-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MGw9gKkbFf3eQQgbzuJcS3GQJVCjbOuVgAE4Xh9LJquCACkBvhGavZ9oofet2UcM qQvDK/RE+FbWktnBfbS2Cw== 0001011438-02-000252.txt : 20020415 0001011438-02-000252.hdr.sgml : 20020415 ACCESSION NUMBER: 0001011438-02-000252 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRILLIANT DIGITAL ENTERTAINMENT INC CENTRAL INDEX KEY: 0001022844 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954592204 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14480 FILM NUMBER: 02596724 BUSINESS ADDRESS: STREET 1: 6355 TOPANGA CANYON BLVD SUITE 120 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8186151500 MAIL ADDRESS: STREET 1: 6355 TOPANGA CANYON BLVD STE 120 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 10KSB 1 form_10-ksb.txt =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 COMMISSION FILE NUMBER 0-22250 BRILLIANT DIGITAL ENTERTAINMENT, INC. (Name of Small Business Issuer In Its Charter) DELAWARE 95-4592204 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 6355 TOPANGA CANYON BOULEVARD, SUITE 120 WOODLAND HILLS, CALIFORNIA 91367 (Address of Principal Executive Offices and Zip Code) (818) 615-1500 (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.001 PAR VALUE AMERICAN STOCK EXCHANGE Securities registered under Section 12(g) of the Exchange Act: NONE Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes X No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [ ] The issuer's revenues for the fiscal year ended December 31, 2001 were $1,816,000. At March 22, 2002 the aggregate market value of the voting stock held by non-affiliates of the issuer was $1,708,840. At March 22, 2002 the issuer had 22,615,097 shares of Common Stock, $0.001 par value, issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's Proxy Statement with respect to its 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. =============================================================================== PART I ITEM 1. DESCRIPTION OF BUSINESS CORPORATE OVERVIEW Brilliant Digital Entertainment, Inc. is a developer of rich media advertising serving technologies, software authoring tools and content for three dimensional, or 3D, animation on the World Wide Web. During the third quarter, 2001 we began marketing and distributing our player, the "Digital Projector" (required for the playback of our rich media content and advertisements) through two large peer-to-peer, or P2P, networks, Sharman Networks, which operates the KaZaA network (formerly operated by Consumer Empowerment B.V.), and StreamCast Networks, which operates the Morpheus network. Previously, our primary method of distribution was through the bundling of the Digital Projector with our animation content which we syndicated to third party web sites. At December 31, 2001, we estimate that our Digital Projector had been distributed to tens of millions of users based on KaZaA's weekly downloads as reported on Download.com, as additional P2P connected computers and other users have accessed the KaZaA and Morpheus networks. Sharman Networks continues to distribute our player and StreamCast Networks has discontinued its distribution. We commercialize our technology in two primary ways. We license our rich media advertising server technologies to websites to enable the selling and serving of our proprietary rich media advertising format, and we license our rich media content authoring tools - "b3d Studio" and "b3d Studio Pro" - to production studios. We launched our rich media 3D advertising banners - Brilliant Banners - into the market to offer advertisers and web sites an alternative to the current Graphics Interchange Format, or GIF, banners that are prevalent on web sites today. With the decline of industry wide banner advertising revenues and click through rates, we believe that our animated 3D banner advertisements perform better than GIF banners and may help reinvigorate certain online advertising campaigns. We have introduced the Brilliant Banner to our syndication partners, other significant advertisers and websites, making the technologies available for them to commence selling and serving this rich media advertising format. In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet, Inc., to create a private, peer-to-peer network utilizing existing, proven technology to leverage the processing, storage and distribution power of a peer-to-peer network comprised of tens of millions of users. Altnet intends to license commercially available digital rights management technology to protect against infringement of the proprietary rights of the owners of the content distributed over the Altnet network. Altnet licensed the peer-to-peer technology necessary to operate the network from Blastoise, Ltd. doing business as Joltid. Pursuant to our agreement, Blastoise acquired 49% of the outstanding common stock of Altnet. We have licensed some of the world's best known characters for the production and web distribution of episodic animations, called MultipathTM Movies, that include SUPERMAN, XENA: WARRIOR PRINCESS, KISS, and ACE VENTURA, and have produced animated music videos of top selling artists including Ja Rule, Ludacris, DMX and Li'l Romeo. These full-screen productions, developed using our proprietary suite of b3d software tools, have small files for faster download relative to full video files. Currently we distribute select animated content through Internet syndication partners including Warner Bros. Online, Roadrunner and selected sites from the Universal Music Group. In 2001, we substantially reduced our internal production and syndication of 3D animation, which we used primarily to distribute our Digital Projector, in order to reduce our costs and our cash burn rate. We have discontinued operations at Digital Hip Hop, the joint venture we formed to produce animated music videos for the World Wide Web, and have discontinued operations at, and placed into liquidation, Brilliant Interactive Ideas Pty. Ltd., our Australian-based production company. The reduction in our content production and syndication activities has allowed us to focus our efforts and allocate our resources to the further development and exploitation of our advertising serving and authoring tools businesses, and to pursue the development of a private, peer-to-peer network business through our Altnet subsidiary. Page 1 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 Australian 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) 615-1500. Information on our web sites, www.brilliantdigital.com and www.b3d.com, does not constitute part of this Form 10-KSB. TECHNOLOGY BUSINESS We license our rich media advertising server technologies to web sites to enable advertisers and web sites to display our rich media 3D advertising banners - Brilliant Banners - as an alternative to the current two dimensional, or 2D, GIF banners that are prevalent on web sites today. Tests conducted by us have shown that small advertising campaigns created and served in our advertising format have generally provided click through rates higher than the industry norm for static, 2D GIF banner ads. With the decline of industry wide banner advertising revenues and click through rates during 2001, we believe that our animated 3D banner ads may help reinvigorate online advertising campaigns. We are also introducing our advertising format to third party ad serving companies, making our technologies available for them to commence selling and serving this new rich media advertising format. In November 2001, we became a Rich Media Silver Vendor of DoubleClick, Inc. This rich media certification was awarded after our technology passed the DoubleClick tests for functionality, impression tracking and click tracking. We believe DoubleClick to be the technological leader for ad serving on Web, and believe that having our rich media ad serving technology certified by DoubleClick is a significant achievement. According to a March 14, 2002 press release issued by DoubleClick, "The DART rich media vendor certification program launched in October 2001, provides confidence to any advertiser or publisher that the relevant technology has passed stringent requirements. The certification is a seal of approval that guarantees that rich media creatives meet the high standards of functionality and reporting required of all DoubleClick technologies." At December 31, 2001, we were one of only seven vendors to have received the Rich Media Silver Vendor certification from DoubleClick. Our proprietary rich media authoring tools - B3D STUDIO and B3D STUDIO PRO - were developed to be the optimal software for creating digital animation that could be streamed easily and efficiently via the Internet. b3d Studio is designed to work as a plug-in with Discreet's (a division of Autodesk, Inc.) 3D STUDIO MAX and Alias|Wavefront's MAYA animation software. We have licensed our software tools to other content developers and studios interested in creating content for the Internet. We intend for our tools to proliferate and become the de facto standard for the production, distribution and viewing of 3D animation over the Internet. The primary components of our rich media technologies include: o Digital Projector - a playback device used to view content created with our b3d software tools that is seamlessly downloaded and transparently installed to a user's computer. o b3d Studio and b3d Studio Pro - the authoring tools used for the lay-up, directing, producing and editing of real time animation designed for output to the World Wide Web and other media. o Brilliant Banner Ad Server - a technology that enables the serving of Brilliant Banner advertisements to third party web sites. o b3d Installer - a technology that enables our Digital Projector and content to be installed without taking the user out of their Internet browser. o b3d Reporting - a reporting technology used to analyze, in real time, the performance of content, particularly advertising banners, produced using b3d Studio. Page 2 SALES, MARKETING AND DISTRIBUTION OF OUR TECHNOLOGY We have engaged the services of two outside consultants whose primary responsibilities are to promote and sell our technology. Senior management is also marketing and promoting the advantages of our b3d products. We are marketing our rich media advertising solutions to advertising agencies, third party advertising representative firms and directly to advertisers. We are also marketing our content authoring tools to production companies, including those that participated in a beta test of the tools during 2000. Animation content generated using b3d Studio can be applied to the production of training, artistic rendering, educational, architectural, engineering, e-commerce, and other solutions that require animation. We believe that broad use of our tools in the creation of animated content will encourage greater use of the Digital Projector, and establish broader demand for our ad serving technologies. We generally charge a fee to our clients for the production of Brilliant Banners, which we outsource to third party production firms at a cost that generally equals the fee we receive from our client. Consequently, the production of Brilliant Banners is not profitable for us. We also receive sales commissions from the publishers of web sites on which we place Brilliant Banners advertisements. Our long-term strategy, however, is to derive revenue by licensing our ad-serving product, which is required to serve Brilliant Banners. Our ability to derive significant licensing revenue, however, depends in part on the market's acceptance of the Brilliant Banner as viable rich media advertising solution. CONTENT PRODUCTION TOOLS We have developed several integrated proprietary software tools that enable us to produce Internet-ready, high-quality animated content. B3D STUDIO AND B3D STUDIO PRO. b3d Studio is the centerpiece of the content development and production process. b3d Studio is an object-oriented environment that collects and integrates source files from ScripNav and TalkTrack with graphics, sound and animation, and makes them available for lay-up, editing and final output. ScripNav was developed specifically for the writing of complex, interactive 3D animated content, including our MultipathTM Movies and interactive banner ad scripts. It is used to compose, edit and finalize a script using a commercially available word processing package. It provides for the insertion of various subplots into scenes in order to adapt the script to the interactive format of the MultipathTM Movie, game or online banner ad. TalkTrack automatically synchronizes a character's lip movements with corresponding dialogue tracks. TalkTrack does this by examining wave files and generating output files that contain references to the appropriate mouth shapes. TalkTrack allows for low cost modification of the animated content to any language without the awkward appearance of dubbed movies. b3d Studio provides a multi-window editing environment in which the developer can preview, analyze and edit the final product. b3d Studio includes a Shot Based Editing System that enables movie "clips" to be incorporated into a scene. It also allows cuts and edits to take place, as in a traditional film environment. For example, the specific scene data (sets and props) can be loaded into memory and viewed from different camera positions. b3d Studio, through its Data Compression Wizard, builds, integrates and compresses the data files to create a b3d file to be played on our Digital Projector. The Data Compression Wizard arranges, assembles and, using licensed technology, compresses thousands of audio and bitmap files that are created during the development of a MultipathTM Movie or other b3d animation in a manner that optimizes the playing of the title. The Data Compression Wizard compresses files allowing up to five hours of branching content to be captured in less than 60 megabytes of disk space, as compared with conventional technologies, which presently would require at least one gigabyte of storage. DIGITAL PROJECTOR. The Digital Projector contains all the necessary components to load and play b3d animations or any animation files that have been designed using our b3d technology. The Digital Projector is the software engine that the system uses to play everything from a Brilliant Banner to a music video to a MultipathTM Movie, each produced in our b3d format, and is generally the only software tool that we must continually modify to permit the b3d content to be adapted to new platforms. The Digital Projector was Page 3 developed exclusively for the PC. Presently, we have no intention of developing the Digital Projector for use on other platforms. In addition to our proprietary software tools and engines, we and other b3d content producers use certain commercially available sound and graphics tools in the production process. CONTENT TOOLS APPLICATIONS The b3d software tools suite allows for the creation of three-dimensional objects that function within a three-dimensional environment that can be updated in real time. Examples of the applications for the tools suite include: o Entertainment content delivered over the Internet, on traditional broadcast and cable television and on CD-ROM and DVD o Internet advertisements o Virtual storefronts with database enabled e-commerce o Educational programming o Sports instruction o Personal online persona o Virtual reality content applications and environment management B3D STUDIO TOOLS ADVANTAGES We believe our b3d technology is one of only a few known methods for creating high-quality linear and interactive programming for the Internet, traditional television broadcasting, DVD and CD-ROM utilizing a single production process. Our current b3d technology offers the following significant advantages over competing rich media or 3D real time animation technologies: SMALLER DATA TRANSMISSION REQUIREMENTS. While certain media requires the compression and transmission of each frame in a video image (there are 25 frames per second of video image), our b3d technology requires only the transmission of animation instructions, which consist of commands such as "move the left arm upwards by 12 degrees." As a result, b3d files require much less data to be transmitted, which allows b3d files to be streamed more easily over the Internet. SMALL FILES AND FAST RENDERING. b3d files are highly compressed binary images with simple command sets, requiring small files and resulting in fast rendering. INTERACTIVITY. b3d files offer interactivity. We have developed a unique pre-load system to enable story or interactive branching to take place seamlessly and without interruption to the story or visual representations. STREAMING DURING PLAYBACK. b3d files allow content to begin playing after only a portion of the program has been downloaded, with sound and animation continuing to stream over the Internet while the content plays. Competing formats generally require that the entire program be downloaded before the user can begin to play the content. SCALABLE SCREEN SIZE. b3d files can scale from small thumbnails to full-screen movies without degradation. Competing formats generally either pixelate as users enlarge the screen, or are restricted to a partial screen. SCALES WITH INTERNET BANDWIDTH. Our Digital Projector can automatically detect Internet bandwidth and selects the best-quality soundtrack and textures that can be streamed within this bandwidth. Page 4 This is superior to those competing products, which offer bandwidth scalability, but generally require the user to manually select their bandwidth requirements. LOW SERVER IMPACT. The continuous stream of video data served on demand to viewers worldwide continues to present a significant challenge. In contrast, much of the data required to view b3d files resides on the user's computer. Consequently, less data is required to be streamed to the user while the content plays. In addition, b3d files compress to under 10% of a similar video advertisement. SERVER-CLIENT SIDE CONTROL. b3d technology has evolved to enable control over images delivered to the viewer in real time by the party responsible for serving the image. Images related to 3D geometry or animation can be managed by the host to be directly responsive to decisions, choices or the interaction of the viewer. This enables the party serving the image to change the client's view in real-time in accordance with demographic data and profiling intelligence. All data on the client and server side is managed via the b3d file format. USER FRIENDLY. To achieve acceptance with the broadest possible audience, we strive to make our products more user-friendly than those of our competitors, as follows: o VERSATILE PLAYABILITY. b3d files play with just a double-click of the mouse and in a number of different formats, such as on a web page, inside an e-mail, in a word processor document, spreadsheet or PowerPoint presentation. With self-contained b3d files, everything needed to view the animated content is contained in a single b3d file, eliminating the need for program installation. o WEB SITE OPERATORS. b3d files do not require special server software with attendant license fees. b3d files can be placed on any HTTP web server without any special server requirements. Their ease of use and low bandwidth requirement appeal to web site operators. o ANIMATORS. While using our b3d Studio plug-in for Maya and 3D Studio Max, animators using these popular 3D design packages can quickly and easily output their work as a small b3d file and play it on a web page in a full screen window with high clarity. o ADVERTISERS. The current standard advertising mechanism features silent, animated Graphics Interchange Format (GIF) files. Our technology allows for the use of real-time, 3D-based banner advertisements with animated graphics and streaming sound. More significantly, b3d advertisements are interactive. We believe that interactive advertisements improve the likelihood that viewers will be interested in the ads, remember the product being advertised and are more likely to click on the ads. We believe that b3d created ads will be desirable to web site operators, who will encourage their use, because of the greater effectiveness of the ads. o E-COMMERCE. b3d designers may program the files so that consumers can only play certain content from within a specific web site or only on one occasion, even though the viewer has already downloaded the data to their personal computer. Because b3d content is interactive, e-commerce can be integrated into the content to produce sales opportunities online. Furthermore, the capacity to control images on the viewers' personal computer enables product placement and responsive content to be created. THE B3D INSTALLER We have developed installation technology that enables our Digital Projector and content to be installed without taking the user out of their Internet browser. The installer works in conjunction with encrypted installation scripts and a backend database to manage objects on the user's PC and to synchronize assets on the user's PC with those on the server. This will enable the future integration of e-commerce components into content and enable content to be updated on a regular basis. For instance, in a virtual shopping application, with each visit to the virtual supermarket, the Installer will detect objects Page 5 and automatically update the user's PC with the files required to display items in the order pre-determined by the vendor. PENDING PATENTS The technology involved in creating and maintaining a state-of-the-art tools suite represents a significant barrier to entry for new and less technologically advanced competitors. We have eight pending patents with respect to our tools suite, which, if issued, will include the following subject areas: o Streaming Internet Data -- This patent application describes a method of streaming data over the Internet for real time playback of 3D animated interactive movies. o Automated Lip Sync -- This patent application describes how mouth shapes are created by lip sync recognition algorithms and applied to 3D objects as gestures. o Controlling 3D Object Gestures -- This patent application describes a method of assigning and applying gestures to 3D animated objects. o Preloading, Caching and Look Ahead of Internet Streamed Data -- This patent application describes a method of storing multiple files within a single file for interactive streaming of 3D animation data. o Real Time Scalability of Real Time 3D Graphics -- This patent application describes the method of creating and playing back animated content such that the content scales with available playback CPU power and available Internet bandwidth. COMPETITION FOR OUR RICH MEDIA AD FORMAT AND SOFTWARE TOOLS The market for products and services in the online advertising industry is very competitive. We expect this competition to continue to increase because there are low barriers to entry as well as expected industry consolidation. We believe that our ability to compete depends on many factors, some of which are beyond our control, including the following: o Enhancements to existing ad serving solutions developed either by us or our competitors; o New ad serving solutions developed by our competitors with superior attributes; o Our ability to provide adequate support for our customers; o Our sales and marketing efforts; o Patents granted to competitors which may limit our ability or our partners' ability to compete in certain ad markets or to use certain techniques; o Market acceptance of our Brilliant Banner; and o General improvement in the online advertising environment. There are a number of companies that provide ad serving services, including many which are focused on establishing their format as the de facto standard for ad serving on the Web, including DoubleClick, Inc., Engage, Inc. (through its Accipiter product), and Real Media (a unit of 24/7 Real Media). We compete for Internet advertising revenues with large Web publishers and Web portals, such as AOL Time Warner, Microsoft Corporation and Yahoo!. We also compete with the traditional advertising media of television, radio, cable and print for a share of advertisers' total advertising budgets. We also encounter competition from a number of other sources, including content aggregation companies, companies Page 6 engaged in advertising sales networks, advertising agencies and other companies that facilitate Internet advertising. We expect the market for rich media advertising technologies to grow given that consumer response to, and thus the value to advertisers of, two dimensional, static GIF banner ads on the Internet has declined rapidly. The decline in value of 2D GIF advertisements has caused both large and small web advertisers to seek viable alternatives. Rich media alternatives, including Brilliant Banners, are being considered by advertisers and web site operators as solutions to 2D GIF banner advertisements, where the standard click through has declined to less than one half of one percent. We believe our principal competitors in the delivery of rich media advertisements are those vendors whose technologies, like ours, have received the Rich Media Silver Vendor certification from DoubleClick, Inc. These vendors include Enliven, Unicast, eyeblaster, eyeReturn and Poindexter. We are at a competitive disadvantage to many of our competitors because their rich media advertisements can be viewed without special software programs, unlike our Brilliant Banners, which can only be viewed by users who have previously downloaded our Digital Projector. Given that Brilliant Banners and other forms of rich media advertisements are performing much better than 2D GIF advertisements, we believe additional competitors will enter the rich media advertisement market. The markets for our content production software tools are competitive and subject to rapid change characterized by both the constant demand for new product features at reduced prices and the pressure to accelerate the release of new features and tool enhancements. Companies competing in this market include established companies like Macromedia, Inc., Adobe Systems, Inc., Pulse Entertainment, Inc. and Viewpoint Corporation. Certain of our competitors are focused on two-dimensional technologies as can be seen in the Macromedia FLASH toolset, while others offer three dimensional animation. We expect additional competitors to enter the market as the demand for Internet-ready content increases. CONTENT PRODUCTION AND SYNDICATION We built our content production and syndication businesses and associated technologies in part to increase the use and availability of our Digital Projector. Viewers watch Brilliant Banners, music videos, animations, MultipathTM Movies (movies produced with multiple endings, depending on the "path" chosen by the user) and other b3d-produced content using the Digital Projector, which resides on a user's hard drive. Increasing the installed base of Digital Projectors increases the number of users who are able to view b3d-produced content, such as Brilliant Banners, which makes b3d content more appealing to advertisers as well as content developers who may be inclined to license our tools. Historically, our Digital Projector distribution strategy has been to create appealing entertainment content, such as our MultipathTM Movies and music videos, and syndicate that content to third party web sites for viewing by computer users. The initial viewing of the content would initiate a download of our Digital Projector. This strategy was only moderately successful, requiring expensive and time consuming production of entertainment content and resulting in approximately four to five million actively installed Digital Projectors at June 30, 2001. Commencing in September 2001, we changed our Digital Projector distribution strategy and began bundling our Digital Projector with downloads of Sharman Networks' KaZaA Media Desktop and StreamCast Network's Morpheus network. Due to the popularity of these file-sharing networks, at December 31, 2001, we estimate that our Digital Projector had been distributed to tens of millions of users as additional P2P connected computers and other users have accessed the KaZaA and Morpheus networks. Sharman Networks continues to distribute our player and StreamCast Networks has discontinued its distribution. The weekly downloads of the KaZaA Media Desktop and, consequently, our Digital Projector continued to average approximately two million during January and February 2002, and can be initiated from both the home page, www.kazaa.com, and from the web site www.download.com, operated by CNET Networks, Inc. Due to the success of this distribution channel, as well as the fact that our internal content production facilities were operating on a negative cash flow basis, we are no longer pursuing content production and syndication as a primary means for distribution of our Digital Projector. We also pursued our content production and syndication business to generate revenue by sharing advertising revenues with syndication partners displaying our content. Because of the significant decline in Page 7 advertising revenues generated by "content only" web sites, who were our primary syndication partners, we have also discontinued pursuing this business. Due to these changes in our business strategies, in 2001 we eliminated our internal production of 3D animation and substantially reduced our syndication of existing content. We have discontinued operations at Digital Hip Hop, the joint venture we formed to produce animated music videos for the World Wide Web, and have discontinued operations at, and placed into liquidation, Brilliant Interactive Ideas Pty. Ltd., our Australian-based production company. We now outsource the production of b3d content, primarily Brilliant Banners, to a number of facilities in the United States and overseas that have already licensed our tools. It is our intention to expand the number of third parties capable of creating Brilliant Banners, including the production departments of advertising agencies. CONTENT PRODUCTION Historically, we developed a broad range of b3d animation designed to appeal to a variety of viewer demographics. We placed greater emphasis on using characters from familiar licensed content in order to aid our online technology distribution efforts. Some of our previous production efforts included the development of titles in the following categories: MUSIC. Through our Digital Hip Hop venture, we produced animated, online music videos for top selling artists from Island Def Jam (a subsidiary of Universal Music Group), Priority Records and DreamWorks Music, some of which may still be viewed at web sites operated by these companies. MULTIPATHTM WEBISODES. Our MultipathTM Movie webisode series, including SUPERMAN, ACE VENTURA, XENA: WARRIOR PRINCESS and KISS IMMORTALS, among others, were made available by our syndication partners. Warner Bros. Online continues to make available the Superman series, which may generate future revenue for us depending on the success of Warner's internal sales team to sell the available advertising space. CHOOSE YOUR OWN NIGHTMARE SERIES. The CHOOSE YOUR OWN NIGHTMARE series of MultipathTM Movies were targeted to children, eight to twelve years of age. All of these titles are based upon Bantam Doubleday Dell's popular children's book series, CHOOSE YOUR OWN ADVENTURE and CHOOSE YOUR OWN NIGHTMARE. MULTIPATHTM MOVIES FOR KIDS. MultipathTM Movies for Kids were targeted to children three to twelve years of age. The first title we developed was QUEST FOR THE WOOLLY MAMMOTH, followed by THE SUNKEN TREASURE and THE RESCUE, all featuring Popeye. We are now focused on the production of rich media advertising banners, primarily through outsource agreements with third party production companies which have already licensed our software tools. We believe that the superior performance of rich media advertisements as compared to traditional 2D GIF advertisements will drive the demand for our Brilliant Banners. The rich media components of our Brilliant Banners include sound and high quality animation, which serve to increase click through rates and increase the efficiency of the advertising message being delivered, making Brilliant Banners significantly more saleable and at higher prices than 2D GIF advertisements. We announced in July 2001 that Warner Bros. Online ordered an additional 30 webisodes of The MultipathTM Adventures of SUPERMAN. In December 2001, however, the production agreement with Warner Bros. was terminated after the delivery of the first 12 additional webisodes, which Warner Bros. began making available on Warner Bros. Online in February 2002. This brings the total number of SUPERMAN webisodes ordered and delivered to Warner Bros Online to 57. CONTENT DISTRIBUTION Historically, we distributed our MultipathTM Movies, animated music videos and other entertainment content through a network of syndication partners, including: Page 8 WARNER BROS. ONLINE. Warner Bros. Online continues to feature our content. Our SUPERMAN MultipathTM Movie Webisodes are on the Warner Bros. Online website. Previously Warner Bros. Online also displayed some of the other selected MultipathTM Movie content, including KISS IMMORTALS, XENA: WARRIOR PRINCESS and the CHOOSE YOUR OWN NIGHTMARE series, as well as hosted some of the web videos we produced including Li'l Romeo. YAHOO!. We entered into a content distribution and promotional agreement with Yahoo! Inc. Through the agreement, we provided 3D animated programming based on, and co-produced in conjunction with, the popular rock band KISS as part of our KISS IMMORTALS series. In addition to making the KISS Webisodes available on Yahoo! Entertainment, we developed a customized, co-branded version of our 3-D Digital Projector, which linked to other properties on the Yahoo! network, including Yahoo! Shopping and Yahoo! Music. STUDIOS USA. We entered into an agreement with Studios USA to place 3D animated content on their Web sites including SCIFI.COM, USANetwork.com and StudiosUSA.com. We shared in the advertising revenue generated by the Webisodes placed on their sites and the other third party broadcast sites, if any, to which Studios USA syndicated. VH1. We entered into a revenue share distribution agreement with VH1 whereby the KISS IMMORTALS series was featured on their website - VH1.com. ROAD RUNNER. We entered into a non-exclusive agreement with Road Runner, the high-speed online service, whereby some of our content was distributed and promoted to Road Runner subscribers. We also participated in Road Runner's off-line marketing and promotions campaign, and our content was promoted within the Road Runner Service. While we have ceased to produce new entertainment content, some existing content is still available on some syndication partner web sites, including SUPERMAN, and XENA: WARRIOR PRINCESS, as well as the animated music videos of artists JA RULE, DMX, LI'L ROMEO and REDMAN/LADY LUCK. This content is available on web sites operated or controlled by Warner Bros. Online, Roadrunner and Universal Music Group. Revenue, if any, is split with the distribution partner according to various deal structures, many of which are traffic dependent. DIGITAL HIP HOP We entered into an agreement with Russell Simmons and Stan Lathan that provided for the formation of Los Angeles-based Digital Hip Hop, Inc., a joint venture production studio headed by Stan Lathan. Digital Hip Hop produced and distributed full screen animated music videos and other content primarily for Internet and broadband distribution. Digital Hip Hop produced animated music videos for top selling artists including JA RULE, SUM41, LUDACRIS, DMX, REDMAN/LADY LUCK and LI'L ROMEO pursuant to production agreements with the record labels (Island Def Jam, DreamWorks Records, Priority Records, and others). As our internal costs typically exceeded the agreed upon production fees, our strategy was to recapture the differential with our share of the ad revenue, as well as gain an additional means of distributing our Digital Projector. The distribution of our Digital Projector was only partially successful, and our portion of the ad revenue fell short of our projections. During the fourth quarter of 2001, we discontinued operations at Digital Hip Hop based on the limited prospects of additional web video production work. Past clients, including the Universal Music Group and Priority Records, were reluctant to make future commitments for incremental web videos at prices which were higher than previously paid. We do not intend to actively market and promote the production of animated music videos for the Web. However, to the extent that previous partners request a quote for additional work or we are approached to produce additional web videos, we intend to outsource the production work to existing third party licensees of b3d Studio and b3d Studio Pro, many of whom are currently producing Brilliant Banners, and charge a fee for overseeing the project. Page 9 SALES AND MARKETING OF OUR B3D CONTENT We have discontinued all sales and marketing of our MultipathTM Movies and music videos, which historically were a primary focus of our sales and marketing efforts. We continue to market Brilliant Banners with our ad serving and b3d authoring tools. To facilitate the broad acceptance of our rich media banners and software tools, we are pursuing a strategy that includes the following elements: ADVERTISING. We are actively promoting advertising impressions, known as inventory, for sale on Sharman Networks' KaZaA Media Desktop. We are promoting this inventory through third party advertising rep firms such as Interep, Advertising.com and DoubleClick's media division; directly to potential clients; and to ad agencies which represent advertising clients. Our marketing position is that Brilliant Banners perform better than regular 2D GIF banner ads and can be sold at higher CPM prices. We are generally charging a fee for the banner ads and coordinating their production. These fees are offset by the expenditures to the outside production firms actually doing the work, and as such, the production is not profitable for us. Long term, we intend to derive our revenue through the licensing of our ad serving product, which is required for the serving of Brilliant Banners. We are also receiving a sales commission from the web publishers, including KaZaA, if advertising is placed on their web sites due to our direct efforts (which we are doing as an additional means of promoting our Brilliant Banner rich media ad format). DVD RETAIL CHANNEL. We began a limited release of selected MultipathTM Movie titles to the DVD market in the fourth quarter of 2000 pursuant to a March 1999 agreement with SlingShot, Inc., a special purpose DVD publisher and distributor. Additional titles may be released into the market in 2002, however it is unlikely that other DVDs will be developed in the future, as our DVD title have met with very limited success in the market. OUR OTHER DIGITAL ANIMATION AND INTERNET BUSINESSES E-BRILLIANT. In February 2000, we entered into a joint venture with e-New Media Company Limited, a Hong Kong-based telecommunications, information services and Internet company. Pursuant to our agreement, e-New Media opened and agreed to fund a 3D animation studio in Singapore, known as e-Brilliant Pty. Limited, which was dedicated to the creation of interactive animated content for the converging multi-media markets in Asia. In November, 2001 e-Brilliant ceased operations due, in part, to e-New Media's decision to stop funding the studio. THE AUCTION CHANNEL. In July 1999, we acquired Trojan Television Limited. Trojan Television Limited was a London-based company doing business as The Auction Channel. Founded in 1996, The Auction Channel integrated live satellite, cable TV and Web broadcasts of auction events conducted by auction houses, allowing participants to watch events on television and the Internet, and use the Internet or their telephone to bid simultaneously with people actually present at the auction house. In late 2000, we decided to sell The Auction Channel. The Auction Channel has been accounted for as a discontinued operation in fiscal 2001 pursuant to Management's formal adoption on December 31, 2000 of a plan to dissolve the business unit. On April 30, 2001, we sold substantially all of the assets of The Auction Channel to Metro Channels, LLC and closed The Auction Channel's New York and London offices. ALTNET, INC. In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet, Inc., to create a private, secure, peer-to-peer network utilizing existing, proven technology to leverage the processing, storage and distribution power of a peer-to-peer network comprised of tens of millions of users. Altnet intends to license commercially available digital rights management technology to protect against infringement of the proprietary rights of the owners of the content distributed over the Altnet network. Altnet licensed the peer-to-peer technology necessary to operate the network from Blastoise, Ltd. doing business as Joltid. Blastoise is owned and operated by the developers of the FastTrack P2P technology, the underlying technology which operates the KaZaA and Grokster P2P networks. Blastoise owns the rights to the FastTrack technology. Pursuant to our agreement, Blastoise acquired 49% of the outstanding common stock of Altnet. Page 10 CREATION OF THE ALTNET NETWORK Peer-to-peer computing is the sharing of computer resources and services by direct exchange between computer systems, and not through a central server. Peer-to-peer computing applications include the exchange of digital files and other information, processing cycles (the cycles by which data is processed in the central processing unit of a computer), cache storage (temporary storage of files in the central processing unit of a computer), and disk storage. Peer-to-peer computing takes advantage of existing desktop computing power and networking connectivity, allowing users to access the collective power of individual computers to benefit the entire enterprise. Millions of computers are logged onto the Internet at any given time, each with excess processing power, excess storage capacity and unused bandwidth. Through Altnet, we intend to create a private peer-to-peer network to enable our clients to access and utilize this excess processing power, storage capacity and unused bandwidth for multiple applications. To develop the Altnet private peer-to-peer network, each computer that comprises the network must be equipped with a software program. To distribute the program, we bundled it in a package, that we call ALTNET SECUREINSTALL, with our Digital Projector. Pursuant to an agreement with Sharman Networks, SecureInstall, along with the Digital Projector, is being downloaded as part of Sharman Networks KaZaA Media Desktop, which has consistently been averaging in excess of two million downloads per week since we began bundling our software in the fall, 2001. The basis of the SecureInstall is our b3d Installer technology. The Installer technology connects to file servers, P2P networks and ad servers, via "connectors", for the purpose of distributing files across the network. These "connectors" consist of small amounts of JavaScript code plus small, encrypted install scripts used by the Installer. These components help facilitate the delivery of files - ad banners, music files, documents, software files, etc. - across the network. Apart from facilitating Altnet SecureInstall connectivity, the Installer is a full-fledged software installation system, with key features including file compression, file patching and file encryption. The file compression reduces download sizes, the file patching allows software updates to be made available as 'patches' rather than full downloads, and file encryption provides protection from tampering for files on the network, even if they are on the hard drives of thousands of user's PCs connected to a P2P network. To maximize the efficiency of the Altnet network, selected users with higher than average processing power, significant free space on their hard drives and broadband connectivity to the Internet, will first be engaged by Altnet to become main hubs on the network. We refer to each of these hubs as a qualified PC, or QPC. We intend to enter into an end user agreement with the owner of each QPC pursuant to which we will compensate the owner for access to and use of their computers while logged onto the Internet. We have yet to finalize the terms of compensation, however we anticipate it will be a combination of non-cash components, which may include gift certificates, products and/or access to video content, and we expect to initiate this process some time in Q2 2002. QPCs will also be segmented based on geographic region and functionality to balance the demands on the network, thereby spreading evenly across the network the services to be provided. A significant feature of the Altnet network is its ability to communicate with FastTrack technology already installed on desktops worldwide. Tens of millions of search requests each day are being made on the FastTrack Network via the KaZaA Graphical User Interface (GUI). These search requests can be intercepted by Altnet and returned to the FastTrack Network and displayed in the KaZaA GUI such that secure content provided via Altnet can be made visible to KaZaA users. Altnet has reached an agreement with Sharman Networks to allow Altnet search results to propagate in the KaZaA GUI and Sharman Networks has indicated its intent to work with Altnet and Altnet's customers to highlight secure search results so as to increase the popularity of the underlying content. Our longer-term goal is for Altnet, through multiple client relationships, to be the next advancement in distributed bandwidth, storage and computing. Currently, distributed storage and computing companies, such as Akamai, operate as content delivery network service providers, whereby their services improve the speed, quality, reliability and scalability of Websites by delivering the Web content and applications of their customers, through a distributed worldwide network of servers, to a server geographically closer to end users. Altnet intends to go the next step, which is directly to the end user in a private, peer-to-peer network. Page 11 ALTNET SERVICES We intend to market Altnet's peer-to-peer services in three main areas: Network Services, Distributed Storage and Distributed Processing. NETWORK SERVICES - Altnet's Network Services will be marketed as money saving, enterprise solutions to companies that spend significant amounts on Internet bandwidth and infrastructure for the following applications: o File downloads from web sites or servers; o Content distribution, including "push" (where content such as music, movies, news, sports or weather, is automatically "pushed" to the user) and cached on their PC; o Ad serving; o Content backup; and o Video messaging/conferencing. An example of Network Services is ad serving. When a user opens a new Web page, and the banner ad which appears on that page is delivered by a third party ad serving company, such as DoubleClick, the third party ad serving company incurs infrastructure, management, bandwidth and processing costs for every single banner ad which gets served. Often times, the same ad gets "served" millions of times each month. Using Altnet's proposed solutions, all of those ads could be delivered to the users via the Altnet network, thereby saving costs for third party ad serving companies. Users of the network will benefit because QPCs, acting as hubs, will reduce latency and increase processing performance by having the files requested by one user delivered by another user who (a) already has the file, and (b) is geographically located close to the requesting user. Similar to companies that have a worldwide, distributed network of servers, we intend to utilize intelligent load balancing traffic management instructions to spread the file distribution demands on the network and not overload any one particular region. Additionally, the network will utilize commercially available digital rights management (DRM) software (software which provides the means of protecting audio and video files by encrypting the files and only allowing users to play the files after they have obtained a license key) to enhance the safety, security and legitimacy of Altnet's users. Copyright and trademark protection will be central to the Altnet service and we will not launch the network for commercial purposes until the DRM software we choose is satisfactory to our users and fully protects the rights of the file owners. DISTRIBUTED STORAGE - Distributed storage services include the storage, management, protection and sharing of electronic information used for electronic commerce, data warehousing and transaction processing. Altnet's Distributed Storage services will be marketed to companies that are currently servicing these markets. Altnet does not intend to develop the expertise to compete with companies in these sectors, rather Altnet will focus its efforts on servicing companies that have a requirement to access P2P networks in order to carry out their storage applications. Some of the better-known companies in this industry are Scale Eight, Zambeel, EMC, Brocade and X-Drive. Other more advanced projects like "Ocean Store" point to particular solutions based around Nomadic Data concepts that reflect a potentially promising future for massively scaleable redundant networks like Altnet. By leveraging the excess storage capacity on the Altnet network, we believe, in certain storage market segments, Altnet can generate significant storage cost savings for its clients, a portion of which may be earned by Altnet as consideration for its services. DISTRIBUTED PROCESSING - Distributed processing services work by taking large tasks and dividing them into many smaller tasks, all of which are disseminated to many computers running simultaneously via a network such as a private corporate network, or the Internet. After the tasks are processed via individual computers, the data is transmitted back to a central server, which assembles the results. Altnet's Distributed Processing services will be marketed to companies currently in the high performance computing field, as well as the performance testing/measurement areas. Altnet does not intend to develop the expertise to compete with companies in these sectors, rather Altnet will focus its efforts on servicing companies that have a requirement to access P2P networks in order to carry out their services. The leaders in this space are IBM, Page 12 Parabon and United Devices. Similar to Altnet's Distributed Storage business, Altnet intends to earn a portion of the cost savings realized by its customers as consideration for its Distributed Processing services. SALES AND MARKETING OF ALTNET'S SERVICES We currently intend to market Altnet's services by first engaging consultants to approach current providers of network services whom we have targeted as potential clients. Revenue may be derived from several key areas, with the initial focus on companies wishing to distribute files to large volumes of people at very low bandwidth costs. These customers include content owners using the Internet to promote movies (trailers), samplers and demo or freeware products. In addition, potential clients include ad serving companies, such as DoubleClick, and companies that specialize in providing streaming and caching services, such as Akamai and Inktomi Corporation. The same consultants will ultimately approach a target list of clients in the distributed processing and distributed storage markets such as Scale Eight, Zambeel, Data Synapse, United Devices, X-Drive and Brocade. Our overall sales and marketing strategy is to approach the leaders in their respective industries and promote Altnet as a potential money saving service. Provided we have success with using consultants, we intend to recruit and hire a small, dedicated sales staff. COMPETITION FOR ALTNET'S SERVICES There are a number of peer-to-peer, file sharing companies in existence, and several have either launched or are planning to launch business competitive with the services to be offered by Altnet, however widespread distribution remains a significant barrier to success. These companies include Red Swoosh, Blue Falcon, Kontiki, Evernet, Uprizer and numerous others. Additionally in the file sharing market, StreamCast Networks, iMesh, Bear Share, Lime Wire, Grokster and KaZaA are all potential competitors to the services Altnet plans to introduce. Further, there are a number of companies in the distributed computing market, many which are well known and well capitalized. Specifically, in the ad serving sector of Network Services, DoubleClick, Inc. and 24/7 Real Media provide ad serving services, have a much longer operating history than Altnet and each have sufficient capital to continue operating. Companies in the streaming/caching industry include Inktomi and Akamai, both of which have longer operating histories than Altnet and adequate capital to continue operating. In the Distributed Processing services industry, the leader is IBM, the well-known, blue-chip corporation. Others include United Devices, Data Synapse and Parabon. In the Distributed Storage field, the most notable competitors may be EMC and Brocade. In the event that Altnet is successful in its initial efforts, we anticipate that some or all of these companies will increase their respective capital development expenditures to protect their position in their respective industries. Each of these companies either has adequate capital reserves or access to the capital markets to fund an expansion or initiative that would protect its position. Additionally, industry consolidation is expected. As such, if one or more of these companies were to merge, their collective resources would significantly exceed Altnet's and would allow them to pursue positions, which may be to the detriment of Altnet. ALTNET'S COMPETITIVE ADVANTAGE We believe that Altnet is well positioned to compete effectively with companies currently providing distributed computing services. The software necessary to operate Altnet's peer-to-peer network has been installed on tens of millions of computers worldwide, and additional computers are added with each successive download of the KaZaA Media Desktop, providing a competitive advantage over other P2P competitors that have not achieved similar success in mass distribution of their software application. Altnet intends to "turn on" the network by first engaging, through end user licensing agreements, a critical mass of users who will act as QPCs, then engaging other users with lesser performing computers, ultimately accessing tens of millions of users. Altnet's ability to communicate with FastTrack technology already installed on desktops worldwide also presents a significant advantage by allowing content owners the opportunity to associate their secure content with tens of millions of search requests made each day via the KaZaA GUI. Page 13 ALTNET'S UNPROVEN BUSINESS MODEL AND FINANCIAL RISKS Altnet is a new business that we are pursuing based upon our perceived market opportunity; yet its business model is unproven. There are no guarantees that the model will be successful. Its success will depend, in part, on the following: o our ability to establish relationships to formalize end user agreements with enough QPC owners to allow the network to work efficiently and effectively; o acceptance by corporate customers of our services; o the technical viability of the commercially available DRM software we employ to protect the proprietary content that will pass through the Altnet network and will reside on network computers; o our underlying peer-to-peer technology; and o our ability to raise the funding necessary to support the sales, marketing, research and development necessary to establish the business of Altnet. RESEARCH AND DEVELOPMENT In fiscal years 2000 and 2001, we spent $3,855,000 and $1,892,000, respectively, on research and development. The costs decreased by $1,963,000 primarily due to a decrease in web development costs, research and development personal and overhead costs associated with our research and development efforts. In December 2001, we commenced the liquidation of Brilliant Interactive Ideas, Pty. Ltd., and formed Brilliant Digital Entertainment Pty. Ltd. for the purposes of continuing our research and development efforts in Australia. The result was we decreased the headcount in Sydney from 53 employees at December 31, 2000 to 7 employees at December 31, 2001. Presently, our research and development efforts are principally focused on the following tasks: o Developing technology to improve delivery and performance of Brilliant Banners; o Developing new b3d Digital Projector features, including new transparency overlays that allow banner ads to move outside the banner ad space and animate over the entire web page or desktop, plus new anti-aliasing features to provide improved visual quality of product representations and text within rich-media ads; o Enhancing the b3d tools suite, documentation and Digital Projector by increasing performance, and adding new interactivity features; o Developing enhanced Internet delivery capabilities of our content, including new content serving techniques, reduction of content file sizes though new compression technology, and streaming of animation data; o Providing a fully scalable reporting platform with multi-partner, multi-user login capability; o Providing additional integration and compatibility between our statistics and reporting functions and the reporting packages of DoubleClick and others, with the goal of making it as easy for any advertiser or web site to run a Brilliant Banner as it is for them to run a regular GIF campaign; and o Developing technology pursuant to our initiatives in the peer-to-peer market, through Altnet. We may determine to alter the course and scope of our research and development efforts and to abandon any one or more of these projects. As is the case with most research and development efforts, there can be no assurance that our research will prove to be successful or result in commercially viable developments. Page 14 OUR EMPLOYEES At December 31, 2001, we had 18 full-time employees, of which 7 were engaged in research and development, 1 in production, 6 in general administration and finance and 4 in sales, marketing and business development. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good. We currently utilize the services of 6 independent consultants, 1 in software development, 3 in administrative and business development roles and 2 in sales and marketing pursuant to contractual relationships. Eleven employees, including the Chief Executive Officer/President, and the Chief Operating Officer/Chief Financial Officer are based in Woodland Hills, California. Seven employees operate out of a facility located in Sydney, Australia. ITEM 2. DESCRIPTION OF PROPERTIES Our corporate offices are located in Woodland Hills, California, with annual lease payments of approximately $83,000. Our research and development is conducted in Australia from premises that are leased on a month-to-month basis. ITEM 3. LEGAL PROCEEDINGS We are not involved in any material litigation. ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS None. Page 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK Brilliant's Common Stock trades on the American Stock Exchange under the symbol "BDE." The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock as reported by the American Stock Exchange:
HIGH LOW ------ ------ YEAR ENDED DECEMBER 31, 2000 First Quarter........................ $13.88 $ 4.00 Second Quarter....................... 10.88 4.75 Third Quarter........................ 4.88 3.25 Fourth Quarter....................... 3.25 0.69 YEAR ENDED DECEMBER 31, 2001 First Quarter........................ $2.12 $ 0.65 Second Quarter....................... 1.00 0.55 Third Quarter........................ 0.82 0.23 Fourth Quarter....................... 0.60 0.15
