As filed with the Securities and Exchange Registration No. 333-78733
Commission on September 28, 1999
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BRILLIANT DIGITAL ENTERTAINMENT, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 7372 95-4592204
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(Address and Telephone Number of Principal Executive Offices)
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(Address of Principal Place of Business or Intended Principal Place of
Business)
MARK DYNE, CHIEF EXECUTIVE OFFICER
6355 TOPANGA CANYON BOULEVARD, SUITE 120
WOODLAND HILLS, CALIFORNIA 91367
(818) 346-3653
(Name, Address and Telephone Number of Agent for Service)
COPIES TO:
Murray Markiles, Esq.
John J. McIlvery, Esq.
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East
Los Angeles, California 90067
(310) 728-3200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------ --------------- -------------------- ---------------------- --------------
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum Amount Of
Title of Each Class of Securities Amount To Be Offering Price Aggregate Registration
To Be Registered Registered(1) Per Unit Offering Price Fee
- ------------------------------------------------ --------------- -------------------- ---------------------- --------------
Common Stock, par value $.001 per share 2,046,000 $2.94 (2) $6,015,240 $1,673 (3)
- ------------------------------------------------ --------------- -------------------- ---------------------- --------------
</TABLE>
(1)In the event of a stock split, stock dividend, or similar transaction
involving the Registrant's common stock, in order to prevent dilution, the
number of shares registered shall automatically be increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.
(2)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) on the basis of the average high and low prices of
the Registrant's common stock reported on the American Stock Exchange on
September 23, 1999.
(3)A registration fee of $3,378 was paid with respect to 2,040,000 shares of
Common Stock included with the initial filing of the Registration Statement.
A registration fee of $5 is being paid with respect to an additional 6,000
shares of Common Stock included with the filing of this amendment to the
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
==============================================================================
<PAGE>
SUBJECT TO COMPLETION - September 28, 1999
2,046,000 Shares PROSPECTUS
BRILLIANT DIGITAL ENTERTAINMENT, INC.
Common Stock
This prospectus may be used only in connection with the resale by St.
Annes Investments, Ltd. or its assigns and Trinity Capital Advisors, Inc. of
shares of the common stock of BRILLIANT DIGITAL ENTERTAINMENT as follows:
o Up to 2,000,000 shares of common stock that may be issued by us to St.
Annes under a securities purchase agreement;
o Up to 40,000 shares of common stock that may be issued by us to
Trinity as a financial advisory fee under the securities purchase
agreement; and
o Up to 6,000 shares of common stock that we have already issued to
Trinity as a financial advisory fee.
We will issue the shares of common stock to St. Annes at a discount to the
then current market price of the common stock, as follows:
o If the market price is $4.00 or less, then the price for the shares
shall be 86% of the market price; and
o If the market price is greater than $4.00, then the price shall be 88%
of the market price.
The shares of common stock offered using this prospectus may be resold
from time to time by St. Annes and Trinity. We will not receive any of the
proceeds from the sale of the shares by these selling stockholders.
BRILLIANT'S common stock is traded on the American Stock Exchange under
the symbol "BDE." On September 23, 1999, the closing sale price of the common
stock on the American Stock Exchange was $2.94 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SHARES.
We have filed with the Securities and Exchange Commission a registration
statement covering the resale by some of our stockholders of up to 2,902,011
shares of our common stock. The resale of the 2,902,011 shares may occur
concurrently with the resale by the selling stockholders of the shares to be
sold using this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
This prospectus is dated , 1999
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
ABOUT BRILLIANT DIGITAL ENTERTAINMENT
GENERAL
BRILLIANT DIGITAL ENTERTAINMENT is a production and development studio
that uses software to create digital entertainment for distribution over the
Internet, on CD-ROM and DVD and, in the future, as television programming and
for home video. Using our proprietary software tools, we produce Multipath(TM)
Movies. Multipath Movies are three-dimensional digitally animated stories each
with up to hundreds of plot alternatives, or paths, leading to multiple distinct
conclusions that are influenced by the user. Our Multipath Movies feature
seamless interactivity ensuring that the plot and graphical presentation of the
story are uninterrupted by the user's decisions.
Historically, we have derived revenues primarily from the sale of
Multipath Movies distributed on CD-ROM through retail outlets, and under
Multipath Movie distribution contracts where we are entitled to fixed minimum
guaranteed payments. To date, we have not achieved significant sales of
Multipath Movies viewed in real time over the Internet, and Multipath Movies
titles on DVD will not be available for purchase until the second half of 1999.
OUR MARKETING STRATEGY
We have secured stories and characters for our Multipath Movies from a
number of sources, including:
o SUPERMAN from D.C. Comics, a subsidiary of Warner Bros.;
o XENA: WARRIOR PRINCESS and HERCULES & XENA THE ANIMATED MOVIE, each
from Universal Studios;
o ACE VENTURA from Morgan Creek;
o POPEYE from King Features Syndicate;
o the CHOOSE YOUR OWN NIGHTMARE series for kids from Bantam Doubleday
Dell Books; and
o content from the rock group, KISS.
We also develop Multipath Movies based on internally developed stories and
characters. Further to our strategy, we have entered into distribution
agreements with Packard Bell NEC, CompuServe, @Home, DVD Express, Kesmai's
Gamestorm and Slingshot.
Our first Multipath Movie title, CYBERSWINE, together with two titles in
the CHOOSE YOUR OWN NIGHTMARE series and one POPEYE title, were completed and
released at the end of 1997. During 1998, an additional 11 titles were
completed, including episodes of XENA, ACE VENTURA, POPEYE and GRAVITY Angels,
our internally developed title. During the last quarter of 1998 and the first
quarter of 1999, we launched additional titles, led by XENA, in retail stores in
domestic and international markets. Many of these titles also are available
online at www.multipathmovies.com as previews, webisodes and/or CD-ROM's.
Webisodes are serialized Multipath Movie episodes we offer through subscription.
We also have agreements with @Home, DVD Express and Kesmai's Gamestorm to offer
Multipath Movies to their online users. In addition, Slingshot also has agreed
to develop technologies required to play Hi-Fidelity Multipath Movies on DVD.
Slingshot has agreed to publish and distribute on DVD up to 20 titles to
retailers worldwide.
We have progressed with our plans to release some of our Multipath Movies
in non-interactive format as television broadcast/cable programming and home
video features. In January 1999, we entered into an agreement with Kaleidoscope
Media Group for the distribution of GRAVITY ANGELS, a two-hour 3D animated
science fiction thriller, to the television broadcast/cable and home video
markets. We intend to segment Multipath Movies into 30-minute episodes and
package together multiple episodes to create a season-length series for the
television market. Similarly, we intend to produce 80- to 120-minute animated
features for the home video market. We intend to enter into joint ventures or
partnerships with film and television production companies to jointly develop
and release digital entertainment for the television broadcast/cable and home
video markets. Utilizing our proprietary tools we can convert this content for
distribution on the Internet, DVD and CD-ROM, thereby increasing our revenue
opportunities. Although, as described above, we are presently implementing our
plans to release some of the Multipath Movies in non-interactive format as
Page 2
<PAGE>
television broadcast/cable programming and home video features, we note that we
cannot guarantee that we will be able to do so.
OUR SOFTWARE TOOLS
Using our proprietary software tools, we develop Multipath Movies in a
single production process. We have five proprietary software tools:
o SCRIPNAV -- a software tool that enables a script writer to write,
review and correct branching multipath scripts;
o TALKTRACK -- a software tool used to synchronize facial expressions
and mouth movements to voice soundtracks automatically;
o SCUD ENGINE -- a software system which collects and integrates the
output from all of the component tools to produce the Multipath
Movie;
o MR. COPY -- a software tool that arranges, reorders and, using
licensed technology, compresses and decompresses audio and bit map
files created during the production of a Multipath Movie and
optimally organizes the files for use in playing the Multipath
Movie; and
o DIGITAL PROJECTOR -- which contains all the necessary elements to
load and play a Multipath Movie.
Our proprietary software tools allow us to produce each title in multiple
formats in a single cost-efficient production process. This enables us to
amortize our production costs across the revenue streams we realize from each
format. In addition, our TalkTrack tool allows for low-cost modification of
Multipath Movies to other languages without the awkward appearance of dubbed
movies. Our proprietary software tools and production process are designed to
emulate traditional film writing and production techniques and allow
screenwriters, directors and producers to develop Multipath Movies without any
detailed knowledge of computer programming or significant assistance from
expensive programming teams. We believe that by utilizing existing entertainment
resources we will be able to generate high-quality digital entertainment at a
low cost.
OUR ACQUISITION OF THE AUCTION CHANNEL
We have recently expanded our business to offer Internet- and
television-based auction services through our subsidiary, Trojan Television
Limited, which we acquired in July 1999. Trojan Television Limited is a
London-based company doing business as The Auction Channel. Founded in 1996, The
Auction Channel integrates live satellite, cable TV and World Wide Web
broadcasts of auction events conducted by auction houses, allowing for
participants to watch auction events on television or the Internet and use the
Internet or their telephone to bid on items presented at auction. The Auction
Channel is developing a Web site at www.theauctionchannel.com to be a principal
auction site where visitors will identify, select, attend and participate in
auction events. The Auction Channel has entered into agreements to provide its
services with major auction houses like Christie's South Kensington, Phillips,
Bonhams, Allsop & Co., Brooks and Antiquorum. Our acquisition of The Auction
Channel furthers our business plan of offering products and services
specifically for the converging media of Internet and television.
CORPORATE INFORMATION
We are a Delaware corporation that was incorporated in July 1996. We were
formed through the combination of two businesses: Brilliant Interactive Ideas,
Pty. Ltd., an entertainment software developer and producer, and Sega Australia
New Developments, a research and development operation for leading edge software
tools. Our executive offices are located at 6355 Topanga Canyon Boulevard, Suite
120, Woodland Hills, California 91367, and our telephone number is (818)
346-3653. Information on our Web site, www.multipathmovies.com, does not
constitute part of this prospectus.
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<PAGE>
ABOUT THE OFFERING
We entered into a securities purchase agreement with St. Annes on March
29, 1999. This agreement entitles us to sell, from time to time during the
three-year term of the agreement, up to $6,000,000 of our common stock to St.
Annes. Under the agreement, we have:
o Filed a registration statement with respect to 2,000,000 shares of
common stock that we may sell from time to time to St. Annes or its
assigns under the securities purchase agreement, which St. Annes or
its assigns may offer to resell to the public using this prospectus;
o Agreed to pay to our financial advisor, Trinity Capital Advisors, a
financial advisory fee in cash equal to 3% of the purchase price of
the shares of common stock that are issued and sold to St. Annes or
its assigns at each closing under the securities purchase agreement;
and
o Agreed to issue to Trinity shares of common stock having an
aggregate market closing price equal to 2% of the purchase price of
the shares of common stock that are issued and sold to St. Annes or
its assigns at each closing under the securities purchase agreement.
40,000 of the shares issuable to Trinity, and an additional 6,000
shares we issued to Trinity in December 1998, were included in the
registration statement and may be offered for sale by Trinity to the
public using this prospectus.
The total outstanding shares identified below do not include the following
shares that will dilute your investment if and when they are issued:
o shares of common stock issuable to the selling stockholders under
the securities purchase agreement;
o approximately 500,000 shares of common stock issuable in connection
with our acquisition of The Auction Channel;
o 2,490,625 shares of common stock issuable upon exercise of options
granted or available for future grant under our 1996 Stock Option
Plan; and
o 715,040 shares of common stock issuable upon exercise of outstanding
warrants.
Shares offered by ST. ANNES........... Up to 2,000,000 shares.
Shares offered by TRINITY............. Up to 46,000 shares.
Offering Price........................ Determined at the time of sale by the
selling stockholder.
Total Shares outstanding as of
September 8, 1999.................... 11,915,999 Shares.
Use of proceeds by BRILLIANT......... We will not receive any proceeds from
the sale of shares by the selling
stockholders in this offering. Any
proceeds we receive from the sale of
common stock under the securities
purchase agreement will be used for
working capital and general corporate
purposes.
Dividend Policy...................... We currently intend to retain any
future earnings to fund the
development and growth of our
business. Therefore, we do not
anticipate currently paying dividends.
See "Dividend Policy."
American Stock Exchange Symbol....... BDE
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
The following summary financial data is derived from our financial
statements and related notes appearing elsewhere in this prospectus. You should
read the following summary financial data in conjunction with those financial
statements and notes.
The pro forma statement of operations data reflects our acquisition of
Trojan Television Limited in July 1999 as if the acquisition had occurred on
January 1, 1998, and the pro forma balance sheet data reflects our acquisition
of Trojan as if the acquisition had occurred on June 30, 1999.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (unaudited)
<S> <C> <C> <C> <C>
Total revenues.................................................... $ 2,481 $ 431 $ 32 $ 334
Gross profit (loss)............................................... 2,437 (952) (314) (15)
Total operating expenses.......................................... 5,230 8,909 4,019 4,168
Loss from operations.............................................. (2,793) (9,861) (4,333) (4,183)
Net loss.......................................................... (2,305) (9,425) (4,050) (4,112)
Comprehensive loss................................................ (2,473) (9,353) (4,046) (4,086)
Basic and diluted net loss per share.............................. $ (0.31) $ (1.00) $ (0.43) $ (0.41)
Weighted average number of shares used in computing
basic and diluted net loss per share............................. 7,384 9,403 9,403 10,131
Pro forma net loss (unaudited).................................... $(12,792) $(6,316)
Pro forma basic and diluted net loss per share (unaudited)........ $ (1.26) $ (0.58)
Weighted average number of shares used in computing pro
forma basic and diluted net loss per share (unaudited)............ 10,160 10,888
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
------------------------------
(unaudited)
ACTUAL PRO FORMA
---------------- -------------
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents............................................................... $ 4,587 $ 4,899
Total current assets.................................................................... 7,322 7,724
Total assets............................................................................ 8,734 17,211
Total long-term liabilities............................................................. 407 407
Total stockholders' equity.............................................................. 6,611 13,279
</TABLE>
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<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE THE MATERIAL
ONES FACING OUR COMPANY. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IF
THIS OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
WE WILL NOT BE ABLE TO SELL OUR MULTIPATH MOVIES IF THEY DO NOT ACHIEVE MARKET
ACCEPTANCE.
Each Multipath Movie is an individual artistic work, and its ability to
generate sales primarily will be determined by consumer reaction, which is
unpredictable. To generate sales, we must develop stories and characters that
capture the attention and imagination of consumers and 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
our ability to generate revenues from our Multipath Movies include:
o consumer reluctance to initiate time consuming downloads of data
necessary to view our products;
o our marketing strategies;
o the quality of our products and competing products;
o critical reviews; and
o the availability of alternative forms of entertainment and leisure
time activities.
WE HAVE EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, REDUCED REVENUES DUE TO
DELAYS IN THE INTRODUCTION AND DISTRIBUTION OF OUR PRODUCTS.
We cannot be certain that we will be able to meet our planned release
dates for our new Multipath Movies. If we cannot begin to ship an important new
product during the scheduled quarter, our revenues would likely be reduced in
that quarter. In the past, we have experienced significant delays in our
introduction of some 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 1997
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, after the 1998 holiday selling season. As a result, we
experienced fewer sales of these products than we would have if the products
were in stores during the holiday selling seasons, which had a materially
adverse effect on our operating results for the 1997 and 1998 fourth quarters.
It is likely in the future that delays will continue to occur and that some new
products will not be released in accordance with our internal development
schedule or the expectations of public market analysts and investors.
WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT SALES OF OUR PRODUCTS VIEWED ON THE
INTERNET UNLESS THERE IS A REDUCTION IN THE TIME IT TAKES TO DOWNLOAD THE
LARGE AMOUNTS OF DATA NECESSARY TO VIEW OUR PRODUCTS ON THE INTERNET.
Our revenue growth depends in part on our ability to distribute our
products for viewing on the Internet. We believe that without reductions in the
time to download Multipath Movies over the Internet , our Multipath Movies may
be unable to gain consumer acceptance. This reduction in download time depends
in part upon advances in compression technology. We have experienced delays in
the development of compression technologies, which, we believe, has materially
and adversely affected our online sales and results of operations. 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.
OUR PROSPECTS ARE DIFFICULT TO FORECAST BECAUSE WE HAVE ONLY BEEN SELLING
MULTIPATH MOVIES SINCE DECEMBER 1997.
We have a limited history of selling Multipath Movies upon which to
evaluate our future prospects. We acquired the software tools necessary to
produce Multipath Movies in August 1996 and introduced our first Multipath Movie
in December 1997. We are unable to accurately anticipate our future performance
because of this limited experience. As a result, we may frequently over-spend
for production or marketing of titles that will fail, or under-spend on
marketing for other titles, either of which will result in the misallocation of
our limited financial resources and adversely affect our revenues and
profitability.
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<PAGE>
IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DEFER
COMPLETION OF MULTIPATH MOVIE TITLES AND REDUCE OVERHEAD SIGNIFICANTLY.
We believe that our existing funds, cash generated from operations and
proceeds from our future sales 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.
OUR SOFTWARE DISTRIBUTORS AND PUBLISHERS, OUR OEM PROVIDERS AND THE LICENSORS
FROM WHOM WE OBTAIN RIGHTS TO OUR STORIES AND CHARACTERS MAY CAUSE US TO DELAY
THE RELEASE OF OUR PRODUCTS, WHICH MAY RESULT IN LOWER PRODUCT SALES AND LOWER
REVENUES THAN ANTICIPATED.
Our distribution relationships with software distributors and publishers
and OEM providers, and our licensing arrangements with companies that own the
stories or characters used in many of our Multipath Movies, contain potentially
burdensome provisions. These provisions may affect our ability to release our
products, which would adversely affect our revenues, for a number of reasons,
such as:
o A software distributor or a licensor of a story or character may, in
the exercise of its product approval rights, arbitrarily require
expensive and time consuming changes to our products, which may
cause a delay in the release of the products; and
o An OEM provider could change the shipping schedule of the equipment
with which our products are bundled, and thereby cause a delay in
their distribution.
One delay has already occurred. Packard Bell NEC, which agreed to
distribute our initial Multipath Movie CYBERSWINE and other movies selected by
us bundled with Packard Bell computers, significantly delayed the introduction
of CYBERSWINE beyond the initially anticipated launch date. Packard Bell NEC
also delayed the release of POPEYE AND THE QUEST FOR THE WOOLLY MAMMOTH, NIGHT
OF THE WEREWOLF and the HALLOWEEN PARTY bundled on Packard Bell computers beyond
the initially anticipated launch dates. As a result, these Multipath Movies were
not available to consumers on Packard Bell computers as early as we initially
anticipated, and we experienced fewer sales of these Multipath Movies and lower
revenues than we expected.
WE MAY NOT BE ABLE TO LICENSE STORIES AND CHARACTERS THAT APPEAL TO CONSUMERS
FOR USE IN OUR MULTIPATH MOVIES, WHICH IS NECESSARY FOR OUR
MULTIPATH MOVIES TO SELL WELL IN THE MARKET.
We use stories and characters developed by third parties in our Multipath
Movies. If we cannot license stories and characters that appeal to consumers at
prices or upon terms or conditions that we consider acceptable, we may not be
able to develop Multipath Movies that consumers will purchase. To have access to
appealing stories and characters for use in our Multipath Movies, we will need
to continue to develop new relationships and maintain existing relationships
with the licensors of these stories and characters. Many licensors are reluctant
to grant broad licenses covering multiple formats, like the Internet and
television, to companies without a proven track record in the particular
industry. When rights are available, there is often significant competition for
licenses.
IF THE VENDOR WE USE TO DELIVER MULTIPATH MOVIES THROUGH OUR INTERNET SITE
EXPERIENCES AN INTERRUPTION IN SERVICE, WE WILL NOT BE ABLE TO SELL MOVIES
THROUGH OUR INTERNET SITE UNTIL SERVICE RESUMES.
We presently use a single vendor to deliver 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 this portion of our business and maintain customer
satisfaction.
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<PAGE>
IF WE CANNOT OBTAIN CD-ROM AND DVD MANUFACTURING AND PACKAGING SERVICES ON A
TIMELY BASIS, WE MAY NOT BE ABLE TO TIMELY DELIVER OUR CD-ROM AND DVD PRODUCTS
TO DISTRIBUTORS AND RETAILERS AND OUR SALES WILL BE ADVERSELY
AFFECTED.
We use third party vendors to press CD-ROM and DVD disks, assemble
purchased product components, print product packaging and user manuals and
package finished products in connection with the retail distribution of our
Multipath Movies. 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. If we cannot obtain adequate manufacturing services, we will
not be able to timely produce and deliver our CD-ROM and DVD products to
distributors and retail stores for ultimate sale to consumers, which will
adversely affect our sales and operating results.
IF WE ARE UNABLE TO DEVELOP A RETAIL SALES CHANNEL, EFFECTIVELY COMPETE FOR
RETAIL SHELF SPACE AND NEGOTIATE FAVORABLE TERMS WITH RETAILERS, OUR RETAIL
SALES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED.
To be profitable, we anticipate that a significant amount of sales of
Multipath Movies will need to be made by traditional retailers. We may not be
able to achieve significant retail sales at prices favorable to us. We have no
prior experience in developing or managing a retail sales channel or selling
products in retail stores. We are currently expending significant resources to
develop a retail sales channel, which expenditures must be made before we
realize any significant retail sales. The competition for shelf space in retail
stores is intense. We expect that our products will 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 increasingly are 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 sales volume and the price we receive for our products.
WE MAY ENCOUNTER PROBLEMS IN CONNECTION WITH OUR ACQUISITION OF THE AUCTION
CHANNEL, WHICH MAY INCREASE THE COSTS OF THE ACQUISITION AND DISTRACT
MANAGEMENT'S ATTENTION FROM OPERATING THE COMBINED BUSINESS.
In July 1999, we acquired Trojan Television Limited, a London-based
company doing business as The Auction Channel. The Auction Channel integrates
live satellite, cable TV and Web broadcasts of auction events conducted by
auction houses, allowing for participants to watch auction events on television
and use the Internet or their telephone to bid simultaneously with people
actually present at the auction house. We have very little experience in
acquiring businesses and will likely encounter difficulties in integrating The
Auction Channel's operations with our existing operations, which may result in
unexpected costs and adversely affect our operating results. In addition, the
integration will require the dedication of management resources, which may
temporarily distract management's attention from the day-to-day operations of
the two companies and adversely affect our operating results. Some of the
difficulties we expect to encounter include, among others, those related to:
o integrating Brilliant's and The Auction Channel's management staffs;
o retaining The Auction Channel's key management and technical
personnel; and
o coordinating the operation of geographically separated organizations
with distinct cultures.
THE AUCTION CHANNEL MAY NEVER BE PROFITABLE, WHICH WILL ADVERSELY AFFECT OUR
CONSOLIDATED OPERATIONS.
The Auction Channel commenced operations in July 1996 and, accordingly,
has a limited operating history upon which to evaluate its future prospects.
There can be no assurance that The Auction Channel will achieve profitability or
implement its business strategy. The Auction Channel had net losses of
approximately $310,000 in fiscal 1997, $521,000 in fiscal 1998 and $2,131,000
for the fiscal year ended June 30, 1999, and an accumulated deficit of
$2,888,000 as of June 30, 1999 relating to net losses from the period from July
1, 1996 through fiscal 1997 , fiscal 1998 and fiscal 1999. We expect that The
Auction Channel will continue to sustain losses at least for the next twelve
months.
Page 8
<PAGE>
OUR AMORTIZATION EXPENSES WILL INCREASE AS A RESULT OF OUR ACQUISITION
OF THE AUCTION CHANNEL CAUSING AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
Our acquisition of The Auction Channel has been accounted for as a
purchase. Based on the purchase price paid, The Auction Channel acquisition is
expected to result in significant goodwill recorded on our balance sheet. As a
result, we expect that our amortization expense will significantly increase over
historical levels. This increase in amortization expense will have an adverse
effect on our operating results during the remainder of 1999 and in subsequent
periods.
IF THE AUCTION CHANNEL LOSES ITS LICENSE TO THE COMPUTER SOFTWARE AND HARDWARE
TECHNOLOGIES IT USES IN ITS BUSINESS, THE AUCTION CHANNEL MAY NOT BE ABLE TO
CONTINUE TO SELL ITS PRODUCTS AND SERVICES.
Many of the underlying computer software and hardware technologies used by
The Auction Channel are licensed from Articulate UK Limited. The Auction Channel
has, with respect to these technologies, a worldwide, irrevocable license, with
rights to exploit and improve, to any and all software, patents, technology,
object code, documentation and know how developed or owned or licensable by
Articulate UK. If The Auction Channel loses its rights to the computer software
and hardware technologies it licenses from Articulate UK as a result of a
dispute with Articulate UK or otherwise, The Auction Channel will not be able to
continue to sell its products and services. If this occurs, The Auction
Channel's revenues will be substantially reduced.
PRODUCT RETURNS THAT EXCEED OUR ANTICIPATED RESERVES COULD RESULT IN WORSE THAN
EXPECTED OPERATING RESULTS.
At the time we ship our products to retailers, we will establish reserves,
including reserves that estimate the potential for future product returns.
Product returns or price protection concessions that exceed our reserves 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 any
future write-offs will not occur or that amounts written off will not have a
material adverse effect on our business and depress the market price of our
common stock. Actual returns to date have been within management's estimates.
FLUCTUATIONS IN OPERATING RESULTS MAY RESULT IN UNEXPECTED REDUCTIONS IN REVENUE
AND STOCK PRICE VOLATILITY.
We operate in an industry that is subject to significant fluctuations in
operating results from quarter to quarter, which may lead to unexpected
reductions in revenues and stock price volatility. Factors that may influence
our quarterly operating results include:
o shipping schedules for PC hardware with which Multipath Movies are
bundled;
o the introduction or enhancement of software 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 the introduction or availability of new computer hardware to be used
with our products; and
o the timing of orders from major customers.
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.
BECAUSE WE ARE SUBJECT TO SEASONAL BUYING PATTERNS, IF WE DO NOT ACHIEVE STRONG
FOURTH QUARTER SALES OUR REVENUES AND OPERATING RESULTS FOR THE ENTIRE FISCAL
YEAR WILL LIKELY BE ADVERSELY AFFECTED.
The entertainment software business is highly seasonal. Typically, demand
for entertainment software products and net revenues are highest during the
year-end holiday buying season, decline in the first calendar quarter and are
lowest in the second and third calendar quarters. As a result, a
disproportionate share of our net revenues historically has been generated in
the fourth quarter of our fiscal year. If we do not have strong fourth quarter
sales, our revenues and operating results for the entire fiscal year will likely
be adversely affected. We expect our revenues and operating results will
continue to reflect these seasonal factors.
Page 9
<PAGE>
IF WE DO NOT IMPROVE OUR SOFTWARE TOOLS TO PRODUCE NEW, MORE ENHANCED MULTIPATH
MOVIES, OUR REVENUES 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. If we cannot
develop improvements to these software tools, our Multipath Movies may not
obtain or maintain market acceptance and our revenues will be adversely
affected.
ERRORS OR DEFECTS IN OUR SOFTWARE TOOLS AND PRODUCTS MAY CAUSE A LOSS OF MARKET
ACCEPTANCE AND RESULT IN FEWER SALES OF OUR PRODUCTS.
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 some 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.
TO DEVELOP PRODUCTS THAT CONSUMERS DESIRE, WE MUST MAKE SUBSTANTIAL INVESTMENTS
IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID TECHNOLOGICAL
DEVELOPMENTS THAT ARE TYPICAL IN OUR INDUSTRY.
The entertainment software market and the PC industry are subject to rapid
technological developments . To develop products that consumers desire, we must
continually improve and enhance our existing products and technologies and
develop new products and technologies that incorporate these technological
developments. We cannot be certain that we will have the financial and technical
resources available to make these improvements. We must make these improvements
while remaining competitive in terms of performance and price. This will require
us to make substantial investments in research and development, often times well
in advance of the widespread release of the products in the market and any
revenues these products may generate.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM UNAUTHORIZED USE
BY OTHERS, WHICH COULD INCREASE OUR LITIGATION COSTS AND
ADVERSELY AFFECT OUR SALES.
Our ability to compete with other entertainment software companies depends
in part upon our proprietary technology. Unauthorized use by others of our
proprietary technology could result in an increase in competing products and a
reduction in our sales. 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 these
precautions will provide meaningful protection from unauthorized use by others.
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.
IF OUR PRODUCTS INFRINGE ANY PROPRIETARY RIGHTS OF OTHERS, A LAWSUIT MAY BE
BROUGHT AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE SELLING OUR PRODUCTS.
We believe that our products, including our software tools, do not
infringe any valid existing proprietary rights of third parties. Any
infringement claims, however, 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, 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.
Page 10
<PAGE>
OUR STOCK PRICE AND TRADING VOLUME FLUCTUATE WIDELY AND MAY CONTINUE TO DO SO IN
THE FUTURE. AS A RESULT, WE MAY EXPERIENCE SIGNIFICANT DECLINES IN OUR STOCK
PRICE.
The market price and trading volume of our common stock, which trades on
the American Stock Exchange, has been subject to substantial volatility, which
is likely to continue. This volatility may result in significant declines in the
price of our common stock. Factors that may cause these fluctuations include:
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 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. The
market price and trading volume of our stock may be subject to these
fluctuations.
IF OUR STOCK DOES NOT SUSTAIN A SIGNIFICANT TRADING VOLUME, STOCKHOLDERS MAY BE
UNABLE TO SELL LARGE POSITIONS IN OUR COMMON STOCK.
In the past, our common stock has not experienced significant trading
volume on a consistent basis and has not been actively followed by stock market
analysts. The average trading volume in our common stock may not increase or
sustain its current levels. As a result, we cannot be certain that an adequate
trading market will exist to permit stockholders to sell large positions in our
common stock.
BECAUSE OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR COMMON
STOCK, THEY MAY BE ABLE TO INFLUENCE STOCKHOLDER VOTES AND DISCOURAGE OTHERS
FROM ATTEMPTING TO ACQUIRE US.
As of July 22, 1999, our officers and directors owned, in total,
approximately 17.8% 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 THAT MAY DEPRESS THE PRICE OF
OUR COMMON STOCK.
Our adoption of a stockholders' rights plan, our ability to issue up to
700,000 shares of preferred stock and some provisions of our certificate of
incorporation and bylaws and of Delaware law could make it more difficult for a
third party to make an unsolicited takeover attempt of us. These anti-takeover
measures may depress the price of our common stock by making third parties less
able to acquire us by offering to purchase shares of our stock at a premium to
its market price. Our board of directors can issue up to 700,000 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. 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.
OUR SALE OF SHARES TO ST. ANNES 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 St. Annes
Investments, Ltd. that allows us to sell to St. Annes up to $6,000,000 worth of
shares of our common stock at a discount to the then-prevailing market price of
our common stock. If the market price is $4.00 or less, St. Annes will receive a
discount equal to 14% of the market price,
Page 11
<PAGE>
and if the market price is greater than $4.00, St. Annes will receive a discount
equal to 12% of the market price. Accordingly, the issuance of shares under the
securities purchase agreement 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.
The table below sets forth the number of shares and the percentages of our
common stock that St. Annes would own if we elected to sell the entire
$6,000,000 worth of stock under the purchase agreement. The share amounts and
the percentages are based on our closing share price of $3.4375 on September 8,
1999, and on assumed closing share prices of $2.58, $1.72 and $0.86, which
prices represent a 25%, 50% and 75% decline, respectively, in our September 8,
1999 closing share price. The percentages are also based on 11,915,999 shares of
our common stock outstanding on September 8, 1999.
<TABLE>
<CAPTION>
PERCENTAGE DECLINE IN PERCENTAGE OF
SEPTEMBER 8, 1999 CLOSING ASSUMED SHARES OF COMMON OUTSTANDING
PRICE CLOSING PRICE STOCK COMMON STOCK
--------------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C>
-- $ 3.44 2,028,123 14.5%
25% $ 2.58 2,704,164 18.5%
50% $ 1.72 4,056,247 25.4%
75% $ 0.86 8,112,493 40.5%
</TABLE>
WE MAY NOT BE ABLE TO SELL THE ENTIRE $6,000,000 WORTH OF SHARES OF OUR COMMON
STOCK TO ST. ANNES WITHOUT OBTAINING STOCKHOLDER APPROVAL, WHICH MAY REQUIRE
THAT WE SEEK ALTERNATIVE SOURCES OF FINANCING THAT MAY NOT BE AVAILABLE ON
TERMS FAVORABLE TO US.
Under the rules of the American Stock Exchange, we cannot sell to St.
Annes under our securities purchase agreement more than 1,881,800 shares of
common stock unless we obtain stockholder approval of the issuance of shares in
excess of this amount. Accordingly, if the average price at which we sell our
stock to St. Annes under the securities purchase agreement is less than $3.19
per share, we will not be able to sell the entire $6,000,000 worth of shares of
our common stock to St. Annes without first obtaining stockholder approval. If
we are unable to obtain stockholder approval, or if we choose not to pursue
stockholder approval, we may be required to seek alternative sources of
financing to fund our working capital requirements. We cannot guarantee that
additional financing will be available or that, if available, it can be obtained
on terms favorable to us and our stockholders.
OUR SALE OF SHARES TO ROSEWORTH UPON CONVERSION OF A DEBENTURE AT A PRICE BELOW
THE MARKET PRICE OF OUR COMMON STOCK WILL HAVE A DILUTIVE IMPACT ON OUR
STOCKHOLDERS.
We have issued to Roseworth a $1,000,000 debenture that Roseworth may
convert into common stock at a discount to the then-prevailing market price of
our common stock. As of the date of this prospectus, Roseworth has converted
$750,000 of the debenture into 205,522 shares of common stock, and may convert
the remaining $250,000 of principal and all accrued interest into shares of
common stock upon notice to us. Accordingly, the issuance of shares upon
conversion of the remaining principal and interest under the debenture will have
a dilutive impact on our stockholders. Discounted sales resulting from the
conversion of the debenture could have an immediate adverse effect on the market
price of the common stock.
DECREASES IN THE PRICE OF OUR COMMON STOCK COULD INCREASE SHORT SALES OF OUR
COMMON STOCK BY THIRD PARTIES, WHICH COULD RESULT IN FURTHER REDUCTIONS IN THE
PRICE OF OUR COMMON STOCK.
Our sales of common stock to St. Annes and Roseworth at a discount to the
market price of our common stock could result in reductions in the market price
of our common stock. Downward pressure on the price of our common stock could
encourage short sales of the stock by third parties. Material amounts of short
selling could place further downward pressure on the market price of the common
stock. A short sale is a sale of stock that is not owned by the seller. The
seller borrows the stock for delivery at the time of the short sale, and buys
back the stock when it is necessary to return the borrowed shares. If the price
of the common stock declines between the time the seller sells the stock and the
time the seller subsequently repurchases the common stock, then the seller sold
the shares for a higher price then he purchased the shares and may realize a
profit.
