agreement are incorporated herein by this reference and shall
constitute part of this Agreement as is fully set forth herein.
Section 13.3. SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.
Section 13.4. HEADINGS. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 13.5. REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity relied
upon for the determination of the trading price or trading volume of the Common
Stock on any given Trading Day for the purposes of this Agreement shall be
Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.
Section 13.6. REPLACEMENT OF CERTIFICATES. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Convertible Debenture or any
Conversion Shares and (ii) in the case of any such loss, theft or destruction of
such certificate, upon delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company (which shall not exceed that
required by the Company's transfer agent in the ordinary course) or (iii) in the
case of any such mutilation, on surrender and cancellation of such certificate,
the Company at its expense will execute and deliver, in lieu thereof, a new
certificate of like tenor.
Section 13.7. FEES AND EXPENSES. Each of the Company and the Investor agrees to
pay its own expenses incident to the performance of its obligations hereunder.
Section 13.8. BROKERAGE. Each of the parties hereto represents that it has had
no dealings in connection with this transaction with any finder or broker who
will demand payment of any fee or commission from the other party. The Company
on the one hand, and the Investor, on the other hand, agree to indemnify the
other against and hold the other harmless from any and all liabilities to any
person claiming brokerage commissions or finder's fees on account of services
purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Debenture
Purchase Agreement to be executed by the undersigned, thereunto duly authorized,
as of the date first set forth above.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE
---------------------------------
Mark Dyne
Chief Executive Officer
ROSEWORTH GROUP, LTD.
By: /S/ HANS GASSNER
---------------------------------
Hans Gassner
Director
EXHIBIT 10.2
EXHIBIT A
4% CONVERTIBLE DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR
CANADIAN PROVINCE, OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THE SECURITIES ARE RESTRICTED AND MAY NOT BE OFFERED, RESOLD,
PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM SUCH REGISTRATION
REQUIREMENTS.
No. ___ US $1,000,000
---------
BRILLIANT DIGITAL ENTERTAINMENT, INC.
4% CONVERTIBLE DEBENTURE DUE APRIL 27, 2000
THIS DEBENTURE is issued by BRILLIANT DIGITAL ENTERTAINMENT, INC.,
a corporation organized and existing under the laws of the State of Delaware
(the "Company") and is designated as its 4% Convertible Debenture Due April 27,
2000.
FOR VALUE RECEIVED, the Company promises to pay to ROSEWORTH
GROUP, LTD., or permitted assigns (the "Holder"), the principal sum of One
Million and 00/100 (US $1,000,000) Dollars on the later of (1) April 27, 2000 or
(2) six months after the date that the Securities and Exchange Commission first
declares the Registration Statement to be effective (the "Maturity Date") and to
pay interest on the principal sum outstanding from time to time quarterly in
arrears at the rate of 4% per annum accruing from the date of initial issuance.
Accrual of interest shall commence on the first business day to occur after the
date of initial issuance and continue until payment in full of the principal sum
has been made or duly provided for. Quarterly interest payments shall be due and
payable on July 1, October 1, January 1 and April 1 of each year, commencing
with July 1, 1999. If any interest payment date or the Maturity Date is not a
business day in the State of New York, then such payment shall be made on the
next succeeding business day. Subject to the provisions of Paragraph 4 below,
the interest on this Debenture is payable at the option of the Company, in cash
or in shares of Common Stock of the Company, $.001 par value per share ("Common
Stock") valued at the Conversion Price (as defined herein) on the interest
payment date, at the address last appearing on the Debenture Register of the
Company as designated in writing by the Holder from time to time. The Company
will pay the principal of and any accrued but unpaid interest due upon this
Debenture on the Maturity Date, less any amounts required by law to be deducted,
to the
<PAGE>
registered holder of this Debenture as of the tenth day prior to the Maturity
Date and addressed to such holder at the last address appearing on the Debenture
Register. The forwarding of such check, or the required number of shares of
Common Stock determined pursuant to the provisions of Paragraph 4 below, shall
constitute a payment of principal and interest hereunder and shall satisfy and
discharge the liability for principal and interest on this Debenture to the
extent of the sum represented by such check or the equivalent Conversion Price
value of such shares of Common Stock (as defined in Paragraph 3 below) plus any
amounts so deducted.
This Debenture is subject to the following additional provisions:
1. The Company shall be entitled to withhold from
all payments of principal of, and interest on, this Debenture any amounts
required to be withheld under the applicable provisions of the United States
income tax laws or other applicable laws at the time of such payments, and
Holder shall execute and deliver all required documentation in connection
therewith.
2. This Debenture has been issued subject to investment
representations of the original purchaser hereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended (the
"Act"), and other applicable state and foreign securities laws. The Holder shall
deliver written notice to the Company of any proposed transfer of this
Debenture. In the event of any proposed transfer of this Debenture, the Company
may require, prior to issuance of a new Debenture in the name of such other
person, that it receive reasonable transfer documentation including legal
opinions that the issuance of the Debenture in such other name does not and will
not cause a violation of the Act or any applicable state or foreign securities
laws. Prior to due presentment for transfer of this Debenture, the Company and
any agent of the Company may treat the person in whose name this Debenture is
duly registered on the Company's Debenture Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes,
whether or not this Debenture be overdue, and neither the Company nor any such
agent shall be affected by notice to the contrary. This Debenture has been
executed and delivered pursuant to the Debenture Purchase Agreement dated as of
April 21, 1999 between the Company and the original Holder (the "Purchase
Agreement"), and is subject to the terms and conditions of the Purchase
Agreement, which are, by this reference, incorporated herein and made a part
hereof. Capitalized terms used and not otherwise defined herein shall have the
meanings set forth for such terms in the Purchase Agreement.
3. The Holder of this Debenture is entitled, at its
option, to convert at any time commencing on the date hereof, the principal
amount of this Debenture or any portion thereof, together with accrued but
unpaid interest, provided that the portion of the principal amount so converted
is Five Thousand Dollars (US $5,000) or a multiple thereof (unless if at the
time of such election to convert the aggregate principal amount of this
Debenture is less than Five Thousand Dollars (US $5,000), then the whole amount
thereof) into shares of Common Stock of the Company ("Conversion Shares") at a
conversion price for each share of Common Stock ("Conversion Price") equal to
the lower of (a) 95% of the Market Price at the Conversion Date (as defined in
Section 8 hereof) or (b) $6.00. The term "Market Price" shall have the meaning
set forth in the Purchase Agreement.