On March 22, 2002, the closing sales price of the Common Stock as reported on the American Stock Exchange was $0.13 per share. As of March 22, 2002, there were 76 holders of record of our Common Stock. RECENT SALES OF UNREGISTERED SECURITIES In October 2001, we agreed to issue to Consumer Empowerment B.V., a company organized under the laws of The Netherlands (former operator of the KaZaA network) warrants to purchase up to 150,000 shares of our common stock at an exercise price per share of $0.2710, which is equal to the ten (10) day volume weighted average price of our common stock for the ten (10) trading days prior to October 2, 2001. The warrants have a term of 36 months. The warrants will be issued to KaZaA in consideration for certain services provided by KaZaA pursuant to an agreement between Consumer Empowerment B.V. and the Company. The issuance and sale of these securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the "Securities Act") pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering. As reported in our Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 14, 2001, in May 2001, we sold to Harris Toibb, Europlay 1, LLC (an entity in which our Chairman has an ownership interest) and Preston Ford, Inc. secured convertible promissory notes (the "Original Notes") in the aggregate principal amount of $2,264,150 and three-year warrants (the "Original Warrants") to purchase up to an aggregate of 2,850,393 shares of our Common Stock at exercise prices of $0.793 per share (with respect to 2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). We sold these securities for an aggregate purchase price of $2,264,150. The Original Notes have a term of eighteen months from the date of issuance and an interest rate of 10% per annum, payable at maturity. The principal amount of the Original Notes and, at the option of the holder, all accrued interest, may be converted by the holder into shares of our Common Stock at a conversion price of $0.706 per share. The Original Notes are secured by all of our assets and the assets of our subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios, Inc. The Original Notes and the Original Warrants were amended in our recent financing transaction, as described below. On December 19, 2001, we entered into a financing transaction that was structured similarly to the financing we conducted in May 2001 and involved one of the same investors. In the December 2001 Page 16 financing transaction, we sold to Harris Toibb and Capel Capital Ltd. secured convertible promissory notes (the "New Notes") in the aggregate principal amount of $750,000 (the "Principal Amount") and warrants (the "New Warrants") to purchase up to that number of shares of our Common Stock obtained by dividing 200% of the Principal Amount by the lesser of (i) $0.20, or (ii) the volume weighted average price of a share of our Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (we refer to items (i) and (ii) collectively as the "Conversion Price"). The New Warrants are exercisable at a price per share equal to 1.125 times the Conversion Price. The New Notes mature simultaneous with the Original Notes on November 10, 2002 and bear interest at the rate of 10% per annum. The principal amount of the New Notes and, at the option of the holder, all accrued interest, may be converted by the holder into shares of our Common Stock at the Conversion Price. As with the May 2001 financing, the New Notes are secured by all of our assets and the assets of our two subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios, Inc. As a condition to the New Notes financing transaction, the Original Notes and the Original Warrants were amended to correspond to all the terms of the New Notes financing transaction. As a consequence, Harris Toibb, Europlay 1, LLC and Preston Ford, Inc. are able to convert the aggregate purchase price of the Original Notes and all accrued interest into shares of our Common Stock at the much lower Conversion Price for the New Notes. In addition, these original investors are able to exercise the Original Warrants at a price per share equal to 1.125 times the much lower Conversion Price. In connection with these transactions, Harris Toibb, Europlay 1, LLC, Preston Ford, Inc. and Capel Capital each represented that they were an "accredited investor" as that term is defined under Rule 501(a)(4) of Regulation D promulgated by the SEC 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 as a transaction not involving any public offering DIVIDENDS We have never paid any dividends on our Common Stock. We intend to retain any earnings for use in our business and do not intend to pay any cash dividends on our Common Stock in the foreseeable future. Page 17 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-KSB. THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING THE CONSOLIDATED OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY AND CASH FLOWS OF BRILLIANT DIGITAL ENTERTAINMENT, INC. FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000. EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS DESCRIBED BELOW UNDER THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS." OVERVIEW Brilliant Digital Entertainment, Inc. is a developer of rich media advertising serving technologies, software authoring tools and content for three dimensional, or 3D, animation on the World Wide Web. During the third quarter of 2001, we began marketing and distributing our player, the "Digital Projector" (required for the playback of our rich media content and advertisements) through two large peer-to-peer, or P2P, networks, Sharman Networks, which operates the KaZaA network (formerly operated by Consumer Empowerment B.V.), and StreamCast Networks, which operates the Morpheus network. Previously, our primary method of distribution was through the bundling of the Digital Projector with our animation content which we syndicated to third party web sites. At December 31, 2001, we estimate that our Digital Projector had been distributed to tens of millions of users based on KaZaA's weekly downloads as reported on Download.com, as additional P2P connected computers and other users have accessed the KaZaA and Morpheus networks. Sharman Networks continues to distribute our player and StreamCast Networks has discontinued its distribution. We commercialize our technology in two primary ways. We license our rich media advertising server technologies to websites to enable the selling and serving of our proprietary rich media advertising format, and we license our rich media content authoring tools - "b3d Studio" and "b3d Studio Pro" - to production studios and content developers interested in creating content for the Internet. We launched our rich media 3D advertising banners - Brilliant Banners - into the market to offer advertisers and web sites an alternative to the current Graphics Interchange Format, or GIF, banners that are prevalent on web sites today. With the decline of industry wide banner advertising revenues and click through rates, we believe that our animated 3D banner advertisements perform better than GIF banners and may help reinvigorate certain online advertising campaigns. We license our rich media ad serving technologies, through our wholly-owned subsidiary B3D, Inc., to high traffic websites, including the P2P network, Sharman Networks, for the serving of Brilliant Banners. We are also introducing our ad format to third party ad serving companies, making our technologies available for them to commence selling and serving this new rich media ad format. In November 2001, we became a Rich Media Silver Vendor of DoubleClick, Inc. This rich media certification was awarded after our technology passed the DoubleClick tests for functionality, impression tracking and click tracking. In February 2002, we formed Brilliant P2P, Inc., later renamed Altnet, Inc., to create a private, peer-to-peer network utilizing existing, proven technology to leverage the processing, storage and distribution power of a peer-to-peer network comprised of tens of millions of users. Altnet intends to license commercially available digital rights management technology to protect against infringement of the proprietary rights of the owners of the content distributed over the Altnet network. Altnet licensed the peer-to-peer technology necessary to operate the network from Blastoise, Ltd. doing business as Joltid. Blastoise is owned and operated by the developers of the FastTrack P2P technology, the underlying technology which operates the KaZaA and Grokster P2P networks. Pursuant to our agreement, Blastoise acquired 49% of the outstanding common stock of Altnet. Peer-to-peer computing is the sharing of computer resources and services by direct exchange between computer systems, and not through a central server. Peer-to-peer computing applications include Page 18 the exchange of digital files and other information, processing cycles (the cycles by which data is processed in the central processing unit of a computer), cache storage (temporary storage of files in the central processing unit of a computer), and disk storage. Peer-to-peer computing takes advantage of existing desktop computing power and networking connectivity, allowing users to access the collective power of individual computers to benefit the entire enterprise. Millions of computers are logged onto the Internet at any given time, each with excess processing power, excess storage capacity and unused bandwidth. Through Altnet, we intend to create a private peer-to-peer network to enable our clients to access and utilize this excess processing power, storage capacity and unused bandwidth for multiple applications. We intend to commercialize Altnet through licensing agreements for Altnet's three main services: Network Services, Distributed Storage and Distributed Processing. We have licensed some of the world's best known characters for the production and web distribution of episodic animations, called MultipathTM Movies, that include SUPERMAN, XENA: WARRIOR PRINCESS, KISS, and ACE VENTURA, and have produced animated music videos of top selling artists including Ja Rule, Ludacris, DMX and Li'l Romeo. These full-screen productions, developed using our proprietary suite of b3d software tools, have small files for faster download relative to full video files. Currently we distribute our animated content through Internet syndication partners including Warner Bros. Online, Roadrunner and selected sites from the Universal Music Group. In 2001, we substantially reduced our internal production and syndication of 3D animation, which we used primarily to distribute our Digital Projector, in order to reduce our costs and our cash burn rate. We have discontinued operations at Digital Hip Hop, the joint venture we formed to produce animated music videos for the World Wide Web, and have discontinued operations at, and placed into liquidation, Brilliant Interactive Ideas Pty. Ltd., our Australian-based production company. The reduction in our content production and syndication activities has allowed us to focus our efforts and allocate our resources to the further development and exploitation of our advertising serving and authoring tools businesses, and to pursue the development of a private, peer-to-peer network business through our Altnet subsidiary. DIGITAL HIP HOP We entered into an agreement with Russell Simmons and Stan Lathan that provided for the formation of Los Angeles-based Digital Hip Hop, Inc., a joint venture production studio headed by Stan Lathan. Digital Hip Hop produced and distributed full screen animated music videos and other content primarily for Internet and broadband distribution. Digital Hip Hop produced animated music videos for top selling artists including JA RULE, SUM41, LUDACRIS, DMX, REDMAN/LADY LUCK and LI'L ROMEO pursuant to production agreements with the record labels (Island Def Jam, DreamWorks Records, Priority Records, and others). As our internal costs typically exceeded the agreed upon production fees, our strategy was to recapture the differential with our share of the ad revenue, as well as gain an additional means of distributing our Digital Projector. The distribution of our Digital Projector was only partially successful, and our portion of the ad revenue fell short of our projections. During the fourth quarter of 2001, we discontinued operations at Digital Hip Hop based on the limited prospects of additional web video production work. Past clients, including the Universal Music Group and Priority Records, were reluctant to make future commitments for incremental web videos at prices which were higher than previously paid. We do not intend to actively market and promote the production of animated music videos for the Web. However, to the extent that previous partners request a quote for additional work or we are approached to produce additional web videos, we intend to outsource the production work to existing third party licensees of b3d Studio and b3d Studio Pro, many of whom are currently producing Brilliant Banners, and charge a fee for overseeing the project. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles Page 19 generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to reserves for bad debts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our use of estimates, however, is quite limited, as we have adequate time to process and record actual results from operations. RESULTS OF OPERATIONS REVENUES. Production fees are paid by customers in exchange for our development of animated content, including banner ads, in accordance with customer specifications. The development agreements generally specify certain "milestones" which must be achieved throughout the production process. As these milestones are achieved, we recognize the portion of the development fee allocated to each milestone. Revenues, which are earned from the sale or licensing of our software tools, are recognized when the sales or licensing agreements are entered into. If the agreement covers a period in excess of one year, the revenue associated with this agreement is recognized on a straight-line basis over the life of the agreement. Advertising revenues, which are earned revenues from the placing of our content on third party web sites, are recognized when the third party accounts to us. Ad server licensing revenues are recognized when we invoice the licensee, which usually occurs after the terms of the advertising campaign insertion order are fulfilled. 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. 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. Revenues increased 76% from $1,030,000 for the year ended December 31, 2000 to $1,816,000 for the year ended December 31, 2001. The increase is primarily due to (i) the increase in production fees related to the production of animated music videos by Digital Hip Hop, (ii) a full year of revenues recognized through our distribution and technology agreements with e-New Media, and (iii) an increase in advertising revenues. The increase was partially offset by a decrease in software and DVD sales. Revenues for 2001 include $917,000 earned under a technology and distribution agreement with e-New Media, advertising and other revenues of $518,000, and production revenues of $381,000 for digital animated music videos. Revenues for 2000 include $612,000 earned under an agreement with e-New-media, advertising and development revenues of $309,000, and software sales of $109,000. 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, including salaries and benefits, and manufacturing overhead required to produce content, including MultipathTM Movies, animated music videos and banner ads, reproduce and package software products. Cost of revenues increased from $268,000 for the year ended December 31, 2000 to $463,000 for the year ended December 31, 2001. This represents an increase of $195,000, or 73%, which is primarily due to the development of animated music videos during 2001, at a cost of $352,000. This increase is offset by a reduction in software and motion capture costs in 2001 as compared to the prior year. Also adding to this increase, in 2001, we amortized $105,000 of royalty expense in connection with our licensing rights compared to $53,000 in 2000. In 2000, we fully amortized the remaining capitalized movie software costs of $158,000, Page 20 for previously released titles, and incurred direct costs of $44,000 for software sales, and other development costs of $41,000. SALES AND MARKETING. Sales and marketing expenses include primarily costs for salaries and benefits, advertising, promotions, and travel. Sales and marketing expenses decreased $812,000 or 49% from $1,651,000 for the year ended December 31, 2000 to $839,000 for the year ended December 31, 2001. The decrease is primarily attributable to the reduction in outside sales and marketing consultants who had been retained to market the b3d tools. Also in 2001, we elected not to participate in the Siggraph trade show, which cost $264,000 in 2000. In 2001, we incurred $426,000 expense for warrants issued in connection with our agreement with Yahoo!, while incurring $596,000 in 2000. 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 $86,000 or 2% from $4,324,000 for the year ended December 31, 2000 to $4,410,000 for the year ended December 31, 2001. Although there were cuts in some areas, overall expenses increased due to the addition of Digital Hip Hop, which contributed $572,000 to our general and administrative expenses. 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 software tools used to develop MultipathTM Movies and other 3D animated content. The costs decreased 51% from $3,855,000 for the year ended December 31, 2000 to $1,892,000 for the year ended December 31, 2001 primarily due to a decrease in web development costs, research and development personal and overhead costs associated with research and development. We decreased the headcount in Sydney from 53 employees at December 31, 2000 to 7 at December 31, 2001. DEPRECIATION AND AMORTIZATION. 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 decreased 11% from $319,000 for the year ended December 31, 2000 to $284,000 for the year ended December 31, 2001. The decrease is attributable to some fixed assets being fully depreciated and the disposal of other fixed assets. OTHER INCOME AND EXPENSE. Other income and expense includes interest income and interest expense, gains and losses on foreign exchange transactions, and export development grants paid to our subsidiary, Brilliant Interactive Ideas Pty. Ltd., by the Australian Trade Commission for its participation in certain export activities. Other income and expense decreased from income of $179,000 in 2000 to a loss of $563,000 in 2001. The decrease is primarily due to a non-cash debt discount expense of $467,000 and interest expense of $118,000 in association with the financing agreement. Additionally, we wrote off $264,000 recorded as a loss on investment for the joint venture in Digital Hip Hop. This expense is partially offset by the increase in the trade export grant of $69,000. NET LOSS ON DISCONTINUED OPERATIONS. The Auction Channel has been accounted for as a discontinued operation pursuant to Management's formal adoption on December 31, 2000 of a plan to dissolve the business unit. Net liabilities to be disposed of, at their expected realizable values, have been separately classified in the accompanying balance sheet at December 31, 2000. The Company recognized a gain of $327,000 in 2001 due to the sale of substantially all of the assets of The Auction Channel in April 2001. LIQUIDITY, CAPITAL RESOURCES AND RELATED PARTY TRANSACTIONS As of December 31, 2001, our cash and cash equivalents totaled approximately $185,000. This is a decrease of $3,216,000 as compared to December 31, 2000, resulting primarily from a net loss of $6,328,000. Page 21 We primarily satisfied our cash needs in 2001 through the sale of Secured Convertible Promissory Notes and related Common Stock Purchase Warrants in the aggregate principal amounts of $2,264,000 in May 2001, and $350,000 in December 2001 with subsequent funding in 2002, of $400,000 tied to the December financing agreement. A detailed description of these notes is provided below. Also, see Notes 5, 7 and 14 to the Financial Statements. Cash flows from operating, financing and investing activities for the years ended December 31, 2001 and 2000 are summarized in the following table (dollars in thousands):
ACTIVITY: 2001 2000 ------------------------- ----------- ---------- Continuing Operations $ ( 5,000) $ (16,000) Discontinuing Operations $ ( 1,000) $ 5,000 Investing $ -- $ (1,000) Financing $ 3,000 $ 12,000
Net cash of $5,397,000 used in operating activities during the year ended December 31, 2001 was primarily attributable to a net loss from continuing operations of $6,635,000 partially offset by the sale of substantially all of the assets of The Auction Channel and subsequent closure of the London and New York offices. This is compared to a net use of cash in 2000 of $10,590,000 attributable primarily to a net loss of $21,916,000. Net cash used to purchase computer equipment amounted to $23,000 in 2001 as compared to $760,000 in 2000. In 2001, cash of $73,000 was used in financing activities for the repayment of notes for the financing of office furniture and computer equipment, and financing costs related to our Director's and Officer's insurance. In 2000 we paid $76,000 on the repayment of notes for the financing of office furniture and computer equipment. We have an obligation under our agreement with Morgan Creek to fund entirely the development of two MultipathTM Movies, the first of which, ACE VENTURA CD-ROM, was developed and shipped in the fourth quarter of 1998. The second project has not been identified yet. We have an obligation under our joint venture agreement with KISS Digital, LLC to fund 75% of the development of a MultipathTM Movie up to $900,000. As of December 31, 2000 we had contributed $917,000 to the project. We do not expect to contribute additional funds to this project. We also are required as of December 31, 2001 to make minimum payments of $37,000 under various licensing agreements. At December 31, 2001, we had rental commitments for our office facility of $90,000 and two promissory notes for the financing of office furniture and computer equipment in the amount of $54,000 and $31,000 payable over the next 2 years. Our contractual obligations are as follows:
CONTRACTUAL TOTAL LESS THAN 1-3 OBLIGATIONS 1 YEAR YEARS Capital Leases $85,000 $54,000 $31,000 Operating Lease $90,000 $83,000 $ 7,000 ---------- ----------- -------- Total Cash Obligations $175,000 $137,000 $38,000 ========== =========== ========
As reported in our Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 14, 2001, in May 2001, we sold to Harris Toibb, Europlay 1, LLC (an entity in which our Chairman has an ownership interest) and Preston Ford, Inc. secured convertible promissory notes (the Page 22 "Original Notes") in the aggregate principal amount of $2,264,150 and three-year warrants (the "Original Warrants") to purchase up to an aggregate of 2,850,393 shares of our common stock at exercise prices of $0.793 per share (with respect to 2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). We sold these securities for an aggregate purchase price of $2,264,150. The Original Notes have a term of eighteen months from the date of issuance and an interest rate of 10% per annum, payable at maturity. The principal amount of the Original Notes and, at the option of the holder, all accrued interest, may be converted by the holder into shares of our common stock at a conversion price of $0.706 per share. The Original Notes are secured by all of our assets and the assets of our subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios, Inc. The Original Notes and the Original Warrants were amended in our recent financing transaction, as described below. On December 19, 2001, we entered into a financing transaction that was structured similar to the financing we conducted in May 2001 and involved one of the same investors. In the December financing transaction, we sold to Harris Toibb and Capel Capital Ltd. secured convertible promissory notes (the "New Notes") in the aggregate principal amount of $750,000 (the "Principal Amount") and warrants (the "New Warrants") to purchase up to that number of shares of our common stock obtained by dividing 200% of the Principal Amount by the lesser of (i) $0.20, or (ii) the volume weighted average price of a share of our Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (we refer to items (i) and (ii) collectively as the "Conversion Price"). The New Warrants are exercisable at a price per share equal to 1.125 times the Conversion Price. The New Notes mature simultaneous with the Original Notes on November 10, 2002 and bear interest at the rate of 10% per annum. The principal amount of the New Notes and, at the option of the holder, all accrued interest, may be converted by the holder into shares of our Common Stock at the Conversion Price. As with the May 2001 financing, the New Notes are secured by all of our assets and the assets of our two subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios, Inc. As a condition to the December 2001 financing transaction, the Original Notes and the Original Warrants were amended to correspond to all the terms of the New Notes and New Warrants. As a consequence, Harris Toibb, Europlay 1, LLC and Preston Ford, Inc. are able to convert the aggregate purchase price of the Original Notes and all accrued interest into shares of our common stock at the much lower Conversion Price for the New Notes. In addition, these original investors are able to exercise the Original Warrants at a price per share equal to 1.125 times the much lower Conversion Price from the December 2001 financing. In support of the December 2001 financing transaction, our Board of Directors sought and received an opinion from a reputable financial advisory firm that the financing transaction is fair to us and our stockholders from a financial point of view. The issuance of the additional shares of Common Stock pursuant to the terms of the 2001 financing transactions, if so issued, could result in a change in control of the Company. As of December 19, 2001, upon conversion and exercise of his notes and warrants, Harris Toibb would own approximately 68% of our issued and outstanding common stock, assuming a Conversion Price of $0.20. As a consequence, following the conversion and exercise by him of the promissory notes and warrants, Mr. Toibb would own a majority of our voting securities and would be able to approve any matter presented to the stockholders for approval at a meeting, including the ability to elect all of the nominees for director presented to the stockholders for election at each annual meeting. The Board of Directors of the Company is divided into three classes, with each class to serve a staggered term of three years. One class of the Board of Directors is elected at each annual meeting of the stockholders. Accordingly, upon Mr. Toibb's conversion and exercise of his promissory notes and warrants, he would have the ability, within two annual meetings of stockholders, to elect a majority of the Company's Board of Directors. On March 7, 2002, we entered into a Common Stock and Warrant Purchase Agreement among us, Harris Toibb, a current investor, and MarKev Services, LLC, an entity co-owned by our Chairman and our Page 23 Chief Executive Officer and President (collectively, the "Purchasers"), whereby we sold (i) 5,673,222 shares of our common stock at $0.1322 per share (the "Purchase Price"), a price per share of our common stock based on the volume weighted average price of a share of our common stock on the American Stock Exchange over the five (5) consecutive trading days immediately preceding March 7, 2002, for an aggregate investment amount of $750,000, and (ii) warrants (the "Warrants") to purchase in the aggregate up to 10,085,728 shares of our common stock at an exercise price per share of $0.148725, which represents a price paid per share equal to 1.125 times the Purchase Price. Each of the Purchasers received "piggyback" registration rights with respect to the common stock they purchased and with respect to the common stock issuable upon exercise of the Warrants. In support of the March 2002 financing transaction, our Board of Directors sought and received an opinion from a reputable financial advisory firm that the financing transaction is fair to us and our stockholders from a financial point of view. The March 2002 financing transaction, was unanimously approved by an independent committee of the Board, as well as by the Board of Directors, with only our Chairman and our Chief Executive Officer and President, who are also Directors, abstaining because of their interest in the transaction. The Board approved the sale of up to $1,250,000 worth of common stock. On March 20, 2002, we entered into a Common Stock and Warrant Purchase Agreement between us and David Wilson, a current investor who controls Preston Ford, Inc. and participated in the May 2001 financing, whereby we sold (i) 378,215 shares of our common stock at $0.1322 per share (the "Purchase Price"), a price per share of our common stock based on the volume weighted average price of a share of our common stock on the American Stock Exchange over the five (5) consecutive trading days immediately preceding March 7, 2002, for an aggregate investment amount of $50,000, and (ii) warrants (the "Wilson Warrants") to purchase in the aggregate up to 672,382 shares of our common stock at an exercise price per share of $0.148725, which represents a price paid per share equal to 1.125 times the Purchase Price. Mr. Wilson received "piggyback" registration rights with respect to the common stock he purchased and with respect to the common stock issuable upon exercise of the Wilson Warrants. Our operations generated negative cash flow during the years ended December 31, 2000 and 2001, and we expect a significant use of cash during the upcoming 2002 fiscal year as we initiate the business opportunity for Altnet, Inc., as well as continue to develop our software tools and continue our marketing efforts for our tools and 3D rich media banners ads. We anticipate our current cash reserves, plus our expected generation of cash from existing operations, to fund our anticipated expenditures into the third quarter of 2002. As such, we will require additional equity or debt financing during 2002, the amount and timing depending in large part on our spending program. If additional funds are raised through the issuance of equity securities, our stockholders may experience significant dilution. Furthermore, there can be no assurance that additional financing will be available when needed or that if available, such financing will include terms favorable to our stockholders or us. If such financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our products and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations, and would most likely result in our having to file for bankruptcy protection under the Internal Revenue Code. Please see "Cautionary Statements and Risk Factors - IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY IMPLEMENTATION OF OUR BUSINESS PLAN, REDUCE OVERHEAD SIGNIFICANTLY OR SUSPEND OPERATIONS." The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The report of our Independent Certified Public Accountants for the December 31, 2001 financial statements included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Page 24 We are seeking additional funding and believe that, if we are successful in raising additional capital, this may result in improved operating results. There can be no assurance, however, that with any additional financing, higher cash flows will be generated by operations. ACCOUNTING TREATMENT FOR DEVELOPMENT COSTS AND RESEARCH EXPENDITURES Our 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, we expense all costs related to the development of both our software tools and MultipathTM Movie titles. The Company achieved technological feasibility of its original Digital Projector during the third quarter of 1997. Since the date of achieving technological feasibility, the costs of developing MultipathTM Movies intended to be viewed on the original projector have been capitalized in accordance with SFAS No. 86. We continue to develop new Digital Projectors with enhanced functionality such as improved compression technology. Costs incurred in the development of new Digital Projectors are expensed until technological feasibility is reached. MultipathTM Movies that are developed for new Digital Projectors that have not yet reached technological feasibility are capitalized in accordance with SFAS No. 86 to the extent that they are compatible with an existing Digital Projector. Amounts incurred for MultipathTM Movies that are developed for new Digital Projectors that are not compatible with an existing projector and would require substantial revision in order to achieve compatibility are expensed as incurred. ACCOUNTING GUIDANCE FOR REVENUE RECOGNITION FOR SOFTWARE TRANSACTIONS Software sales entered into prior to December 15, 1997 were accounted for in accordance with AICPA Statement of Position ("SOP") 91-1, "Software Revenue Recognition." For transactions entered into after December 15, 1997 the Company recognizes revenue from the sale of software in accordance with SOP 97-2, "Software Revenue Recognition". SOP 97-2 provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing, or otherwise marketing computer software. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. Subsequently, the SEC released SAB 101B, which delayed the implementation date of SAB 101 for registrants with fiscal years that begin between December 16, 1999 and March 15, 2000. We were required to be in conformity with the provisions of SAB 101, as amended by SAB 101B, no later than October 1, 2000. The adoption of SAB 101, as amended by SAB 101B, has not had a material adverse effect on our financial position, results of operations or cash flows. In October 2000, we adopted the Financial Accounting Standards Board SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability, measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 has not had a material effect on our financial statements. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain problems that have arisen in practice since the issuance of APB No. 25, "Accounting for Stock Issued to Employees." The effective date of the interpretation was July 1, 2000. The Page 25 provisions of the interpretation apply prospectively, but they will also cover certain events occurring after December 15, 1998 and after January 12, 2000. The adoption of FIN. 44 has not had a material adverse effect on our current or historical consolidated financial statements, but may affect future accounting regarding stock option transactions. In March 2000, EITF 00-2 "Accounting for Web Site Development Costs" was released. EITF 00-2 provides guidance on how an entity should account for costs involved in such areas as planning, developing software to operate the web site, graphics, content, and operating expenses. EITF 00-2 is effective for web site development costs incurred for fiscal quarters beginning after June 30, 2000. We adopted EITF 00-2 during the year ending December 31, 2000, and all amounts associated with our web sites were expensed in accordance with EITF 00-2. In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that we recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires that, upon adoption of SFAS 142, we reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that we identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires us to complete a transitional goodwill impairment test nine months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We believe the adoption of this Statement will have no material impact on our financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFASB 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFASB 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. We believe the adoption of this Statement will have no material impact on our financial statements. CAUTIONARY STATEMENTS AND RISK FACTORS Several of the matters discussed in this document contain forward-looking statements that involve risks and uncertainties. Factors associated with the forward-looking statements that could cause actual results to differ materially from those projected or forecast are included in the statements below. In addition to other information contained in this report, readers should carefully consider the following cautionary statements. Page 26 IF WE ARE UNABLE TO RAISE ADDITIONAL FUNDS, WE MAY BE REQUIRED TO DELAY IMPLEMENTATION OF OUR BUSINESS PLAN, REDUCE OVERHEAD SIGNIFICANTLY OR SUSPEND OPERATIONS. We currently have a number of obligations that we are unable to meet without generating additional revenues or raising additional capital. If we cannot generate additional revenues or raise additional capital in the near future, we may become insolvent. As of December 31, 2001, our cash balance was approximately $185,000 and our outstanding accounts payable, accrued expenses and current debt totaled approximately $1,814,000. Historically, we have funded our capital requirements with debt and equity financing. Our ability to obtain additional equity or debt financing depends on a number of factors including our financial performance and the overall conditions in our industry. If we are not able to raise additional financing or if such financing is not available on acceptable terms, we may liquidate assets, seek or be forced into bankruptcy, and/or continue operations but suffer material harm to our operations and financial condition. These measures could have a material adverse affect on our ability to continue as a going concern. WE HAVE A HISTORY OF LOSSES, A NEGATIVE NET WORTH AND MAY NEVER ATTAIN PROFITABILITY. We have a limited operating history and have not attained profitability. Since inception, we have incurred significant losses and negative cash flow, and as of December 31, 2001 we had an accumulated deficit of $54.6 million. Additionally, as of the date of this report, our current liabilities exceed our current assets. We have not achieved profitability and expect to continue to incur operating losses for the foreseeable future as we fund operating and capital expenditures in the areas of software tools development, brand promotion, sales and marketing, administration, deployment of our Altnet peer-to-peer network and operating infrastructure. Our business model assumes that consumers and advertisers will be attracted to our rich media advertising formats (Brilliant Banners), and that animators and those who produce banner advertisements will use our b3d tools and technology in the development of other b3d-produced content. Our business model also assumes that a significant portion of our future revenues will be derived from our Altnet peer-to-peer business, which is not operational. This business model is not yet proven and we cannot assure you that we will ever achieve or sustain profitability or that our operating losses will not increase in the future or be inconsistent with the expectations of the public market. Primarily as a result of our continued losses, our independent public accountants modified the opinion on our December 31, 2001 financial statements to include an explanatory paragraph wherein they expressed substantial doubt about our ability to continue as a going concern. IF WE BECOME INSOLVENT, WE WILL BE IN DEFAULT UNDER OUR SECURED CONVERTIBLE PROMISSORY NOTES, WHICH COULD RESULT IN OUR OBLIGATION TO PAY IMMEDIATELY ALL AMOUNTS THEN OUTSTANDING UNDER THE NOTES. If we generally do not pay, or become unable to pay, our debts as such debts become due, we will default under our outstanding Secured Convertible Promissory Notes, in the aggregate principal amount of $3.0 million. If a default occurs, all amounts owed to the holders of the notes would immediately become due and payable. If the debt becomes due before its stated maturity in November 2002, we likely will not have sufficient funds to repay the indebtedness, which will entitle the holders of the notes to exercise all of their rights and remedies, including foreclosure on all of our assets which we pledged as collateral to secure repayment of the debt. ALTNET IS AN UNPROVEN BUSINESS VENTURE AND MAY REQUIRE SIGNIFICANT CAPITAL TO BE SUCCESSFULLY IMPLEMENTED. Our Altnet peer-to-peer business is unproven and we cannot guaranty that it will be successful. The success of the business will depend, in part, on our ability to enter into end user agreements with a sufficient number of qualified personal computer owners to allow the network to work efficiently and effectively, acceptance by corporate customers of our services, the technical viability of the commercially available DRM software we employ to protect the proprietary content that will pass through the Altnet network and reside on network computers, and our underlying peer-to-peer technology. Additionally, we do not have sufficient capital to internally fund Altnet's development and operations. Consequently, the capital necessary to launch and fund Altnet will need to come from outside sources. We cannot make assurances that sufficient capital will be available at all or on terms acceptable to us to fund Altnet's development and operations. OUR BUSINESS MODEL CONTEMPLATES RECEIVING A SIGNIFICANT PORTION OF OUR FUTURE REVENUES FROM RICH MEDIA INTERNET ADVERTISEMENTS DEVELOPED AND SERVED USING OUR SOFTWARE TOOLS AND FROM INTERNET Page 27 ADVERTISING SERVICES. INTERNET ADVERTISING IS DEPENDENT ON THE ECONOMIC PROSPECTS OF ADVERTISERS AND THE ECONOMY IN GENERAL AND RECENTLY HAS EXPERIENCED A SIGNIFICANT DECLINE. A CONTINUED DECREASE IN EXPENDITURES BY ADVERTISERS OR A PROLONGED DOWNTURN IN THE ECONOMY COULD CAUSE US TO FAIL TO ACHIEVE OUR REVENUE PROJECTIONS. We are increasing our emphasis on generating revenues from the sale of our b3d tools for the creation of rich media Internet advertisements and from the sale of technologies and services to Web publishers, third party advertising representation firms, advertisers and agencies. In recent quarters, the market for Internet advertising has experienced lower demand, lower prices for advertisements and the reduction of marketing and advertising budgets. As a consequence, expenditures for Internet advertisements have decreased. We cannot be certain that future decreases will not occur and that spending on Internet advertisement will return to historical levels. A continued decline in the economic prospects of advertisers or the economy in general could cause us to fail to achieve our advertising-related revenue projections. WE WILL NOT BE ABLE TO GENERATE REVENUES FROM OUR BRILLIANT BANNERS IF THEY DO NOT ACHIEVE MARKET ACCEPTANCE. The success of our Brilliant Banner rich media ad format and our ability to generate revenues through sale and serving of these advertisements will be determined by consumer reaction and acceptance. To generate revenues, we must develop advertisements that appeal to the advertising community and the consumer, which is unpredictable. Additionally, our Brilliant Banner advertisements face competition from other online advertising companies like Unicast and Viewpoint. Other factors that influence our ability to generate revenues from our Brilliant Banners include: o Acceptance of the Brilliant Banner advertising format by websites; o Performance of the Brilliant Banner versus other rich media advertising formats and traditional 2D advertisements; and o Our ability to broadly disseminate our Digital Projector, which is necessary to view our Brilliant Banners. OUR FAILURE TO MAINTAIN STRATEGIC RELATIONSHIPS WITH DISTRIBUTION PARTNERS COULD REDUCE THE NUMBER OF DIGITAL PROJECTORS WE ARE ABLE TO DISSEMINATE TO CONSUMERS, WHICH WOULD REDUCE THE NUMBER OF USERS THAT ARE ABLE TO VIEW OUR MEDIA CONTENT, DECREASE THE VALUE OF OUR BRILLIANT BANNERS TO ADVERTISERS AND LIMIT THE NUMBER OF USER'S FOR OUR ALTNET PEER-TO-PEER BUSINESS. We distribute our Digital Projector and the software necessary to create and run our Altnet peer-to-peer business primarily by bundling it with Sharman Networks' KaZaA Media Desktop. We rely on computer users' demand for the KaZaA Media Desktop to increase the installed base of our (1) Digital Projector, which is necessary to view b3d-produced content such as our Brilliant Banners, and (2) Altnet software, which is necessary to connect users to our private peer-to-peer network. Our business, results of operations and financial condition could be materially adversely affected if we do not maintain our distribution relationship with Sharman Networks on acceptable terms or if this relationship does not achieve the projected distribution of our Digital Projector and Altnet software. Additionally, a disruption in the distribution of the KaZaA Media Desktop or a decrease in demand for the product by users would necessarily impact the future distribution of our technology. The KaZaA Media Desktop, as well as other peer-to-peer software products, is currently the subject of a lawsuit; Metro-Goldwyn-Mayer Studios, Inc. et. al. v. Grokster, Ltd. et. al., filed in the United States District Court for the Central District of California (Western Division) by twenty-eight entertainment companies claiming that, among other things, the KaZaA Media Desktop facilitates, contributes to and encourages copyright infringement. On November 18, 2001, there was an additional complaint filed, Lieber et. al v. Consumer Empowerment B.V., et. al. To the extent that Sharman Networks is precluded from distributing the KaZaA Media Desktop as a result of this litigation, it would prevent the further distribution of the Digital Projector and Altnet peer-to-peer software with the KaZaA product which could have a material adverse affect on our business and financial condition. OUR STOCK PRICE MAY DECLINE SIGNIFICANTLY IF WE ARE DELISTED FROM THE AMERICAN STOCK EXCHANGE. Our common stock currently is quoted on the American Stock Exchange. For continued inclusion on the American Stock Exchange, we must meet certain tests, including maintaining a sales price for Page 28 our common stock above $1.00 per share, and net tangible assets of at least $4 million. We currently are not in compliance with both the bid price and net tangible assets requirements. If we continue to fail to satisfy the listing standards on a continuous basis, the American Stock Exchange may, at its sole discretion, delist our common stock from the exchange. If this occurs, trading of our common stock may be conducted on (i) the NASDAQ SmallCap Market, if we qualify for listing at that time, which we currently do not, (ii) in the over-the-counter market on the "pink sheets", or (iii) if available, the NASD's "Electronic Bulletin Board." In any of those cases, investors could find it more difficult to buy or sell, or to obtain accurate quotations as to the value of our common stock. The trading price per share of our common stock likely would be reduced as a result. WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES THAT OFFER SOFTWARE TOOLS AND SERVICES SIMILAR TO OURS. The markets for our software tools are highly competitive and characterized by pressure to incorporate new features and accelerate the release of new and enhanced products. A number of companies currently offer content development products and services that compete directly or indirectly with one or more of our tools sets. These competitors include, among others, Macromedia, Inc., Adobe Systems, Inc. as well as Pulse Entertainment, Inc. and Viewpoint Corporation. As we compete with larger competitors such as Macromedia across a broader range of product lines and different platforms, we may face increasing competition from such companies. WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH MICROSOFT, REAL NETWORKS AND OTHER COMPANIES IN THE MEDIA DELIVERY MARKET. The market for software and services for the delivery of media over the Internet is constantly changing and highly competitive. Companies such as Microsoft Corporation and Real Networks, Inc. have substantial penetration in the media delivery market, and significantly greater resources than we do. More companies are entering the market for, and expending increasing resources to develop, media delivery software and services. We expect that competition will continue to intensify. Because our b3d content, such as our Brilliant Banners, can only be viewed using our Digital Projector, if we do not achieve a widespread distribution of our media player, there will not be substantial demand for b3d-produced content or our software tools. IF WE DO NOT IMPROVE OUR SOFTWARE TOOLS TO PRODUCE NEW, MORE ENHANCED 3D ANIMATED CONTENT, OUR REVENUES WILL BE ADVERSELY AFFECTED. The software tools that enable us to create 3D content, such as our Brilliant Banners, have been developed over the past five years. Additional refinement of these tools is necessary to continue to enhance the b3d format. If we cannot develop improvements to these software tools, our Brilliant Banners and all other b3d-produced content 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 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. For instance, for the twelve months ended December 31, 2001, we reduced our expenditures on research and development by $1.96 million as compared to the same period in 2000, due primarily to our capital constraints. We must make improvements to our technology while remaining competitive in terms of performance and price. This will require us to make investments in research and development, often times Page 29 well in advance of the widespread release of the products in the market and any revenues these products may generate. 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. 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 the introduction or enhancement of software products and technology by us and our competitors; o the use by animators of our toolsets to create b3d-produced content; o the market's acceptance of our 3D Brilliant Banner advertising format; and o our ability to launch and operate our Altnet peer-to-peer business. 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. 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 at a discount to the market price of our common stock, which may be necessary to raise additional capital to fund operations, 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 Page 30 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 than he purchased the shares and may realize a profit. WE WILL NOT BE ABLE TO GENERATE SIGNIFICANT REVENUES FROM OUR TECHNOLOGY BUSINESS IF OUR B3D TOOLSET DOES NOT ACHIEVE MARKET ACCEPTANCE. Our b3d toolset may have programming errors, may be incompatible with other software or hardware products in the market, may face slow adoption in the marketplace and may face competition from other toolmakers. Other factors that influence our ability to generate revenues from our b3d toolset include: o our marketing strategies; o the quality of our products and competing products; o critical reviews; o the availability of alternative forms of entertainment and leisure time activities; o our ability to sell advertising and sponsorships for the content; o our ability to increase the installed base of our Digital Projector, which is necessary to view b3d-produced content; o our b3d toolset may contain features, functionality or workflow conventions that may not be widely accepted by our target audience; o our ability to continue to develop, enhance and deliver the toolset in accordance with established milestones; and o the marketplace's reluctance to adopt a new toolset. WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT DEMAND FOR 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 animated content over the Internet, b3d-produced content may be unable to gain wide consumer acceptance. This reduction in download time depends in part upon advances in compression technology. We have previously experienced delays in the development of compression technologies, which, we believe, materially and adversely affected our online sales and results of operations. We believe that large, time-consuming downloads for both our Digital Projector and b3d content have previously deterred potential users of our products and have reduced the effectiveness of our marketing campaigns. 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 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, patent, 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 Page 31 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 PRODUCT. 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. 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 RECENT CAPITAL RAISING EFFORTS HAVE RESULTED IN SUBSTANTIAL DILUTION TO OUR STOCKHOLDERS AND OUR FUTURE CAPITAL NEEDS WOULD INCREASE THIS DILUTION. During 2001, we raised $3.0 million through the sale of convertible promissory notes and common stock purchase warrants. The promissory notes, which mature on November 10, 2002, and accrued interest may be converted by the holders at any time into a number of shares of our common stock determined by dividing the amount due under the notes, including interest, by a price equal to the lesser of $.20 and the lowest 5 day volume weighted average price of our common stock as reported by the American Stock Exchange at any time during the term of the notes. At March 22, 2002, the principal and interest outstanding under the Notes could be converted by the holders into 26,624,194 shares of common stock, which would represent 54.1% of our outstanding common stock immediately following the conversion. The warrants have an expiration date of May 23, 2004 and entitle the holders to purchase up to an aggregate of 200% of their invested capital in shares of our Common Stock at a per share exercise price equal to 112.5% of the conversion price. The exercise of the warrants would increase the number of shares outstanding and result in further dilution to our other stockholders. Additionally, during the first quarter of 2002, we raised an additional $800,000 through the sale of 6,051,437 shares of common stock and common stock purchase warrants. These warrants have an expiration date of May 23, 2004 and entitle the holders to purchase up to an aggregate of 10,758,110 shares of our Common Stock at a per share exercise price of $0.148725. We anticipate that during remainder of 2002, we will need to raise additional capital, as our current operations do not generate positive cash flow. As such, any additional capital raising efforts would cause further dilution to stockholders. Page 32 ITEM 7. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS OF BRILLIANT DIGITAL ENTERTAINMENT, INC. Report of Independent Certified Public Accountants...........................34 Consolidated Balance Sheet as of December 31, 2001...........................35 Consolidated Statements of Operations for the years ended December 31, 2000 and 2001................................................36 Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2000 and 2001....................................37 Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 2001..........................................38 Notes to Consolidated Financial Statements...................................40 Page 33 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Brilliant Digital Entertainment, Inc.: We have audited the accompanying consolidated balance sheets of Brilliant Digital Entertainment, Inc. as of December 31, 2001 and the related consolidated statements of income and comprehensive loss, stockholders' deficit, and cash flows for each of the two years in the period ended December 31, 2001. 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 in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brilliant Digital Entertainment, Inc. at December 31, 2001 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP Los Angeles, California March 26, 2002. Page 34
BRILLIANT DIGITAL ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEET (In thousands, except per share data) DECEMBER 31, 2001 ------------ ASSETS Current assets: Cash and cash equivalents.................................... $ 185 Accounts receivable, net..................................... 69 Accounts receivable, related party........................... 4 Other assets, net............................................ 278 ------------ Total current assets............................................. 536 Property, plant and equipment, net (Note 9)...................... 139 Other assets, net................................................ 443 ------------ Total assets..................................................... $ 1,118 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable............................................. $ 387 Accrued expenses (Note 10)................................... 1,032 Deferred revenue (Note 5).................................... 917 Notes payable, related parties............................... 27 Capital financing, net of discount (Note 5).................. 194 Current portion of note payable (Note 6)..................... 174 ------------ Total current liabilities........................................ 2,731 Note payable, less current portion (Note 6)...................... 32 Deferred Revenue (Note 5)........................................ 2,554 Other long term liabilities...................................... 50 ------------ Total liabilities................................................ 5,367 Commitments and contingencies (Note 13) Stockholders' deficit: Preferred Stock ($0.001 par value; 1,000,000 shares authorized; no shares issued or outstanding) (Note 7).... -- Common Stock ($0.001 par value; 150,000,000 shares authorized; 16,463,288 shares issued and outstanding) (Note 7 & Note 14)....................... 16 Additional paid-in capital................................... 50,601 Accumulated deficit.......................................... (54,577) Accumulated other comprehensive loss......................... (289) ------------ Total stockholders' deficit...................................... (4,249) ------------ Total liabilities and stockholders' deficit...................... $ 1,118 ============
See Notes to Consolidated Financial Statements Page 35
BRILLIANT DIGITAL ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share data) YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 ------------- ------------ Revenues: Software sales........................................... $ 9 $ 109 Distribution and technology revenue from related party... 917 612 Development fees and other revenues...................... 890 309 -------------- ------------ Total revenues........................................ 1,816 1,030 Cost of revenues: Software sales........................................... -- 44 Development fees and other costs......................... 463 224 -------------- ------------ Total cost of revenues................................ 463 268 Gross profit................................................ 1,353 762 Operating expenses: Sales and marketing...................................... 839 1,651 General and administrative............................... 4,410 4,324 Research and development................................. 1,892 3,855 Depreciation and amortization............................ 284 319 -------------- ------------ Total operating expenses.............................. 7,425 10,149 -------------- ------------ Loss from operations........................................ (6,072) (9,387) Other income (expense): Export market development grant.......................... 185 116 Gain on foreign exchange transactions.................... 44 (1) Loss on disposal of equipment............................ (2) -- Loss on investment in joint venture...................... (264) (100) Interest income.......................................... 291 257 Interest expense......................................... (817) (93) -------------- ------------ Total other income (expense).......................... (563) 179 -------------- ------------ Loss from continuing operations............................. $ (6,635) $ (9,208) Loss from discontinued operations (Note 2).................. (317) (12,708) Gain on disposal of discontinued operations (Note 2 & Note 5) 624 -- --------------- ------------ Net Loss.................................................... $ (6,328) $ (21,916) Other comprehensive loss: Foreign currency translation adjustment.................. (123) (15) -------------- ------------ Comprehensive loss.......................................... $ (6,451) $ (21,931) ============== ============ Basic and diluted continuing operations .................... $ (0.41) $ (0.62) Basic and diluted for discontinued operations............... $ 0.02 $ (0.85) Basic and diluted net loss per share........................ $ (0.39) $ (1.47) --------------- -------------- Weighted average number of shares used in computing Basic and diluted net loss per share.................... 16,236 14,931 ============== ============
See Notes to Consolidated Financial Statements Page 36
BRILLIANT DIGITAL ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (In thousands, except share data) COMMON STOCK ACCUMULATED -------------------- ADDITIONAL OTHER NO. OF PAID-IN ACCUMULATED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL ---------- -------- ----------- ----------- -------------- --------- BALANCE AT DECEMBER 31, 1999.... 12,598,874 $ 12 $ 31,908 $ (26,333) $ (151) $ 5,436 Grant of stock options....... -- -- 1,642 -- -- 1,642 Exercise of stock options and warrants............... 288,000 -- 1,170 -- -- 1,170 Issuance of shares for joint venture investment... 2,554,589 3 11,087 -- -- 11,090 Shares issued for convertible debenture...... 612,825 1 1,499 -- -- 1,500 Foreign exchange translation (net of tax of $0)......... -- -- -- -- (15) (15) Net loss..................... -- -- -- (21,916) -- (21,916) ----------- -------- ----------- ----------- ---------- --------- BALANCE AT DECEMBER 31, 2000.... 16,054,288 16 47,306 (48,249) (166) (1,093) Grant of warrants............ -- -- 42 -- -- 42 Issuance of shares to Investors.................. 400,000 -- 264 -- -- 264 Issuance of shares for services................... 9,000 -- 6 -- -- 6 Beneficial conversion feature.................... 2,983 -- -- 2,983 Foreign exchange translation................ -- -- -- -- (123) (123) Net loss..................... -- -- -- (6,328) -- (6,328) ----------- -------- ----------- ----------- ---------- --------- BALANCE AT DECEMBER 31, 2001.... 16,463,288 $ 16 $ 50,601 $ (54,577) $ (289) $ (4,249) =========== ======== =========== =========== ========== =========
See Notes to Consolidated Financial Statements Page 37
BRILLIANT DIGITAL ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEAR ENDED DECEMBER 31, ------------------------- 2001 2000 ----------- ------------ OPERATING ACTIVITIES Net loss........................................................ $ (6,328) $ (21,916) Adjustments to reconcile net loss to the net cash provided by (used in) operating activities: Depreciation and other amortization........................ 1,182 2,404 Loss on investment in joint venture........................ 264 100 Effect of stock options and warrants granted............... -- 849 Gain on disposal of discontinued operations................ (624) -- Issuance of common stock for services...................... 6 -- Issuance of common stock for joint venture................. 42 -- Loss on disposal of equipment.............................. 125 -- Changes in operating assets and liabilities: Accounts receivable...................................... 101 61 Other assets............................................. 691 (1,341) Accounts payable and accruals............................ 455 (183) Deferred revenue......................................... (917) 4,357 ---------- ----------- Net cash used in continuing activities.......................... (5,003) (15,669) Net cash (used) provided in discontinued activities............. (394) 5,079 ---------- ----------- Net cash used in operating activities........................... (5,397) (10,590) INVESTING ACTIVITIES Investment in joint venture..................................... -- (100) Purchases of equipment.......................................... (23) (760) ---------- ----------- Net cash used in investing activities........................... (23) (860) FINANCING ACTIVITIES Proceeds from issuance of shares................................ -- 12,222 Proceeds from capital financing................................. 2,614 -- Repayments of notes............................................. (73) (76) ---------- ----------- Net cash provided by financing activities....................... 2,541 12,146 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................. (2,879) 696 Translation adjustments......................................... (123) (15) Cash and cash equivalents at beginning of period................ 3,187 2,506 ---------- ----------- Cash and cash equivalents at end of period...................... $ 185 $ 3,187 ---------- ----------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest................................................... $ 20 $ 63 ---------- -----------