Page 12
<PAGE>
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains statements that constitute forward-looking
statements within the meaning of Section 21E of the Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe" and similar expressions and variations of
these words are intended to identify forward-looking statements. These forward
looking statements appear in a number of places in this prospectus and include
statements regarding:
o our intent or current expectations regarding our strategies, plans
and objectives;
o our product release schedules;
o our ability to design, develop, manufacture and market products;
o our intentions and strategies about The Auction Channel; and
o the ability of our products to achieve or maintain commercial
acceptance.
Any forward-looking statements are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially from
those projected in this prospectus, for the reasons, among others, described in
the Risk Factors section beginning on page 6. You should read the Risk Factors
section carefully, and should not place undue reliance on any forward-looking
statements, which speak only as of the date of this prospectus. We undertake no
obligation to release publicly any updated information about forward-looking
statements to reflect events or circumstances occurring after the date of this
prospectus or to reflect the occurrence of unanticipated events.
Page 13
<PAGE>
THE SECURITIES PURCHASE AGREEMENT
On March 29, 1999, we entered into the securities purchase agreement with
St. Annes pursuant to which, subject to the satisfaction of conditions, we may
issue and sell, from time to time, up to an aggregate of $6,000,000 of our
common stock.
For a period of up to 36 months after the registration statement that
contains this prospectus is declared effective by the Securities and Exchange
Commission, we may from time to time, in our sole discretion, sell (or put)
shares of our common stock to St. Annes. The price that St. Annes will pay for
our stock will be at a discount to the market price of our common stock on the
date we deliver a put notice to St. Annes, as follows:
o If the market price is $4.00 or less, then the price for the shares
shall be 86% of the market price; and
o If the market price is greater than $4.00, then the price shall be
88% of the market price.
The market price of our common stock, for purposes of calculating the
purchase price under the securities purchase agreement, is the lowest volume
adjusted price during the ten trading days immediately preceding the date that
we deliver a put notice to St. Annes. The volume adjusted price on a trading day
is equal to the total dollar value of all shares of our common stock traded on
the American Stock Exchange on the trading day, divided by the total volume of
our common stock traded on the American Stock Exchange on the trading day.
Some conditions must be satisfied before we can put shares to St. Annes,
including, but not limited to, the following:
o The registration statement of which this prospectus forms a part
must be effective;
o The market price of our common stock may not be less than $1.00 on
the date we deliver a put notice to St. Annes;
o We must sell at least $100,000 of our common stock to St. Annes upon
each put of shares;
o The closing date with respect to any put of shares shall not occur
within 15 business days of any other put closing date;
o Our representations and warranties to St. Annes set forth in the
securities purchase agreement must be accurate as of the date of
each put and we must not be in breach of any of our obligations
under the securities purchase agreement;
o The number of shares of common stock that we put, when added to all
other shares of common stock previously acquired by St. Annes under
the securities purchase agreement and still owned by St. Annes at
the time of the put, shall not exceed 9.99% of our common stock
outstanding on the date of the put notice; and
o The aggregate number of shares of common stock that we may issue
and sell to St. Annes under the securities purchase agreement may
not exceed 1,881,800 shares of common stock unless we obtain
stockholder approval of the issuance of shares in excess of this
amount.
We have agreed to put to St. Annes at least $1,000,000 of our common stock
during the 36 month term of the securities purchase agreement.
We have agreed to register the resale by St. Annes of the shares of common
stock we put to St. Annes under the securities purchase agreement. We have filed
a registration statement, of which this prospectus forms a part, to satisfy our
registration obligation. If the 2,000,000 shares of common stock included in the
registration statement are less than the total number of shares we actually put
to St. Annes under the securities purchase agreement, we will file another
registration statement to include these additional shares. We have agreed to
prepare and file amendments and supplements to the registration statement as
necessary to keep it effective as long as registrable securities are
outstanding. We have agreed to bear some expenses, other than any broker
discounts and commissions of the selling stockholders, in connection with the
registration statement.
St. Annes and its representatives have the right to review the
registration statement and our records and properties to obtain information
about us and the accuracy of the registration statement and this prospectus.
We have agreed to pay to Trinity Capital Advisors, as compensation for
services rendered in connection with the securities purchase agreement, a cash
fee equal to 3% of the purchase price paid to us by St. Annes at any put
closing, and
Page 14
<PAGE>
issue to Trinity shares of common stock having an aggregate market
price equal to 2% of the purchase price paid to us by St. Annes at any put
closing.
The securities purchase agreement will automatically terminate on the
earliest of:
o the date on which St. Annes has purchased an aggregate of $6,000,000
of our common stock under the securities purchase agreement;
o 36 months after the effective date of the initial registration
statement filed under the securities purchase agreement; or
o June 29, 2002.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock offered by the selling stockholders under this prospectus. We will,
however, receive from St. Annes the purchase price for the shares of common
stock that we sell to St. Annes under the securities purchase agreement. If the
market price of our common stock, as determined under the securities purchase
agreement, is $4.00 or less, the purchase price is equal to 86% of the market
price. If the market price of our common stock is greater than $4.00, the
purchase price is equal to 88% of the market price. We may receive from $0 to
$6,000,000 from St. Annes, depending upon how many shares we sell under the
securities purchase agreement. See "Securities Purchase Agreement." We intend to
use all proceeds from the sale of common stock under the securities purchase
agreement for working capital and general corporate purposes.
DIVIDEND POLICY
We have never paid any dividends on our common stock. We intend to retain
earnings for use in our business and do not intend to pay any dividends on our
common stock in the foreseeable future.
DETERMINATION OF THE OFFERING PRICE
The selling stockholders may from time to time sell all or a portion of
the shares of common stock offered by them under this prospectus in routine
brokerage transactions on the American Stock Exchange, in negotiated
transactions, or otherwise, at fixed prices which may be changed, at market
prices prevailing at the time of sale, at prices related to the stock market's
closing prices or at negotiated prices. The selling stockholders also may make
private sales directly or through brokers. Because of this, the offering price
cannot be determined as of the date of this prospectus. See "Plan of
Distribution."
Page 15
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock commenced trading on the American Stock Exchange on November
22, 1996 under the symbol "BDE." Prior to that time, there was no public market
for our common stock. The following table sets forth, for the periods indicated,
the high and low prices for our common stock as reported by the American Stock
Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter................................................. $ 6.00 $ 3.88
Second Quarter................................................ 8.38 4.50
Third Quarter................................................. 9.88 6.25
Fourth Quarter................................................ 9.38 4.00
YEAR ENDED DECEMBER 31, 1998
First Quarter................................................. $ 6.38 $ 2.13
Second Quarter .............................................. 4.63 2.06
Third Quarter................................................. 3.69 1.25
Fourth Quarter................................................ 3.50 1.06
YEAR ENDED DECEMBER 31, 1999
First Quarter................................................. $ 5.25 $ 1.75
Second Quarter................................................ 7.94 2.50
Third Quarter (through September 8, 1999)..................... 6.13 2.88
</TABLE>
On September 8, 1999, the closing sale price of the common stock as
reported on the American Stock Exchange was $3.44 per share. As of September 8,
1999, there were 67 holders of record of our common stock.
CAPITALIZATION
The following table sets forth our actual capitalization as of June 30,
1999 and our pro forma capitalization as of June 30, 1999 giving effect to our
acquisition of Trojan Television Limited in July 1999 as if it had occurred on
June 30, 1999. This table should be read in conjunction with our financial
statements, the notes to our financial statements, our unaudited pro forma
combined financial statements and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. In addition to approximately 756,754 shares of common stock issued
or to be issued in connection with our acquisition of Trojan, the issuance of
which is reflected in the pro forma column below, the number of issued and
outstanding shares in the following table excludes the following shares that
could further dilute your investment:
o shares of common stock issuable to the selling stockholders under the
securities purchase agreement;
o 2,491,875 shares of common stock issuable upon exercise of options
granted or available for future grant under our 1996 Stock Option
Plan;
o 715,040 shares of common stock issuable upon exercise of outstanding
warrants; and
o 159,718 shares of common stock issued between July 1, 1999 and
September 8, 1999.
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------
(unaudited, in thousands)
ACTUAL PRO FORMA
------------ -----------
Stockholders' equity:
<S> <C> <C>
Preferred Stock, $0.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding.............................. $ -- $ --
Common Stock, $0.001 par value; 30,000,000 shares authorized;
11,756,281 (actual) and 12,513,035 (pro forma) shares issued
and outstanding 12 13
Additional paid-in capital......................................... 26,494 33,161
Accumulated deficit................................................ (19,798) (19,798)
Accumulated other comprehensive income (loss)...................... (97) (97)
----------- ----------
Total stockholders' equity............................................. 6,611 12,279
----------- ----------
Total capitalization .............................................. $ 6,611 $ 13,279
=========== ==========
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of our business for
the periods indicated. The statement of operations data with respect to the
years ended December 31, 1997 and 1998, and the balance sheet data as of
December 31, 1997 and 1998 are derived from our audited consolidated financial
statements and the notes to these financial statements appearing elsewhere in
this prospectus. The statement of operations data for the six months ended June
30, 1998 and 1999, and the balance sheet data as of June 30, 1999 are derived
from our unaudited consolidated financial statements appearing elsewhere in this
prospectus. The unaudited pro forma statement of operations data for the year
ended December 31, 1998 and the six months ended June 30, 1999 reflects our
acquisition of Trojan Television Limited in July 1999 as if the acquisition had
occurred on January 1, 1998, and the unaudited pro forma balance sheet data as
of June 30, 1999 reflects our acquisition of Trojan as if the acquisition had
occurred on June 30, 1999. The following data should be read along with our
financial statements, the notes to our financial statements, our unaudited pro
forma combined financial statements and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- ---------------------------------
1997 1998 1998 1999
--------------- ---------------- ---------------- ----------------
(unaudited)
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Revenues:
<S> <C> <C> <C> <C>
Software sales................................. $ 2,246 $ 221 $ 32 $ 233
Development fees............................... 235 210 -- 101
--------------- ---------------- ---------------- ----------------
Total revenues............................ 2,481 431 32 334
Cost of revenues.................................. 44 1,383 346 349
--------------- ---------------- ---------------- ----------------
Gross profit (loss)............................... 2,437 (952) (314) (15)
Operating expenses:
Sales and marketing............................ 1,090 1,785 991 479
General and administrative..................... 2,217 2,936 1,244 1,536
Research and development....................... 1,709 3,798 1,652 1,883
Depreciation................................... 214 390 132 270
--------------- ---------------- ---------------- ----------------
Total operating expenses.................. 5,230 8,909 4,019 4,168
--------------- ---------------- ---------------- ----------------
Income (loss) from operations..................... (2,793) (9,861) (4,333) (4,183)
Other income (expense), net........................ 488 436 283 71
--------------- ---------------- ---------------- ----------------
Income (loss) before income taxes................. (2,305) (9,425) (4,050) (4,112)
Income taxes...................................... -- -- -- --
--------------- ---------------- ---------------- ----------------
Net income (loss)................................. $ (2,305) $ (9,425) $ (4,050) $ (4,112)
=============== ================ ================ ================
Other comprehensive income:
Foreign currency translation adjustment
(net of tax effects of $ 0).................... (168) 72 4 26
--------------- ---------------- ---------------- ----------------
Comprehensive income (loss)....................... $ (2,473) $ (9,353) $ (4,046) $ (4,086)
=============== ================ ================ ================
Basic and diluted net income (loss) per share..... $ (0.31) $ (1.00) $ (0.43) $ (0.41)
=============== ================ ================ ================
Weighted average number of shares used
in computing basic and diluted net income
(loss) per share............................... 7,384 9,403 9,403 10,131
=============== ================ ================ ================
Pro forma net income (loss) (unaudited)........... $ (12,792) $ (6,316)
================ ================
Pro forma basic and diluted net income
(loss) per share (unaudited)................... $ (1.26) $ (0.58)
================ ================
Weighted average number of shares used in
computing pro forma basic and diluted net
income (loss) per share (unaudited)............ 10,160 10,888
================ ================
</TABLE>
Page 17
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1999
---------------------------- ---------------------------
1997 1998 ACTUAL PRO FORMA
-------------- ------------- ------------- -------------
(unaudited)
(in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Cash and cash equivalents.................................. $ 12,338 $ 3,187 $ 4,587 $ 4,899
Total current assets....................................... 14,722 5,636 7,322 7,724
Total assets............................................... 16,843 7,453 8,734 17,211
Total long-term debt....................................... -- 343 407 407
Total stockholders' equity................................. 14,822 5,558 6,611 13,279
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT AND THE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE
CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS
OF BRILLIANT DIGITAL ENTERTAINMENT FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998
AND DECEMBER 31, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30,
1998. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS
DESCRIBED IN "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Brilliant is a production and development studio that uses software to
create digital entertainment for distribution over the Internet, on CD-ROM and
DVD and, in the future, as television programming and for home video. Through
our subsidiary, The Auction Channel, we also provide services to auction houses
that enable participants to watch auction events on television and bid using
their telephone or the Internet. We are headquartered in the United States and
were incorporated in July 1996. Initially, 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. Our annual
and quarterly revenue also will depend upon the use by auction houses of our
auction-related products and services. The revenues derived from the production
and distribution of our Multipath Movies will depend primarily on the acceptance
by the market of the Multipath Movie concept and the underlying content of the
Multipath Movie, neither of which can be predicted nor necessarily bear a direct
correlation to the production or distribution costs incurred. See "Risk
Factors"- We will not be able to sell our Multipath Movies if they do not
achieve market acceptance." 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.
OUR ACQUISITION OF THE AUCTION CHANNEL
On July 1, 1999, we acquired Trojan Television Limited. Trojan Television
Limited is a London-based company doing business as The Auction Channel. Founded
in 1996, The Auction Channel integrates live satellite, cable TV and Web
broadcasts of auction events conducted by auction houses, allowing for
participants to watch events on television and use the Internet or their
telephone to bid simultaneously with people actually present at the auction
house. The Auction Channel has entered into agreements to provide its services
with major auction houses like Christie's South Kensington, Phillips, Bonhams,
Allsop & Co., Brooks and Antiquorum.
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. Progress is being made in the retail channel through
our relationship with GT Interactive, who is representing selected titles sold
in jewel case CD-ROM formats. Certain titles are now available in stores such as
Wal-Mart, Target and other mass merchant retailers. In addition to distribution
through GT Interactive, we have entered into a distribution agreement with The
Learning Company to sell 4 boxed titles, including Superman and Gravity Angels,
into computer retail stores and to expand distribution based upon the success of
the initial title launch. There are, however, numerous obstacles and
uncertainties involved in developing a retail distribution channel. In the past,
we have experienced significant delays in our introduction of titles in the
retail channel. For instance, delays
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in duplication, packaging and distribution caused our first movies to begin
arriving at retailers at the end of December 1997, after the holiday selling
season. Similarly, we experienced distribution delays in the fourth quarter of
1998 that caused our products to reach retail shelves only at the end of
December. We cannot guarantee that similar delays will not occur in the future.
However, since December 1998, we have received additional orders for XENA and
ACE VENTURA.
DVD MARKET
We intend to release Multipath Movie titles to the DVD market for
distribution commencing in the second half of 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 , Gamestorm and Fox Kids. 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 the on-line 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 on-line marketplace.
B3D - 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 - 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 - Max is 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 - 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 into release to the market.
Animation content generated using B3D - 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 a suggested
retail price of $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
In 1997, we recognized revenue and recorded in accounts receivable $2.0
million due from Packard Bell NEC in connection with a distribution deal.
Management is aware that Packard Bell NEC has significantly delayed distribution
our titles bundled with Packard Bell NEC's computers. In addition to the delay,
Packard Bell NEC has bundled our 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 its distribution agreement with us,
specifically Packard Bell NEC's commitment to ship our software with up to 6
million computers with at least 2 million of such computers being shipped within
12 months of the commencement of the shipment, subject to an extension not to
exceed 6 months. The 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 our products. 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 our
products. 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 and second quarter of 1999, we have begun reducing the
number of employees working in our production studio and research and
development facilities. Staff numbers are based upon production demands at any
point in time.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO SIX MONTHS ENDED JUNE 30,
1998
REVENUES. Revenues from the sale of Multipath Movies through retail
outlets are recognized when the product is shipped. Product returns or price
protection concessions that exceed our reserves could materially adversely
affect our business and operating results and could increase the magnitude of
quarterly fluctuations in our operating and financial results. See "Risk Factors
- -- Product returns that exceed our anticipated reserves could result in worse
than expected operating results."
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 they exceed any associated non-refundable royalty advance.
Royalties related to non-refundable advances are recognized when the CD-ROM
master is delivered to the licensees. Royalty revenues in excess of
non-refundable advances are recognized upon notification by the distributor that
a royalty has been earned by us. Development fees are paid by customers in
exchange for our development of software packages in accordance with customer
specifications. The software development agreements generally specify certain
"milestones" which must be achieved throughout the development process. As these
milestones are achieved, we recognize the portion of the development fee
allocated to each milestone. Software sales revenues are recognized upon
shipment of product.
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<PAGE>
Revenues increased from $32,000 for the six months ended June 30, 1998 to
$334,000 for the six months ended June 30, 1999. This represents an increase of
$302,000. Revenues for the six months ended June 30, 1999 consist of $80,000
earned under a Multipath Movie technology and content development agreement ,
Multipath Movie retail sales of $233,000 and $21,000 from services related to
the capture of physical motion used in the creation of animated content.
Revenues for six months ended June 30, 1998 were primarily the result of $32,000
in Multipath Movie retail sales.
COST OF REVENUES. Cost of revenues consists primarily of the amortization
and write-down of capitalized movie software costs for previously released
titles, royalties to third parties and the direct costs and manufacturing
overhead required to reproduce and package software products. Cost of revenues
increased from $346,000 for the six months ended June 30, 1998 to $349,000 for
the six months ended June 30, 1999. The costs of revenues for the first six
months of 1998 were primarily a result of the amortization of $161,000 and a
write-down of $145,000 of capitalized movie software costs for previously
released titles. Costs of revenues for the first six months of 1999 include
direct costs, royalties, and manufacturing overhead of $91,000 and amortization
of capitalized movie software costs of $258,000. 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").
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 $991,000 for the six months ended June 30,
1998 to $479,000 for the six months ended June 30, 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 increased 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 1999. The marketing
expense for the six months ended June 30, 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 $1,244,000 for the six months ended June 30, 1998 to $1,536,000
for the six months ended June 30, 1999. This represents an increase of $292,000
that is primarily attributable to increased professional fees of $145,000,
increased recruiting costs of $50,000, increased public relations costs of
$40,000 and increased consulting costs of $73,000.
RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and benefits of personnel conducting research and development of
software products. Research and development costs also include costs associated
with creating our traditional CD-ROM software tools and the software tools used
to develop Multipath Movies. Research and development expenses increased from
$1,652,000 for the six months ended June 30, 1998 to $1,883,000 for the six
months ended June 30, 1999. In accordance with SFAS No. 86, the results of
operations for the six months ended June 30, 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
after the first quarter of 1998 are intended to be viewed on our new Internet
Digital Projector, which we released in the fourth quarter of 1998. To the
extent capitalized Multipath Movie software costs are attributable to titles
that we have begun to ship, these costs are subject to amortization. We have
written off amounts incurred subsequent to the first quarter of 1998 in the
development and production of Multipath Movies designed to be viewed on the new
Digital Projector. As the technology on which our product is designed to operate
is continuously changing, a reserve against capitalized costs is necessary until
shortly before the release of the title. Therefore, no additional movie
development costs are anticipated to be capitalized in the future.
We are focusing 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.
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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 $132,000 for the six months ended June 30, 1998 to $270,000 for
the six months ended June 30, 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 Australia'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 $127,000 for the six months ended June 30, 1999. Net interest income
decreased from $256,000 for the six months ended June 30, 1998 to $4,000 for the
six months ended June 30, 1999. This decrease is due to the lower cash balances
during 1999 and to interest expense incurred in association with the 4%
convertible debenture we issued to Roseworth Group, Ltd. in April 1999.
FISCAL YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997
REVENUES. Revenues decreased from $2,481,000 for the year ended December
31, 1997 to $431,000 for the year ended December 31, 1998. This represents a
decrease of $2,050,000. Revenues for year ended December 31, 1998 reflect
$210,000 earned under a Multipath Movie technology and content development
agreement and Multipath Movie retail sales of $221,000. Revenues for the prior
year were primarily the result of $1,973,000 in revenue from a software bundling
agreement with Packard Bell NEC. See Note 2 of Notes to Consolidated Financial
Statements.
During 1998, users were not equipped to purchase on-line episodes of our
Multipath Movies over the Internet as early as expected. This is due, in part,
to delays in the shipment by Packard Bell NEC of personal computers bundled with
our products, and the decision by Packard Bell NEC to include our products only
on middle- and high-end computers. This has had a significant negative impact on
our 1998 revenues and earnings and is expected to have a similar impact in 1999.
We do not believe Packard Bell NEC will ship the required number of units under
our agreement. See "Business -- Our Multipath Movie Business -- Strategic,
Content and Distribution Relationships -- Packard Bell NEC."
COST OF REVENUES. Cost of revenues increased from $44,000 for the year
ended December 31, 1997 to $1,383,000 for the year ended December 31, 1998. This
represents an increase of $1,339,000. Cost of revenues in 1997 include costs
associated with software sales. The increase in costs of revenues in the 1998
period is primarily a result of amortization ($312,000) and write down
($834,000) of capitalized movie software costs for previously released titles.
SALES AND MARKETING. Sales and marketing expenses increased from
$1,090,000 for the year ended December 31, 1997 to $1,785,000 for the year ended
December 31, 1998. The increase is primarily attributable to increased costs
associated with our promotional efforts. Sales and marketing expenses are
expected to increase in future periods due to the expansion of our sales force
and marketing efforts. The increase in marketing expense for the fourth quarter
of 1998 was due to implementation of our online marketing program.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $2,217,000 for the year ended December 31, 1997 to $2,936,000 for the year
ended December 31, 1998. The increase is attributable to increased employment
costs associated with the development of internal management and the addition of
personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$1,709,000 for the year ended December 31, 1997 to $3,798,000 for the year ended
December 31, 1998. In accordance with SFAS No. 86, the results of operations for
the year ended December 31, 1998 include Multipath Movie software development
costs and research and development expenses.
DEPRECIATION. Depreciation expense increased from $214,000 for the year
ended December 31, 1997 to $390,000 for the year ended December 31, 1998. The
increase is attributable to the increase in depreciable assets resulting from
the growth of our operations, primarily from production and general overhead
activities.
OTHER INCOME AND EXPENSE. Other income includes trade grant revenue of
$148,000 and $73,000 for the years ended December 31, 1997 and December 31,
1998, respectively. Interest income increased from $313,000 for the year ended
December 31, 1997 to $399,000 for the year ended December 31, 1998. This
increase is due to the higher cash balances as a result of our public offering
of common stock in December 1997.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, our principal source of liquidity was approximately
$4,587,000 in cash, which we primarily raised through debt and equity financing.
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. In connection with the loan, we
paid to Roseworth a fee of $30,000 and issued to Roseworth 5,883 shares of our
common stock. On May 13, 1999, Roseworth converted $250,000 of the debenture
into 76,489 shares of common stock at $3.26 per share. On May 24, 1999,
Roseworth converted $500,000 of the debenture into 129,033 shares of common
stock at $3.87 per share. At June 30, 1999, $250,000 in principal under the
debenture remained outstanding.
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.
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.
Net cash used in operating activities during the six months ended June 30,
1999 was primarily attributable to a net loss of $4,112,000. Net cash used in
investing activities in the six months ended June 30, 1999 was due primarily to
the purchase of computer equipment. Cash used in financing activities for the
three months ended June 30, 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
above.
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
June 30, 1999 to make minimum payments of $107,000 under various licensing
agreements. At June 30, 1999, we had rental commitments for our offices and
production facilities of $703,000 and a promissory note for the financing of
fixed assets in the amount of $111,000 payable over the next 5 years.
We believe that our existing funds and proceeds from the securities
purchase agreement with St. Annes, the convertible debenture and the private
placement will be sufficient to fund our ongoing working capital requirements .
See "Risk Factors - If we are unable to raise additional funds, we may be
required to defer completion of Multipath Movie titles and reduce overhead
significantly."
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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 have tested our product on the website and have not experienced any Year 2000
problems. We are researching the measures our customers and vendors have taken
to address the Year 2000 problem and how any Year 2000 problems experienced by
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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BUSINESS
OUR COMPANY
We are a production and development studio that uses software to create
digital entertainment for distribution over the Internet, on CD-ROM and DVD and,
in the future, as television programming and for home video. Using our
proprietary software tools, we produce Multipath(TM) Movies. Multipath Movies
are three-dimensional digitally animated stories each with up to hundreds of
plot alternatives, or paths, leading to multiple distinct conclusions that are
influenced by the user. Our Multipath Movies feature seamless interactivity
ensuring that the plot and graphical presentation of the story are uninterrupted
by the user's decisions.
We have recently expanded our business to offer Internet- and
television-based auction services through our subsidiary, Trojan Television
Limited, which we acquired in July 1999. Trojan Television Limited is a
London-based company doing business as The Auction Channel. Founded in 1996, The
Auction Channel integrates live satellite, cable TV and World Wide Web
broadcasts of auction events conducted by auction houses, allowing for
participants to watch auction events on television or the Internet and use the
Internet or their telephone to bid on items presented at auction. The Auction
Channel is developing a Web site at www.theauctionchannel.com to be a principal
auction site where visitors will identify, select, attend and participate in
auction events. The Auction Channel has entered into agreements to provide its
services with major auction houses like Christie's South Kensington, Phillips,
Bonhams, Allsop & Co., Brooks and Antiquorum. Our acquisition of The Auction
Channel furthers our business plan of offering products and services
specifically for the converging media of Internet and television.
OUR MULTIPATH MOVIE BUSINESS
THE DIGITAL ENTERTAINMENT MARKET
Digital entertainment is created and stored and can be distributed
electronically. Examples of current digital entertainment products include
high-end computer games, virtual reality attractions and computer-animated
television programs and feature films. Traditionally, digital entertainment has
been distributed on CD-ROM and game console cartridges. Leading edge digital
entertainment products are now also being released online to capitalize on the
current interest in the Internet and the World Wide Web. In addition, digital
entertainment products have recently been released as broadcast television and
cable programming, home videos, and even full-length feature movies, although on
a limited basis.
THE MULTIPATH MOVIE
Multipath Movies are unlike any other entertainment product known to us.
In contrast to existing compressed video interactive movies, the action of a
Multipath Movie does not stop while a user makes decisions. A user's decisions
are implemented seamlessly because our proprietary Digital Projector has the
technical ability to form and manipulate streams of complex three-dimensional
animated images in real time, sequentially, for the duration of the movie. A
Multipath Movie provides the user with up to hundreds of plot branches leading
to a number of different conclusions. The opening scenes of each Multipath Movie
typically require limited interaction, which is intended to introduce users to
the story in a manner that builds user empathy with the lead characters and
teaches the user how to interact with a Multipath Movie. Further into a
Multipath Movie, the level of prompted interactivity may increase. Users
interact with Multipath Movies by responding with a mouse, keyboard or remote
control device to decision points which affect the plot of a Multipath Movie.
Decision points are identified by icons appearing at pre-scripted points, where
there is tension between two characters or where characters have differing
opinions about an issue, requiring the viewer to make a supportive selection.
The Multipath Movie allows the user to jump forward or reverse to previously
viewed scenes and, if desired, to select a different decision path. The user can
view the Multipath Movie from the perspective chosen by the director or elect an
almost infinite number of alternative camera positions.
We are targeting a larger market than users of traditional computer games
for our Multipath Movie products. Multipath Movies are approximately 20 to 30
minutes in length so that users can enjoy them within a single sitting. The
content of our Multipath Movies is designed to appeal to a wide variety of
audiences.
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MULTIPATH MOVIE DISTRIBUTION FORMATS
In 1999, we intend to release Multipath Movies in the following formats:
o RETAIL CD-ROM AND DVD TITLEs. We offer Multipath Movies on CD-ROM for
retail distribution. These CD-ROM's contain previews of all previously released
titles that can be unlocked by the user. In addition, we expect to offer
Multipath Movies on DVD for retail distribution in the second half of 1999.
o BUNDLED TITLES WITH ONLINE CAPABILITY. Multipath Movie titles are
bundled on a variety of hardware systems. Typically, only the preview of the
title is offered for viewing by the user without the need to connect to the
Internet. If the user wishes to view the full title, the user can connect to the
Internet and "pay to view" the title on our website at www.multipathmovies.com.
o WEBISODES AND PREVIEWS. Webisodes and previews are offered on our
website at www.multipathmovies.com. Webisodes are serialized episodes that we
offer through subscription. Users receive an e-mail, usually weekly, indicating
the availability of a new webisode. Typically, webisodes are available over a
12-week period. Previews of selected titles are available to users at no charge
on our website.
o TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEo. We are developing
selected Multipath Movie titles in non-interactive format as television
broadcast/cable programming and as home video features. We intend to segment
these Multipath Movies into episodes for sale into the broadcast and cable
series markets. By packaging together multiple episodes, we can create a
season-length series. In January 1999, we entered into an agreement with
Kaleidoscope Media Group for the distribution of GRAVITY ANGELS, a two-hour 3D
animated science fiction thriller, to the broadcast and home video markets.
MULTIPATH MOVIE CONTENT CATEGORIES
We are developing a broad range of Multipath Movie titles designed to
appeal to viewers of varying ages and tastes. Much of the PC-based digital
entertainment developed to date has been designed for the dedicated computer
game player, typically an eight to 21-year-old male with substantial free time
and spending money who appreciates game playing complexities. Our strategy is to
develop and produce Multipath Movie titles based upon various types of
compelling content directed at discrete consumer categories. Because internally
developed titles require significant time and expertise, we place greater
emphasis on licensed content. We currently are developing titles according to
the following categories:
MULTIPATH MOVIE FEATURES. Our first Multipath Movie, CYBERSWINE, was
produced from original scripts developed by us, and is loosely based on an
Australian science fiction comic strip series. We also have developed various
other titles for this category including our original series, GRAVITY ANGELS, as
well as titles based on licensed content including ACE VENTURA, XENA: WARRIOR
PRINCESS and the upcoming SUPERMAN and KISS titles.
CHOOSE YOUR OWN NIGHTMARE SERIES. We are continuing to develop the CHOOSE
YOUR OWN NIGHTMARE series, which is a series of Multipath Movies targeting
children eight to twelve years of age. Initial titles in the series include
NIGHT OF THE WEREWOLF and HALLOWEEN PARTY, and more recent titles include HOW I
BECAME A FREAK, THE EVIL PENPAL, THE CURSE OF THE MUMMY and THE BITE OF THE
VAMPIRE. All of these titles are based upon Bantam Doubleday Dell's popular
children's series, CHOOSE YOUR OWN NIGHTMARE. Each of the books in this series
is written in a branching format, where the reader skips to different pages or
chapters of the book depending upon responses to questions posed in the story.
Because of the branching nature of the series, these stories are ideally suited
to the Multipath Movie format.
MULTIPATH MOVIES FOR KIDS. Multipath Movies for Kids are targeted at
children three to twelve years of age. These titles are specifically designed to
appeal to this age group by including more comic-like characters and engaging
music and sound effects. The first title we developed was QUEST FOR THE WOOLLY
MAMMOTH, followed by THE SUNKEN TREASURE and THE RESCUE, all featuring POPEYE.
INTERNET TICKETING AND E-COMMERCE
We have developed our own proprietary ticketing system to collect revenue
from online users of our products. Our ticketing system is designed for
compatibility with a wide variety of data storage and content billing
arrangements and to allow customers to be billed more easily under a variety of
charging options. Our ticketing system allows a viewer to
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purchase a "Movie Ticket." The ticketing system and our multipath serving
software currently reside on restricted access servers at the facilities of
Worldsite Networks and are maintained, upgraded and queried for reports by us
via remote access. Through the facilities of Worldsite, we:
o receive requests from customers to purchase Movie Tickets;
o receive, process and transmit credit card or other payment
authorizations sufficient to allow us to receive payment of the
price of each Movie Ticket from the customer's credit card
processor;
o deliver Movie Tickets to customers;
o provide Multipath Movie instructions after receipt, verification and
cancellation of the customer's Movie Ticket; and
o collect and process information relating to customers.
THE PRODUCTION OF MULTIPATH MOVIES
The Multipath Movie production process consists of eight phases:
o scripting;
o creative design;
o voice and sound;
o model and world building;
o texturing and lighting;
o blocking/camera editing;
o special effects animation; and
o the generation of rendered output.
The production of a Multipath Movie is very similar to the production of a
traditional film. Just as the traditional film director identifies locations,
builds sets and chooses actors, the digital Multipath Movie director builds
"worlds" and "models." In the same way that traditional filmed entertainment
directors give actors wardrobes and props, the Multipath Movie director
"textures" the models.
The Multipath Movie production process, however, differs from the
traditional movie process in three important ways. First, the traditional
process is substantially more labor intensive, requiring large crews, artisans
and technicians to produce a final product. Once scenes are filmed and edited,
any reshoots require the re-assembling of actors and crews, which is not only
costly but often not feasible. Second, filming and editing in the traditional
film process are two separate functions that cannot be performed simultaneously.
Through digital production, a scene, or group of scenes, can be blocked,
animated and edited at the same time. As a result, the producer can immediately
view the scene and make any necessary changes while avoiding substantial costs
and logistical problems. Finally, the digital Multipath Movie process allows the
producer to easily substitute models and worlds, alter texturing and lighting,
alter the blocking and editing process and alter special effects. By clicking
the mouse, the director/scriptwriter can preview entire scenes, add/delete
characters and plots and automatically change the appearance of a character or
object. Characters and sets are all digitally produced and then animated using
our software tools. Set components such as language on storefronts and vehicles
and personal features such as skin tone and hair color need to be changed only
once to effect the desired change throughout the Multipath Movie.
OUR SOFTWARE TOOLS AND PRODUCTION CAPABILITIES
We have developed five proprietary software tools that enable us to
produce high-quality Multipath Movies.
SCRIPNAV. ScripNav was developed specifically for the writing of complex
Multipath Movie scripts. A scriptwriter will use ScripNav to compose, edit and
finalize a script using a commercially available word processing package. Then,
the scriptwriter will insert various subplots into scenes in order to adapt the
script to the Multipath Movie format. The alternative subplots, or paths, are
based upon different temperaments of the lead character. For example, if the
character is angry, the character will approach the other characters and the
events in the scene in a much more aggressive and hostile manner, which will, in
turn, send the plot in the appropriate direction. By inserting directional
guides throughout the script, the scriptwriter is able to create a script with
multiple paths and endings based on a character's moods and his or her
interactions with the other characters. Once the script has been developed in
the Multipath Movie style, ScripNav enables the scriptwriter to read, review and
correct the script. ScripNav then corrects for
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syntax and branching errors and allows the scriptwriter to review the multiple
plots produced. Lastly, ScripNav produces statistics that allow the scriptwriter
to identify scenes that either cannot or are unlikely to be reached through the
plot's development and, therefore, should be excluded from the final Multipath
Movie product.