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4. The entire unpaid balance of this Debenture and
accrued interest thereon outstanding on the Maturity Date hereof shall
automatically convert into Common Stock at the Conversion Price on the Maturity
Date.
5. If the closing price per share of the Common Stock
on the Principal Market is equal to or less than $1.00 for 10 or more
consecutive Trading Days, the Company shall have the right within 3 Trading Days
after the date any such triggering event occurs to deliver to the Holder a
written notice of the Company's intent to redeem the entire outstanding amount
of this Debenture. Within 3 Trading Days following its receipt of such notice,
the Holder shall elect (by delivering written notice to the Company ) either (a)
to have the Company redeem the Debenture for a cash payment equal to 120% of the
outstanding principal amount of this Debenture and all accrued and unpaid
interest thereon, or (b) to agree not to convert all or any portion of this
Debenture for a thirty-day period commencing upon the Holder's receipt of the
Company's notice pursuant to the preceding sentence. If the Holder fails to
deliver its notice to the Company within such 3 Trading Day Period, the Company
may elect to have the provisions of clause (a) or (b) of the preceding sentence
apply by delivering written notice to the Holder within Three Trading Days
following the expiration of the Holder's notice period. If the Holder or the
Company elects to have this Debenture redeemed, the Company shall make the
redemption payment to the Holder within 5 Trading Days following its receipt of
the Holder's notice electing redemption or the Company's delivery of its notice
to the Holder electing redemption, as applicable.
6. Notwithstanding anything to the contrary contained
herein, in the event that a conversion (when aggregated with all prior
conversions of portions of this Debenture) requires the Company to issue a
number of shares of Common Stock which would exceed 19.5% of the number of
shares of Common Stock issued and outstanding on the date of this Debenture, the
Company shall issue only such number of shares of Common Stock as shall not
exceed such limit and shall pay the Holder cash in the amount of the Volume
Adjusted Price on the Conversion Date for the number of shares of Common Stock
in excess of such number of shares into which this Debenture (or the portion
thereof then being converted) is then convertible at the Conversion Price. Any
payments under this Paragraph 6 shall be made to a U.S. account designated in
writing by the Holder to the Company when the Notice of Conversion is given. The
rights of all holders of Convertible Debentures issued under the Purchase
Agreement to convert their Convertible Debentures into shares of Common Stock
shall be prorated among such holders based on their respective percentage
holdings at the time of conversion of the aggregate outstanding amount of all
Convertible Debentures in order to comply with the aforesaid overall limitation.
Any conversion which is paid in cash under this Paragraph 6 shall be paid within
five (5) Business Days of the Conversion Date, or else the Company shall
thereafter be unable to exercise its redemption rights under Paragraph 5 with
respect to the outstanding Debentures.
7. In the event that the Conversion Price of the Common
Stock is less than $3.00 per share on any Conversion Date, or in the event a
registration statement permitting the immediate resale of the Conversion Shares
by the Holder is not effective on such Conversion Date, the Company may elect to
deliver to the Holder in consideration of any such conversion cash, Conversion
Shares or any combination thereof. The amount of cash to be delivered shall
equal the Volume Adjusted Price on the Conversion Date of the number of shares
of Common
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<PAGE>
Stock as would have been issued at the Conversion Price upon such conversion.
The Company's ability to deliver cash as full or partial conversion
consideration in accordance with this Section 7 shall be conditioned on the
Company's delivery of notice to the Holder of such election by the Company no
later than twenty-four (24) hours following the Company's receipt of a Notice of
Conversion. The Holder shall then have a further twenty-four (24) hour period in
which to withdraw his Notice of Conversion, or else the Holder shall be deemed
to have accepted such alternative cash consideration.
8. (a) Conversion shall be effectuated by
surrendering this Debenture to the Company (if such Conversion will convert all
outstanding principal) together with the form of conversion notice attached
hereto as Exhibit A (the "Notice of Conversion"), executed by the Holder of this
Debenture evidencing such Holder's intention to convert this Debenture or a
specified portion (as above provided) hereof, and accompanied, if required by
the Company, by proper assignment hereof in blank. Interest accrued or accruing
from the date of issuance to the date of conversion shall, at the option of the
Company, be paid in cash as set forth above or in Common Stock upon conversion
at the Conversion Price on the Conversion Date. No fraction of a shares or scrip
representing a fraction of a share will be issued on conversion, but the number
of shares issuable shall be rounded to the nearest whole share. The date on
which Notice of Conversion is given (the "Conversion Date") shall be deemed to
be the date on which the Holder faxes the Notice of Conversion duly executed to
the Company. Facsimile delivery of the Notice of Conversion shall be accepted by
the Company at facsimile number (818) 615-0995 Attn.: Mark Dyne. Certificates
representing Common Stock upon conversion will be delivered to the Holder within
six (6) Business Days from the date the Notice of Conversion is delivered to the
Company. Delivery of shares upon conversion shall be made to a U.S. address
specified by the Holder in the Notice of Conversion.
(b) The Company understands that a delay in
the issuance of shares of Common Stock upon a conversion beyond the six (6)
Business Day period described in Paragraph 8(a) could result in economic loss to
the Holder. As compensation to the Holder for such loss, the Company agrees to
pay late payments to the Holder for late issuance of shares of Common Stock upon
conversion in accordance with the following schedule (where "No. Business Days
Late" is defined as the number of Business Days beyond six (6) Business Days
from the date the Notice of Conversion is delivered to the Company).