See Notes to Consolidated Financial Statements Page 38 SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY: We issued 200,000 shares of our common stock to each of Russell Simmons and Stan Lathan for an increased ownership in Digital Hip Hop, raising our ownership percentage in Digital Hip Hop from 50% to 75%. We issued 9,000 shares of our common stock during the year in connection with a consulting agreement and incurred $6,000 in consulting expense. In May 2001, we issued $2,264,150 of Secured Convertible Promissory Notes (the "Original Notes") with warrants to purchase shares of our common stock. A beneficial conversion feature of $1,056,000 was recorded in connection with this transaction, which is being amortized on a straight-line basis over the life of the Original Notes. We incurred a beneficial conversion feature expense of $10,690 for the second quarter 2001. In the third and fourth quarters 2001 each, we expensed $176,000 in connection with the amortization of the beneficial conversion feature. This will continue in future quarters through November 10, 2002. In December 2001, we issued another $350,000 of Secured Convertible Promissory Notes as part of an overall financing of $750,000, the balance of which was funded in 2002 (the "New Notes"), with warrants to purchase shares of our common stock. A beneficial conversion feature of $295,000 was recorded in connection with this transaction, which is being amortized on a straight-line basis over the life of the New Notes. We incurred a beneficial conversion feature expense of $13,400 for the fourth quarter 2001. The remaining balance will be amortized in future quarters through November 10, 2002. Also in December 2001, the conversion feature and warrants issued in connection with the Original Notes were adjusted to the same terms as the New Notes. As such, an additional beneficial conversion feature of $1,632,000 was recorded and will also be amortized on a straight-line basis over the remaining life of the Original Notes. In the first half of 2001, the Company issued 120,000 warrants in consideration for consulting services for three outside consultants and expensed $42,000 in the 2nd Quarter of 2001. Page 39 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Brilliant Digital Entertainment, Inc. ("Brilliant" or the "Company") is a developer of rich media advertising serving technologies, software authoring tools and content for three dimensional, or 3D, animation on the World Wide Web. During the third quarter, 2001 the Company began marketing and distributing its player, the "Digital Projector" (required for the playback of our rich media content and advertisements) through two large peer-to-peer, or P2P, networks, Sharman Networks, which operates the KaZaA network (formerly operated by Consumer Empowerment B.V.), and StreamCast Networks, which operates the Morpheus network. Previously, the Company's primary method of distribution was through the bundling of the Digital Projector with its animation content which was syndicated to third party web sites. At December 31, 2001, the Company estimated that its Digital Projector had been distributed to tens of millions of users based on KaZaA's weekly downloads as reported on Download.com, as additional P2P connected computers and other users have accessed the KaZaA and Morpheus networks. Sharman Networks continues to distribute our player and StreamCast Networks has discontinued its distribution. Brilliant commercializes its technology in two primary ways: they license their rich media advertising server technologies to websites to enable the selling and serving of their proprietary rich media advertising format, and they license their rich media content authoring tools - "b3d Studio" and "b3d Studio Pro". 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") and Sega Australia New Developments ("SAND") a division of Sega Ozisoft Pty. Ltd., which was the Australian subsidiary of Sega of Japan ("SEGA"). Historically, BII Australia produced and marketed interactive multimedia titles for the education and entertainment markets. SAND had developed and owned the rights to proprietary software tools, which were designed to allow the Company to both develop a new genre of digital entertainment products, and to cost effectively, produce ancillary products. In exchange for the issue of common stock in the Company, SEGA transferred the intellectual property rights for the software tools to the Company, which continued to develop the technology using the funding raised through its listing on the American Stock Exchange. In 2001, the Company substantially reduced its internal production and syndication of 3D animation. The Company discontinued operations at Digital Hip Hop, the joint venture formed to produce animated music videos for the World Wide Web, and has discontinued operations at, and placed into liquidation, BII Australia. The reduction in the content production and syndication activities has allowed the Company to focus its efforts and allocate its resources to the further development and exploitation of its ad serving and authoring tools businesses, and to pursue the development of a private, peer-to-peer network business through its Altnet subsidiary. GOING CONCERN UNCERTAINTY The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. However, the Company has suffered recurring operating losses and at December 31,2001 had negative working capital of approximately $2,200,000 and a stockholders' deficit of approximately $4,200,000. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company is seeking additional funding and believes that this will result in improved operating results. There can be no assurance, however, that the Company will be able to secure additional funding, or that if such funding is available, whether the terms or conditions would be acceptable to the Company. Page 40 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of Brilliant and its subsidiaries after intercompany balances and transactions have been eliminated. DISCONTINUED OPERATIONS The Auction Channel was accounted for as a discontinued operation pursuant to Management's formal adoption on December 31, 2000 of a plan to dissolve the business unit. The Company sold substantially all of the net assets on April 1, 2001, closed the London and New York offices and is now dissolved. Brilliant Interactive Ideas Pty. Ltd, the wholly owned Australian subsidiary was placed into voluntary administration in December 2001, and has subsequently been put into liquidation. REVENUE RECOGNITION SOFTWARE SALES: The Company receives revenue from the sale or licensing of its software tools, including the granting of exclusive distribution rights in specified territories. For such distribution agreements, which cover a period of time, are exclusive for a geographic territory and exceed one year in term, the Company recognizes revenue on a straight-line basis over the life of the agreement. PRODUCTION FEES: The Company receives production fees in exchange for the development of animated content, including banner ads and animated music web videos, in accordance with customer specifications. The development agreements generally specify certain "milestones" which must be achieved throughout the production process. As these milestones are achieved, the Company recognizes the portion of the development fee allocated to each milestone. DEVELOPMENT FEES: The Company enters into development contracts under which they 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. The Company has derived revenues from royalties, development fees and software sales. The Company licenses its traditional CD-ROM products to publishers and distributors in exchange for non-refundable advances and royalties based on product sales. Royalties based on product sales are due only to the extent 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. DISTRIBUTION FEES: 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 AICPA Statement of Position 97-2 are met. Additional revenue, related to the 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 the shipment of the product. It is the Company's policy to provide for estimated returns at the time software sales revenue is recognized and for bad debts. At December 31, 2001 the Company had a provision for bad debts of $25,000. Page 41 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 COST OF REVENUES Cost of revenues consists primarily of royalties to third parties, amortization of capitalized movie software costs, the direct costs required to reproduce and package software products, and productions costs for music videos, advertising banners and MultipathTM movie, including direct salaries and benefits. RESEARCH AND DEVELOPMENT COSTS The Company incurs research and development costs relating to the development of its three dimensional authoring tools, development of its Digital Projector, ad serving software and traditional CD-ROM software tools, which provide the technical infrastructure for the production of MultipathTM Movies and CD-ROM titles. The Company incurred research and development costs of $3,855,000 and $1,892,000, including web development costs for the year ended December 31, 2000 and the year ended December 31, 2001, respectively. The Company accounts for web development costs in accordance with the EITF 00-2, "Accounting for Web site Development Costs." MOVIE SOFTWARE COSTS Movie software costs consist of the costs of development and production of digitally animated MultipathTM Movies including labor, material and production overhead. These costs were fully amortized in 2000. 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 MultipathTM Movie titles. The Company achieved technological feasibility of its original Digital Projector during the third quarter of 1997. Since the date of achieving technological feasibility, the costs of developing MultipathTM Movies intended to be viewed on the original projector have been capitalized in accordance with SFAS No. 86. The Company continues to develop new Digital Projectors with enhanced functionality such as improved compression technology. Costs incurred in the development of new Digital Projectors are expensed until technological feasibility is reached. MultipathTM Movies that are developed for new Digital Projectors that have not yet reached technological feasibility are capitalized in accordance with SFAS No. 86 to the extent that they are compatible with an existing Digital Projector. Amounts incurred for MultipathTM Movies that are developed for new Digital Projectors that are not compatible with an existing projector and would require substantial revision in order to achieve compatibility are expensed as incurred. To the extent capitalized movie software costs are attributable to titles which have begun to ship, they are subject to amortization. Amortized amounts of $158,000 are included in costs of revenues for the year ended December 31, 2000. CASH EQUIVALENTS The Company considers all highly liquid investments with maturity of three months or less when acquired to be "cash and cash equivalents". Page 42 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 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 a current exchange rate ($0.5117 at December 31, 2001), and revenues and expenses are translated into U.S. dollars using an average exchange rate ($0.5819 for the year ended December 31, 2000 and $0.5163 for the year ended December 31, 2001). The effects of foreign currency translation adjustments are deferred and included as "other comprehensive loss" as a component of stockholders' deficit, on an accumulated basis. 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 losses are included in the statements of operations. NET LOSS PER SHARE SFAS No. 128 "Earnings Per Share", 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 2,820,000 and 5,974,000 were excluded from the average number of common and common equivalent shares outstanding in the diluted EPS calculation for the years ended December 31, 2000 and 2001, 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 uses the intrinsic value method prescribed by APB Opinion No. 25. See Note 7 for supplemental disclosure. Page 43 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 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. The Company maintains the majority of its cash and cash equivalents in one bank and with one brokerage house. The account at the bank is guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2001, the Company had approximately $145,000 at a bank, which was in excess of the FDIC insurance limit. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that materially affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," establishes guidelines regarding when impairment losses on long-lived assets, which include plant and equipment, should be recognized and how impairment losses should be measured. The Company periodically reviews such assets for possible impairments and expected losses, if any, are recorded currently. In 2000, the Company decided to sell its subsidiary, The Auctionchannel, Inc. The Company estimated the fair value of the business held for sale based on discussions with prospective buyers and adjusted the value, taking into consideration the selling costs. The Company reduced its carrying value of goodwill by $4,189,000 to record assets held for sale at the fair value. The Auctionchannel, Inc. was sold on April 1, 2001 and the New York and London offices were closed. 3. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. Subsequently, the SEC released SAB 101B, which delayed the implementation date of SAB 101 for registrants with fiscal years that begin between December 16, 1999 and March 15, 2000. The Company was required to be in conformity with the provisions of SAB 101, as amended by SAB 101B, no later than October 1, 2000. The Company believes the adoption of SAB 101, as amended by SAB 101B, has not had an adverse effect on the Company's financial position, results of operations or cash flows. In October 2000, the Company adopted the Financial Accounting Standards Board SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability, measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 has no effect on the Company's financial statements. Page 44 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB Opinion No. 25" (FIN. 44). The Interpretation is intended to clarify certain problems that have arisen in practice since the issuance of APB No. 25, "Accounting for Stock Issued to Employees." The effective date of the interpretation was July 1, 2000. The provisions of the interpretation apply prospectively, but they will also cover certain events occurring after December 15, 1998 and after January 12, 2000. The Company believes the adoption of FIN. 44 has not had a material adverse effect on the Company's current or historical consolidated financial statements, but may affect future accounting regarding stock option transactions. In March 2000, EITF 00-2 "Accounting for Web Site Development Costs" was released. EITF 00-2 provides guidance on how an entity should account for costs involved in such areas as planning, developing software to operate the web site, graphics, content, and operating expenses. EITF 00-2 is effective for web site development costs incurred for fiscal quarters beginning after June 30, 2000. The Company adopted EITF 00-2 during the year ending December 31, 2000, and all amounts associated with the Web Site were expensed in accordance with EITF 00-2. In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires that, upon adoption of SFAS 142, the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test nine months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will have no material impact on its financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFASB 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFASB 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company believes the adoption of this Statement will have no material impact on its financial statements. Page 45 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 4. RELATED PARTY TRANSACTIONS There were no related party purchase and sales transactions during the years ended December 31, 2000 and December 31, 2001. See Note 5 for related party financing transactions. 5. SIGNIFICANT AGREEMENTS E-NEW MEDIA In February 2000, the Company entered into an agreement with e-New Media Digital Entertainment Limited ("e-New Media"), a wholly owned subsidiary of e-New Media Company. The agreement with e-New Media provides for a Distribution Agreement, a Production Joint Venture Agreement, a Technology License Agreement and an Investment Agreement. The Distribution Agreement stipulates that e-New Media will have Internet distribution rights to English and Asian language versions of the Company's MultipathTM Movie webisodes in selected Asian territories, with exclusive rights to the Asian language versions. e-New Media has paid the Company a fee of $2,500,000 for these rights. The revenue will be recognized over a 6-year period, which commenced in the 2nd quarter of 2000. e-New Media is entitled to a distribution fee of 20% of gross revenues generated under the Distribution Agreement. During the year ended December 31, 2001 the Company recognized $417,000 of this fee in revenues. Deferred revenue includes $417,000 in current and $1,388,000 in long term. The Production Joint Venture Agreement provides for the formation of a joint venture studio, known as e-Brilliant, to create new content using the Company's b3d technology for distribution in the Asian territories for which e-New Media has distribution rights. These projects, developed by the joint venture, will be fully funded by e-New Media. The joint venture is owned in equal parts by e-New Media and Brilliant Digital Entertainment. As of December 31, 2001, the Company has not received any revenue from this part of the agreement, and in November 2001 e-Brilliant ceased operations due, in part, to e-New Media's decision to stop funding the studio. The Technology Licensing Agreement provides for the Company to grant to the joint venture, owned equally by e-New Media and Brilliant, a 5-year exclusive alpha license to the Company's b3d technology for exploitation by the joint venture in those Asian territories where e-New Media has distribution rights. e-New Media has paid the Company a fee of $2,500,000 for this license. The revenue will be recognized over a 5-year period, and commenced in the 2nd quarter of 2000. The Company is also entitled to a 10% royalty on all joint venture revenues. During the year ended December 31, 2001, the Company recognized $500,000 in revenue. Deferred revenue includes $500,000 in current and $1,166,000 in long term. The Company has not received any royalties yet from this joint venture. Pursuant to the Investment Agreement in 2000, e-New Media acquired 666,667 shares of the Company's common stock at $6.00 per share, for aggregate proceeds to the Company of $4,000,000. On September 9, 2000 e-New Media purchased an additional 1,130,000 shares of the Company's common stock at $4.28 per share for proceeds of $4,837,000. DIGITAL HIP HOP In August 2000, the Company entered into a joint venture agreement to produce music videos for the Internet. The investment required an initial contribution of technology and $100,000 for a 50% ownership. In the fiscal year 2000, the loss incurred reduced the investment to a zero balance. In May 2001, Page 46 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 the Company acquired an additional 25% of Digital Hip Hop by issuing 400,000 shares of the Company's common stock to the other two partners in Digital Hip Hop. Digital Hip Hop also received from the Company's wholly-owned subsidiary, B3D, Inc., a 5-year exclusive Alpha level license to its b3d production tool suite for the production of hip hop content for non-Asian markets. During the fourth quarter of 2001, the Company discontinued operations at Digital Hip Hop based on the limited prospects of additional web video production work. Past clients, including the Universal Music Group and Priority Records, were reluctant to make future commitments for incremental web videos at prices that were higher than previously paid. The Company does not intend to actively market and promote the future production of animated music videos for the Web. CONVERTIBLE PROMISSORY NOTES In May 2001, the Company sold to Harris Toibb, Europlay 1, LLC (an entity in which the Company's Chairman has an ownership interest) and Preston Ford, Inc. secured convertible promissory notes (the "Original Notes") in the aggregate principal amount of $2,264,150 and three-year warrants (the "Original Warrants") to purchase up to an aggregate of 2,850,393 shares of the Company's Common Stock at exercise prices of $0.793 per share (with respect to 2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). These securities were sold for an aggregate purchase price of $2,264,150. The Original Notes have a term of eighteen months from the date of issuance and an interest rate of 10% per annum, payable at maturity. The principal amount of the Original Notes and, at the option of the holder, all accrued interest, may be converted by the holder into shares of the Company's Common Stock at a conversion price of $0.706 per share. The Original Notes are secured by all of the Company's assets and the assets of the Company's subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios, Inc. In connection with the Original Notes, the Company recorded a beneficial conversion feature of $1,056,000, which is being amortized on a straight-line basis over the life of the Original Notes. The Original Notes and the Original Warrants were amended in the December 2001 financing transaction, as described below. On December 19, 2001, the Company entered into a financing transaction that was structured similarly to the financing conducted in May 2001, and involved one of the same investors. In the December financing transaction, the Company sold to Harris Toibb and Capel Capital Ltd. secured convertible promissory notes (the "New Notes") in the aggregate principal amount of $750,000 (the "Principal Amount") and warrants (the "New Warrants") to purchase up to that number of shares of the Company's Common Stock obtained by dividing 200% of the Principal Amount by the lesser of (i) $0.20, or (ii) the volume weighted average price of a share of the Company's Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (items (i) and (ii) hereinafter referred to collectively as the "Conversion Price"). The New Warrants are exercisable at a price per share equal to 1.125 times the Conversion Price. The New Notes mature simultaneous with the Original Notes on November 10, 2002 and bear interest at the rate of 10% per annum. The principal amount of the New Notes and, at the option of the holder, all accrued interest, may be converted by the holder into shares of the Company's Common Stock at the Conversion Price. As with the Original Notes, the New Notes are secured by all of the Company's assets and the assets of the two subsidiaries, B3D, Inc. and Brilliant Studios, Inc., and guaranteed by B3D, Inc. and Brilliant Studios, Inc. In connection with the New Notes, the Company recorded a beneficial conversion feature of $295,000, which is being amortized on a straight-line basis over the life of the New Notes. As a condition to the December 2001 financing transaction, the Original Notes and the Original Warrants were amended to correspond to all the terms of the New Notes and New Warrants. As a consequence, Harris Toibb, Europlay 1, LLC and Preston Ford, Inc. are able to convert the aggregate purchase price of the Original Notes and all accrued interest into shares of the Company's Common Stock at the much lower Conversion Price for the New Notes. In addition, these original investors are able to exercise Page 47 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 the Original Warrants at a price per share equal to 1.125 times the much lower Conversion Price from the December 2001 financing. Pursuant to this amendment to the Original Notes and Original Warrants, the Company recorded an additional beneficial conversion feature of $1,632,000, which is being amortized on a straight-line basis over the remaining life of the Original Notes. In support of the May 2001 financing transaction and the December 2001 financing transaction, the Company sought and received an opinion from a reputable financial advisory firm that the financing transactions were each fair to the Company and its stockholders from a financial point of view at the time the respective financings closed. THE AUCTION CHANNEL On April 30, 2001 the Company sold substantially all of the assets of The Auction Channel to Metro Channels, LLC, a division of Rainbow Media Holdings, Inc. The Auction Channel and the Company's London based subsidiary, Trojan Television, Ltd., has ceased operations. In connection with the disposal of the assets and discontinuance of the related operations, the Company realized a gain of $624,000. 6. 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. At December 31, 2001 the balance due was $31,385, of which $27,702 is classified as short term. On October 3, 2000, the Company entered into a capital lease agreement with Crocker Capital Inc. The principal amount of the lease obligation is $58,421 plus interest of $19,081 due in 36 monthly payments of $2,152. A final payment of $100 will buy out the lease obligation, which is collateralized by computer equipment used as a web server, and is located at Exodus, a third party web hosting facility. At December 31, 2001 the balance due was $53,536, of which $25,834 is classified as short term. Additionally, the Company has an obligation to fund a Directors and Officers insurance policy, with total premiums of $163,401 and financing charges of $5,222. The policy was renewed in November 2001 with 12 months coverage. The balance due on the policy at December 31, 2001 was $120,175, which is classified as short term. 7. 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 Page 48 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 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 Common 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 non-assessable. We issued 9,000 shares of our Common Stock during the year in connection with a consulting agreement and incurred $6,000 in consulting expense. 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, 2000, 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 may adversely affect the voting power or other rights of the holders of the Company's Common Stock. WARRANTS On February 17, 2000, the Company issued 307,692 warrants exercisable at $6.50 per share to e-New Media as partial consideration for a licensing and distribution agreement. The warrants are being expensed over the 6 year-period of the agreements. The warrants expired in November 2000. The Company recognized $82,000 expense in 2001 with the balance of the value, $342,000, recorded in Other Assets, of which $260,000 is classified as a long term asset, with the balance classified as a short term asset. On March 1, 2000, warrants, exercisable at $6.00 per share, were issued to a consultant for 30,000 shares of Common Stock. The warrants vested immediately upon issuance and expire on February 28, 2002. The Company incurred $96,000 of expense in connection with the issuance. On May 23, 2000, the Company issued 350,076 warrants at $6.29 per share as partial consideration for an agreement with Yahoo! These warrants, valued at $1,022,222, are currently exercisable at $6.29 and expired in May 2001. The Company recognized $596,295 of warrant expense in 2000, with the remaining value of $425,927 expensed in the first half of 2001. On May 23, 2001, the Company issued, in connection with Secured Convertible Promissory Notes (the "Original Notes"), to Harris Toibb, Europlay 1, LLC and Preston Ford, Inc. (the "Investors") warrants to purchase 2,850,393 shares of Common Stock at exercise prices of $0.793 per share (with respect to 2,792,118 shares) and $0.858 per share (with respect to 58,275 shares). The number of shares underlying each warrant issued to each Investor is equal to 100% of the principal amount of the note acquired by that Investor divided by 112.5% of the average closing sales price of the Company's Common Stock on the American Stock Exchange over the 10 trading days prior to execution by the Investor of a note purchase agreement. In December 2001, the terms of the Original Notes were amended such that the number of warrants to be issued to the Investors relative to the Original Notes and the warrants issued in connection with Secured Convertible Promissory Notes pursuant to the December 2001 financing (the "New Notes") will only be finally determined upon conversion of the notes. (See Footnote 5 SIGNIFICANT AGREEMENTS - CONVERTIBLE PROMISSORY NOTES). Page 49 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 In connection with the issuance of warrants from the Original Notes, a beneficial conversion feature of $1,056,000 was recorded and is being amortized on a straight-line basis over the life of the Original Notes. The Company incurred a beneficial conversion feature expense of $10,690 for the second quarter 2001. In the third and fourth quarters 2001 each, the Company expensed $176,000 in connection with the beneficial conversion feature. This will continue in future quarters through November 10, 2002. In connection with the December 2001 issuance of warrants from the New Notes, a beneficial conversion feature of $295,000 was recorded and is being amortized on a straight-line basis over the life of the New Notes. The Company incurred a beneficial conversion feature expense of $13,400 for the fourth quarter 2001. The remaining balance will be amortized in future quarters through November 10, 2002. Also in December 2001, the conversion feature and warrants issued in connection with the Original Notes were adjusted to the same terms as the New Notes. As such, an additional beneficial conversion feature of $1,632,000 was recorded and will also be amortized on a straight-line basis over the remaining life of the Original Notes. In the first half of 2001, the Company issued 120,000 warrants in consideration for consulting services for three outside consultants and expensed $42,000 in the 2nd Quarter of 2001. The following table summarizes warrant activity:
NUMBER OF SHARES OPTION PRICE ----------- --------------- Outstanding at December 31, 1999..... 805,000 $4.00 -- $ 8.00 Granted.............................. 698,000 $5.94 -- $ 6.50 Exercised............................ (250,000) $4.00 -- $ 5.50 Forfeited............................ (548,000) $5.00 -- $ 8.00 ----------------------------------------------------------------------- Outstanding at December 31, 2000..... 705,000 $4.00 -- $ 6.50 Granted.............................. 2,960,000 $4.00 -- $ 6.50 Exercised............................ -- $0.00 -- $ 0.00 Forfeited............................ (660,000) $4.00 -- $ 6.29 ----------------------------------------------------------------------- Outstanding at December 31, 2001..... 3,005,000 $0.75 -- $ 5.50
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 3,500,000, 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. Page 50 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 The following table summarizes stock option activity:
NUMBER OF SHARES OPTION PRICE ----------- --------------- Outstanding at December 31, 1999..... 1,441,000 $1.50 -- Granted.............................. 915,000 $4.81 -- $ 7.00 Exercised............................ (38,000) $1.50 -- $ 3.94 Forfeited............................ (203,000) $1.50 -- $ 7.00 ------------------------------------------------------------------------ Outstanding at December 31, 2000..... 2,115,000 $1.50 -- $ 7.00 Granted.............................. 1,681,000 $2.62 -- $ 0.16 Exercised............................ -- Forfeited............................ (827,000) $5.94 -- $ 0.65 ------------------------------------------------------------------------ Outstanding at December 31, 2001..... 2,969,000 $5.94 -- $ 0.16 Exercisable at December 31, 2001..... 862,000
As discussed in Note 2, the Company has adopted the disclosure-only provisions of SFAS No. 123, which requires the use of an option valuation model 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 2001 and 2000, respectively: interest rates of 5.5% and 5.5%; dividend yields of 0% for both years; volatility factors of the expected market price of the Company's common stock of 75.0% and 75.0%; and expected life of the options of 3 years for both years. These assumptions resulted in a weighted average fair value of $1.66 and $2.95 per share for stock options granted in 2001 and 2000, 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 2001 and 2000 is not representative of the pro forma effect on net loss in future years because it reflects expense for only one year's vesting. Pro forma information in future years will also reflect the amortization of any stock options granted in succeeding years. The Company's pro forma information is as follows: Page 51 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- Net loss, as reported........................ $(6,328,000) $(21,916,000) Net loss, pro forma.......................... $(6,686,000) $(22,893,000) Basic and diluted loss per share, as reported $(0.39) $(1.47) Basic and diluted loss per share, pro forma.. $(0.41) $(1.53)
8. INCOME TAXES The Company has adopted the asset and liability method of accounting for income taxes. Income tax expense shown in the statements of operations is calculated on the operating profit before tax, adjusted for items, which, due to treatment under income tax legislation, create permanent differences between accounting profit and taxable income. Deferred income taxes under FAS No. 109 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2001 the Company had cumulative tax losses resulting in a net operating loss ("NOL") carry forward of approximately $36,131,000. 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, 2001 are as follows: DECEMBER 31, 2001 ------------- Deferred tax assets: Net operating losses..................................... 6,001,000 Temporary differences.................................... 327,000 ------------- Total deferred tax assets................................ 6,328,000 Valuation allowance...................................... (6,328,000) ------------- Net deferred tax assets (liabilities) ...................... $ -- ============= The reconciliation of the effective income tax rate to the Federal statutory rate is as follows: Page 52 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001
YEAR ENDED DECEMBER 31, 2001 2000 ----------- ---------- 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% ========== ==========
9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: DECEMBER 31, 2001 -------------- Computers and equipment................... $1,322,000 Leasehold improvements.................... 185,000 Furniture and fixtures.................... 123,000 -------------- 1,630,000 Less accumulated depreciation............. (1,491,000 ) -------------- $139,000 ============== 10. ACCRUED EXPENSES Accrued expenses consist of the following: DECEMBER 31, 2001 -------------- Employee compensation..................... $825,000 Accrued Payroll Expenses.................. 143,000 Licensing................................. 37,000 Other .................................... 27,000 -------------- $1,032,000 ============== The employee compensation includes an accrual for the chairman and for the president and chief executive officer of $825,000. 11. GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS The Company's 2001 operations consist of the operations of BII Australia in Australia, and Brilliant in the United States. The Auction Channel was the United Kingdom. The following schedule sets forth the revenues and long-lived assets, including those of the discontinued operations of The Auction Channel and of the Company by geographic area: Page 53 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001
UNITED UNITED STATES AUSTRALIA KINGDOM ------------ ------------ ----------- YEAR ENDED DECEMBER 31, 2000 Revenues from unaffiliated customers... $301,000 $117,000 $280,000 Revenues from affiliated customers..... 612,000 -- -- ------------ ------------ ----------- Total revenues......................... $913,000 $117,000 $280,000 ============ ============ =========== YEAR ENDED DECEMBER 31, 2001: Revenues from unaffiliated customers... $873,000 $26,000 -- Revenues from affiliated customers..... 917,000 -- -- ------------ ------------ ----------- Total revenues......................... $1,790,000 $26,000 -- ============ ============ =========== LONG-LIVED ASSETS AS OF: December 31, 2001...................... $793,000 $53,000 -- ============ ============ ===========
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 web music videos, duplication and packaging, royalties due to third parties, a major portion of the sales and marketing costs, and certain corporate expenses were incurred and paid in the United States. For the year ended December 31, 2001, e-New Media represented 51% of the revenues with distribution and licensing rights of $917,000. Digital Hip Hop earned 21% ($381,000) of the revenues through the production of music videos primarily for Island Def Jam. Warner Bros. Online contributed 12% ($226,000) of the revenues, while Warner Bros. site "Entertaindom" contributed advertising revenues of 3% ($59,000). Infogrames contributed 6% ($100,000) in advertising revenues. For the year ended December 31, 2000, e-New Media represented 59% of revenues with distribution and licensing rights of $612,000. Slingshot provided DVD revenues of 11% ($116,000) and Warner Bros. contributed 9% ($88,000) in advertising revenues. 12. SEGMENT INFORMATION With the discontinuation of The Auction Channel, the Company has one operating segment: digital animation. Brilliant Digital Entertainment, in the United States, together with its subsidiaries in Australia, is a production and development studio that uses its proprietary software tool set to create digital entertainment for distribution over the Internet, on CD-ROM and DVD, as television programming and for home video. Brilliant Digital Entertainment also offers for sale its proprietary authoring tools, b3d Studio and b3d Studio Pro. The Altnet business is not yet operational. 13. COMMITMENTS AND CONTINGENCIES At December 31, 2001, the Company was obligated under certain licensing agreements to make additional payments totaling $37,000 for use of certain properties and characters in development of its products through August 2003. The Company has two fixed asset financing notes (Note 6) with future minimum payments as of December 31, 2001 under these leases are as follows: Page 54 BRILLIANT DIGITAL ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 YEAR AMOUNT -------------- ----------- 2002 54,000 2003 31,000 ----------- $85,000 =========== The Company leases its facilities under an operating lease agreement expiring in 2003. Future minimum payments as of December 31, 2001 under the lease are as follows: YEAR AMOUNT -------------- ----------- 2002 83,000 2003 7,000 ----------- $90,000 =========== Rent expense was $728,000 and $176,000 for the year ended December 31, 2000 and the year ended December 31, 2001, respectively. 14. SUBSEQUENT EVENT The Company completed a financing round and has raised $800,000 in a private placement of its common stock to Harris Toibb, MarKev Services LLC and David Wilson, all investors in the Company prior to the closing of this financing. The Company sold $750,000 to Harris Toibb and MarKev Services LLC on March 7, 2002, and sold $50,000 to David Wilson on March 20, 2002. Pursuant to the terms of certain Common Stock and Warrant Purchase Agreements, the Company sold 6,051,437 shares of its common stock at a price per share equal to $0.1322, which represents the volume weighted average price of a share of the Company's common stock on the American Stock Exchange over the five consecutive trading days immediately preceding March 7, 2002, the date the Company entered into the Purchase Agreement with Harris Toibb and MarKev Services LLC. In addition, the purchasers in the transaction received warrants to purchase an additional 10,758,110 shares of the Company's Common Stock at a purchase price equal to $0.148725, which represents a price paid per share equal to 1.125 times the price paid per share in this transaction. These warrants will expire on May 23, 2004. On February 22, 2002, the Company filed a Certificate of Amendment which amended its Amended and Restated Certificate of Incorporation to increase the number of shares of Common Stock, par value $0.001, authorized to be issued from 30,000,000 to 150,000,000. Page 55 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Information required by this Item 9 will appear in the proxy statement for the 2002 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION Information regarding executive compensation will appear in the proxy statement for the 2002 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership of certain beneficial owners and management will appear in the proxy statement for the 2002 Annual Meeting of Stockholders, and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain relationships and related transactions will appear in the proxy statement for the 2002 Annual Meeting of Stockholders, and is incorporated by this reference. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K. (a) Exhibits: See attached Exhibit List. (b) Reports on Form 8-K. Current Report on Form 8-K filed on December 21, 2001, reporting under Items 1, 5 and 7 the completion of a financing transaction that could result in a change in control of Registrant and the amendment to Registrant's Rights Agreement, dated March 30, 1998, as amended. Page 56 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRILLIANT DIGITAL ENTERTAINMENT, INC. By: /S/ ROBERT CHMIEL ------------------------------------ Robert Chmiel Its: Chief Financial Officer (Principal Financial and Accounting Officer) and Chief Operating Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Mark Dyne and Robert Chmiel, and each of them, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-KSB and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. SIGNATURES In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /S/ MARK DYNE Chairman of the Board of Directors March 29, 2002 - -------------------------- Mark Dyne /S/ KEVIN BERMEISTER Chief Executive, President and March 29, 2002 - -------------------------- Director Kevin Bermeister /S/ROBERT CHMIEL Chief Financial Officer (Principal March 29, 2002 - -------------------------- Financial and Accounting Officer) Robert Chmiel and Chief Operating Officer /S/ MARK MILLER Director March 29, 2002 - -------------------------- Mark Miller /S/ RUSSELL SIMMONS Director March 29, 2002 - -------------------------- Russell Simmons /S/ RAY MUSCI Director March 29, 2002 - -------------------------- Ray Musci /S/ GARTH SALONER Director March 29, 2002 - -------------------------- Garth Saloner /S/ JEFF SCHEINROCK Director March 29, 2002 - -------------------------- Jeff Scheinrock /S/ ABE SHER Director March 29, 2002 - -------------------------- Abe Sher
Page 57 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 3.1 Amended and Restated Certificate of Incorporation of Registrant. 3.2 Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to Form S-1 filed on September 17, 1996, and the amendments thereto. 3.3 Certificate of Designation of Rights, Preferences and Privileges of Preferred Stock. Incorporated by reference to Exhibit A to the Rights Agreement filed as Exhibit 4.1 to Current Report on Form 8-K filed as of April 6, 1998. 4.1 Specimen Stock Certificate of Common Stock of Registrant. Incorporated by reference to Exhibit 4.1 to Form S-1 filed on September 17, 1996, and the amendments thereto. 4.2 Rights Agreement, dated as of March 30, 1998, between Registrant and U.S. Stock Transfer Corporation as Rights Agent. Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed as of April 6, 1998. 4.3 Form of Rights Certificate. Incorporated by reference to Exhibit B to the Rights Agreement filed as Exhibit 4.1 to Current Report on Form 8-K filed as of April 6, 1998. 10.1 Registrant's Second Amended and Restated 1996 Stock Option Plan. Incorporated by reference to Exhibit 10.1 to Form 10-KSBfor the year ended December 31, 2000. 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 Memorandum of Agreement, dated September 5, 1996, by and between 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.] 10.5 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. 10.6 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. 10.7 Standard Form Lease Agreement, dated May 16, 1997, between Topanga & Victory Partners L.P. and 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.] Page 58 10.8 Warrant Agreement, dated November 4, 1997, between Chloe Holdings, Inc. and Registrant. Incorporated by reference to Exhibit 10.43 to Form SB-2 filed on November 5, 1997, and the amendments thereto. 10.9 Lease Agreement between Daiwa Real Estate Co. Ltd. And BII Australia. Incorporated by reference to Exhibit 10.45 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. 10.10 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. 10.11 Debenture and Warrant Purchase Agreement, dated as of April 21, 1999, between 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. 10.12 4% Convertible Debenture Due April 27, 2000 of 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. 10.13 Registration Rights Agreement, dated as of April 21, 1999, between 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. 10.14 Agreement for the sale and purchase of share capital of Trojan Television Limited, dated July 1, 1999, between SF International Limited and Others and Registrant. Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed as of July 14, 1999. 10.15 Option Agreement, dated March 11, 1999, by and among 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 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 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. 10.16 Nontransferable Redeemable Warrant Agreement, dated July 1, 1999, by and between Registrant and IBidLive, N.V. Incorporated by reference to Exhibit 10.38 to Form SB-2 filed on May 19, 1999, and the amendments thereto. 10.17 Nontransferable Redeemable Warrant Agreement, dated July 1, 1999, by and between Registrant and IBidLive, N.V. Incorporated by reference to Exhibit 10.39 to Form SB-2 filed on May 19, 1999, and the amendments thereto. 10.18 Securities Purchase Agreement, dated as of March 29, 1999, between 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. 10.19 Registration Rights Agreement, dated as of March 29, 1999, between 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. Page 59 10.20 Debenture and Warrant Purchase Agreement, dated as of October 29, 1999, between Registrant and Roseworth Group, Ltd. Incorporated by reference to Exhibit 10.1 to Form S-3 filed on November 24, 1999, as amended. 10.21 4% Convertible Debenture Due October 29, 2000 of the Registrant, in the principal amount of $1,000,000, dated as of October 29, 1999. Incorporated by reference to Exhibit 10.2 to Form S-3 filed on November 24, 1999, as amended. 10.22 Warrant, dated October 29, 1999, granted to Roseworth Group, Ltd. Incorporated by reference to Exhibit 10.4 to Form S-3 filed on November 24, 1999, as amended. 10.23 Registration Rights Agreement, dated as of October 29, 1999, between Registrant and Roseworth Group, Ltd. Incorporated by reference to Exhibit 10.5 to Form S-3 filed on November 24, 1999, as amended. 10.24 Securities Purchase Agreement closed as of September 19, 2000, by and between Registrant and e-New Media Digital Entertainment Limited. Incorporated by reference to Exhibit 99.1 to Form 8-K filed on September 27, 2000. 10.25 Stock Purchase Agreement, dated as of January 1, 2000, between Registrant and Continental Capital & Equity Corporation. Incorporated by reference to Exhibit 10.1 to Form S-3 filed on April 14, 2000, as amended. 10.26 Strategic Partner Agreement, dated as of February 17, 2000, between Registrant and e-New Media Digital Entertainment Limited. Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998. 10.27 Nontransferable Redeemable Warrant Agreement, dated February 28, 2000, between Registrant and e-New Media Digital Entertainment Limited. Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998. 10.28 Executive Employment Agreement, dated as of December 18, 2000, by and between Registrant and Robert Chmiel. Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001. 10.29 Executive Employment Agreement, dated as of January 1, 2001, by and between Registrant and Kevin Bermeister. Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001. 10.30 Asset Purchase Agreement, dated as of March 16, 2001, by and among Registrant, The Auction Channel, Inc., Trojan Television Limited and Metro Channel, LLC, as amended by the Amendment, dated April 27, 2001, as further amended by the Amendment, dated April 30, 2001. Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed as of May 15, 2001. 10.31 Note and Warrant Purchase Agreement, dated as of April 19, 2001, between Registrant and Europlay 1, LLC. Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. 10.32 Note and Warrant Purchase Agreement, dated as of April 19, 2001, between Registrant and Harris Toibb. Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. Page 60 10.33 Note and Warrant Purchase Agreement, dated as of April 26, 2001, between Registrant and Preston Ford, Inc. Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. 10.34 Amendment to Note and Warrant Purchase Agreements, dated as of May 23, 2001, between Registrant and Harris Toibb and acknowledged and consented to by Europlay 1, LLC and Preston Ford, Inc. Incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. 10.35 Form of Secured Convertible Promissory Note of Registrant, dated May 23, 2001. Incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. 10.36 Form of Warrant to Purchase Common Stock of Registrant, dated May 23, 2001. Incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. 10.37 Security and Pledge Agreement, dated May 23, 2001, made by Registrant, B3D, Inc., and Brilliant Studios, Inc. in favor of Harris Toibb, as agent. Incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. 10.38 Guaranty, dated May 23, 2001, made by B3D, Inc. and Brilliant Studios, Inc. in favor of Harris Toibb, as agent. Incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001. 10.39 Rights Agreement Amendment, dated as of May 9, 2001, 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 December 21, 2001. 10.40 Technology Bundle License Agreement, dated as of October 2, 2001, by and between Registrant and Consumer Empowerment B.V., a company organized under the laws of The Netherlands. [Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment by Registrant.] 10.41 Note and Warrant Purchase Agreement, dated December 10, 2001, by and between Registrant and Harris Toibb. 10.42 Note and Warrant Purchase Agreement, dated December 10, 2001, by and between Registrant and Capel Capital Ltd. 10.43 Secured Convertible Promissory Note, dated December 19, 2001, in favor of Harris Toibb. 10.44 Secured Convertible Promissory Note, dated December 19, 2001, in favor of Capel Capital Ltd. 10.45 Common Stock Purchase Warrant, dated December 19, 2001, by and between Registrant and Harris Toibb. 10.46 Common Stock Purchase Warrant, dated December 19, 2001, by and between Registrant and Capel Capital Ltd. 10.47 Amendment Number Two to Note and Warrant Purchase Agreements, dated December 19, 2001, by and between Registrant and Harris Toibb. Page 61 10.48 Amendment Number One to Secured Convertible Promissory Notes, dated December 19, 2001, in favor of Harris Toibb. 10.49 Amendment No. 1 to Warrant to Purchase Common Stock, dated December 19, 2001, by and between Registrant and Harris Toibb. 10.50 Amendment No. 1 to Warrant to Purchase Common Stock, dated December 19, 2001, by and between Registrant and Europlay 1, LLC. 10.51 Amendment No. 1 to Warrant to Purchase Common Stock, dated December 19, 2001, by and between Registrant and Preston Ford, Inc. 10.52 Amendment Number One to Security and Pledge Agreement, dated as of December 19, 2001, by and between Registrant, B3D, Inc., and Brilliant Studios, Inc. in favor of Harris Toibb, as agent. 10.53 Security and Pledge Agreement, dated as of December 19, 2001, made by Registrant, B3D, Inc., and Brilliant Studios, Inc. in favor of Harris Toibb, as agent. 10.54 Investor Rights Agreement, by and between Registrant, Harris Toibb, Europlay 1, LLC, Preston Ford, Inc. and Capel Capital Ltd. 10.55 Guaranty, dated December 19, 2001, made by B3D, Inc. and Brilliant Studios, Inc. in favor of Harris Toibb, as agent. 10.56 Acknowledgement, Consent and Reaffirmation, dated December 19, 2001, by Brilliant Studios, Inc. and B3D, Inc. 21.1 List of Subsidiaries. 23.1 Consent of BDO Seidman, LLP. 24.1 Power of Attorney (included on signature page). Page 62 EX-3 3 exhibit_3-1.txt EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BRILLIANT INTERACTIVE, INC. BRILLIANT INTERACTIVE, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: A. The name of the corporation is Brilliant Interactive, Inc. The Original Certificate of Incorporation of B.I.I. Holdings, Inc. was filed with the Secretary of State of the State of Delaware on July 31, 1996. A Certificate of Amendment of Certificate of Incorporation changing the name of the Corporation to Brilliant Interactive, Inc. was filed with the Secretary of State of the State of Delaware on August 6, 1996. B. This amended and restated Certificate of Incorporation, which restates and integrates and does further amend the provisions of the Certificate of Incorporation of the Corporation, has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware by unanimous written consent of the stockholders given in accordance with Section 228 of the General Corporation Law of the State of Delaware. C. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: I. The name of the Corporation is Brilliant Digital Entertainment, Inc. II. The address of the registered office of the Corporation in the State of Delaware is 9 East Loockerman Street, City of Dover, County of Kent, Delaware l9901. The name of its registered agent at such address is National Corporate Research, Ltd. III. The purpose of this Corporation is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of the State of Delaware (the "Delaware Law"). Page 1 IV. This Corporation is authorized to issue two classes of shares, designated, respectively, "Preferred Stock" and "Common Stock." Each class of stock shall have a par value of $.001 per share. The number of shares of Preferred Stock authorized to be issued is 1,000,000 and the number of shares of Common Stock authorized to be issued is 30,000,000. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. Except and to the extent designated with respect to the Preferred Stock, all rights to vote and all voting power shall be vested in the Common Stock and the holders thereof shall be entitled at all elections of directors to one (1) vote per share. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called only by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President of the Corporation. VI. The directors of the Corporation shall be divided into three classes, designated Class I, Class II and Class III. The term of the initial Class I directors shall terminate on the date of the 1997 annual meeting of stockholders; the term of the Class II directors shall terminate on the date of the 1998 annual meeting of stockholders and the term of the Class III directors shall terminate on the date of the 1999 annual meeting of stockholders. At each annual meeting of stockholders beginning in 1997, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as reasonably possible, and any additional directors of any class elected to fill a vacancy resulting form an increase in such class shall hold for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent directors. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors, however resulting, shall be filled only by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director and not by the stockholders. Any director elected to fill a vacancy shall hold Page 2 office for a term that shall coincide with the terms of the class to which such director shall have been elected. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time, for cause only, by the affirmative vote of the holders of a majority of the outstanding shares of the Corporation then entitled to vote generally in the election of the directors, considered for purposes of this Article VI as one class. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Amended and Restated Certificate of Incorporation or the resolution or resolutions adopted by the Board of Directors pursuant to the second paragraph of Article IV applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article VI unless expressly provided by such terms. VII. Elections of directors at an annual or special meeting of stockholders need not be by written ballot unless the Bylaws of the Corporation shall otherwise provide. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of the stockholders at an annual or special meeting duly noticed and called, as provided in the Bylaws of the Corporation, and may not be taken by written consent of the stockholders pursuant to the Delaware Law; provided, however, if the Corporation has only one stockholder, then any action required or permitted to be taken at any annual or special meeting of stockholders may be taken by the written consent of such stockholder. VIII. The officers of the Corporation shall be chosen in such a manner, shall hold their offices for such terms and shall carry out such duties as are determined solely by the Board of Directors, subject to the right of the Board of Directors to remove any officer or officers at any time with or without cause. IX. The Corporation shall indemnify to the fullest extent authorized or permitted by law (as now or hereafter in effect) any person made, or threatened to be made, a defendant or witness to any action, suit or proceeding (whether civil or criminal or otherwise) by reason of the fact that she or he, her or his testator or intestate, is or was a director, officer, employee or agent of the Corporation or by reason of the fact that any person is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or enterprise. Nothing contained herein shall affect any rights to indemnification to which employees other than directors and officers may be entitled by Page 3 law. No amendment or repeal of this paragraph of Article IX shall apply to or have any effect on any right to indemnification provided hereunder with respect to any acts or omissions occurring prior to such amendment or repeal. No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware Law, or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this paragraph of Article IX shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. In furtherance and not in limitation of the powers conferred by statute: (i) the Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer, employee or agent of the Corporation, or is serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify against such liability under the provisions of law; and (ii) the Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contract providing indemnification to the full extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing to ensure the payment of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere. X. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the corporation shall have the sole authority to adopt, repeal, alter, amend or rescind the Bylaws of the Corporation. XI. The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote, but in addition to any vote of the holders of any Page 4 class or series thereof of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 66 2/3 percent of the combined voting power of the outstanding shares of stock of all classes and series thereof of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with (i) the second sentence of Article V, (ii) Article VI, (iii) the second paragraph of Article VII, (iv) Article X or (v) this Article XI. XII. Mark Dyne and Kevin Bermeister, acting in their capacity as officers and directors of the Corporation shall not be required to present to the Corporation corporate opportunities which such director wishes to present to another company with which such director is affiliated; provided, however, that both Mark Dyne and Kevin Bermeister are required to present to the Corporation any corporate opportunities for the development of any type of interactive digital entertainment with the exception of opportunities for participation in the development by others of interactive digital entertainment where publishing and/or distribution rights for the product to be developed are offered to Messrs Dyne and/or Bermeister solely for Australia, New Zealand (and surrounding territories), and/or Southern Africa. For purposes hereof, "development" does not include passive financing of the development of products by third parties not affiliated with Mr. Dyne or Bermeister, as the case may be. IN WITNESS WHEREOF, the undersigned has executed this Amended and Restated Certificate of Incorporation this 11th day of September, 1996. BRILLIANT INTERACTIVE, INC. By: /S/ DIANA MARANON ------------------------------- Diana Maranon Its: Secretary Page 5 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BRILLIANT DIGITAL ENTERTAINMENT, INC. The undersigned, Kevin Bermeister, the President and Chief Executive Officer, of Brilliant Digital Entertainment, Inc. (the "Corporation"), a corporation organized and existing by virtue of the General Corporation Law (the "GCL") of the State of Delaware, does hereby certify pursuant to Section 103 of the GCL as to the following: 1. The name of the Corporation is Brilliant Digital Entertainment, Inc. The original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on July 31, 1996. 