TALKTRACK. TalkTrack automatically synchronizes a character's lip
movements with corresponding dialogue tracks. Talk Track does this by examining
wave files and generating output files that contain references to the
appropriate mouth shapes. The tool samples sounds and matches them to the most
appropriate mouth shape and, in the process, builds a library of correct sound
samples with a direct relationship to a correct mouth shape. As we create more
content, we will build a library of improving sound and mouth shape matches. We
believe that TalkTrack is a more efficient and cost effective way to incorporate
voice into Multipath Movies than other existing sound tools. In addition,
TalkTrack allows for low cost modification of the Multipath Movies to any
language without the awkward appearance of dubbed movies. The sophistication of
this tool was significantly enhanced during 1997 by incorporation of improved
voice sampling techniques and database applications and by incorporation of
licensed lip synchronization technology.
SCUD ENGINE. SCuD Engine is the centerpiece of the Multipath Movie
development and production process. SCuD Engine collects and integrates files
from ScripNav, graphics, sound and TalkTrack tools and makes them available for
positioning and editing. SCuD Engine provides a multi-window editing environment
in which the developer can preview, analyze and edit the final product. When a
previously unedited scene is opened, SCuD Engine retrieves the text for the
scene from the script text file of ScripNav and places the text in on-screen
blocks or slots. The developer can then view the descriptive or dialogue text
while attaching imported graphics, sound and other source material to that line
of script. SCuD Engine also includes a Shot Based Editing System that enables
multiple sets and props to be incorporated into one scene to allow cuts and
edits to take place in line with a traditional film environment. For example, in
CYBERSWINE the specific scene data like sets and props could be loaded into
memory and then shown through different camera positions. In GRAVITY ANGELS,
data from a number of different scenes can be loaded into memory residing in an
"off" state until it needs to be used by the camera or editor at which time it
returns to an "on" state. This substantially improves the visual richness of
scenes.
MR. COPY. Mr. Copy builds, integrates and allocates the final data
files in composing a Multipath Movie to be played on the Digital Projector.
Mr. Copy arranges, assembles and, using licensed technology, compresses and
decompresses thousands of audio and bit map files that are created during the
development of a Multipath Movie in a manner that optimizes the playing of
the title. Mr. Copy compresses files allowing up to five hours of branching
content to be captured in as little as 60 megabytes of disk space, as
compared with conventional technologies which presently would require at
least one gigabyte of storage.
DIGITAL PROJECTOR. Digital Projector contains all the necessary components
to load and play the final Multipath Movie products or any animation files that
have been designed to take advantage of our b3d file format. Digital Projector
is the software engine for any system that is being used to play the Multipath
Movie and is generally the only software tool that we must modify to permit the
Multipath Movie to be adapted to new platforms. We have developed Digital
Projector for IBM-compatible PCs, and may develop Digital Projector for other
platforms.
In addition to our proprietary software tools and engines, we use
commercially available sound and graphics tools in the Multipath Movie
production process. Our proprietary tools used in conjunction with commercially
available tools allow the developer to produce a high-quality Multipath Movie
from the initial scripting stage to the generation of title output.
In 1999, we plan to release our first commercially available tool, B3D -
Minimize for Max. This tool contains a limited sub-set of our multipath
technology and is designed to work with 3D Studio Max animation software. B3D -
Minimize for Max enables animators to convert and compress 3D models and
animation into files for fast download and playback over the Internet with our
Digital Projector software tool, available free of charge from our web site. A
b3d file contains everything needed to view online interactive animation,
including three dimensional graphics, textures, sound and motion. All data is
highly compressed so that it takes less time to download over the Internet. For
example, the well known "Dancing Baby" AVI animation, with sound, is a large
download. "Dancing Baby.b3d" with sound and animation data plays back using the
entire computer screen and is a ten to twenty times smaller download.
Three-dimensional animated content created by B3D Minimize for Max can be saved
in "streaming" or "self-contained" files. Streaming b3d files download only the
texture and geometry assets onto the viewer's desktop, with motion and sound
data streamed over the Internet while the movie is played. Self-contained b3d
files download all components to the client computer, so they can be e-mailed or
embedded in documents.
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In order to further promote our multipath production processes and
technology, we intend to release on a limited basis object code versions of our
software tools to selected entertainment production companies and other
entertainment professionals. We intend to release these software tool sets
through joint venture arrangements in which we can control the proprietary value
of the software tools and their dissemination. As part of these joint venture
arrangements, we will provide technical and production assistance, while
deriving revenue from a retained ownership interest in the titles produced by
the joint venture. The availability and use of our software tools by the
entertainment community at large is expected by us to stimulate the overall
level of interest in the multipath and b3d format and will increase the number
of available properties, thereby helping to establish the format as a de facto
standard. Additionally, we intend to selectively adapt and enhance our tools to
include features suggested by entertainment production professionals. We
currently are in negotiations contemplating these types of joint ventures but do
not guarantee that any of these negotiations will be successfully concluded or
prove to be beneficial to us if consummated.
SALES AND MARKETING OF OUR MULTIPATH MOVIES
Our sales and marketing program is designed to achieve revenue growth,
create and continue capturing new customers and promote the ongoing growth of
the Multipath Movie genre through various distribution methods and promotional
initiatives. To facilitate the broad acceptance of Multipath Movies, we are
pursuing a broad distribution strategy. We are focusing on three primary
channels in building broad distribution of our consumer products.
CD-ROM RETAIL CHANNELS AND DIRECT-TO-RETAIL. We are continuing to
establish a retail distribution program in which Multipath Movies are marketed
through traditional software publishers and distributors nationwide. In
addition, we will seek to substantially broaden distribution in retail and
mass-market outlets, including video retailers, during 1999. We outsource the
logistical, shipping and warehousing needs for our direct-to-retail program.
Progress is being made in the retail channel through our relationship with GT
Interactive, who is representing selected titles on CD-ROM through their
mass-market outlets. Some titles are now available in stores such as Wal-Mart,
Target and other mass merchant retailers. There are, however, numerous obstacles
and uncertainties involved in developing a retail distribution channel. In the
past, we have experienced significant delays in our introduction of titles in
the retail channel. For instance, delays in duplication, packaging and
distribution caused our first Multipath Movies, CYBERSWINE, POPEYE AND THE QUEST
FOR THE WOOLLY MAMMOTH, NIGHT OF THE WEREWOLF and the HALLOWEEN PARTY to begin
arriving at retailers at the end of December 1997, after the holiday selling
season. Similarly, we experienced distribution delays in the fourth quarter of
1998 that caused our products to reach retail shelves only at the end of
December. We cannot guarantee that similar delays will not occur in the future.
Further, we intend to release Multipath Movie titles to the DVD market for
distribution commencing in 1999. We believe that distributing our titles on DVD
will increase the awareness of Multipath Movies in the retail market.
INTERNET AND ONLINE SERVICES. Given the importance of Internet and online
delivery in the overall success of the Multipath Movie format, we believe that
it is critical to make Multipath Movies available to as many Internet and online
service users as possible. Consequently, we seek to bundle our titles through
various OEM manufacturers. Selected Multipath Movie titles may continue to be
distributed to CompuServe users on CD-ROM, which will allow them to purchase
Multipath Movies through our website. In addition, we have participated in
online marketing campaigns with well-known sites such as Disney's and
Microsoft's and have entered into content and distribution arrangements with DVD
Express, Mediadome, Gamestorm, and @Home. Relationships with other on-line
business partners are currently being pursued but cannot be guaranteed.
We have been disappointed and adversely affected by the performance of
Packard Bell NEC of its obligation to ship our products with 6 million Packard
Bell NEC personal computers. Due to delays by Packard Bell NEC in the shipment
of some of our titles beyond their initially anticipated launch dates, and the
decision by Packard Bell NEC to distribute our titles with only its middle- to
high-end computers, we do not believe Packard Bell NEC will ship the required
number of units under our agreement. See " -- Strategic, Content and
Distribution Relationships -- Packard Bell NEC."
We also have experienced delays in the development of compression
technologies designed to reduce the time it takes a user to download from our
website the data necessary to view a Multipath Movie. We believe that the time
required to download Multipath Movies and Webisodes have deterred potential
users of our products and have reduced the effectiveness of our marketing
campaigns with Microsoft and Disney. The development of these technologies
continues to be a significant
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component of our business strategy and a primary focus of our research and
development efforts. We believe that reductions in the time to download
Multipath Movie content over the Internet will lead to an increase in online
sales of our products. However, we are not certain that we will be able to
sufficiently shrink download time to the degree that may be required to satisfy
consumer demands for downloads over non-broadband delivery systems.
TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO. We have begun to
market our Multipath Movies as television programming and home video features.
Due to the episodic and serial nature of our Multipath Movies, our titles are
easily adaptable to the episodic television market. In addition, by grouping
multiple episodes together, we also can produce titles for the cable and direct
to video markets. In January 1999, we entered into an agreement with
Kaleidoscope Media Group for the distribution of GRAVITY Angels, a two-hour 3D
animated science fiction thriller, to the television broadcast/cable and home
video markets. We believe the convergence of television programming and Internet
content can create opportunities for more content to be produced using our
technology.
B3D SALES AND MARKETING. In addition to consumer product sales and
marketing, we are pursuing a strategy designed to encourage active use of our
tools and technology by a broad market of animators who are currently using 3D
Studio Max, an animation and 3D design software package developed and marketed
by Kinetix, a division of Autodesk. Our B3D - Minimize for Max tool is a plug-in
to 3D Studio Max. It enables animators to output their animation to be played
back in real time on the Internet using our Digital Projector playback system.
B3D - Minimize for Max will be distributed by Digimation Inc., an authorized
distributor of 3D Studio Max plug-ins, and by us directly to the market. The
marketing program is designed to encourage content creation and distribution on
the Internet of B3D - Minimize for Max to further encourage use of the Digital
Projector, and through this, to establish broader demand for our other tools and
technology that we intend to continue to release to the market. Animation
content generated using B3D Minimize for Max can be of any type. The tool is not
limited to the production of entertainment content. It can be applied to the
production of artistic renderings, education, architecture, engineering,
e-commerce and other solutions that require animation.
INTERNATIONAL SALES AND MARKETING OF OUR MULTIPATH MOVIES
Our international sales and marketing strategy is managed from the United
States and executed through a combination of domestic and offshore efforts. Our
strategy for international distribution is to utilize exclusive arrangements for
specific countries or dedicated territories with distributors that, in
management's opinion, are best suited to direct the commercial launch and
ongoing marketing support of products in that country or territory. We believe
that we will be able to continue to capitalize on management's extensive network
of international relationships and background in the international distribution
of CD-ROM products. In 1997, we retained a managing director for Europe, based
in the United Kingdom. We are actively exploring distribution, joint venture and
strategic relationship opportunities in Europe. We believe that product
distribution in Europe will require implementation of localized distribution
strategies and methods through established regional distributors. In addition,
we believe that greater emphasis on traditional retail distribution methods will
be required in Europe initially because of lower Internet usage in this region.
We are actively pursuing relationships in the Asia-Pacific region for
distribution of selected Multipath Movie titles. In addition, we are focusing on
the Latin American market and have recently entered into a relationship with a
Panamanian company for the localization and distribution of selected titles in
parts of Latin America.
Given the global nature of the World Wide Web, we believe that
international markets represent a significant incremental opportunity for our
Multipath Movies delivered over the Internet. Utilizing our proprietary
TalkTrack technology, we can deliver Multipath Movies in foreign languages
without significant logistical or cost issues.
STRATEGIC, CONTENT AND DISTRIBUTION RELATIONSHIPS
We have entered into various strategic relationships and other
arrangements to assist in the development, production and distribution of
Multipath Movies. These strategic relationships will be an integral element in
the execution of our business strategy.
@HOME NETWORK. We entered into a content and distribution agreement with
@Home Network, the leading provider of high-speed Internet services via cable
infrastructure, in December 1998. This revenue sharing agreement represents the
first large-scale animated content distribution relationship to tap the rapidly
growing broadband market. Under the agreement, our Multipath Movie titles are
offered to @Home subscribers, enabling them to access our
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interactive digital webisodes via our website at www.multipathmovies.com.
@Home's high-speed network allows subscribers to download our content at faster
speeds than can users connected to the Internet via standard modems. The
agreement also provides @Home with an exclusive worldwide license to scaleable
content that has been designed to take advantage of the capabilities of high
performance Intel Architecture-based microprocessors. Multipath Movie titles and
our Digital Projector technology are prominently featured on the @Home Showcase.
Showcase is a high traffic area on the @Home service that resides only a single
click off the @Home home page.
SLINGSHOT. We entered into an agreement with Slingshot, a special purpose
DVD publisher and distributor, in March 1999. We granted to Slingshot exclusive
worldwide rights to distribute 20 of our Multipath Movies in DVD format. Under
the agreement, Slingshot has made an up-front, non-refundable cash advance and
provided a minimum guarantee in exchange for its exclusive retail DVD
distribution rights. OEM and bundled sales of DVD products will be managed
jointly by us and Slingshot. Slingshot will also use a DVD version of our
Digital Projector to drive traffic to our web site. Initial DVD titles are
expected to be available in retail outlets in the second half of 1999.
KESMAI CORPORATION. We entered into a content marketing and distribution
agreement with Kesmai Corporation, a subsidiary of News Corporation, which is a
world leader in online multiplayer games, in March 1999. Marketing and
distribution will occur though Kesmai's popular online games service, GameStorm.
Through this relationship, GameStorm will offer direct access to our webisodes.
We expect to launch our relationship with a co-branded page on the GameStorm
service.
PACKARD BELL NEC. We entered into an agreement with Packard Bell NEC in
September 1996 for Packard Bell NEC to bundle software for a Multipath Movie
title with up to 80% of the first 7.4 million multimedia equipped personal
computers shipped by Packard Bell NEC in the United States, the United Kingdom,
Australia, New Zealand and South Africa over a three-year period that ends in
December 2000. The bundled software allows the user to access Multipath Movies
from an Internet site established by us. We have the ability to periodically
substitute our most current Multipath Movie titles for the title initially
bundled by Packard Bell NEC. For a period ending two years following the
expiration of the three year shipping period, Packard Bell NEC committed to
provide point of sale retail advertising for the Multipath Movies distributed
through Packard Bell NEC, and to create a prominently displayed icon on the
Packard Bell NEC screen display which, when clicked, will enable the user to
view a preview of the Multipath Movie and purchase the entire Multipath Movie.
Packard Bell NEC received warrants to purchase 600,000 shares of our common
stock upon execution of the agreement. We redeemed the warrants in July 1999.
Under the terms of a September 1997 agreement, we granted Packard Bell NEC
the additional rights to bundle Multipath Movies loaded on the hard drives of
Packard Bell NEC computers. We also granted Packard Bell NEC distribution rights
to Multipath Movie titles which became available during the 12 month period
following the date the first bundled Multipath Movie was shipped on the hard
drives of Packard Bell NEC computers. Packard Bell agreed to ship our Multipath
Movies with at least one third of the 6 million computers required to be shipped
by it under the September 1996 agreement, and to pay us a fixed fee of $1.00 for
each computer shipped with a Multipath Movie, during the 12-month period. In
addition, under the September 1997 agreement, Packard Bell is entitled to
receive 40% of net revenues received by us from online end users during the
12-month period. The agreement provides that if Packard Bell NEC has not shipped
the required minimum number of computers during the 12 month period, the period
will be extended for up to an additional six months. In connection with this
agreement, we granted to Packard Bell NEC warrants to purchase an additional
200,000 shares of our common stock, which warrants expired in February 1999. The
warrants were exercisable at $10 per share. None of the warrants were exercised
prior to their expiration. During 1997, we recognized revenues and established a
receivable of $2 million in connection with Packard Bell NEC's requirement to
ship at least 2 million computers with our bundled titles.
We have been disappointed in the performance by Packard Bell NEC of its
obligations under our agreements. The first international shipment of Packard
Bell NEC computers with our bundled titles occurred in December 1997, and the
first shipments in the U.S. occurred in July 1998, well after our initially
anticipated launch dates. This delay was the result of internal issues of
Packard Bell NEC. In addition, Packard Bell NEC has decided to distribute our
titles with only its middle- to high-end computers, which limits the number of
available computers that can be bundled with our titles. For the six months
ended December 31, 1998, we have received $98,000 under our agreements with
Packard Bell NEC. Under the terms of the September 1997 agreement, Packard Bell
NEC is obligated to continue to make fixed payments to us of $1.00 for each
computer shipped with our bundled titles through the end of the shipping period,
by which time Packard Bell NEC is required to have paid us $2 million under the
September 1997 agreement. Based on the level of fixed payments made to us for
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the six months ended December 31, 1998, we do not believe Packard Bell NEC will
satisfy its obligations to us to ship 2 million computers with our titles by the
end of the shipping period, and we believe that Packard Bell NEC is not bundling
our titles with all of its middle- to high-end computers. We also do not believe
Packard Bell NEC will ship the required 6 million computers with our titles
under our agreement within the required time period. Furthermore, as a result of
the delay in, and reduced number of, computers shipped by Packard Bell NEC with
our bundled titles, our Internet revenues have been significantly lower than
anticipated.
MORGAN CREEK PRODUCTIONS. We have entered into a joint venture with Morgan
Creek Interactive, a subsidiary of Morgan Creek Productions. Morgan Creek is a
principal developer and distributor of feature films. Morgan Creek's past
features include ACE VENTURA: PET DETECTIVE and ACE VENTURA: WHEN NATURE CALLS.
Our agreement provides that Morgan Creek will contribute to the joint venture a
nonexclusive license for two motion picture scripts for use in the development
of Multipath Movies to be distributed on CD-ROM and DVD platforms. We are
responsible for all development costs of the Multipath Movies but will be
entitled to recover these costs before Morgan Creek will participate in any
revenues generated from the Multipath Movies created by the joint venture. We
will also contribute to the joint venture a nonexclusive license to our Digital
Projector software tool solely for use in connection with two Multipath Movies
to be produced by the joint venture. In exchange for the contribution of
development content, Morgan Creek will receive, following our recovery of
production costs and recovery of our investment in the joint venture, a
designated percentage of the joint venture's revenues. Morgan Creek also
received warrants to purchase 85,000 shares of our common stock. The agreement
provides that Morgan Creek will own all intellectual property related to the
content used in the Multipath Movies created by the joint venture and will have
the right to exploit this content for other uses without any royalty obligation
to the joint venture or to us, although we will retain all rights to the
licensed software tool. ACE VENTURA, THE CASE OF THE SERIAL SHAVER is the first
title that has been released under this agreement and production of a second
title is nearing completion.
BANTAM DOUBLEDAY DELL BOOKS FOR YOUNG READERS. We have an agreement with
Bantam Doubleday Dell that provides us with an option to acquire exclusive
worldwide interactive rights to Bantam Doubleday Dell's CHOOSE YOUR OWN
NIGHTMARE and CHOOSE YOUR OWN ADVENTURE series of interactive books. Our option
covers over 185 titles, plus any additional titles in each series published by
Bantam Doubleday Dell. Our rights include rights to adapt the licensed titles to
interactive format only and to deliver the products on CD-ROM, DVD and via the
Internet. By exercising our option, we will be required to acquire no less than
18 titles during the seven-year term of the Bantam agreement. Bantam Doubleday
Dell will be entitled to receive a portion of the net proceeds from sales of the
licensed titles. Upon our election of each of the first 16 titles, in batches of
four titles, we are required to pay Bantam Doubleday Dell a nonrefundable
advance against which royalties will be applied. To date, we have exercised our
option on 10 titles. We completed production of six titles as of December 31,
1998.
KING FEATURES SYNDICATE. Our agreement with King Features Syndicate
provides us with the rights to use the character POPEYE and related story
characters in Multipath Movies for play on PC-based CD-ROM products and over the
Internet in countries where English is the predominantly spoken language. We
have the right to adapt licensed titles for a number of Multipath Movies. We
have paid King Features Syndicate a cash advance against future royalties. If we
meet minimum earned royalty levels, we will have the option to extend the
agreement for two years beyond its original three-year term which continues
until December 31, 1999. We have released three POPEYE titles as of December 31,
1998.
UNIVERSAL STUDIOS. Our agreement with Universal provides us with the
rights to use some story scripts from the live action television series XENA:
WARRIOR PRINCESS and animated character designs from the direct-to-video motion
picture HERCULES & XENA THE ANIMATED MOVIE for use in the production of
Multipath Movies. The Multipath Movie titles based on the original plots can be
made for CD-ROM and DVD, and can be distributed and sold via the Internet. We
have paid Universal Studios part of an advance against future royalty payments
and guaranteed minimum royalties. The initial term of this agreement continues
until January 31, 2002. The first Multipath Movie title, GIRLS JUST WANNA HAVE
FUN, has been released and production of an additional title is nearing
completion.
D.C. COMICS (WARNER BROS.). Our agreement with D.C. Comics provides us
with the rights to use the comic strip character SUPERMAN in Multipath Movies
which can be distributed on CD-ROM and DVD platforms, or via the Internet. We
have paid D.C. Comics a guaranteed advance against royalties. We also are
obligated to pay D.C. Comics a percentage of net advertising proceeds received
from the sale of Multipath Movies based on the SUPERMAN character. The initial
term of the agreement continues until September 1, 2001. Production on the first
SUPERMAN title, MENACE OF METALLO, is nearing completion.
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COMPUSERVE. We expect CompuServe to continue to distribute enabling
software and digital assets for our Multipath Movies on CD-ROMs sent by
CompuServe to its members and prospective members. In addition, links to our
website at www.multipathmovies.com continue to appear in select areas on the
CompuServe website.
OTHERS. DVD Express has agreed to distribute our content on their DVD.com
website and Mediadome, an Intel website, continues to feature XENA. In addition,
Digimation will offer distribution of the B3D - Minimize for Max plug-in, on a
non-exclusive basis. We also are actively pursuing additional bundling,
distribution and licensing arrangements pursuant to which Multipath Movies will
be distributed through original equipment manufacturers and through specialty
software and mass merchandise retail channels.
RESEARCH AND DEVELOPMENT
Our research and development efforts are principally focused on the
following tasks:
o Completing and enhancing the B3D - Minimize for Max tool,
documentation and mini-viewer version of the Digital Projector;
o Implementing our relationships with @Home and other technology
partners;
o Completing our ScuD II advanced animation production environment;
o Developing enhanced Internet delivery capabilities of our Multipath
Movies, including reduction of content file sizes though new
compression technology and streaming of animation data;
o Increasing the efficiency of our object-oriented production process;
o Enhancing our software tools to continually add features identified
by, and of value to, the creative and production entertainment
communities; and
o Improving our proprietary database to enhance facial expressions and
mouth movements of Multipath Movie characters.
In 1998, we made substantial improvements in the reduction in the size of
files required to view 3D animation on-line through the streaming of animation
data. Reduced file sizes will enable users with low bandwidth connections to the
Internet to view Multipath Movies without the need to download very large
computer files. In addition, we also continued to develop a proprietary
object-oriented database that we believe will increase production efficiencies
by giving Multipath Movie producers ready access to a database of objects, such
as sets, props and characters. We are expending substantial resources at our
research and development facility in Australia, where we maintain a staff of
fourteen engineers. Research and development expenses for the years ended
December 31, 1997 and 1998 were $1,709,000 and $3,798,000, respectively.
COMPETITION FOR OUR MULTIPATH MOVIES
The markets for our digital entertainment products are intensely
competitive, subject to rapid change and characterized by constant demand for
new product features at reduced prices and pressure to accelerate the release of
new products and product enhancements. We expect to compete with computer
graphics special effects firms, including Pixar, ILM, Digital Domain, Sony
ImageWorks, Pacific Data Images and Rhythm & Hues. We also expect to compete
with firms producing CD-ROM products such as GT Interactive, Electronic Arts,
Learning Company and large corporations, such as Disney and Microsoft, with
substantial bases of intellectual property content and substantial financial
resources, who have entered or announced their intention to enter the market for
CD-ROM entertainment products. Finally, our Multipath Movies will compete with
traditional feature films and television programming produced by major movie
studios, including Disney, Warner Bros., Twentieth Century Fox, Paramount, Sony,
Lucasfilm, MCA Universal and MGM/UA, as well as numerous other independent
motion picture and television production companies. Several movie studios
already have developed their own internal computer animation capability and have
developed and released animated feature films or created computer animation for
special effects in animated films. We expect additional competition in the
animated feature film market from these and other movie studios. We will also
compete with movie studios for the acquisition of literary properties,
production financing, the services of performing artists, and the services of
other creative and technical personnel, particularly in the fields of animation
and technical direction.
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OUR AUCTION BUSINESS
Our subsidiary, Trojan Television Limited, which operates as The Auction
Channel, uses licensed computer software and hardware technology to provide
television and Internet broadcast services to auction houses. The Auction
Channel enables participants to watch auction events on television or the
Internet and use the Internet or their telephone to bid on items presented at
auction.
The Auction Channel's computer software and hardware systems are used to
host:
o LIVE AUCTION EVENTs: These auctions are broadcast by television
and/or the Internet while the event is actually occurring, allowing
participants to bid in real time.
The Auction Channel is further developing its computer software and
hardware systems to enable hosting of:
o VIRTUAL AUCTION EVENTs: These auctions, which are delivered over the
Internet, allow participants to bid in real time in a manner that
resembles a traditional auction.
o DELAYED AUCTIONs: Participants in these auctions bid for items by
delivering their bids progressively over the Internet until the
items are sold.
The Auction Channel is developing a Web site at www.theauctionchannel.com
to be a principal auction site where visitors will identify, select, attend and
participate in auction events. Using visitor profiles, purchasing habits and
other information obtained in response to questions on its Web site, The Auction
Channel will assist visitors to find and participate in auctions that are of
interest to them throughout the world. Visitors to the Web site will be able to
place bids on selected items without physically being present at the auction
house, all of which will be transparent to the auctioneer conducting the auction
event.
The Auction Channel's television operations provide television
broadcasters with individual auction programs or a series of high profile
auction programs conducted by leading auction houses. These television programs
will be packaged with a preview of the auction event. We intend to develop the
The Auction Channel into an interactive television channel dedicated to auction
related programming such as daily coverage of auction events, preview programs,
documentaries, auction-related game shows and news of auction events. The
auction television channel is in the early stages of development and we do not
guarantee that it will be implemented successfully or at all. The Auction
Channel's television operations primarily will be dedicated to creating visitors
to our Internet bidding Web sites.
THE AUCTION CHANNEL'S PRINCIPAL PRODUCTS AND SERVICES
The Auction Channel's principal products and services consist of the
following:
o IBS (INTERACTIVE BIDDING SYSTEM) -- IBS is a television-based
service that permits an audience to view a live auction event on
television and participate by placing bids over the telephone. The
television signal is output on a cable or broadcast television
channel and/or for local viewing in the auction room. To avoid
confusion from poor synchronization of the television output and the
telephone relay, the telephone is used solely to bid and cannot be
used to listen in on auction events. The acceptance of a bid is
communicated to the participant on the telephone and displayed to
all viewers on the television screen. When the auctioneers hammer
comes down stopping all further bids, the winner's "paddle" details
are displayed. IBS is currently being developed to allow
participants to bid using their television's remote control.
o NETBIDLIVE -- NetBidLive is an Internet-based service that permits
an audience to view a live auction event on the Internet and
participate by placing bids over the Internet using their personal
computer. Participants initially access the Internet bidding Web
site via The Auction Channel's Web site at
www.theauctionchannel.com. Prior to bidding, the participant must
provide a client number and personal identification number. The Web
page shows a bid button that shows the next bid increment, an image
of the item currently being bid upon and other details about the
item. When the bid button is selected, the bid is transmitted in
real time and feedback as to the status of the bid is sent to the
participant. NetBidLive currently is being updated to include
streaming of video and audio data.
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o GRANDSTAND -- GrandStand also is an Internet-based service that
permits an audience to view a live auction event on the Internet,
but the audience cannot participate in the auction by placing a bid.
If users of GrandStand are interested in placing bids during an
auction, they can push a button on their computer screen to access
the registration screen of NetBidLive.
o AUDIODIRECT (CHRISTIE'S DIRECT) - AudioDirect is a telephone-based
service that only permits bidding by telephone without the ability
to view the item up for auction. The participant is provided with a
catalogue of items up for auction in advance of the auction event.
At the time of the auction, the participant follows the auction by
listening over the telephone for item numbers and price information.
AudioDirect has additional features, including the ability to leave
commission bids, browse an electronic catalogue and select items
that are up for auction, request more information about the
condition of an item, receive an alarm call about a specific item,
pay bills, obtain shipping price quotes and make shipping
arrangements. This system currently is installed and operational in
Christie's South Kensington, London sale room.
o SALEVISION - SaleVision is a television-based service that displays
auction related information on television screens throughout an
auction house during an auction event. The display includes
information about currencies, item descriptions and value estimates,
as well as live footage of the auctioneer and of the item currently
being bid upon. The SaleVision system also is used to output a
television signal from the auction room to the broadcast satellite
or cable service from which the TV signal is distributed to homes in
the television broadcaster's territory.
o CURRENCYVISION - CurrencyVision is a very basic television-based
service that includes only a current bid in different currencies for
display on television screens throughout an auction house during an
auction event. CurrencyVision is an entry-level product.
MARKETING OF THE AUCTION CHANNEL'S PRODUCTS AND SERVICES
The Auction Channel was founded and has its principal offices in the
United Kingdom. Due to its geographic location and the abundance of auction
houses located in the United Kingdom, The Auction Channel has first tested and
marketed its products and services primarily in the United Kingdom. We plan to
further expand The Auction Channel's business in the United Kingdom, and to
commence operations outside of the United Kingdom, including in North America,
Asia and the remaining countries of Europe. The Auction Channel has established
relationships with well known auction houses such as CHRISTIES, PHILLIPS,
BROOKS, BONHAMS, ALLSOPS and ANTIQUORUM to deliver products and services,
increase participation in auction events and help build auction house brand
awareness. The Auction Channel's existing relationships with auction houses
include exclusive and non-exclusive fixed term arrangements and arrangements
relating to individual auction events.
The Auction Channel markets its services to auction houses and television
and cable networks through direct sales efforts by its senior management team.
The Auction Channel markets and develops consumer awareness of its Web site and
services by featuring its World Wide Web address, www.theauctionchannel.com, on
all of its televisioin programs, through Internet banner advertisements and
links, newsletter subscriptions and media releases.
THE AUCTION MARKETS
There are three primary online auction markets, which include:
o BUSINESS TO BUSINESS: The business-to-business market focuses
primarily on products such as computers, industrial and biotech
equipment, coal and other commodities and any other industrial item
that is subject to liquidation or season-end excess inventory. This
category also includes dealers, such as fine art dealers, selling
through auction houses to other dealers.
o PERSON TO PERSON: This person-to-person market is exemplified by
Internet-based companies such as eBay, which act as a facilitator
between buyers and sellers regardless of their geographical
location. This market is characterized by a "buyer beware" policy
since the facilitator normally does not take responsibility for the
authentication of the goods being offered for sale.
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o BUSINESS TO PERSON: The business to person market has been the
slowest of the auction markets to develop. We believe that this
market will become a useful means for large retail companies to
discount and close out unwanted inventory. This category also
includes dealers selling through auction houses to private
individuals.
Within the auction market, we believe the following are the primary types
of online auction companies:
o AUCTION HOUSE WITH DEDICATED ONLINE TRADING AREA - includes
companies that have developed their own online trading environment
for their own auction activities.
o AUCTION HOUSE WITH DEDICATED ONLINE TRADING AREA AND DEALER NETWORK
includes companies that have developed their own online trading
environment for their own auction activities and the auction
activities of members of a dealer network. Sotheby's is an example
of this type of online auction company.
o TRADING AREA - includes companies such as eBay which have developed
trading areas where individuals post items for auction which are
acquired by other individuals.
o TRADING AREA WITH 'TIED' AUCTION HOUSE - includes companies with a
trading area that establish a relationship with an auction house in
order to benefit from increased volume and authentication services.
The relationship between Sotheby's and Amazon.com is an example of
these types of online auction companies.
o AUCTION HOUSE-TRADING CONDUIT OR CHANNEL - includes companies like
The Auction Channel that provide distribution and marketing services
to all auction houses.
One of the many benefits to auction houses of the technology used by The
Auction Channel is its low entry cost and low systems support and development
expenditure in relation to its extremely high market penetration. This enables
auction houses to access and service new and extremely fast growing markets with
minimum development costs. The Auction Channel has developed a real-time auction
environment specifically to add-value to existing auction house services, while
at the same time differentiating its services from existing online auction
companies.
COMPETITION IN THE ONLINE AUCTION MARKET
Competition in the on-line auction market is intense. Many competitors of
The Auction Channel are substantially larger and have significantly greater
resources and revenues. Principal competitors include eBay, QXL, LiveBid, Onsale
and Amazon.com. We estimate that eBay will have over 6 million registered users
by the end of 1999 trading in tens of millions of items. Recently, eBay acquired
Butterfield & Butterfield auctioneers, a traditional auction house. QXL, which
uses the eBay delayed auction model and has announced that it is Europe's
equivalent of eBay, has recently started an auction affiliate network. Onsale,
Inc. is an electronic retailer that sells merchandise through an interactive
online auction service. Amazon.com, Inc., is an online book, CD and video
retailer which acquired LiveBid.com. LiveBid.com provides live bidding on online
auctions. Additionally, Amazon.com has formed Amazon.Sotheby.com, a strategic
partnership with Sotheby's, a traditional auction house. In addition to the
above companies, most of the major portal Web sites, such as Yahoo and America
Online, have instituted their own auction services.
PRINCIPAL SUPPLIERS
Many of the underlying computer software and hardware technologies used by
The Auction Channel, including the Interactive Bidding System and associated
products, are licensed from Articulate UK Limited. The Auction Channel has, with
respect to these technologies, a worldwide, irrevocable license, with rights to
exploit and improve, to any and all software, patents, technology, object code,
documentation and know how developed or owned or licensable by Articulate UK.
The license granted to The Auction Channel currently is exclusive, but will
become nonexclusive if The Auction Channel and its affiliates collectively do
not spend with the Articulate UK and its affiliates at least 150,000 British
Pounds in the first 12 months of the license term and 200,000 British Pounds in
each year thereafter. The Auction Channel has the right to sublicense this
technology to third party licensees including auctioneers but excluding parties
in the business of providing auction related services to auctioneers. Articulate
UK's right to license its technology is similarly restricted. Articulate UK
retains the right to use the licensed technologies for its own internal business
purposes, including its operation of an auction service in direct competition
with The Auction Channel.
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REGULATORY APPROVALS
The United Kingdom Independent Television Commission requires that any
person broadcasting television transmissions into or out of the United Kingdom
must hold an ITC broadcast license. The Auction channel currently holds an ITC
broadcast license.
RESEARCH AND DEVELOPMENT
The Auction Channel has spent the last nine months developing the software
to enable the Interactive Bidding System to successfully integrate with existing
auction house technologies. Approximately $240,000 was spent on research and
development during the nine months ended June 30, 1999.