Late Payment for Each
$5,000 of Principal Amount
No. Business Days Late Being Converted
---------------------- --------------------------
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
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Late Payment for Each
$5,000 of Principal Amount
No. Business Days Late Being Converted
---------------------- --------------------------
8 $800
9 $900
10 $1,000
More than 10 $1,000 +$200 for each Business Day
Late beyond 10 Business Days
The Company shall pay any payments incurred under this
Paragraph 8(b) in immediately available funds upon demand. Nothing herein shall
limit Holder's right to pursue injunctive relief and/or actual damages for the
Company's failure to issue and deliver Common Stock to the holder, including,
without limitation, the Holder's actual losses occasioned by any "buy-in" of
Common Stock necessitated by such late delivery. Furthermore, in addition to any
other remedies which may be available to the Holder, in the event that the
Company fails for any reason to effect delivery of such shares of Common Stock
within six (6) Business Days from the date the Notice of Conversion is delivered
to the Company, the Holder will be entitled to revoke the relevant Notice of
Conversion by delivering a notice to such effect to the Company, whereupon the
Company and the Holder shall each be restored to their respective positions
immediately prior to delivery of such Notice of Conversion, and in such event no
late payments shall be due in connection with such withdrawn conversion.
(c) If at any time (a) the Company challenges, disputes
or denies the right of the Holder to effect the conversion of this Debenture
into Common Stock or otherwise dishonors or rejects any Notice of Conversion
delivered in accordance with this Paragraph 8 or (b) any Company stockholder who
is not and has never been an Affiliate (as defined in Rule 405 under the
Securities Act of 1933, as amended) of the Holder obtains a judgment or any
injunctive relief from any court or public or governmental authority which
denies, enjoins, limits, modifies, delays or disputes the right of the holder
hereof to effect the conversion of this Debenture into Common Stock, then the
Holder shall have the right, by written notice, to require the Company to
promptly redeem this Debenture for cash at a redemption price equal to one
hundred ten percent (110%) of the outstanding principal amount hereof and all
accrued and unpaid interest hereon. Under any of the circumstances set forth
above, the Company shall be responsible for the payment of all costs and
expenses of the Holder, including reasonable legal fees and expenses, as and
when incurred in disputing any such action or pursuing its rights hereunder (in
addition to any other rights of the Holder), subject in the case of clause (b)
to the Company's right to control and assume the defense of any such action. In
the absence of an injunction precluding the same, the Company shall issue shares
upon a properly noticed conversion.
(d) The Holder shall be entitled to exercise its
conversion privilege notwithstanding the commencement of any case under 11
U.S.C. ss. 101 ET SEQ. (the "Bankruptcy Code"). In the event the Company is a
debtor under the Bankruptcy Code, the Company hereby waives to the fullest
extent permitted any rights to relief it may have under 11 U.S.C.ss. 362 in
respect of the Holder's conversion privilege.
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9. No provision of this Debenture shall alter or impair
the obligation of the Company, which is absolute and unconditional, to pay the
principal of, and interest on, this Debenture at the time, place, and rate, and
in the coin or currency or shares of Common Stock, herein prescribed. This
Debenture is a direct obligation of the Company.
10. No recourse shall be had for the payment of the
principal of, or the interest on, this Debenture, or for any claim based hereon,
or otherwise in respect hereof, against any incorporator, shareholder, employee,
officer or director, as such, past, present or future, of the Company or any
successor corporation, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
11. If the Company merges or consolidates with another
corporation or sells or transfers all or substantially all of its assets to
another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or in exchange for Common Stock,
then as a condition of such merger, consolidation, sale or transfer, the Company
and any such successor, purchaser or transferee agree that the Debenture may
thereafter be converted on the terms and subject to the conditions set forth
above into the kind and amount of stock, securities or property receivable upon
such merger, consolidation, sale or transfer by a holder of the number of shares
of Common Stock into which this Debenture might have been converted immediately
before such merger, consolidation, sale or transfer, subject to adjustments
which shall be as nearly equivalent as may be practicable. In the event of any
proposed merger, consolidation or sale or transfer of all or substantially all
of the assets of the Company (a "Sale"), the Holder hereof shall have the right
to convert by delivering a Notice of Conversion to the Company and the Escrow
Agent within fifteen (15) days of receipt of notice of such Sale from the
Company. In the event the Holder hereof shall elect not to convert, the Company
may prepay all outstanding principal and accrued interest on this Debenture as
provided in Section 5, less all amounts required by law to be deducted, upon
which tender of payment following such notice, the right of conversion shall
terminate.
12. The Holder of the Debenture, by acceptance hereof,
agrees that this Debenture is being acquired for investment and that such Holder
will not offer, sell or otherwise dispose of this Debenture or the Shares of
Common Stock issuable upon conversion thereof except under circumstances which
will not result in a violation of the Act or any applicable state Blue Sky or
foreign laws or similar laws relating to the sale of securities.
13. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions.