2. The Board of Directors of the Corporation, pursuant to Section 242 of the GCL, adopted the following resolution: RESOLVED, that the first paragraph of ARTICLE IV, of the Certificate of Incorporation is amended to read in its entirety as follows: "This Corporation is authorized to issue two classes of shares, designated, respectively, "Preferred Stock" and "Common Stock." Each class of stock shall have a par value of $0.001 per share. The number of shares of Preferred Stock authorized to be issued is 1,000,000 and the number of shares of Common Stock authorized to be issued is 150,000,000." 3. The majority of the Stockholders of the Corporation, pursuant to Section 228 of the GCL, ratified the Amendment as set forth above. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment of Amended and Restated Certificate of Incorporation as of the 20th day of February, 2002. /S/ KEVIN BERMEISTER ----------------------------------- Kevin Bermeister, President and Chief Executive Officer EX-10 4 exhibit_10-40.txt EXHIBIT 10.40 BRILLIANT DIGITAL ENTERTAINMENT, INC. TECHNOLOGY BUNDLE LICENSE AGREEMENT This agreement ("AGREEMENT") is entered into as of the 2nd day of October, 2001 ("EFFECTIVE DATE"), by and between Brilliant Digital Entertainment, Inc., a Delaware corporation, located at 6355 Topanga Canyon Blvd., Suite 120, Woodland Hills, California 91367 ("BDE"), and Consumer Empowerment B.V., a company organized under the laws of The Netherlands and located at Stadionweg 70, 1077SP Amsterdam, The Netherlands ("LICENSEE"). In consideration of the mutual terms, conditions and covenants hereinafter set forth, BDE and Licensee agree as follows: 1. LICENSES a) Subject to the terms and conditions of this Agreement, BDE hereby grants the following to Licensee during the term of this Agreement: (i) A non-exclusive, non-transferable, worldwide license to use, and sublicense to Licensee's end users, BDE's b3d projector and required technology ("DIGITAL PROJECTOR") as a required install component in all current and future versions and releases of Licensee's peer to peer ("P2P") technology platform currently available on the Internet known as the KaZaa Media Desktop and built upon the FastTrack P2P technology ("KaZaa"). (ii) Provided Licensee is distributing the Digital Projector in accordance with Section 2 below, a non-exclusive, non-transferable, worldwide license to use, and sublicense to Licensee's end users, BDE's Brilliant Installer Technology object code version ("BIT") that can be customized for integration into KaZaa. (iii) Upon execution of this Agreement by an authorized signatory of both parties, BDE shall grant to KaZaa one hundred fifty thousand (150,000) warrants to purchase BDE common stock ("BDE Warrants"). The BDE Warrants shall be held in escrow according to the following time schedule: (i) *** shall be held in escrow for *** and shall be assigned to KaZaa, subject to *** and (ii) *** shall be assigned to KaZaa subsequent to ***. All BDE Warrants shall be issued in the form of Attachment "A" attached hereto and incorporated herein by reference (the "Form of Warrant"), will have an exercise price per share equal to the ten (10) day volume weighed averaging price of BDE's common stock for the ten trading days immediately prior to the Effective Date and must be exercised no later than thirty-six (36) months from the Effective Date. Said Warrants shall have registration rights as provided to other holders of warrants in BDE of comparable nature. - ------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. Page 1 of 6 b) Other than as provided in this Agreement, BDE shall retain all right, title and interest in and to the BIT and Digital Projector (including, but not limited to, ownership of all copyrights and other intellectual property rights therein). Licensee acknowledges and agrees that no ownership interest in the BIT and Digital Projector are transferred. Neither this Agreement, nor any action, omission or statement by BDE or Licensee, nor Licensee's use of the BIT and Digital Projector shall in any way confer or imply a grant, other than as provided in this Agreement, of rights, title or interest thereto or to any element or portion thereof, including without limitation, copyrights, trademarks, trade names, service marks or goodwill, ownership of which shall at all times remain solely and exclusively with BDE. Licensee shall not modify, reverse engineer or decompile the BIT and Digital Projector. Licensee further agrees to retain all copyright and trademark notices on the BIT and Digital Projector and to take other steps necessary to protect BDE's intellectual property rights. 2. LICENSEE'S OBLIGATIONS Licensee shall, for the Term of this Agreement, bundle the Digital Projector as a required install component in all current and future versions and releases and downloads of KaZaa or any successors thereof distributed by Licensee, commencing with all downloads made on October 16, 2001. The Digital Projector will always be bundled in a manner that renders it fully operational (to the same extent as when downloaded from BDE's site) to all users. In the event the Digital Projector technology causes a technical conflict with KaZaa and such technical conflict cannot immediately be corrected, KaZaa may immediately remove the Digital Projector from all required installations as provided for in this Section 2, until such time as BDE corrects this conflict. Upon successful resolution of said technical conflict, Licensee's obligation under this Section 2 shall resume to be in full force and effect, without prejudice to Licensee's right to terminate this Agreement pursuant to Section 4 hereunder. 3. CONSIDERATION As consideration for KaZaa's bundling BDE's proprietary Digital Projector with the KaZaa browser, BDE shall pay KaZaa ***. 4. TERM AND TERMINATION a.) The term ("TERM") of this Agreement shall be for one (1) year commencing on the Effective Date upon execution of this Agreement by authorized signatories of both parties. The Term shall automatically renew for two additional terms of one (1) year each ("ADDITIONAL TERMS"), provided that neither Party gives written notice of non-renewal at least ninety (90) days prior to end of either Additional Term. b.) Either party shall have the right to immediately terminate this Agreement in the event of any of the following: i. Upon written notice of termination by one party, effective immediately, if the other party commits a material breach, which is not cured within sixty (60) days of its receipt of written notice from the non-breaching party. - ------------------- *** Terms represented by this symbol are considered confidential. These confidential terms have been omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. Page 2 of 6 ii. Upon written notice of termination, effective immediately, by the non-defaulting party; if either party has breached its obligations of confidentiality hereunder. iii. Upon written notice of termination, effective immediately, if one party's actions materially adversely affects the other party and such adverse actions are not cured within sixty (60) days of written notice. c.) Notwithstanding the foregoing, in the event Licensee materially breaches any of BDE's material intellectual property rights in connection with this Agreement, BDE shall have the right to terminate this Agreement immediately. . d.) The provisions of this Section 4 (Term and Termination), Section 5 (Confidentiality), Section 6 (Representation, Warranties and Indemnifications), Section 7 (Limitation of Liability) and Section 8 (Remedies) shall survive any termination or expiration of this Agreement. 5. CONFIDENTIALITY a.) The terms of this Agreement and information and data that one party (the "Receiving Party") has received or will receive from the other party (the "Disclosing Party") about the Disclosing Party's (or its suppliers') business activities that are proprietary and confidential, which shall include all business, financial, technical and other information of a party marked or designated by such party as "confidential" or "proprietary," or information which, by the nature of the circumstances surrounding the disclosure, should be reasonably understood to be confidential or proprietary to the Disclosing Party and any reference manuals compiled or provided hereunder (collectively, "CONFIDENTIAL INFORMATION"), ought in good faith to be treated as confidential. The Receiving Party agrees that for the Term and for two (2) years thereafter, the Receiving Party will not disclose the Confidential Information to any third party, nor use the Confidential Information for any purpose not permitted under this Agreement. The nondisclosure obligations set forth in this Section shall not apply to information that the Receiving Party can document (i) is generally available to the public (other than through breach of this Agreement), (ii) is furnished by the Disclosing Party to others without restrictions similar to those imposed by this Agreement, (iii) is independently developed by employees or agents of the Receiving Party who can be shown to have had no access to the information or (iv) was already lawfully in the Receiving Party's possession at the time of receipt of the information from the Disclosing Party. b.) Notwithstanding the foregoing, each party may disclose Confidential Information (i) to the extent required by a court of competent jurisdiction or other governmental authority or otherwise as required by law or (ii) on a "need-to-know" basis under an obligation of confidentiality to its legal counsel, accountants, banks and other financing sources and their advisors. 6. REPRESENTATIONS, WARRANTIES AND INDEMNITIFICATIONS a) BY BDE. BDE represents and warrants all of the following: (i) BDE is authorized to enter into this Agreement; (ii) BDE has the right to grant the rights granted to Licensee hereunder; (iii) the BIT and Digital Projector, and the normal use thereof, shall not violate any Page 3 of 6 third party rights, including without limitation, intellectual party rights, rights of privacy, publicity, personal or proprietary rights, or other common law or statutory rights; (iv) BDE shall not knowingly violate requirements related to data protection requirements in force anywhere in the world and shall obtain all consents necessary to process personal data (including sensitive data); and (v) the BIT and Digital Projector are free from any viruses, "time bombs", disabling programming codes or instructions, copy protection mechanisms, or other such items that may interfere with or adversely affect the use of them. In furtherance of the foregoing, BDE shall indemnify, defend and hold harmless Licensee, its affiliates, officers, directors, employees, consultants and agents from and against any and all claims, actions, losses, damages, liabilities, costs and expenses (including reasonable outside attorneys' fees) resulting from or arising out of or in connection with any breach of the foregoing representations and warranties or any breach of this Agreement or any portion thereof. Licensee shall promptly notify BDE of all claims and proceedings related thereto of which Licensee becomes aware. b) BY LICENSEE. Licensee represents and warrants all of the following: (i) Licensee is authorized to enter into this Agreement; (ii) Licensee's use of the BIT and Digital Projector shall not defame any person or entity or infringe the rights of any third party, including, without limitation, any trade name, trademark, copyright or other intellectual property right and shall not invade or violate any right of privacy, publicity, personal or proprietary right, or other common law or statutory right; (iii) Licensee shall not alter, reverse engineer or decompile the BIT and Digital Projector; (iv) Licensee shall not use the BIT and Digital Projector, except as specifically permitted herein; and (v) Licensee shall not attack title to or any rights of BDE in and to the BIT and Digital Projector or attack the validity of this Agreement. In furtherance of the foregoing, Licensee shall indemnify, defend and hold harmless BDE, its affiliates, officers, directors, employees, consultants and agents from and against any and all claims, actions, losses, damages, liabilities, costs and expenses (including reasonable outside attorneys' fees) resulting from or arising out of or in connection with any breach of the foregoing representations and warranties or any breach of this Agreement or any portion thereof. BDE shall promptly notify Licensee of all claims and proceedings related thereto of which BDE becomes aware. c) THE BIT AND DIGITAL PROJECTOR ARE LICENSED "AS IS" AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7. LIMITATION OF LIABILITY IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 8. REMEDIES Licensee's failure to comply with any material condition, term or obligation herein or any material breach of this Agreement shall render the licenses granted herein null and void. In the case of any material breach by Licensee, BDE shall have the right to pursue all appropriate Page 4 of 6 remedies at law or in equity therefor. Any breach of Licensee's obligations regarding BDE's trademarks, service marks, trade names, copyrights or other intellectual property rights shall entitle BDE to seek equitable relief in addition to its other available legal remedies in a court of competent jurisdiction. Licensee confirms that BDE's forbearance to enforce any right or remedy following any breach shall not be a waiver of BDE's right to elect or enforce the same right or remedy for later breaches. 9. GENERAL a) PUBLICITY. Neither of the parties hereto shall issue a press release or public announcement or otherwise make any disclosure concerning this Agreement or the terms hereof, without prior written approval by the other party. Notwithstanding the foregoing, either party may announce the existence of relationship between Licensee and BDE. b) ASSIGNMENT. Neither party may assign this Agreement, in whole or in part, without the other party's written consent (which will not be unreasonably withheld), except that either party may assign this Agreement (i) in connection with a sale of all or substantially all of such party's assets, (ii) to a subsidiary or affiliate, or (iii) as part of a merger, consolidation or reorganization. It shall be noted that, whenever in this Agreement one of the parties hereto is named or referred to, the heirs, legal representatives, successors, successors-in-title and assigns of such parties shall be included, and all covenants and agreements contained in this Agreement by or on behalf of BDE or KaZaa shall be binding upon and inure to the benefit of their respective heirs, legal representatives, successors-in-title and assigns, whether so expressed or not. c) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of California, notwithstanding the actual state or country of residence or incorporation of Licensee. The parties hereto agree that the exclusive forum for the resolution of disputes hereunder shall be the State or Federal Courts located in Los Angeles County, California and waive any objection thereto on the basis of personal jurisdiction or venue. d) ATTORNEYS' FEES. If any action, suit or other proceeding is instituted concerning or arising out of this Agreement, the prevailing party shall recover all of such party's reasonable outside attorneys' fees and costs incurred in each and every such action, suit or other proceeding, including any and all appeals or petitions therefrom. e) NOTICE. All notices required to be given hereunder shall be deemed to have been given: (i) seven (7) days after deposit in the mail, postage prepaid for first-class mail, return receipt requested; (ii) three (3) days after deposit with Federal Express or another nationally recognized overnight delivery service, delivery charges prepaid; or (iii) upon the date of receipt of written confirmation that the notice was transmitted by electronic facsimile device ("Fax"), as set forth below: If to BDE: Brilliant Digital Entertainment, Inc. 6355 Topanga Canyon Blvd., Suite 120 Woodland Hills, CA 91367 USA Attn: Kevin Bermeister, Fax: +1 (818) 615-0995 Page 5 of 6 If to Licensee: Consumer Empowerment B.V. Postbus 14707 1001LE Amsterdam, The Netherlands Attn: Niklas Zennstrom Fax: +31-20-524-1348 f) NO AGENCY. The parties are independent contractors and will have no power or authority to assume or create any obligation or responsibility on behalf of each other. This Agreement will not be construed to create or imply any partnership, agency or joint venture. g) SEVERABILITY. In the event that any of the provisions of this Agreement are held to be unenforceable under any applicable law or be so held by an applicable court decision, the remaining portions of this Agreement will remain in full force and effect. h) MODIFICATIONS AND WAIVERS. Unless otherwise specified, any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement and any consent to any departure by the parties from the terms of this Agreement, shall be effective only if it is made or given in writing and signed by both parties. No failure or delay on the part of either party in exercising any right, power or remedy under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise or the exercise of any other right, power or remedy. i) ENTIRE AGREEMENT. This Agreement is the complete and exclusive agreement between the parties with respect to the subject matter hereof, superseding any prior agreements and communications (both written and oral) regarding such subject matter. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the Effective Date. BRILLIANT DIGITAL ENTERTAINMENT, INC. KAZAA ("LICENSEE") By: /S/ KEVIN BERMEISTER By: /S/ NIKLAS ZENNSTROM --------------------------------- ------------------------------ Name: Kevin Bermeister Name: Niklas Zennstrom ------------------------------- ------------------------------ Title: President and Chief Executive Title: President & CEO Officer ------------------------------ ------------------------------- Page 6 of 6 ATTACHMENT A THE WARRANT EVIDENCED OR CONSTITUTED HEREBY, AND ALL SHARES OF COMMON STOCK ISSUABLE HEREUNDER, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 144. WARRANT TO PURCHASE COMMON STOCK OF BRILLIANT DIGITAL ENTERTAINMENT, INC. NO. __ _____________, 2002 THIS CERTIFIES THAT, for value received, _______________, or its permitted registered assigns ("HOLDER"), is entitled, subject to the terms and conditions of this Warrant, at any time or from time to time after the issuance date of this Warrant (the "EFFECTIVE DATE"), and before 5:00 p.m. Pacific Time on ___________________ (the "EXPIRATION DATE"), to purchase from Brilliant Digital Entertainment, Inc., a Delaware corporation (the "COMPANY"), up to ______________ (______) shares of Common Stock of the Company at a price per share of $____ (the "PURCHASE PRICE"). Both the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein. 1. CERTAIN DEFINITIONS. As used in this Warrant the following terms shall have the following respective meanings: 1.1 "FAIR MARKET VALUE" of a share of Common Stock as of a particular date shall mean: (a) If traded on a securities exchange or the Nasdaq National Market, the Fair Market Value shall be deemed to be the average of the closing prices of the Common Stock of the Company on such exchange or market over the five (5) trading days ending immediately prior to the applicable date of valuation; (b) If traded over-the-counter, the Fair Market Value shall be deemed to be the average of the closing bid and asked quotations averaged over the fifteen (15)-day period ending immediately prior to the applicable date of valuation; and (c) If there is no public market, the Fair Market Value shall be the value thereof, as agreed upon in good faith by the Company and the Holder; provided, however, that if the Company and the Holder cannot agree on such value, such value shall be determined by an independent valuation firm experienced in valuing businesses jointly selected in good faith by the Company and the Holder. Fees and expenses of the valuation firm shall be paid for by the Company. 1.2 "REGISTERED HOLDER" shall mean any Holder in whose name this Warrant is registered upon the books and records maintained by the Company. 1.3 "WARRANT" as used herein, shall include this Warrant and any warrant delivered in substitution or exchange therefor as provided herein. 1.4 "COMMON STOCK" shall mean the Common Stock of the Company and any other securities at any time receivable or issuable upon exercise of this Warrant. 2. EXERCISE OF WARRANT 2.1 PAYMENT. Subject to compliance with the terms and conditions of this Warrant and applicable securities laws, this Warrant may be exercised, in whole or in part at any time or from time to time, on or before the Expiration Date by the delivery (including, without limitation, delivery by facsimile) of the form of Notice of Exercise attached hereto as EXHIBIT 1 (the "NOTICE OF EXERCISE"), duly executed by the Holder, at the principal office of the Company, and as soon as practicable after such date, surrendering (a) this Warrant at the principal office of the Company, and (b) payment in cash (by check) or by wire transfer of an amount equal to the product obtained by multiplying the number of shares of Common Stock being purchased upon such exercise by the then effective Purchase Price (the "EXERCISE AMOUNT"). 2.2 STOCK CERTIFICATES; FRACTIONAL SHARES. As soon as practicable on or after the date of any exercise of this Warrant but in any event within 5 business days after its receipt of the Exercise Amount, the Company shall issue and deliver to the person or persons designated by the Holder a certificate or certificates for the aggregate number of whole shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share equal to such fraction of the current Fair Market Value of one whole share of Common Stock as of such date of exercise. No fractional shares or scrip representing fractional shares shall be issued upon an exercise of this Warrant. 2.3 PARTIAL EXERCISE; EFFECTIVE DATE OF EXERCISE. In case of any partial exercise of this Warrant, the Company shall cancel this Warrant upon surrender hereof and shall execute and deliver a new Warrant of like tenor and date for the balance of the shares of Common Stock purchasable hereunder. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above. The person entitled to receive the shares of Common Stock issuable upon exercise of this Warrant shall be treated for all purposes as the holder of record of such shares as of the close of business on the Page 2 date the Company receives the Notice of Exercise, subject to receipt of the Exercise Amount. 2.4 VESTING. The warrants shall vest fully upon issuance. 3. VALID ISSUANCE: TAXES. All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable. The Company shall not be required to pay any tax or other charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Common Stock in any name other than that of the Registered Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate or security until such tax or other charge has been paid, or it has been established to the Company's reasonable satisfaction that no tax or other charge is due. 4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities or property receivable or issuable upon exercise of this Warrant) and the Purchase Price are subject to adjustment upon occurrence of the following events: 4.1 ADJUSTMENT FOR STOCK SPLITS, STOCK SUBDIVISIONS OR COMBINATIONS OF SHARES. The Purchase Price of this Warrant shall be proportionally decreased and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally increased to reflect any stock split or other subdivision of the Company's Common Stock. The Purchase Price of this Warrant shall be proportionally increased and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally decreased to reflect any reverse stock split, consolidation or combination of the Company's Common Stock. 4.2 ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS OF STOCK OR OTHER SECURITIES OR PROPERTY. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Common Stock (or any shares of stock or other securities at the time issuable upon exercise of the Warrant) payable in (a) securities of the Company (including debt instruments) or (b) assets (excluding cash dividends paid or payable solely out of retained earnings), then, in each such case, the Holder of this Warrant on exercise hereof at any time after the consummation, effective date or record date of such dividend or other distribution, shall receive, in addition to the shares of Common Stock (or such other stock or securities) issuable on such exercise prior to such date, and without the payment of additional consideration therefor, the securities or such other assets of the Company to which such Holder would have been entitled upon such date if such Holder had exercised this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such additional securities or Page 3 other assets distributed with respect to such shares as aforesaid during such period giving effect to all adjustments called for by this SECTION 4. 4.3 RECLASSIFICATION. If the Company, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change, and the Purchase Price therefore shall be appropriately adjusted, all subject to further adjustment as provided in this SECTION 4. No adjustment shall be made pursuant to this SECTION 4.3 upon any conversion or redemption of the Common Stock which is the subject of SECTION 4.5. 4.4 ADJUSTMENT FOR CAPITAL REORGANIZATION, MERGER OR CONSOLIDATION. In case of any capital reorganization of the capital stock of the Company (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or any merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all the assets of the Company then, and in each such case, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the Holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Purchase Price then in effect, the number of shares of stock or other securities or property (including cash) to which the holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this SECTION 4. The foregoing provisions of this SECTION 4.4 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be shall be the value as agreed upon in good faith by the Company and the Holder; provided, however, that if the Company and the Holder cannot agree on such value, such value shall be determined by an independent valuation firm experienced in valuing such property jointly selected in good faith by the Company and the Holder. All Fees and expenses of the valuation firm shall be paid for by the Company. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. Page 4 4.5 CONVERSION OF COMMON STOCK. In case all or any portion of the authorized and outstanding shares of Common Stock of the Company are redeemed or converted or reclassified into other securities or property pursuant to the Company's Certificate of Incorporation or otherwise, or the Common Stock otherwise ceases to exist, then, in such case, the Holder of this Warrant, upon exercise hereof at any time after the date on which the Common Stock is so redeemed or converted, reclassified or ceases to exist (the "TERMINATION DATE"), shall receive, in lieu of the number of shares of Common Stock that would have been issuable upon such exercise immediately prior to the Termination Date, the securities or property that would have been received if this Warrant had been exercised in full and the Common Stock received thereupon had been simultaneously converted immediately prior to the Termination Date, all subject to further adjustment as provided in this Warrant. Additionally, the Purchase Price shall be immediately adjusted such that the aggregate Purchase Price of the maximum number of securities or other property for which this Warrant is exercisable immediately after the Termination Date is equal to the aggregate Purchase Price of the maximum number of shares of Common Stock for which this Warrant was exercisable immediately prior to the Termination Date, all subject to further adjustment as provided herein. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in the Purchase Price, or number or type of shares issuable upon exercise of this Warrant, the Chief Financial Officer or Controller of the Company shall compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of the adjusted Purchase Price. The Company shall promptly send (by facsimile and by either first class mail, postage prepaid or overnight delivery) a copy of each such certificate to the Holder. In addition, if at any time prior to the Expiration Date: 5.1 the Company shall declare any dividend payable in any securities or make any distribution to its stockholders; 5.2 the Company shall offer to its stockholders as a class any additional shares of Common Stock or securities convertible into Common Stock or any right to subscribe to Common Stock or securities convertible or exchangeable into Common Stock; or 5.3 a dissolution or winding up of the Company (other than in connection with a consolidation, merger or sale of all or substantially all of its property, assets and business as an entirety) shall be proposed; then in any one or more of such events, the Company shall give notice in writing of such event to the Holder at least 10 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution or subscription rights, or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or date of the closing of the transfer books, as the case may be. Page 5 6. LOSS OR MUTILATION. Upon receipt of evidence reasonably satisfactory to the Company of the ownership of and the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver in lieu thereof a new Warrant of like tenor as the lost, stolen, destroyed or mutilated Warrant. 7. RESERVATION OF COMMON STOCK. The Company hereby covenants that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant such number of shares of Common Stock or other shares of capital stock of the Company as are from time to time issuable upon exercise of this Warrant and, from time to time, will take all steps necessary to amend its Certificate of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant. All such shares shall be duly authorized, and when issued upon such exercise, shall be validly issued, fully paid and non-assessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights, except encumbrances or restrictions arising under federal or state securities laws. Issuance of this Warrant shall constitute full authority to the Company's Officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 8. TRANSFER AND EXCHANGE. Subject to the terms and conditions of this Warrant and compliance with all applicable securities laws, this Warrant and all rights hereunder may be transferred to any Registered Holder's parent, subsidiary or affiliate, in whole or in part, on the books of the Company maintained for such purpose at the principal office of the Company referred to above, by the Registered Holder hereof in person, or by duly authorized attorney, upon surrender of this Warrant properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any permitted partial transfer, the Company will issue and deliver to the Registered Holder a new Warrant or Warrants with respect to the shares of Common Stock not so transferred. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that when this Warrant shall have been so endorsed, the person in possession of this Warrant may be treated by the Company, and all other persons dealing with this Warrant, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding; provided, however that until a transfer of this Warrant is duly registered on the books of the Company, the Company may treat the Registered Holder hereof as the owner for all purposes. 9. RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof, agrees that, absent an effective registration statement filed with the Securities and Exchange Commission (the "SEC") under the Securities Act covering the disposition or sale of this Warrant or the Common Stock issued or issuable upon exercise hereof, as the case may be, and registration or qualification under applicable state securities laws, such Holder will not sell, transfer, pledge, or hypothecate any or all of this Warrant or such Common Stock, as the case may be, unless either (i) the Company has received an opinion of counsel, in form and substance reasonably satisfactory to the Company, to the effect that such registration is not required in connection with such disposition or (ii) the sale of such securities is made pursuant to SEC Rule 144. Page 6 10. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the Holder hereby represents, warrants and covenants that any shares of stock purchased upon exercise of this Warrant shall be acquired for investment only and not with a view to, or for sale in connection with, any distribution thereof; that the Holder has had such opportunity as such Holder has deemed adequate to obtain from representatives of the Company such information as is necessary to permit the Holder to evaluate the merits and risks of its investment in the Company; that the Holder is able to bear the economic risk of holding such shares as may be acquired pursuant to the exercise of this Warrant for an indefinite period; that the Holder understands that the shares of stock acquired pursuant to the exercise of this Warrant will not be registered under the 1933 Act (unless otherwise required pursuant to exercise by the Holder of the registration rights, if any, granted to the Registered Holder) and will be "restricted securities" within the meaning of Rule 144 under the 1933 Act and that the exemption from registration under Rule 144 will not be available for at least one (1) year from the date of exercise of this Warrant, and even then will not be available unless a public market then exists for the stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and that all stock certificates representing shares of stock issued to the Holder upon exercise of this Warrant or upon conversion of such shares may have affixed thereto a legend substantially in the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. 11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. In the absence of affirmative action by such Holder to purchase Common Stock by exercise of this Warrant or Common Stock upon conversion thereof, no provisions of this Warrant, and no enumeration herein of the rights or privileges of the Holder hereof shall cause such Holder hereof to be a stockholder of the Company for any purpose. 12. NOTICES. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Agreement shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party; (b) when received when sent by facsimile at the address and number set forth below; (c) three Page 7 business days after deposit in the U.S. mail with first class or certified mail receipt requested postage prepaid and addressed to the other party as set forth below; or (d) the next business day after deposit with a national overnight delivery service, postage prepaid, addressed to the parties as set forth below with next-business-day delivery guaranteed, provided that the sending party receives a confirmation of delivery from the delivery service provider. To Holder: To the Company: BRILLIANT DIGITAL ENTERTAINMENT, INC. ____________________________ 6355 Topanga Canyon Blvd., Suite 120 ____________________________ Los Angeles, CA 91367 Attn:_______________________ Attn: Chief Financial Officer Fax Number:_________________ Fax Number: (818) 712-0810 Each person making a communication hereunder by facsimile shall promptly confirm by telephone to the person to whom such communication was addressed each communication made by it by facsimile pursuant hereto. A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this SECTION 12 by giving the other party written notice of the new address in the manner set forth above. 13. HEADINGS. The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof. 14. LAW GOVERNING. This Warrant shall be construed and enforced in accordance with, and governed by, the laws of the State of California. 15. NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Registered Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock issuable upon the exercise of this Warrant above the amount payable therefore upon such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon exercise of this Warrant. 16. SEVERABILITY. If any term, provision, covenant or restriction of this Warrant is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Warrant shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 17. COUNTERPARTS. For the convenience of the parties, any number of counterparts of this Warrant may be executed by the parties hereto and each such executed counterpart shall be, and shall be deemed to be, an original instrument. Page 8 IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the Effective Date. Brilliant Digital Entertainment, Inc. - ------------------------------------ ------------------------------------- By By - ------------------------------------ ------------------------------------- Printed Name Printed Name - ------------------------------------ ------------------------------------- Title Title SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK Page 9 EXHIBIT 1 NOTICE OF EXERCISE (To be executed upon exercise of Warrant) To: Brilliant Digital Entertainment, Inc. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, the securities of Brilliant Digital Entertainment, Inc., as provided for therein, and tenders herewith payment of the exercise price in full in the form of a certified or official bank check in same-day funds or wire transfer in the amount of $____________ for _________ of such securities. Please issue a certificate or certificates for such securities in the name of, and pay any cash for any fractional share to (please print name, address and social security number): Name: ------------------------------------------------------------------- Address: ------------------------------------------------------------------- Signature: ------------------------------------------------------------------- Note: The above signature should correspond exactly with the name on the first page of this Warrant Certificate. If said number of shares shall not be all the shares purchasable under the within Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder rounded up to the next higher whole number of shares. EXHIBIT 2 ASSIGNMENT (To be executed only upon assignment of Warrant Certificate) For value received, the undersigned hereby sells, assigns and transfers unto the parties set forth below all or such portion of the Warrants represented by the within Warrant Certificate set forth below, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company with respect to the number of Warrants set forth below, with full power of substitution in the premises: NAME(S) OF ASSIGNEE(S) ADDRESS # OF WARRANTS - ---------------------- --------------------- ------------------------- And if said number of Warrants shall not be all the Warrants represented by the Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the Warrants registered by said Warrant Certificate. Dated: ------------------------------------------------------------------- Signature: ------------------------------------------------------------------- Notice: The signature to the foregoing Assignment must correspond to the name as written upon the face of this security in every particular, without alteration or any change whatsoever. EX-10 5 exhibit_10-41.txt EXHIBIT 10.41 NOTE AND WARRANT PURCHASE AGREEMENT THIS NOTE AND WARRANT PURCHASE AGREEMENT (this "AGREEMENT"), is made and entered into as of the 10th day of December, 2001, by and between BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation (the "COMPANY"), located at 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, CA 91367, and the purchaser identified on the signature page to this Agreement (the "PURCHASER"), located at the address set forth on the Signature Page to this Agreement. ARTICLE 1 AUTHORIZATION AND SALE OF SECURITIES 1.1 AUTHORIZATION. The Company has authorized the sale and issuance to the Purchaser and others of (i) 10% secured convertible promissory notes due no later than November 10, 2002 in the form attached hereto as EXHIBIT A (the "CONVERTIBLE NOTES"), convertible into Common Stock, par value $.001 per share, of the Company ("COMMON STOCK"), which Convertible Notes are issuable on the Closing Date (as defined below) in an aggregate principal amount not exceeding $750,000, and (ii) warrants expiring May 10, 2004 to purchase Common Stock in the form attached hereto as EXHIBIT B (the "WARRANTS"), each at an exercise price per share equal to 1.125 times the lesser of (i) $0.20 or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days during the period commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002, which Warrants are issuable no later than the Closing Date. The shares of capital stock issuable upon conversion of the Convertible Notes are referred to as the "CONVERSION SHARES." The shares of capital stock issuable upon exercise of the Warrants are referred to as the "WARRANT SHARES." The Convertible Notes, the Warrants, the Conversion Shares and the Warrant Shares are collectively referred to as the "SECURITIES." 1.2 AGREEMENT TO PURCHASE AND SELL CONVERTIBLE NOTES. The Company agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company, a Convertible Note in the principal amount set forth on the Signature Page to this Agreement (the "COMMITTED AMOUNT") on the terms and conditions set forth herein. Additionally, in further consideration of the Purchaser's purchase of the Convertible Note hereunder, the Company agrees to issue to the Purchaser, and the Purchaser agrees to accept from the Company, a Warrant initially exercisable for a number of Warrant Shares equal to two hundred percent (200%) of the Committed Amount (the "WARRANT COVERAGE") at an exercise price equal to 112.5% multiplied by the lesser of (i) $0.20 or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002. The number and type of shares issuable upon exercise of the Warrant is subject to adjustment as set forth in the Warrant. 1.3 CLOSING AND DELIVERY. The purchase and sale of the Convertible Note shall occur at 12:00 p.m., Los Angeles time, on December 19, 2001, or at such other time on or before December 31, 2001 as is mutually agreed upon by the Company and the Agent (as defined below) on behalf of himself and all purchasers of Convertible Notes. Such purchase and sale is referred to herein as the "CLOSING," and the date of the Closing is referred to herein as the "CLOSING DATE." The Closing shall be held at the offices of the Company first set forth above. At the Closing, the Company will deliver to Purchaser the Convertible Note being purchased at such Closing and the Purchaser shall deliver to the Company by check or wire the principal amount being advanced against such Convertible Note at the Closing, as set forth in the Convertible Note. At the Closing, the Company shall also deliver or cause to be delivered to the Purchaser a Warrant and a fully executed copy of the December Security Agreement, the December Guaranty and the Investor Rights Agreement(each as defined below). 1.4 NATURE OF OFFERING. The investment in the Securities is being made in reliance upon the provisions of Section 4(2) ("SECTION 4(2)") of the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and Regulation D ("REGULATION D") and the other rules and regulations promulgated under the Securities Act and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to the investment to be made hereunder. 1.5 SECURITY; GUARANTY: INVESTORS RIGHTS. The Company's obligations under the Convertible Note will be secured by the collateral set forth in that certain Security and Pledge Agreement (the "DECEMBER SECURITY AGREEMENT") dated as of the Closing Date by and among the Company, the subsidiaries of the Company named therein and Harris Toibb ("TOIBB") as agent for himself and the other purchasers of the Convertible Notes ("AGENT"), in the form attached hereto as EXHIBIT C, and guaranteed pursuant to the Guaranty dated as of the Closing Date (the "DECEMBER GUARANTY") made by the Guarantors (as defined in the December Guaranty) in favor of Toibb as Agent for himself and the other purchasers of the Convertible Notes, in the form attached hereto as EXHIBIT D. The parties hereto, along with certain other entities or individuals, are entering into an Investor Rights Agreement dated the Closing Date (the "INVESTOR RIGHTS AGREEMENT"). ARTICLE 2 CONVERSION 2.1 OPTIONAL CONVERSION. From and after the Closing Date, the Purchaser shall have the right, at its option, by giving written notice to the Company at its principal office at any time prior to the full repayment of the Convertible Note, to convert in whole or in part the outstanding principal amount of the Convertible Note and all accrued interest thereon into a number of Conversion Shares equal to the quotient obtained by dividing the outstanding principal amount of the Convertible Note and all accrued interest thereon at a price per share equal to the lesser of (i) $0.20 (the "FIXED CONVERSION PRICE") or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002 (subject to appropriate adjustment for stock splits, stock dividends, combinations, recapitalizations and the like) ((i) and (ii) above are collectively referred to as the "CONVERSION PRICE"). 2.2 ISSUANCE OF ADDITIONAL STOCK BELOW THE FIXED CONVERSION PRICE. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Conversion Price in effect immediately prior to the issuance of such Page 2 Additional Stock, the Fixed Conversion Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Conversion Price of the shares subject to conversion shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 2.2, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding as of December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001. 2.3 AUTHORIZED SHARES. At all times from and after the Closing Date, the Company shall maintain or, if necessary, shall repurchase, a sufficient number of authorized shares of Common Stock reserved for issuance in a timely manner upon conversion or exercise of the Convertible Note, the Warrants, the Prior Notes and the Prior Warrants (as defined below) in accordance with the terms hereof and thereof, PROVIDED, HOWEVER, that to the extent that an insufficient number of shares of Common Stock are currently reserved for issuance to enable the Company to satisfy this SECTION 2.3, the Company shall have until February 28, 2002 to meet the requirements of this covenant. 2.4 ISSUANCE OF SHARES ON CONVERSION. As soon as practicable after any conversion of the Convertible Note, the Company, at its expense, will cause to be issued in the name of and delivered to the holder of the Convertible Note, a certificate or certificates for the number of fully paid and non-assessable Conversion Shares to which that holder shall be entitled on such conversion. No fractional shares will be issued on conversion of the Convertible Note. If on conversion of the Convertible Note a fraction of a share results, the Company will pay the cash value of that fractional share, with the value of any such full share equal to the Conversion Price. 2.5 LIMITATIONS ON CONVERSION. Notwithstanding anything to the contrary contained in this Agreement and the Convertible Note, a Convertible Note may not be converted, in whole or in part, into Conversion Shares unless and until any then-applicable requirements of all federal and state securities laws and regulatory agencies charged with enforcing securities laws shall have been fully complied with to the satisfaction of the Company and its counsel; PROVIDED, HOWEVER, that the Page 3 Company shall at all times use its best efforts to comply with such requirements. The Company may, in its reasonable discretion, condition any conversion of the Convertible Note upon the holder's delivery to the Company of a written agreement, in form and substance satisfactory to the Company, whereby the holder makes, at the time of conversion, such representations and warranties to and for the benefit of the Company as are comparable to the representations and warranties of the Purchaser set forth in SECTION 3.2(d) below as and to the extent applicable to the issuance of the Conversion Shares upon conversion of the Convertible Note. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 BY THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows: (a) STATUS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power to own and operate its properties and assets, to carry on its business as now conducted and to enter into and to perform its obligations under this Agreement, the Convertible Note, the Warrant, the December Security Agreement, the December Guaranty and the Investor Rights Agreement (collectively, the "TRANSACTION DOCUMENTS"). The Company is duly qualified to do business and is in good standing in California and in each other state in which a failure to be so qualified would have a material adverse effect on the Company's financial condition or its ability to own and operate its properties and assets and conduct its business in the manner now conducted. (b) AUTHORIZATION. The Company has full legal right, power and authority to conduct its business and affairs. The Company has full legal right, power and authority to enter into and perform its obligations under the Transaction Documents, including the issuance of the Securities. The execution and delivery of this Agreement, the borrowing hereunder, the execution and delivery of the other Transaction Documents, and the performance by the Company of its obligations thereunder, including the issuance of the Securities, are within the corporate powers of the Company and have been duly authorized by all necessary corporate action properly taken and the Company has received all necessary governmental approvals, if any, that are required. The officer(s) executing this Agreement and all of the other Transaction Documents are duly authorized to act on behalf of the Company. (c) VALIDITY AND BINDING EFFECT. This Agreement and the other Transaction Documents are the legal, valid and binding obligations of the Company and its subsidiaries, enforceable in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. (d) VALIDITY AND BINDING EFFECT OF PRIOR TRANSACTION DOCUMENTS. The three Note and Warrant Purchase Agreements, dated April, 2001, executed by the Company in favor of the purchasers named therein, as amended (the "Prior Purchase Agreements"), the three Secured Convertible Promissory Notes dated May 23, 2001, executed and delivered in connection with the Prior Purchase Agreements (the "Prior Notes"), the Warrants To Purchase Common Stock of Brilliant Digital Entertainment, Inc. issued in May, 2001 in connection with the Prior Purchase Agreements (the "Prior Warrants"), the Security and Pledge Agreement, dated May 23, 2001, Page 4 executed by the Company and its subsidiaries named therein in favor of Harris Toibb (the "May Security Agreement"), and the Guaranty, dated as May 23, 2001, executed in favor of Harris Toibb by the parties named therein (the "May Guaranty") are, and after they are amended on the Closing Date, shall continue to be, the legal, valid and binding obligations of the Company and its subsidiaries, enforceable in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. The Prior Purchase Agreements, the Prior Notes, the Prior Warrants, the May Security Agreement and the May Guaranty are collectively referred to herein as the "Prior Transaction Documents". (e) NO CONFLICTS. Consummation of the transactions contemplated hereby and the performance of the obligations of the Company under and by virtue of the Transaction Documents, including the issuance of the Securities, do not conflict with, and will not result in any breach of, or constitute a default or trigger a lien under, any mortgage, security deed or agreement, deed of trust, lease, bank loan or credit agreement, corporate charter or bylaws, agreement or certificate of limited partnership, partnership agreement, license, franchise or any other instrument or agreement to which the Company is a party or by which the Company or its respective properties may be bound or affected or to which the Company has not obtained an effective waiver. (f) EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject to the accuracy of the Purchaser's representations in SECTION 3.2(d), (e), (g) and (h), the sale of the Securities will not require registration under the Securities Act and/or any applicable state securities law. The Conversion Shares and the Warrant Shares issuable by the Company upon conversion of the Convertible Note and exercise of the Warrant, respectively, shall, if and when the Convertible Note is converted and the Warrant is exercised in accordance with their respective terms, be duly and validly issued, fully-paid and non-assessable shares of Common Stock, free of all liens, claims, encumbrances, preemptive rights, rights of first refusal and restrictions on transfer, except as imposed by applicable securities laws. (g) SEC DOCUMENTS. The Company has made available to the Purchaser true and complete copies of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000 and each report, proxy statement or registration statement filed by the Company with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") or the Securities Act since the filing of such Annual Report through the date hereof (collectively such documents are referred to as the "SEC DOCUMENTS"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act, and rules and regulations of the SEC promulgated thereunder and the SEC Documents did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents complied in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto at the time of such inclusion. Such financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof Page 5 and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited interim statements, to normal year-end audit adjustments). Neither the Company nor any of its subsidiaries has any material indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due) that would have been required to be reflected in, reserved against or otherwise described in the financial statements or in the notes thereto in accordance with GAAP, which was not fully reflected in, reserved against or otherwise described in the financial statements or the notes thereto included in the SEC Documents or was not incurred in the ordinary course of business consistent with the Company's past practices since the last date of such financial statements. (h) NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS TRANSACTION. Neither the Company nor any of its affiliates nor any person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the Securities or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Securities under the Securities Act; PROVIDED, that the Company makes no representation or warranty with respect to the Purchaser or any other purchaser of the Convertible Notes. (i) NO MATERIAL ADVERSE EFFECT. Since September 30, 2001, no Material Adverse Effect (as defined) has occurred or exists with respect to the Company, except as disclosed in the SEC Documents. For purposes hereof, "MATERIAL ADVERSE EFFECT" shall mean any effect on the business, operations, properties, prospects, material agreements or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under the Transaction Documents in any material respect. (j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September 30, 2001, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents. (k) NO INTEGRATED OFFERING. Other than as described in the SEC Documents or pursuant to an effective registration statement under the Securities Act, or pursuant to the issuance or exercise of employee stock options, or pursuant to its discussion with the Purchaser or any other purchaser of the Convertible Notes in connection with the transactions contemplated hereby or by the transactions contemplated by the Prior Purchase Agreements or other purchasers represented by the Agent in connection with such transaction, the Company has not issued, offered or sold the Convertible Notes or any shares of Common Stock (including for this purpose any securities of the same or a similar class as the Convertible Notes or Common Stock or any securities convertible into, exchangeable or exercisable for the Convertible Notes or Common Stock or any such other securities) within the six-month period next preceding the date hereof in a manner that would make unavailable the exemption from Securities Act registration being relied upon by the Company for the offer and sale to the Purchaser and the other purchasers of the Securities as contemplated by this Agreement, and the Company shall not permit any of its directors, officers or affiliates directly or indirectly to take any action (including, without limitation, any offering or sale to any person or entity of the Convertible Notes or shares of Common Stock), so as to make unavailable the Page 6 exemption from Securities Act registration being relied upon by the Company for the offer and sale to the Purchaser and the other purchasers of the Securities as contemplated by this Agreement. (l) LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the SEC Documents, there are no lawsuits or proceedings pending or, to the knowledge of the Company, threatened, against the Company, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which could reasonably be expected to either have a Material Adverse Effect or result in a judgment against the Company in an amount in excess of $75,000. Except as set forth in the SEC Documents, no judgment, order, writ, injunction or decree or award has been issued by or, to the knowledge of the Company, requested of any court, arbitrator or governmental agency which could result in a Material Adverse Effect. (m) NO MISLEADING OR UNTRUE COMMUNICATION. The Company and, to the knowledge of the Company, any person representing the Company, or any other person selling or offering to sell the Convertible Notes or Warrants in connection with the transaction contemplated by this Agreement, have not made, at any time, any oral communication in connection with the offer or sale of the same which contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (n) SUBSIDIARIES. The Company does not have any subsidiaries except for Brilliant Studios, Inc., a Delaware corporation, B3D, Inc., a Delaware corporation, and Brilliant Interactive Ideas Pty. Limited, an Australian corporation. The Company also owns seventy-five percent (75%) of the outstanding shares of Digital Hip Hop, Inc., a Delaware corporation. (o) VALIDITY OF LIEN. The December Security Agreement is effective to create in favor of the Purchaser, a legal, valid and enforceable security interest in the Collateral (as defined in the December Security Agreement) and proceeds thereof. When financing statements in appropriate form are filed in the Office of the Secretary of State for the State of Delaware, the security interests granted pursuant to the December Security Agreement will constitute legal, valid, perfected and enforceable security interests in all of the Collateral in favor of the Purchaser. (p) SOLVENCY OF THE COMPANY. The Company will be solvent under GAAP following each receipt of an advance under the Convertible Notes. (q) NO DEFAULT. No Event of Default has occurred and is continuing hereunder or under the Convertible Note (r) VALIDITY OF EARLIER LIEN. The liens and security interests granted by the May Security Agreement continue to create a valid and perfected first priority security interest in all of the collateral purported to be covered thereby. 