OUR EMPLOYEES
At December 31, 1998, we had 98 full-time employees: 14 engaged in
research and development, 74 in production, eight in general administration and
finance and two in sales and marketing. None of our employees is covered by a
collective bargaining agreement. We consider our relationship with our employees
to be good. We currently utilize the services of seven independent software
developers pursuant to contractual relationships. Eight of our employees,
including the Chairman and CEO, the President, the CFO and the Director of
Licensing, are based in Los Angeles, California. All other employees operate out
of facilities located in Bondi Junction, a suburb of Sydney, Australia. In 1997,
we retained a consultant as a managing director for Europe, based in the United
Kingdom. During 1999, we anticipate reducing the number of employees working in
our production studio and research and development facilities.
At June 30, 1999, The Auction Channel had 14 employees and 2
consultants.
OUR PROPERTIES
During January 1998, we expanded our production facilities in Bondi
Junction, Australia to approximately 12,800 square feet, and moved and expanded
our research and development facilities consisting of approximately 3,300 square
feet to Double Bay, Australia. The current annual rental under the Bondi
Junction lease is $163,000 and under the Double Bay lease is $59,000. During
January 1999, we merged our research and development facilities into our
development facilities in Bondi Junction. Our lease for our Double Bay premises
expires in January 2000. We have sub-let these premises, offsetting our lease
commitment through January 2000. We also lease an office in Woodland Hills,
California for rent of approximately $69,000 per annum.
The Auction Channel currently operates on two Dutch barges on the River
Thames in London, England that are docked to a private pier. Both boats are
leased. One boat is a permanent office and the other boat consists of an office
and a private residence. The rental agreements provide for aggregate monthly
lease payments for both boats of approximately $2,800. In the case of the office
boat, the lease is terminable upon one month's notice by either party and, in
the case of the boat with office space and a private residence, the lease is
terminable upon three month's notice by either party.
LEGAL PROCEEDINGS
We are not involved in any material litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our directors
and executive officers as of April 15, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Mark Dyne................................... 38 Chairman of the Board of Directors and Chief
Executive Officer
Kevin Bermeister............................ 38 President and Director
Michael Ozen................................ 44 Chief Financial Officer and Secretary
Mark Miller................................. 39 Vice President, Production and Operations
and Director
Anthony Rose................................ 34 Vice President, Technology
Diana Maranon (1)........................... 40 Director
Ray Musci (1)(2)............................ 38 Director
Garth Saloner (2)........................... 44 Director
Jeff Scheinrock (1)(2)...................... 48 Director
<FN>
- ----------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
</TABLE>
MARK DYNE has served as our Chairman of the Board of Directors and
Chief Executive Officer since October 1996. Mr. Dyne currently is Chairman
of the Board of Directors of Tag-It Pacific, Inc., a position he has held
since September 1997. Mr. Dyne is a director and equity owner of Sega
Ozisoft Pty. Ltd. and previously served as its Co-Chief Executive Officer.
Mr. Dyne helped found Sega Ozisoft in 1982 with Mr. Bermeister. Sega
Ozisoft, now a majority owned subsidiary of Infogrames Entertainment
(France), is a computer software distributor for many leading publishers
including, among others, Virgin Interactive, Accolade, Access, Codemasters
and Eidos. Mr. Dyne currently is a director of Monto Holdings Pty. Ltd. and
a co-owner of Packard Bell NEC Australia Pty. Ltd. Monto is a private
investment holding company and Packard Bell NEC Australia is one of the
leading manufacturers and distributors of personal computers through the
Australian mass merchant channel. From June 1995 through May 1997, Mr. Dyne
served as a Co-Chief Executive Officer of Sega Enterprises (Australia) Pty.
Ltd., a theme park developer. Sega Enterprises is owned jointly by Mr. Dyne,
Mr. Bermeister, Sega Enterprises Japan, Mitsubishi Corp. and Mitsui Corp. Mr.
Dyne also serves on the Board of Directors of Virgin Interactive
Entertainment Limited, a distributor of computer software programs and video
games, and has an equity interest therein. Mr. Dyne is a member of the Board
of Directors of Sega Gaming Technologies, Inc., a Nevada company in the
business of producing multiplayer casino equipment.
KEVIN BERMEISTER has served as our President since October 1996 and as
a Director since August 1996. Mr. Bermeister is a director and equity owner
of Sega Ozisoft Pty. Ltd. and previously served as its Co-Chief Executive
Officer. Mr. Bermeister helped found Sega Ozisoft in 1982 with Mr. Dyne.
Mr. Bermeister also is a director of Packard Bell NEC Australia Pty. Ltd.,
Jacfun Pty. Ltd. and Virgin Interactive Entertainment Limited. Jacfun owns
the Darling Harbour property occupied by the Sega Enterprises (Australia)
Pty. Ltd. indoor theme park in Sydney, Australia.
MICHAEL OZEN has served as our Chief Financial Officer since October 1996
and Secretary since March 1997. Mr. Ozen also serves as a director of both the
Clubhouse Children's Museum and the New Museum for Children. From May 1991
through June 1996, Mr. Ozen served as Manager -- International Taxes at Coopers
& Lybrand, LLP. In July 1996, Mr. Ozen became Director -- International Taxes at
Coopers & Lybrand, LLP, a position he held until October 1996.
MARK MILLER has served as our Vice President, Production and Operations
since October 1996 and as a Director since August 1996. Mr. Miller served as
our President and Chief Financial Officer from August 1996 through September
1996. Mr. Miller also is Managing Director of BII Australia, a position he
has held since March 1994. From February 1993 through December 1994, Mr.
Miller was Managing Director of Pacific Interactive Education Pty. Limited
("PIE"), where he was primarily engaged in the development and maintenance of
educational and multimedia software for use by schools and other educational
institutions. Mr. Miller currently is a director of PIE. From 1989 through
1992, Mr. Miller
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was Director of Sales and Marketing of Dealing Information Systems Pty. Ltd., a
developer of proprietary modular software treasury systems for managing
financial transactions.
ANTHONY ROSE has served as a consultant to BII Australia since April
1994 and currently serves as our Vice President, Technology. Mr. Rose also
is the owner and director of and, prior to April 1994, was employed by, A.R.
Technology Pty. Ltd., an Australian company founded by Mr. Rose in 1988.
A.R. Technology is involved in the design and manufacture of digital
electronics hardware and software. A.R. Technology has completed design
assignments for Apple, Epson, Panasonic and other corporations and government
institutions. Mr. Rose holds several international patents relating to
anti-virus hardware circuits for personal computers.
DIANA MARANON has served as a Director since October 1996, and served
as our Secretary from August 1996 until March 1997. Ms. Maranon is the
President and Managing Director of Averil Capital Markets Group, Inc., a
financial advisory firm, and a member of the National Association of
Securities Dealers. Ms. Maranon serves as a director of Virgin Interactive
Entertainment Limited and Tag-It Pacific, Inc. Prior to founding Averil in
1994, Ms. Maranon was a Vice President with Wasserstein Perella & Co., Inc.,
an investment banking firm, with whom she started in 1988. At Wasserstein
Parella, Ms. Maranon was responsible for covering companies headquartered in
the Western United States. From 1985 to 1988, Ms. Maranon practiced
securities law with Skadden Arps Slate Meagher & Flom. Ms. Maranon is a
member of the California Bar.
RAY MUSCI has served as a Director since October 1996. From May 1990 to
the present, Mr. Musci has served as the President, Chief Executive Officer and
as a director of Infogrames Entertainment, Inc., a company that develops,
publishes and distributes software products. From September 1994 to July 1996,
Mr. Musci served as a director of Ocean International, Ltd., the holding company
of Infogrames Entertainment, Inc. From August 1985 to March 1990, Mr. Musci was
Executive Vice President/General Manager of Data East USA, Inc., a subsidiary of
Data East Corp., a Japanese company, where he established a consumer division to
develop, manufacture, market and distribute consumer video games, entertainment
software and coin-operated video arcade games and pinball machines.
GARTH SALONER has served as a Director since October 1996. From 1990 to
the present, Mr. Saloner has served as the Robert A. Magowan Professor of
Strategic Management and Economics at the Graduate School of Business at
Stanford University. He also has served as Associate Dean for Academic Affairs
and Director of Research and Course Development at the Stanford Graduate School
of Business. From 1982 to 1990 Mr. Saloner taught as a professor in the
Economics Department of the Massachusetts Institute of Technology. Mr. Saloner
also is a director and a member of the audit and compensation committees of
Quick Response Services, Inc., a corporation that provides electronic data
interchange services in the retail market, a director of Charles River
Associates, a corporation that provides economic consulting services, and a
director of NextStage Entertainment, a corporation involved in the construction
and management of live entertainment theatres.
JEFF SCHEINROCK has served as a Director since October 1996. Since May
1997, Mr. Scheinrock has been Chief Executive Officer of Scheinrock Advisory
Group, Inc. From July 1, 1996 until May 2, 1997, Mr. Scheinrock served as Vice
Chairman, Chief Financial Officer and Assistant Secretary of Kistler Aerospace
Corporation, a company involved in the development, marketing and manufacture of
reusable satellite launch vehicles. From March 1, 1989 to July 1, 1996, Mr.
Scheinrock was the Vice Chairman of Finance and Strategic Planning of Packard
Bell NEC. Mr. Scheinrock is a director of SRS Labs, Inc., a corporation listed
on the Nasdaq Stock Market's National Market. Mr. Scheinrock also is a director
of various other private companies.
Our Board of Directors is divided into three classes, designated Class I,
Class II and Class III. Garth Saloner currently is the Class I director who will
stand for election at the 2000 annual stockholders meeting. Mark Miller, Ray
Musci and Jeff Scheinrock currently are the Class II directors who will stand
for election at the 2001 annual stockholders meeting. Mark Dyne, Kevin
Bermeister and Diana Maranon currently are the Class III directors who will
stand for election at the 2002 annual stockholders meeting. At each annual
meeting of stockholders, successors of the class of directors whose term expires
at that annual meeting are elected for a three-year term or until their
successors have been elected and qualified. If the number of directors is
changed, an increase or decrease is to be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible. The
authorized number of members of our Board of Directors currently is eight.
Directors may be removed from office only for cause by the affirmative vote of a
majority of the outstanding shares of our common stock. Vacancies on our Board
of Directors may be filled only by a majority of the directors then in office.
There currently is one vacancy in the Class I directors.
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<PAGE>
AGREEMENT TO NOMINATE DIRECTORS
Pursuant to a stock purchase agreement we entered into with Prince Ahmad
Bin Khalid Al-Saud, we have agreed to elect Prince Al-Saud or his designee as a
Class I director for a term ending in 2000. Additionally, we have agreed that so
long as Prince Al-Saud maintains ownership of at least 5% of our outstanding
equity securities, we will use our best efforts to continue to cause the Prince
Al-Saud or his designee to be nominated for election as a director.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee currently consists of Messrs. Musci, Saloner and
Scheinrock. The Audit Committee recommends the engagement of our independent
public accountants, reviews the scope of the audit to be conducted by the
independent public accountants and meets with the independent public accountants
and our Chief Financial Officer to review matters relating to our financial
statements, our accounting principles and our system of internal accounting
controls, and the committee reports its recommendations as to the approval of
our financial statements to the Board of Directors.
The Compensation Committee currently consists of Ms. Maranon and
Messrs. Musci and Scheinrock. The Compensation Committee is responsible for
considering and making recommendations to the Board of Directors regarding
executive compensation and is responsible for administering our stock option
and executive incentive compensation plans.
COMPENSATION OF DIRECTORS
Our nonemployee directors currently are paid $1,500 for their personal
attendance at any meeting of the Board of Directors and $500 for attendance at
any telephonic meeting of the Board of Directors or at any meeting of a
committee of the Board of Directors. Nonemployee directors also received options
to purchase 15,000 shares of common stock in fiscal 1998. Directors also are
reimbursed for their reasonable travel expenses incurred in attending Board or
committee meetings.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth, as to our Chief Executive Officer and as
to each of the other four most highly compensated officers whose compensation
exceeded $100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to us in all
capacities during the last three fiscal years. For a description of employment
agreements between us and some executive officers, see "Employment Agreements
with Executive Officers" below. In October 1998, all of our then outstanding
stock options were repriced under an option repricing program. For a description
of the terms of the option repricing program, see "Report of the Compensation
Committee on Repricing of Stock Options" below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NUMBER OF
OTHER SECURITIES
FISCAL YEAR ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION ENDED(1) SALARY COMPENSATION OPTIONS
--------------------------- -------- ------ ------------ -------
<S> <C> <C> <C> <C>
Mark Dyne.............................. December 31, 1998 $ 225,000 -- 100,000 (2)
Chief Executive Officer December 31, 1997 $ 225,000 -- --
December 31, 1996 $ 56,250 -- --
June 30, 1996 -- -- --
Kevin Bermeister....................... December 31, 1998 $ 225,000 -- 100,000 (2)
President December 31, 1997 $ 225,000 -- --
December 31, 1996 $ 56,250 -- --
June 30, 1996 -- -- --
Michael Ozen........................... December 31, 1998 $ 165,000 -- 50,000 (3)
Chief Financial Officer December 31, 1997 $ 165,000 -- --
And Secretary December 31, 1996 $ 41,000 -- 30,000 (4)
June 30, 1996 -- -- --
Mark Miller............................ December 31, 1998 $ 126,000 20,000 (2)
Vice President, Production December 31, 1997 $ 89,000 $ 15,000 (5) --
And Operations December 31, 1996 $ 23,000 -- --
June 30, 1996 $ 69,000 -- --
Anthony Rose........................... December 31, 1998 $ 107,000 -- 50,000 (3)
Vice President, Technology December 31, 1997 $ 126,000 -- --
December 31, 1996 $ 37,000 -- 30,000 (4)
June 30, 1996 -- -- --
- ----------------------
<FN>
(1) We changed our fiscal year end from June 30 to December 31, effective
December 31, 1996.
(2) These options, which were initially granted in March 1998, were repriced
in October 1998 under our option repricing program.
(3) Consists of options to purchase 30,000 shares and 20,000 shares of common
stock granted in October 1996 and March 1998, respectively, all of which
were repriced in October 1998 under our option repricing program.
(4) These options were cancelled in October 1998 in connection with the grant
of a repriced option under our option repricing program.
(5) Consists of motor vehicle and income protection insurance premiums.
</FN>
</TABLE>
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the grant of stock
options made during the fiscal year ended December 31, 1998 to the Named
Executive Officers. Options covering an aggregate of 452,000 shares of common
stock were granted to employees during the fiscal year ended December 31, 1998.
In October 1998, options covering an aggregate of 747,000 shares of common
stock, including options to purchase the 452,000 shares granted earlier in the
year, were repriced under our option repricing program. The percentages in the
following table are based only on options to purchase 452,000 shares initially
granted to employees in fiscal 1998, and do not account for replacement options
granted in fiscal 1998 in connection with our option repricing program.
Additionally, the exercise price and tax withholding obligations related to the
exercise of options may be paid by delivery of already owned shares, subject to
some conditions.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTION EMPLOYEES IN EXERCISE OR EXPIRATION
NAME GRANTED FISCAL YEAR BASE PRICE DATE
---- ------- ---------- ---------- ----
<S> <C> <C> <C> <C>
Mark Dyne................................. 100,000(1) -- $ 2.75 3/19/08
100,000(2)(3) 22.1% $ 1.50 3/19/08
Kevin Bermeister.......................... 100,000(1) -- $ 2.75 3/19/08
100,000(2)(3) 22.1% $ 1.50 3/19/08
Michael Ozen.............................. 30,000(2)(4) -- $ 1.50 9/30/06
20,000(1) -- $ 2.75 3/19/08
20,000(2)(3) 4.4% $ 1.50 3/19/08
Mark Miller............................... 20,000(1) -- $ 2.75 3/19/08
20,000(2)(3) 3.4% $ 1.50 3/19/08
Anthony Rose.............................. 30,000(2)(5) -- $ 1.50 9/11/06
20,000(1) -- $ 2.75 3/19/08
20,000(2)(3) 4.4% $ 1.50 3/19/08
- ------------------------
<FN>
(1) This option, which was granted in March 1998, was cancelled in October
1998 in connection with the grant of a repriced option under our option
repricing program. Prior to its cancellation, this option would have
vested and become exercisable in four equal annual installments,
commencing on January 1, 1999.
(2) This option consists of a repriced option granted in October 1998 under
our option repricing program to replace an existing option to purchase the
same number of shares of common stock at a higher exercise price.
(3) This option vests and becomes exercisable as follows: 25% vested on April
1, 1999, and 25% vests on each of January 1, 2000, 2001, and 2002.
(4) This option vests and becomes exercisable as follows: 22,500 shares vested
on March 16, 1999, and 7,500 shares vest on October 1, 1999.
(5) This option vests and becomes exercisable as follows: 18,125 shares vested
on March 17, 1999, and 11,875 shares vest in 19 equal monthly installments
of 625 shares commencing on April 1, 1999.
</FN>
</TABLE>
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<PAGE>
STOCK OPTIONS HELD AT FISCAL YEAR END
The following table sets forth, for those Named Executive Officers who
held stock options at fiscal year end, information regarding the number of
shares of common stock underlying stock options held at fiscal year end and the
value of options held at fiscal year end based upon the last reported sales
price of the common stock on the American Stock Exchange on December 31, 1998
($1.75 per share). No stock options were exercised by any Named Executive
Officer during fiscal 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
- ---- ----------------- ---------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark Dyne.............................. -0- 100,000 -0- $ 25,000
Kevin Bermeister....................... -0- 100,000 -0- $ 25,000
Michael Ozen........................... -0- 50,000 -0- $ 12,500
Mark Miller............................ -0- 20,000 -0- $ 5,000
Anthony Rose........................... -0- 50,000 -0- $ 12,500
- ------------
<FN>
(1) Based on a closing price of $1.75 per share of common stock on December
31, 1998, all options were in-the-money at fiscal year end.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Effective October 1, 1996, we entered into an employment agreement with
Michael Ozen pursuant to which Mr. Ozen serves as our Chief Financial Officer at
a base salary of $165,000 per year. Mr. Ozen received options to purchase an
aggregate of 30,000 shares of common stock which vest in four equal annual
installments commencing on the date of grant. In October 1998, Mr. Ozen's
options were repriced under our option repricing program. Mr. Ozen's employment
is terminable by us at will. In the event we terminate Mr. Ozen's employment
without cause, Mr. Ozen is entitled to three months severance payment plus
one-month severance payment for each year served after the second year of
employment, not to exceed an aggregate of 12 months severance payment. For
purposes of the agreement, cause means the willful disregard of, or failure to
perform, duties where the willful disregard or failure is not discontinued
within a reasonable period of time from receipt of written notice relating
thereto.
A.R. Technology Limited, an Australian corporation of which Anthony Rose
is the sole stockholder, provides the services of Anthony Rose to BII Australia
in exchange for approximately $107,000 per year. The arrangement is terminable
at will by either party upon 30 days prior written notice.
Pacific Interactive Education Pty. Limited ("PIE") provides the services
of Mark Miller to BII Australia. PIE was paid $0, $37,000 and $90,000 during the
period from September 2, 1993 to June 30, 1994, and the years ended June 30,
1995 and 1996, respectively. For the period from July 1, 1996 to December 31,
1996, BII Australia paid PIE $18,000 for the services of Mark Miller. These
amounts include auto allowances, contributions to retirement benefits and profit
included in payments to PIE for purchases of computer equipment. No amounts were
paid to PIE for the services of Mark Miller during fiscal 1997. For fiscal 1998,
BII Australia paid PIE $52,000 for the services of Mark Miller. This amount
represented profit in payments to PIE for purchases of computer equipment. This
arrangement is terminable at will by either party upon 30 days prior written
notice.
STOCK OPTION PLAN
We adopted the Brilliant Digital Entertainment, Inc. 1996 Stock Option
Plan in September 1996, and amended the 1996 Plan in May 1997 and July 1999. The
purpose of the 1996 Plan is to attract, retain and motivate some of our key
employees and employees of our subsidiaries by giving them incentives which are
linked directly to increases in the value of our common stock. Each director,
officer, employee or consultant of Brilliant Digital Entertainment or any of our
subsidiaries is eligible to be considered for the grant of awards under the 1996
Plan. The maximum number of shares of common stock that may be issued pursuant
to awards granted under the 1996 Plan is 2,500,000, subject to adjustments to
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<PAGE>
prevent dilution. Any shares of common stock subject to an award which for any
reason expires or terminates unexercised are again available for issuance under
the 1996 Plan.
The 1996 Plan authorizes its administrator to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of:
o shares of common stock;
o an option, warrant, convertible security, stock appreciation right
or similar right with an exercise or conversion privilege at a price
related to the common stock; or
o any other security or benefit with a value derived from the value of
the common stock.
Any stock option granted may be an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code of 1986, or a nonqualified stock
option. The Compensation Committee of the Board of Directors currently
administers the 1996 Plan. Subject to the provisions of the 1996 Plan, the
Compensation Committee will have full and final authority to select the
executives and other employees to whom awards will be granted thereunder, to
grant the awards and to determine the terms and conditions of the awards and the
number of shares to be issued pursuant thereto. The maximum number of shares of
common stock with respect to which awards may be granted under the 1996 Plan to
any executive or employee during any fiscal year is 100,000, subject to
adjustment to prevent dilution.
As of July 22, 1999, 1,420,000 shares of common stock remained available
for grant of awards to eligible participants under the 1996 Plan.
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF STOCK OPTIONS
During October 1998, the Compensation Committee of the Board of Directors
approved a stock option repricing program. Under the program, each holder of
stock options granted under the Brilliant Digital Entertainment 1996 Stock
Option Plan, including directors and Named Executive Officers, was entitled to
exchange their existing stock option for a repriced stock option to purchase the
same number of shares at an exercise price of $1.50 per share. The new exercise
price was lower than the exercise price under all of the existing stock options
and was higher than the then stock market closing price of $1.125 per share of
common stock. As a condition to receiving this more favorable exercise price,
each option holder who elected to participate in the program was required to
agree to a less favorable vesting schedule. Under the repriced options, any
shares of common stock which had already vested under the existing stock option
could not be exercised for a period of 120 days from date the option holder
elected to exchange his or her stock option. In addition, any shares under an
existing stock option which were scheduled to vest on January 1, 1999 did not
vest under the repriced option until April 1, 1999. Other than the lower
exercise price and the changes to the vesting schedule, each new stock option
issued under the repricing program has terms substantially equivalent to the
terms of the surrendered option, including the same number of shares and
expiration date. Options to purchase a total of 747,000 shares of common stock
were eligible to participate in the program, all of which were exchanged by the
holders thereof for repriced stock options.
The Compensation Committee approved the stock option repricing program as
a result of the significant reduction in the price of our common stock in fiscal
1998. The Committee determined that our existing stock options no longer
provided meaningful incentive to the option holders to remain in our employ and
to maximize shareholder value. The existing stock options had exercise prices of
between $2.31 per share and $6.38 per share, which exercise prices exceeded the
trading prices of our common stock for a substantial majority of the time from
June 1998 until the date the option repricing program was approved. The
Committee determined that the exchange of new stock options with a lower
exercise price for our existing stock options would once again provide incentive
to our officers, directors and employees to continue to provide services to us
and to maximize shareholder value.
COMPENSATION COMMITTEE
Diana Maranon
Ray Musci
Jeff Scheinrock
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<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation and our Bylaws provide that we shall
indemnify our directors, officers and employees to the fullest extent permitted
by the Delaware General Corporation Law ("Delaware Law"). Section 145 of the
Delaware Law provides that a corporation may indemnify any person who was or is
a party or is threatened to be made a party to an action, other than an action
by or in the right of the corporation, because the person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or other enterprise, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to an action by
or in the right of the corporation to procure a judgment in its favor because
the person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification shall be made if the person is adjudged to be liable to the
corporation unless the Delaware Court of Chancery or the court in which the
action or suit was brought determines the person is entitled to indemnity.
Delaware law further provides that nothing in the above-described provisions
shall be deemed exclusive of any other rights to indemnification or advancement
of expenses to which any person may otherwise be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
Our certificate of incorporation also provides that each of our directors
shall not be liable to us or to our stockholders for monetary damages for breach
of fiduciary duty as a director. Section 102(b)(7) of the Delaware Law provides
that a provision so limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other things:
o breach of the duty of loyalty;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
o unlawful payment of dividends; or
o transactions from which the director derived an improper personal
benefit.
We have entered into separate but identical indemnity agreements with each
of our directors and some of our officers. Under the indemnity agreements, we
have agreed to indemnify each director or officer against any amounts which he
becomes legally obligated to pay in connection with any claim against him based
upon any action or inaction which he may commit, omit or suffer while acting in
his capacity as our director or officer or as a director or officer of one of
our subsidiaries. The director or officer, however, must have acted in good
faith and in a manner he reasonably believed to be in or not opposed to our best
interests and, with respect to any criminal action, had no reasonable cause to
believe his conduct was unlawful.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mark Miller, an officer and director of Brilliant Digital Entertainment,
is a shareholder of Multimedia Connexion Pty., Ltd. BII Australia periodically
purchases hardware and software from Multimedia Connexion Pty. Ltd. For the
fiscal years ended December 31, 1997 and 1998, BII Australia purchased computer
equipment totaling $121,000 and $59,000, respectively.
Diana Maranon is a director of Brilliant Digital Entertainment. Averil
Capital Markets Group, Inc., a financial advisory firm founded and controlled by
Ms. Maranon, has, since November 1995, performed services for us including
investigation of strategic alternatives and assistance with our common stock
offerings. As consideration for these services, we paid to Averil $200,000
during the six months ended December 31, 1996, $22,000 for the year ended
December 31, 1997, $30,000 for the year ended December 31, 1998 and $18,750
during the six months ended June 30, 1999, plus out of pocket expenses. In
connection with our December 1997 offering of common stock, we made an
additional cash payment to Averil of $180,000 and granted to Chloe Holding,
Inc., an affiliate of Averil, currently exercisable warrants to purchase 15,040
shares of common stock at an exercise price of $5.50 per share.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information regarding the beneficial
ownership of the common stock as of September 8, 1999 for:
o each person who is known to us to be the beneficial owner of more
than 5% percent of the outstanding common stock;
o each of our directors;
o each of the Named Executive Officers;
o each of the selling stockholders named in this prospectus; and
o all of our directors and executive officers as a group.
The address of each person listed is in care of Brilliant Digital
Entertainment, Inc., 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills,
California 91367, unless otherwise provided below the person's name.
Shares of common stock that a person has the right to acquire under
options, warrants or other arrangements within 60 days of September 8, 1999 are
deemed outstanding for purposes of computing the percentage ownership of the
person who has the right to acquire the shares but are not deemed outstanding
for computing the percentage ownership of any other person. Except as provided
under applicable community property laws or as indicated in the footnotes to the
table, each stockholder identified in the table possesses sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by that stockholder. The table assumes that all of the shares
of common stock offered by this prospectus are issued to the selling
stockholders under the securities purchase agreement and are sold using this
prospectus.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING THE OFFERING
--------------------- NUMBER OF ---------------------
NAME AND ADDRESS NUMBER PERCENT SHARES OFFERED NUMBER PERCENT
-------- --------- ------------------- -------- ---------
<S> <C> <C> <C> <C> <C>
St. Annes Investments, Ltd.(1).................. 0 -- % 2,000,000 0 -- %
c/o Ultrafinance
Gross Muenster Platz 26
Zurich, Switzerland CH-8022
Trinity Capital Advisors, Inc................... 6,000 * 46,000 0 *
c/o Corporate Filing Services
4th Floor, Harbour Centre
P.O. Box 61 GT
Georgetown, Grand Cayman
Kevin Bermeister (2)............................ 1,247,600 10.4 -- 1,247,600 8.9
Mark Dyne (2)................................... 1,240,600 10.4 -- 1,240,600 8.9
Reefknot Limited (3)............................ 1,200,118 10.1 -- 1,200,118 8.6
One Stokes Place
St. Stephens Green
Dublin 2
Republic of Ireland
Prince Ahmad Bin Khalid Al-Saud................. 1,000,000 8.4 -- 1,000,000 7.2
P. O. Box 1011
Riyadh, Saudi Arabia 11431
Sega Enterprises Limited........................ 780,001 6.5 -- 780,001 5.6
2-12 Haneda 1-Chome
Ohta-Ku, Tokyo 144 Japan
Mark Miller (4)................................. 505,013 4.2 -- 505,013 3.6
Diana Maranon (5)............................... 84,012 * -- 84,012 *
Anthony Rose (6)................................ 48,125 * -- 48,125 *
Michael Ozen (7)................................ 35,000 * -- 35,000 *
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<PAGE>
Ray Musci (8)................................... 28,750 * -- 28,750 *
Garth Saloner (8)............................... 28,750 * -- 28,750 *
Jeff Scheinrock (8)............................. 28,750 * -- 28,750 *
Directors and executive officers
as a group (9 persons) (9)................... 2,386,600 19.6 % -- 2,386,600 16.8 %
- --------------------------------
<FN>
* Less than one percent.
(1) Under the securities purchase agreement, St. Annes will not be required to
purchase a number of shares of our common stock which, when added to all
other shares previously acquired by St. Annes and still owned by St. Annes
would exceed 9.99% of the number of shares of our common stock outstanding
on the applicable purchase date.
(2) Includes 25,000 shares of common stock reserved for issuance upon exercise
of stock options which currently are exercisable, and 430,000 shares of
common stock that may be acquired by a general partnership, of which
Messrs. Bermeister and Dyne are general partners, from Pacific Interactive
Education Pty. Limited upon exercise of an option that currently is
exercisable.
(3) Nicholas Landor, a director of Reefknot Limited, has the authority to vote
and dispose of the shares of common stock held by Reefknot Limited.
(4) Consists of 430,013 shares of common stock held by Pacific Interactive
Education Pty. Limited, 70,000 shares of common stock held by the Mark
Miller Family Trust, of which Pacific Interactive Pty. Limited is trustee,
and 5,000 shares of common stock reserved for issuance upon exercise of
stock options which currently are exercisable. Mark Miller and his wife
are the sole stockholders of Pacific Interactive Education Pty. Limited
and Pacific Interactive Pty. Limited.
(5) Consists of 28,750 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable, and 55,262
shares of common stock underlying warrants which currently are
exercisable.
(6) Consists of 20,000 shares of common stock held by HiTech Corporation
Limited over which Mr. Rose has exclusive voting and investment power, and
28,125 shares of common stock reserved for issuance upon exercise of stock
options which currently are exercisable or will become exercisable on or
before November 7, 1999.
(7) Consists of 35,000 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable or will become
exercisable on or before November 7, 1999.
(8) Consists of 28,750 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable.
(9) Includes 233,125 shares of common stock reserved for issuance upon
exercise of stock options which currently are exercisable or will become
exercisable on or before November 7, 1999, and 55,262 shares of common
stock underlying warrants which currently are exercisable.
</FN>
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue a total of 30,000,000 shares of common stock,
par value $0.001 per share, and 1,000,000 shares of preferred stock, par value
$0.001 per share. The following statements are brief summaries of some
provisions relating to our capital stock.
COMMON STOCK
At September 8, 1999, we had 11,915,999 shares of common stock outstanding
held by approximately 67 holders of record. The holders of common stock are
entitled to one vote for each share of common stock on all matters on which the
holders of common stock are entitled to vote. The holders of common stock are
entitled to receive ratably dividends when, as and if declared by our Board of
Directors out of funds legally available for the payment of dividends. In the
event that we liquidate, dissolve or wind up our business, the holders of common
stock are entitled, subject to the rights of holders of our preferred stock, if
any, to share ratably in all assets remaining available for distribution after
payment of liabilities and after provision is made for each class of stock, if
any, having preference over the common stock.
The holders of common stock have no preemptive or conversion rights, and
we may not subject them to further calls or assessments. There are no redemption
or sinking fund provisions applicable to the common stock. The outstanding
shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
Our Board of Directors has the authority to issue the authorized and
unissued preferred stock in one or more series with such designations, rights
and preferences as may be determined from time to time by our Board of
Directors. Accordingly, our Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of our common stock. In the event of issuance, the preferred
stock could be utilized, under some circumstances, as a way of discouraging,
delaying or preventing anyone from acquiring or effecting a change of control of
BRILLIANT. Other than as may be necessitated by our stockholders' rights plan,
currently we do not intend to issue any shares of our preferred stock.
In March 1998, we adopted a stockholders' rights plan. Under the rights
plan we designated 300,000 shares of our preferred stock as Series A Preferred
Stock, par value $.001 per share, and distributed one preferred share purchase
right for each share of our common stock outstanding on April 2, 1998. Subject
to some exceptions, each share of common stock issued after April 2, 1998 also
will receive one preferred share purchase right. Upon the occurrence of
triggering events related to an unsolicited takeover attempt of BRILLIANT, each
purchase right not owned by the party or parties making the unsolicited takeover
attempt will entitle its holder to purchase from us one one-hundredth of a share
of the Series A Preferred Stock at a purchase price of $15.00, subject to
adjustments, which purchase price will be below the then market value of the
Series A Preferred Stock.
WARRANTS
In December 1997 , we granted to Chloe Holding, Inc., an affiliate of
Averil Capital Markets Group, Inc., warrants to purchase 15,040 shares of common
stock at an exercise price of $5.50 per share. The warrants were granted to
Chloe as consideration for services performed for us by Averil, including
investigation of strategic alternatives and assistance with our 1997 common
stock offering. These warrants currently are exercisable and expire on November
4, 2000. In June 1998, we registered with the Securities and Exchange Commission
the resale by Chloe of the 15,040 shares of common stock underlying the
warrants.
In July 1998, we entered into a strategic alliance with Intel Corporation
and granted Intel warrants to purchase 300,000 shares of common stock. The
warrants currently are exercisable at an exercise price of $4.00 per share and
expire in July 2001. The warrants provide for piggyback registration rights and
for demand registration rights. In July 1999, we filed with the Commission a
registration statement covering the resale by Intel of the 300,000 shares of
common stock underlying the warrants.
In July 1999, in connection with our acquisition of The Auction Channel
and our license of technology used by The Auction Channel, we granted to
iBidLive, N.V. warrants to purchase 400,000 shares of our common stock. Of these
50
<PAGE>
warrants, 200,000 are exercisable at $3.50 per share and expire on December 31,
1999, and 200,000 are exercisable at $4.00 per share and expire on June 30,
2000. We have the right to redeem all, but not less than all, of each 200,000
warrants at a price of $0.001 per share by written notice mailed 30 days prior
to the redemption date. We may give this notice within 20 days following any
period of 15 consecutive trading days during which the closing sale price of the
shares of our common stock on the American Stock Exchange exceeds a per share
price equal to 110% of the respective warrant exercise prices.
All of the warrants granted to Chloe, Intel and iBidLive, N.V. are
entitled to equitable adjustments in the purchase price and in the number of
shares of common stock and/or other securities deliverable upon exercise thereof
in the event of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger.
ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation provides that our Board of Directors is
classified into three classes of directors. Our certificate of incorporation
also provides that all stockholder action must be effected at a duly called
meeting of stockholders and not by a consent in writing. In addition, our
certificate of incorporation and our Bylaws provide that only our Chief
Executive Officer, our President or a majority of the members of our Board of
Directors may call a special meeting of stockholders. In addition, our directors
may not be removed without cause. We also have the authority to issue one or
more series of "blank check" preferred stock, and we have reserved 300,000
shares of our preferred stock for issuance in connection with our stockholders'
rights plan. See "--Preferred Stock." These provisions of our certificate of
incorporation and our Bylaws and our stockholders' rights plan could discourage
potential acquisition proposals and could delay or prevent a change in control
of Brilliant Digital Entertainment. These provisions also may have the effect of
preventing changes in our management. See "Risk Factors -- We have adopted a
number of anti-takeover measures that may depress the price of our common
stock."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with some exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of the person, who is an "interested
stockholder" for a period of three years from the date that the person became an
interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder, excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.
TRANSFER AGENT
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991.
51
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of the shares at a stipulated price per share;
o a combination of any of these methods of sale; and
o any other method permitted pursuant to applicable law.
St. Annes is an "underwriter" within the meaning of the Securities Act of
1933 in connection with its sale of our common stock pursuant to this
prospectus. Broker-dealers who act in connection with the sale of the common
stock may also be deemed to be underwriters. Profits on any resale of the common
stock as a principal by these broker-dealers and any commissions received by the
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act of 1933.
If required, the following information will be disclosed in a prospectus
supplement or, if necessary, an amendment to the registration statement:
o the names of any of agent, dealer or underwriter;
o the price at which the common stock is to be sold;
o the number of shares of common stock involved;
o any applicable commissions or discounts; and
o other facts material to the transaction.
Under applicable rules and regulations under the Securities Exchange Act
of 1934, any person engaged in a distribution of our common stock may not
simultaneously engage in market making activities with respect to the common
stock for a period beginning when the person becomes a distribution participant
and ending upon the person's completion of participation in a distribution,
including stabilization activities in the common stock to effect covering
transactions, to impose penalty bids or to effect passive market making bids. In
addition and without limiting the foregoing, in connection with transactions in
our common stock, we and the selling stockholders will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder, including, without limitation, Rule 10b-5 and, insofar as we and the
selling stockholders are distribution participants, Regulation M and Rules 100,
101, 102, 103, 104 and 105 thereof. All of the foregoing may affect the
marketability of our common stock.
St. Annes has agreed that it will not engage in short sales of our common
stock except during periods of time determined by us when the prohibition on
short sales will not apply.
The selling stockholders will pay all commissions and some other expenses
associated with their sale of our common stock. We are registering the common
stock issued hereby pursuant to our contractual obligations under the securities
purchase agreement, and we have agreed to pay the costs of registering the
shares hereunder. We have also agreed to pay legal fees incurred by St. Annes up
to a maximum of $7,500. We have agreed to indemnify St. Annes with respect to
the common stock subject to this offering against some types of liabilities,
including, without limitation, some liabilities under the Securities Act of
1933, or, if the indemnity is unavailable, to contribute toward amounts required
to be paid in respect of these liabilities.
Trinity Capital Advisors acted as a financial advisor in connection with
the securities purchase agreement
52
<PAGE>
and this offering. In exchange for these services, we will pay Trinity at each
put closing under the securities purchase agreement cash equal to 3% of the
purchase price we receive from St. Annes at the put closing, and we will issue
to Trinity common stock with an aggregate market price equal to 2% of the
purchase price paid by St. Annes at the put closing. See "Securities Purchase
Agreement."
We will issue the shares of common stock to St. Annes at a discount to the
then current market price of the common stock, as defined in the securities
purchase agreement, as follows:
o If the market price is $4.00 or less, then the price for the shares
shall be 86% of the market price; and
o If the market price is greater than $4.00, then the price shall be
88% of the market price.
The market price of our common stock, for purposes of calculating the
purchase price under the securities purchase agreement, is the lowest volume
adjusted price during the ten trading days immediately preceding the date that
we deliver a put notice to St. Annes. The volume adjusted price on a trading day
is equal to (i) the total dollar value of all shares of our common stock traded
on the American Stock Exchange on the trading day, divided by (ii) the total
volume of our common stock traded on the American Stock Exchange on the trading
day.
The table below sets forth the number of shares and the percentages of our
common stock that St. Annes would own if we elected to sell the entire
$6,000,000 worth of stock under the purchase agreement. The share amounts and
the percentages are based on our closing share price of $3.4375 on September 8,
1999, and on assumed closing share prices of $2.58, $1.72 and $0.86, which
prices represent a 25%, 50% and 75% decline, respectively, in our September 8,
1999 closing share price. The percentages are also based on 11,915,999 shares of
our common stock outstanding on September 8, 1999. Under the rules of the
American Stock Exchange, we cannot sell to St. Annes under the purchase
agreement more than 1,881,800 shares of common stock unless we obtain
stockholder approval of the issuance of shares in excess of this amount.
<TABLE>
<CAPTION>
PERCENTAGE DECLINE IN PERCENTAGE OF
SEPTEMBER 8, 1999 ASSUMED SHARES OF OUTSTANDING
CLOSING PRICE CLOSING PRICE COMMON STOCK COMMON STOCK
--------------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C>
-- $ 3.44 2,028,123 14.5%
25% $ 2.58 2,704,164 18.5%
50% $ 1.72 4,056,247 25.4%
75% $ 0.86 8,112,493 40.5%
</TABLE>
53
<PAGE>
LEGAL MATTERS
The validity of the common stock subject to this offering will be passed
upon for us by Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles,
California, counsel to BRILLIANT DITIAL ENTERTAINMENT.
EXPERTS
The financial statements of Brilliant Digital Entertainment, Inc. as of
December 31, 1998 and for each of the two years in the period ended December 31,
1998 included in this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on their authority
as experts in auditing and accounting. The financial statements of Trojan
Television Limited as of June 30, 1998 and 1997 and for the years then ended
included in this prospectus have been so included in reliance on the report of
Edwards & Co, independent accountants, given on their authority as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement under the Securities Act covering the shares to
be sold using this prospectus. This prospectus does not contain all of the
information included in the registration statement and the exhibits to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and with respect to any contract or other document filed as an exhibit
to the registration statement, reference is made to the exhibit for a more
complete description of the matter involved. For further information about us
and the shares offered using this prospectus, please refer to the registration
statement and the exhibits to the registration statement. A copy of the
registration statement, including the exhibits, may be inspected without charge
at the Securities and Exchange Commission's principal office in Washington,
D.C., and copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon
payment of prescribed rates.
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can read and copy
these documents at the SEC's Public Reference Room, located at 450 Fifth Street,
NW, Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Our SEC filings are also
available on the SEC's Web Site at http://www.sec.gov. You can also read our SEC
filings at the American Stock Exchange, 86 Trinity Plaza, New York, New York.
54
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL
ENTERTAINMENT, INC.
<S> <C>
Report of Independent Accountants...........................................F-3
Consolidated Balance Sheet as of December 31, 1998
and June 30, 1999 (unaudited).........................................F-4
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998, and the six months ended
June 30, 1998 and 1999 (unaudited)....................................F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1998, and the six months
ended June 30, 1999 (unaudited)........................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998, and the six months ended
June 30, 1998 and 1999 (unaudited).....................................F-7
Notes to Consolidated Financial Statements..................................F-9
FINANCIAL STATEMENTS OF TROJAN TELEVISION LIMITED
Report of the Auditors to the Members .....................................F-21
Statement of Operations and Accumulated Deficit for the
Year Ended 30th June 1998.............................................F-22
Balance Sheet As at 30th June 1998.........................................F-23
Statements of Cash Flows As at 30th June 1998..............................F-24
Notes to the Financial Statements For the Year Ended 30th June 1998........F-25
Report of the Auditors to the Members......................................F-28
Statement of Operations and Accumulated Deficit for
the Period Ended 30th June 1997.......................................F-29
Balance Sheet As at 30th June 1997.........................................F-30
Statements of Cash Flows As at 30th June 1997..............................F-31
Notes to the Financial Statements for the Period Ended 30th June 1997......F-32
Statement of Operations and Accumulated Deficit for the
Period Ended 30th June 1999 (unaudited)...............................F-35
Balance Sheet As at 30th June 1999 (unaudited).............................F-36
Statements of Cash Flows As at 30th June 1999 (unaudited)..................F-37
Notes to the Financial Statements For the
Period Ended 30th June 1999 (unaudited)...............................F-38
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Combined Financial Statements..........................F-41
Unaudited Pro Forma Condensed Consolidated Statement of
Operations Including Trojan Television Acquisition
for the Year Ended December 31, 1998..................................F-42
Unaudited Pro Forma Condensed Consolidated Balance Sheet Including
Trojan Television Acquisition at June 30, 1999........................F-43
Unaudited Pro Forma Condensed Consolidated Statement of
Operations Including Trojan Television Acquisition
for the Six Months Ended June 30, 1999................................F-44
Notes to Unaudited Pro Forma Combined Financial Statements.................F-45
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brilliant Digital Entertainment, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations and stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Brilliant Digital Entertainment, Inc. (the "Company") and its subsidiary at
December 31, 1998, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
March 29, 1999, except for the third paragraph of Note 11, as to which the date
is April 14, 1999
Los Angeles, California
F-3
<PAGE>
<TABLE>
<CAPTION>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
DECEMBER 31, JUNE 30,
1998 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 3,187 $ 4,587
Accounts receivable, net............................................... 2,139 2,131
Accounts receivable -- related party................................... -- 316
Other assets........................................................... 310 288
----------------- -----------------
Total current assets........................................................ 5,636 7,322
Property, plant and equipment, net.......................................... 754 599
Movie software costs........................................................ 626 415
Other assets, net........................................................... 437 398
----------------- -----------------
Total assets................................................................ $ 7,453 $ 8,734
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable....................................................... $ 274 $ 329
Accrued expenses....................................................... 1,250 1,215
Current portion of note payable........................................ 28 172
----------------- -----------------
Total current liabilities................................................... 1,552 1,716
Note payable, less current portion.......................................... 97 83
Convertible debenture....................................................... 100 250
Other long term liabilities................................................. 146 74
----------------- -----------------
Total liabilities........................................................... 1,895 2,123
Commitments and contingencies
Stockholders' equity:
Preferred Stock ($0.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding).................................... -- --
Common Stock ($0.001 par value; 30,000,000 shares authorized;
9,409,001 shares issued and outstanding at December 31, 1998;
11,756,281 shares issued and outstanding at June 30, 1999).......... 9 12
Additional paid-in capital............................................. 21,357 26,494
Accumulated deficit.................................................... (15,685) (19,798)
Accumulated other comprehensive income (loss).......................... (123) (97)
----------------- -----------------
Total stockholders' equity.................................................. 5,558 6,611
----------------- -----------------
Total liabilities and stockholders' equity.................................. $ 7,453 $ 8,734
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------- ----------------------------------
1997 1998 1998 1999
---------------- -------------- ----------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software sales................................... $ 2,246 $ 221 $ 32 $ 233
Development fees................................. 235 210 -- 101
---------------- -------------- ----------------- ----------------
Total revenues.............................. 2,481 431 32 334
Cost of revenues.................................... 44 1,383 346 349
---------------- -------------- ----------------- ----------------
Gross profit (loss)................................. 2,437 (952) (314) (15)
Operating expenses:
Sales and marketing.............................. 1,090 1,785 991 479
General and administrative....................... 2,217 2,936 1,244 1,536
Research and development......................... 1,709 3,798 1,652 1,883
Depreciation..................................... 214 390 132 270
---------------- -------------- ----------------- ----------------
Total operating expenses.................... 5,230 8,909 4,019 4,168
---------------- -------------- ----------------- ----------------
Income (loss) from operations....................... (2,793) (9,861) (4,333) (4,183)
Other income (expense):
Export market development grant.................. 148 73 33 127
Gain (loss) on foreign exchange transactions..... 27 (5) (6) (5)
Debenture epense................................. -- -- -- (55)
Interest income.................................. 313 399 260 75
Interest expense................................. -- (31) (4) (71)
---------------- -------------- ----------------- ----------------
Total other income (expense)................ 488 436 283 71
---------------- -------------- ----------------- ----------------
Income (loss) before income taxes................... (2,305) (9,425) (4,050) (4,112)
Income taxes........................................ -- -- --
---------------- -------------- ----------------- ----------------
Net income (loss)................................... $ (2,305) $ (9,425) $ (4,050) $ (4,112)
================ ============== ================= ================
Other comprehensive income:
Foreign currency translation adjustment
(net of tax effects of $ 0)................... (168) 72 4 26
---------------- -------------- ----------------- ----------------
Comprehensive income (loss)......................... $ (2,473) $ (9,353) $ (4,046) $ (4,086)
================ ============== ================= ================
Basic and diluted net income (loss) per share....... $ (0.31) $ (1.00) $ (0.43) $ (0.41)
================ ============== ================= ================
Weighted average number of shares
used in computing basic and diluted
net income (loss) per share......................... 7,384 9,403 9,403 10,131
================ ============== ================= ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
COMMON STOCK RETAINED ACCUMULATED
-------------------- ADDITIONAL EARNINGS OTHER
NO. OF PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) TOTAL
------------ -------- ----------- -------------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... 7,200,001 $ 7 $ 11,320 $ (3,955) $ (27) $7,345
Grant of warrants.................. -- -- 140 -- -- 140
Grant of stock options............. -- -- 12 -- -- 12
Exercise of stock options.......... 3,000 -- -- -- -- --
Public offering, net of expenses
of $1,202...................... 2,200,000 2 9,796 -- -- 9,798
Foreign exchange translation (168
(net of tax of $0)............. -- -- -- -- (168) )
Net loss........................... -- -- -- (2,305) -- (2,305)
------------ -------- ------------ --------------- --------------- ---------
Balance at December 31, 1997......... 9,403,001 9 21,268 (6,260) (195) 14,822
Grant of warrants.................. -- -- 80 -- -- 80
Grant of stock options............. -- -- 9 -- -- 9
Issuance of shares................. 6,000 -- -- -- -- --
Foreign exchange translation
(net of tax of $0)............. -- -- -- -- 72 72
Net loss........................... -- -- -- (9,425) -- (9,425)
------------ -------- ------------ --------------- --------------- ---------
Balance at December 31, 1998......... 9,409,001 9 21,357 (15,685) (123) 5,558
Exercise of stock options.......... 4,375 -- 6 -- -- 6
Issuance of shares................. 2,137,883 3 4,324 -- -- 4,327
Converted debenture................ 205,522 -- 807 -- -- 807
Foreign exchange translation
(net of tax of $0) (unaudited). -- -- -- -- 26 26
Net loss (unaudited)............... -- -- -- (4,113) -- (4,113)
------------ -------- ------------ --------------- --------------- ---------
Balance at June 30, 1999
(unaudited)...................... 11,756,281 $ 12 $ 26,494 $ (19,798) $ (97) $ 6,611
============ ======== ============ =============== =============== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss)................................... $ (2,305) $ (9,425) $ (4,050) $ (4,112)
Adjustments to reconcile net income (loss)
to the net cash provided by (used in)
operating activities:
Depreciation and other amortization............. 473 691 282 380
Amortization of movie software costs............ -- 1,146 306 258
Effect of warrants granted...................... 140 64 -- --
Effect of stock options granted................. 12 9 -- --
Debenture expense............................... -- -- -- 55
Changes in operating assets and liabilities:
Accounts receivable.......................... (1,986) (51) 121 8
Accounts receivable - related party.......... -- -- -- (316)
Movie software costs......................... (1,284) (795) (821) --
Other assets................................. (478) (80) (41) (45)
Accounts payable and accruals................ 1,225 (487) (337) 105
Deferred revenue............................. (154) -- -- --
Long-term liabilities........................ -- -- -- (71)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities. (4,357) (8,928) (4,540) (3,738)
INVESTING ACTIVITIES
Purchases of equipment.............................. (599) (549) (469) (62)
----------- ----------- ----------- -----------
Net cash used in investing activities............... (599) (549) (469) (62)
FINANCING ACTIVITIES
Proceeds from issuance of shares.................... 9,798 -- -- 4,384
Proceeds from issuance of convertible debenture
and warrants, net of costs....................... -- 83 -- 951
Proceeds from issuance of note...................... -- 104
Repayments of notes................................. -- (13) -- (14)
Repayment of debenture.............................. -- -- -- (100)
Repayment of amounts payable to related parties..... (78) -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities........... 9,720 174 -- (5,221)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................ 4,764 (9,303) (5,009) 1,421
Translation adjustments............................. (17) 152 90 (21)
Cash and cash equivalents at beginning
of period......................................... 7,591 12,338 12,338 3,187
----------- ----------- ----------- -----------
Cash and cash equivalents at end of
Period............................................ $ 12,338 $ 3,187 $ 7,419 $ 4,587
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................... $ -- $ 26 $ 4 $ 9
=========== =========== =========== ============
Income Taxes................................ $ -- $ 19 $ 15 $ --
=========== =========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
The Company has an insurance policy with a term extending to November 2000.
Insurance premiums of $240,000 for coverage after December 31, 1998 are included
in Other Assets, current and long term, and Liabilities, current and long term,
and represent a non cash financing activity.
F-8
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Brilliant Digital Entertainment, Inc. ("Brilliant" or the "Company") is a
production and development studio producing digital entertainment for
distribution over the Internet and on CD-ROM and DVD. In July 1996, the Company
incorporated in the State of Delaware and, in August 1996, issued an aggregate
of 1,000,000 shares of its Common Stock in exchange for all of the capital stock
of Brilliant Interactive Ideas, Pty. Ltd., a company incorporated in the State
of New South Wales, Australia ("BII Australia"). Historically, BII Australia
developed, produced and marketed interactive multimedia titles for the education
and entertainment markets. BII Australia has one subsidiary, Sega Australia New
Development ("SAND"), which the Company acquired in September 1996. SAND owns
the rights to proprietary software tools which are designed to allow the Company
to both develop a new genre of digital entertainment products, and to cost
effectively produce ancillary products. The Company operates principally in the
computer software industry.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of Brilliant and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated.
REVENUE RECOGNITION
Software sales entered into prior to December 15, 1997 were accounted for
in accordance with AICPA Statement of Position ("SOP") 91-1, "Software Revenue
Recognition." For transactions entered into after December 15, 1997 the Company
recognizes revenue from the sale of software in accordance with SOP 97-2,
"Software Revenue Recognition". SOP 97-2 provides guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software.
SOFTWARE SALES: The Company grants distribution rights to its CD-ROM
products to distributors in exchange for a non-refundable minimum fixed fee and
a percentage of sales of the products. Revenue related to the non-refundable
minimum fixed fee is recognized when the CD-ROM master is delivered to the
customer and the other criteria of SOP 97-2 are met. Revenue related to a
percentage of sales is recognized upon notification by the distributor that a
royalty has been earned by the Company. Software sales resulting from the
Company selling completed software products are recognized upon shipment of
product. It is the Company's policy to provide for estimated returns at the time
software sales revenue is recognized. At December 31, 1998 the Company had a
provision for returns of $125,000.
DEVELOPMENT FEES: The Company receives development fees in exchange for
the development of CD-ROM products pursuant to agreements with customers. The
software development agreements generally specify certain "milestones" which
must be achieved throughout the development process. As these milestones are
achieved, the Company recognizes the portion of the development fee allocated to
each milestone. Generally, the customers will recoup the development fees from
royalties paid from the revenues generated by the products.
COST OF REVENUES
Cost of revenues consists primarily of royalties to third parties,
amortization of capitalized movie software costs, and the direct costs required
to reproduce and package software products.
RESEARCH AND DEVELOPMENT COSTS
The Company incurs research and development costs relating to the
development of traditional CD-ROM software tools which provide the technical
infrastructure for production of CD-ROM titles produced by the Company. The
Company incurred research and development costs of $1,709,000 and $3,798,000 for
the year ended December 31, 1997 and the year ended December 31, 1998,
respectively.
F-9
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
MOVIE SOFTWARE COSTS
Movie software costs consist of the costs of development and production of
digitally animated Multipath Movies including labor, material and production
overhead.
The Company's accounting policy follows Statement of Financial Accounting
Standards No. 86 ("SFAS No. 86"), which provides for the capitalization of
software development costs once technological feasibility is established. The
capitalized costs are then amortized beginning on the date the product is made
available for sale either on a straight-line basis over the estimated product
life or on a ratio of current revenues to total projected product revenues,
whichever results in the greater amortization amount. Prior to reaching
technological feasibility, the Company expenses all costs related to the
development of both its software tools and Multipath Movie titles. The Company
achieved technological feasibility of its original Digital Projector during the
third quarter of 1997 and began capitalizing certain development costs related
to the production of Multipath Movies in accordance with SFAS No. 86. Since the
date of achieving technological feasibility, the costs of developing Multipath
Movies intended to be viewed on the original projector have been capitalized in
accordance with SFAS No. 86. Multipath Movies developed by the Company
subsequent to the first quarter of 1998 are intended to be viewed on a new
Digital Projector, which was released in the fourth quarter of 1998. The Company
has written off amounts incurred subsequent to the first quarter of 1998 in the
development and production of Multipath Movies designed to be viewed on the new
Digital Projector. As the technology on which the Company's product is designed
to operate is continuously changing, management considers that a reserve against
capitalized costs is necessary. Therefore no additional movie development costs
are anticipated to be capitalized in the future. To the extent capitalized movie
software costs are attributable to titles which have begun to ship, they are
subject to amortization. Amortized amounts of $312,000 have been included in
costs of revenues for the year ended December 31, 1998.
Movie software costs are stated at the lower of unamortized cost or
estimated net realizable value. To the extent that unamortized movie software
costs exceed anticipated revenues, an additional amortization charge is made to
current operations to reduce the capitalized costs to net realizable value. For
the year ended December 31, 1998, the Company expensed $834,000 to reduce the
capitalized costs to net realizable value.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when acquired to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over estimated useful
lives or lease life ranging up to five years.
INCOME TAXES
The Company uses the asset and liability method to account for income
taxes as required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rules and laws that will be in effect when the differences are expected to
reverse.
FOREIGN CURRENCY TRANSLATION
The functional currency of BII Australia is its local currency, Australian
dollars. Assets and liabilities of BII Australia are translated into U.S.
dollars (the reporting currency) using current exchange rates ($0.6123 at
December 31, 1998), and revenues and expenses are translated into U.S. dollars
using average exchange rates ($0.7424 for the year ended December 31, 1997 and
$0.6322 for the year ended December 31, 1998). The effects of foreign currency
translation adjustments are deferred and included as a component of
stockholders' equity.
F-10
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Foreign currency transaction gains and losses result from the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Foreign currency transaction gains (losses) are included in
the statements of operations.
NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"). SFAS No. 128, effective for periods ending after December 15, 1997,
revised the computation, presentation, and disclosure requirements of earnings
per share. Principal among computation revisions is the replacement of primary
earnings per share with basic earnings per share, which does not consider common
stock equivalents. In addition, SFAS No. 128 modifies certain dilutive
computations and replaces fully diluted earnings per share with diluted earnings
per share. Common equivalent shares from stock options and warrants (using the
treasury stock method) have been included in this computation when dilutive.
Options and warrants representing common shares of 1,223,262 and 2,166,262
shares were excluded from the average number of common and common equivalent
shares outstanding in the diluted EPS calculation for the years ended December
31, 1997 and 1998, respectively, because they were anti-dilutive.
STOCK OPTIONS
The Company accounts for employee stock options or similar equity
instruments in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS
No. 123 defines a fair-value-based method of accounting for employee stock
options or similar equity instruments. This statement gives entities a choice to
recognize related compensation expense by adopting the new fair-value method or
to measure compensation using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, the former standard. If the former
standard for measurement is elected, SFAS No. 123 requires supplemental
disclosure to show the effect of using the new measurement criteria. The Company
has used the intrinsic value method prescribed by APB Opinion No. 25. See Note 5
for supplemental disclosure.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company has investment policies that limit investments
to short-term investment grade securities. Accounts receivable are principally
from distributors and retailers of the Company's products. The Company performs
credit evaluations and generally does not require collateral. At December 31,
1998, 88% of the Company's accounts receivable arose from a non-exclusive CD-ROM
Distribution Agreement (the "Distribution Agreement") with one customer, Packard
Bell NEC. Management is aware that Packard Bell NEC has significantly delayed
distribution of the Company's titles bundled with Packard Bell NEC's computers.
In addition to the delay, Packard Bell NEC has bundled the Company's software on
significantly fewer computers than required. As a result of these factors
management believes that Packard Bell NEC will not be able to comply with the
terms of the Distribution Agreement, specifically Packard Bell NEC's commitment
to ship the Company's software with 6 million computers with at least 2 million
of such computers being shipped within 12 months of the commencement of such
shipment, subject to an extension not to exceed 6 months (the "shipment
period"). Such shipment triggers Packard Bell NEC's obligation to pay a minimum
royalty of $1,973,333 at the rate of $1 for each Packard Bell NEC computer
shipped with the Company's product. The full minimum royalty amount is
contractually due by no later than the end of the shipment period, regardless of
actual shipments by Packard Bell NEC of personal computers containing the
Company's product. Management believes that it has contractual right to payment
by Packard Bell NEC of the minimum guaranteed amount no later than the end of
the shipment period.
The Company analyzes customer receivables to determine the necessity of an
allowance for doubtful accounts. For the year ended December 31, 1998 a
provision of $15,000 was considered necessary.
F-11
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for prior years have been reclassified to conform with the
1998 financial statement presentation.
3. RELATED PARTY TRANSACTIONS
Mark Miller, Brilliant's Vice President, Operations and Production and
Director, is a shareholder and director of Pacific Interactive Education Pty.
Ltd. ("PIE"). BII Australia periodically purchases certain computer
equipment from PIE. For the year ended December 31, 1998, BII Australia's
purchases totaled $41,000 in computer equipment and $9,000 in software.
Mark Miller is a shareholder of Multimedia Connexion Pty. Ltd. BII
Australia periodically purchases hardware and software from Multimedia
Connexion Pty. Ltd. For the year ended December 31, 1997 and the year ended
December 31, 1998, BII Australia purchased computer equipment totaling
$121,000 and $57,000, respectively. Additionally, Mrs. S. Miller received
$27,000 from BII Australia for administrative services during the year ended
December 31, 1998.
Mark Dyne, Brilliant's Chairman and Chief Executive Officer and Director,
is a director of Monto Holdings Pty. Ltd. ("Monto"). In 1995 Monto entered into
a multimedia production agreement with BII Australia and paid BII for the
production of completed software packages. BII Australia has arranged for
publication and distribution of completed software packages and is obligated to
pay to Monto 50% of the net receipts from the sale of the software packages. At
December 31, 1997 and at December 31, 1998 the liability to Monto was $4,000.
There were no transactions during 1998.
Mark Dyne and Kevin Bermeister, Brilliant's President and Director, are
directors and shareholders of Sega Ozisoft Pty. Ltd. ("Sega Ozisoft") Sega
Ozisoft purchased $26,000 of product from the Company during the year ended
December 31, 1998.
Kevin Bermeister and his personal assistant received payment from BII
Australia for management services through Bassac Holdings P/L, a company
controlled by Kevin Bermeister, in the amount of $27,000 for the year ended
December 31, 1998.
Kevin Bermeister and Mark Dyne are both directors and shareholders of
Packard Bell Pty. Ltd. BII Australia purchased an aggregate of approximately
$7,000 and $13,000 in goods from Packard Bell Pty. Ltd. during the year ended
December 31, 1997 and the year ended December 31, 1998, respectively.
Averil Capital Markets Group, Inc. ("Averil"), a financial advisory firm
founded and controlled by Diana Maranon, a director of the Company, has
performed services for the Company including investigation of strategic
alternatives and assistance with the Company's common stock offerings. As
consideration for such services, the Company paid to Averil $22,000 for the year
ended December 31, 1997, and $30,000 for the year ended December 31, 1998, plus
out of pocket expenses. In 1996 the Company granted to Chloe Holding, Inc.
("Chloe"), an affiliate of Averil, currently exercisable warrants to purchase
40,222 shares of Common Stock with an exercise price of $0.0326 per share. In
connection with the Company's December 1997 offering of Common Stock, the
Company made a cash payment to Averil of $180,000 and granted to Chloe warrants
to purchase 15,040 shares of Common Stock at an exercise price of 110% of the
offering price.
Gary Barber was a shareholder of Morgan Creek Productions, Inc. and a
director of the Company from October 1996 until November 1998 at which time he
tendered his resignation from the Company's Board of Directors. From May 1989
until July 1997, Mr. Barber was employed by Morgan Creek Productions, Inc. From
January 1995 until July 1997, he was Vice Chairman and Chief Operating Officer
of Morgan Creek Productions, Inc. In September 1996, the Company entered into a
strategic relationship with Morgan Creek Interactive, Inc. ("Morgan Creek"), an
affiliate of Morgan Creek Productions, Inc.,
F-12
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
to provide creative product for the Company's Multipath Movies. Pursuant to
the agreement between the Company and Morgan Creek, the Company is obligated
to fund entirely the development of two Multipath Movies. The first project
commenced under this agreement is a thirteen episode comedy adventure series
featuring the Ace Ventura character.
4. NOTES PAYABLE
On July 17, 1998 the Company entered into a Senior Secured Promissory Note
(the "Note"). The original principal amount of $103,893 plus interest at a rate
of 15.18% is due in 60 equal monthly payments plus one final payment equal to
10% of the original principal amount. The Note is collateralized by office
furniture and equipment.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held
of record on all matters on which the holders of Common Stock are entitled to
vote. The holders of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors out of funds legally available therefore.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled subject to the rights of holders of
Preferred Stock issued by the Company, if any, to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision is made for each class of stock, if any, having preference over
the Common Stock.
In March 1998 the Company adopted a stockholder's rights plan and, in
connection therewith, distributed one preferred share purchase right for each
outstanding share of the Company's Common Stock outstanding on April 2, 1998.
Upon the occurrence of certain events, each purchase right not owned by certain
hostile acquirers will entitle its holder to purchase shares of the Company's
Series A Preferred Stock, which is convertible into Common Stock, at a value
below the then current market value of the preferred stock. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the share purchase rights and of any Preferred
Stock that may be issued in the future.
The holders of Common Stock have no preemptive or conversion rights and
they are not subject to further calls or assessments by the Company. There are
no redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock,
par value $0.001 per share. As of December 31, 1998 no shares were issued or
outstanding. The Board of Directors has the authority to issue the authorized
and unissued Preferred Stock in one or more series with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock.
WARRANTS
In September 1997, the Company issued warrants to purchase 200,000 shares
of the Company's Common Stock, exercisable at $10.00, in connection with a
distribution agreement. The warrants expired in February 1999. The value of the
warrants is calculated to be $140,000 which has been recorded as an expense
charge to operations with a corresponding credit to stockholders' equity.
In July 1998, the Company issued warrants to purchase 300,000 shares of
the Company's Common Stock exercisable at $4.00 per share to a computer chip
manufacturer. The warrants were issued as partial consideration for the computer
chip manufacturers' obligations under that certain Software Development
Agreement, dated as of July 14, 1998, between the Company and the partner. The
warrants are currently exercisable and expire in July 2001. In association with
the warrants, the
F-13
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Company recognized $64,000 of consulting expense with the balance of the
value recorded in Other Assets at December 31, 1998.
On December 3, 1998, the Company issued a $100,000 convertible debenture
due December 1, 2000 and a Common Stock purchase warrant to purchase up to
1,800,000 shares of Common Stock expiring on November 30, 2001. The convertible
debenture bears interest at a rate of 4% payable quarterly in arrears.
The debenture holder may convert the debenture into shares of Common Stock
at any time. The conversion price is 86% of the market price (as described
below) on the date that the holder delivers a conversion notice. On the maturity
date of the debenture, the unpaid balance of the debenture and any accrued and
unpaid interest will convert automatically into shares of Common Stock valued at
the conversion price on the maturity date. The Company can, at any time, prepay
all or any portion of the outstanding balance plus accrued interest in cash or
in common shares at the conversion price.
The holder of the warrant may exercise the warrant in full at an exercise
price of $25 per share from October 1, 2001 until the warrant expires. The
Company can elect to cancel the warrant in full upon 30 days written notice. The
Company may call a portion of the warrant for redemption at any time, subject to
minimum and maximum limits and provided that the "market price" of the Common
Stock is at least $1.00 per share and that a registration statement covering the
shares underlying the warrant is effective. Upon any call, the warrant holder
may acquire shares by exercising the portion of the warrant called. The exercise
price will be 88% of the "market price," defined as the lowest trade price of
Brilliant's Common Stock on the American Stock Exchange over the last ten
trading days prior to the redemption notice date. If the market price is $4.00
or less, the exercise price will be reduced to 86% of the market price. The
holder may elect not to exercise shares upon a call. In this case the holder
must issue the Company a convertible debenture similar to that described above,
equal to the value of the shares not exercised at the conversion price. In
addition warrants not exercised upon call by the Company are canceled. See Note
11 to the Consolidated Financial Statements for a description of the rescission
of this convertible debentures and warrant subsequent to year end.
As compensation for financial advisory services in connection with the
issuance of the debenture and the warrant, the Company issued 6,000 shares of
the Common Stock to its financial advisor the value of which has been recorded
as a cost of raising capital. A registration statement covering the shares
underlying the convertible debenture and the warrant has not been declared
effective by the governing authoritative body. The Company has issued the shares
of Common Stock in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
1996 STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "1996 Plan") which became
effective on September 13, 1996. Each director, officer, employee or consultant
of the Company or any of its subsidiaries is eligible to be considered for the
grant of awards under the 1996 Plan. The maximum number of shares of Common
Stock that may be issued pursuant to awards granted under the 1996 Plan is
1,080,000, subject to certain adjustments to prevent dilution. Any shares of
Common Stock subject to an award which for any reason expires or terminates
unexercised are again available for issuance under the 1996 Plan. The maximum
number of shares of Common Stock with respect to which options or rights may be
granted under the 1996 Plan to any executive or other employee during any fiscal
year is 100,000, subject to certain adjustments to prevent dilution. Although
any award that was duly granted may thereafter be exercised or settled in
accordance with its terms, no shares of Common Stock may be issued pursuant to
any award made after September 13, 2006. Options granted generally have a term
of 10 years and usually vest over 4 years at the rate of 25% per year beginning
on the first day in the year subsequent to the year of the grant.
During 1996 the Board had granted options covering an aggregate of 185,000
shares of Common Stock to certain directors (125,000 shares) and employees
(60,000 shares) of the Company, with an exercise price of $10 per share. In
November 1996, the exercise price of the options was repriced to $4.00 per
share. The directors options were granted effective as each director joined the
Board of Directors and were immediately fully vested. The options granted to
employees vest over a four-year period. In connection with these employee stock
options, $15,000 was recognized as compensation expense in each of the years
ended December 31, 1997 and December 31, 1998, and deferred compensation of
$31,000 is included in other assets at December 31, 1998.
F-14
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
During 1997 the Company granted additional options covering 101,000 shares
of Common Stock to certain employees of the Company with a weighted average
exercise price of $5.19 per share, and vesting over a 4 year period. In
connection with these employee stock options, compensation expense of $12,000
was recognized in 1997.
During April 1998 the Company authorized the issuance of an additional
527,000 options to employees pursuant to the 1996 Plan, of which 502,000 had an
exercise price of $2.75 per share and 25,000 had an exercise price of $2.31 per
share. The options vest over a four year period. 65,000 options were forfeited
with the separation of seven employees from the Company.