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14. The following shall constitute an "Event of
Default":
a. The Company shall default in the payment of
principal or interest on this Debenture and same
shall continue for a period of three (3) days; or
b. Any of the representations or warranties made by the
Company herein, in the Purchase Agreement, the
Registration Rights Agreement, or in any agreement,
certificate or financial or other written statements
heretofore or hereafter furnished by the Company in
connection with the execution and delivery of this
Debenture or the Purchase Agreement shall be false
or misleading in any material respect at the time
made; or
c. The Company fails to issue shares of Common Stock to
the Holder or to cause its Transfer Agent to issue
shares of Common Stock upon exercise by the Holder
of the conversion rights of the Holder in accordance
with the terms of this Debenture, fails to transfer
or to cause its Transfer Agent to transfer any
certificate for shares of Common Stock issued to the
Holder upon conversion of this Debenture as and when
required by this Debenture or the Registration
Rights Agreement, and such transfer is otherwise
lawful, or fails to remove any restrictive legend or
to cause its Transfer Agent to transfer any
certificate or any shares of Common Stock issued to
the Holder upon conversion of this Debenture as and
when required by this Debenture, the Purchase
Agreement or the Registration Rights Agreement and
such legend removal is otherwise lawful, and any
such failure shall continue uncured for five (5)
business days; or
d. The Company shall fail to perform or observe, in any
material respect, any other covenant, term,
provision, condition, agreement or obligation of the
Company under the Purchase Agreement, the
Registration Rights Agreement or this Debenture and
such failure shall continue uncured for a period of
thirty (30) days after written notice from the
Holder of such failure; or
e. The Company shall (1) admit in writing its inability
to pay its debts generally as they mature; (2) make
an assignment for the benefit of creditors or
commence proceedings for its dissolution; or (3)
apply for or consent to the appointment of a
trustee, liquidator or receiver for its or for a
substantial part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall
not be discharged within sixty (60) days after such
appointment; or
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g. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental
agency shall assume custody or control of the whole
or any substantial portion of the properties or
assets of the Company and shall not be dismissed
within sixty (60) days thereafter; or
h. Any money judgment, writ or warrant of attachment,
or similar process in excess of One Hundred Thousand
($100,000) Dollars in the aggregate shall be entered
or filed against the Company or any of its
properties or other assets and shall remain unpaid,
unvacated, unbonded or unstayed for a period of
sixty (60) days or in any event later than five (5)
days prior to the date of any proposed sale
thereunder; or
i. Bankruptcy, reorganization, insolvency or
liquidation proceedings or other proceedings for
relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against
the Company and, if instituted against the Company,
shall not be dismissed within sixty (60) days after
such institution or the Company shall by any action
or answer approve of, consent to, or acquiesce in
any such proceedings or admit the material
allegations of, or default in answering a petition
filed in any such proceeding; or
j. The Company shall have its Common Stock suspended or
delisted from trading on an exchange or the Nasdaq
market for in excess of two Trading Days;
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, anything herein or
in any note or other instruments contained to the contrary notwithstanding, and
the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law;
provided, that any payment of this Debenture in connection with an Event of
Default (other than a delisting of its Common Stock pursuant to clause (j.)) may
be made, at the Company's election, in cash or in shares of Common Stock, in
such number as would be issued at the Conversion Price on the date the Debenture
becomes due and payable.
15. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
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16. In no event shall the Holder be permitted to convert this
Debenture for shares of Common Stock in excess of the amount of this Debenture
upon the conversion of which, (x) the number of shares of Common Stock owned by
such Holder (other than shares of Common Stock issuable upon conversion of this
Debenture) plus (y) the number of shares of Common Stock issuable upon
conversion of this Debenture, would be equal to or exceed 9.9% of the number of
shares of Common Stock then issued and outstanding, including shares issuable
upon conversion of this Debenture held by such Holder after application of this
Paragraph 16. As used herein, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder. To the extent that the
limitation contained in this Paragraph 16 applies, the determination of whether
this Debenture is convertible (in relation to other securities owned by the
Holder) and of which a portion of this Debenture is convertible shall be in the
sole discretion of such Holder, and the submission of a Notice of Conversion
shall be deemed to be such Holder's determination of whether this Debenture is
convertible (in relation to other securities owned by such holder) and of which
portion of this Debenture is convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination. Nothing contained herein shall be
deemed to restrict the right of a holder to convert this Debenture into shares
of Common Stock at such time as such conversion will not violate the provisions
of this Paragraph 16. The provisions of this Paragraph 16 may be waived by the
Holder of this Debenture upon not less than 75 days' prior notice to the
Company, and the provisions of this Paragraph 16 shall continue to apply until
such 75th day (or such later date as may be specified in such notice of waiver).
No conversion of this Debenture in violation of this Paragraph 16 but otherwise
in accordance with this Debenture shall affect the status of the Common Stock
issued upon such conversion as validly issued, fully-paid and nonassessable. If
on the Maturity Date the conversion of this Debenture into Common Stock pursuant
to Paragraph 4 would cause the limit contained in the first sentence of this
Paragraph 16 to be exceeded, such conversion of this Debenture shall occur up to
such limit and the remaining unconverted portion of this Debenture shall be
converted into Common Stock (1) in accordance with one or more Notices of
Conversion delivered by the Holder or (2) 65 days after the Maturity Date,
whichever is earlier. Notwithstanding anything contained herein to the contrary,
no interest shall accrue after the Maturity Date on any such unconverted portion
of this Debenture.
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IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed by an officer thereunto duly authorized.
Dated: April 27, 1999
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE
--------------------------------
Name: Mark Dyne
------------------------------
Title: CEO
-----------------------------
Attest:
/S/ MICHAEL OZEN
- ---------------------------
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EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ ________________
of the principal amount of the above Debenture No. ___ into Shares of Common
Stock of BRILLIANT DIGITAL ENTERTAINMENT, INC. (the "Company") according to the
conditions hereof, as of the date written below.
Date of Conversion* ____________________________________________________________
Applicable Conversion Price * __________________________________________________
Signature_______________________________________________________________________
[Name]
Address:________________________________________________________________________
________________________________________________________________________
* This original Notice of Conversion must be received by the Company by the
third business day following the Date of Conversion, and, if such conversion
represents the remaining principal balance of the Debenture, the original
Debenture.
EXHIBIT 10.3
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of April 21, 1999, between
ROSEWORTH GROUP, LTD., having an address at c/o Dr. Batliner & Partners,
Aeuestrasse 74, FI-9490, Vaduz, Liechtenstein ("Holder"), and BRILLIANT DIGITAL
ENTERTAINMENT, INC., a corporation incorporated under the laws of the State of
Delaware, and having its principal place of business at 6355 Topanga Canyon
Blvd., Suite 120, Woodland Hills, CA 91367 (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Holder is purchasing from the Company, pursuant to a Debenture
Purchase Agreement dated the date hereof (the "Purchase Agreement"), a
$1,000,000 Convertible Debenture (terms not defined herein shall have the
meanings ascribed to them in the Purchase Agreement); and
WHEREAS, the Company desires to grant to the Holder the
registration rights set forth herein with respect to the shares of Common Stock
issuable upon conversion of the Convertible Debenture (hereinafter referred to
as the "Stock" or "Securities" of the Company).