3.2 BY THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows: (a) STATUS. If Purchaser is a corporation, partnership, trust or limited liability company, Purchaser is duly organized, validly existing and in good standing (to the extent applicable) under the laws of the state of its formation, and has the power to own and operate its properties, to Page 7 carry on its business as now conducted and to enter into and to perform its obligations under this Agreement and the other Transaction Documents to which it is a party. (b) AUTHORIZATION. Purchaser has the full legal right, power and authority to enter into and perform its obligations under the Transaction Documents. The execution and delivery of this Agreement, the execution and delivery of each Transaction Document to which the Purchaser is a party, and the performance by the Purchaser of its obligations hereunder and thereunder are within the powers of the Purchaser and have been duly authorized by all necessary action properly taken and the Purchaser has received all necessary governmental approvals, if any, that are required. The person executing this Agreement and all of the other Transaction Documents to which the Purchaser is a party is duly authorized to act on behalf of the Purchaser. (c) VALIDITY AND BINDING EFFECT. This Agreement and the other Transaction Documents are the legal, valid and binding obligations of the Purchaser, enforceable in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. (d) INVESTMENT REPRESENTATIONS. (i) Purchaser has such knowledge and experience in financial and business matters, including investments of the type represented by the Convertible Note and the Warrant and the Common Stock issuable upon conversion of the Convertible Note and exercise of the Warrant, as to be capable of evaluating the merits of investment in the Company and can bear the economic risk of an investment in the Convertible Note and the Warrant and the Common Stock issuable upon conversion of the Convertible Note and exercise of the Warrant; (ii) Purchaser is an "accredited investor" as such term is defined in Rule 501 of Regulation D under the Securities Act; and (iii) Purchaser is acquiring the Convertible Note and the Warrant and, to the extent converted or exercised, as the case may be, will be acquiring the Common Stock issuable upon conversion of the Convertible Note and exercise of the Warrant, for investment purposes only, for its own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof in contravention of the Securities Act or any state securities law, without prejudice, however, to Purchaser's right at all times to sell or otherwise dispose of all or any part of the Securities pursuant to an effective registration statement under the Securities Act and applicable state securities laws, or under an exemption from such registration available under the Securities Act and other applicable state securities laws. (e) TRANSFER RESTRICTIONS. Purchaser acknowledges and agrees that the Convertible Note and the securities issuable upon conversion of the Convertible Note are subject to, and that Purchaser will be bound by, the additional transfer restrictions set forth in Section 6 of the Convertible Note. (f) ABSENCE OF CONFLICTS. The execution and delivery of this Agreement and the other Transaction Documents to which the Purchaser is a party, and the consummation of the transactions contemplated thereby, and compliance with the requirements thereof, will not violate Page 8 any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Purchaser or (a) violate any provision of any indenture, instrument or agreement to which Purchaser is a party or is subject, or by which Purchaser or any of its assets is bound; (b) conflict with or constitute a material default thereunder; (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Purchaser to any third party; or (d) require the approval of any third-party (which has not been obtained) pursuant to any material contract, agreement, instrument, relationship or legal obligation to which Purchaser is subject or to which any of its assets, operations or management may be subject. (g) DISCLOSURE; ACCESS TO INFORMATION. The Purchaser has received all documents, records, books and other publicly available information pertaining to Purchaser's investment in the Company that have been requested by the Purchaser. The Company is subject to the periodic reporting requirements of the Exchange Act, and the Purchaser has reviewed or received copies of all SEC Documents that have been requested by it. (h) MANNER OF SALE. At no time was Purchaser presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. ARTICLE 4 COVENANTS AND AGREEMENTS 4.1 LISTING OF COMMON STOCK. The Company hereby agrees to use its best efforts to maintain the listing of the Common Stock on any of the American Stock Exchange, the New York Stock Exchange, the NASDAQ National Market, or the NASDAQ Small-Cap Market, whichever is at the time the principal trading exchange or market for the Common Stock (the "PRINCIPAL Market"), and as soon as reasonably practicable following the Closing to list the Conversion Shares and the Warrant Shares on the Principal Market. The Company further agrees, if the Company applies to have the Common Stock traded on any other Principal Market, it will include in such application the Conversion Shares and the Warrant Shares. 4.2 ISSUANCE OF CONVERTIBLE NOTE AND WARRANT. The sale of the Convertible Notes and the Warrant and the issuance of the Common Stock upon conversion of the Convertible Note or exercise of the Warrant, as the case may be, shall be made in accordance with the provisions and requirements of Section 4(2) and Regulation D under the Securities Act (with respect to the issuance of the Convertible Notes, the Warrants and the Warrant Shares), Section 3(a)(9) of the Securities Act (with respect to the issuance of the Conversion Shares) and any applicable state securities law. The Company shall make all necessary SEC and "blue sky" filings required to be made by the Company in connection with the sale of the Securities to the Purchaser as required by all applicable laws. 4.3 ESTABLISHMENT OF ESCROW ACCOUNT. Purchaser and the Company agree that ten percent (10%) of all amounts advanced by Purchaser under the Convertible Note will be deposited into an escrow account with Akin, Gump, Strauss, Hauer & Feld, LLP. If the Company does not commit an Event of Default described in SECTIONS 6.1(h) OR (i), the funds in the escrow account shall be released to the Company immediately following the funding of the Equity Investment (as defined in SECTION 6.1(h)). If an Event of Default as described in SECTIONS 6.1(h) OR (i) does occur, then the funds in the escrow account shall be released to the Company, and such funds shall be used for the Page 9 sole purpose of paying the Company's expenses, including legal expenses and any expenses that might be incurred in connection with the Company's filing for bankruptcy protection. 4.4 NOTICE OF TITLE 11 FILING. The Company shall provide to the Purchaser written notice of any decision or corporate action taken by the Company authorizing the filing by the Company of a voluntary petition for relief under Title 11 of the United States Code at least ten (10) days prior to the date selected for such filing. 4.5 WAIVER OF RIGHTS UNDER SECTION 362 OF THE BANKRUPTCY CODE. In the event that the Company files a petition under the United States Bankruptcy Code or under any other similar federal or state law, the Company unconditionally and irrevocably agrees that the Agent, on behalf of the Purchaser, shall be entitled, and the Company hereby unconditionally and irrevocably consents, to relief from the automatic stay so as to allow the Agent to exercise its rights and remedies under the December Security Agreement with respect to the Collateral (as such term is defined in the December Security Agreement), including taking possession of the Collateral, foreclosing on its lien or security interests or otherwise exercising its rights and remedies with respect to the Collateral. In such event, the Company hereby agrees it shall not, in any manner, oppose or otherwise delay any motion filed by the Agent for relief from the automatic stay. 4.6 SALE OF ASSETS. The Company hereby agrees that in the event the Company commences a bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code, the Company shall, at the request of the Buyers (as defined herein), file, within the first twenty (20) days of the commencement of the bankruptcy case a motion under section 363 of the Bankruptcy Code asking the Court to approve the sale of all or substantially all of the assets of the Company and its subsidiaries to Harris Toibb and such other Purchasers (including those under the Prior Transaction Documents) that desire to participate in the sale (collectively, the "BUYERS"), on terms and conditions reasonably acceptable to the Buyers, including the right of the Buyers to credit bid any secured indebtedness owed to them. 4.7 DEBTOR IN POSSESSION FINANCING. The Company hereby agrees that in the event the Company decided to commence a bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code, the Company shall give Harris Toibb and such other Purchasers (including those under the Prior Transaction Documents) that desire to participate in the financing (collectively, the "LENDERS") the right of first refusal (but without any corresponding obligation of the Lenders) with respect to the provision to the Company and its subsidiaries of debtor in possession financing. ARTICLE 5 LEGEND Each certificate representing the Conversion Shares and the Warrant Shares will bear a legend in substantially the following form (the "LEGEND"): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER Page 10 THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. ARTICLE 6 DEFAULT AND REMEDIES 6.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default hereunder: (a) Default in the payment of the principal of or interest on the indebtedness evidenced by the Convertible Note in accordance with the terms of the Convertible Note; (b) A default or event of default shall occur in respect of any of the other Convertible Notes or any other indebtedness of the Company that exceeds, in the aggregate, $75,000 and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (c) The Company shall be liquidated, dissolved, partitioned or terminated, or the charter thereof shall expire or be revoked; (d) The Company (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within thirty (30) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; (e) Failure of the Company to perform any of its obligations, covenants or agreements under this Agreement or any of the other Transaction Documents (other than the payment of the principal of or interest on the indebtedness evidenced by the Convertible Note, which shall be subject to SUBSECTION 6.1(a) above and not this SUBSECTION (e)); (f) A default or event of default shall occur under any of the other Transaction Documents or under the Prior Transaction Documents and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (g) The Purchaser's inability to convert the Convertible Note into Conversion Shares upon written notice to the Company as provided for herein due to the Company's failure to comply with (and not due to the holder's failure to meet all applicable investor suitability Page 11 requirements of) the then-applicable requirements of all federal, state and local securities laws and regulatory agencies charged with enforcing securities laws as provided for in SECTION 2.4 of this Agreement; (h) The Company shall fail to provide the Agent with a copy of a signed letter of intent with an investor who is, and on terms and conditions that are, reasonably satisfactory to the Agent, dated no later than February 28, 2002, pursuant to which such investor agrees to acquire equity in the Company in consideration for an investment of at least three million dollars ($3,000,000) (the "EQUITY INVESTMENT"); (i) The Equity Investment shall fail to fund by April 15, 2002; (j) A default or event of default shall occur in respect of any agreement of the Company that requires the payment by the Company of an amount in excess of $75,000; or (k) Either of the Company's agreements with Consumer Empowerment B.V. (better known as "Kazaa") or StreamCast Networks, Inc. (better known as "Morpheus") shall be terminated or amended in such a way as to result in a Material Adverse Effect. With respect to any Event of Default described above in SUBSECTIONS 6.1(e), (f) and (j) that is capable of being cured and that does not already provide its own cure procedure (a "CURABLE DEFAULT"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if the Company provides notice to the Purchaser of such Curable Default in accordance with the provisions hereof within three (3) business days of the Company learning of such default and such Curable Default is fully cured and/or corrected within fifteen (15) days of the Company's notice thereof to the Purchaser. 6.2 ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of Default described in SUBSECTION 6.1(d), the indebtedness evidenced by the Convertible Note shall be immediately due and payable in full; and upon the occurrence of any other Event of Default described above, the Agent, on behalf of the Purchaser, at any time thereafter may at its option accelerate the maturity of the indebtedness evidenced by the Convertible Note without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidenced by the Convertible Note: (a) The Agent, on behalf of the Purchaser, shall be immediately entitled to exercise any and all rights and remedies possessed by the Purchaser pursuant to the terms of the Convertible Note and all of the other Transaction Documents; and (b) The Agent, on behalf of the Purchaser, shall have any and all other rights and remedies that the Purchaser may now or hereafter possess at law, in equity or by statute. 6.3 REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred upon or reserved to the Purchaser by this Agreement or any of the other Transaction Documents is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder, under any of the other Transaction Documents or now or hereafter existing at law, in equity or by statute. No delay or omission by the Agent to exercise any right, power or remedy accruing upon the occurrence of any Event of Default shall exhaust or impair any Page 12 such right, power or remedy or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every right, power and remedy given by this Agreement and the other Transaction Documents to the Agent or the Purchaser may be exercised from time to time and as often as may be deemed expedient by the Agent or the Purchaser. ARTICLE 7 CONDITIONS TO CLOSING 7.1 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of Purchaser to advance funds under the Convertible Note at the Closing and the other obligations of Purchaser under this Agreement are subject to the satisfaction as of the Closing of the following conditions, any of which may be waived in writing in whole or in part by Purchaser: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true and correct as of the date hereof and as of the Closing Date with the same force and effect as though such representations and warranties had been made at and as of such date (i.e., with respect to a representation that a state of facts exists on or as of the date hereof, it is a condition that such state of facts exists on or as of the Closing Date, and with respect to a representation that a state of facts has or has not changed between a date prior to the date hereof and the date hereof, it is a condition that such state of facts has or has not changed between such prior date and the Closing Date), except as affected by transactions contemplated hereby and except that any such representation or warranty made as of a specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. (b) PERFORMANCE. The Company shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by the Company on or prior to the Closing Date. (c) FAIRNESS OPINION. The Company shall have delivered to the Purchaser an opinion from The Mentor Group stating that the transactions contemplated by this Agreement are fair to the Company and its shareholders. (d) BOARD APPROVAL. The Company shall have delivered to the Purchaser a resolution of a special committee of the Board of Directors of the Company consisting solely of members of the Board of Directors of the Company who are not employees or officers of or lenders to the Company, approving the transactions contemplated by this Agreement. (e) FORCE MAJEURE. None of the following shall have occurred: (i) any suspension of trading, disruption or material adverse change, or any development involving a prospective material adverse change, in or affecting the capital markets generally or any of the corporate bond, interest rate swaps or commercial mortgage backed securities markets in particular; (ii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, NASDAQ, the American Stock Exchange or any setting of minimum prices for trading on any such exchange; (iii) any banking moratorium declared by Federal, New York or Delaware authorities; or (iv) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency, PROVIDED, HOWEVER, that this item (iv) shall not include the current military activities of the United States of America in the country of Afghanistan. Page 13 (f) AMENDMENT OF PRIOR TRANSACTION DOCUMENTS. The Company, and its subsidiaries to the extent they are parties, shall have delivered to the Agent, duly executed amendments to the Prior Purchase Agreements, the Prior Notes, the Prior Warrants and the May Security Agreement, in form and substance satisfactory to the Agent, and a duly executed reaffirmation of the May Guaranty, in form and substance satisfactory to the Agent. (g) DELIVERY OF DOCUMENTS. The Company, and its subsidiaries to the extent they are parties, shall have delivered to the Agent the Convertible Notes, Warrants, December Security Agreement, December Guaranty, UCC-1 financing statements and Investor Rights Agreement, in form and substance satisfactory to the Agent and the Company, duly executed by the Company and its subsidiaries (to the extent they are parties). 7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell the Convertible Note to Purchaser at the Closing and the other obligations of the Company under this Agreement are subject to the satisfaction as of the Closing of the following conditions, any of which may be waived in writing in whole or in part by the Company: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser contained in this Agreement shall be true and correct as of the date hereof and as of the Closing Date with the same force and effect as though such representations and warranties had been made at and as of such date (i.e., with respect to a representation that a state of facts exists on or as of the date hereof, it is a condition that such state of facts exists on or as of the Closing Date, and with respect to a representation that a state of facts has or has not changed between a date prior to the date hereof and the date hereof, it is a condition that such state of facts has or has not changed between such prior date and the Closing Date), except as affected by transactions contemplated hereby and except that any such representation or warranty made as of a specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. (b) PERFORMANCE. The Purchaser shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by the Purchaser on or prior to the Closing Date. ARTICLE 8 CONDITIONS TO ADDITIONAL ADVANCES 8.1 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of Purchaser to make additional advances pursuant to the Schedule of Advances (as defined in the Convertible Note) under the terms of the Convertible Note and the other obligations of Purchaser under this Agreement are subject to the satisfaction as of the time of each such additional advance of the conditions set forth in the Convertible Note and the following conditions, any of which may be waived in writing in whole or in part by the Agent: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true and correct as of the date of such additional advance with the same force and effect as though such representations and warranties had been made at and as of such date (i.e., with respect to a representation that a state of facts exists on or as of the date hereof, it is a condition that such state of facts exists on or as of the date of such additional advance, and with respect to a representation that a state of facts has or has not changed Page 14 between a date prior to the date hereof and the date hereof, it is a condition that such state of facts has or has not changed between such prior date and the date of such additional advance), except as affected by transactions contemplated hereby and except that any such representation or warranty made as of a specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. (b) PERFORMANCE. The Company shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by the Company on or prior to the date of such additional advance. (c) FORCE MAJEURE. None of the following shall have occurred: (i) any suspension of trading, disruption or material adverse change, or any development involving a prospective material adverse change, in or affecting the capital markets generally or any of the corporate bond, interest rate swaps or commercial mortgage backed securities markets in particular; (ii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, NASDAQ, the American Stock Exchange or any setting of minimum prices for trading on any such exchange; (iii) any banking moratorium declared by Federal, New York or Delaware authorities; or (iv) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency, PROVIDED, HOWEVER, that this item (iv) shall not include the current military activities of the United States of America in the country of Afghanistan. ARTICLE 9 TERMINATION 9.1 TERMINATION PRIOR TO CLOSING. Either party (the "TERMINATING PARTY") may (but shall not be obligated to) terminate this Agreement prior to the Closing by giving written notice to the other party if any of the conditions to the Terminating Party's obligations provided for in SECTION 7 have not been satisfied as of the Closing (other than due to the Terminating Party's failure to comply with its obligations under this Agreement) and the Terminating Party has not expressly waived such condition in writing on or before the Closing. 9.2 TERMINATION FOLLOWING THE CLOSING. If the Closing occurs, this Agreement shall remain in full force and effect until the payment in full by the Company of the full principal amount of the Convertible Note and all accrued interest thereon, or conversion of the same into Conversion Shares as provided herein, at which time the Purchaser shall cancel the Convertible Note and deliver it to the Company. ARTICLE 10 SURVIVAL; INDEMNIFICATION 10.1 SURVIVAL. The representations, warranties and covenants made by each of the Company and the Purchaser in this Agreement, the schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Page 15 Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. 10.2 INDEMNITY. (a) BY THE COMPANY. The Company hereby agrees to indemnify and hold harmless the Purchaser, its affiliates and their respective officers, directors, partners and members (collectively, the "PURCHASER INDEMNITEES"), from and against any and all losses, claims, damages, costs, expenses (including, without limitation, reasonable attorney's fees and disbursements and reasonable costs and expenses of expert witnesses and investigation), judgments, penalties, liabilities and deficiencies (collectively, "LOSSES"), and agrees to reimburse the Purchaser Indemnitees for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Purchaser Indemnitees and to the extent arising out of or in connection with: (i) any misrepresentation, omission of fact or breach of any of the Company's representations or warranties contained in this Agreement, the schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or (ii) any failure by the Company to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, the schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement. (b) BY THE PURCHASER. The Purchaser hereby agrees to indemnify and hold harmless the Company, its affiliates and their respective officers, directors, partners and members (collectively, the "COMPANY INDEMNITEES"), from and against any and all Losses, and agrees to reimburse the Company Indemnitees for reasonable all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with: (i) any misrepresentation, omission of fact, or breach of any of the Purchaser's representations or warranties contained in this Agreement, the schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Purchaser pursuant to this Agreement; or (ii) any failure by the Purchaser to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or any instrument, certificate or agreement entered into or delivered by the Purchaser pursuant to this Agreement. 10.3 NOTICE. Promptly after receipt by either party hereto seeking indemnification pursuant to SECTION 10.2 (an "INDEMNIFIED PARTY") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "CLAIM"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to SECTION 10.2 is being sought (the "INDEMNIFYING PARTY") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially Page 16 prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. 10.4 DIRECT CLAIMS. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by any court of competent jurisdiction. ARTICLE 11 APPOINTMENT OF AGENT 11.1 APPOINTMENT. The Purchaser hereby designates Harris Toibb as Agent to act as specified herein and in the other Transaction Documents. The Purchaser hereby irrevocably authorizes the Agent to take such action on its behalf under the provisions of this Agreement, the other Transaction Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its officers, directors, agents or employees. Purchaser acknowledges that the Agent also serves in a similar capacity as agent under the Prior Transaction Documents, and Purchaser agrees that any actions that the Agent takes when acting in that capacity shall not be and shall not be deemed to be a conflict with his responsibilities hereunder. 11.2 NATURE OF DUTIES. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents. Neither the Agent nor Page 17 any of its officers, directors, agents or employees shall be liable for any action taken or omitted by any of them hereunder or under any other Transaction Document or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement or any other Transaction Document a fiduciary relationship in respect of the Purchaser and nothing in this Agreement or any other Transaction Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any other Transaction Document except as expressly set forth herein. The Agent shall promptly transmit to the Purchaser a copy of each notice given to it by the Company pursuant to the terms of this Agreement and shall give notice to the Purchaser of any default or Event of Default of which it becomes aware. 11.3 LACK OF RELIANCE ON THE AGENT. Independently and without reliance upon the Agent, the Purchaser, to the extent it deems appropriate, has made (i) its own independent investigation of the financial condition and affairs of the Company in connection with the making of the loan provided for hereunder and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Company and, except as expressly provided in this Agreement, the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide the Purchaser with any credit or other information with respect thereto, whether coming into its possession before the making of the loan or at any time or times thereafter. The Agent shall not be responsible to the Purchaser for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of this Agreement or any other Transaction Document or the financial condition of the Company or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Transaction Document, or the financial condition of the Company or the existence or possible existence of any default or Event of Default. 11.4 RELIANCE. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any person that the Agent believed to be the proper person, and, with respect to all legal matters pertaining to this Agreement and any other Transaction Document and its duties hereunder and thereunder, upon advice of counsel selected by it. 11.5 INDEMNIFICATION. To the extent the Agent is not reimbursed and indemnified by the Company, the Purchaser will reimburse and indemnify the Agent, in proportion to the principal amount of the amounts owing to the Purchaser and all other purchasers of Convertible Notes, for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Agent in performing its duties hereunder or under any other Transaction Document; PROVIDED, HOWEVER, that the Purchaser shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. 11.6 THE AGENT IN ITS INDIVIDUAL CAPACITY. With respect to its obligation to purchase one or more of the Convertible Notes, the Agent shall have the rights and powers specified in the Page 18 Agent's respective purchase agreement as a purchaser thereof and may exercise the same rights and powers as though it were not performing the duties specified herein. Toibb may lend money to and generally engage in any kind of business with the Company or any affiliate of the Company as if it were not performing the duties specified herein, and may accept fees and other consideration from the Company for services in connection with this Agreement and otherwise without having to account for the same to the Purchaser. 11.7 SUCCESSION. (a) The Agent may resign from the performance of all its functions and duties hereunder and/or under the other Transaction Documents at any time by giving fifteen (15) business days' prior written notice to the Company and the Purchaser. Such resignation shall take effect upon the appointment of a successor Agent pursuant to clauses (b) and (c) below or as otherwise provided below. (b) Upon any such notice of resignation, the holders of at least a majority of the principal amount of the Convertible Notes shall appoint a successor Agent hereunder which shall be a person or entity reasonably acceptable to the Company. (c) If a successor Agent shall not have been so appointed within such fifteen (15) business day period, the Agent, with the consent of the Company, may then appoint a successor Agent which shall serve as Agent hereunder until such time, if any, as the holders of at least a majority of the principal amount of the Convertible Notes appoint a successor Agent as provided above. ARTICLE 12 MISCELLANEOUS 12.1 SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Whenever in this Agreement one of the parties hereto is named or referred to, the heirs, legal representatives, successors, successors-in-title and assigns of such parties shall be included, and all covenants and agreements contained in this Agreement by or on behalf of the Company or by or on behalf of the Purchaser shall bind and inure to the benefit of their respective heirs, legal representatives, successors-in-title and assigns, whether so expressed or not. 12.2 SEVERABILITY. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such 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 and shall be interpreted so as to be effective and valid. 12.3 INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW. Anything in this Agreement, the Convertible Note or any of the other Transaction Documents to the contrary notwithstanding, in no event whatsoever, whether by reason of advancement of proceeds of the Committed Amount, acceleration of the maturity of the unpaid balance of the indebtedness evidenced by the Convertible Note or otherwise, shall the interest and other charges agreed to be paid to the Purchaser for the use of the money advanced or to be advanced hereunder exceed the Page 19 maximum amounts collectible under applicable laws in effect from time to time. It is understood and agreed by the parties that, if for any reason whatsoever the interest or loan charges paid or contracted to be paid by the Company in respect of the indebtedness evidenced by the Convertible Note shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then IPSO FACTO, the obligation to pay such interest and/or loan charges shall be reduced to the maximum amounts collectible under applicable laws in effect from time to time, and any amounts collected by the Purchaser that exceed such maximum amounts shall be applied to the reduction of the principal balance of the indebtedness evidenced by the Convertible Note and/or refunded to the Company so that at no time shall the interest or loan charges paid or payable in respect of the indebtedness evidenced by the Convertible Note exceed the maximum amounts permitted from time to time by applicable law. 12.4 ARTICLE AND SECTION HEADINGS, DEFINED TERMS. Numbered and titled article and section headings and defined terms are for convenience only and shall not be construed as amplifying or limiting any of the provisions of this Agreement. 12.5 NOTICES. Any and all notices, elections or demands permitted or required to be made under this Agreement shall be in writing, signed by the party giving such notice, election or demand and shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), to the other party at the address set forth in the introductory paragraph to this Agreement, or at such other address as may be supplied in writing and of which receipt has been acknowledged in writing. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice, election or demand. 12.6 ENTIRE AGREEMENT. This Agreement and the other written agreements between the Company and the Purchaser represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein; PROVIDED, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the obligations described herein, the provision of this Agreement shall control. 12.7 GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of the State of California, without regard to conflict of law principles thereof. 12.8 AMENDMENT. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; PROVIDED, HOWEVER, that the Agent may, with the consent of the Company, waive or amend, on behalf of all purchasers of Convertible Notes, any provisions hereof or of the Convertible Notes, PROVIDED that any such waiver or amendment which affects any holder in any manner materially and adversely different than any other holder may not be effected without the consent and agreement of the holder so adversely affected. 12.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained herein or in any of the Transaction Documents or made by or furnished on behalf of the Page 20 Company in connection herewith or in any Transaction Documents shall survive the execution and delivery of this Agreement and the other Transaction Documents. 12.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 12.11 CONSTRUCTION AND INTERPRETATION. Should any provision of this Agreement require judicial interpretation, the parties hereto agree that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be more strictly construed against the party that itself or through its agent prepared the same, it being agreed that the Company, the Purchaser and their respective agents have participated in the preparation hereof. 12.12 COSTS AND ATTORNEYS' FEES. If any action, suit, arbitration or other proceeding is instituted to remedy, prevent or obtain relief from a default in the performance by any party to this Agreement of its obligations under this Agreement, the prevailing party (as determined by the court or other fact-finder) will be entitled to recover from the losing party all actual costs incurred in each and every such action, suit, arbitration or other proceeding, including any and all appeals or petitions therefrom, including, without limitation, reasonable attorneys' fees and disbursements. 12.13 AUDIT RIGHTS. Purchaser shall have the continuing right, without hindrance or delay, to inspect, audit, check and make extracts from the Company's books, records, journals, orders, receipts and other accounting records at the office of the Company at the address set forth on the first page of this Agreement at any time during regular business hours upon one business day's advance notice (absent an Event of Default then existing). The Purchaser shall also during any such examination be provided with reasonable access to the officers of the Company. 12.14 WAIVER OF JURY TRIAL. The Purchaser and the Company each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto. 12.15 LEGAL FEES. The Company shall pay all legal fees and expenses of Harris Toibb incurred in connection with the negotiation and documentation of the Transaction Documents and in connection with the negotiation and documentation of amendments to the Prior Transaction Documents. Page 21 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have caused this Agreement to be executed by their duly authorized officers, as of the day and year first above written. COMPANY: BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL -------------------------------- Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer PURCHASER: HARRIS TOIBB --------------------------------------- (Print Name of Purchaser) /S/ HARRIS TOIBB --------------------------------------- (Signature) N/A --------------------------------------- (Title, if applicable) 6355 TOPANGA CANYON BLVD., SUITE 411 WOODLAND HILLS, CALIFORNIA 91367 FACSIMILE: (818) 883-5636 --------------------------------------- (Address) Committed Amount: $350,000 ---------------------- Accepted and Acknowledged by: HARRIS TOIBB, as Agent under Article 11 /S/ HARRIS TOIBB - ------------------------------ Harris Toibb SIGNATURE PAGE TO NOTE AND WARRANT PURCHASE AGREEMENT Page 22 EXHIBIT A SECURED CONVERTIBLE PROMISSORY NOTE (See Exhibit 10.43) EXHIBIT B WARRANT (See Exhibit 10.45) EXHIBIT C SECURITY AND PLEDGE AGREEMENT (See Exhibit 10.53) EXHIBIT D GUARANTY (See Exhibit 10.55) EX-10 6 exhibit_10-42.txt EXHIBIT 10.42 NOTE AND WARRANT PURCHASE AGREEMENT THIS NOTE AND WARRANT PURCHASE AGREEMENT (this "AGREEMENT"), is made and entered into as of the 10th day of December, 2001, by and between BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation (the "COMPANY"), located at 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, CA 91367, and the purchaser identified on the signature page to this Agreement (the "PURCHASER"), located at the address set forth on the Signature Page to this Agreement. ARTICLE 1 AUTHORIZATION AND SALE OF SECURITIES 1.1 AUTHORIZATION. The Company has authorized the sale and issuance to the Purchaser and others of (i) 10% secured convertible promissory notes due no later than November 10, 2002 in the form attached hereto as EXHIBIT A (the "CONVERTIBLE NOTES"), convertible into Common Stock, par value $.001 per share, of the Company ("COMMON STOCK"), which Convertible Notes are issuable on the Closing Date (as defined below) in an aggregate principal amount not exceeding $750,000, and (ii) warrants expiring May 10, 2004 to purchase Common Stock in the form attached hereto as EXHIBIT B (the "WARRANTS"), each at an exercise price per share equal to 1.125 times the lesser of (i) $0.20 or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days during the period commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002, which Warrants are issuable no later than the Closing Date. The shares of capital stock issuable upon conversion of the Convertible Notes are referred to as the "CONVERSION SHARES." The shares of capital stock issuable upon exercise of the Warrants are referred to as the "WARRANT SHARES." The Convertible Notes, the Warrants, the Conversion Shares and the Warrant Shares are collectively referred to as the "SECURITIES." 1.2 AGREEMENT TO PURCHASE AND SELL CONVERTIBLE NOTES. The Company agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company, a Convertible Note in the principal amount set forth on the Signature Page to this Agreement (the "COMMITTED AMOUNT") on the terms and conditions set forth herein. Additionally, in further consideration of the Purchaser's purchase of the Convertible Note hereunder, the Company agrees to issue to the Purchaser, and the Purchaser agrees to accept from the Company, a Warrant initially exercisable for a number of Warrant Shares equal to two hundred percent (200%) of the Committed Amount (the "WARRANT COVERAGE") at an exercise price equal to 112.5% multiplied by the lesser of (i) $0.20 or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002. The number and type of shares issuable upon exercise of the Warrant is subject to adjustment as set forth in the Warrant. 1.3 CLOSING AND DELIVERY. The purchase and sale of the Convertible Note shall occur at 12:00 p.m., Los Angeles time, on December 19, 2001, or at such other time on or before December 31, 2001 as is mutually agreed upon by the Company and the Agent (as defined below) on behalf of himself and all purchasers of Convertible Notes. Such purchase and sale is referred to herein as the "CLOSING," and the date of the Closing is referred to herein as the "CLOSING DATE." The Closing shall be held at the offices of the Company first set forth above. At the Closing, the Company will deliver to Purchaser the Convertible Note being purchased at such Closing and the Purchaser shall deliver to the Company by check or wire the principal amount being advanced against such Convertible Note at the Closing, as set forth in the Convertible Note. At the Closing, the Company shall also deliver or cause to be delivered to the Purchaser a Warrant and a fully executed copy of the December Security Agreement, the December Guaranty and the Investor Rights Agreement(each as defined below). 1.4 NATURE OF OFFERING. The investment in the Securities is being made in reliance upon the provisions of Section 4(2) ("SECTION 4(2)") of the United States Securities Act of 1933, as amended (the "SECURITIES ACT"), and Regulation D ("REGULATION D") and the other rules and regulations promulgated under the Securities Act and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to the investment to be made hereunder. 1.5 SECURITY; GUARANTY: INVESTORS RIGHTS. The Company's obligations under the Convertible Note will be secured by the collateral set forth in that certain Security and Pledge Agreement (the "DECEMBER SECURITY AGREEMENT") dated as of the Closing Date by and among the Company, the subsidiaries of the Company named therein and Harris Toibb ("TOIBB") as agent for himself and the other purchasers of the Convertible Notes ("AGENT"), in the form attached hereto as EXHIBIT C, and guaranteed pursuant to the Guaranty dated as of the Closing Date (the "DECEMBER GUARANTY") made by the Guarantors (as defined in the December Guaranty) in favor of Toibb as Agent for himself and the other purchasers of the Convertible Notes, in the form attached hereto as EXHIBIT D. The parties hereto, along with certain other entities or individuals, are entering into an Investor Rights Agreement dated the Closing Date (the "INVESTOR RIGHTS AGREEMENT"). ARTICLE 2 CONVERSION 2.1 OPTIONAL CONVERSION. From and after the Closing Date, the Purchaser shall have the right, at its option, by giving written notice to the Company at its principal office at any time prior to the full repayment of the Convertible Note, to convert in whole or in part the outstanding principal amount of the Convertible Note and all accrued interest thereon into a number of Conversion Shares equal to the quotient obtained by dividing the outstanding principal amount of the Convertible Note and all accrued interest thereon at a price per share equal to the lesser of (i) $0.20 (the "FIXED CONVERSION PRICE") or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002 (subject to appropriate adjustment for stock splits, stock dividends, combinations, recapitalizations and the like) ((i) and (ii) above are collectively referred to as the "CONVERSION PRICE"). 2.2 ISSUANCE OF ADDITIONAL STOCK BELOW THE FIXED CONVERSION PRICE. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Conversion Price in effect immediately prior to the issuance of such Page 2 Additional Stock, the Fixed Conversion Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Conversion Price of the shares subject to conversion shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 2.2, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding as of December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001. 2.3 AUTHORIZED SHARES. At all times from and after the Closing Date, the Company shall maintain or, if necessary, shall repurchase, a sufficient number of authorized shares of Common Stock reserved for issuance in a timely manner upon conversion or exercise of the Convertible Note, the Warrants, the Prior Notes and the Prior Warrants (as defined below) in accordance with the terms hereof and thereof, PROVIDED, HOWEVER, that to the extent that an insufficient number of shares of Common Stock are currently reserved for issuance to enable the Company to satisfy this SECTION 2.3, the Company shall have until February 28, 2002 to meet the requirements of this covenant. 2.4 ISSUANCE OF SHARES ON CONVERSION. As soon as practicable after any conversion of the Convertible Note, the Company, at its expense, will cause to be issued in the name of and delivered to the holder of the Convertible Note, a certificate or certificates for the number of fully paid and non-assessable Conversion Shares to which that holder shall be entitled on such conversion. No fractional shares will be issued on conversion of the Convertible Note. If on conversion of the Convertible Note a fraction of a share results, the Company will pay the cash value of that fractional share, with the value of any such full share equal to the Conversion Price. 2.5 LIMITATIONS ON CONVERSION. Notwithstanding anything to the contrary contained in this Agreement and the Convertible Note, a Convertible Note may not be converted, in whole or in part, into Conversion Shares unless and until any then-applicable requirements of all federal and state securities laws and regulatory agencies charged with enforcing securities laws shall have been fully complied with to the satisfaction of the Company and its counsel; PROVIDED, HOWEVER, that the Page 3 Company shall at all times use its best efforts to comply with such requirements. The Company may, in its reasonable discretion, condition any conversion of the Convertible Note upon the holder's delivery to the Company of a written agreement, in form and substance satisfactory to the Company, whereby the holder makes, at the time of conversion, such representations and warranties to and for the benefit of the Company as are comparable to the representations and warranties of the Purchaser set forth in SECTION 3.2(d) below as and to the extent applicable to the issuance of the Conversion Shares upon conversion of the Convertible Note. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 BY THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows: (a) STATUS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power to own and operate its properties and assets, to carry on its business as now conducted and to enter into and to perform its obligations under this Agreement, the Convertible Note, the Warrant, the December Security Agreement, the December Guaranty and the Investor Rights Agreement (collectively, the "TRANSACTION DOCUMENTS"). The Company is duly qualified to do business and is in good standing in California and in each other state in which a failure to be so qualified would have a material adverse effect on the Company's financial condition or its ability to own and operate its properties and assets and conduct its business in the manner now conducted. (b) AUTHORIZATION. The Company has full legal right, power and authority to conduct its business and affairs. The Company has full legal right, power and authority to enter into and perform its obligations under the Transaction Documents, including the issuance of the Securities. The execution and delivery of this Agreement, the borrowing hereunder, the execution and delivery of the other Transaction Documents, and the performance by the Company of its obligations thereunder, including the issuance of the Securities, are within the corporate powers of the Company and have been duly authorized by all necessary corporate action properly taken and the Company has received all necessary governmental approvals, if any, that are required. The officer(s) executing this Agreement and all of the other Transaction Documents are duly authorized to act on behalf of the Company. (c) VALIDITY AND BINDING EFFECT. This Agreement and the other Transaction Documents are the legal, valid and binding obligations of the Company and its subsidiaries, enforceable in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. (d) VALIDITY AND BINDING EFFECT OF PRIOR TRANSACTION DOCUMENTS. The three Note and Warrant Purchase Agreements, dated April, 2001, executed by the Company in favor of the purchasers named therein, as amended (the "Prior Purchase Agreements"), the three Secured Convertible Promissory Notes dated May 23, 2001, executed and delivered in connection with the Prior Purchase Agreements (the "Prior Notes"), the Warrants To Purchase Common Stock of Brilliant Digital Entertainment, Inc. issued in May, 2001 in connection with the Prior Purchase Agreements (the "Prior Warrants"), the Security and Pledge Agreement, dated May 23, 2001, Page 4 executed by the Company and its subsidiaries named therein in favor of Harris Toibb (the "May Security Agreement"), and the Guaranty, dated as May 23, 2001, executed in favor of Harris Toibb by the parties named therein (the "May Guaranty") are, and after they are amended on the Closing Date, shall continue to be, the legal, valid and binding obligations of the Company and its subsidiaries, enforceable in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. The Prior Purchase Agreements, the Prior Notes, the Prior Warrants, the May Security Agreement and the May Guaranty are collectively referred to herein as the "Prior Transaction Documents". (e) NO CONFLICTS. Consummation of the transactions contemplated hereby and the performance of the obligations of the Company under and by virtue of the Transaction Documents, including the issuance of the Securities, do not conflict with, and will not result in any breach of, or constitute a default or trigger a lien under, any mortgage, security deed or agreement, deed of trust, lease, bank loan or credit agreement, corporate charter or bylaws, agreement or certificate of limited partnership, partnership agreement, license, franchise or any other instrument or agreement to which the Company is a party or by which the Company or its respective properties may be bound or affected or to which the Company has not obtained an effective waiver. (f) EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject to the accuracy of the Purchaser's representations in SECTION 3.2(d), (e), (g) and (h), the sale of the Securities will not require registration under the Securities Act and/or any applicable state securities law. The Conversion Shares and the Warrant Shares issuable by the Company upon conversion of the Convertible Note and exercise of the Warrant, respectively, shall, if and when the Convertible Note is converted and the Warrant is exercised in accordance with their respective terms, be duly and validly issued, fully-paid and non-assessable shares of Common Stock, free of all liens, claims, encumbrances, preemptive rights, rights of first refusal and restrictions on transfer, except as imposed by applicable securities laws. (g) SEC DOCUMENTS. The Company has made available to the Purchaser true and complete copies of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000 and each report, proxy statement or registration statement filed by the Company with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") or the Securities Act since the filing of such Annual Report through the date hereof (collectively such documents are referred to as the "SEC DOCUMENTS"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act, and rules and regulations of the SEC promulgated thereunder and the SEC Documents did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents complied in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto at the time of such inclusion. Such financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof Page 5 and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited interim statements, to normal year-end audit adjustments). Neither the Company nor any of its subsidiaries has any material indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due) that would have been required to be reflected in, reserved against or otherwise described in the financial statements or in the notes thereto in accordance with GAAP, which was not fully reflected in, reserved against or otherwise described in the financial statements or the notes thereto included in the SEC Documents or was not incurred in the ordinary course of business consistent with the Company's past practices since the last date of such financial statements. (h) NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS TRANSACTION. Neither the Company nor any of its affiliates nor any person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the Securities or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Securities under the Securities Act; PROVIDED, that the Company makes no representation or warranty with respect to the Purchaser or any other purchaser of the Convertible Notes. (i) NO MATERIAL ADVERSE EFFECT. Since September 30, 2001, no Material Adverse Effect (as defined) has occurred or exists with respect to the Company, except as disclosed in the SEC Documents. For purposes hereof, "MATERIAL ADVERSE EFFECT" shall mean any effect on the business, operations, properties, prospects, material agreements or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under the Transaction Documents in any material respect. (j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September 30, 2001, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents. (k) NO INTEGRATED OFFERING. Other than as described in the SEC Documents or pursuant to an effective registration statement under the Securities Act, or pursuant to the issuance or exercise of employee stock options, or pursuant to its discussion with the Purchaser or any other purchaser of the Convertible Notes in connection with the transactions contemplated hereby or by the transactions contemplated by the Prior Purchase Agreements or other purchasers represented by the Agent in connection with such transaction, the Company has not issued, offered or sold the Convertible Notes or any shares of Common Stock (including for this purpose any securities of the same or a similar class as the Convertible Notes or Common Stock or any securities convertible into, exchangeable or exercisable for the Convertible Notes or Common Stock or any such other securities) within the six-month period next preceding the date hereof in a manner that would make unavailable the exemption from Securities Act registration being relied upon by the Company for the offer and sale to the Purchaser and the other purchasers of the Securities as contemplated by this Agreement, and the Company shall not permit any of its directors, officers or affiliates directly or indirectly to take any action (including, without limitation, any offering or sale to any person or entity of the Convertible Notes or shares of Common Stock), so as to make unavailable the Page 6 exemption from Securities Act registration being relied upon by the Company for the offer and sale to the Purchaser and the other purchasers of the Securities as contemplated by this Agreement. (l) LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the SEC Documents, there are no lawsuits or proceedings pending or, to the knowledge of the Company, threatened, against the Company, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which could reasonably be expected to either have a Material Adverse Effect or result in a judgment against the Company in an amount in excess of $75,000. Except as set forth in the SEC Documents, no judgment, order, writ, injunction or decree or award has been issued by or, to the knowledge of the Company, requested of any court, arbitrator or governmental agency which could result in a Material Adverse Effect. (m) NO MISLEADING OR UNTRUE COMMUNICATION. The Company and, to the knowledge of the Company, any person representing the Company, or any other person selling or offering to sell the Convertible Notes or Warrants in connection with the transaction contemplated by this Agreement, have not made, at any time, any oral communication in connection with the offer or sale of the same which contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (n) SUBSIDIARIES. The Company does not have any subsidiaries except for Brilliant Studios, Inc., a Delaware corporation, B3D, Inc., a Delaware corporation, and Brilliant Interactive Ideas Pty. Limited, an Australian corporation. The Company also owns seventy-five percent (75%) of the outstanding shares of Digital Hip Hop, Inc., a Delaware corporation. (o) VALIDITY OF LIEN. The December Security Agreement is effective to create in favor of the Purchaser, a legal, valid and enforceable security interest in the Collateral (as defined in the December Security Agreement) and proceeds thereof. When financing statements in appropriate form are filed in the Office of the Secretary of State for the State of Delaware, the security interests granted pursuant to the December Security Agreement will constitute legal, valid, perfected and enforceable security interests in all of the Collateral in favor of the Purchaser. (p) SOLVENCY OF THE COMPANY. The Company will be solvent under GAAP following each receipt of an advance under the Convertible Notes. (q) NO DEFAULT. No Event of Default has occurred and is continuing hereunder or under the Convertible Note (r) VALIDITY OF EARLIER LIEN. The liens and security interests granted by the May Security Agreement continue to create a valid and perfected first priority security interest in all of the collateral purported to be covered thereby. 3.2 BY THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows: (a) STATUS. If Purchaser is a corporation, partnership, trust or limited liability company, Purchaser is duly organized, validly existing and in good standing (to the extent applicable) under the laws of the state of its formation, and has the power to own and operate its properties, to Page 7 carry on its business as now conducted and to enter into and to perform its obligations under this Agreement and the other Transaction Documents to which it is a party. (b) AUTHORIZATION. Purchaser has the full legal right, power and authority to enter into and perform its obligations under the Transaction Documents. The execution and delivery of this Agreement, the execution and delivery of each Transaction Document to which the Purchaser is a party, and the performance by the Purchaser of its obligations hereunder and thereunder are within the powers of the Purchaser and have been duly authorized by all necessary action properly taken and the Purchaser has received all necessary governmental approvals, if any, that are required. The person executing this Agreement and all of the other Transaction Documents to which the Purchaser is a party is duly authorized to act on behalf of the Purchaser. (c) VALIDITY AND BINDING EFFECT. This Agreement and the other Transaction Documents are the legal, valid and binding obligations of the Purchaser, enforceable in accordance with their respective terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. (d) INVESTMENT REPRESENTATIONS. (i) Purchaser has such knowledge and experience in financial and business matters, including investments of the type represented by the Convertible Note and the Warrant and the Common Stock issuable upon conversion of the Convertible Note and exercise of the Warrant, as to be capable of evaluating the merits of investment in the Company and can bear the economic risk of an investment in the Convertible Note and the Warrant and the Common Stock issuable upon conversion of the Convertible Note and exercise of the Warrant; (ii) Purchaser is an "accredited investor" as such term is defined in Rule 501 of Regulation D under the Securities Act; and (iii) Purchaser is acquiring the Convertible Note and the Warrant and, to the extent converted or exercised, as the case may be, will be acquiring the Common Stock issuable upon conversion of the Convertible Note and exercise of the Warrant, for investment purposes only, for its own account and not with a view to, or for resale in connection with, the distribution or other disposition thereof in contravention of the Securities Act or any state securities law, without prejudice, however, to Purchaser's right at all times to sell or otherwise dispose of all or any part of the Securities pursuant to an effective registration statement under the Securities Act and applicable state securities laws, or under an exemption from such registration available under the Securities Act and other applicable state securities laws. (e) TRANSFER RESTRICTIONS. Purchaser acknowledges and agrees that the Convertible Note and the securities issuable upon conversion of the Convertible Note are subject to, and that Purchaser will be bound by, the additional transfer restrictions set forth in Section 6 of the Convertible Note. (f) ABSENCE OF CONFLICTS. The execution and delivery of this Agreement and the other Transaction Documents to which the Purchaser is a party, and the consummation of the transactions contemplated thereby, and compliance with the requirements thereof, will not violate Page 8 any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Purchaser or (a) violate any provision of any indenture, instrument or agreement to which Purchaser is a party or is subject, or by which Purchaser or any of its assets is bound; (b) conflict with or constitute a material default thereunder; (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Purchaser to any third party; or (d) require the approval of any third-party (which has not been obtained) pursuant to any material contract, agreement, instrument, relationship or legal obligation to which Purchaser is subject or to which any of its assets, operations or management may be subject. (g) DISCLOSURE; ACCESS TO INFORMATION. The Purchaser has received all documents, records, books and other publicly available information pertaining to Purchaser's investment in the Company that have been requested by the Purchaser. The Company is subject to the periodic reporting requirements of the Exchange Act, and the Purchaser has reviewed or received copies of all SEC Documents that have been requested by it. (h) MANNER OF SALE. At no time was Purchaser presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. ARTICLE 4 COVENANTS AND AGREEMENTS 4.1 LISTING OF COMMON STOCK. The Company hereby agrees to use its best efforts to maintain the listing of the Common Stock on any of the American Stock Exchange, the New York Stock Exchange, the NASDAQ National Market, or the NASDAQ Small-Cap Market, whichever is at the time the principal trading exchange or market for the Common Stock (the "PRINCIPAL Market"), and as soon as reasonably practicable following the Closing to list the Conversion Shares and the Warrant Shares on the Principal Market. The Company further agrees, if the Company applies to have the Common Stock traded on any other Principal Market, it will include in such application the Conversion Shares and the Warrant Shares. 