In October 16, 1998 all of the outstanding stock options were repriced at
$1.50 per share. As a term of this repricing, all repriced options which had
already vested were not exercisable for a period of 120 days from the date of
the repricing. In addition, those repriced options which were scheduled to vest
on January 1, 1999 would now vest on April 1, 1999.
In October 1998 the Company granted 100,000 options to an outside
consultant. These options have a strike price of $1 13/16 per share which was
equal to the market price of the Company's Common Stock on the date of grant.
10,000 of the options vested immediately with the balance vesting upon the
achievement by the outside consultant of certain performance criteria by no
later than April 30, 1999. The Company has recorded consulting expense of $9,000
during the year ended December 31, 1998 which is equal to the value of the
options which vested immediately.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
NUMBER
OF SHARES OPTION PRICE
------------ --------------
<S> <C> <C>
Outstanding at December 31, 1996 185,000 $4.00
Granted 101,000 $0.01-$6.38
Exercised (3,000) $0.01
- -------------------------------------------------------------------------------
Outstanding at December 31, 1997 283,000 $4.00-$6.38
Granted 627,000 $1.50-$2.75
Forfeited (65,000) $1.50-$5.875
- -------------------------------------------------------------------------------
Outstanding at December 31, 1998 845,000 $1.50
Exercisable at December 31, 1998 0
</TABLE>
As discussed in Note 2, the Company has adopted the disclosure-only
provisions of SFAS No. 123 which requires the use of option valuation models to
provide supplemental information regarding options granted after 1994. Pro forma
information regarding net loss and loss per share shown below was determined as
if the Company had accounted for its employee stock options using the fair value
method pursuant to SFAS No. 123.
The fair value of the options as examined at the date of grant is based on
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1998, respectively: interest rates of 6.0% and 5.5%;
dividend yields of 0% for both years; volatility factors of the expected market
price of the Company's common stock of 45.0% and 65.0%; and expected life of the
options of 3 years for both years. These assumptions resulted in a weighted
average fair value of $2.03 and $1.12 per share for stock options granted in
1997 and 1998, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have not been traded. In addition, the assumptions used in option
valuation models are highly subjective, particularly the expected stock price
volatility of the underlying stock. Because changes in these subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of the options is amortized to expense over the
options' vesting periods. The pro forma effect on net loss for 1997 and 1998 is
not representative of the pro forma effect on net income (loss) in future years
because it reflects expense for only one
F-15
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
year's vesting. Pro forma information in future years will also reflect the
amortization of any stock options granted in succeeding years. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Net loss, as reported.................................. $(2,305,000) $(9,425,000)
Net loss, pro forma.................................... $(2,409,000) $(9,606,000)
Basic and diluted loss per share, as reported.......... $(0.31) $(1.00)
Basic and diluted loss per share, pro forma............ $(0.33) $(1.02)
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
In 1995, Pick Two Limited ("Pick Two"), made a $193,000 non-refundable
advance to BII Australia to develop certain software. In 1996, Pick Two made an
additional $19,000 non-refundable advance to BII Australia. These advances were
non-interest bearing, and were to be repaid from proceeds from the sales of the
completed software. During the six months ended December 31, 1996, approximately
$48,000 of the advances were repaid out of proceeds received from the sale of
certain research materials. During the year ended December 31, 1997 the balance
of the advances were recognized as revenue. During 1998 there were no further
advances or revenue recognition.
In September 1996, the Company entered into a strategic relationship with
Crawford Productions Pty., Ltd. ("Crawford") to provide creative product for the
Company's Multipath Movies. Pursuant to the agreement between the Company and
Crawford, the Company is obligated to contribute up to one half of the costs
incurred to develop and produce each project selected by the parties, if any,
for development into Multipath Movie titles, which cost per film is anticipated
to be approximately $790,000. To date, no projects have been identified for
development by the parties and it is unlikely that any project will be
identified in the future.
The Company has an obligation under its joint venture agreement with KISS
Digital, LLC to fund 75% of the development of a Multipath Movie, up to
$900,000.
At December 31, 1998, the Company was obligated under certain licensing
agreements to make minimum payments totaling $142,000 for use of certain
properties and characters in development of its products.
The Company leases its facilities under operating lease agreements
expiring through 2003. Future minimum payments as of December 31, 1998 under
these leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 321,000
2000 283,000
2001 128,000
2002 71,000
2003 6,000
-------------
$809,000
=============
</TABLE>
Rent expense was $166,000 and $273,000 for the year ended December 31,
1997 and the year ended December 31, 1998, respectively.
7. INCOME TAXES
The Company has adopted the asset and liability method of accounting for
income taxes. Income tax expense shown in the statements of operations is
calculated on the operating profit before tax, adjusted for items which, due to
treatment under income tax legislation, create permanent differences between
accounting profit and taxable income. Deferred income taxes
F-16
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
under FAS No. 109 reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
BII Australia has NOL's of approximately $371,000 at December 31, 1998,
which are available for offset against Australian taxable income in the future.
These NOL's may be carried forward indefinitely. At December 31, 1998 the
Company's U.S. parent has cumulative tax losses resulting in NOL carry forwards
of approximately $14,312,000. The losses will begin to expire in the year 2011.
No tax benefit has been recorded for these NOL's.
The significant components of the net deferred tax assets and liabilities
recorded in the accompanying consolidated balance sheet as of December 31, 1998
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
----------------
Deferred tax assets:
<S> <C>
Acquired in-process research and development.......................... $270,000
Stock options......................................................... 62,000
Warrants issued....................................................... 523,000
Accruals and reserves................................................. 219,000
Net operating loss carry forward...................................... 5,863,000
Other deferred tax assets............................................. 4,000
----------------
Total deferred tax assets............................................. 6,941,000
Valuation allowance................................................... 6,623,000
----------------
Net deferred tax assets.................................................. 318,000
Deferred tax liabilities:
Deferred movie software costs......................................... 318,000
----------------
Net deferred tax assets (liabilities) ................................... --
================
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1998 was an increase of $4,275,000.
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
----------------- -------------------
<S> <C> <C>
Federal income tax rate.............................. 34% 34%
Foreign and U. S. tax effect attributable to
foreign operations................................ -- --
Effect of net operating loss and net operating loss
carry forward..................................... (34) (34)
----------------- -------------------
Effective income tax rate............................ 0% 0%
================= ===================
</TABLE>
F-17
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------
<S> <C>
Computers and equipment............................ $1,315,000
Leasehold improvements............................. 191,000
Furniture and fixtures............................. 124,000
------------------
1,630,000
Less accumulated depreciation...................... (876,000 )
------------------
$754,000
==================
</TABLE>
9. ACCRUED EXPENSES
Accrued Expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-----------------
<S> <C>
Employee compensation.............................. $ 873,000
Insurance.......................................... 144,000
Advertising........................................ 88,000
Legal and accounting............................... 71,000
Other.............................................. 74,000
-----------------
$ 1,250,000
=================
</TABLE>
F-18
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company's operations consist of the operations of BII in Australia
and of Brilliant in the United States and the United Kingdom. The following
schedule sets forth the revenues and accounts receivable of the Company by
geographic area:
<TABLE>
<CAPTION>
UNITED STATES AUSTRALIA OTHER
------------- ----------- ------
Year ended December 31, 1997:
<S> <C> <C> <C>
Revenues from unaffiliated customers............... $2,229,000 $196,000 $56,000
Revenues from affiliated customers................. -- -- --
-------------- --------------- --------------
Total revenues..................................... $2,229,000 $196,000 $56,000
============== =============== ==============
Year ended December 31, 1998:
Revenues from unaffiliated customers............... $303,000 $25,000 $77,000
Revenues from affiliated customers................. -- 26,000 --
-------------- --------------- --------------
Total revenues..................................... $303,000 $51,000 $77,000
============== =============== ==============
Accounts Receivable as of:
December 31, 1998................................. $2,025,000 $37,000 $77,000
============== =============== ==============
</TABLE>
For each of the periods shown above, the movie software costs, a portion
of the operating expenses and most of the research and development costs of the
Company were incurred and paid in Australia. The production costs associated
with the duplication and packaging, royalties due to third parties, a major
portion of the sales and marketing costs, and certain corporate expenses are
incurred and paid in the United States. The identifiable assets of the Company,
other than accounts receivable and corporate assets, are predominantly related
to the operations in Australia.
For the year ended December 31, 1997, one customer accounted for more
than 10% of total revenues (Packard Bell NEC, 80% or $1,973,000). For the year
ended December 31, 1998 a computer chip manufacturer accounted for 51%
($201,000) of the reported revenue, and GT Interactive and One Stop accounted
for 28% ($112,000) and 10%($44,000) of revenues, respectively.
11. SUBSEQUENT EVENTS
In March 1999 the Company entered into a securities purchase agreement
(the "Agreement") with a private investor. The Agreement replaced the equity
financing arrangement the Company entered into with AMRO International, S.A. in
December 1998, which provided for a convertible debenture and a warrant as
described in Note 5 to the Consolidated Financial Statements. This equity
financing arrangement was rescinded concurrently with the execution of the
Agreement.
The Agreement gives the Company the right at its election to sell to the
investor up to a total of $6 million of the Company's Common Stock at a discount
to its "market price" from time to time during the three year term of the
agreement. Each sale of shares under the agreement is subject to certain minimum
and maximum dollar amounts and certain other conditions, including that the
"market price" of the Common Stock at the time the Company gives a sale notice
is at least $1 per share and that a registration statement under the Securities
Act covering the investor's resale of the shares is in effect at the closing of
the sale. "Market price" is defined as the lowest daily volume adjusted price of
the Company's Common Stock (as reported on Bloomberg) for any trading day during
the 10-trading day period ending on the date that the Company gives a sale
notice to the investor. The purchase price that the Company will receive for its
shares in each sale will be 88% of the market price of the Common Stock if the
market price is more than $4 per share, and 86% of the market price if the
market price is $4 per share or less.
In April 1999, the Company received a loan commitment (the "Commitment")
from a private investor, which is subject to the Company's acceptance. Under the
Commitment, the investor has undertaken to lend to the Company $1,000,000
F-19
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
no later than April 21, 1999 pursuant to a $1,000,000 convertible debenture
which will be due on the first anniversary of the debenture. The investor will
have the right to convert the debenture into shares of the Company's Common
Stock. The conversion price will be equal to the lower of 95% of the "market
price" of the Common Stock at the time the holder delivers a conversion notice
to the Company or $6.00 per share. On the maturity date of the debenture, the
unpaid balance of the debenture and any accrued and unpaid interest will convert
automatically into shares of Common Stock valued at the conversion price on the
maturity date. "Market price" is defined as the lowest volume weighted adjusted
price of the Company's Common Stock on the Principal Market (as reported on
Bloomberg) during the 10 business days prior to the business day on which the
conversion notice is sent to the Company.
12. SUBSEQUENT EVENTS (UNAUDITED)
On April 27,1999, the Company issued to Roseworth Group, Ltd. a 4%
convertible debenture in the principal amount of $1,000,000. The debenture is
due on the later of April 27, 2000 or six months following the date the
Securities and Exchange Commission declares effective a registration statement
covering the resale of the shares of common stock underlying the debenture. The
debenture may be converted by Roseworth Group, Ltd. into shares of the Company's
common stock at a conversion price per share equal to the lower of 95% of the
market price of the Company's common stock at the conversion date or $6.00. On
the maturity date of the debenture, the unpaid balance of the debenture and any
accrued and unpaid interest will convert automatically into shares of common
stock at the conversion price on the maturity date. Market price is defined as
the lowest volume weighted adjusted price of the common stock on the American
Stock Exchange during the 10 trading days prior to the trading day on which the
conversion notice is sent to the Company.
In May 1999, the Company issued 2,132,000 shares of its common stock to
seven investors in a private placement. The private placement raised aggregate
proceeds of $4,311,250. Of the 2,132,000 shares of common stock, 1,880,000
shares were issued to five investors at $2.00 per share and 252,000 shares were
issued to two investors at $2.1875 per share.
13. BASIS OF PRESENTATION (UNAUDITED)
The accompanying unaudited condensed consolidated financial
statements as of June 30, 1999 reflect all adjustments that, in the opinion of
management, are considered necessary for a fair presentation of the financial
position, results of operations, and cashflows for the period presented. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period.
F-20
<PAGE>
TROJAN TELEVISION LIMITED
REPORT OF THE AUDITORS TO THE MEMBERS
We have audited the financial statements on pages F-22 to F-27, which have been
prepared under the historical cost convention and in accordance with accounting
principles generally accepted in the United States of America.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of the financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with generally accepted Auditing Standards.
An audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgements made by the directors in
the preparation of the financial statements, and of whether the accounting
policies are appropriate to the company's circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
GOING CONCERN
In forming our opinion, we have considered the adequacy of the disclosures made
in Note 2 of the financial statements concerning the uncertainty as to the
likelihood of success of the directors efforts to raise further capital. In view
of the significance of this uncertainty we consider that it should be drawn to
your attention but our opinion is not qualified in this respect.
OPINION
In our opinion, the financial statements give a true and fair view of the state
of the company's affairs as at 30th June 1998 and of its loss for the year then
ended.
/s/ Edwards & Co.
EDWARDS & CO.
Registered Auditors
Chartered Accountants
London
DATE: 25 June 1999
F-21
<PAGE>
<TABLE>
TROJAN TELEVISION LIMITED
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED 30TH JUNE 1998
<CAPTION>
YEAR TO
30TH JUNE
1998
(pound)
<S> <C>
Net sales 35,770
Costs and expenses:
Costs of sales 96,823
Selling and administrative 263,159
Interest 1,111
----------
361,093
----------
Net loss (325,323)
Accumulated deficit
Beginning of period (193,475)
----------
End of period (pound) (518,798)
================
</TABLE>
F-22
<PAGE>
<TABLE>
TROJAN TELEVISION LIMITED
BALANCE SHEET
AS AT 30TH JUNE 1998
<CAPTION>
AS AT
30TH JUNE
1998
(pound)
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents 1,713
Other current assets 4,521
----------
Total current assets 6,234
PROPERTY, PLANT AND EQUIPMENT
Office equipment 16,348
Accumulated depreciation and amortisation (6,038)
----------
10,310
----------
Total assets (pound) 16,544
======
LIABILITIES AND SHAREHOLDERS DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses 65,141
Taxes, other than income taxes 17,212
Other current liabilities 98,872
----------
Total current liabilities 181,225
SHAREHOLDERS' DEFICIT
Common stock, 1p par value
Authorised shares - 40,000
Issued shares - 10,000 100
Additional paid in capital 354,017
Accumulated deficit (518,798)
----------
Total shareholders deficit (164,681)
----------
Total liabilities and shareholders' deficit (pound) 16,544
======
</TABLE>
APPROVED BY THE BOARD ON 30TH APRIL 1999
/S/ JASON GLEAVE
- -----------------------------
J GLEAVE
F-23
<PAGE>
<TABLE>
TROJAN TELEVISION LIMITED
STATEMENTS OF CASH FLOWS
AS AT 30TH JUNE 1998
12 MONTHS TO
30TH JUNE
1998
(pound)
Cash flows from operating activities
<S> <C>
Net loss (325,323)
Adjustments to reconcile net loss to cash flows
used in operating activities
Depreciation 5,450
Changes in operating assets and liabilities
Decrease in accounts receivable 305
Decrease in other current assets 1,240
Increase in current liabilities 128,103
----------
Net cash utilised by operating activities (190,225)
----------
Cash provided by shareholders 201,707
Cash flows from investing activities
Purchases of property and equipment (12,424)
----------
Net decrease in cash (942)
Cash at beginning of period 2,655
----------
Cash at end of period (pound) 1,713
======
</TABLE>
F-24
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 1998
1. THE COMPANY
Trojan Television Limited ("the Company") was incorporated in June 1996 in
England and Wales and commenced trading on 1st July 1996. The company is
in the business of television and internet broadcasting of auctions and
related programming.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING CONVENTION
The financial statements are prepared under the historical cost convention
and in accordance with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from these estimates.
REVENUE RECOGNITION
Revenue is recognised when the service which the company has been engaged
to supply has been completed.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated so as to write off the cost of tangible fixed
assets, less their estimated residual values, on a straight line basis
over the expected useful economic lives of the assets concerned. The
principal annual rates used for this purpose are:
Office equipment - over 3 years
WEBSITE AND SOFTWARE DEVELOPMENT
All costs incurred in the creation of the company's website and the
development of software are written off against income in the period in
which they are incurred.
F-25
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 1998
GOING CONCERN
Since the year end additional loans have been received by the company to
support the continuing development of its activities. The directors are
actively seeking further equity finance and negotiations are at an
advanced stage with Brilliant Digital Entertainment Inc, a US listed
corporation.
Due to the on-going support provided by these loans, the directors believe
it is appropriate to prepare the financial statements on the going concern
basis which assumes that the company will continue in operational
existence for the foreseeable future. In spite of the support received to
date, the company has been paying creditors outside of their normal terms
of trade.
If the company were unable to continue in operational existence for the
foreseeable future, adjustments would have to be made to reduce the
balance sheet values of assets to their recoverable amounts and to provide
for further liabilities that might arise, and to re-classify fixed assets
as current assets.
3. PROPERTY AND EQUIPMENT
Property and equipment at 30th June 1998 consisted of:
<TABLE>
<CAPTION>
1998
(pound)
<S> <C>
Office equipment 16,348
Less: Accumulated depreciation 6,038
------
(pound) 10,310
======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The company is in dispute with several creditors who are claiming they are
owed equity in the company. In order to dismiss the claim to equity the
company may have to pay a premium to the creditors although at the present
time the amount is undeterminable.
Subsequent to the balance sheet date, the company has continued to incur
substantial professional fees as a result of its restructuring and
potential future sale.
F-26
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 1998
5. RELATED PARTY TRANSACTIONS
As at 30th June 1998 the company had loans from several of its minority
shareholders, repayable on demand totaling (pound)44,000.
6. INCOME TAXES
No liability to income taxes arises as a result of the losses made by the
company.
7. POST BALANCE SHEET EVENTS
Since the year end the company has entered into negotiations with two of
its clients over the company's commitment to broadcast a certain number of
auctions. As a result of these negotiations the company may have to bear
the cost of broadcasting these auctions for which no income will be
received from the auction house. No provision has been made in these
accounts.
F-27
<PAGE>
TROJAN TELEVISION LIMITED
REPORT OF THE AUDITORS TO THE MEMBERS
We have audited the financial statements on pages F-29 to F-34, which have been
prepared under the historical cost convention and in accordance with accounting
principles generally accepted in the United States of America.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of the financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on those statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with generally accepted Auditing Standards.
An audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgements made by the directors in
the preparation of the financial statements, and of whether the accounting
policies are appropriate to the company's circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
GOING CONCERN
In forming our opinion, we have considered the adequacy of the disclosures made
in Note 2 of the financial statements concerning the uncertainty as to the
likelihood of success of the directors efforts to raise further capital. In view
of the significance of this uncertainty we consider that it should be drawn to
your attention but our opinion is not qualified in this respect.
OPINION
In our opinion, the financial statements give a true and fair view of the state
of the company's affairs as at 30th June 1997 and of its loss for the period
then ended.
/s/ Edwards & Co.
EDWARDS & CO.
Registered Auditors
Chartered Accountants
London
DATE: 25 June 1999
F-28
<PAGE>
TROJAN TELEVISION LIMITED
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE PERIOD ENDED 30TH JUNE 1997
<TABLE>
<CAPTION>
12 MONTHS TO
30TH JUNE
1997
(pound)
<S> <C>
Net sales 259
Costs and expenses:
Costs of sales 47,658
Selling and administrative 145,431
Interest 645
----------
193,734
----------
Net loss (193,475)
Accumulated deficit
Beginning of period -
----------
End of period (pound) (193,475)
======
</TABLE>
F-29
<PAGE>
TROJAN TELEVISION LIMITED
BALANCE SHEET
AS AT 30TH JUNE 1997
<TABLE>
<CAPTION>
AS AT
30TH JUNE
1997
(pound)
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents 2,655
Other current assets 6,066
----------
Total current assets 8,721
PROPERTY, PLANT AND EQUIPMENT
Office equipment 3,924
Accumulated depreciation and amortisation (588)
----------
3,336
----------
Total assets (pound) 12,057
=====
LIABILITIES AND SHAREHOLDERS DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses 24,079
Taxes, other than income taxes 14,043
Other current liabilities 15,000
----------
Total current liabilities 53,122
SHAREHOLDERS' DEFICIT
Common stock, 1p par value
Authorised shares - 40,000
Issued shares - 10,000 100
Additional paid in capital 152,310
Accumulated deficit (193,475)
----------
Total shareholders deficit (41,065)
----------
Total liabilities and shareholders' deficit (pound) 12,057
=====
</TABLE>
APPROVED BY THE BOARD ON 14TH MAY 1998
/S/ JASON GLEAVE
- --------------------------------
J GLEAVE
F-30
<PAGE>
TROJAN TELEVISION LIMITED
STATEMENTS OF CASH FLOWS
AS AT 30TH JUNE 1997
<TABLE>
<CAPTION>
12 MONTHS TO
30TH JUNE
1997
(pound)
Cash flows from operating activities
<S> <C>
Net loss (193,475)
Adjustments to reconcile net loss to cash flows
used in operating activities
Depreciation 588
Changes in operating assets and liabilities
Increase in accounts receivable (305)
Increase in other current assets (5,761)
Increase in current liabilities 53,122
----------
Net cash utilised by operating activities (145,831)
----------
Cash provided by shareholders capital 152,410
Cash flows from investing activities
Purchases of property and equipment (3,924)
----------
Net increase in cash 2,655
Cash at beginning of period -
----------
Cash at end of period (pound) 2,655
=====
</TABLE>
F-31
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30TH JUNE 1997
1. THE COMPANY
Trojan Television Limited ("the Company") was incorporated in June 1996 in
England and Wales and commenced trading on 1st July 1996. The company is
in the business of television and internet broadcasting of auctions and
related programming.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING CONVENTION
The financial statements are prepared under the historical cost convention
and in accordance with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from these estimates.
REVENUE RECOGNITION
Revenue is recognised when the service which the company has been engaged
to supply has been completed.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated so as to write off the cost of tangible fixed
assets, less their estimated residual values, on a straight line basis
over the expected useful economic lives of the assets concerned. The
principal annual rates used for this purpose are:
Office equipment - over 3 years
WEBSITE AND SOFTWARE DEVELOPMENT
All costs incurred in the creation of the company's website and the
development of software are written off against income in the period in
which they are incurred.
F-32
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30TH JUNE 1997
GOING CONCERN
Since the period end additional loans have been received by the company to
support the continuing development of its activities. The directors are
actively seeking further equity finance and negotiations are at an
advanced stage with Brilliant Digital Entertainment Inc, a US listed
corporation.
Due to the on-going support provided by these loans, the directors believe
it is appropriate to prepare the financial statements on the going concern
basis which assumes that the company will continue in operational
existence for the foreseeable future. In spite of the support received to
date, the company has been paying creditors outside of their normal terms
of trade.
If the company were unable to continue in operational existence for the
foreseeable future, adjustments would have to be made to reduce the
balance sheet values of assets to their recoverable amounts and to provide
for further liabilities that might arise, and to re-classify fixed assets
as current assets.
3. PROPERTY AND EQUIPMENT
Property and equipment at 30th June 1997 consisted of:
<TABLE>
<CAPTION>
1997
(pound)
<S> <C>
Office equipment 3,924
Less: Accumulated depreciation 588
-------------
(pound) 3,336
=============
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The company is in dispute with several creditors who are claiming they are
owed equity in the company. In order to dismiss the claim to equity the
company may have to pay a premium to the creditors although at the present
time the amount is undeterminable.
Subsequent to the balance sheet date, the company has continued to incur
substantial professional fees as a result of its restructuring and
potential future sale.
F-33
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30TH JUNE 1997
5. RELATED PARTY TRANSACTIONS
As at 30th June 1997 the company had loans from several of its minority
shareholders, repayable on demand, totaling (pound)15,000.
6. INCOME TAXES
No liability to income taxes arises as a result of the losses made by the
company.
7. POST BALANCE SHEET EVENTS
Since the period end the company has entered into negotiations with two of
its clients over the company's commitment to broadcast a certain number of
auctions. As a result of these negotiations the company may have to bear
the cost of broadcasting these auctions for which no income will be
received from the auction house. No provision has been made in these
accounts.
F-34
<PAGE>
<TABLE>
TROJAN TELEVISION LIMITED
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
AS AT 30TH JUNE 1999
(UNAUDITED)
<CAPTION>
12 MONTHS TO
30TH JUNE
1999
(pound)
<S> <C>
Net sales 233,722
Costs and expenses:
Costs of sales 50,931
Selling and administrative 1,486,534
Interest 9,276
------------
1,546,741
------------
Net loss (1,313,019)
Accumulated deficit
Beginning of period (518,798)
------------
End of period (pound) (1,831,817)
==================
</TABLE>
F-35
<PAGE>
<TABLE>
TROJAN TELEVISION LIMITED
BALANCE SHEET
AS AT 30TH JUNE 1999
(UNAUDITED)
<CAPTION>
AS AT
30TH JUNE
1999
(pound)
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents 24,494
Other current assets 57,417
----------
Total current assets 81,911
PROPERTY, PLANT AND EQUIPMENT
Office equipment 19,931
Accumulated depreciation and amortisation (13,182)
----------
6,749
-----------
Total assets (pound)88,660
=============
LIABILITIES AND SHAREHOLDERS DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses 770,912
Taxes, other than income taxes 17,122
Other current liabilities 778,326
------------
Total current liabilities 1,566,360
SHAREHOLDERS' DEFICIT
Common stock, 1p par value
Authorised shares - 40,000
Issued shares - 10,000 100
Additional paid in capital 354,017
Accumulated deficit (1,831,817)
------------
Total shareholders deficit (1,477,700)
----------
Total liabilities and shareholders' deficit (pound) 88,660
===============
</TABLE>
F-36
<PAGE>
<TABLE>
TROJAN TELEVISION LIMITED
STATEMENTS OF CASH FLOWS
AS AT 30TH JUNE 1999
(UNAUDITED)
<CAPTION>
12 MONTHS TO
30TH JUNE
1999
(pound)
Cash flows from operating activities
<S> <C>
Net loss (1,313,019)
Adjustments to reconcile net loss to cash flows
used in operating activities
Depreciation 7,144
Changes in operating assets and liabilities
Increase in accounts receivable -
Increase in other current assets (52,896)
Increase in current liabilities 1,385,135
----------
Net cash utilised by operating activities 26,364
----------
Cash flows from investing activities
Purchases of property and equipment (3,583)
----------
Net increase in cash 22,781
Cash at beginning of period 1,713
----------
Cash at end of period (pound) 24,494
===============
</TABLE>
F-37
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30TH JUNE 1999
(UNAUDITED)
1. THE COMPANY
Trojan Television Limited ("the Company") was incorporated in June 1996 in
England and Wales. The Company is in the business of television and
Internet broadcasting of auctions and related programming.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING CONVENTION
The financial statements are prepared under the historical cost convention
and in accordance with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from these estimates.
REVENUE RECOGNITION
Revenue is recognized when the service which the Company has been engaged
to supply has been completed.
PROPERTY EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated so as to write off the cost of tangible fixed
assets, less their estimated residual values, on a straight line basis
over the expected useful economic lives of the assets concerned. The
principal annual rates used for this purpose are:
Office equipment - Over 3 years.
WEBSITE AND SOFTWARE DEVELOPMENT
All costs incurred in the creation of the Company's website and the
development of software are written off against income in the period in
which they are incurred.
GOING CONCERN
The financial statements have been prepared on the basis that the Company
is a going concern. The Company has received firm commitments for future
funding of the business.
3. TURNOVER
The turnover of the Company is attributable to its principal activities
and arises wholly within the European Community.
Included within net sales for the six months to 30th June is
(pound)200,000 in respect of sale of use of technology.
4. OTHER CURRENT ASSETS
Other current assets comprise amounts due from HM Customs and Excise.
F-38
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30TH JUNE 1999
(UNAUDITED)
5. PROPERTY AND EQUIPMENT
Property and equipment at 30th June 1999 and 30th June 1998 consisted
of:
<TABLE>
<CAPTION>
1999 1998
(pound) (pound)
<S> <C> <C>
Office equipment 19,931 16,348
Less: Accumulated Depreciation 13,182 6,038
------------- ------------
6,749 6,327
============= ============
</TABLE>
6. CREDITORS: AMOUNTS FALLING DUE WITH ONE YEAR
<TABLE>
<CAPTION>
1999 1998
(pound) (pound)
<S> <C> <C>
Accounts Payable 560,333 49,331
Accrued expenses 210,579 15,810
Other loans 778,326 58,182
Other taxes and social security 17,122 17,212
------------- ------------
1,566,360 140,535
============= ============
</TABLE>
7. SHARE CAPITAL
<TABLE>
<CAPTION>
1999 1998
Authorised
<S> <C> <C>
Ordinary shares of 0.1p 2,000,000 100,000
Allotted, called up and fully paid
Ordinary shares of 0.1p 292,000 200,000
At 30th June 1998 the Company had 100 authorised, allotted, called up and
fully paid ordinary shares of (pound)1 each.
On 8th December the Company shares were subdivided into 10,000 shares of
1p each.
On 30th April 1999 the Company subdivided the ordinary 1p shares into
shares of 0.1p. The authorized share capital was increased to (pound)2,000
to be represented by 2,000,00 shares.
On 30th April 1999 the company made a 2 for 1 bonus issue of shares then
in existence.
The Company recognized 92,000 shares issued in prior periods to various
minority shareholders. The contributions for the shares in issue have been
treated as a capital contribution.
8. RELATED PARTY TRANSACTIONS
At 30th June 1999 the company had loans from several of its shareholders,
repayable on demand, totaling (pound)44,000 which have been guaranteed by
the director Jason Gleave.
Included within Other loans is (pound)5,000 owed to the director Jason
Gleave.
F-39
<PAGE>
TROJAN TELEVISION LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30TH JUNE 1999
(UNAUDITED)
9. SUBSEQUENT EVENTS
On 1st July 1999 the company issued 1,700,000 shares to a consortium of
companies in consideration of conversion of loans to share capital to a
value of (pound)182,000.
The shareholders of the Company have agreed to sell all the shares
currently in issue to Brilliant Digital Entertainment Inc.
F-40
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements are based
on the financial statements of Brilliant Digital Entertainment, Inc. and Trojan
Television Limited combined and adjusted to give effect to:
o the acquisition by Brilliant of the stock of Trojan;
o the purchase by Brilliant of a promissory note payable by Trojan;
and
o the acquisition by Brilliant of certain rights to proprietary
technology owned by a third party, certain of which were formerly
held by Trojan.
The acquisition of these items (collectively referred to as the
"Acquisition") will be effected through the exchange of approximately 757,000
shares of Brilliant common stock, after estimated adjustments to be determined
following the Acquisition, and warrants to acquire an additional 400,000 shares
of Brilliant common stock. The value of the warrants was determined using the
Black-Scholes pricing model. The substantial majority of the shares will be
restricted within the meaning of the Securities Act and cannot be sold unless
registered under the Securities Act or unless an exemption from registration is
available. The value of the stock and warrants is approximately $6.3 million
based on the simple average of the closing share price for the day preceding,
the day of and the two days subsequent to the public announcement of the
purchase. The pro forma adjustments are described in the accompanying notes to
the unaudited pro forma financial statements. The balance sheet of Trojan as at
June 30, 1999 was converted from British Pounds to Dollars using a currency
exchange rate of 1.5765, and the statement of operations of Trojan for the three
months ended March 31, 1999 and the year ended December 31, 1998 was converted
from British Pounds to Dollars using a currency exchange rate of 1.616 and
1.6589, respectively.
These pro forma combined financial statements conform to Brilliant's
fiscal year-end of December 31. Trojan's fiscal year-end is June 30 and
therefore, in accordance with Rule 11-02(c)(3) of Regulation S-X, the results of
Trojan have been recast to reflect Trojan's results for the year ended December
31.
The unaudited pro forma combined statements of operations for the six
months ended June 30, 1999 and for the year ended December 31, 1998 give effect
to the Acquisition as if it had occurred on January 1, 1998. The unaudited pro
forma combined balance sheet at June 30, 1999 gives effect to the Acquisition as
if it had occurred on such date.
The unaudited pro forma combined financial statements are not necessarily
indicative of the results of operations or financial position of Brilliant that
would have occurred had the Acquisition occurred at the beginning of each period
presented or on the date indicated, nor are they necessarily indicative of
future operating results or financial position. They should be read in
conjunction with (i) the notes hereto, (ii) Brilliant's unaudited financial
statements and the notes thereto as of and for the quarter ended June 30, 1999,
and Brilliant's audited financial statements and the notes thereto as of and for
the year ended December 31, 1998, and (iii) the audited and unaudited financial
information for Trojan.
The unaudited proforma combined financial statements have been
preliminarily prepared on the basis that:
o A third of the value to be paid for the acquisition of rights to
proprietary technology owned by a third party and used by Trojan in
its business should be allocated to goodwill. We may determine that
a different allocation is more appropriate. If so, the allocation to
goodwill could be as low as 0% and as high as 70%.
o The amortization period for the purchased rights to the proprietary
technology is two years. We may determine that a different period is
more appropriate. If so, the amortization period could be as short
as six months and as long as five years.
o The amortization period for the goodwill acquired from Trojan is
five years. We may determine that a different period is more
appropriate. If so, the amortization period for the goodwill could
be as short as three years and as long as 10 years.
F-41
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
INCLUDING TROJAN TELEVISION ACQUISITION
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except share data)
As reported
----------------------- Pro Forma Combined
Brilliant Trojan Adjustments Pro Forma
---------- ----------- ------------- -------------
Revenues:
Software sales.............................. $ 221 $ 221
Development fees............................ 210 210
Other income................................ $ 17 17
---------- ----------- ------------- -------------
Total revenues.............................. 431 17 448
Cost of revenues............................ 1,383 21 1,404
---------- ----------- ------------- --------------
Gross profit (loss)......................... (952) (4) (956)
Operating expenses:
Sales and marketing......................... 1,785 1,785
General and administrative.................. 2,936 1,266 4,202
Research and development.................... 3,798 3,798
Depreciation and Amortization............... 390 $ 2,097 4,5 2,487
---------- ----------- ------------- -------------
Total operating expenses.................... 8,909 1,266 2,097 12,272
---------- ----------- ------------- -------------
Income (loss) from operations............... (9,861) (1,270) (2,097) (13,228)
Other income (expense):
Export market development grant............. 73 73
Foreign exchange gain (loss)................ (5) (5)
Interest income (expense) net............... 368 (8) 8 6 368
---------- ----------- ------------- -------------
Total other income (expense)................ 436 (8) (8) 436
---------- ----------- ------------- -------------
Income (loss) before income taxes........... (9,425) (1,278) (2,089) (12,792)
---------- ----------- ------------- -------------
Income taxes................................