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. REGISTRABLE SECURITIES. As used herein the term
"Registrable Security" means the Securities until (i) the Registration Statement
has been declared effective by the Commission, and all Securities have been
disposed of pursuant to the Registration Statement, (ii) all Securities have
been sold under circumstances under which all of the applicable conditions of
Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (iii) all Securities have been otherwise transferred to
holders who may trade such Securities without restriction under the Securities
Act, and the Company has delivered a new certificate or other evidence of
ownership for such Securities not bearing a restrictive legend or (iv) such time
as, in the opinion of counsel to the Company, all Securities may be sold without
any time, volume or manner limitations pursuant to Rule 144(k) (or any similar
provision then in effect) under the Securities Act. The term "Registrable
Securities" means any and/or all of the securities falling within the foregoing
definition of a "Registrable Security." In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be deemed to be made
in the definition of "Registrable Security" as is appropriate in order to
prevent any dilution or enlargement of the rights granted pursuant to this
Agreement.
Section 2. RESTRICTIONS ON TRANSFER. The Holder acknowledges and
understands that prior to the registration of the Registrable Securities as
provided herein, the Securities are "restricted securities" as defined in Rule
144 promulgated under the Act. The Holder understands that no disposition or
transfer of the Registrable Securities may be made by Holder in the absence of
(i) an opinion of counsel to the Holder that such transfer may be made without
registration under the Securities Act or (ii) such registration.
With a view to making available to the Holder the
benefits of Rule 144 under the Securities Act or any other similar rule or
regulation of the Commission that may at any time permit the Holder to sell
securities of the Company to the public without registration ("Rule 144"), the
Company agrees to:
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(a) comply with the provisions of paragraph (c)(1) of Rule
144; and
(b) file with the Commission in a timely manner all
reports and other documents required to be filed by the Company pursuant to
Section 13 or 15(d) under the Exchange Act; and, if at any time it is not
required to file such reports but in the past had been required to or did file
such reports, it will, upon the request of any Holder, make available other
information as required by, and so long as necessary to permit sales of, its
Registrable Securities pursuant to Rule 144.
Section 3. REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES.
(a) The Company agrees that it will prepare and file
with the Securities and Exchange Commission ("Commission"), on or before May 15,
1999, a registration statement (on Form S-3, or other appropriate registration
statement) under the Securities Act (the "Registration Statement"), at the sole
expense of the Company (except as provided in Section 3(c) hereof), in respect
of all holders of Securities, so as to permit a public offering and resale of
the Registrable Securities under the Act.
The Company shall use its best efforts to cause the
Registration Statement to become effective on or before August 13, 1999, or, if
earlier, within five (5) days of Commission clearance to request acceleration of
effectiveness. The number of shares designated in the Registration Statement to
be registered shall include the number of shares of Common Stock which would be
issued upon conversion of the Convertible Debenture assuming a Market Price of
$1.00 per share of Common Stock, and shall include appropriate language
regarding reliance upon Rule 416 to the extent permitted by the Commission. The
Company will notify Holder of the effectiveness of the Registration Statement
within one Business Day of such event. In the event that the number of shares so
registered shall be insufficient to register the resale of all the Registrable
Securities, then the Company shall be obligated to file, within thirty (30) days
notice from any Holder, a further registration statement registering such shares
and shall use its best efforts to cause such registration statement to become
effective within sixty (60) days from the filing date.
(b) The Company will maintain the Registration
Statement or post-effective amendment filed under this Section 3 hereof
effective under the Securities Act until the earlier of (i) the date that none
of the Convertible Debenture or the Registrable Securities are or may become
issued and outstanding, (ii) the date that all of the Registrable Securities
have been sold pursuant to the Registration Statement, (iii) the date the
holders thereof receive an opinion of counsel to the Company, which counsel
shall be reasonably acceptable to the Holder, that the Registrable Securities
may be sold under the provisions of Rule 144 without limitation as to volume,
(iv) all Registrable Securities have been otherwise transferred to Holders who
may trade such shares without restriction under the Securities Act, and the
Company has delivered a new certificate or other evidence of ownership for such
securities not bearing a restrictive legend, or (v) all Registrable Securities
may be sold without any time, volume or manner limitations pursuant to Rule
144(k) or any similar provision then in effect under the Securities Act in the
opinion of counsel to the Company, which counsel shall be reasonably acceptable
to the Holder (the "Effectiveness Period").
(c) All fees, disbursements and out-of-pocket expenses
and costs incurred by the Company in connection with the preparation and filing
of the Registration Statement under subparagraph 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees of the Company) shall be borne by the Company. The Holder shall
bear the cost of underwriting and/or brokerage discounts, fees and commissions,
if any, applicable to the Registrable Securities being registered and the fees
and expenses of its counsel. The Holder and its counsel shall have a reasonable
period, not to exceed three (3) Business Days, to review the proposed
Registration Statement or any amendment thereto, prior to filing with the
Commission, and the Company shall provide each Holder
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with copies of any comment letters received from the Commission with respect
thereto within two (2) Business Days of receipt thereof. The Company shall make
reasonably available for inspection by Holder, any underwriter participating in
any disposition pursuant to the Registration Statement, and any attorney,
accountant or other agent retained by such Holder or any such underwriter all
relevant financial and other records, pertinent corporate documents and
properties of the Company and its subsidiaries, and cause the Company's
officers, directors and employees to supply all information reasonably requested
by such Holder or any such underwriter, attorney, accountant or agent in
connection with the Registration Statement, in each case, as is customary for
similar due diligence examinations; PROVIDED, HOWEVER, that all records,
information and documents that are designated in writing by the Company, in good
faith, as confidential, proprietary or containing any material non-public
information shall be kept confidential by such Holder and any such underwriter,
attorney, accountant or agent (pursuant to an appropriate confidentiality
agreement in the case of any such Holder or agent), unless such disclosure is
made pursuant to judicial process in a court proceeding (after first giving the
Company an opportunity promptly to seek a protective order or otherwise limit
the scope of the information sought to be disclosed) or is required by law, or
such records, information or documents become available to the public generally
or through a third party not in violation of an accompanying obligation of
confidentiality; and PROVIDED FURTHER that, if the foregoing inspection and
information gathering would otherwise disrupt the Company's conduct of its
business, such inspection and information gathering shall, to the maximum extent
possible, be coordinated on behalf of the Holder and the other parties entitled
thereto by one firm of counsel designed by and on behalf of the majority in
interest of Holder and other parties. The Company shall qualify any of the
Registrable Securities for sale in such states as such Holder reasonably
designates and shall furnish indemnification in the manner provided in Section 6
hereof. However, the Company shall not be required to qualify in any state which
will require an escrow or other restriction relating to the Company and/or the
sellers, or which will require the Company to qualify to do business in such
state or require the Company to file therein any general consent to service of
process. The Company at its expense will supply the Holder with copies of the
Registration Statement and the prospectus included therein and other related
documents in such quantities as may be reasonably requested by the Holder.