4.2 ISSUANCE OF CONVERTIBLE NOTE AND WARRANT. The sale of the Convertible Notes and the Warrant and the issuance of the Common Stock upon conversion of the Convertible Note or exercise of the Warrant, as the case may be, shall be made in accordance with the provisions and requirements of Section 4(2) and Regulation D under the Securities Act (with respect to the issuance of the Convertible Notes, the Warrants and the Warrant Shares), Section 3(a)(9) of the Securities Act (with respect to the issuance of the Conversion Shares) and any applicable state securities law. The Company shall make all necessary SEC and "blue sky" filings required to be made by the Company in connection with the sale of the Securities to the Purchaser as required by all applicable laws. 4.3 ESTABLISHMENT OF ESCROW ACCOUNT. Purchaser and the Company agree that ten percent (10%) of all amounts advanced by Purchaser under the Convertible Note will be deposited into an escrow account with Akin, Gump, Strauss, Hauer & Feld, LLP. If the Company does not commit an Event of Default described in SECTIONS 6.1(h) OR (i), the funds in the escrow account shall be released to the Company immediately following the funding of the Equity Investment (as defined in SECTION 6.1(h)). If an Event of Default as described in SECTIONS 6.1(h) OR (i) does occur, then the funds in the escrow account shall be released to the Company, and such funds shall be used for the Page 9 sole purpose of paying the Company's expenses, including legal expenses and any expenses that might be incurred in connection with the Company's filing for bankruptcy protection. 4.4 NOTICE OF TITLE 11 FILING. The Company shall provide to the Purchaser written notice of any decision or corporate action taken by the Company authorizing the filing by the Company of a voluntary petition for relief under Title 11 of the United States Code at least ten (10) days prior to the date selected for such filing. 4.5 WAIVER OF RIGHTS UNDER SECTION 362 OF THE BANKRUPTCY CODE. In the event that the Company files a petition under the United States Bankruptcy Code or under any other similar federal or state law, the Company unconditionally and irrevocably agrees that the Agent, on behalf of the Purchaser, shall be entitled, and the Company hereby unconditionally and irrevocably consents, to relief from the automatic stay so as to allow the Agent to exercise its rights and remedies under the December Security Agreement with respect to the Collateral (as such term is defined in the December Security Agreement), including taking possession of the Collateral, foreclosing on its lien or security interests or otherwise exercising its rights and remedies with respect to the Collateral. In such event, the Company hereby agrees it shall not, in any manner, oppose or otherwise delay any motion filed by the Agent for relief from the automatic stay. 4.6 SALE OF ASSETS. The Company hereby agrees that in the event the Company commences a bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code, the Company shall, at the request of the Buyers (as defined herein), file, within the first twenty (20) days of the commencement of the bankruptcy case a motion under section 363 of the Bankruptcy Code asking the Court to approve the sale of all or substantially all of the assets of the Company and its subsidiaries to Harris Toibb and such other Purchasers (including those under the Prior Transaction Documents) that desire to participate in the sale (collectively, the "BUYERS"), on terms and conditions reasonably acceptable to the Buyers, including the right of the Buyers to credit bid any secured indebtedness owed to them. 4.7 DEBTOR IN POSSESSION FINANCING. The Company hereby agrees that in the event the Company decided to commence a bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code, the Company shall give Harris Toibb and such other Purchasers (including those under the Prior Transaction Documents) that desire to participate in the financing (collectively, the "LENDERS") the right of first refusal (but without any corresponding obligation of the Lenders) with respect to the provision to the Company and its subsidiaries of debtor in possession financing. ARTICLE 5 LEGEND Each certificate representing the Conversion Shares and the Warrant Shares will bear a legend in substantially the following form (the "LEGEND"): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER Page 10 THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. ARTICLE 6 DEFAULT AND REMEDIES 6.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default hereunder: (a) Default in the payment of the principal of or interest on the indebtedness evidenced by the Convertible Note in accordance with the terms of the Convertible Note; (b) A default or event of default shall occur in respect of any of the other Convertible Notes or any other indebtedness of the Company that exceeds, in the aggregate, $75,000 and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (c) The Company shall be liquidated, dissolved, partitioned or terminated, or the charter thereof shall expire or be revoked; (d) The Company (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within thirty (30) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; (e) Failure of the Company to perform any of its obligations, covenants or agreements under this Agreement or any of the other Transaction Documents (other than the payment of the principal of or interest on the indebtedness evidenced by the Convertible Note, which shall be subject to SUBSECTION 6.1(a) above and not this SUBSECTION (e)); (f) A default or event of default shall occur under any of the other Transaction Documents or under the Prior Transaction Documents and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (g) The Purchaser's inability to convert the Convertible Note into Conversion Shares upon written notice to the Company as provided for herein due to the Company's failure to comply with (and not due to the holder's failure to meet all applicable investor suitability Page 11 requirements of) the then-applicable requirements of all federal, state and local securities laws and regulatory agencies charged with enforcing securities laws as provided for in SECTION 2.4 of this Agreement; (h) The Company shall fail to provide the Agent with a copy of a signed letter of intent with an investor who is, and on terms and conditions that are, reasonably satisfactory to the Agent, dated no later than February 28, 2002, pursuant to which such investor agrees to acquire equity in the Company in consideration for an investment of at least three million dollars ($3,000,000) (the "EQUITY INVESTMENT"); (i) The Equity Investment shall fail to fund by April 15, 2002; (j) A default or event of default shall occur in respect of any agreement of the Company that requires the payment by the Company of an amount in excess of $75,000; or (k) Either of the Company's agreements with Consumer Empowerment B.V. (better known as "Kazaa") or StreamCast Networks, Inc. (better known as "Morpheus") shall be terminated or amended in such a way as to result in a Material Adverse Effect. With respect to any Event of Default described above in SUBSECTIONS 6.1(e), (f) and (j) that is capable of being cured and that does not already provide its own cure procedure (a "CURABLE DEFAULT"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if the Company provides notice to the Purchaser of such Curable Default in accordance with the provisions hereof within three (3) business days of the Company learning of such default and such Curable Default is fully cured and/or corrected within fifteen (15) days of the Company's notice thereof to the Purchaser. 6.2 ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of Default described in SUBSECTION 6.1(d), the indebtedness evidenced by the Convertible Note shall be immediately due and payable in full; and upon the occurrence of any other Event of Default described above, the Agent, on behalf of the Purchaser, at any time thereafter may at its option accelerate the maturity of the indebtedness evidenced by the Convertible Note without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidenced by the Convertible Note: (a) The Agent, on behalf of the Purchaser, shall be immediately entitled to exercise any and all rights and remedies possessed by the Purchaser pursuant to the terms of the Convertible Note and all of the other Transaction Documents; and (b) The Agent, on behalf of the Purchaser, shall have any and all other rights and remedies that the Purchaser may now or hereafter possess at law, in equity or by statute. 6.3 REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred upon or reserved to the Purchaser by this Agreement or any of the other Transaction Documents is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder, under any of the other Transaction Documents or now or hereafter existing at law, in equity or by statute. No delay or omission by the Agent to exercise any right, power or remedy accruing upon the occurrence of any Event of Default shall exhaust or impair any Page 12 such right, power or remedy or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every right, power and remedy given by this Agreement and the other Transaction Documents to the Agent or the Purchaser may be exercised from time to time and as often as may be deemed expedient by the Agent or the Purchaser. ARTICLE 7 CONDITIONS TO CLOSING 7.1 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of Purchaser to advance funds under the Convertible Note at the Closing and the other obligations of Purchaser under this Agreement are subject to the satisfaction as of the Closing of the following conditions, any of which may be waived in writing in whole or in part by Purchaser: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true and correct as of the date hereof and as of the Closing Date with the same force and effect as though such representations and warranties had been made at and as of such date (i.e., with respect to a representation that a state of facts exists on or as of the date hereof, it is a condition that such state of facts exists on or as of the Closing Date, and with respect to a representation that a state of facts has or has not changed between a date prior to the date hereof and the date hereof, it is a condition that such state of facts has or has not changed between such prior date and the Closing Date), except as affected by transactions contemplated hereby and except that any such representation or warranty made as of a specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. (b) PERFORMANCE. The Company shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by the Company on or prior to the Closing Date. (c) FAIRNESS OPINION. The Company shall have delivered to the Purchaser an opinion from The Mentor Group stating that the transactions contemplated by this Agreement are fair to the Company and its shareholders. (d) BOARD APPROVAL. The Company shall have delivered to the Purchaser a resolution of a special committee of the Board of Directors of the Company consisting solely of members of the Board of Directors of the Company who are not employees or officers of or lenders to the Company, approving the transactions contemplated by this Agreement. (e) FORCE MAJEURE. None of the following shall have occurred: (i) any suspension of trading, disruption or material adverse change, or any development involving a prospective material adverse change, in or affecting the capital markets generally or any of the corporate bond, interest rate swaps or commercial mortgage backed securities markets in particular; (ii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, NASDAQ, the American Stock Exchange or any setting of minimum prices for trading on any such exchange; (iii) any banking moratorium declared by Federal, New York or Delaware authorities; or (iv) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency, PROVIDED, HOWEVER, that this item (iv) shall not include the current military activities of the United States of America in the country of Afghanistan. Page 13 (f) AMENDMENT OF PRIOR TRANSACTION DOCUMENTS. The Company, and its subsidiaries to the extent they are parties, shall have delivered to the Agent, duly executed amendments to the Prior Purchase Agreements, the Prior Notes, the Prior Warrants and the May Security Agreement, in form and substance satisfactory to the Agent, and a duly executed reaffirmation of the May Guaranty, in form and substance satisfactory to the Agent. (g) DELIVERY OF DOCUMENTS. The Company, and its subsidiaries to the extent they are parties, shall have delivered to the Agent the Convertible Notes, Warrants, December Security Agreement, December Guaranty, UCC-1 financing statements and Investor Rights Agreement, in form and substance satisfactory to the Agent and the Company, duly executed by the Company and its subsidiaries (to the extent they are parties). 7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell the Convertible Note to Purchaser at the Closing and the other obligations of the Company under this Agreement are subject to the satisfaction as of the Closing of the following conditions, any of which may be waived in writing in whole or in part by the Company: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser contained in this Agreement shall be true and correct as of the date hereof and as of the Closing Date with the same force and effect as though such representations and warranties had been made at and as of such date (i.e., with respect to a representation that a state of facts exists on or as of the date hereof, it is a condition that such state of facts exists on or as of the Closing Date, and with respect to a representation that a state of facts has or has not changed between a date prior to the date hereof and the date hereof, it is a condition that such state of facts has or has not changed between such prior date and the Closing Date), except as affected by transactions contemplated hereby and except that any such representation or warranty made as of a specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. (b) PERFORMANCE. The Purchaser shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by the Purchaser on or prior to the Closing Date. ARTICLE 8 CONDITIONS TO ADDITIONAL ADVANCES 8.1 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of Purchaser to make additional advances pursuant to the Schedule of Advances (as defined in the Convertible Note) under the terms of the Convertible Note and the other obligations of Purchaser under this Agreement are subject to the satisfaction as of the time of each such additional advance of the conditions set forth in the Convertible Note and the following conditions, any of which may be waived in writing in whole or in part by the Agent: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true and correct as of the date of such additional advance with the same force and effect as though such representations and warranties had been made at and as of such date (i.e., with respect to a representation that a state of facts exists on or as of the date hereof, it is a condition that such state of facts exists on or as of the date of such additional advance, and with respect to a representation that a state of facts has or has not changed Page 14 between a date prior to the date hereof and the date hereof, it is a condition that such state of facts has or has not changed between such prior date and the date of such additional advance), except as affected by transactions contemplated hereby and except that any such representation or warranty made as of a specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. (b) PERFORMANCE. The Company shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by the Company on or prior to the date of such additional advance. (c) FORCE MAJEURE. None of the following shall have occurred: (i) any suspension of trading, disruption or material adverse change, or any development involving a prospective material adverse change, in or affecting the capital markets generally or any of the corporate bond, interest rate swaps or commercial mortgage backed securities markets in particular; (ii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, NASDAQ, the American Stock Exchange or any setting of minimum prices for trading on any such exchange; (iii) any banking moratorium declared by Federal, New York or Delaware authorities; or (iv) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency, PROVIDED, HOWEVER, that this item (iv) shall not include the current military activities of the United States of America in the country of Afghanistan. ARTICLE 9 TERMINATION 9.1 TERMINATION PRIOR TO CLOSING. Either party (the "TERMINATING PARTY") may (but shall not be obligated to) terminate this Agreement prior to the Closing by giving written notice to the other party if any of the conditions to the Terminating Party's obligations provided for in SECTION 7 have not been satisfied as of the Closing (other than due to the Terminating Party's failure to comply with its obligations under this Agreement) and the Terminating Party has not expressly waived such condition in writing on or before the Closing. 9.2 TERMINATION FOLLOWING THE CLOSING. If the Closing occurs, this Agreement shall remain in full force and effect until the payment in full by the Company of the full principal amount of the Convertible Note and all accrued interest thereon, or conversion of the same into Conversion Shares as provided herein, at which time the Purchaser shall cancel the Convertible Note and deliver it to the Company. ARTICLE 10 SURVIVAL; INDEMNIFICATION 10.1 SURVIVAL. The representations, warranties and covenants made by each of the Company and the Purchaser in this Agreement, the schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Page 15 Agreement or otherwise, whether at law or in equity, irrespective of any investigation made by or on behalf of such party on or prior to the Closing Date. 10.2 INDEMNITY. (a) BY THE COMPANY. The Company hereby agrees to indemnify and hold harmless the Purchaser, its affiliates and their respective officers, directors, partners and members (collectively, the "PURCHASER INDEMNITEES"), from and against any and all losses, claims, damages, costs, expenses (including, without limitation, reasonable attorney's fees and disbursements and reasonable costs and expenses of expert witnesses and investigation), judgments, penalties, liabilities and deficiencies (collectively, "LOSSES"), and agrees to reimburse the Purchaser Indemnitees for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Purchaser Indemnitees and to the extent arising out of or in connection with: (i) any misrepresentation, omission of fact or breach of any of the Company's representations or warranties contained in this Agreement, the schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or (ii) any failure by the Company to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement, the schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement. (b) BY THE PURCHASER. The Purchaser hereby agrees to indemnify and hold harmless the Company, its affiliates and their respective officers, directors, partners and members (collectively, the "COMPANY INDEMNITEES"), from and against any and all Losses, and agrees to reimburse the Company Indemnitees for reasonable all out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with: (i) any misrepresentation, omission of fact, or breach of any of the Purchaser's representations or warranties contained in this Agreement, the schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Purchaser pursuant to this Agreement; or (ii) any failure by the Purchaser to perform in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Agreement or any instrument, certificate or agreement entered into or delivered by the Purchaser pursuant to this Agreement. 10.3 NOTICE. Promptly after receipt by either party hereto seeking indemnification pursuant to SECTION 10.2 (an "INDEMNIFIED PARTY") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "CLAIM"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to SECTION 10.2 is being sought (the "INDEMNIFYING PARTY") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially Page 16 prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. 10.4 DIRECT CLAIMS. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnified Party disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or by any court of competent jurisdiction. ARTICLE 11 APPOINTMENT OF AGENT 11.1 APPOINTMENT. The Purchaser hereby designates Harris Toibb as Agent to act as specified herein and in the other Transaction Documents. The Purchaser hereby irrevocably authorizes the Agent to take such action on its behalf under the provisions of this Agreement, the other Transaction Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its officers, directors, agents or employees. Purchaser acknowledges that the Agent also serves in a similar capacity as agent under the Prior Transaction Documents, and Purchaser agrees that any actions that the Agent takes when acting in that capacity shall not be and shall not be deemed to be a conflict with his responsibilities hereunder. 11.2 NATURE OF DUTIES. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents. Neither the Agent nor Page 17 any of its officers, directors, agents or employees shall be liable for any action taken or omitted by any of them hereunder or under any other Transaction Document or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement or any other Transaction Document a fiduciary relationship in respect of the Purchaser and nothing in this Agreement or any other Transaction Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any other Transaction Document except as expressly set forth herein. The Agent shall promptly transmit to the Purchaser a copy of each notice given to it by the Company pursuant to the terms of this Agreement and shall give notice to the Purchaser of any default or Event of Default of which it becomes aware. 11.3 LACK OF RELIANCE ON THE AGENT. Independently and without reliance upon the Agent, the Purchaser, to the extent it deems appropriate, has made (i) its own independent investigation of the financial condition and affairs of the Company in connection with the making of the loan provided for hereunder and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Company and, except as expressly provided in this Agreement, the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide the Purchaser with any credit or other information with respect thereto, whether coming into its possession before the making of the loan or at any time or times thereafter. The Agent shall not be responsible to the Purchaser for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of this Agreement or any other Transaction Document or the financial condition of the Company or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Transaction Document, or the financial condition of the Company or the existence or possible existence of any default or Event of Default. 11.4 RELIANCE. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any person that the Agent believed to be the proper person, and, with respect to all legal matters pertaining to this Agreement and any other Transaction Document and its duties hereunder and thereunder, upon advice of counsel selected by it. 11.5 INDEMNIFICATION. To the extent the Agent is not reimbursed and indemnified by the Company, the Purchaser will reimburse and indemnify the Agent, in proportion to the principal amount of the amounts owing to the Purchaser and all other purchasers of Convertible Notes, for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Agent in performing its duties hereunder or under any other Transaction Document; PROVIDED, HOWEVER, that the Purchaser shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. 11.6 THE AGENT IN ITS INDIVIDUAL CAPACITY. With respect to its obligation to purchase one or more of the Convertible Notes, the Agent shall have the rights and powers specified in the Page 18 Agent's respective purchase agreement as a purchaser thereof and may exercise the same rights and powers as though it were not performing the duties specified herein. Toibb may lend money to and generally engage in any kind of business with the Company or any affiliate of the Company as if it were not performing the duties specified herein, and may accept fees and other consideration from the Company for services in connection with this Agreement and otherwise without having to account for the same to the Purchaser. 11.7 SUCCESSION. (a) The Agent may resign from the performance of all its functions and duties hereunder and/or under the other Transaction Documents at any time by giving fifteen (15) business days' prior written notice to the Company and the Purchaser. Such resignation shall take effect upon the appointment of a successor Agent pursuant to clauses (b) and (c) below or as otherwise provided below. (b) Upon any such notice of resignation, the holders of at least a majority of the principal amount of the Convertible Notes shall appoint a successor Agent hereunder which shall be a person or entity reasonably acceptable to the Company. (c) If a successor Agent shall not have been so appointed within such fifteen (15) business day period, the Agent, with the consent of the Company, may then appoint a successor Agent which shall serve as Agent hereunder until such time, if any, as the holders of at least a majority of the principal amount of the Convertible Notes appoint a successor Agent as provided above. ARTICLE 12 MISCELLANEOUS 12.1 SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Whenever in this Agreement one of the parties hereto is named or referred to, the heirs, legal representatives, successors, successors-in-title and assigns of such parties shall be included, and all covenants and agreements contained in this Agreement by or on behalf of the Company or by or on behalf of the Purchaser shall bind and inure to the benefit of their respective heirs, legal representatives, successors-in-title and assigns, whether so expressed or not. 12.2 SEVERABILITY. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such 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 and shall be interpreted so as to be effective and valid. 12.3 INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW. Anything in this Agreement, the Convertible Note or any of the other Transaction Documents to the contrary notwithstanding, in no event whatsoever, whether by reason of advancement of proceeds of the Committed Amount, acceleration of the maturity of the unpaid balance of the indebtedness evidenced by the Convertible Note or otherwise, shall the interest and other charges agreed to be paid to the Purchaser for the use of the money advanced or to be advanced hereunder exceed the Page 19 maximum amounts collectible under applicable laws in effect from time to time. It is understood and agreed by the parties that, if for any reason whatsoever the interest or loan charges paid or contracted to be paid by the Company in respect of the indebtedness evidenced by the Convertible Note shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then IPSO FACTO, the obligation to pay such interest and/or loan charges shall be reduced to the maximum amounts collectible under applicable laws in effect from time to time, and any amounts collected by the Purchaser that exceed such maximum amounts shall be applied to the reduction of the principal balance of the indebtedness evidenced by the Convertible Note and/or refunded to the Company so that at no time shall the interest or loan charges paid or payable in respect of the indebtedness evidenced by the Convertible Note exceed the maximum amounts permitted from time to time by applicable law. 12.4 ARTICLE AND SECTION HEADINGS, DEFINED TERMS. Numbered and titled article and section headings and defined terms are for convenience only and shall not be construed as amplifying or limiting any of the provisions of this Agreement. 12.5 NOTICES. Any and all notices, elections or demands permitted or required to be made under this Agreement shall be in writing, signed by the party giving such notice, election or demand and shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), to the other party at the address set forth in the introductory paragraph to this Agreement, or at such other address as may be supplied in writing and of which receipt has been acknowledged in writing. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice, election or demand. 12.6 ENTIRE AGREEMENT. This Agreement and the other written agreements between the Company and the Purchaser represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein; PROVIDED, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the obligations described herein, the provision of this Agreement shall control. 12.7 GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of the State of California, without regard to conflict of law principles thereof. 12.8 AMENDMENT. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; PROVIDED, HOWEVER, that the Agent may, with the consent of the Company, waive or amend, on behalf of all purchasers of Convertible Notes, any provisions hereof or of the Convertible Notes, PROVIDED that any such waiver or amendment which affects any holder in any manner materially and adversely different than any other holder may not be effected without the consent and agreement of the holder so adversely affected. 12.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties contained herein or in any of the Transaction Documents or made by or furnished on behalf of the Page 20 Company in connection herewith or in any Transaction Documents shall survive the execution and delivery of this Agreement and the other Transaction Documents. 12.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 12.11 CONSTRUCTION AND INTERPRETATION. Should any provision of this Agreement require judicial interpretation, the parties hereto agree that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be more strictly construed against the party that itself or through its agent prepared the same, it being agreed that the Company, the Purchaser and their respective agents have participated in the preparation hereof. 12.12 COSTS AND ATTORNEYS' FEES. If any action, suit, arbitration or other proceeding is instituted to remedy, prevent or obtain relief from a default in the performance by any party to this Agreement of its obligations under this Agreement, the prevailing party (as determined by the court or other fact-finder) will be entitled to recover from the losing party all actual costs incurred in each and every such action, suit, arbitration or other proceeding, including any and all appeals or petitions therefrom, including, without limitation, reasonable attorneys' fees and disbursements. 12.13 AUDIT RIGHTS. Purchaser shall have the continuing right, without hindrance or delay, to inspect, audit, check and make extracts from the Company's books, records, journals, orders, receipts and other accounting records at the office of the Company at the address set forth on the first page of this Agreement at any time during regular business hours upon one business day's advance notice (absent an Event of Default then existing). The Purchaser shall also during any such examination be provided with reasonable access to the officers of the Company. 12.14 WAIVER OF JURY TRIAL. The Purchaser and the Company each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto. 12.15 LEGAL FEES. The Company shall pay all legal fees and expenses of Harris Toibb incurred in connection with the negotiation and documentation of the Transaction Documents and in connection with the negotiation and documentation of amendments to the Prior Transaction Documents. Page 21 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have caused this Agreement to be executed by their duly authorized officers, as of the day and year first above written. COMPANY: BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL ------------------------------------ Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer PURCHASER: CAPEL CAPITAL LTD. ------------------------------------------- (Print Name of Purchaser) /S/ NICK HANNAH ------------------------------------------- (Signature) Director of Corporate Director ------------------------------------------- (Title, if applicable) PO BOX 212 HADSLEY HOUSE ST. PETER PORT GUERNSEY CHANNEL ISLANDS FACSIMILE: 44-1481-713112 ------------------------------------------- (Address) Committed Amount: $400,000 ------------------------- Accepted and Acknowledged by: HARRIS TOIBB, as Agent under Article 11 /S/ HARRIS TOIBB - ------------------------------ Harris Toibb SIGNATURE PAGE TO NOTE AND WARRANT PURCHASE AGREEMENT Page 22 EXHIBIT A SECURED CONVERTIBLE PROMISSORY NOTE (See Exhibit 10.44) EXHIBIT B WARRANT (See Exhibit 10.46) EXHIBIT C SECURITY AND PLEDGE AGREEMENT (See Exhibit 10.53) EXHIBIT D GUARANTY (See Exhibit 10.55) EX-10 7 exhibit_10-43.txt EXHIBIT 10.43 THIS SECURED CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURED CONVERTIBLE PROMISSORY NOTE NOR THE SECURITIES ISSUABLE HEREUNDER MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. - ------------------------------------------------------------------------------ $350,000 December 19, 2001 Woodland Hills, California BRILLIANT DIGITAL ENTERTAINMENT, INC. SECURED CONVERTIBLE PROMISSORY NOTE FOR VALUE RECEIVED, Brilliant Digital Entertainment, Inc., a Delaware corporation ("BORROWER"), located at 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, CA 91367, hereby unconditionally promises to pay to the order of Harris Toibb ("LENDER"), and his successors, endorsees, transferees and assigns (together with Lender, "HOLDER"), the principal sum of Three Hundred Fifty Thousand Dollars ($350,000), or, such lesser amount as has been advanced by Lender to Borrower in accordance with the Purchase Agreement (as defined below) and the Schedule of Advances (as defined below), and any unpaid accrued interest thereon, as set forth below. The principal amount of this Convertible Note, and any unpaid interest accrued thereon, shall be due and payable in full on November 10, 2002 (the "MATURITY DATE") in the manner provided for in SECTION 4 below, unless this Convertible Note shall have been previously converted as provided in SECTION 6 below. 1. PURCHASE AGREEMENT. This Convertible Note has been executed and delivered by Borrower pursuant to that certain Note and Warrant Purchase Agreement, dated as of December 10, 2001, between Borrower and Lender (the "PURCHASE AGREEMENT"). Borrower herein agrees with Holder that Borrower will perform and discharge each of its covenants and agreements contained in the Purchase Agreement as from time to time amended and supplemented, the provisions of which Purchase Agreement are hereby incorporated in this Convertible Note by reference with the same effect as if it were set forth in full. The Purchase Agreement is subject to amendment in the manner provided therein, and any such amendment shall be binding upon the Holder and any subsequent holders of this Convertible Note. All capitalized terms used herein and not defined herein shall have the meanings given such terms in the Purchase Agreement. 2. ADVANCES. Lender has advanced to Borrower on the date hereof the sum of One Hundred Sixty-three Thousand Three Hundred Thirty-three Dollars and Thirty-three Cents ($163,333.33), less the sum of $50,000.00 that was pre-advanced by Lender to Borrower on December 14, 2001. Attached and incorporated into this Convertible Note is a schedule of advances (the "SCHEDULE OF ADVANCES"). Lender shall provide additional advances to Borrower in accordance with the Schedule of Advances, provided that Borrower complies with the following conditions: (a) Borrower delivers to the Agent not later than December 19, 2001 an operating budget that meets with Lender's reasonable approval (the "OPERATING BUDGET"). (b) Borrower delivers to the Agent on or immediately prior to each scheduled advance date a certificate, dated the date of the advance, executed by an officer of Borrower stating that Borrower has not spent more than allowed by the Operating Budget and that actual expenses in any particular category do not exceed the amount set forth in the Operating Budget for that category by more than ten percent (10%), that the representations and warranties set forth in section 3.1 of the Purchase Agreement are true and correct as of the date of the advance, and the other conditions that Borrower is required to meet prior to any such advance under the terms of the Purchase Agreement. (c) No Event of Default hereunder or under the Purchase Agreement shall have occurred. (d) Each of the conditions set forth in Article 8 of the Purchase Agreement shall have been met by Borrower. 3. INTEREST. Borrower agrees to pay simple interest on the unpaid principal amount hereof. Interest shall accrue from the date of each advance to Borrower in accordance with the Purchase Agreement until this Convertible Note is paid in full at a rate equal to ten percent (10%) per annum. Interest shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period during which it accrues. In no event shall the interest paid hereunder, together with any other consideration paid or agreed to be paid for the use, forbearance or detention of money advanced hereunder, exceed the highest lawful rate permissible under any law which a court of competent jurisdiction may deem applicable hereto. In the event that such a court determines that the Holder has charged, received or contracted to receive interest hereunder in excess of the highest lawful rate permissible, the interest payable hereunder shall automatically be reduced to the maximum rate permitted by law, and the Holder shall promptly refund to Borrower any interest received by it in excess of the maximum lawful rate (with such reduction and refund being made first with respect to cash interest amounts paid or payable under this Convertible Note, and thereafter with respect to any other consideration received by the Holder). It is the intent hereof that Borrower not pay or contract to pay, and that the Holder not receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may lawfully be paid by Borrower under applicable law. 4. PAYMENT. All payments of principal, interest and all other amounts payable in respect of this Convertible Note shall be made by wire transfer in lawful money of the United States of America in immediately available Federal funds, to an account furnished to Borrower in writing for that purpose at least two (2) business days prior to the Maturity Date. Holder shall, before Page 2 disposing of this Convertible Note or any part hereof, make a notation hereon of all principal and interest payments previously made hereunder and of the date to which interest hereon has been paid; PROVIDED, HOWEVER, that the failure to correctly make a notation of any payment made on this Convertible Note shall not limit or otherwise affect the obligation of Borrower under this Convertible Note with respect to any loan evidenced hereby or payments of principal or interest on this Convertible Note. 5. PREPAYMENT. Borrower may not prepay this Convertible Note, in whole or in part, without the prior written consent of the Holder. Any partial prepayment, to the extent permitted by Holder, shall not affect the obligation to continue to pay in full the amount of the payments hereunder until the entire unpaid principal balance hereof and all accrued interest hereon has been paid in full. Any such prepayment shall be applied first to interest and then to principal. 6. CONVERSION RIGHTS. The Holder, and any subsequent holder of this Convertible Note, is entitled to the rights and benefits, and is subject to the obligations, conditions and restrictions, set forth in the Purchase Agreement, including without limitation the right to convert this Convertible Note into certain securities of Borrower in the manner provided in the Purchase Agreement. 7. TRANSFERS. (a) By acceptance hereof, the Holder acknowledges that this Convertible Note and the capital stock of Borrower that may be issued upon its conversion have not been registered under the Securities Act, and Holder agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Convertible Note or any capital stock issued upon its conversion in the absence of (i) an effective registration statement under the Securities Act as to this Convertible Note or such securities and registration or qualification of this Convertible Note or such securities under any applicable Blue Sky or state securities laws then in effect, or (ii) an opinion of counsel, reasonably satisfactory to Borrower, that such registration and qualification are not required. Each certificate or other instrument for capital stock issued upon the conversion of this Convertible Note shall bear a legend in the form set forth in the Purchase Agreement. (b) Subject to the provisions of SECTION 7(a) hereof, this Convertible Note and all rights hereunder are transferable, in whole or in part, upon surrender of the Convertible Note with a properly executed assignment, in the form prescribed by Borrower, at the principal office of Borrower; PROVIDED, HOWEVER, that, except for transfers by Holder of all or any portion of this Convertible Note to any parent, subsidiary or affiliate of Holder or to any officer, director, partner or member of any such parent, subsidiary or affiliate, this Convertible Note may not be transferred in whole or in part without the prior written consent of Borrower. (c) Until any transfer of this Convertible Note is made in the Convertible Note register, Borrower may treat the registered Holder as the absolute owner hereof for all purposes; PROVIDED, HOWEVER, that if and when this Convertible Note is properly assigned in blank, Borrower may (but shall not be required to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (d) Borrower will maintain a register containing the names and addresses of the registered Holders of this Convertible Note. Any registered Holder may change such registered Page 3 Holder's address as shown on the Convertible Note register by written notice to Borrower requesting such change. (e) In the reasonable discretion of Borrower, Borrower may condition any transfer of all or any portion of this Convertible Note (other than a disposition satisfying the conditions set forth in clause (i) of SECTION 7(a) above) upon the transferee's delivery to Borrower of a written agreement, in form and substance reasonably satisfactory to Borrower, whereby the transferee (i) makes such representations and warranties to and for the benefit of Borrower as are comparable to the representations and warranties of the purchaser of the Convertible Note as set forth in the Purchase Agreement, as and to the extent applicable to the proposed disposition, and (ii) agrees to be bound by the transfer restrictions set forth in this SECTION 7. 8. TRANSFER BY BORROWER. Borrower may not assign, and no person may assume, any of the obligations of Borrower under this Convertible Note without the prior written consent of Holder, which consent may be granted or withheld in Holder's sole discretion, and any attempt to do so without such consent shall be void. 9. EVENTS OF DEFAULT; REMEDIES. (a) EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default hereunder: (i) Default in the payment of the principal of or interest on the indebtedness evidenced by this Convertible Note in accordance with the terms of this Convertible Note; (ii) A default or event of default shall occur in respect of any of the other Convertible Notes or any other indebtedness of Borrower that exceeds, in the aggregate, $75,000 and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (iii) Borrower shall be liquidated, dissolved, partitioned or terminated, or the charter thereof shall expire or be revoked; (iv) Borrower (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within thirty (30) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; (v) Failure of Borrower to perform any of its obligations, covenants or agreements under the Purchase Agreement or any of the other Transaction Documents Page 4 (other than the payment of the principal of or interest on the indebtedness evidenced by this Convertible Note, which shall be subject to SUBSECTION 9(a)(i) above and not this SUBSECTION (v)); (vi) A default or event of default shall occur under any of the other Transaction Documents or under the Prior Transaction Documents and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (vii) The Holder's inability to convert this Convertible Note into securities of Borrower upon written notice to Borrower as provided for in the Purchase Agreement due to Borrower's failure to comply with (and not due to the Holder's failure to meet all applicable investor suitability requirements of) the then-applicable requirements of all federal, state and local securities laws and regulatory agencies charged with enforcing securities laws as provided for in SECTION 2.4 of the Purchase Agreement; (viii) Borrower shall fail to provide the Agent with a copy of a signed letter of intent with an investor who is, and on terms and conditions that are, reasonably satisfactory to the Agent, dated no later than February 28, 2002, pursuant to which such investor agrees to acquire equity in Borrower in consideration for an investment of at least three million dollars ($3,000,000) (the "EQUITY INVESTMENT"); (ix) The Equity Investment shall fail to fund by April 15, 2002; (x) A default or event of default shall occur in respect of any agreement of Borrower that requires the payment by Borrower of an amount in excess of $75,000; or (xi) Either of Borrower's agreements with Consumer Empowerment B.V. (better known as "Kazaa") or StreamCast Networks, Inc. (better known as "Morpheus") shall be terminated or amended in such a way as to result in a Material Adverse Effect. With respect to any Event of Default described above in SUBSECTIONS 9(a)(v), (vi) and (x) that is capable of being cured and that does not already provide its own cure procedure (a "CURABLE DEFAULT"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if Borrower provides notice to Holder of such Curable Default in accordance with the provisions hereof within three (3) business days of Borrower learning of such default and such Curable Default is fully cured and/or corrected within fifteen (15) days of Borrower's notice thereof to Holder. (b) ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of Default described in SUBSECTION 9(a)(iv), the indebtedness evidenced by this Convertible Note shall be immediately due and payable in full; and upon the occurrence of any other Event of Default described above, the Agent at any time thereafter may at its option accelerate the maturity of the indebtedness evidenced by this Convertible Note without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidenced by the Convertible Note: Page 5 (i) The Agent, on behalf of Holder, shall be immediately entitled to exercise any and all rights and remedies possessed by Holder pursuant to the terms of this Convertible Note and all of the other Transaction Documents; and (ii) The Agent, on behalf of Holder, shall have any and all other rights and remedies that Holder may now or hereafter possess at law, in equity or by statute. (c) REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred upon or reserved to Holder by this Convertible Note or any of the other Transaction Documents is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder, under any of the other Transaction Documents or now or hereafter existing at law, in equity or by statute. No delay or omission by the Agent to exercise any right, power or remedy accruing upon the occurrence of any Event of Default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every right, power and remedy given by this Convertible Note and the other Transaction Documents to the Agent or Holder may be exercised from time to time and as often as may be deemed expedient by the Agent. 10. SECURITY; GUARANTY. Borrower's obligations under this Convertible Note are secured by the collateral set forth in the December Security Agreement and guaranteed pursuant to the December Guaranty. 11. NOTICES. Any notice required by the provisions of this Convertible Note to be given to Holder shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), addressed to Holder at the address appearing on the books of Borrower. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice. 12. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. 13. WAIVER OF JURY TRIAL. Borrower and Lender each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto. 14. WAIVERS. Borrower waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Convertible Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Convertible Note, and Borrower agrees that its liability shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. 15. ATTORNEYS FEES. Borrower promises to pay all reasonable costs and expenses, including attorneys' fees, incurred in the collection and enforcement of this Convertible Note, including, without limitation, enforcement before any court and including all appellate proceedings. Page 6 16. SEVERABILITY. Wherever possible each provision of this Convertible Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Convertible Note shall be prohibited by or invalid under such 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 Convertible Note and shall be interpreted so as to be effective and valid. IN WITNESS WHEREOF, Borrower has executed and delivered this Convertible Note as of the day and year and at the place first written above. BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL ------------------------------- Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer SIGNATURE PAGE TO SECURED CONVERTIBLE PROMISSORY NOTE Page 7 SCHEDULE OF ADVANCES December 19, 2001: $163,333.33, less $50,000.00, which was pre-advanced to Borrower by Lender on December 14, 2001 January 2, 2002: $93,333.33 February 1, 2002: $93,333.34 EX-10 8 exhibit_10-44.txt EXHIBIT 10.44 THIS SECURED CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURED CONVERTIBLE PROMISSORY NOTE NOR THE SECURITIES ISSUABLE HEREUNDER MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. - ------------------------------------------------------------------------------- $400,000 December 19, 2001 Woodland Hills, California BRILLIANT DIGITAL ENTERTAINMENT, INC. SECURED CONVERTIBLE PROMISSORY NOTE FOR VALUE RECEIVED, Brilliant Digital Entertainment, Inc., a Delaware corporation ("BORROWER"), located at 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, CA 91367, hereby unconditionally promises to pay to the order of Capel Capital, Ltd. ("LENDER"), and its successors, endorsees, transferees and assigns (together with Lender, "HOLDER"), the principal sum of Four Hundred Thousand Dollars ($400,000), or, such lesser amount as has been advanced by Lender to Borrower in accordance with the Purchase Agreement (as defined below) and the Schedule of Advances (as defined below), and any unpaid accrued interest thereon, as set forth below. The principal amount of this Convertible Note, and any unpaid interest accrued thereon, shall be due and payable in full on November 10, 2002 (the "MATURITY DATE") in the manner provided for in SECTION 4 below, unless this Convertible Note shall have been previously converted as provided in SECTION 6 below. 1. PURCHASE AGREEMENT. This Convertible Note has been executed and delivered by Borrower pursuant to that certain Note and Warrant Purchase Agreement, dated as of December 10, 2001, between Borrower and Lender (the "PURCHASE AGREEMENT"). Borrower herein agrees with Holder that Borrower will perform and discharge each of its covenants and agreements contained in the Purchase Agreement as from time to time amended and supplemented, the provisions of which Purchase Agreement are hereby incorporated in this Convertible Note by reference with the same effect as if it were set forth in full. The Purchase Agreement is subject to amendment in the manner provided therein, and any such amendment shall be binding upon the Holder and any subsequent holders of this Convertible Note. All capitalized terms used herein and not defined herein shall have the meanings given such terms in the Purchase Agreement. 2. ADVANCES. Lender has advanced to Borrower on the date hereof the sum of One Hundred Eighty-six Thousand Six Hundred Sixty-six Dollars and Sixty-seven Cents ($186,666.67). Attached and incorporated into this Convertible Note is a schedule of advances (the "SCHEDULE OF ADVANCES"). Lender shall provide additional advances to Borrower in accordance with the Schedule of Advances, provided that Borrower complies with the following conditions: (a) Borrower delivers to the Agent not later than December 19, 2001 an operating budget that meets with Lender's reasonable approval (the "OPERATING BUDGET"). (b) Borrower delivers to the Agent on or immediately prior to each scheduled advance date a certificate, dated the date of the advance, executed by an officer of Borrower stating that Borrower has not spent more than allowed by the Operating Budget and that actual expenses in any particular category do not exceed the amount set forth in the Operating Budget for that category by more than ten percent (10%), that the representations and warranties set forth in section 3.1 of the Purchase Agreement are true and correct as of the date of the advance, and the other conditions that Borrower is required to meet prior to any such advance under the terms of the Purchase Agreement. (c) No Event of Default hereunder or under the Purchase Agreement shall have occurred. (d) Each of the conditions set forth in Article 8 of the Purchase Agreement shall have been met by Borrower. 3. INTEREST. Borrower agrees to pay simple interest on the unpaid principal amount hereof. Interest shall accrue from the date of each advance to Borrower in accordance with the Purchase Agreement until this Convertible Note is paid in full at a rate equal to ten percent (10%) per annum. Interest shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period during which it accrues. In no event shall the interest paid hereunder, together with any other consideration paid or agreed to be paid for the use, forbearance or detention of money advanced hereunder, exceed the highest lawful rate permissible under any law which a court of competent jurisdiction may deem applicable hereto. In the event that such a court determines that the Holder has charged, received or contracted to receive interest hereunder in excess of the highest lawful rate permissible, the interest payable hereunder shall automatically be reduced to the maximum rate permitted by law, and the Holder shall promptly refund to Borrower any interest received by it in excess of the maximum lawful rate (with such reduction and refund being made first with respect to cash interest amounts paid or payable under this Convertible Note, and thereafter with respect to any other consideration received by the Holder). It is the intent hereof that Borrower not pay or contract to pay, and that the Holder not receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may lawfully be paid by Borrower under applicable law. 4. PAYMENT. All payments of principal, interest and all other amounts payable in respect of this Convertible Note shall be made by wire transfer in lawful money of the United States of America in immediately available Federal funds, to an account furnished to Borrower in writing for that purpose at least two (2) business days prior to the Maturity Date. Holder shall, before disposing of this Convertible Note or any part hereof, make a notation hereon of all principal and interest payments previously made hereunder and of the date to which interest hereon has been Page 2 paid; PROVIDED, HOWEVER, that the failure to correctly make a notation of any payment made on this Convertible Note shall not limit or otherwise affect the obligation of Borrower under this Convertible Note with respect to any loan evidenced hereby or payments of principal or interest on this Convertible Note. 5. PREPAYMENT. Borrower may not prepay this Convertible Note, in whole or in part, without the prior written consent of the Holder. Any partial prepayment, to the extent permitted by Holder, shall not affect the obligation to continue to pay in full the amount of the payments hereunder until the entire unpaid principal balance hereof and all accrued interest hereon has been paid in full. Any such prepayment shall be applied first to interest and then to principal. 6. CONVERSION RIGHTS. The Holder, and any subsequent holder of this Convertible Note, is entitled to the rights and benefits, and is subject to the obligations, conditions and restrictions, set forth in the Purchase Agreement, including without limitation the right to convert this Convertible Note into certain securities of Borrower in the manner provided in the Purchase Agreement. 7. TRANSFERS. (a) By acceptance hereof, the Holder acknowledges that this Convertible Note and the capital stock of Borrower that may be issued upon its conversion have not been registered under the Securities Act, and Holder agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Convertible Note or any capital stock issued upon its conversion in the absence of (i) an effective registration statement under the Securities Act as to this Convertible Note or such securities and registration or qualification of this Convertible Note or such securities under any applicable Blue Sky or state securities laws then in effect, or (ii) an opinion of counsel, reasonably satisfactory to Borrower, that such registration and qualification are not required. Each certificate or other instrument for capital stock issued upon the conversion of this Convertible Note shall bear a legend in the form set forth in the Purchase Agreement. (b) Subject to the provisions of SECTION 7(a) hereof, this Convertible Note and all rights hereunder are transferable, in whole or in part, upon surrender of the Convertible Note with a properly executed assignment, in the form prescribed by Borrower, at the principal office of Borrower; PROVIDED, HOWEVER, that, except for transfers by Holder of all or any portion of this Convertible Note to any parent, subsidiary or affiliate of Holder or to any officer, director, partner or member of any such parent, subsidiary or affiliate, this Convertible Note may not be transferred in whole or in part without the prior written consent of Borrower. (c) Until any transfer of this Convertible Note is made in the Convertible Note register, Borrower may treat the registered Holder as the absolute owner hereof for all purposes; PROVIDED, HOWEVER, that if and when this Convertible Note is properly assigned in blank, Borrower may (but shall not be required to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. (d) Borrower will maintain a register containing the names and addresses of the registered Holders of this Convertible Note. Any registered Holder may change such registered Holder's address as shown on the Convertible Note register by written notice to Borrower requesting such change. Page 3 (e) In the reasonable discretion of Borrower, Borrower may condition any transfer of all or any portion of this Convertible Note (other than a disposition satisfying the conditions set forth in clause (i) of SECTION 7(a) above) upon the transferee's delivery to Borrower of a written agreement, in form and substance reasonably satisfactory to Borrower, whereby the transferee (i) makes such representations and warranties to and for the benefit of Borrower as are comparable to the representations and warranties of the purchaser of the Convertible Note as set forth in the Purchase Agreement, as and to the extent applicable to the proposed disposition, and (ii) agrees to be bound by the transfer restrictions set forth in this SECTION 7. 8. TRANSFER BY BORROWER. Borrower may not assign, and no person may assume, any of the obligations of Borrower under this Convertible Note without the prior written consent of Holder, which consent may be granted or withheld in Holder's sole discretion, and any attempt to do so without such consent shall be void. 9. EVENTS OF DEFAULT; REMEDIES. (a) EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default hereunder: (i) Default in the payment of the principal of or interest on the indebtedness evidenced by this Convertible Note in accordance with the terms of this Convertible Note; (ii) A default or event of default shall occur in respect of any of the other Convertible Notes or any other indebtedness of Borrower that exceeds, in the aggregate, $75,000 and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (iii) Borrower shall be liquidated, dissolved, partitioned or terminated, or the charter thereof shall expire or be revoked; (iv) Borrower (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within thirty (30) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more; (v) Failure of Borrower to perform any of its obligations, covenants or agreements under the Purchase Agreement or any of the other Transaction Documents (other than the payment of the principal of or interest on the indebtedness evidenced by this Page 4 Convertible Note, which shall be subject to SUBSECTION 9(a)(i) above and not this SUBSECTION (v)); (vi) A default or event of default shall occur under any of the other Transaction Documents or under the Prior Transaction Documents and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period; (vii) The Holder's inability to convert this Convertible Note into securities of Borrower upon written notice to Borrower as provided for in the Purchase Agreement due to Borrower's failure to comply with (and not due to the Holder's failure to meet all applicable investor suitability requirements of) the then-applicable requirements of all federal, state and local securities laws and regulatory agencies charged with enforcing securities laws as provided for in SECTION 2.4 of the Purchase Agreement; (viii) Borrower shall fail to provide the Agent with a copy of a signed letter of intent with an investor who is, and on terms and conditions that are, reasonably satisfactory to the Agent, dated no later than February 28, 2002, pursuant to which such investor agrees to acquire equity in Borrower in consideration for an investment of at least three million dollars ($3,000,000) (the "EQUITY INVESTMENT"); (ix) The Equity Investment shall fail to fund by April 15, 2002; (x) A default or event of default shall occur in respect of any agreement of Borrower that requires the payment by Borrower of an amount in excess of $75,000; or (xi) Either of Borrower's agreements with Consumer Empowerment B.V. (better known as "Kazaa") or StreamCast Networks, Inc. (better known as "Morpheus") shall be terminated or amended in such a way as to result in a Material Adverse Effect. With respect to any Event of Default described above in SUBSECTIONS 9(a)(v), (vi) and (x) that is capable of being cured and that does not already provide its own cure procedure (a "CURABLE DEFAULT"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if Borrower provides notice to Holder of such Curable Default in accordance with the provisions hereof within three (3) business days of Borrower learning of such default and such Curable Default is fully cured and/or corrected within fifteen (15) days of Borrower's notice thereof to Holder. (b) ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of Default described in SUBSECTION 9(a)(iv), the indebtedness evidenced by this Convertible Note shall be immediately due and payable in full; and upon the occurrence of any other Event of Default described above, the Agent at any time thereafter may at its option accelerate the maturity of the indebtedness evidenced by this Convertible Note without notice of any kind. Upon the occurrence of any such Event of Default and the acceleration of the maturity of the indebtedness evidenced by the Convertible Note: (i) The Agent, on behalf of Holder, shall be immediately entitled to exercise any and all rights and remedies possessed by Holder pursuant to the terms of this Convertible Note and all of the other Transaction Documents; and Page 5 (ii) The Agent, on behalf of Holder, shall have any and all other rights and remedies that Holder may now or hereafter possess at law, in equity or by statute. (c) REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred upon or reserved to Holder by this Convertible Note or any of the other Transaction Documents is intended to be exclusive of any other right, power or remedy, but each and every such right, power and remedy shall be cumulative and concurrent and shall be in addition to any other right, power and remedy given hereunder, under any of the other Transaction Documents or now or hereafter existing at law, in equity or by statute. No delay or omission by the Agent to exercise any right, power or remedy accruing upon the occurrence of any Event of Default shall exhaust or impair any such right, power or remedy or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every right, power and remedy given by this Convertible Note and the other Transaction Documents to the Agent or Holder may be exercised from time to time and as often as may be deemed expedient by the Agent. 