Net income (loss)........................... $ (9,425) $(1,278) $ (2,089) $ (12,792)
========== =========== ============= =============
Other comprehensive income:
Foreign currency translation
adjustment (net of tax effect)........... 72 72
---------- ----------- ------------- -------------
Comprehensive income (loss)................. $ (9,353) $(1,278) $ (2,089) $ (12,720)
========== =========== ============= =============
Basic and diluted net income
(loss) per share......................... $(1.00) $ (1.26)
========== =============
Weighted average number of shares
used in computing basic and
diluted net income (loss) per share...... 9,403 757 1,2,3 10,160
========== ============= =============
</TABLE>
F-42
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
INCLUDING TROJAN TELEVISION ACQUISITION
AT JUNE 30, 1999
(In thousands)
<TABLE>
<CAPTION>
As reported
----------------------- Pro Forma Combined
Brilliant Trojan Adjustments Eliminations Pro Forma
---------- ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $4,587 $ 39 $ 273 3 $ 4,899
Accounts receivable................... 2,447 2,447
Other assets.......................... 288 90 378
---------- ----------- -------------- -------------- -----------
Total current assets.................. 7,322 129 273 7,724
Property, plant and equipment, net.... 599 11 610
Movie software costs.................. 415 415
Goodwill.............................. 6,452 1,2,4 6,452
Other assets.......................... 398 2,112 2,5 $ (500) 6 2,010
---------- ----------- -------------- -------------- -----------
Total assets.......................... $8,734 $ 140 $ 8,837 $ (500) $ 17,211
========== =========== ============== ============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables........................ $ 329 $ 1,215 $ 1,544
Accrued and other liabilities......... 1,215 27 1,242
Current portion of note payable....... 172 1,228 $ (161) 1,2,3 $ (500) 6 739
---------- ----------- -------------- -------------- -----------
Total current liabilities............. 1,716 2,470 (161) (500) 3,525
Note payable, less current portion.... 83 -- 83
Convertible debenture................. 250 -- 250
Other long term liabilities........... 74 -- 74
---------- ----------- -------------- -------------- -----------
Total liabilities..................... 2,123 2,470 (161) (500) 3,932
Stockholders' equity:
Preferred Stock.......................
Common stock.......................... 12 1 0 1,2,3 13
Additional paid-in capital............ 26,494 557 6,110 1,2,3 33,161
Accumulated deficit................... (19,798) (2,888) 2,888 (19,798)
Accumulated other comprehensive
loss.............................. (97) (97)
---------- ----------- -------------- -------------- -----------
Total stockholders' equity............ 6,611 (2,330) 8,998 13,279
---------- ----------- -------------- -------------- -----------
Total liabilities and
stockholders' equity.............. $8,734 $ 140 $ 8,837 $ (500) $ 17,211
========== =========== ============== ============== ===========
</TABLE>
F-43
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
INCLUDING TROJAN TELEVISION ACQUISITION
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
As reported
----------------------- Pro Forma Combined
Brilliant Trojan Adjustments Pro Forma
---------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software sales............................................. $ 233 $ 233
Development fees........................................... 101 101
Other income............................................... $ 362 362
---------- ----------- -------------- ----------
Total revenues............................................. 334 362 696
Cost of revenues........................................... 349 57 406
---------- ----------- -------------- ----------
Gross profit (loss)........................................ (15) 305 290
Operating expenses:
Sales and marketing........................................ 479 479
General and administrative................................. 1,536 1,460 2,996
Research and development................................... 1,883 1,883
Depreciation and Amortization.............................. 270 $ 1,049 4,5 1,319
---------- ----------- -------------- ----------
Total operating expenses................................... 4,168 1,460 1,049 6,677
---------- ----------- -------------- ----------
Income (loss) from operations.............................. (4,183) (1,155) (1,049) (6,387)
Other income (expense):
Export market development grant ........................... 127 127
Foreign exchange gain (loss)............................... (5) (5)
Debenture expense.......................................... (55) (55)
Interest income (expense) net.............................. 4 (7) 7 6 4
---------- ----------- -------------- ----------
Total other income (expense)............................... 71 (7) 7 71
---------- ----------- -------------- ----------
Income (loss) before income taxes.......................... (4,112) (1,162) (1,042) (6,316)
Income taxes...............................................
---------- ----------- -------------- ----------
Net income (loss).......................................... $ (4,112) $(1,162) $ (1,042) $ (6,316)
========== =========== ============== ==========
Other comprehensive income:
Foreign currency translation adjustment
(net of tax effect)................................... 26 26
---------- ----------- -------------- ----------
Comprehensive income (loss)................................ $ (4,086) $(1,162) $ (1,042) $ (6,290)
========== =========== ============== ==========
Basic and diluted net income (loss)
per share............................................. $(0.41) $ (0.58)
========== ==========
Weighted average number of shares used
in computing basic and diluted
net income (loss) per share........................... 10,131 757 1,2,3 10,888
========== ============== ==========
</TABLE>
F-44
<PAGE>
BRILLIANT DIGITAL ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The pro forma balance sheet has been prepared to reflect the acquisition
of 100% of the stock of Trojan Television Limited ("Trojan") by Brilliant
Digital Entertainment, Inc. ("Brilliant") for an aggregate price of $3,316,000,
representing 506,000 shares of Brilliant common stock that will be transferred
to the prior owners of Trojan. Additionally, Brilliant issued to an unrelated
third party 175,000 shares of Brilliant common stock and warrants to purchase up
to 400,000 shares of Brilliant common stock (collectively valued at $2,418,000)
in order to settle certain claims to ownership of Trojan and to acquire a
license to certain software technology which is used by Trojan. Finally,
Brilliant issued 76,000 shares of Brilliant common stock to certain shareholders
of Trojan to satisfy an outstanding loan and certain other amounts due to these
shareholders. For purposes of the valuation of Brilliant's common stock,
Brilliant used the simple average of the closing share price for the day
preceding the day of and the two days subsequent to the public announcement of
the purchase.
The following describes each pro forma entry to the unaudited combined
balance sheet as of June 30, 1999:
(1) Reflects the issuance of common shares to acquire Trojan and the
elimination of the common shareholders' equity accounts of Trojan.
We believe that the fair value of the assets and liabilities
acquired approximates their book value . The excess of the purchase
price over the value of the net assets acquired has been recorded as
goodwill.
(2) Reflects the issuance of common stock and warrants to purchase
shares of common stock to (1) settle the claims to ownership of
Trojan and (2) acquire a license to certain software technology
which is used by Trojan. $1,612,000 has been allocated to this
software technology . The remainder of the value ($806,000) has been
recorded as goodwill. Warrants currently in the money are assumed
exercised on the first day available for exercise.
(3) Reflects cash paid in to the company by certain Trojan shareholders
increasing a loan payable to these shareholders, the issuance of
common stock to purchase the loan, and the adjustment to accrued
liabilities on consummation of the acquisition.
The following describes each pro forma entry to the unaudited combined
statement of operations for the six months ended June 30, 1999 and the year
ended December 31, 1998:
(4) Reflects the amortization of goodwill over five years ($646,000 for
the six months ended June 30, 1999) and $1,291,000 for the year
ended December 31, 1998.
(5) Reflects the amortization of the exclusive software technology
license over two years ($403,000 for the six months ended June 30,
1999 and $806,000 for the year ended December 31, 1998).
(6) Reflects the elimination of interest expense on the loan payable to
be repaid, and the elimination of the loan.
F-45
<PAGE>
- -------------------------------------------------------------------------------
YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO GIVE
YOU INFORMATION DIFFERENT THAN THAT 2,046,000 Shares
CONTAINED IN THIS PROSPECTUS. WE ARE Common Stock
OFFERING TO SELL SHARES OF COMMON
STOCK ONLY IN JURISDICTIONS WHERE
OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS
PROSPECTUS IS CURRENT ONLY AS OF ITS BRILLIANT DIGITAL
DATE, REGARDLESS OF THE TIME YOU ENTERTAINMENT, INC.
RECEIVE THIS PROSPECTUS.
----------------
----------------
TABLE OF CONTENTS
PAGE PROSPECTUS
Prospectus Summary................2 ----------------
Risk Factors.....................6
Cautionary Notice About
Forward-Looking
Statements....................13
The Securities Purchase
Agreement.....................14
Use of Proceeds.................15
Dividend Policy.................15
Determination of the Offering
Price.........................15
Price Range of Common Stock.....16
Capitalization..................16
Selected Consolidated
Financial Data1...............17
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations.................19 , 1999
Business........................26
Management......................39
Certain Relationships and
Related Transactions..........47
Principal and Selling
Stockholders..................48
Description of Capital Stock....50
Plan of Distribution............52
Legal Matters...................54
Experts.........................54
Where You Can Find More
Information...................54
Index to Consolidated
Financial Statements.........F-1
------------------------------------- ----------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- -------- --------------
<S> <C>
Registrant's Amended and Restated Certificate
of Incorporation.......................................... 3.1
Registrant's Amended and Restated Bylaws ................... 3.2
Registrant's Form of Indemnification Agreement.............. 10.28
</TABLE>
The Registrant's Certificate of Incorporation and its Bylaws provide for
the indemnification by the Registrant of each director, officer and employee of
the Registrant to the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended. Section 145 of
the Delaware General Corporation Law provides in relevant part that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Registrant's Certificate of Incorporation provides that a director of
the Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(o)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the liability
of a director for, among other things: breach of the duty of loyalty; acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; unlawful payment of dividends; and transactions from which
the director derived an improper personal benefit.
The Registrant has entered into separate but identical indemnity
agreements (the "Indemnity Agreements") with each director of the Registrant and
certain officers of the Registrant (the "Indemnitees"). Pursuant to the terms
and conditions of the Indemnity Agreements, the Registrant indemnified each
Indemnitee against any amounts which he or she becomes legally obligated to pay
in connection with any claim against him or her based upon any action or
inaction which he or she may commit, omit or suffer while acting in his or her
capacity as a director and/or officer of the Registrant or its subsidiaries,
provided, however, that Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be
II-1
<PAGE>
in or not opposed to the best interests of the Registrant and, with respect
to any criminal action, had no reasonable cause to believe Indemnitee's Conduct
was unlawful.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and the
American Stock Exchange fee.
<TABLE>
<CAPTION>
<S> <C>
Registration fee - Securities and Exchange Commission....... $ 3,383
American Stock Exchange fee................................. 17,500
Accounting fees and expenses................................ 5,000
Legal fees and expenses (other than blue sky)............... 20,000
Blue sky fees and expenses, including legal fees............ --
Printing; stock certificates................................ 250
Transfer agent and registrar fees........................... 300
Miscellaneous............................................... 500
-------
Total............................................ $46,933
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In September 1996, the Registrant issued pursuant to its 1996 Stock Option
Plan (the "1996 Plan") non-statutory stock options to purchase an aggregate of
185,000 shares of Common Stock at $10.00 per share to the non-employee directors
and an executive officer. The issuance and sale of these securities is exempt
from the registration requirements of the Securities Act pursuant to Rule 701
because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.
In November 1997, the Registrant issued warrants to purchase 15,040 shares
of Common Stock at an exercise price of $5.50 per share to Chloe Holdings, Inc.
("Chloe") as partial consideration valued at $20,000 for services rendered in
connection with the Registrant's public offering in December 1997. The warrants
vest and become exercisable in December 1998 and expire on November 4,
2000.Chloe covenanted that (i) it acquired the warrants for its own account with
the present intention of holding such warrants for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
warrants (other than a distribution in compliance with all applicable federal
and state securities laws); (ii) it is an experienced and sophisticated investor
and has such knowledge and experience in financial and business matters that it
is capable of evaluating the relative merits and the risks of an investment in
the warrants and of protecting its own interests in connection with the
transaction at issue; (iii) it is willing to bear and is capable of bearing the
economic risk of an investment in the warrants; and (iv) the Registrant made
available to it, prior to the date of the warrant agreement, the opportunity to
ask questions of the Registrant and its officers, and to receive from the
Registrant and its officers information concerning the terms and conditions of
the warrant and the warrant agreement and to obtain any additional information
with respect to the Registrant, its business, operations and prospects, as
reasonably requested by it; and (v) it is an "accredited investor" as that term
is defined under Rule 501(a)(4) of Regulation D promulgated by the Commission
under the Securities Act. The issuance and sale of these securities was exempt
from the registration and prospectus delivery requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act (in accordance with Rule 506 of
Regulation D) as a transaction not involving any public offering.
In July 1998, the Registrant issued warrants to purchase 300,000 shares of
Common Stock, par value $.001 per share, to a computer chip manufacturer at an
exercise price of $4.00 per share. The warrants were issued as partial
consideration for the manufacturer's obligations under that certain Software
Development Agreement, dated as of July 14, 1998, between the Registrant and the
manufacturer. The warrants are currently exercisable and expire in July 2001. In
connection with the issuance, the manufacturer represented to the Registrant,
and the Registrant believed, that the manufacturer was acquiring the warrants
for investment purposes only and not with a view to, or for sale in connection
with, a distribution of the warrants, and that the manufacturer was capable of
bearing the economic risk of an investment in the Registrant. The warrants
contain appropriate restrictive legends regarding resale and contain
registration rights in connection with resale of the underlying shares of Common
Stock. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.
II-2
<PAGE>
On December 3, 1998, the Registrant issued to AMRO International, S.A. a
$100,000 convertible debenture due December 1, 2000 and a Common Stock purchase
warrant expiring on November 30, 2001. AMRO paid $100,000 for the debenture and
$5,000 for the warrant. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering. As compensation for financial advisory services rendered by
Trinity Capital Advisors, Inc. in connection with the issuance of the debenture
and the warrant, the Registrant issued to Trinity Capital 6,000 shares of Common
Stock and paid to Trinity Capital a fee of $3,150. The issuance and sale of
these securities was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act (in accordance with Rule 506 of Regulation D) as a transaction not involving
any public offering. In March 1999, the Registrant redeemed from AMRO the
debenture for $100,000 plus accrued interest and the warrant for $5,000.
On April 27,1999, the Registrant issued to Roseworth Group, Ltd. a 4%
convertible debenture in the principal amount of $1,000,000 due on the later of
April 27, 2000 or six months following the date the Commission declares
effective a registration statement with respect to the resale of the shares of
common stock underlying the debenture. The debenture may be converted by
Roseworth into shares of Registrant's common stock at a conversion price for
each share of common stock equal to the lower of 95% of its market price at the
conversion date or $6.00. On the maturity date of the debenture, the unpaid
balance of the debenture and any accrued and unpaid interest will convert
automatically into shares of common stock at the conversion price on the
maturity date. The market price is defined as the lowest volume weighted
adjusted price of the our common stock on the American Stock Exchange (as
reported on Bloomberg) during the 10 business days prior to the business day on
which the conversion notice is sent to the Registrant. On May 13, 1999,
Roseworth converted $250,000 of the principal amount of the debenture into
76,489 shares of our common stock, and on May 24, 1999 Roseworth converted an
additional $500,000 of the principal amount of the debenture into 129,033 shares
of our common stock. The Registrant issued the debenture and the shares of
common stock issued upon conversion of the debenture in reliance on Section 4(2)
of the Securities Act as a transaction not involving any public offering. In
connection with the issuance of the debenture, Registrant paid to Roseworth a
fee of $30,000 and issued to Roseworth 5,883 shares of common stock. The
issuance and sale of these securities was exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to Section 4(2)
of the Securities Act (in accordance with Rule 506 of Regulation D) as a
transaction not involving any public offering.
In May 1999, the Registrant sold an aggregate of 2,132,000 shares of
Common Stock to seven investors for aggregate proceeds of $4,311,250. Each of
these investors covenanted that it acquired the shares for his own account for
investment purposes only and not with a view to any distribution of the shares,
and that he was an "accredited investor" as that term is defined under Rule
501(a)(4) of Regulation D promulgated by the Commission under the Securities
Act. The issuance and sale of these securities was exempt from the registration
and prospectus delivery requirements of the Securities Act pursuant to Section
4(2) of the Securities Act (in accordance with Rule 506 of Regulation D) as a
transaction not involving any public offering.
In June 1999, the Registrant sold 60,000 shares of Common Stock to Harris
Toibb for $272,500. Mr. Toibb covenanted that it acquired the shares for his own
account for investment purposes only and not with a view to any distribution of
the shares, and that he was an "accredited investor" as that term is defined
under Rule 501(a)(4) of Regulation D promulgated by the Commission under the
Securities Act. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.
In July 1999, the Registrant sold an aggregate of 38,612 shares of Common
Stock to three investors as partial consideration for the sale of indebtedness
in the amount of 335,082.62 British Pounds owed to the investors by Trojan
Television Limited. Each of these investors covenanted that it acquired the
shares for its own account for investment purposes only and not with a view to
any distribution of the shares, and that he was an "accredited investor" as that
term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.
In July 1999, the Registrant issued warrants to purchase 400,000 shares of
Common Stock to iBidLive, N.V. Of these warrants, 200,000 are exercisable at
$3.50 per share and expire on December 31, 1999, and 200,000 are exercisable at
$4.00 per share and expire on June 30, 2000. The warrants were issued as partial
consideration for the settlement of claims against Trojan Television Limited by
affiliates of iBidLive, N.V. pursuant to a settlement agreement dated as of
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<PAGE>
April 30, 1999. iBidLive covenanted that it acquired the warrants for its own
account for investment purposes only and not with a view to any distribution of
the warrants, and that it was an "accredited investor" as that term is defined
under Rule 501(a)(4) of Regulation D promulgated by the Commission under the
Securities Act. The issuance and sale of these securities was exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) of the Securities Act (in accordance with Rule 506 of Regulation
D) as a transaction not involving any public offering.
In September 1999, the Registrant sold 40,500 shares of Common Stock to
Chiltern Group PLC in payment of $162,000 in investment banking fees owed by the
Registration to Chiltern Group PLC. Chiltern covenanted that it acquired the
shares for its own account for investment purposes only and not with a view to
any distribution of the shares, and that it was an "accredited investor" as that
term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.
In September 1999, the Registrant sold 9,540 shares of our common stock to
HAL Nominees Limited in payment of $47,700 in legal owed by the Registrant to
HAL Nominees Limited. HAL Nominees covenanted that it acquired the shares for
its own account for investment purposes only and not with a view to any
distribution of the shares, and that it was an "accredited investor" as that
term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.
In September 1999, the Registrant sold 8,566 shares of our common stock to
Wendy L. Paige in payment of approximately $55,200 in legal fees owed by Trojan
Television Limited to Ms. Paige. Ms. Paige covenanted that she acquired the
shares for her own account for investment purposes only and not with a view to
any distribution of the shares, and that she was an "accredited investor" as
that term is defined under Rule 501(a)(4) of Regulation D promulgated by the
Commission under the Securities Act. The issuance and sale of these securities
was exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act (in accordance
with Rule 506 of Regulation D) as a transaction not involving any public
offering.
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
1.1 Securities Purchase Agreement, dated as of March 29, 1999, between the
Registrant and St. Annes Investments, Ltd. Incorporated by reference
to Exhibit 10.52 to Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998.
1.2 Registration Rights Agreement, dated as of March 29, 1999, between the
Registrant and St. Annes Investments, Ltd. Incorporated by reference
to Exhibit 10.53 to Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998.
2.1 Exchange Agreement, dated August 20, 1996, by and among the Registrant,
Brilliant Interactive Ideas Pty. Ltd. ("BII Australia"), Reefknot
Limited and Pacific Interactive Education Pty. Limited. Incorporated by
reference to Exhibit 2.1 to Form S-1 filed on September 17, 1996, and
the amendments thereto.
2.2 Asset Purchase Agreement, dated September 12, 1996, by and between the
Registrant and Sega Ozisoft Pty. Ltd. Incorporated by reference to
Exhibit 2.2 to Form S-1 filed on September 17, 1996, and the
amendments thereto.
3.1 Amended and Restated Certificate of Incorporation of Registrant.
Incorporated by reference to Exhibit 3.1 to Form S-1 filed on
September 17, 1996, and the amendments thereto.
3.2 Amended and Restated Bylaws of Registrant. Incorporated by reference
to Exhibit 3.2 to Form S-1 filed on September 17, 1996, and the
amendments thereto.
3.3 Certificate of Designation of Rights, Preferences and Privileges of
Preferred Stock. Incorporated by reference to Exhibit A to the Rights
Agreement filed as Exhibit 4.1 to Current Report on Form 8-K filed as
of April 6, 1998.
II-4
<PAGE>
4.1 Specimen Stock Certificate of Common Stock of Registrant. Incorporated
by reference to Exhibit 4.1 to Form S-1 filed on September 17, 1996,
and the amendments thereto.
4.2 Rights Agreement, dated as of March 30, 1998, between Registrant and
U.S. Stock Transfer Corporation as Rights Agent. Incorporated by
reference to Exhibit 4.1 to Current Report on Form 8-K filed as of
April 6, 1998.
4.3 Form of Rights Certificate. Incorporated by reference to Exhibit B to
the Rights Agreement filed as Exhibit 4.1 to Current Report on Form
8-K filed as of April 6, 1998.
5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.
10.1 Registrant's 1996 Stock Option Plan. Incorporated by reference to
Exhibit 10.1 to Form S-1 filed on September 17, 1996, and the
amendments thereto.
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock
Option). Incorporated by reference to Exhibit 10.2 to Form S-1 filed
on September 17, 1996, and the amendments thereto.
10.3 Form of Registrant's Stock Option Agreement (Incentive Stock Option).
Incorporated by reference to Exhibit 10.3 to Form S-1 filed on
September 17, 1996, and the amendments thereto.
10.4 Intentionally Omitted.
10.5 CD-ROM Distribution Agreement, dated September 14, 1996 by and between
the Registrant and Packard Bell NEC. Incorporated by reference to
Exhibit 10.5 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a grant of Confidential Treatment.]
10.6 Memorandum of Agreement, dated September 5, 1996, by and between the
Registrant and Bantam Doubleday Dell Books For Young Readers.
Incorporated by reference to Exhibit 10.9 to Form S-1 filed on
September 17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.7 Production Agreement, dated March 18, 1994, by and between Pick Two
Ltd. and BII Australia. Incorporated by reference to Exhibit 10.10 to
Form S-1 filed on September 17, 1996, and the amendments thereto.
[Portions of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.8 Assistant Multimedia Software Development & Production Agreement,
dated January 17, 1996, by and between Sega Ozisoft Pty. Limited and
BII Australia. Incorporated by reference to Exhibit 10.11 to Form S-1
filed on September 17, 1996, and the amendments thereto. [Portions of
this Exhibit have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a grant of Confidential
Treatment.]
10.9 Licensing Agreement for "Cyberswine" Story Concept & Characters, dated
July 19, 1995, by and between Eat Cyberfist Pty. Limited and Sega
Ozisoft Pty Limited. Incorporated by reference to Exhibit 10.12 to
Form S-1 filed on September 17, 1996, and the amendments thereto.
[Portions of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.10 Publishing Agreement, dated March 9, 1994, by and between Shortland
Publications Limited and BII Australia. Incorporated by reference to
Exhibit 10.14 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a grant of Confidential Treatment.]
10.11 Publishing Agreement, dated December 1, 1994, by and between Shortland
Publications Limited and BII Australia. Incorporated by reference to
Exhibit 10.16 to Form S-1 filed on September 17, 1996, and the
amendments thereto. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a grant of Confidential Treatment.]
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<PAGE>
10.12 Distribution Agreement, dated July 1, 1996, by and between BII
Australia and Fujitsu Basic Software Corporation. Incorporated by
reference to Exhibit 10.7 to Form S-1 filed on September 17, 1996, and
the amendments thereto. [Portions of this Exhibit have been deleted
and filed separately with the Securities and Exchange Commission
pursuant to a grant of Confidential Treatment.]
10.13 License Agreement -- Domestic, dated July 31, 1996, between the Hearst
Corporation, King Features Syndicate Division and the Registrant.
Incorporated by reference to Exhibit 10.18 to Form S-1 filed on
September 17, 1996, and the amendments thereto. [Portions of this
Exhibit have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.14 Distribution Agreement, dated February 22, 1996, by and between BII
Australia and Shortland Publications Limited. Incorporated by
reference to Exhibit 10.20 to Form S-1 filed on September 17, 1996,
and the amendments thereto. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.15 Heads of Agreement, dated November 25, 1994, by and between SAND and
Eat Cyberfist Pty. Limited. Incorporated by reference to Exhibit 10.21
to Form S-1 filed on September 17, 1996, and the amendments thereto.
[Portions of this Exhibit have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.16 Memorandum of Understanding, dated September 14, 1996, by and between
the Registrant and Morgan Creek Interactive, Inc. Incorporated by
reference to Exhibit 10.23 to Form S-1 filed on September 17, 1996,
and the amendments thereto. [Portions of this Exhibit have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a grant of Confidential Treatment.]
10.17 Nontransferable Redeemable Warrant Agreement, dated September 14,
1996, by and between the Registrant and Packard Bell NEC. Incorporated
by reference to Exhibit 10.25 to Form S-1 filed on September 17, 1996,
and the amendments thereto.
10.18 Registrant's Promissory Note, dated September 10, 1996. Incorporated
by reference to Exhibit 10.27 to Form S-1 filed on September 17, 1996,
and the amendments thereto.
10.19 Form of Registrant's Indemnification Agreement. Incorporated by
reference to Exhibit 10.28 to Form S-1 filed on September 17, 1996,
and the amendments thereto.
10.20 Form of Registrant's Employee Confidential Information and
Non-Solicitation Agreement. Incorporated by reference to Exhibit 10.29
to Form S-1 filed on September 17, 1996, and the amendments thereto.
10.21 Commercial Lease, dated August 8, 1994, by and between PW Securities
Pty. Ltd. and Sega Ozisoft. Incorporated by reference to Exhibit 10.32
to Form S-1 filed on September 17, 1996, and the amendments thereto.
10.22 Warrant Agreement by and between Chloe Holdings, Inc. and the
Registrant. Incorporated by reference to Exhibit 10.36 to Form S-1
filed on September 17, 1996, and the amendments thereto.
10.23 Standard Form Lease Agreement, dated May 16, 1997, between Topanga &
Victory Partners L.P. and the Registrant. Incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1997. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
grant of Confidential Treatment.]
10.24 Site Management Agreement, dated August 1, 1997, between CompuServe
and the Registrant. Incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-QSB for the quarter ended September 30,
1997. [Portions of this Exhibit have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a grant of
Confidential Treatment.]
10.25 Redeemable Warrant Agreement, dated September 1, 1997, between Packard
Bell NEC and the Registrant. Incorporated by reference to Exhibit
10.40 to Form SB-2 filed on November 5, 1997, and the amendments
thereto.
10.26 Engagement Letter, dated August 1, 1997, between Averil Associates,
Inc. and the Registrant. Incorporated by reference to Exhibit 10.41 to
Form SB-2 filed on November 5, 1997, and the amendments thereto.
II-6
<PAGE>
10.27 CD-ROM Distribution Agreement, dated September 22, 1997, between
Packard Bell NEC and the Registrant. Incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a grant of Confidential Treatment.]
10.28 Warrant Agreement, dated November 4, 1997, between Chloe Holdings,
Inc. and the Registrant. Incorporated by reference to Exhibit 10.43 to
Form SB-2 filed on November 5, 1997, and the amendments thereto.
10.29 Lease Agreement, dated January 12, 1998, between Capital Credit Company
Pty. Limited and Winmor Pty. Limited and BII Australia.
10.30 Lease Agreement between Daiwa Real Estate Co. Ltd. and BII Australia.
10.31 Architectural Development and Assistance Agreement, dated
July 14, 1998. Incorporated by reference to Exhibit 10.1 to Amendment
No. 1 to Quarterly Report on Form 10-QSB/A for the quarter ended
September 30, 1998. [Portions of this Exhibit have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a grant of Confidential Treatment.]
10.32 Warrant, dated July 16, 1998. Incorporated by reference to Exhibit
10.2 to Amendment No. 1 to Quarterly Report on Form 10-QSB/A for the
quarter ended September 30, 1998.
10.33 Debenture and Warrant Purchase Agreement, dated as of April 21, 1999,
between the Registrant and Roseworth Group, Ltd. Incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1999.
10.34 4% Convertible Debenture Due April 27, 2000 of the Registrant, in the
principal amount of $1,000,000, dated as of April 27, 1999.
Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form
10-QSB for the quarter ended March 31, 1999.
10.35 Registration Rights Agreement, dated as of April 21, 1999, between the
Registrant and Roseworth Group, Ltd. Incorporated by reference to
Exhibit 10.3 to Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1999.
10.36 Agreement for the sale and purchase of share capital of Trojan
Television Limited, dated July 1, 1999, between SF International
Limited and Others and the Registrant. Incorporated by reference to
Exhibit 10.1 to Current
Report on Form 8-K filed as of July 14, 1999.
10.37 Option Agreement, dated March 11, 1999, by and among the Registrant,
Tim Helfet, Brent Cohen and SF International Ltd. acting for itself or
as nominee for Commtel Services Ltd, HL International Ltd and Kai
Schuermann, as amended by the First Amendment to Option Agreement,
dated April 12, 1999, by and among the Registrant, Tim Helfet, Brent
Cohen and SF International Ltd. acting for itself or as nominee for
Commtel Services Ltd, HL International Ltd and Kai Schuermann, as
further amended the Second Amendment to Option Agreement, dated April
29, 1999, by and among the Registrant, Tim Helfet, Brent Cohen and SF
International Ltd. acting for itself or as nominee for Commtel
Services Ltd, HL International Ltd and Kai Schuermann. Incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed as of
July 14, 1999.
10.38 Nontransferable Redeemable Warrant Agreement, dated July 1, 1999, by
and between the Registrant and iBidLive, N.V.
10.39 Nontransferable Redeemable Warrant Agreement, dated July 1, 1999, by
and between the Registrant and iBidLive, N.V.
21.1 List of Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.
II-7
<PAGE>
23.2 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in
Exhibit 5.1).
23.3 Consent of Edwards & Co.
24.1 Power of Attorney (included on signature page).*
- ---------------------------
* Previously filed.
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales of
securities are being made, a post-effective amendment to this Registration
Statement to (i) include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the Registration Statement, and (iii) include any additional or changed material
information on the plan of distribution;
(2) That, for the purpose of determining liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Los Angeles, State
of California, on September 24, 1999.
BRILLIANT DIGITAL ENTERTAINMENT,
INC.
By: /S/ MICHAEL OZEN
-----------------------------
Michael Ozen, Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* Chief Executive Officer and September 24, 1999
- ------------------------------ Chairman
Mark Dyne of the Board of Directors
* President and Director September 24, 1999
- ------------------------------
Kevin Bermeister
/s/ Michael Ozen Chief Financial Officer September 24, 1999
- ------------------------------ (Principal Financial
Michael Ozen and Accounting Officer) and
Secretary
* Vice President, Operations September 24, 1999
- ----------------------------- and Production
Mark Miller and Director
* Director September 24, 1999
- -----------------------------
Diana Maranon
* Director September 24, 1999
- -----------------------------
Ray Musci
* Director September 24, 1999
- -----------------------------
Garth Saloner
* Director September 24, 1999
- -----------------------------
Jeff Scheinrock
</TABLE>
* By: /S/ MICHAEL OZEN
----------------------------
Michael Ozen
As Attorney-In-Fact
[LETTERHEAD OF TROOP STEUBER PASICH REDDICK & TOBEY, LLP]
September 28, 1999
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Boulevard, Suite 120
Woodland Hills, CA 91367
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 (the "Registration Statement") to which this letter is attached as Exhibit
5.1 filed by Brilliant Digital Entertainment, Inc., a Delaware corporation (the
"Company"), in order to register under the Securities Act of 1933, as amended
(the "Act"), 2,046,000 shares of Common Stock of the Company and any additional
shares of Common Stock of the Company which may be registered pursuant to Rule
462(b) under the Act (the "Shares").
We are of the opinion that the Shares have been duly authorized and
upon issuance and sale in conformity with and pursuant to the Registration
Statement, and receipt of the purchase price therefor as specified in the
Registration Statement, the Shares will be legally and validly issued, fully
paid and non-assessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to use of our name in the Prospectus constituting a part thereof.
Respectfully yours,
/s/ Troop Steuber Pasich
Reddick & Tobey, LLP
TROOP STEUBER PASICH
REDDICK & TOBEY, LLP
THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
NONTRANSFERABLE REDEEMABLE WARRANT AGREEMENT
This Warrant Agreement (the "AGREEMENT") is made and entered
into as of this 1st day of July, 1999 by and between Brilliant Digital
Entertainment, Inc., a Delaware corporation (the "COMPANY"), and iBidLive, N.V.
(with permitted transferee pursuant to Section 8.2 below, the "HOLDER").
By acceptance of this Warrant Agreement, the Holder hereby agrees as
follows:
1. GRANT OF WARRANT. The Company hereby grants to the Holder the right and
option (the "WARRANT") to purchase at any time during the "Exercise Period" (as
defined in Section 2 below), upon the terms and subject to the conditions set
forth in this Agreement, an aggregate of 200,000 shares of Common Stock, par
value $.001 per share, of the Company (the "COMMON STOCK"), for an exercise
price per share (the "EXERCISE PRICE") of $4.00 subject to adjustment as
provided in Section 5 below. The shares of Common Stock issuable upon exercise
of the Warrant are referred to as the "WARRANT SHARES," and the Warrant Shares
and the Warrant are together referred to as the "SECURITIES."
2. EXERCISE PERIOD. The Warrant shall be exercisable commencing on the
date hereof and terminate and expire at 5:00 p.m. (Los Angeles time) on June 30,
2000.
3. EXERCISE OF WARRANT. There is no obligation to exercise all or any
portion of the Warrant. The Warrant may be exercised, in whole or in part, at
any time after the date hereof only by delivery to the Company of:
3.1 Written notice of exercise in form and substance identical to and
containing the representations set forth in EXHIBIT A attached to this
Agreement; and
3.2 Payment of the Exercise Price for the Warrant Shares being acquired
upon exercise of the Warrant, by wire transfer in immediately available Federal
funds. Upon receipt of the foregoing, the Company shall promptly issue in the
name of the Holder a certificate evidencing the Warrant Shares being purchased
by such exercise and deliver such certificate to the address requested in the
notice of exercise.
<PAGE>
4 REDEMPTION.
4.1 At any time after the date of this Agreement the Company may redeem
and cancel all, and not less than all, the unexercised rights to purchase
Warrant Shares evidenced by the Warrant for an aggregate redemption price (the
"REDEMPTION PRICE") of $.001 multiplied by the number of Warrant Shares then
issuable under the Warrant, provided, however, that before any such call for
redemption of the Warrant can take place the (i) high closing bid price for the
Common Stock in the over-the-counter market as reported by the NASD Automated
Quotation System or (ii) the closing sale price on the primary exchange on which
the Common Stock is traded, if the Common Stock is traded on a national
securities exchange, shall have for fifteen (15) consecutive trading days
subsequent to the date of this agreement equaled or exceeded 110% of the
Exercise Price.