(d) The Company shall not be required by this Section
3 to include a Holder's Registrable Securities in any Registration Statement
which is to be filed if, in the opinion of counsel for both the Holder and the
Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holder and
the Company) the proposed offering or other transfer as to which such
registration is requested is exempt from applicable federal and state securities
laws and would result in all purchasers or transferees obtaining securities
which are not "restricted securities", as defined in Rule 144 under the
Securities Act.
(e) In the event that (i) the Registration Statement to
be filed by the Company pursuant to Section 3(a) above is not filed with the
Commission on or before May 15, 1999, (ii) the Registration Statement is not
declared effective by the Commission on or before August 13, 1999 (or, if the
Registration Statement receives a review by the Commission staff, on or before
September 12, 1997), or (iii) the Registration Statement is not maintained as
effective by the Company for the period set forth in Section 3(b) above (each a
"Registration Default"), then the Company will pay Holder (pro rated on a daily
basis), as liquidated damages for such failure and not as a penalty, in the
event of late filing (in the case of clause (i) above), two percent (2%) of the
aggregate market value of the Registrable Securities issued or issuable to the
Holder upon conversion of the Convertible Debenture on any date of determination
and beneficially held by the Holder for every monthly period or portion thereof
thereafter until the Registration Statement has been filed, and in the event of
late effectiveness (in case of clause (ii) above) or lapsed effectiveness (in
the case of clause (iii) above), two percent (2%) of the aggregate market value
of the Registrable Securities issued or issuable to the Holder upon conversion
of the Convertible Debenture on any date of determination and
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<PAGE>
beneficially held by the Holder for every monthly period or portion thereof
thereafter (regardless of whether one or more such Registration Defaults are
then in existence) until the Registration Statement has been declared effective.
Such payment of the liquidated damages shall be made to the Holder in cash,
within five (5) calendar days of demand, provided, however, that the payment of
such liquidated damages shall not relieve the Company from its obligations to
register the Registrable Securities pursuant to this Section. The market value
of the Common Stock for this purpose shall be the closing price (or last trade,
if so reported) on the Principal Market for each day during such Registration
Default. Notwithstanding anything to the contrary contained herein, a failure to
maintain the effectiveness of the Registration Statement or the ability of a
Holder to use the Registration Statement to effect resales of Registrable
Securities during the period after 45 days and within 90 days from the end of
the Company's fiscal year resulting solely from the need to update the Company's
financial statements contained or incorporated by reference in the Registration
Statement shall not constitute a Registration Default and shall not trigger the
accrual of liquidated damages hereunder.
If the Company does not remit the damages to the
Holder as set forth above, the Company will pay the Holder reasonable costs of
collection, including attorneys fees, in addition to the liquidated damages. The
registration of the Registrable Securities pursuant to this provision shall not
affect or limit Holder's other rights or remedies as set forth in this
Agreement.
(f) No provision contained herein shall preclude
the Company from selling securities pursuant to any Registration Statement in
which it is required to include Registrable Securities pursuant to this Section
3.
(g) If at any time or from time to time after the
effective date of the Registration Statement, the Company notifies the Holder in
writing of the existence of a Potential Material Event (as defined in Section
3(h) below), the Holder shall not offer or sell any Registrable Securities or
engage in any other transaction involving or relating to Registrable Securities,
from the time of the giving of notice with respect to a Potential Material Event
until such Holder receives written notice from the Company that such Potential
Material Event either has been disclosed to the public or no longer constitutes
a Potential Material Event; provided, however, that the Company may not so
suspend the right to such holders of Registrable Securities for more than twenty
(20) days in the aggregate (or such greater period, not to exceed 90 days in the
aggregate, as may be required to prepare and file audited financial statements
of a company or business acquired) during any twelve month period, during the
periods the Registration Statement is required to be in effect. If a Potential
Material Event shall occur prior to the date the Registration Statement is
filed, then the Company's obligation to file the Registration Statement shall be
delayed without penalty for not more than twenty (20) days (or such greater
period, not to exceed 90 days in the aggregate, as may be required to prepare
and file audited financial statements of a company or business acquired). The
Company must give Holder notice in writing at least two (2) business days prior
to the first day of the blackout period.
(h) "Potential Material Event" means any of the
following: (a) the possession by the Company of material information not ripe
for disclosure in a registration statement, as determined in good faith by the
Chief Executive Officer or the Board of Directors of the Company that disclosure
of such information in the Registration Statement would be detrimental to the
business and affairs of the Company; or (b) any material engagement or activity
by the Company which would, in the good faith determination of the Chief
Executive Officer or the Board of Directors of the Company, be adversely
affected by disclosure in a registration statement at such time, which
determination shall be accompanied by a good faith determination by the Chief
Executive Officer or the Board of Directors of the Company that the Registration
Statement would be materially misleading absent the inclusion of such
information.
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Section 4. COOPERATION WITH COMPANY. The Holder will cooperate
with the Company in all respects in connection with this Agreement, including
timely supplying all information reasonably requested by the Company (which
shall include all information regarding the Holder and proposed manner of sale
of the Registrable Securities required to be disclosed in the Registration
Statement) and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Securities and
entering into and performing its obligations under any underwriting agreement,
if the offering is an underwritten offering, in usual and customary form, with
the managing underwriter or underwriters of such underwritten offering. Nothing
in this Agreement shall obligate the Holder to consent to be named as an
underwriter in the Registration Statement. The obligation of the Company to
register the Registrable Securities shall be absolute and unconditional as to
those Registrable Securities which the Commission will permit to be registered
without naming the Holder as an underwriter.