10. SECURITY; GUARANTY. Borrower's obligations under this Convertible Note are secured by the collateral set forth in the December Security Agreement and guaranteed pursuant to the December Guaranty. 11. NOTICES. Any notice required by the provisions of this Convertible Note to be given to Holder shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), addressed to Holder at the address appearing on the books of Borrower. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice. 12. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. 13. WAIVER OF JURY TRIAL. Borrower and Lender each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto. 14. WAIVERS. Borrower waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Convertible Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Convertible Note, and Borrower agrees that its liability shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. 15. ATTORNEYS FEES. Borrower promises to pay all reasonable costs and expenses, including attorneys' fees, incurred in the collection and enforcement of this Convertible Note, including, without limitation, enforcement before any court and including all appellate proceedings. 16. SEVERABILITY. Wherever possible each provision of this Convertible Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Convertible Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such Page 6 provision or the remaining provisions of this Convertible Note and shall be interpreted so as to be effective and valid. IN WITNESS WHEREOF, Borrower has executed and delivered this Convertible Note as of the day and year and at the place first written above. BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL ------------------------------- Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer SIGNATURE PAGE TO SECURED CONVERTIBLE PROMISSORY NOTE Page 7 SCHEDULE OF ADVANCES December 19, 2001: $186,666.67 January 2, 2002: $106,666.67 February 1, 2002: $106,666.66 EX-10 9 exhibit_10-45.txt EXHIBIT 10.45 THIS WARRANT AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE HEREUNDER MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. - ------------------------------------------------------------------------------- WARRANT TO PURCHASE COMMON STOCK OF BRILLIANT DIGITAL ENTERTAINMENT, INC. NO. 4 December 19, 2001 THIS CERTIFIES THAT, for value received, Harris Toibb, or his permitted registered assigns ("HOLDER"), is entitled, subject to the terms and conditions of this Warrant, at any time or from time to time commencing three months after the issuance date of this Warrant (the "EFFECTIVE DATE"), and before 5:00 p.m. Pacific Time on May 23, 2004 (the "EXPIRATION DATE"), to purchase from Brilliant Digital Entertainment, Inc., a Delaware corporation (the "Company"), up to a number of shares of Common Stock of the Company obtained by dividing Seven Hundred Thousand Dollars ($700,000.00) by the product obtained by multiplying 112.5% by the lesser of (i) $0.20 (the "FIXED PURCHASE PRICE"), or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (the product obtained by multiplying 112.5% by the lesser of (i) or (ii) above is referred to herein as the "PURCHASE PRICE"), at an exercise price per share equal to the Purchase Price. Both the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein. 1. CERTAIN DEFINITIONS. As used in this Warrant the following terms shall have the following respective meanings: 1.1 "FAIR MARKET VALUE" of a share of Common Stock as of a particular date shall mean: (a) If traded on a securities exchange or the Nasdaq National Market, the Fair Market Value shall be deemed to be the average of the closing prices of the Common Stock of the Company on such exchange or market over the five (5) trading days ending immediately prior to the applicable date of valuation; (b) If traded over-the-counter, the Fair Market Value shall be deemed to be the average of the closing bid and asked quotations averaged over the fifteen (15)-day period ending immediately prior to the applicable date of valuation; and (c) If there is no public market, the Fair Market Value shall be the value thereof, as agreed upon in good faith by the Company and the Holder; provided, however, that if the Company and the Holder cannot agree on such value, such value shall be determined by an independent valuation firm experienced in valuing businesses jointly selected in good faith by the Company and the Holder. Fees and expenses of the valuation firm shall be paid for by the Company. 1.2 "REGISTERED HOLDER" shall mean any Holder in whose name this Warrant is registered upon the books and records maintained by the Company. 1.3 "WARRANT" as used herein, shall include this Warrant and any warrant delivered in substitution or exchange therefor as provided herein. 1.4 "COMMON STOCK" shall mean the Common Stock of the Company and any other securities at any time receivable or issuable upon exercise of this Warrant. 2. EXERCISE OF WARRANT 2.1 PAYMENT. Subject to compliance with the terms and conditions of this Warrant and applicable securities laws, this Warrant may be exercised, in whole or in part at any time or from time to time after the Effective Date, and on or before the Expiration Date by the delivery (including, without limitation, delivery by facsimile) of the form of Notice of Exercise attached hereto as EXHIBIT 1 (the "NOTICE OF EXERCISE"), duly executed by the Holder, at the principal office of the Company, and as soon as practicable after such date, surrendering (a) this Warrant at the principal office of the Company, and (b) payment in cash (by check) or by wire transfer of an amount equal to the product obtained by multiplying the number of shares of Common Stock being purchased upon such exercise by the then effective Purchase Price (the "EXERCISE AMOUNT"). 2.2 NET ISSUE EXERCISE. In lieu of the payment methods set forth in SECTION 2.1(b) above, the Holder may elect to exchange all or some of this Warrant for shares of Common Stock equal to the value of the amount of the Warrant being exchanged on the date of exchange. If Holder elects to exchange this Warrant as provided in this SECTION 2.2, Holder shall tender to the Company the Warrant for the amount being exchanged, along with written notice of Holder's election to exchange some or all of the Warrant, and the Company shall issue to Holder the number of shares of the Common Stock computed using the following formula: Page 2 X = Y (A-B) ----------- A Where: X = the number of shares of Common Stock to be issued to Holder. Y = the number of shares of Common Stock purchasable under the amount of the Warrant being exchanged (as adjusted to the date of such calculation). A = the Fair Market Value of one share of the Common Stock. B = Purchase Price (as adjusted to the date of such calculation). 2.3 STOCK CERTIFICATES; FRACTIONAL SHARES. As soon as practicable on or after the date of any exercise of this Warrant but in any event within 5 business days after its receipt of the Exercise Amount, the Company shall issue and deliver to the person or persons designated by the Holder a certificate or certificates for the aggregate number of whole shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share equal to such fraction of the current Fair Market Value of one whole share of Common Stock as of such date of exercise. No fractional shares or scrip representing fractional shares shall be issued upon an exercise of this Warrant. 2.4 PARTIAL EXERCISE; EFFECTIVE DATE OF EXERCISE. In case of any partial exercise of this Warrant, the Company shall cancel this Warrant upon surrender hereof and shall execute and deliver a new Warrant of like tenor and date for the balance of the shares of Common Stock purchasable hereunder. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above. The person entitled to receive the shares of Common Stock issuable upon exercise of this Warrant shall be treated for all purposes as the holder of record of such shares as of the close of business on the date the Company receives the Notice of Exercise, subject to receipt of the Exercise Amount. 2.5 VESTING. The warrants shall vest fully upon issuance. 3. VALID ISSUANCE: TAXES. All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable. The Company shall not be required to pay any tax or other charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Common Stock in any name other than that of the Registered Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate or security until such tax or other charge has been paid, or it has been established to the Company's reasonable satisfaction that no tax or other charge is due. 4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of Page 3 stock or other securities or property receivable or issuable upon exercise of this Warrant) and the Purchase Price are subject to adjustment upon occurrence of the following events: 4.1 ADJUSTMENT FOR STOCK SPLITS, STOCK SUBDIVISIONS OR COMBINATIONS OF SHARES. The Purchase Price of this Warrant shall be proportionally decreased and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally increased to reflect any stock split or other subdivision of the Company's Common Stock. The Purchase Price of this Warrant shall be proportionally increased and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally decreased to reflect any reverse stock split, consolidation or combination of the Company's Common Stock. 4.2 ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS OF STOCK OR OTHER SECURITIES OR PROPERTY. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Common Stock (or any shares of stock or other securities at the time issuable upon exercise of the Warrant) payable in (a) securities of the Company (including debt instruments) or (b) assets (excluding cash dividends paid or payable solely out of retained earnings), then, in each such case, the Holder of this Warrant on exercise hereof at any time after the consummation, effective date or record date of such dividend or other distribution, shall receive, in addition to the shares of Common Stock (or such other stock or securities) issuable on such exercise prior to such date, and without the payment of additional consideration therefor, the securities or such other assets of the Company to which such Holder would have been entitled upon such date if such Holder had exercised this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such additional securities or other assets distributed with respect to such shares as aforesaid during such period giving effect to all adjustments called for by this SECTION 4. 4.3 RECLASSIFICATION. If the Company, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change, and the Purchase Price therefore shall be appropriately adjusted, all subject to further adjustment as provided in this SECTION 4. No adjustment shall be made pursuant to this SECTION 4.3 upon any conversion or redemption of the Common Stock which is the subject of SECTION 4.5. 4.4 ADJUSTMENT FOR CAPITAL REORGANIZATION, MERGER OR CONSOLIDATION. In case of any capital reorganization of the capital stock of the Company (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or any merger or consolidation of the Company with or into another Page 4 corporation, or the sale of all or substantially all the assets of the Company then, and in each such case, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the Holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Purchase Price then in effect, the number of shares of stock or other securities or property (including cash) to which the holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this SECTION 4. The foregoing provisions of this SECTION 4.4 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be the value as agreed upon in good faith by the Company and the Holder; provided, however, that if the Company and the Holder cannot agree on such value, such value shall be determined by an independent valuation firm experienced in valuing such property jointly selected in good faith by the Company and the Holder. All Fees and expenses of the valuation firm shall be paid for by the Company. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. 4.5 CONVERSION OF COMMON STOCK. In case all or any portion of the authorized and outstanding shares of Common Stock of the Company are redeemed or converted or reclassified into other securities or property pursuant to the Company's Certificate of Incorporation or otherwise, or the Common Stock otherwise ceases to exist, then, in such case, the Holder of this Warrant, upon exercise hereof at any time after the date on which the Common Stock is so redeemed or converted, reclassified or ceases to exist (the "TERMINATION DATE"), shall receive, in lieu of the number of shares of Common Stock that would have been issuable upon such exercise immediately prior to the Termination Date, the securities or property that would have been received if this Warrant had been exercised in full and the Common Stock received thereupon had been simultaneously converted immediately prior to the Termination Date, all subject to further adjustment as provided in this Warrant. Additionally, the Purchase Price shall be immediately adjusted such that the aggregate Purchase Price of the maximum number of securities or other property for which this Warrant is exercisable immediately after the Termination Date is equal to the aggregate Purchase Price of the maximum number of shares of Common Stock for which this Warrant was exercisable immediately prior to the Termination Date, all subject to further adjustment as provided herein. Page 5 4.6 FULL RATCHET ADJUSTMENT FOR ISSUANCE OF ADDITIONAL STOCK. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Purchase Price in effect immediately prior to the issuance of such Additional Stock, the Fixed Purchase Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Purchase Price of the shares subject to exercise under this Warrant shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 4.6, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, each as may be contemplated in SECTIONS 4.1 through 4.3 and SECTION 4.5 above, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding as of December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions, as may be contemplated in SECTION 4.4 above; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in the Purchase Price, or number or type of shares issuable upon exercise of this Warrant, the Chief Financial Officer or Controller of the Company shall compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of the adjusted Purchase Price. The Company shall promptly send (by facsimile and by either first class mail, postage prepaid or overnight delivery) a copy of each such certificate to the Holder. In addition, if at any time prior to the Expiration Date: 5.1 the Company shall declare any dividend payable in any securities or make any distribution to its stockholders; Page 6 5.2 the Company shall offer to its stockholders as a class any additional shares of Common Stock or securities convertible into Common Stock or any right to subscribe to Common Stock or securities convertible or exchangeable into Common Stock; or 5.3 a dissolution or winding up of the Company (other than in connection with a consolidation, merger or sale of all or substantially all of its property, assets and business as an entirety) shall be proposed; then in any one or more of such events, the Company shall give notice in writing of such event to the Holder at least 10 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution or subscription rights, or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or date of the closing of the transfer books, as the case may be. 6. LOSS OR MUTILATION. Upon receipt of evidence reasonably satisfactory to the Company of the ownership of and the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver in lieu thereof a new Warrant of like tenor as the lost, stolen, destroyed or mutilated Warrant. 7. RESERVATION OF COMMON STOCK. The Company hereby covenants that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant such number of shares of Common Stock or other shares of capital stock of the Company as are from time to time issuable upon exercise of this Warrant and, from time to time, will take all steps necessary to amend its Certificate of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant. All such shares shall be duly authorized, and when issued upon such exercise, shall be validly issued, fully paid and non-assessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights, except encumbrances or restrictions arising under federal or state securities laws. Issuance of this Warrant shall constitute full authority to the Company's Officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 8. TRANSFER AND EXCHANGE. Subject to the terms and conditions of this Warrant and compliance with all applicable securities laws, this Warrant and all rights hereunder may be transferred to any Registered Holder's parent, subsidiary or affiliate or to any officer, director, partner or member of any such parent, subsidiary or affiliate, in whole or in part, on the books of the Company maintained for such purpose at the principal office of the Company referred to above, by the Registered Holder hereof in person, or by duly authorized attorney, upon surrender of this Warrant properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any permitted partial transfer, the Company will issue and deliver to the Registered Holder a new Warrant or Warrants with respect to the shares of Common Stock not so transferred. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that when this Warrant shall have been so endorsed, the person in possession of Page 7 this Warrant may be treated by the Company, and all other persons dealing with this Warrant, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding; provided, however that until a transfer of this Warrant is duly registered on the books of the Company, the Company may treat the Registered Holder hereof as the owner for all purposes. 9. RESTRICTIONS ON TRANSFER. By acceptance hereof, the Holder acknowledges that this Warrant and the capital stock of the Company that may be issued upon its exercise have not been registered under the Securities Act, and Holder agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Warrant or any capital stock issued upon its exercise in the absence of (i) an effective registration statement under the Securities Act as to this Warrant or such securities and registration or qualification of this Warrant or such securities under any applicable Blue Sky or state securities laws then in effect, or (ii) an opinion of counsel, reasonably satisfactory to the Company, that such registration and qualification are not required. In the reasonable discretion of the Company, the Company may condition any transfer of all or any portion of this Warrant or the capital stock of the Company that may be issued upon its exercise (other than a disposition satisfying the conditions set forth in clause (i) of SECTION 9(i) above) upon the transferee's delivery to the Company of a written agreement, in form and substance reasonably satisfactory to the Company, whereby the transferee makes such representations and warranties to and for the benefit of the Company as are comparable to the representations and warranties of the Holder set forth in SECTION 10 below. 10. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the Holder hereby represents, warrants and covenants that any shares of stock purchased upon exercise of this Warrant shall be acquired for investment only and not with a view to, or for sale in connection with, any distribution thereof; that the Holder has had such opportunity as such Holder has deemed adequate to obtain from representatives of the Company such information as is necessary to permit the Holder to evaluate the merits and risks of its investment in the Company; that the Holder is able to bear the economic risk of holding such shares as may be acquired pursuant to the exercise of this Warrant for an indefinite period; that the Holder understands that the shares of stock acquired pursuant to the exercise of this Warrant will not be registered under the 1933 Act (unless otherwise required pursuant to exercise by the Holder of the registration rights, if any, granted to the Registered Holder) and will be "restricted securities" within the meaning of Rule 144 under the 1933 Act and that the exemption from registration under Rule 144 will not be available for at least one (1) year from the date of exercise of this Warrant, subject to any special treatment by the SEC for exercise of this Warrant pursuant to SECTION 2.2, and even then will not be available unless a public market then exists for the stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and that all stock certificates representing shares of stock issued to the Holder upon exercise of this Warrant or upon conversion of such shares may have affixed thereto a legend substantially in the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN Page 8 EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. 11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. In the absence of affirmative action by such Holder to purchase Common Stock by exercise of this Warrant or Common Stock upon conversion thereof, no provisions of this Warrant, and no enumeration herein of the rights or privileges of the Holder hereof shall cause such Holder hereof to be a stockholder of the Company for any purpose. 12. NOTICES. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Agreement shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party; (b) when received when sent by facsimile at the address and number set forth below; (c) three business days after deposit in the U.S. mail with first class or certified mail receipt requested postage prepaid and addressed to the other party as set forth below; or (d) the next business day after deposit with a national overnight delivery service, postage prepaid, addressed to the parties as set forth below with next-business-day delivery guaranteed, provided that the sending party receives a confirmation of delivery from the delivery service provider. To Holder: To the Company: HARRIS TOIBB BRILLIANT DIGITAL ENTERTAINMENT, INC. 6355 Topanga Canyon Blvd., 6355 Topanga Canyon Blvd., Suite 120 Suite 411 Woodland Hills, CA 91367 Woodland Hills, CA 91367 Attn: Chief Financial Officer Fax Number: (818) 883-5636 Fax Number: (818) 615-0995 Each person making a communication hereunder by facsimile shall promptly confirm by telephone to the person to whom such communication was addressed each communication made by it by facsimile pursuant hereto. A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this SECTION 12 by giving the other party written notice of the new address in the manner set forth above. 13. HEADINGS. The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof. 14. LAW GOVERNING. This Warrant shall be construed and enforced in accordance with, and governed by, the laws of the State of California. 15. WAIVER OF JURY TRIAL. The Company and, by acceptance of this Warrant, the Holder each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto. Page 9 16. NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Registered Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock issuable upon the exercise of this Warrant above the amount payable therefore upon such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon exercise of this Warrant. 17. SEVERABILITY. If any term, provision, covenant or restriction of this Warrant is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Warrant shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 18. COUNTERPARTS. For the convenience of the parties, any number of counterparts of this Warrant may be executed by the parties hereto and each such executed counterpart shall be, and shall be deemed to be, an original instrument. Page 10 IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the date first set forth above. Brilliant Digital Entertainment, Inc. /S/ HARRIS TOIBB /S/ ROBERT CHMIEL - ------------------------------------ ------------------------------------- By By Harris Toibb Robert Chmiel - ------------------------------------ ------------------------------------- Printed Name Printed Name Chief Operating Officer and N/A Chief Financial Officer - ------------------------------------ ------------------------------------- Title Title SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK Page 11 EXHIBIT 1 NOTICE OF EXERCISE (To be executed upon exercise of Warrant) To: Brilliant Digital Entertainment, Inc. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, the securities of Brilliant Digital Entertainment, Inc., as provided for therein, and (check the applicable box): [ ] tenders herewith payment of the exercise price in full in the form of cash or a certified or official bank check or wire transfer in same-day funds in the amount of $____________ for _________ such securities. [ ] Elects the Net Issue Exercise option pursuant to Section 2.2 of the Warrant, and accordingly requests delivery of a net of ______________ of such securities. Please issue a certificate or certificates for such securities in the name of, and pay any cash for any fractional share to (please print name, address and social security number): Name: ------------------------------------------------------------------- Address: ------------------------------------------------------------------- Signature: ------------------------------------------------------------------- Note: The above signature should correspond exactly with the name on the first page of this Warrant Certificate. If said number of shares shall not be all the shares purchasable under the within Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder rounded up to the next higher whole number of shares. EXHIBIT 2 ASSIGNMENT (To be executed only upon assignment of Warrant Certificate) For value received, the undersigned hereby sells, assigns and transfers unto the parties set forth below all or such portion of the Warrants represented by the within Warrant Certificate set forth below, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company with respect to the number of Warrants set forth below, with full power of substitution in the premises: NAME(S) OF ASSIGNEE(S) ADDRESS # OF WARRANTS - ---------------------- ------------------------- ---------------------- And if said number of Warrants shall not be all the Warrants represented by the Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the Warrants registered by said Warrant Certificate. Dated: ------------------------------------------------------------------ Signature: ------------------------------------------------------------------ Notice: The signature to the foregoing Assignment must correspond to the name as written upon the face of this security in every particular, without alteration or any change whatsoever. EX-10 10 exhibit_10-46.txt EXHIBIT 10.46 THIS WARRANT AND THE SECURITIES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE HEREUNDER MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. - ------------------------------------------------------------------------------- WARRANT TO PURCHASE COMMON STOCK OF BRILLIANT DIGITAL ENTERTAINMENT, INC. NO. 5 December 19, 2001 THIS CERTIFIES THAT, for value received, Capel Capital Ltd., or its permitted registered assigns ("HOLDER"), is entitled, subject to the terms and conditions of this Warrant, at any time or from time to time commencing three months after the issuance date of this Warrant (the "EFFECTIVE DATE"), and before 5:00 p.m. Pacific Time on May 23, 2004 (the "EXPIRATION DATE"), to purchase from Brilliant Digital Entertainment, Inc., a Delaware corporation (the "COMPANY"), up to a number of shares of Common Stock of the Company obtained by dividing Eight Hundred Thousand Dollars ($800,000.00) by the product obtained by multiplying 112.5% by the lesser of (i) $0.20 (the "FIXED PURCHASE PRICE"), or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (the product obtained by multiplying 112.5% by the lesser of (i) or (ii) above is referred to herein as the "PURCHASE PRICE"), at an exercise price per share equal to the Purchase Price. Both the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein. 1. CERTAIN DEFINITIONS. As used in this Warrant the following terms shall have the following respective meanings: 1.1 "FAIR MARKET VALUE" of a share of Common Stock as of a particular date shall mean: (a) If traded on a securities exchange or the Nasdaq National Market, the Fair Market Value shall be deemed to be the average of the closing prices of the Common Stock of the Company on such exchange or market over the five (5) trading days ending immediately prior to the applicable date of valuation; (b) If traded over-the-counter, the Fair Market Value shall be deemed to be the average of the closing bid and asked quotations averaged over the fifteen (15)-day period ending immediately prior to the applicable date of valuation; and (c) If there is no public market, the Fair Market Value shall be the value thereof, as agreed upon in good faith by the Company and the Holder; provided, however, that if the Company and the Holder cannot agree on such value, such value shall be determined by an independent valuation firm experienced in valuing businesses jointly selected in good faith by the Company and the Holder. Fees and expenses of the valuation firm shall be paid for by the Company. 1.2 "REGISTERED HOLDER" shall mean any Holder in whose name this Warrant is registered upon the books and records maintained by the Company. 1.3 "WARRANT" as used herein, shall include this Warrant and any warrant delivered in substitution or exchange therefor as provided herein. 1.4 "COMMON STOCK" shall mean the Common Stock of the Company and any other securities at any time receivable or issuable upon exercise of this Warrant. 2. EXERCISE OF WARRANT 2.1 PAYMENT. Subject to compliance with the terms and conditions of this Warrant and applicable securities laws, this Warrant may be exercised, in whole or in part at any time or from time to time after the Effective Date, and on or before the Expiration Date by the delivery (including, without limitation, delivery by facsimile) of the form of Notice of Exercise attached hereto as EXHIBIT 1 (the "NOTICE OF EXERCISE"), duly executed by the Holder, at the principal office of the Company, and as soon as practicable after such date, surrendering (a) this Warrant at the principal office of the Company, and (b) payment in cash (by check) or by wire transfer of an amount equal to the product obtained by multiplying the number of shares of Common Stock being purchased upon such exercise by the then effective Purchase Price (the "EXERCISE AMOUNT"). 2.2 NET ISSUE EXERCISE. In lieu of the payment methods set forth in SECTION 2.1(B) above, the Holder may elect to exchange all or some of this Warrant for shares of Common Stock equal to the value of the amount of the Warrant being exchanged on the date of exchange. If Holder elects to exchange this Warrant as provided in this SECTION 2.2, Holder shall tender to the Company the Warrant for the amount being exchanged, along with written notice of Holder's election to exchange some or all of the Warrant, and the Company shall issue to Holder the number of shares of the Common Stock computed using the following formula: Page 2 X = Y (A-B) ----------- A Where: X = the number of shares of Common Stock to be issued to Holder. Y = the number of shares of Common Stock purchasable under the amount of the Warrant being exchanged (as adjusted to the date of such calculation). A = the Fair Market Value of one share of the Common Stock. B = Purchase Price (as adjusted to the date of such calculation). 2.3 STOCK CERTIFICATES; FRACTIONAL SHARES. As soon as practicable on or after the date of any exercise of this Warrant but in any event within 5 business days after its receipt of the Exercise Amount, the Company shall issue and deliver to the person or persons designated by the Holder a certificate or certificates for the aggregate number of whole shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share equal to such fraction of the current Fair Market Value of one whole share of Common Stock as of such date of exercise. No fractional shares or scrip representing fractional shares shall be issued upon an exercise of this Warrant. 2.4 PARTIAL EXERCISE; EFFECTIVE DATE OF EXERCISE. In case of any partial exercise of this Warrant, the Company shall cancel this Warrant upon surrender hereof and shall execute and deliver a new Warrant of like tenor and date for the balance of the shares of Common Stock purchasable hereunder. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above. The person entitled to receive the shares of Common Stock issuable upon exercise of this Warrant shall be treated for all purposes as the holder of record of such shares as of the close of business on the date the Company receives the Notice of Exercise, subject to receipt of the Exercise Amount. 2.5 VESTING. The warrants shall vest fully upon issuance. 3. VALID ISSUANCE: TAXES. All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable. The Company shall not be required to pay any tax or other charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Common Stock in any name other than that of the Registered Holder of this Warrant, and in such case the Company shall not be required to issue or deliver any stock certificate or security until such tax or other charge has been paid, or it has been established to the Company's reasonable satisfaction that no tax or other charge is due. 4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of Page 3 stock or other securities or property receivable or issuable upon exercise of this Warrant) and the Purchase Price are subject to adjustment upon occurrence of the following events: 4.1 ADJUSTMENT FOR STOCK SPLITS, STOCK SUBDIVISIONS OR COMBINATIONS OF SHARES. The Purchase Price of this Warrant shall be proportionally decreased and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally increased to reflect any stock split or other subdivision of the Company's Common Stock. The Purchase Price of this Warrant shall be proportionally increased and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be proportionally decreased to reflect any reverse stock split, consolidation or combination of the Company's Common Stock. 4.2 ADJUSTMENT FOR DIVIDENDS OR DISTRIBUTIONS OF STOCK OR OTHER SECURITIES OR PROPERTY. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Common Stock (or any shares of stock or other securities at the time issuable upon exercise of the Warrant) payable in (a) securities of the Company (including debt instruments) or (b) assets (excluding cash dividends paid or payable solely out of retained earnings), then, in each such case, the Holder of this Warrant on exercise hereof at any time after the consummation, effective date or record date of such dividend or other distribution, shall receive, in addition to the shares of Common Stock (or such other stock or securities) issuable on such exercise prior to such date, and without the payment of additional consideration therefor, the securities or such other assets of the Company to which such Holder would have been entitled upon such date if such Holder had exercised this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such additional securities or other assets distributed with respect to such shares as aforesaid during such period giving effect to all adjustments called for by this SECTION 4. 4.3 RECLASSIFICATION. If the Company, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change, and the Purchase Price therefore shall be appropriately adjusted, all subject to further adjustment as provided in this SECTION 4. No adjustment shall be made pursuant to this SECTION 4.3 upon any conversion or redemption of the Common Stock which is the subject of SECTION 4.5. 4.4 ADJUSTMENT FOR CAPITAL REORGANIZATION, MERGER OR CONSOLIDATION. In case of any capital reorganization of the capital stock of the Company (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or any merger or consolidation of the Company with or into another Page 4 corporation, or the sale of all or substantially all the assets of the Company then, and in each such case, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the Holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Purchase Price then in effect, the number of shares of stock or other securities or property (including cash) to which the holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this SECTION 4. The foregoing provisions of this SECTION 4.4 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be the value as agreed upon in good faith by the Company and the Holder; provided, however, that if the Company and the Holder cannot agree on such value, such value shall be determined by an independent valuation firm experienced in valuing such property jointly selected in good faith by the Company and the Holder. All Fees and expenses of the valuation firm shall be paid for by the Company. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. 4.5 CONVERSION OF COMMON STOCK. In case all or any portion of the authorized and outstanding shares of Common Stock of the Company are redeemed or converted or reclassified into other securities or property pursuant to the Company's Certificate of Incorporation or otherwise, or the Common Stock otherwise ceases to exist, then, in such case, the Holder of this Warrant, upon exercise hereof at any time after the date on which the Common Stock is so redeemed or converted, reclassified or ceases to exist (the "TERMINATION DATE"), shall receive, in lieu of the number of shares of Common Stock that would have been issuable upon such exercise immediately prior to the Termination Date, the securities or property that would have been received if this Warrant had been exercised in full and the Common Stock received thereupon had been simultaneously converted immediately prior to the Termination Date, all subject to further adjustment as provided in this Warrant. Additionally, the Purchase Price shall be immediately adjusted such that the aggregate Purchase Price of the maximum number of securities or other property for which this Warrant is exercisable immediately after the Termination Date is equal to the aggregate Purchase Price of the maximum number of shares of Common Stock for which this Warrant was exercisable immediately prior to the Termination Date, all subject to further adjustment as provided herein. Page 5 4.6 FULL RATCHET ADJUSTMENT FOR ISSUANCE OF ADDITIONAL STOCK. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Purchase Price in effect immediately prior to the issuance of such Additional Stock, the Fixed Purchase Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Purchase Price of the shares subject to exercise under this Warrant shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 4.6, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, each as may be contemplated in SECTIONS 4.1 through 4.3 and SECTION 4.5 above, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding as of December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions, as may be contemplated in SECTION 4.4 above; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in the Purchase Price, or number or type of shares issuable upon exercise of this Warrant, the Chief Financial Officer or Controller of the Company shall compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of the adjusted Purchase Price. The Company shall promptly send (by facsimile and by either first class mail, postage prepaid or overnight delivery) a copy of each such certificate to the Holder. In addition, if at any time prior to the Expiration Date: 5.1 the Company shall declare any dividend payable in any securities or make any distribution to its stockholders; Page 6 5.2 the Company shall offer to its stockholders as a class any additional shares of Common Stock or securities convertible into Common Stock or any right to subscribe to Common Stock or securities convertible or exchangeable into Common Stock; or 5.3 a dissolution or winding up of the Company (other than in connection with a consolidation, merger or sale of all or substantially all of its property, assets and business as an entirety) shall be proposed; then in any one or more of such events, the Company shall give notice in writing of such event to the Holder at least 10 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution or subscription rights, or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or date of the closing of the transfer books, as the case may be. 6. LOSS OR MUTILATION. Upon receipt of evidence reasonably satisfactory to the Company of the ownership of and the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver in lieu thereof a new Warrant of like tenor as the lost, stolen, destroyed or mutilated Warrant. 7. RESERVATION OF COMMON STOCK. The Company hereby covenants that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant such number of shares of Common Stock or other shares of capital stock of the Company as are from time to time issuable upon exercise of this Warrant and, from time to time, will take all steps necessary to amend its Certificate of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant. All such shares shall be duly authorized, and when issued upon such exercise, shall be validly issued, fully paid and non-assessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights, except encumbrances or restrictions arising under federal or state securities laws. Issuance of this Warrant shall constitute full authority to the Company's Officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 8. TRANSFER AND EXCHANGE. Subject to the terms and conditions of this Warrant and compliance with all applicable securities laws, this Warrant and all rights hereunder may be transferred to any Registered Holder's parent, subsidiary or affiliate or to any officer, director, partner or member of any such parent, subsidiary or affiliate, in whole or in part, on the books of the Company maintained for such purpose at the principal office of the Company referred to above, by the Registered Holder hereof in person, or by duly authorized attorney, upon surrender of this Warrant properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any permitted partial transfer, the Company will issue and deliver to the Registered Holder a new Warrant or Warrants with respect to the shares of Common Stock not so transferred. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that when this Warrant shall have been so endorsed, the person in possession of Page 7 this Warrant may be treated by the Company, and all other persons dealing with this Warrant, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding; provided, however that until a transfer of this Warrant is duly registered on the books of the Company, the Company may treat the Registered Holder hereof as the owner for all purposes. 9. RESTRICTIONS ON TRANSFER. By acceptance hereof, the Holder acknowledges that this Warrant and the capital stock of the Company that may be issued upon its exercise have not been registered under the Securities Act, and Holder agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Warrant or any capital stock issued upon its exercise in the absence of (i) an effective registration statement under the Securities Act as to this Warrant or such securities and registration or qualification of this Warrant or such securities under any applicable Blue Sky or state securities laws then in effect, or (ii) an opinion of counsel, reasonably satisfactory to the Company, that such registration and qualification are not required. In the reasonable discretion of the Company, the Company may condition any transfer of all or any portion of this Warrant or the capital stock of the Company that may be issued upon its exercise (other than a disposition satisfying the conditions set forth in clause (i) of SECTION 9(i) above) upon the transferee's delivery to the Company of a written agreement, in form and substance reasonably satisfactory to the Company, whereby the transferee makes such representations and warranties to and for the benefit of the Company as are comparable to the representations and warranties of the Holder set forth in SECTION 10 below. 10. COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the Holder hereby represents, warrants and covenants that any shares of stock purchased upon exercise of this Warrant shall be acquired for investment only and not with a view to, or for sale in connection with, any distribution thereof; that the Holder has had such opportunity as such Holder has deemed adequate to obtain from representatives of the Company such information as is necessary to permit the Holder to evaluate the merits and risks of its investment in the Company; that the Holder is able to bear the economic risk of holding such shares as may be acquired pursuant to the exercise of this Warrant for an indefinite period; that the Holder understands that the shares of stock acquired pursuant to the exercise of this Warrant will not be registered under the 1933 Act (unless otherwise required pursuant to exercise by the Holder of the registration rights, if any, granted to the Registered Holder) and will be "restricted securities" within the meaning of Rule 144 under the 1933 Act and that the exemption from registration under Rule 144 will not be available for at least one (1) year from the date of exercise of this Warrant, subject to any special treatment by the SEC for exercise of this Warrant pursuant to SECTION 2.2, and even then will not be available unless a public market then exists for the stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and that all stock certificates representing shares of stock issued to the Holder upon exercise of this Warrant or upon conversion of such shares may have affixed thereto a legend substantially in the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN Page 8 EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. 11. NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. In the absence of affirmative action by such Holder to purchase Common Stock by exercise of this Warrant or Common Stock upon conversion thereof, no provisions of this Warrant, and no enumeration herein of the rights or privileges of the Holder hereof shall cause such Holder hereof to be a stockholder of the Company for any purpose. 12. NOTICES. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Agreement shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party; (b) when received when sent by facsimile at the address and number set forth below; (c) three business days after deposit in the U.S. mail with first class or certified mail receipt requested postage prepaid and addressed to the other party as set forth below; or (d) the next business day after deposit with a national overnight delivery service, postage prepaid, addressed to the parties as set forth below with next-business-day delivery guaranteed, provided that the sending party receives a confirmation of delivery from the delivery service provider. To Holder: To the Company: CAPEL CAPITAL LTD. BRILLIANT DIGITAL ENTERTAINMENT, INC. PO Box 212 6355 Topanga Canyon Blvd., Suite 120 Hadsley House Woodland Hills, CA 91367 St. Peter Port Attn: Chief Financial Officer GUERNSEY Fax Number: (818) 615-0995 The Channel Islands Fax Number: 44-1481-713112 Each person making a communication hereunder by facsimile shall promptly confirm by telephone to the person to whom such communication was addressed each communication made by it by facsimile pursuant hereto. A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this SECTION 12 by giving the other party written notice of the new address in the manner set forth above. 13. HEADINGS. The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof. 14. LAW GOVERNING. This Warrant shall be construed and enforced in accordance with, and governed by, the laws of the State of California. Page 9 15. WAIVER OF JURY TRIAL. The Company and, by acceptance of this Warrant, the Holder each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto. 16. NO IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Registered Holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock issuable upon the exercise of this Warrant above the amount payable therefore upon such exercise, and (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon exercise of this Warrant. 17. SEVERABILITY. If any term, provision, covenant or restriction of this Warrant is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Warrant shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 18. COUNTERPARTS. For the convenience of the parties, any number of counterparts of this Warrant may be executed by the parties hereto and each such executed counterpart shall be, and shall be deemed to be, an original instrument. Page 10 IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the date first set forth above. Capel Capital Ltd. Brilliant Digital Entertainment, Inc. /S/ NICK HANNAH /S/ ROBERT CHMIEL - ---------------------------------- ------------------------------------- By By Nick Hannah Robert Chmiel - ---------------------------------- ------------------------------------- Printed Name Printed Name Chief Operating Officer and Director of Corporate Director Chief Financial Officer - ---------------------------------- ------------------------------------- Title Title SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK Page 11 EXHIBIT 1 NOTICE OF EXERCISE (To be executed upon exercise of Warrant) To: Brilliant Digital Entertainment, Inc. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, the securities of Brilliant Digital Entertainment, Inc., as provided for therein, and (check the applicable box): [ ] tenders herewith payment of the exercise price in full in the form of cash or a certified or official bank check or wire transfer in same-day funds in the amount of $____________ for _________ such securities. [ ] Elects the Net Issue Exercise option pursuant to Section 2.2 of the Warrant, and accordingly requests delivery of a net of ______________ of such securities. Please issue a certificate or certificates for such securities in the name of, and pay any cash for any fractional share to (please print name, address and social security number): Name: ------------------------------------------------------------------- Address: ------------------------------------------------------------------- Signature: ------------------------------------------------------------------- Note: The above signature should correspond exactly with the name on the first page of this Warrant Certificate. If said number of shares shall not be all the shares purchasable under the within Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder rounded up to the next higher whole number of shares. EXHIBIT 2 ASSIGNMENT (To be executed only upon assignment of Warrant Certificate) For value received, the undersigned hereby sells, assigns and transfers unto the parties set forth below all or such portion of the Warrants represented by the within Warrant Certificate set forth below, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company with respect to the number of Warrants set forth below, with full power of substitution in the premises: NAME(S) OF ASSIGNEE(S) ADDRESS # OF WARRANTS - ---------------------- ------------------------ ----------------------- And if said number of Warrants shall not be all the Warrants represented by the Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the Warrants registered by said Warrant Certificate. Dated: ------------------------------------------------------------------- Signature: ------------------------------------------------------------------- Notice: The signature to the foregoing Assignment must correspond to the name as written upon the face of this security in every particular, without alteration or any change whatsoever. EX-10 11 exhibit_10-47.txt EXHIBIT 10.47 AMENDMENT NUMBER TWO TO NOTE AND WARRANT PURCHASE AGREEMENTS THIS AMENDMENT NUMBER TWO TO NOTE AND WARRANT PURCHASE AGREEMENTS (this "AMENDMENT"), is made and entered into as of the 19th day of December, 2001, by and between BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation (the "COMPANY"), located at 6355 Topanga Canyon Boulevard, Suite 120, Woodland Hills, CA 91367, and HARRIS TOIBB, on behalf of himself ("TOIBB"), located at 6355 Topanga Canyon Boulevard, Suite 411, Woodland Hills, CA 91367, and acknowledged and consented to by the Purchasers. RECITALS A. The Company is a party to (i) that certain Note and Warrant Purchase Agreement, dated April 19, 2001, between the Company and Toibb, (ii) that certain Note and Warrant Purchase Agreement, dated April 19, 2001, between the Company and Europlay 1, LLC, and (iii) that certain Note and Warrant Purchase Agreement, dated April 26, 2001, between the Company and Preston Ford Inc. (each, an "ORIGINAL AGREEMENT" and collectively, the "ORIGINAL AGREEMENTS"), pursuant to which the Company borrowed funds from each of the Purchasers identified in the Original Agreements, and in consideration therefore each such Purchaser was issued common stock purchase warrants and a convertible promissory note in the principal amount set forth on the Signature Page to the Purchaser's respective Original Agreement. The Original Agreements were amended by that certain Amendment to Note and Warrant Purchase Agreements, dated as of May 23, 2001, between the Company and Toibb. All capitalized terms used herein and not defined herein shall have the meanings given such terms in the Original Agreements. B. The Company has requested that Harris Toibb and another party make additional loans to the Company to finance the Company's and its subsidiaries' operations (the "New Loans"). In connection with, and as a condition to, the making of the New Loans, the Original Agreements, the Convertible Notes, the Security Agreement and certain other documents will be amended pursuant to certain documents (the "Amendment Documents") that will be executed and delivered in connection with the New Loans. It is a condition to the making of the New Loans that the Original Agreements be amended in the manner set forth herein. C. Section 11.8 of each of the Original Agreements permits Toibb, on behalf of himself and the other Purchasers as Agent, to amend each of the Original Agreements with the consent of the Company. D. The Company and Toibb desire to amend each of the Original Agreements to provide for a new Conversion Price for the Convertible Notes and a new exercise price for the Warrants, to further provide for an automatic adjustment to the Conversion Price for the Convertible Notes in the event that the Company issues certain Additional Stock (as defined below) at a price per share below the Conversion Price, and to add certain additional covenants and Events of Default, and the Purchasers desire to acknowledge and consent to such amendments. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the Original Agreements is hereby amended as follows: 1. The language of SECTION 1.2 of the Original Agreements is hereby deleted in its entirety and replaced with the following language: "AGREEMENT TO PURCHASE AND SELL CONVERTIBLE NOTES. The Company agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase from the Company, a Convertible Note in the principal amount set forth on the Signature Page to this Agreement (the "COMMITTED AMOUNT") on the terms and conditions set forth herein. Additionally, in further consideration of the Purchaser's purchase of the Convertible Note hereunder, the Company agrees to issue to the Purchaser, and the Purchaser agrees to accept from the Company, a Warrant initially exercisable for a number of Warrant Shares equal to two hundred percent (200%) of the Committed Amount (the "WARRANT COVERAGE") at a price equal to 1.125 times the lesser of (i) $0.20 or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002 (subject to appropriate adjustment for stock splits, stock dividends, combinations, recapitalizations and the like). The number and type of shares issuable upon exercise of the Warrant is subject to adjustment as set forth in the Warrant." 2. The language of SECTION 2.1 of the Original Agreements is hereby deleted in its entirety and replaced with the following language: "OPTIONAL CONVERSION. From and after the Closing Date, the Purchaser shall have the right, at its option, by giving written notice to the Company at its principal office at any time prior to the full repayment of the Convertible Note, to convert in whole or in part the outstanding principal amount of the Convertible Note and all accrued interest thereon into a number of Conversion Shares equal to the quotient obtained by dividing the outstanding principal amount of the Convertible Note and all accrued interest thereon at a price per share equal to the lesser of (i) $0.20 (the "FIXED CONVERSION PRICE") or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. Pacific Time on November 10, 2002 (subject to appropriate adjustment for stock splits, stock dividends, combinations, recapitalizations and the like) ((i) and (ii) above are collectively referred to as the "CONVERSION PRICE")." 3. SECTIONS 2.2, 2.3, 2.4 AND 2.5 of the Original Agreements are hereby renumbered to be SECTIONS 2.3, 2.4, 2.5 AND 2.6, and a new SECTION 2.2 is hereby added to read as follows: "ISSUANCE OF ADDITIONAL STOCK BELOW THE CONVERSION PRICE. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Conversion Price in effect immediately prior to the issuance of such Additional Stock, the Fixed Conversion Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Conversion Price of the shares subject to Page 2 conversion shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 2.2, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding as of December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001." 4. A new SECTION 4.3 is hereby added to the Original Agreements, to read in full as follows: "4.3 NOTICE OF TITLE 11 FILING. The Company shall provide to the Purchaser written notice of any decision or corporate action taken by the Company authorizing the filing by the Company of a voluntary petition for relief under Title 11 of the United States Code at least ten (10) days prior to the date selected for such filing." 5. A new SECTION 4.4 is hereby added to the Original Agreements, to read in full as follows: "4.4 WAIVER OF RIGHTS UNDER SECTION 362 OF THE BANKRUPTCY CODE. In the event that the Company files a petition under the United States Bankruptcy Code or under any other similar federal or state law, the Company unconditionally and irrevocably agrees that the Agent, on behalf of the Purchaser, shall be entitled, and the Company hereby unconditionally and irrevocably consents, to relief from the automatic stay so as to allow the Agent to exercise its rights and remedies under the Security Agreement with respect to the Collateral (as such term is defined in the Security Agreement), including taking possession of the Collateral, foreclosing on its lien or security interests or otherwise exercising its rights and remedies with respect to the Collateral. In such event, the Company hereby agrees it shall not, in any manner, oppose or otherwise delay any motion filed by the Agent for relief from the automatic stay." 6. A new SECTION 4.5 is hereby added to the Original Agreements, to read in full as follows: Page 3 "4.5 SALE OF ASSETS. The Company hereby agrees that in the event the Company commences a bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code, the Company shall, at the request of the Buyers (as defined herein) file, within the first twenty (20) days of the commencement of the bankruptcy case a motion under section 363 of the Bankruptcy Code asking the Court to approve the sale of all or substantially all of the assets of the Company and its subsidiaries to Harris Toibb and such other Purchasers that desire to participate in the sale (collectively, the "BUYERS"), on terms and conditions acceptable to the Buyers, including the right of the Buyers to credit bid any indebtedness owed to them." 7. A new SECTION 4.6 is hereby added to the Original Agreements, to read in full as follows: "4.6 DEBTOR IN POSSESSION FINANCING. The Company hereby agrees that in the event the Company decides to commence a bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code, the Company shall give Harris Toibb and such other Purchasers that desire to participate in the financing (collectively, the "LENDERS") the right of first refusal (but without any corresponding obligation of the Lenders) with respect to the provision to the Company and its subsidiaries of debtor in possession financing." 