4.2 In case the Company shall exercise its right to redeem all, and not
less than all, the unexercised rights to purchase Warrant Shares evidenced by
the Warrant, it shall give or cause to be given notice to the Holder by mailing
to the Holder a notice of redemption, first class, postage prepaid, to the
address of the Holder set forth in Section 10.2 below, within twenty (20)
calendar days of the aforementioned fifteen (15) consecutive trading days and
not later than the thirtieth (30th) day before the date fixed for redemption.
Any notice mailed in the manner provided herein shall be conclusively presumed
to have been duly given whether or not the Holder receives such notice.
4.3 The notice of redemption shall specify (i) the Redemption Price, (ii)
the date fixed for redemption (the "REDEMPTION DATE"), and (iii) that the right
to exercise the Warrant shall terminate at the close of the market upon which
the Common Stock is then traded on the business day immediately preceding the
date fixed for redemption.
4.4 Any right to exercise the Warrant shall terminate on close of the
market upon which the Common Stock is then traded on the business day
immediately preceding the Redemption Date. The Redemption Price payable to the
Holder shall be mailed to the Holder at its address set forth in Section 10.2
below.
5. ADJUSTMENTS TO EXERCISE PRICE, REDEMPTION PRICE AND NUMBER OF SHARES.
The Exercise Price, Redemption Price and number of Shares shall be subject to
adjustment from time to time as follows:
5.1 In the event the Company should at any time or from time to time after
the date of this Warrant (the "ISSUANCE DATE") fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Exercise Price and the Redemption Price shall be appropriately decreased
(i.e., the per share
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Exercise Price and the Redemption Price shall be adjusted such that the
aggregate exercise price and for all Warrant Shares issuable upon exercise of
the Warrant in full and the Redemption Price for the entire Warrant, as
adjusted, shall remain the same) and the number of Warrant Shares shall be
increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
5.2 If the number of shares of Common Stock outstanding at any time after
the Issuance Date is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date of such combination, the Exercise
Price and Redemption Price shall each be appropriately increased (i.e., the per
share Exercise Price and the Redemption Price shall be adjusted such that the
aggregate exercise price for all Warrant Shares issuable upon exercise of the
Warrant in full and the aggregate redemption price for the entire Warrant, as
adjusted, shall remain the same) and the number of Shares shall be decreased in
proportion to such decrease in the aggregate number of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents.
5.3 In case of any capital reorganization, any reclassification of the
Common Stock (other than a change in par value or a recapitalization described
in Section 5.1 or 5.2 of this Agreement), or the consolidation of the Company
with, or a sale of substantially all of the assets of the Company to (which sale
is followed by a liquidation or dissolution of the Company), or merger of the
Company with, another person, the Holder shall thereafter be entitled upon
exercise of the Warrant to purchase the kind and number of shares of stock or
other securities or the amount or value of any cash, assets or other property
receivable upon such event by a holder of the number of shares of the Common
Stock which the Warrant entitles the holder of the Warrant to purchase from the
Company immediately prior to such event; and in any such case, appropriate
adjustment shall be made in the application of the provisions set forth in this
Agreement with respect to the Holder's rights and interests thereafter, to the
end that the provisions set forth in this Agreement (including the specified
changes and other adjustments to the Exercise Price and Redemption Price) shall
thereafter be applicable in relation to any shares or other property thereafter
purchasable upon exercise of the Warrant.
5.4 If it is expected that there will occur any event described in Section
5.3 hereof, the Company shall give the holder of the Warrant notice thereof,
which notice shall be given at such time or times as notice is given to the
holders of the Company's Common Stock.
5.5 The provisions of this Section 5 are intended to be exclusive, and the
holder of the Warrant shall have no rights other than as set forth in this
Agreement (and the rights of a stockholder upon exercise of the Warrant) upon
the occurrence of any of the events described in this Section 5.
5.6 The grant of the Warrant shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
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6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF HOLDER. The Holder makes
the following representations, warranties and covenants:
6.1 The Holder is acquiring the Securities for its own account with the
present intention of holding such Securities for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
Securities (other than a distribution in compliance with all applicable federal
and state securities laws).
6.2 The Holder is an experienced and sophisticated investor and has such
knowledge and experience in financial and business matters that it is capable of
evaluating the relative merits and the risks of an investment in the Securities
and of protecting its own interests in connection with this transaction.
6.3 The Holder is willing to bear and is capable of bearing the economic
risk of an investment in the Securities.
6.4 The Company has made available, prior to the date of this Agreement,
to the Holder the opportunity to ask questions of the Company and its officers,
and to receive from the Company and its officers information concerning the
terms and conditions of the Securities and this Agreement and to obtain any
additional information with respect to the Company, its business, operations and
prospects, as reasonably requested by the Holder.
6.5 The Holder is an "accredited investor" as that term is defined under
Rule 501(a)(8) of Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "SECURITIES ACT").
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company
makes the following representations, warranties and covenants:
7.1 The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
requisite corporate power and authority to carry on its business as now being
conducted and to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby.
7.2 All corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby has been taken. This Agreement constitutes the
valid and binding obligation of the Company, enforceable in accordance with its
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies.
7.3 The Warrant Shares, when issued in accordance with the terms of this
Warrant, will be duly authorized, validly issued and nonassessable shares of the
Common Stock of the Company, free and clear of any liens, claims or restrictions
imposed by or through the Company other than as set forth in this Agreement.
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7.4 The Company covenants that it will at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the issuance of the Warrant Shares upon exercise of all
or part of the Warrant, such number of shares of Common Stock as shall then be
issuable upon the exercise of the entire Warrant.
8. RESTRICTIONS ON TRANSFER OR EXERCISE OF THE WARRANT AND SHARES.
8.1 Each certificate for Warrant Shares initially issued upon the exercise
of the Warrant shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
CONDITIONS SPECIFIED IN A CERTAIN WARRANT AGREEMENT DATED JULY
1, 1999. NO TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE
OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS
CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL REGISTERED OR
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY
TO IT, THAT THE TRANSACTION IS EXEMPT FROM REGISTRATION, AND
UNTIL SUCH CONDITIONS AS ARE CONTAINED IN THE WARRANT
AGREEMENT HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE
WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF BRILLIANT
INTERACTIVE, INC. THE HOLDER OF THIS CERTIFICATE, BY
ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE
PROVISIONS OF THE WARRANT AGREEMENT."
If the Warrant Shares are no longer subject to the transfer
restrictions imposed by applicable state and federal securities law because
either (i) the resale of the Warrant Shares has been registered on a
registration statement declared effective by the Commission or (ii) in the
reasonable opinion of counsel for the Company, or the opinion of counsel for the
Holder, which opinion is reasonably satisfactory to counsel for the Company, all
future dispositions of any of the Warrant Shares by the contemplated transferee
would be exempt from or would satisfy the registration and prospectus delivery
requirements of the Securities Act and the qualification requirements of the
applicable state securities laws, then the restrictions on transfer of such
securities contained in this Section 8.1 shall not apply to any subsequent
transfer thereof and the Company shall, promptly upon request by the Holder,
remove the legend set forth above and shall promptly issue, in exchange for the
certificate bearing such legend, a certificate without such legend to the
Holder.
8.2 THE HOLDER AGREES THAT THE WARRANT MAY NOT BE TRANSFERRED, SOLD,
ASSIGNED OR HYPOTHECATED EXCEPT (I) TO ITS SUCCESSORS IN A MERGER OR
CONSOLIDATION OR OTHER BUSINESS COMBINATION; (II) TO PURCHASERS OF ALL OR
SUBSTANTIALLY ALL OF ITS ASSETS; OR (III) BY OPERATION OF LAW. HOLDER FURTHER
AGREES THAT THE COMPANY SHALL HAVE NO OBLIGATION TO EFFECT ANY TRANSFER OF THE
WARRANT PURSUANT TO THE IMMEDIATELY PRECEDING SENTENCE UNLESS THE TRANSFEREE,
PURCHASER, ASSIGNEE OR PLEDGEE, AS THE CASE MAY BE, SHALL HAVE EXECUTED AN
AGREEMENT OBLIGATING THE TRANSFEREE TO COMPLY WITH ALL TERMS AND CONDITIONS OF
THIS AGREEMENT APPLICABLE TO THE TRANSFEROR.
8.3 Prior to any exercise of the Warrant or any transfer or attempted
transfer of any of the Warrant or Warrant Shares, the Holder shall give the
Company written notice of his intention so to do, describing briefly the manner
of any such proposed exercise, sale or transfer.
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The Holder may effect such exercise or transfer, provided that such exercise or
transfer is not prohibited by this Section 8 and such exercise or transfer
complies with all applicable federal and state securities laws and regulations.
8.4 If in the reasonable opinion of counsel for the Company,
notwithstanding the opinion of counsel to a Holder to the contrary, if any, the
proposed transfer of such Warrant Shares or the Warrant may not be effected
without registration thereof under the Securities Act and such registration has
not occurred, the Company shall, as promptly as practicable, so notify the
Holder and the Holder shall not consummate the proposed transfer.
9. DISPUTES.
9.1 ARBITRATION.
a. Except as otherwise expressly provided for in Section 9.3 below, all
disputes arising in connection with this Agreement shall be finally settled by
arbitration in Los Angeles, California, in accordance with the rules of the
American Arbitration Association (the "RULES OF ARBITRATION") and judgment on
the award rendered by the arbitration panel (the "ARBITRATION PANEL") may be
entered in any court or tribunal of competent jurisdiction.
b. Any party which desires to initiate arbitration proceedings as provided
in Section 9.1(a) above may do so by delivering written notice to the other
party (the "ARBITRATION NOTICE") specifying (A) the nature of the dispute or
controversy to be arbitrated, (B) the name and address of the arbitrator
appointed by the party initiating such arbitration and (C) such other matters as
may be required by the Rules of Arbitration.
c. The party who receives an Arbitration Notice shall appoint an
arbitrator and notify the initiating party of such arbitrator's name and address
within 30 days after delivery of the Arbitration Notice; otherwise, a second
arbitrator shall be appointed at the request of the party who delivered the
Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators
so appointed shall appoint a third arbitrator who shall be the chairman or the
Arbitration Panel and who shall be of American nationality. Should the
arbitrators appointed by the parties not agree upon the appointment of the third
arbitrator within 30 days of their appointment, the third shall be appointed in
accordance with the Rules of Arbitration.
d. In any arbitration proceeding conducted pursuant to the provisions of
this Section 9, both parties shall have the right to discovery, to call
witnesses and to cross-examine the opposing party's witnesses, either through
legal counsel, expert witnesses or both, and such proceedings shall be conducted
in the English language.
9.2 FINALITY OF DECISION. All decisions of the Arbitration Panel shall be
final, conclusive and binding on all parties and shall not be subject to
judicial review. The arbitrator shall divide all costs (other than fees of
counsel) incurred in conducting the arbitration proceeding and the final award
in accordance with what they deem just and equitable under the circumstances.
9.3 LIMITATIONS. Notwithstanding anything to the contrary contained in
Sections 9.1 and 9.2 above, any claim by either party for injunctive or other
equitable relief, including specific
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performance, may be brought in any court of competent jurisdiction and any
judgment, order or decree relating thereto shall have precedence over any
arbitral award or proceeding.
10. MISCELLANEOUS PROVISIONS.
10.1 FURTHER ASSURANCES. The Company and the Holder agree to execute such
further documents or instruments and to take such other actions as are necessary
to carry out the transactions contemplated by this Agreement and the other
agreements referred to herein.
10.2 NOTICES. Any and all notices and other communications to be served
hereunder shall be either delivered (i) by hand; (ii) by prepaid overnight
delivery service; or (iii) by certified or registered mail, postage pre-paid, in
each case, addressed as follows:
If to the Holder:
iBidLive, N.V.
3rd Floor, Wisma Ali Bawal 2
11 Jalan Tandand
46050 Petaling Jaya, Selangor Darul Ehsan
Malaysia
Attn: PETER FARID FAISAL BIN ABDULLAH
If to the Company:
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, CA 91367
Attn: Chief Executive Officer
or at such other address and to the attention of such other person as any party
hereto may designate by written notice to the other in accordance with the terms
hereof.
Any such notice shall be effective (i) if delivered by hand,
when personally delivered; (ii) if given by overnight delivery service, on the
business day following deposit with such service addressed as aforesaid; or
(iii) if given by registered or certified mail, 72 hours after deposit in the
mail postage pre-paid, addressed as aforesaid.
10.3 AMENDMENT; WAIVER. This Agreement shall be binding upon and inure to
the benefit of the parties to this Agreement and their respective successors,
heirs and personal representatives. No provision of this Agreement may be
amended or waived unless in writing signed by all of the parties to this
Agreement. Waiver of any one provision of this Agreement shall not be deemed to
be a waiver of any other provision.
10.4 GOVERNING LAW. This Agreement shall be governed by and construed both
as to validity and performance and enforced in accordance with the laws of the
State of California without giving effect to the choice of law principles
thereof. Each of the parties hereto hereby waive their right to a jury trial
with respect to any such legal actions.
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10.5 ATTORNEYS' FEES. If any action, suit or other proceeding is
instituted to remedy, prevent or obtain relief from a default in the performance
by any party of its obligations under this Agreement, the prevailing party shall
recover all of such party's costs and reasonable attorneys' fees incurred in
each and every such action, suit or other proceeding, including any and all
appeals or petitions therefrom.
10.6 NO FINDERS. The parties each agree to indemnify and hold harmless the
other against any expense incurred by reason of any consulting, brokerage
commission or finder's fee alleged to be payable to any person in connection
with the transactions contemplated hereby because of any act, omission or
statement of indemnifying party or any dealings by the indemnifying party with
any consultant, broker or finder.
10.7 EXPENSES. Each of the parties shall pay its own expenses incurred in
connection with the preparation of this agreement and the consummation of the
transactions contemplated hereby.
10.8 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be or become
prohibited or invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
10.9 HEADINGS. The section and subsection headings contained in this
Agreement are included for convenience only and form no part of the agreement
between the parties.
10.10 SURVIVAL. The provisions of Section 9 and Section 10 shall survive
termination of this Agreement.
10.11 INTERPRETATION. In all matters of interpretation, whenever necessary
to give effect to any provision of this Agreement, each gender shall include the
others, the singular shall include the plural, and the plural shall include the
singular. The titles of the paragraphs of this Agreement are for convenience
only and shall not in any way affect the interpretation of any provision or
condition of this Agreement. Each party and its counsel have reviewed and
revised this Agreement. As a result, the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments or
exhibits thereto.
10.12 ENTIRE AGREEMENT. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto relating to the subject matter
hereof and there are no other agreements or understandings, written or oral, in
effect between the parties relating to such subject matter except as expressly
referred to herein.
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IN WITNESS WHEREOF, the parties have entered into and executed this
Warrant Agreement as of the date first above written.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MICHAEL OZEN
---------------------------
Name: Michael Ozen
Title: Chief Financial Officer
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EXHIBIT A
NOTICE OF EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT)
TO: Brilliant Digital Entertainment, Inc.
The undersigned hereby irrevocably elects (to the extent indicated
herein) to exercise the Warrant granted to the undersigned pursuant to that
certain Nontransferable Redeemable Warrant Agreement dated July 1, 1999 between
the undersigned and Brilliant Digital Entertainment, Inc., a Delaware
corporation (the "COMPANY") and to purchase ---------- shares of Common Stock
(the "SECURITIES") of the Company. The closing of the exercise of the Warrant
shall take place at ----- on -----------------, -------- at the principal
executive office of the Company located at Brilliant Digital Entertainment,
Inc., 6355 Topanga Canyon Blvd., Suite 120, Woodland Hills, CA 91367.
The undersigned represents, warrants and agrees that the undersigned
(a) is acquiring the Securities for its own account with the present intention
of holding such Securities for investment purposes only and not with a view to,
or for sale in connection with, any distribution of such Securities (other than
a distribution in compliance with all applicable federal and state securities
laws and the provisions of the Agreement), (b) is an "accredited investor" as
that term is defined under Rule 501 of Regulation D promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
---------------------------------------
(Signature)
---------------------------------------
(Print Name)
---------------------------------------
(Title, if Any)
THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
NONTRANSFERABLE REDEEMABLE WARRANT AGREEMENT
This Warrant Agreement (the "AGREEMENT") is made and entered into as of
this 1st day of July, 1999 by and between Brilliant Digital Entertainment, Inc.,
a Delaware corporation (the "COMPANY"), and iBidLive, N.V. (with permitted
transferee pursuant to Section 8.2 below, the "HOLDER").
By acceptance of this Warrant Agreement, the Holder hereby agrees as
follows:
1. GRANT OF WARRANT. The Company hereby grants to the Holder the right and
option (the "WARRANT") to purchase at any time during the "Exercise Period" (as
defined in Section 2 below), upon the terms and subject to the conditions set
forth in this Agreement, an aggregate of 200,000 shares of Common Stock, par
value $.001 per share, of the Company (the "COMMON STOCK"), for an exercise
price per share (the "EXERCISE PRICE") of $3.50 subject to adjustment as
provided in Section 5 below. The shares of Common Stock issuable upon exercise
of the Warrant are referred to as the "WARRANT SHARES," and the Warrant Shares
and the Warrant are together referred to as the "SECURITIES."
2. EXERCISE PERIOD. The Warrant shall be exercisable commencing on the
date hereof and terminate and expire at 5:00 p.m. (Los Angeles time) on December
31, 1999.
3. EXERCISE OF WARRANT. There is no obligation to exercise all or any
portion of the Warrant. The Warrant may be exercised, in whole or in part, at
any time after the date hereof only by delivery to the Company of:
3.1 Written notice of exercise in form and substance identical to and
containing the representations set forth in EXHIBIT A attached to this
Agreement; and
3.2 Payment of the Exercise Price for the Warrant Shares being acquired
upon exercise of the Warrant, by wire transfer in immediately available Federal
funds. Upon receipt of the foregoing, the Company shall promptly issue in the
name of the Holder a certificate evidencing the Warrant Shares being purchased
by such exercise and deliver such certificate to the address requested in the
notice of exercise.
<PAGE>
4. REDEMPTION.
4.1 At any time after the date of this Agreement the Company may redeem
and cancel all, and not less than all, the unexercised rights to purchase
Warrant Shares evidenced by the Warrant for an aggregate redemption price (the
"REDEMPTION PRICE") of $.001 multiplied by the number of Warrant Shares then
issuable under the Warrant, provided, however, that before any such call for
redemption of the Warrant can take place the (i) high closing bid price for the
Common Stock in the over-the-counter market as reported by the NASD Automated
Quotation System or (ii) the closing sale price on the primary exchange on which
the Common Stock is traded, if the Common Stock is traded on a national
securities exchange, shall have for fifteen (15) consecutive trading days
subsequent to the date of this agreement equaled or exceeded 110% of the
Exercise Price.
4.2 In case the Company shall exercise its right to redeem all, and not
less than all, the unexercised rights to purchase Warrant Shares evidenced by
the Warrant, it shall give or cause to be given notice to the Holder by mailing
to the Holder a notice of redemption, first class, postage prepaid, to the
address of the Holder set forth in Section 10.2 below, within twenty (20)
calendar days of the aforementioned fifteen (15) consecutive trading days and
not later than the thirtieth (30th) day before the date fixed for redemption.
Any notice mailed in the manner provided herein shall be conclusively presumed
to have been duly given whether or not the Holder receives such notice.
4.3 The notice of redemption shall specify (i) the Redemption Price, (ii)
the date fixed for redemption (the "REDEMPTION DATE"), and (iii) that the right
to exercise the Warrant shall terminate at the close of the market upon which
the Common Stock is then traded on the business day immediately preceding the
date fixed for redemption.
4.4 Any right to exercise the Warrant shall terminate on close of the
market upon which the Common Stock is then traded on the business day
immediately preceding the Redemption Date. The Redemption Price payable to the
Holder shall be mailed to the Holder at its address set forth in Section 10.2
below.
5. ADJUSTMENTS TO EXERCISE PRICE, REDEMPTION PRICE AND NUMBER OF SHARES.
The Exercise Price, Redemption Price and number of Shares shall be subject to
adjustment from time to time as follows:
5.1 In the event the Company should at any time or from time to time after
the date of this Warrant (the "ISSUANCE DATE") fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Exercise Price and the Redemption Price shall be appropriately decreased
(i.e., the per
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share Exercise Price and the Redemption Price shall be adjusted such that
the aggregate exercise price and for all Warrant Shares issuable upon exercise
of the Warrant in full and the Redemption Price for the entire Warrant, as
adjusted, shall remain the same) and the number of Warrant Shares shall be
increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
5.2 If the number of shares of Common Stock outstanding at any time after
the Issuance Date is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date of such combination, the Exercise
Price and Redemption Price shall each be appropriately increased (i.e., the per
share Exercise Price and the Redemption Price shall be adjusted such that the
aggregate exercise price for all Warrant Shares issuable upon exercise of the
Warrant in full and the aggregate redemption price for the entire Warrant, as
adjusted, shall remain the same) and the number of Shares shall be decreased in
proportion to such decrease in the aggregate number of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents.
5.3 In case of any capital reorganization, any reclassification of the
Common Stock (other than a change in par value or a recapitalization described
in Section 5.1 or 5.2 of this Agreement), or the consolidation of the Company
with, or a sale of substantially all of the assets of the Company to (which sale
is followed by a liquidation or dissolution of the Company), or merger of the
Company with, another person, the Holder shall thereafter be entitled upon
exercise of the Warrant to purchase the kind and number of shares of stock or
other securities or the amount or value of any cash, assets or other property
receivable upon such event by a holder of the number of shares of the Common
Stock which the Warrant entitles the holder of the Warrant to purchase from the
Company immediately prior to such event; and in any such case, appropriate
adjustment shall be made in the application of the provisions set forth in this
Agreement with respect to the Holder's rights and interests thereafter, to the
end that the provisions set forth in this Agreement (including the specified
changes and other adjustments to the Exercise Price and Redemption Price) shall
thereafter be applicable in relation to any shares or other property thereafter
purchasable upon exercise of the Warrant.
5.4 If it is expected that there will occur any event described in Section
5.3 hereof, the Company shall give the holder of the Warrant notice thereof,
which notice shall be given at such time or times as notice is given to the
holders of the Company's Common Stock.
5.5 The provisions of this Section 5 are intended to be exclusive, and the
holder of the Warrant shall have no rights other than as set forth in this
Agreement (and the rights of a stockholder upon exercise of the Warrant) upon
the occurrence of any of the events described in this Section 5.
5.6 The grant of the Warrant shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
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6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF HOLDER. The Holder makes
the following representations, warranties and covenants:
6.1 The Holder is acquiring the Securities for its own account with the
present intention of holding such Securities for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
Securities (other than a distribution in compliance with all applicable federal
and state securities laws).
6.2 The Holder is an experienced and sophisticated investor and has such
knowledge and experience in financial and business matters that it is capable of
evaluating the relative merits and the risks of an investment in the Securities
and of protecting its own interests in connection with this transaction.
6.3 The Holder is willing to bear and is capable of bearing the economic
risk of an investment in the Securities.
6.4 The Company has made available, prior to the date of this Agreement,
to the Holder the opportunity to ask questions of the Company and its officers,
and to receive from the Company and its officers information concerning the
terms and conditions of the Securities and this Agreement and to obtain any
additional information with respect to the Company, its business, operations and
prospects, as reasonably requested by the Holder.
6.5 The Holder is an "accredited investor" as that term is defined under
Rule 501(a)(8) of Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "SECURITIES ACT").
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company
makes the following representations, warranties and covenants:
7.1 The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
requisite corporate power and authority to carry on its business as now being
conducted and to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby.
7.2 All corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby has been taken. This Agreement constitutes the
valid and binding obligation of the Company, enforceable in accordance with its
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies.
7.3 The Warrant Shares, when issued in accordance with the terms of this
Warrant, will be duly authorized, validly issued and nonassessable shares of the
Common Stock of the Company, free and clear of any liens, claims or restrictions
imposed by or through the Company other than as set forth in this Agreement.
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7.4 The Company covenants that it will at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the issuance of the Warrant Shares upon exercise of all
or part of the Warrant, such number of shares of Common Stock as shall then be
issuable upon the exercise of the entire Warrant.
8. RESTRICTIONS ON TRANSFER OR EXERCISE OF THE WARRANT AND SHARES.
8.1 Each certificate for Warrant Shares initially issued upon the exercise
of the Warrant shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
CONDITIONS SPECIFIED IN A CERTAIN WARRANT AGREEMENT DATED JULY
1, 1999. NO TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE
OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS
CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL REGISTERED OR
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY
TO IT, THAT THE TRANSACTION IS EXEMPT FROM REGISTRATION, AND
UNTIL SUCH CONDITIONS AS ARE CONTAINED IN THE WARRANT
AGREEMENT HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE
WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF BRILLIANT
INTERACTIVE, INC. THE HOLDER OF THIS CERTIFICATE, BY
ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE
PROVISIONS OF THE WARRANT AGREEMENT."
If the Warrant Shares are no longer subject to the transfer restrictions
imposed by applicable state and federal securities law because either (i) the
resale of the Warrant Shares has been registered on a registration statement
declared effective by the Commission or (ii) in the reasonable opinion of
counsel for the Company, or the opinion of counsel for the Holder, which opinion
is reasonably satisfactory to counsel for the Company, all future dispositions
of any of the Warrant Shares by the contemplated transferee would be exempt from
or would satisfy the registration and prospectus delivery requirements of the
Securities Act and the qualification requirements of the applicable state
securities laws, then the restrictions on transfer of such securities contained
in this Section 8.1 shall not apply to any subsequent transfer thereof and the
Company shall, promptly upon request by the Holder, remove the legend set forth
above and shall promptly issue, in exchange for the certificate bearing such
legend, a certificate without such legend to the Holder.
8.2 THE HOLDER AGREES THAT THE WARRANT MAY NOT BE TRANSFERRED, SOLD,
ASSIGNED OR HYPOTHECATED EXCEPT (I) TO ITS SUCCESSORS IN A MERGER OR
CONSOLIDATION OR OTHER BUSINESS COMBINATION; (II) TO PURCHASERS OF ALL OR
SUBSTANTIALLY ALL OF ITS ASSETS; OR (III) BY OPERATION OF LAW. HOLDER FURTHER
AGREES THAT THE COMPANY SHALL HAVE NO OBLIGATION TO EFFECT ANY TRANSFER OF THE
WARRANT PURSUANT TO THE IMMEDIATELY PRECEDING SENTENCE UNLESS THE TRANSFEREE,
PURCHASER, ASSIGNEE OR PLEDGEE, AS THE CASE MAY BE, SHALL HAVE EXECUTED AN
AGREEMENT OBLIGATING THE TRANSFEREE TO COMPLY WITH ALL TERMS AND CONDITIONS OF
THIS AGREEMENT APPLICABLE TO THE TRANSFEROR.
8.3 Prior to any exercise of the Warrant or any transfer or attempted
transfer of any of the Warrant or Warrant Shares, the Holder shall give the
Company written notice of his intention so to do, describing briefly the manner
of any such proposed exercise, sale or transfer.
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The Holder may effect such exercise or transfer, provided that such
exercise or transfer is not prohibited by this Section 8 and such exercise or
transfer complies with all applicable federal and state securities laws and
regulations.
8.4 If in the reasonable opinion of counsel for the Company,
notwithstanding the opinion of counsel to a Holder to the contrary, if any, the
proposed transfer of such Warrant Shares or the Warrant may not be effected
without registration thereof under the Securities Act and such registration has
not occurred, the Company shall, as promptly as practicable, so notify the
Holder and the Holder shall not consummate the proposed transfer.
9. DISPUTES.
9.1 ARBITRATION.
a. Except as otherwise expressly provided for in Section 9.3 below, all
disputes arising in connection with this Agreement shall be finally settled by
arbitration in Los Angeles, California, in accordance with the rules of the
American Arbitration Association (the "RULES OF ARBITRATION") and judgment on
the award rendered by the arbitration panel (the "ARBITRATION PANEL") may be
entered in any court or tribunal of competent jurisdiction.
b. Any party which desires to initiate arbitration proceedings as provided
in Section 9.1(a) above may do so by delivering written notice to the other
party (the "ARBITRATION NOTICE") specifying (A) the nature of the dispute or
controversy to be arbitrated, (B) the name and address of the arbitrator
appointed by the party initiating such arbitration and (C) such other matters as
may be required by the Rules of Arbitration.
c. The party who receives an Arbitration Notice shall appoint an
arbitrator and notify the initiating party of such arbitrator's name and address
within 30 days after delivery of the Arbitration Notice; otherwise, a second
arbitrator shall be appointed at the request of the party who delivered the
Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators
so appointed shall appoint a third arbitrator who shall be the chairman or the
Arbitration Panel and who shall be of American nationality. Should the
arbitrators appointed by the parties not agree upon the appointment of the third
arbitrator within 30 days of their appointment, the third shall be appointed in
accordance with the Rules of Arbitration.
d. In any arbitration proceeding conducted pursuant to the provisions of
this Section 9, both parties shall have the right to discovery, to call
witnesses and to cross-examine the opposing party's witnesses, either through
legal counsel, expert witnesses or both, and such proceedings shall be conducted
in the English language.
9.2 FINALITY OF DECISION. All decisions of the Arbitration Panel shall be
final, conclusive and binding on all parties and shall not be subject to
judicial review. The arbitrator shall divide all costs (other than fees of
counsel) incurred in conducting the arbitration proceeding and the final award
in accordance with what they deem just and equitable under the circumstances.
9.3 LIMITATIONS. Notwithstanding anything to the contrary contained in
Sections 9.1 and 9.2 above, any claim by either party for injunctive or other
equitable relief, including specific
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performance, may be brought in any court of competent jurisdiction and any
judgment, order or decree relating thereto shall have precedence over any
arbitral award or proceeding.
10. MISCELLANEOUS PROVISIONS.
10.1 FURTHER ASSURANCES. The Company and the Holder agree to execute such
further documents or instruments and to take such other actions as are necessary
to carry out the transactions contemplated by this Agreement and the other
agreements referred to herein.
10.2 NOTICES. Any and all notices and other communications to be served
hereunder shall be either delivered (i) by hand; (ii) by prepaid overnight
delivery service; or (iii) by certified or registered mail, postage pre-paid, in
each case, addressed as follows:
If to the Holder:
iBidLive, N.V.
3rd Floor, Wisma Ali Bawal 2
11 Jalan Tandand
46050 Petaling Jaya, Selangor Darul Ehsan
Malaysia
Attn: PETER FARID FAISAL BIN ABDULLAH
If to the Company:
Brilliant Digital Entertainment, Inc.
6355 Topanga Canyon Blvd., Suite 120
Woodland Hills, CA 91367
Attn: Chief Executive Officer
or at such other address and to the attention of such other person as any party
hereto may designate by written notice to the other in accordance with the terms
hereof.
Any such notice shall be effective (i) if delivered by hand, when
personally delivered; (ii) if given by overnight delivery service, on the
business day following deposit with such service addressed as aforesaid; or
(iii) if given by registered or certified mail, 72 hours after deposit in the
mail postage pre-paid, addressed as aforesaid.
10.3 AMENDMENT; WAIVER. This Agreement shall be binding upon and inure to
the benefit of the parties to this Agreement and their respective successors,
heirs and personal representatives. No provision of this Agreement may be
amended or waived unless in writing signed by all of the parties to this
Agreement. Waiver of any one provision of this Agreement shall not be deemed to
be a waiver of any other provision.
10.4 GOVERNING LAW. This Agreement shall be governed by and construed both
as to validity and performance and enforced in accordance with the laws of the
State of California without giving effect to the choice of law principles
thereof. Each of the parties hereto hereby waive their right to a jury trial
with respect to any such legal actions.
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10.5 ATTORNEYS' FEES. If any action, suit or other proceeding is
instituted to remedy, prevent or obtain relief from a default in the performance
by any party of its obligations under this Agreement, the prevailing party shall
recover all of such party's costs and reasonable attorneys' fees incurred in
each and every such action, suit or other proceeding, including any and all
appeals or petitions therefrom.
10.6 NO FINDERS. The parties each agree to indemnify and hold harmless the
other against any expense incurred by reason of any consulting, brokerage
commission or finder's fee alleged to be payable to any person in connection
with the transactions contemplated hereby because of any act, omission or
statement of indemnifying party or any dealings by the indemnifying party with
any consultant, broker or finder.
10.7 EXPENSES. Each of the parties shall pay its own expenses incurred in
connection with the preparation of this agreement and the consummation of the
transactions contemplated hereby.
10.8 SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be or become
prohibited or invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
10.9 HEADINGS. The section and subsection headings contained in this
Agreement are included for convenience only and form no part of the agreement
between the parties.
10.10 SURVIVAL. The provisions of Section 9 and Section 10 shall survive
termination of this Agreement.
10.11 INTERPRETATION. In all matters of interpretation, whenever necessary
to give effect to any provision of this Agreement, each gender shall include the
others, the singular shall include the plural, and the plural shall include the
singular. The titles of the paragraphs of this Agreement are for convenience
only and shall not in any way affect the interpretation of any provision or
condition of this Agreement. Each party and its counsel have reviewed and
revised this Agreement. As a result, the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments or
exhibits thereto.
10.12 ENTIRE AGREEMENT. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto relating to the subject matter
hereof and there are no other agreements or understandings, written or oral, in
effect between the parties relating to such subject matter except as expressly
referred to herein.
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IN WITNESS WHEREOF, the parties have entered into and executed this
Warrant Agreement as of the date first above written.
BRILLIANT DIGITAL ENTERTAINMENT, INC.
By: /S/ MICHAEL OZEN
----------------------------
Name: Michael Ozen
Title: Chief Financial Officer
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EXHIBIT A
NOTICE OF EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT)
TO: Brilliant Digital Entertainment, Inc.
The undersigned hereby irrevocably elects (to the extent indicated
herein) to exercise the Warrant granted to the undersigned pursuant to that
certain Nontransferable Redeemable Warrant Agreement dated July 1, 1999 between
the undersigned and Brilliant Digital Entertainment, Inc., a Delaware
corporation (the "COMPANY") and to purchase ---------- shares of Common Stock
(the "SECURITIES") of the Company. The closing of the exercise of the Warrant
shall take place at ----- on -----------------, -------- at the principal
executive office of the Company located at Brilliant Digital Entertainment,
Inc., 6355 Topanga Canyon Blvd., Suite 120, Woodland Hills, CA 91367.
The undersigned represents, warrants and agrees that the undersigned
(a) is acquiring the Securities for its own account with the present intention
of holding such Securities for investment purposes only and not with a view to,
or for sale in connection with, any distribution of such Securities (other than
a distribution in compliance with all applicable federal and state securities
laws and the provisions of the Agreement), (b) is an "accredited investor" as
that term is defined under Rule 501 of Regulation D promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
----------------------------------
(Signature)
----------------------------------
(Print Name)
----------------------------------
(Title, if Any)
EXHIBIT 23.1
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated March 29, 1999 except for the third paragraph of Note 11, as to
which the date is April 14, 1999, relating to the financial statements of
Brilliant Digital Entertainment, Inc., which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP.
Los Angeles, California
September 22, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 (No.
333-78733) of our reports dated 25 June 1999 relating to the financial
statements of Trojan Television Limited which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/ Edwards & Co.
Edwards & Co
London, England
September 24, 1999