Section 5. REGISTRATION PROCEDURES. If and whenever the Company
is required by any of the provisions of this Agreement to effect the
registration of any of the Registrable Securities under the Act, the Company
shall (except as otherwise provided in this Agreement), as expeditiously as
possible, subject to the Holder's assistance and cooperation as reasonably
required:
(a)(i) prepare and file with the Commission such
amendments and supplements to the Registration Statement and the prospectus used
in connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Act with respect to the sale
or other disposition of all securities covered by such registration statement
whenever the Holder of such Registrable Securities shall desire to sell or
otherwise dispose of the same (including prospectus supplements with respect to
the sales of securities from time to time in connection with a registration
statement pursuant to Rule 415 promulgated under the Act) and (ii) take all
lawful action such that each of (A) the Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, not misleading and (B) the Prospectus
forming part of the Registration Statement, and any amendment or supplement
thereto, does not at any time during the Registration Period include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b)(i) prior to the filing with the Commission of any
Registration Statement (including any amendments thereto) and the distribution
or delivery of any prospectus (including any supplements thereto), provide draft
copies thereof to the Holders and reflect in such documents all such comments as
the Holders (and their counsel) reasonably may propose respecting the Selling
Shareholders and Plan of Distribution sections (or equivalents) and (ii) furnish
to each Holder such numbers of copies of a prospectus including a preliminary
prospectus or any amendment or supplement to any prospectus, as applicable, in
conformity with the requirements of the Act, and such other documents, as such
Holder may reasonably request in order to facilitate the public sale or other
disposition of the Registrable Securities owned by such Holder;
(c) register and qualify the Registrable Securities
covered by the Registration Statement under such other securities or blue sky
laws of such jurisdictions as the Holder shall reasonably request (subject to
the limitations set forth in Section 3(d) above), and do any and all other acts
and things which may be necessary or advisable to enable each Holder to
consummate the public sale or other disposition in such jurisdiction of the
securities owned by such Holder, except that the Company shall not for any such
purpose be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
Page 5
<PAGE>
(d) list such Registrable Securities on the American
Stock Exchange, other national securities exchange, the NASDAQ National Market
or the NASDAQ Small-Cap Market, on which the Common Stock of the Company is then
listed, if the listing of such Registrable Securities is then permitted under
the rules of such exchange or Nasdaq;
(e) notify each Holder of Registrable Securities
covered by the Registration Statement, at any time when a prospectus relating
thereto covered by the Registration Statement is required to be delivered under
the Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing, and the Company
shall prepare and file a curative amendment under Section 5(a) as quickly as
commercially possible;
(f) as promptly as practicable after becoming aware of
such event, notify each Holder who holds Registrable Securities being sold (or,
in the event of an underwritten offering, the managing underwriters) of the
issuance by the Commission of any stop order or other suspension of the
effectiveness of the Registration Statement at the earliest possible time and
take all lawful action to effect the withdrawal, recession or removal of such
stop order or other suspension;
(g) cooperate with the Holders who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates for the Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates for the Registrable
Securities to be in such denominations or amounts, as the case may be, as the
Holders reasonably may request and registered in such names as the Holder may
request; and, within three business days after a Registration Statement which
includes Registrable Securities is declared effective by the Commission, deliver
and cause legal counsel selected by the Company to deliver to the transfer agent
for the Registrable Securities (with copies to the Holders whose Registrable
Securities are included in such Registration Statement) an appropriate
instruction and, to the extent necessary, an opinion of such counsel;
(h) take all such other lawful actions reasonably
necessary to expedite and facilitate the disposition by the Holders of their
Registrable Securities in accordance with the intended methods therefor provided
in the prospectus which are customary for issuers to perform under the
circumstances;
(i) in the event of an underwritten offering, promptly
include or incorporate in a Prospectus supplement or post-effective amendment to
the Registration Statement such information as the managers reasonably agree
should be included therein and to which the Company does not reasonably object
and make all required filings of such Prospectus supplement or post-effective
amendment as soon as practicable after it is notified of the matters to be
included or incorporated in such Prospectus supplement or post-effective
amendment; and
(j) maintain a transfer agent and registrar for its
Common Stock.
Section 6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless
the Holder and each person, if any, who controls the Holder within the meaning
of the Securities Act ("Distributing Holder") against any losses, claims,
damages or liabilities, joint or several (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable
Page 6
<PAGE>
attorneys' fees), to which the Distributing Holder may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, preliminary prospectus, final
prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by the
Distributing Holder, specifically for use in the preparation thereof. This
Section 6(a) shall not inure to the benefit of any Distributing Holder with
respect to any person asserting such loss, claim, damage or liability who
purchased the Registrable Securities which are the subject thereof if the
Distributing Holder failed to send or give (in violation of the Securities Act
or the rules and regulations promulgated thereunder) a copy of the prospectus
contained in such Registration Statement to such person at or prior to the
written confirmation to such person of the sale of such Registrable Securities,
where the Distributing Holder was obligated to do so under the Securities Act or
the rules and regulations promulgated thereunder. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will
indemnify and hold harmless the Company, and each officer, director of the
Company or person, if any, who controls the Company within the meaning of the
Securities Act, against any losses, claims, damages or liabilities (which shall,
for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all reasonable attorneys'
fees) to which the Company or any such officer, director or controlling person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, or any related
preliminary prospectus, final prospectus or amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, preliminary prospectus, final prospectus or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Distributing Holder may otherwise
have.
(c) Promptly after receipt by an indemnified party
under this Section 6 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve the indemnifying party from any liability which it may have to any
indemnified party except to the extent of actual prejudice demonstrated by the
indemnifying party. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified,
assume the defense thereof, subject to the provisions herein stated and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation, unless the indemnifying
party shall not pursue the action to its final conclusion. The indemnified party
shall have
Page 7
<PAGE>
the right to employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel shall not be at
the expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is the Distributing Holder, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party, or (ii) the named parties to any such action
(including any impleaded parties) include both the Distributing Holder and the
indemnifying party and the Distributing Holder shall have been advised by such
counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Distributing Holder (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the Distributing Holder, it being understood, however, that the indemnifying
party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 7. CONTRIBUTION. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
indemnified party makes a claim for indemnification pursuant to Section 6 hereof
but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
Section 6 hereof provide for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any indemnified party,
then the Company and the applicable Distributing Holder shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the applicable Distributing Holder on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Distributing Holder agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in this Section 7. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this Section 7
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Notwithstanding any other provision of this Section 7, in no event shall any (i)
Holder be required to undertake liability to any person under this Section 7 for
any amounts in excess of the dollar amount of the proceeds to be received by
such Holder from the sale of such Holder's Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) pursuant to
any Registration Statement under which such Registrable Securities are to be
registered under the Securities Act and (ii) underwriter be required to
undertake liability to any person hereunder for any amounts in excess of the
aggregate discount, commission
Page 8
<PAGE>
or other compensation payable to such underwriter with respect to the
Registrable Securities underwritten by it and distributed pursuant to the
Registration Statement.
Section 8. NOTICES. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: BRILLIANT DIGITAL ENTERTAINMENT, INC.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, CA 91367
Attention: Mark Dyne
Telephone: (818) 615-1500
Fax: (818) 615-0995
with a copy to: Murray Markiles, Esq.
(shall not constitute notice) Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East
24th Floor
Los Angeles, CA 90067
Telephone: (310) 728-3233
Fax: (310) 728-2233
If to any Holder: At its last known
address appearing on the books of
the Company maintained for such
purpose.
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Fax: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 8 by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Page 9
<PAGE>
Section 9. ASSIGNMENT. This Agreement is binding upon and inures
to the benefit of the parties hereto and their respective heirs, successors and
permitted assigns. The rights granted the Holder under this Agreement may be
assigned to any purchaser of substantially all of the Registrable Securities (or
the rights thereto) from Holder, as otherwise permitted by the Purchase
Agreement. In the event of a transfer of the rights granted under this
Agreement, the Holder agrees that the Company may require that the transferee
comply with reasonable conditions as determined in the discretion of the
Company.
Section 10. ADDITIONAL COVENANTS OF THE COMPANY. The Company
agrees that at such time as it meets all the requirements for the use of
Securities Act Registration Statement on Form S-3 it shall file all reports and
information required to be filed by it with the Commission in a timely manner
and take all such other action so as to maintain such eligibility for the use of
such form.
Section 11. COUNTERPARTS/FACSIMILE. This Agreement may be
executed in two or more counterparts, each of which shall constitute an
original, but all of which, when together shall constitute but one and the same
instrument, and shall become effective when one or more counterparts have been
signed by each party hereto and delivered to the other party. In lieu of the
original, a facsimile transmission or copy of the original shall be as effective
and enforceable as the original.
Section 12. REMEDIES. The remedies provided in this Agreement are
cumulative and not exclusive of any remedies provided by law. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
Section 13. CONFLICTING AGREEMENTS. The Company shall not enter
into any agreement with respect to its securities that is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement or
otherwise prevents the Company from complying with all of its obligations
hereunder.
Section 14. HEADINGS. The headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 15. GOVERNING LAW, ARBITRATION. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made in New York by persons domiciled in New York City
and without regard to its principles of conflicts of laws. Any dispute under
this Agreement shall be submitted to arbitration under the American Arbitration
Association (the "AAA") in New York City, New York, and shall be finally and
conclusively determined by the decision of a board of arbitration consisting of
three (3) members (hereinafter referred to as the "Board of Arbitration")
selected as according to the rules governing the AAA. The Board of Arbitration
shall meet on consecutive business days in New York City, New York, and shall
reach and render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to the amount, if any, which
the losing party is required to pay to the other party in respect of a claim
filed. In connection with rendering its decisions, the Board of Arbitration
shall adopt and follow the laws of the State of New York. To the extent
practical, decisions of the Board of Arbitration shall be rendered no more than
thirty (30) calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the Board
of Arbitration (either prior to or after the
Page 10
<PAGE>
expiration of such thirty (30) calendar day period) shall be final, binding and
conclusive on the parties to the dispute, and entitled to be enforced to the
fullest extent permitted by law and entered in any court of competent
jurisdiction. The Board of Arbitration shall be authorized and is hereby
directed to enter a default judgment against any party failing to participate in
any proceeding hereunder within the time periods set forth in the AAA rules. The
non-prevailing party to any arbitration (as determined by the Board of
Arbitration) shall pay the expenses of the prevailing party including reasonable
attorney's fees, in connection with such arbitration. Any party shall be
entitled to obtain injunctive relief from a court in any case where such relief
is available.
Section 16. SEVERABILITY. If any provision of this Agreement
shall for any reason be held invalid or unenforceable, such invalidity or
unenforceablity shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable provision had never been
contained herein. Terms not otherwise defined herein shall be defined in
accordance with the Agreement.
Section 17. CAPITALIZED TERMS. All capitalized terms not
otherwise defined herein shall have the meaning assigned to them in the Purchase
Agreement.
Page 11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed, on the day and year first
above written.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MARK DYNE
-------------------------------------
Mark Dyne
Chief Executive Officer and President
ROSEWORTH GROUP, LTD.
By: /S/ HANS GASSNER
-------------------------------------
Hans Gassner
Director
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-QSB OF BRILLIANT DIGITAL
ENTERTAINMENT, INC. TO WHICH THIS EXHIBIT IS A PART AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER
SHARE DATA).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,632
<SECURITIES> 0
<RECEIVABLES> 2,224
<ALLOWANCES> 140
<INVENTORY> 0
<CURRENT-ASSETS> 3,974
<PP&E> 1,720
<DEPRECIATION> 1,036
<TOTAL-ASSETS> 5,575
<CURRENT-LIABILITIES> 1,584
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 3,681
<TOTAL-LIABILITY-AND-EQUITY> 5,575
<SALES> 206
<TOTAL-REVENUES> 206
<CGS> 205
<TOTAL-COSTS> 2,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,890)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,890)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,890)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