8. The language of SECTION 6.1(B) of the Original Agreements is hereby deleted in its entirety and replaced with the following language: "A default or event of default shall occur in respect of any of the other Convertible Notes, in respect of any of the Secured Convertible Promissory Notes issued by the Company on December 19, 2001 or in respect of any other indebtedness of the Company that exceeds, in the aggregate, $75,000 and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period;" 9. The language of SECTION 6.1(D) of the Original Agreements is hereby deleted in its entirety and replaced with the following language: "The Company (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within thirty (30) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more;" 10. The language of SECTION 6.1(h) of the Original Agreements is hereby deleted in its entirety and replaced with the following language: "(h) A default or event of default shall occur in respect of any agreement of the Company that requires the payment by the Company of an amount in excess of $75,000; Page 4 11. A new SECTION 6.1(i) is hereby added to the Original Agreements, to read in full as follows: "(i) The Company shall fail to provide the Agent with a copy of a signed letter of intent with an investor who is, and on terms and conditions that are, reasonably satisfactory to the Agent, dated no later than February 28, 2002, pursuant to which such investor agrees to acquire equity in the Company in consideration for an investment of at least three million dollars ($3,000,000) (the "EQUITY INVESTMENT"); 12. A new SECTION 6.1(j) is hereby added to the Original Agreements, to read in full as follows: "(j) The Equity Investment shall fail to fund by April 15, 2002; or" 13. A new SECTION 6.1(k) is hereby added to the Original Agreements, to read in full as follows: "(k) Either of the Company's agreements with Consumer Empowerment B.V. (better known as "Kazaa") or StreamCast Networks, Inc. (better known as "Morpheus") shall be terminated or amended in such a way as to result in a Material Adverse Effect." 14. The paragraph at the end of SECTION 6.1 of the Original Agreements is hereby deleted in its entirety and replaced with the following language: "With respect to any Event of Default described above in SUBSECTIONS 6.1(e), (f) and (h) that is capable of being cured and that does not already provide its own cure procedure (a "CURABLE DEFAULT"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if the Company provides notice to the Purchaser of such Curable Default in accordance with the provisions hereof within three (3) business days of the Company learning of such default and such Curable Default is fully cured and/or corrected within fifteen (15) days of the Company's notice thereof to Purchaser." 15. A new SECTION 11.13 is hereby added to the Original Agreements, to read in full as follows: "11.13 AUDIT RIGHTS. Purchaser shall have the continuing right, without hindrance or delay, to inspect, audit, check and make extracts from the Company's books, records, journals, orders, receipts and other accounting records at the office of the Company at the address set forth on the first page of this Agreement at any time during regular business hours upon one business day's advance notice (absent an Event of Default then existing). The Purchaser shall also during any such examination be provided with reasonable access to the officers of the Company." 16. A new SECTION 11.14 is hereby added to the Original Agreements, to read in full as follows: "11.14 WAIVER OF JURY TRIAL. The Company and Purchaser each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto." Page 5 17. MISCELLANEOUS. Except as expressly set forth in this Amendment, all of the terms of the Original Agreements shall remain in full force and effect. All references in the Original Agreements to the "Convertible Notes", the "Security Agreement", the "Warrants" or any of the other documents executed in connection with the Original Agreements shall mean and be a reference to such documents as and to the extent they are amended by the Amendment Documents and all references in such documents to the Original Agreements shall mean and be a reference to the Original Agreements as amended hereby. This Amendment shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made in, and to be performed within, said state. IN WITNESS WHEREOF, the parties hereto have executed this Amendment, or have caused this Amendment to be executed by their duly authorized officers, as of the day and year first above written. BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL ------------------------------ Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer /S/ HARRIS TOIBB -------------------------------------- Harris Toibb, on behalf of himself and the other Purchasers Acknowledged and Agreed to as of the date first above written: EUROPLAY 1, LLC By: /S/ MARK DYNE ------------------------------- Mark Dyne Its: Manager PRESTON FORD, INC. By: /S/ DAVID WILSON ------------------------------- David Wilson Its: ------------------------------- SIGNATURE PAGE TO AMENDMENT NUMBER TWO TO NOTE AND WARRANT PURCHASE AGREEMENTS Page 6 EX-10 12 exhibit_10-48.txt EXHIBIT 10.48 AMENDMENT NUMBER ONE TO SECURED CONVERTIBLE PROMISSORY NOTES THIS AMENDMENT NUMBER ONE TO SECURED CONVERTIBLE PROMISSORY NOTES ("AMENDMENT"), is made and entered into as of the 19th day of December, 2001, by Brilliant Digital Entertainment, Inc., a Delaware corporation ("BORROWER"), in favor of Harris Toibb ("Toibb"), an individual, as agent (in such capacity, "AGENT") for himself and the lenders and holders in whose favor the Secured Convertible Promissory Notes referred to below were executed (Toibb and such lenders and holders collectively "HOLDERS"). W I T N E S S E T H: WHEREAS, Borrower executed a Secured Convertible Promissory Note dated as of May 23, 2001 (the "NOTES") in favor of each Holder; WHEREAS Borrower has requested that Harris Toibb and another party make additional loans to Borrower to finance Borrower's and its subsidiaries' operations (the "New Loans") and in connection with, and as a condition to, the making of the New Loans, the Purchase Agreements, the Notes, the Security Agreement and certain other documents will be amended pursuant to certain documents (the "Amendment Documents") that will be executed and delivered in connection with the New Loans; WHEREAS, in connection with the New Loans, Borrower and Agent, among others, have executed Note and Warrant Purchase Agreements dated as of December 10, 2001, and will execute of even date herewith two Secured Convertible Promissory Notes, two Warrants to Purchase Common Stock of Brilliant Digital Entertainment, Inc., a Security and Pledge Agreement and a Guaranty (all such documents being hereinafter referred to as the "NEW TRANSACTION DOCUMENTS"; and such definition shall be incorporated by this reference into the Notes); WHEREAS, it is a condition to the making of the New Loans that the Notes be amended in the manner set forth herein; and WHEREAS, Section 11.8 of each of the Note and Warrant Purchase Agreements dated April, 2001 between Borrower and a Holder permits Toibb, on behalf of himself and the other Holders as Agent, to amend each of the Notes with the consent of the Company. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto amend the Notes as follows: 1. The language of SUBSECTION 8(a)(ii) of the Notes is hereby deleted in its entirety and replaced with the following language: "(ii) A default or event of default shall occur in respect of any of the other Convertible Notes or any other indebtedness of Borrower that exceeds, in the aggregate, $75,000 and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period;" 2. The language of SUBSECTION 8(a)(iv) of the Notes is hereby deleted in its entirety and replaced with the following language: "(iv) Borrower (i) shall generally not pay or shall be unable to pay its debts as such debts become due, or (ii) shall make an assignment for the benefit of creditors or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, or (iv) shall have had any such petition or application filed or any such proceeding commenced against it that is not dismissed within thirty (30) days, or (v) shall indicate, by any act or intentional and purposeful omission, its consent to, approval of or acquiescence in any such petition, application, proceeding or order for relief or the appointment of a custodian, receiver or trustee for it or a substantial part of its assets, or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty (30) days or more;" 3. The language of SUBSECTION 8(a)(vi) of the Notes is hereby deleted in its entirety and replaced with the following language: "A default or event of default shall occur under any of the other Transaction Documents or under the New Transaction Documents and, if subject to a cure right, such default or event of default shall not be cured within the applicable cure period;" 4. The language of SUBSECTION 8(a)(viii) of the Notes is hereby deleted in its entirety and replaced with the following language. "A default or event of default shall occur in respect of any agreement of Borrower that requires the payment by Borrower of an amount in excess of $75,000;" 5. New SUBSECTIONS 8(a) (ix), (x) AND (xi) are hereby added to the Notes, to read in their entirety as follows: "(ix) Borrower shall fail to provide the Agent with a copy of a signed letter of intent with an investor who is, and on terms and conditions that are, reasonably satisfactory to the Agent, dated no later than February 28, 2002, pursuant to which such investor agrees to acquire equity in Borrower in consideration for an investment of at least three million dollars ($3,000,000) (the "EQUITY INVESTMENT"); (x) The Equity Investment shall fail to fund by April 15, 2002; or (xi) Either of Borrower's agreements with Consumer Empowerment B.V. (better known as "Kazaa") or StreamCast Networks, Inc. (better known as "Morpheus") shall be terminated or amended in such a way as to result in a Material Adverse Effect." Page 2 6. The paragraph at the end of SECTION 8(a) of the Notes is hereby deleted in its entirety and replaced with the following language: "With respect to any Event of Default described above in SUBSECTIONS 8(a)(v), (vi) and (viii) that is capable of being cured and that does not already provide its own cure procedure (a "CURABLE DEFAULT"), the occurrence of such Curable Default shall not constitute an Event of Default hereunder if Borrower provides notice to Holder of such Curable Default in accordance with the provisions hereof within three (3) business days of Borrower learning of such default and such Curable Default is fully cured and/or corrected within fifteen (15) days of Borrower's notice thereof to Holder." 7. A new SECTION 15 is hereby added to the Notes, to read in its entirety as follows: "15. WAIVER OF JURY TRIAL. Borrower and Holder each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto." 8. MISCELLANEOUS. Except as expressly set forth in this Amendment, all of the terms of the Notes shall remain in full force and effect. All references in the Notes to the "Purchase Agreement", the "Warrants", the "Security Agreement" or any of the other documents executed in connection with the Purchase Agreement shall mean and be a reference to such documents as and to the extent they are amended by the Amendment Documents and all references in such documents to the Convertible Notes or the Notes shall mean and be a reference to the Notes as amended hereby. This Amendment shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made in, and to be performed within, said state. Page 3 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment Number One to Secured Convertible Promissory Note to be executed and delivered by its duly authorized officer on the date first set forth above. BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL ----------------------------------- Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer Accepted and acknowledged by: HARRIS TOIBB, as Agent for the Holders /S/ HARRIS TOIBB - ------------------------------- Harris Toibb Page 4 EX-10 13 exhibit_10-49.txt EXHIBIT 10.49 AMENDMENT NO. 1 TO THE WARRANT TO PURCHASE COMMON STOCK OF BRILLIANT DIGITAL ENTERTAINMENT, INC. THIS AMENDMENT NO. 1 TO THE WARRANT TO PURCHASE COMMON STOCK (the "Amendment"), is entered into on this 19th day of December 2001, by and between Brilliant Digital Entertainment, Inc., a Delaware corporation (the "COMPANY"), and Harris Toibb (the "HOLDER"). A. The Holder is the holder of that certain Warrant to Purchase Common Stock No. 1, dated as of May 23, 2001, issued to the Holder by the Company (the "WARRANT"). B. In connection with the transactions contemplated by that certain Note and Warrant Purchase Agreement dated as of December 10, 2001, the parties have agreed to amend certain terms of the Warrant in accordance with the terms hereof. NOW, THEREFORE, in consideration of the premises and agreements set forth herein, and for other good and valuable consideration, the mutual receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereby agree as follows: 1. The first paragraph of the Warrant, which commences with the terms "THIS CERTIFIES THAT," is hereby deleted in its entirety and replaced with the following language: "THIS CERTIFIES THAT, for value received, Harris Toibb, or his permitted registered assigns ("HOLDER"), is entitled, subject to the terms and conditions of this Warrant, at any time or from time to time after the issuance date of this Warrant (the "EFFECTIVE DATE"), and before 5:00 p.m. Pacific Time on May 23, 2004 (the "EXPIRATION DATE"), to purchase from Brilliant Digital Entertainment, Inc., a Delaware corporation (the "COMPANY"), up to a number of shares of Common Stock of the Company obtained by dividing Four Million Dollars ($4,000,000.00) by the product obtained by multiplying 112.5% by the lesser of (i) $0.20 (the "FIXED PURCHASE PRICE"), or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (the product obtained by multiplying 112.5% by the lesser of (i) or (ii) above is referred to herein as the "PURCHASE PRICE"), at an exercise price per share equal to the Purchase Price. Both the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein." 2. A new Section 4.6 is hereby added to read in its entirety as follows: "4.6 FULL RATCHET ADJUSTMENT FOR ISSUANCE OF ADDITIONAL STOCK. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Purchase Price in effect immediately prior to the issuance of such Additional Stock, the Fixed Purchase Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Purchase Price of the shares subject to exercise under this Warrant shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 4.6, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, each as may be contemplated in SECTIONS 4.1 through 4.3 and SECTION 4.5 above, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding prior to December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions, as may be contemplated in SECTION 4.4 above; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001. 3. A new paragraph 18 is added to the Warrant to read in its entirety as follows: "18. WAIVER OF JURY TRIAL. The Company and, by acceptance of this Warrant, the Holder each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto." 4. Except as expressly modified herein, all terms and conditions of the Warrant are hereby ratified, confirmed and approved and shall remain in full force and effect. In the event of any conflict or inconsistency between this Amendment and the Warrant, this Amendment shall govern. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. Brilliant Digital Entertainment, Inc. /S/ HARRIS TOIBB /S/ ROBERT CHMIEL - ---------------------------------- ------------------------------------- By By Harris Toibb Robert Chmiel - ---------------------------------- ------------------------------------- (Printed Name) (Printed Name) Chief Operating Officer and N/A Chief Financial Officer - ---------------------------------- ------------------------------------- (Title) (Title) Page 2 EX-10 14 exhibit_10-50.txt EXHIBIT 10.50 AMENDMENT NO. 1 TO THE WARRANT TO PURCHASE COMMON STOCK OF BRILLIANT DIGITAL ENTERTAINMENT, INC. THIS AMENDMENT NO. 1 TO THE WARRANT TO PURCHASE COMMON STOCK (the "Amendment"), is entered into on this 19th day of December 2001, by and between Brilliant Digital Entertainment, Inc., a Delaware corporation (the "COMPANY"), and Europlay 1, LLC (the "HOLDER"). A. The Holder is the holder of that certain Warrant to Purchase Common Stock No. 2, dated as of May 23, 2001, issued to the Holder by the Company (the "WARRANT"). B. In connection with the transactions contemplated by that certain Note and Warrant Purchase Agreement dated as of December 10, 2001, the parties have agreed to amend certain terms of the Warrant in accordance with the terms hereof. NOW, THEREFORE, in consideration of the premises and agreements set forth herein, and for other good and valuable consideration, the mutual receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereby agree as follows: 1. The first paragraph of the Warrant, which commences with the terms "THIS CERTIFIES THAT," is hereby deleted in its entirety and replaced with the following language: "THIS CERTIFIES THAT, for value received, Europlay 1, LLC, or its permitted registered assigns ("HOLDER"), is entitled, subject to the terms and conditions of this Warrant, at any time or from time to time after the issuance date of this Warrant (the "EFFECTIVE DATE"), and before 5:00 p.m. Pacific Time on May 23, 2004 (the "EXPIRATION DATE"), to purchase from Brilliant Digital Entertainment, Inc., a Delaware corporation (the "Company"), up to a number of shares of Common Stock of the Company obtained by dividing Four Hundred Twenty Eight Thousand Three Hundred Dollars ($428,300.00) by the product obtained by multiplying 112.5% by the lesser of (i) $0.20 (the "FIXED PURCHASE PRICE"), or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (the product obtained by multiplying 112.5% by the lesser of (i) or (ii) above is referred to herein as the "PURCHASE PRICE"), at an exercise price per share equal to the Purchase Price. Both the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein." 2. A new Section 4.6 is hereby added to read in its entirety as follows: "4.6 FULL RATCHET ADJUSTMENT FOR ISSUANCE OF ADDITIONAL STOCK. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Purchase Price in effect immediately prior to the issuance of such Additional Stock, the Fixed Purchase Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Purchase Price of the shares subject to exercise under this Warrant shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 4.6, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, each as may be contemplated in SECTIONS 4.1 through 4.3 and SECTION 4.5 above, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding prior to December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions, as may be contemplated in SECTION 4.4 above; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001. 3. A new paragraph 18 is added to the Warrant to read in its entirety as follows: "18. WAIVER OF JURY TRIAL. The Company and, by acceptance of this Warrant, the Holder each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto." 4. Except as expressly modified herein, all terms and conditions of the Warrant are hereby ratified, confirmed and approved and shall remain in full force and effect. In the event of any conflict or inconsistency between this Amendment and the Warrant, this Amendment shall govern. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. Europlay 1, LLC Brilliant Digital Entertainment, Inc. /S/ MARK DYNE /S/ ROBERT CHMIEL - --------------------------------- -------------------------------------- By By Mark Dyne Robert Chmiel - --------------------------------- -------------------------------------- (Printed Name) (Printed Name) Chief Operating Officer and Manager Chief Financial Officer - --------------------------------- -------------------------------------- (Title) (Title) Page 2 EX-10 15 exhibit_10-51.txt EXHIBIT 10.51 AMENDMENT NO. 1 TO THE WARRANT TO PURCHASE COMMON STOCK OF BRILLIANT DIGITAL ENTERTAINMENT, INC. THIS AMENDMENT NO. 1 TO THE WARRANT TO PURCHASE COMMON STOCK (the "Amendment"), is entered into on this 19th day of December 2001, by and between Brilliant Digital Entertainment, Inc., a Delaware corporation (the "COMPANY"), and Preston Ford Inc. (the "HOLDER"). A. The Holder is the holder of that certain Warrant to Purchase Common Stock No. 3, dated as of May 23, 2001, issued to the Holder by the Company (the "WARRANT"). B. In connection with the transactions contemplated by that certain Note and Warrant Purchase Agreement dated as of December 10, 2001, the parties have agreed to amend certain terms of the Warrant in accordance with the terms hereof. NOW, THEREFORE, in consideration of the premises and agreements set forth herein, and for other good and valuable consideration, the mutual receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereby agree as follows: 1. The first paragraph of the Warrant, which commences with the terms "THIS CERTIFIES THAT," is hereby deleted in its entirety and replaced with the following language: "THIS CERTIFIES THAT, for value received, Preston Ford Inc., or its permitted registered assigns ("HOLDER"), is entitled, subject to the terms and conditions of this Warrant, at any time or from time to time after the issuance date of this Warrant (the "EFFECTIVE DATE"), and before 5:00 p.m. Pacific Time on May 23, 2004 (the "EXPIRATION DATE"), to purchase from Brilliant Digital Entertainment, Inc., a Delaware corporation (the "Company"), up to a number of shares of Common Stock of the Company obtained by dividing One Hundred Thousand Dollars ($100,000.00) by the product obtained by multiplying 112.5% by the lesser of (i) $0.20 (the "FIXED PURCHASE PRICE"), or (ii) the volume weighted average price of a share of the Common Stock on the American Stock Exchange, or any exchange on which the Common Stock is then traded, over any five (5) consecutive trading days commencing on December 14, 2001 and terminating at 5:00 p.m. (Pacific Standard Time) on November 10, 2002 (the product obtained by multiplying 112.5% by the lesser of (i) or (ii) above is referred to herein as the "PURCHASE PRICE"), at an exercise price per share equal to the Purchase Price. Both the number of shares of Common Stock purchasable upon exercise of this Warrant and the Purchase Price are subject to adjustment and change as provided herein." 2. A new Section 4.6 is hereby added to read in its entirety as follows: "4.6 FULL RATCHET ADJUSTMENT FOR ISSUANCE OF ADDITIONAL STOCK. If the Company shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Fixed Purchase Price in effect immediately prior to the issuance of such Additional Stock, the Fixed Purchase Price in effect immediately prior to each such issuance shall automatically be adjusted on a full ratchet basis such that the new Fixed Purchase Price of the shares subject to exercise under this Warrant shall be equal to the value of the consideration paid per each share of Additional Stock issued. For purposes of this SECTION 4.6, "ADDITIONAL STOCK" shall mean any shares of Common Stock issued or issuable by the Company, other than (i) shares of Common Stock issued pursuant to any stock split, stock subdivision, stock dividend, redemption, conversion or other reclassification of securities, or recapitalization, each as may be contemplated in SECTIONS 4.1 through 4.3 and SECTION 4.5 above, (ii) shares of Common Stock, or options or warrants to purchase Common Stock, issued or issuable to employees, consultants or directors of the Company for the primary purpose of soliciting or retaining their employment or services directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Company, (iii) shares of Common Stock, or options or warrants to purchase Common Stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (iv) shares of Common Stock, or options or warrants to purchase Common Stock, issued to any corporate or other strategic partners of the Company, provided such issuances are primarily for other than equity financing purposes and are approved by the Board of Directors of the Company, (v) shares of Common Stock of the Company issuable upon exercise of warrants, options, notes or other rights to acquire securities of the corporation outstanding prior to December 3, 2001, and (vi) shares of Common Stock, or warrants or options to purchase shares of Common Stock issued in connection with bona fide acquisitions, mergers or similar transactions, as may be contemplated in SECTION 4.4 above; PROVIDED, HOWEVER, that the exceptions to the definition of Additional Stock provided for in clauses (ii), (iii), (iv) and (vi) above shall apply only with respect to an aggregate number of shares of Common Stock issued or issuable by the Company thereunder equal to 1.5% of the number of shares of Common Stock outstanding as of December 3, 2001. 3. A new paragraph 18 is added to the Warrant to read in its entirety as follows: "18. WAIVER OF JURY TRIAL. The Company and, by acceptance of this Warrant, the Holder each waive all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder or relating hereto." 4. Except as expressly modified herein, all terms and conditions of the Warrant are hereby ratified, confirmed and approved and shall remain in full force and effect. In the event of any conflict or inconsistency between this Amendment and the Warrant, this Amendment shall govern. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. Preston Ford Inc. Brilliant Digital Entertainment, Inc. /S/ DAVID WILSON /S/ ROBERT CHMIEL - ---------------------------------- ------------------------------------- By By David Wilson Robert Chmiel - ---------------------------------- ------------------------------------- (Printed Name) (Printed Name) Chief Operating Officer and President Chief Financial Officer - ---------------------------------- ------------------------------------- (Title) (Title) Page 2 EX-10 16 exhibit_10-52.txt EXHIBIT 10.52 AMENDMENT NUMBER ONE TO SECURITY AND PLEDGE AGREEMENT THIS AMENDMENT NUMBER ONE TO SECURITY AND PLEDGE AGREEMENT ("AMENDMENT"), is made and entered into as of the 19th day of December, 2001, by and between Brilliant Digital Entertainment, Inc., a Delaware corporation ("BORROWER"), and each Subsidiary of Borrower listed on the signature pages hereof (Borrower and each such Subsidiary being individually a "GRANTOR" and collectively the "GRANTORS"), in favor of Harris Toibb ("TOIBB"), an individual, as agent (in such capacity, "AGENT") for himself and the holders party to the Purchase Agreements referred to below (Toibb and the holders party to the Purchase Agreements collectively "HOLDERS"). W I T N E S S E T H: WHEREAS, each Holder previously made a loan (the "Loans") to Borrower pursuant to the terms of a Note and Warrant Purchase Agreement dated as of April 19, 2001 or April 26, 2001, as amended as of May 23, 2001 (the "Purchase Agreements"); WHEREAS, Borrower's obligations under the Purchase Agreements and the Loans were secured under the terms of a Security and Pledge Agreement, dated as of May 23, 2001 (the "SECURITY AGREEMENT"), executed by Borrower and those Subsidiaries of Borrower listed on the signature pages thereof; WHEREAS, the Borrower has requested that Harris Toibb and another party make additional loans to the Company to finance the Company's and the other Grantors' operations (the "New Loans") and in connection with, and as a condition to, the making of the New Loans, the Purchase Agreements, the Convertible Notes, the Security Agreement and certain other documents will be amended pursuant to certain documents (the "Amendment Documents") that will be executed and delivered in connection with the New Loans; WHEREAS, it is a condition to the making of the New Loans that the Security Agreement be amended in the manner set forth herein; and WHEREAS, Agent, on behalf of Holders, and Grantors therefore wish to amend the Security Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto amend the Security Agreement as follows: 1. A new SECTION 21 is hereby added to the Security Agreement, to read in its entirety as follows: "21. WAIVER OF RIGHTS UNDER SECTION 362 OF THE BANKRUPTCY CODE. In the event that one or more Grantors files a petition under the United States Bankruptcy Code or under any other similar federal or state law, each such Grantor unconditionally and irrevocably agrees that the Agent, on behalf of the Holders, shall be entitled, and each such Grantor hereby unconditionally and irrevocably consents, to relief from the automatic stay so as to allow the Agent to exercise its rights and remedies under this Agreement with respect to the Collateral, including taking possession of the Collateral, foreclosing on its lien or security interests or otherwise exercising its rights and remedies with respect to the Collateral. In such event, each such Grantor hereby agrees it shall not, in any manner, oppose or otherwise delay any motion filed by the Agent for relief from the automatic stay." 2. A new SECTION 8(e) is hereby added to the Security Agreement to read in its entirety as follows: "(e) For purposes of this SECTION 8, the term "Required Holders" shall mean Holders holding 60% or more of the then outstanding Secured Obligations." 3. MISCELLANEOUS. Except as expressly set forth in this Amendment, all of the terms of the Security Agreement shall remain in full force and effect. All references in the Security Agreement to the "Purchase Agreements", "Convertible Notes", the "Warrants" or any of the other documents executed in connection with the Purchase Agreements shall mean and be a reference to such documents as and to the extent they are amended by the Amendment Documents and all references in such documents to the Security Agreement shall mean and be a reference to the Security Agreement as amended hereby. This Amendment shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made in, and to be performed within, said state. Page 2 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment Number One to Security Agreement to be executed and delivered by its duly authorized officer on the date first set forth above. BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL ------------------------------- Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer SUBSIDIARIES: BRILLIANT STUDIOS, INC., a Delaware corporation By: /S/ KEVIN BERMEISTER ------------------------------- Kevin Bermeister Title: President B3D, INC. a Delaware corporation By: /S/ KEVIN BERMEISTER ------------------------------- Kevin Bermeister Title: President Accepted and acknowledged by: HARRIS TOIBB, as Agent for the Holders /S/ HARRIS TOIBB - ----------------------------- Harris Toibb Page 3 EX-10 17 exhibit_10-53.txt EXHIBIT 10.53 SECURITY AND PLEDGE AGREEMENT THIS SECURITY AND PLEDGE AGREEMENT ("SECURITY AGREEMENT"), is made and entered into as of the19th day of December, 2001, by and between Brilliant Digital Entertainment, Inc., a Delaware corporation ("BORROWER"), and each Subsidiary of Borrower listed on the signature pages hereof (Borrower and each such Subsidiary being individually a "GRANTOR" and collectively the "GRANTORS"), in favor of Harris Toibb ("TOIBB"), an individual, as agent (in such capacity, "AGENT") for himself and the holders party to the Purchase Agreements referred to below (Toibb and the holders party to the Purchase Agreements collectively "HOLDERS"). W I T N E S S E T H: WHEREAS, pursuant to a Note and Warrant Purchase Agreement between Borrower and a Holder (as the same may from time to time be amended, modified, or supplemented, each a "PURCHASE AGREEMENT" and collectively, the "PURCHASE AGREEMENTS") of even date herewith, each Holder has agreed to make a loan (collectively, the "CONVERTIBLE NOTE LOANS") to Borrower; and WHEREAS, each Holder is willing to make a Convertible Note Loan but only upon the condition, among others, that each Grantor shall have executed and delivered this Security Agreement to Agent for the ratable benefit of Holders. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms defined in the Purchase Agreements are used herein as therein defined, and the following terms shall have the following meanings (such meanings being equally applicable to both the singular and plural forms of the terms defined): "ACCOUNT DEBTOR" shall mean any "account debtor," as such term is defined in section 9102(a)(3) of the UCC. "ACCOUNTS" shall mean any "account," as such term is defined in section 9102(a)(2) of the UCC, now owned or hereafter acquired by any Grantor. "CHATTEL PAPER" shall mean any "chattel paper," as such term is defined in section 9102(a)(11) of the UCC, now owned or hereafter acquired by any Grantor. "COLLATERAL" shall have the meaning assigned to such term in Section 2 of this Security Agreement. "CONTRACTS" shall mean all contracts, undertakings, or other agreements (other than rights evidenced by Chattel Paper, Documents, or Instruments) in or under which any Grantor may now or hereafter have any right, title or interest, including, without limitation, with respect to an Account, any agreement relating to the terms of payment or the terms of performance thereof. "COPYRIGHTS" shall mean all of the following now or hereafter acquired by any Grantor: (i) all copyrights, registrations, and applications therefor; (ii) all renewals and extensions thereof; (iii) all income, royalties, damages, and payments now and hereafter due or payable or both with respect thereto, including, without limitation, damages and payments for past or future infringements or misappropriations thereof; (iv) all rights to sue for past, present, and future infringements or misappropriations thereof; and (v) all other rights corresponding thereto throughout the world. "DOCUMENTS" shall mean any "documents," as such term is defined in section 9102(a)(30) of the UCC, now owned or hereafter acquired by any Grantor. "EQUIPMENT" shall mean any "equipment," as such term is defined in section 9102(a)(33) of the UCC, now owned or hereafter acquired by any Grantor. "GENERAL INTANGIBLES" shall mean any "general intangibles," as such term is defined in section 9102(a)(42) of the UCC, now owned or hereafter acquired by any Grantor. "HEREBY," "HEREIN," "HEREOF," "HEREUNDER" and words of similar import refer to this Security Agreement as a whole (including, without limitation, any schedules hereto) and not merely to the specific section, paragraph, or clause in which the respective word appears. "INSTRUMENTS" shall mean any "instrument," as such term is defined in section 9102(a)(47) of the UCC, now owned or hereafter acquired by any Grantor, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "INTELLECTUAL PROPERTY COLLATERAL" shall mean all of the Copyrights, Licenses, Patents, Trademarks, and Trade Secrets as to which Agent for the ratable benefit of Holders has been granted a security interest hereunder. "INVENTORY" shall mean all "inventory," as such term is defined in section 9102(a)(48) of the UCC, now owned or hereafter acquired by any Grantor. "LICENSE" shall mean any Patent License, Trademark License, or other license as to which Agent for the ratable benefit of Holders has been granted a security interest hereunder. "LIENS" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "PATENT LICENSE" shall mean all of the following now owned or hereafter acquired by any Grantor: any written agreement granting any right to practice any invention on which a Patent is in existence. Page 2 "PATENTS" shall mean all of the following now or hereafter acquired by any Grantor: (i) all patents and patent applications; (ii) all inventions and improvements described and claimed therein; (iii) all reissues, divisions, continuations, renewals, extensions, and continuations-in-part thereof; (iv) all income, royalties, damages and payments now and hereafter due and/or payable to such Grantor with respect thereto, including, without limitation, damages and payments for past, present or future infringements or misappropriations thereof; (v) all rights to sue for past, present, and future infringements or misappropriations thereof; and (vi) all other rights corresponding thereto throughout the world. "PERMITTED LIENS" shall mean (i) Liens for taxes not yet delinquent, (ii) Liens imposed by law and incurred in the ordinary course of business for obligations not yet due to carriers, warehousemen, laborers, materialmen, (iii) Liens in respect of pledges or deposits under workers' compensation laws or similar legislation, (v) Liens reflected on Borrower's audited Balance Sheet as at December 31, 2000, and (vi) Liens granted pursuant to the terms of that certain Security and Pledge Agreement dated as of May 23, 2001 and executed by Borrower and Grantors in favor of Toibb. "PROCEEDS" shall mean "proceeds," as such term is defined in section 9102(a)(64) of the UCC. "SECURED OBLIGATIONS" shall mean (i) all of the unpaid principal amount of, and accrued interest on, the Convertible Notes; PROVIDED THAT upon the conversion to the Borrower's capital stock of any Convertible Note by any Holder, the Secured Obligations that have thus far accrued in respect of any such Convertible Note shall automatically terminate without any further action by Borrower or Guarantors; (ii) all prepayment and other fees owing by Borrower under the Purchase Agreements to Agent or any Holder; (iii) the obligations of each Guarantor pursuant to the Guaranty to Agent or any Holder; and (iv) all other indebtedness, liabilities and obligations of each Grantor to Agent or any Holder, whether now existing or hereafter incurred, and whether created under, arising out of, or in connection with the Purchase Agreements, this Security Agreement, any other document or agreement, or otherwise. "SECURITY AGREEMENT" shall mean this Security Agreement, as the same may from time to time be amended, modified, or supplemented and shall refer to this Security Agreement as in effect on the date such reference becomes operative. "TRADE SECRETS" shall mean trade secrets, along with any and all (i) income, royalties, damages, and payments now and hereafter due and/or payable to any Grantor with respect thereto, including, without limitation, damages and payments for past or future infringements or misappropriations thereof; (ii) rights to sue for past, present, and future infringements or misappropriations thereof; and (iii) all other rights corresponding thereto throughout the world. "TRADEMARK LICENSE" shall mean all of the following now owned or hereafter acquired by any Grantor: any written agreement granting any right to use any Trademark or Trademark registration. "TRADEMARKS" shall mean all of the following now owned or hereafter acquired by any Grantor: (i) all trademarks (including service marks and trade names, whether registered or at common law), registrations and applications therefor, and the entire product lines and goodwill of Page 3 such Grantor's business connected therewith and symbolized thereby; (ii) all renewals thereof; (iii) all income, royalties, damages, and payments now and hereafter due or payable or both with respect thereto, including, without limitation, damages and payments for past, present, or future infringements or misappropriations thereof; (iv) all rights to sue for past, present, and future infringements or misappropriations thereof; and (v) all other rights corresponding thereto throughout the world. "UCC" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of California; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Agent's and Holders' security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of California, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, or priority and for purposes of definitions related to such provisions. 2. GRANT OF SECURITY INTEREST AND PLEDGE. (a) As collateral security for the prompt and complete payment and performance when due (whether at stated maturity, by acceleration, or otherwise) of all the Secured Obligations and to induce Agent and each Holder to enter into the Purchase Agreement and to make the Convertible Note Loans in accordance with the terms thereof, each Grantor hereby assigns, conveys, mortgages, pledges, hypothecates, and transfers to Agent for the ratable benefit of Holders, and hereby grants to Agent for the ratable benefit of Holders, a security interest in, all of such Grantor's right, title and interest in, to, and under the following (all of which being hereinafter collectively called the "COLLATERAL"): (i) all Accounts of such Grantor; (ii) all Chattel Paper of such Grantor and rights to receive monies included thereby; (iii) all Contracts of such Grantor; (iv) all Copyrights of such Grantor; (v) all Documents of such Grantor; (vi) all Equipment of such Grantor; (vii) all General Intangibles of such Grantor; (viii) all Instruments of such Grantor and rights to receive monies included thereby; (ix) all Inventory of such Grantor; (x) all Patent Licenses of such Grantor; Page 4 (xi) all Trade Secrets of such Grantor; (xii) all Trademark Licenses of such Grantor; (xiii) all shares of capital stock of every class of each Subsidiary listed on the signature page hereof; PROVIDED THAT so long as no Default or Event of Default has occurred and is continuing, each Grantor shall be entitled to receive all cash dividends paid, to vote shares, and to give consents, waivers, and ratifications in respect of the stock secured or pledged hereby; PROVIDED, HOWEVER, that no vote shall be cast or consent, waiver, or ratification, given by any Grantor if the effect thereof would in the reasonable judgment of the Agent impair the stock secured or pledged hereby or be inconsistent with or result in any violation of the provisions of the Purchase Agreement or this Security Agreement; (xiv) all other goods and personal property of such Grantor whether tangible or intangible or whether now owned or hereafter acquired by such Grantor and wherever located; and (xv) to the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions, and replacements for, and rents, profits, and products of each of the foregoing. (b) In addition, as collateral security for the prompt and complete payment when due of the Secured Obligations and in order to induce Holders as aforesaid, Agent, for the ratable benefit of each Holders, is hereby granted a lien and security interest in all property of each Grantor held by Agent or such Holder, including, without limitation, all property of every description, now or hereafter in the possession or custody of or in transit to Agent or such Holder for any purpose, including safekeeping, collection or pledge, for the account of such Grantor, or as to which such Grantor may have any right or power. 3. RIGHTS OF AGENT AND HOLDERS; LIMITATIONS ON AGENT'S AND HOLDERS' OBLIGATIONS. (a) It is expressly agreed by each Grantor that, anything herein to the contrary notwithstanding, such Grantor shall remain liable under each of its Contracts and each of its Licenses to observe and perform all the conditions and obligations to be observed and performed by it thereunder and each Grantor shall perform all of its duties and obligations thereunder, all in accordance with and pursuant to the terms and provisions of each such Contract or License. Neither Agent nor any Holder shall have any obligation or liability under any Contract or License by reason of or arising out of this Security Agreement or the granting to Agent or any Holder of a security interest therein or the receipt by Agent or Holders of any payment relating to any Contract or License pursuant hereto, nor shall Agent or any Holder be required or obligated in any manner to perform or fulfill any of the obligations of any Grantor under or pursuant to any Contract or License, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it or the sufficiency of any performance by any party under any Contract or License, or to present or file any claim, or to take any action to collect or enforce any performance or the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. Page 5 (b) Agent authorizes each Grantor to collect its Accounts provided that such collection is performed in a prudent and businesslike manner, and Agent for the ratable benefit of Holders may, upon the occurrence and during the continuation of any Default or Event of Default and without notice, limit or terminate such authority at any time. If required by Agent at any time during the continuation of any Default or Event of Default, any Proceeds, when first collected by any Grantor, received in payment of any such Account or in payment for any of its Inventory or on account of any of its Contracts, shall be promptly deposited by such Grantor in precisely the form received (with all necessary endorsements) in a special bank account maintained by Agent for the ratable benefit of Holders subject to withdrawal by Agent for the ratable benefit of Holders only, as hereinafter provided, and until so turned over shall be deemed to be held in trust by such Grantor for and as Agent's property for the ratable benefit of Holders and shall not be commingled with such Grantor's other funds or properties. Such Proceeds, when deposited, shall continue to be collateral security for all of the Secured Obligations and shall not constitute payment thereof until applied as hereinafter provided. Agent shall apply all or a part of the funds on deposit in said special account to the principal of or interest on or both in respect of any of the Secured Obligations in accordance with the provisions of SECTION 8(D) hereof and any part of such funds which Agent elects not so to apply and deems not required as collateral security for the Secured Obligations shall be paid over from time to time by Agent to such Grantor. If a Default or an Event of Default has occurred and is continuing, at the request of Agent such Grantor shall deliver to Agent for the ratable benefit of Holders all original and other documents evidencing, and relating to, the sale and delivery of such Inventory or the performance of labor or service that created such Accounts, including, without limitation, all original orders, invoices, and shipping receipts; and, prior to the occurrence of a Default or an Event of Default such Grantor shall deliver photocopies thereof to Agent for the ratable benefit of Holders at the Agent's request. (c) Agent may at any time, upon the occurrence and during the continuation of any Default or Event of Default (whether or not waived), after first notifying each Grantor of its intention to do so, notify Account Debtors of such Grantor, parties to the Contracts of such Grantor, obligors of Instruments of such Grantor and obligors in respect of Chattel Paper of such Grantor that the Accounts and the right, title, and interest of such Grantor in and under such Contracts, such Instruments, and such Chattel Paper have been assigned to Agent for the ratable benefit of Holders and that payments shall be made directly to Agent for the ratable benefit of Holders. Upon the request of Agent, such Grantor will so notify such Account Debtors, parties to such Contracts, obligors of such Instruments, and obligors in respect of such Chattel Paper. Upon the occurrence and during the continuation of a Default or an Event of Default (whether or not waived) Agent may in its own name or in the name of others communicate with such Account Debtors, parties to such Contracts, obligors of such Instruments, and obligors in respect of such Chattel Paper to verify with such Persons to Agent's satisfaction the existence, amount, and terms of any such Accounts, Contracts, Instruments, or Chattel Paper. (d) Upon reasonable prior notice to each Grantor (unless a Default or an Event of Default has occurred and is continuing, in which case no notice is necessary), Agent shall have the right, during normal business hours, to make test verifications of the Accounts and physical verifications of the Inventory in any reasonable manner and through any reasonable medium, and such Grantor agrees to furnish all such assistance and information as Agent may require in connection therewith. Each Grantor at its expense will cause certified independent public accountants satisfactory to Agent to prepare and deliver to Agent for the ratable benefit of Holders Page 6 upon Agent's reasonable request, the following reports: (i) a reconciliation of all its Accounts; (ii) an aging of all its Accounts; (iii) trial balances; and (iv) a test verification of such Accounts as Agent may request. Such Grantor at its expense will cause certified independent public accountants satisfactory to Agent to prepare and deliver to Agent for the ratable benefit of Holders upon Agent's reasonable request the results of the annual physical verification of its Inventory made or observed by such accountants. 4. REPRESENTATIONS AND WARRANTIES. Each Grantor hereby represents and warrants that: (a) Except for the security interest granted to Agent for the ratable benefit of Holders pursuant to this Security Agreement and other Permitted Liens, such Grantor is the sole owner of each item of the Collateral in which it purports to grant a security interest hereunder, having good and marketable title thereto, free and clear of any and all Liens. (b) No effective security agreement, financing statement, equivalent security or lien instrument, or continuation statement covering all or any part of the Collateral is on file or of record in any public office, except such as may have been filed by such Grantor in favor of Agent for the ratable benefit of Holders pursuant to this Security Agreement or such as relate to other Permitted Liens. (c) Upon appropriate financing statements having been filed in the jurisdictions listed on Schedule I hereto, this Security Agreement is effective to create a valid and continuing priority lien on and priority perfected security interest in the Collateral with respect to which a security interest may be perfected by filing pursuant to the UCC, in favor of Agent for the ratable benefit of Holders, prior to all other Liens except Permitted Liens (other than the Lien granted to Agent for the ratable benefit of Holders under this Security Agreement), and is enforceable as such as against creditors of and purchasers from such Grantor (other than purchasers of Inventory in the ordinary course of business) and as against any purchaser of real property where any of the Equipment is located and any present or future creditor obtaining a Lien on such real property. (d) Such Grantor's principal place of business and the place where its records concerning the Collateral are kept and the location of its Inventory and Equipment are set forth on Schedule II hereto, and such Grantor will not change such principal place of business or remove such records or change the location of its Inventory and Equipment unless it has taken such action as is necessary to cause the security interest of Agent for the ratable benefit of Holders in the Collateral to continue to be perfected in accordance with the provisions of SECTION 4(C) hereof. Such Grantor will not change its principal place of business or the place where its records concerning the Collateral are kept or change the location of its Inventory and Equipment without giving thirty (30) days' prior written notice thereof to Agent. (e) The amount represented by such Grantor to Agent from time to time as owing by each Account Debtor or by all Account Debtors in respect of the Accounts of such Grantor will at such time be the correct amount actually and unconditionally owing by such Account Debtors thereunder. Page 7 5. COVENANTS. Each Grantor covenants and agrees with Agent and Holders that from and after the date of this Security Agreement and until the Secured Obligations are fully satisfied: (a) FURTHER DOCUMENTATION; PLEDGE OF INSTRUMENTS. Upon the written request of Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Agent may reasonably deem desirable to obtain the full benefits of this Security Agreement and of the rights and powers herein granted, including, without limitation, using their best efforts to secure all consents and approvals necessary or appropriate for the assignment to Agent for the ratable benefit of Holders of any Contract held by such Grantor or in which such Grantor has any rights not heretofore assigned, the filing of any financing or continuation statements under the UCC with respect to the Liens and security interests granted hereby, transferring Collateral to the Agent's possession (if a security interest in such Collateral can be perfected by possession) for the ratable benefit of Holders, placing the interest of Agent as lienholder on the certificate of title of any vehicle, and using its best efforts to obtain waivers of Liens from landlords and mortgagees. Such Grantor also hereby authorizes Agent to file any such financing or continuation statement without the signature of such Grantor to the extent permitted by applicable law. (b) MAINTENANCE OF RECORDS. Such Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Collateral and all other dealings with the Collateral. If requested by Agent, such Grantor will mark its books and records pertaining to the Collateral to evidence this Security Agreement and the security interests granted hereby. If requested by Agent, all Chattel Paper will be marked with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of Harris Toibb, as Agent for the ratable benefit of Holders." If requested by Agent, the security interest of the Agent shall be noted on the certificate of title of each vehicle. For Agent's and Holders' further security, such Grantor agrees that Agent and Holders shall have a special property interest in all of such Grantor's books and records pertaining to the Collateral and, upon the occurrence and during the continuation of any Default or Event of Default, and upon request by Agent, such Grantor shall deliver and turn over any such books and records to Agent for the ratable benefit of Holders or to its representatives. Prior to the occurrence of a Default or an Event of Default and upon reasonable notice from Agent, such Grantor shall permit any representative of Agent reasonable access to inspect such books and records and will provide photocopies thereof to Agent. (c) INDEMNIFICATION. In any suit, proceeding, or action brought by Agent or any Holder, or against any Agent or Holder by a third party, relating to any Account, Chattel Paper, Contract, General Intangible, or Instrument for any sum owing thereunder, or to enforce any provision of any Account, Chattel Paper, Contract, General Intangible, or Instrument, such Grantor will save, indemnify, and keep Agent and Holders harmless from and against all expense, loss, or damage suffered by reason of any defense, setoff, counterclaim, recoupment, or reduction of liability whatsoever of the obligor thereunder, arising out of a breach by such Grantor of any obligation thereunder or arising out of any other agreement, indebtedness, or liability at any time owing to, or in favor of, such obligor or its successors from such Grantor, and all such obligations of such Grantor shall be and remain enforceable against and only against such Grantor and shall not be enforceable against Agent or Holders. Page 8 (d) COMPLIANCE WITH LAWS. Such Grantor will comply, in all material respects, with all acts, rules, regulations, orders, decrees, and directions of any governmental authority, applicable to the Collateral or any part thereof or to the operation of such Grantor's business; PROVIDED, HOWEVER, that such Grantor may contest any act, regulation, order, decree, or direction in any reasonable manner that shall not in the reasonable opinion of Agent adversely affect Agent's or Holders' rights hereunder or adversely affect the first priority of its security interest in the Collateral. (e) LIMITATION ON LIENS ON COLLATERAL. Such Grantor will not create, permit, or suffer to exist, and will defend the Collateral against and take such other action as is necessary to remove, any Lien on the Collateral except Permitted Liens, and will defend the right, title, and interest of Agent and Holders in and to any of such Grantor's rights under the Chattel Paper, Contracts, Documents, General Intangibles, and Instruments and to the Equipment and Inventory and in and to the Proceeds thereof against the claims and demands of all Persons whomsoever. (f) FURTHER IDENTIFICATION OF COLLATERAL. Such Grantor will if so requested by Agent furnish to Agent for the ratable benefit of Holders, as often as Agent reasonably requests, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Agent may reasonably request, all in reasonable detail. (g) MAINTENANCE OF EQUIPMENT. Such Grantor will keep and maintain the Equipment in good operating condition sufficient for the continuation of the business conducted by such Grantor on a basis consistent with past practices, and such Grantor will provide all maintenance and service and all repairs necessary for such purpose. (h) CONTINUOUS PERFECTION. Such Grantor will not change its name, identity, or corporate structure in any manner that might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of section 9507 of the UCC (or any other then applicable provision of the UCC) unless such Grantor shall have given Agent at least thirty (30) days' prior written notice thereof and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by Agent to amend such financing statement or continuation statement so that it is not seriously misleading. 6. AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT. (a) Each Grantor hereby irrevocably constitutes and appoints Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, from time to time in Agent's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute and deliver any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Security Agreement and, without limiting the generality of the foregoing, hereby gives Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor to do the following: (i) to ask, demand, collect, receive, and give acquittances and receipts for any and all moneys due and to become due under any Collateral and, in the name of such Grantor or its own name or otherwise, to take possession of and endorse and collect any checks, drafts, Page 9 notes, acceptances, or other Instruments for the payment of moneys due under any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Agent for the purpose of collecting any and all such moneys due under any Collateral whenever payable and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Agent for the purpose of collecting any and all such moneys due under any Collateral whenever payable; (ii) to pay or discharge taxes, Liens, security interests, or other encumbrances levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; and (iii) (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due, and to become due thereunder, directly to Agent for the ratable benefit of Holders or as Agent shall direct; (B) to receive payment of and receipt for any and all moneys, claims and other amounts due, and to become due at any time, in respect of or arising out of any Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, and notices in connection with accounts and other Documents constituting or relating to the Collateral; (D) to commence and prosecute any suits, actions, or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action, or proceeding brought against such Grantor with respect to any Collateral; (F) to settle, compromise, or adjust any suit, action, or proceeding described above and, in connection therewith, to give such discharges or releases as Agent may deem appropriate; (G) to license or, to the extent permitted by an applicable license, sublicense, whether general, special, or otherwise, and whether on an exclusive or non-exclusive basis, any Copyright, Patent, or Trademark, throughout the world for such term or terms, on such conditions, and in such manner, as Agent shall in its sole discretion determine; and (H) generally to sell, transfer, pledge, make any agreement with respect to, or otherwise deal with any of the Collateral as fully and completely as though Agent were the absolute owner thereof for all purposes, and to do, at Agent's option and such Grantor's expense, at any time, or from time to time, all acts and things that Agent reasonably deems necessary to protect, preserve, or realize upon the Collateral and Agent's and Holders' Lien therein, in order to effect the intent of this Security Agreement, all as fully and effectively as such Grantor might do. (b) Agent agrees that, except upon the occurrence and during the continuation of a Default or an Event of Default, it will forebear from exercising the power of attorney or any rights granted to Agent for the ratable benefit of Holders pursuant to this SECTION 6. Each Grantor hereby ratifies, to the extent permitted by law, all that said attorneys shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this SECTION 6 is a power coupled with an interest and shall be irrevocable until the Secured Obligations are indefeasibly paid in full. (c) The powers conferred on Agent for the ratable benefit of Holders hereunder are solely to protect Agent's and Holders' interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees, or agents shall be responsible to any Grantor for any act or failure to act, except for its own gross negligence or willful misconduct. Page 10 (d) Each Grantor also authorizes Agent, at any time and from time to time upon the occurrence and during the continuation of any Default or Event of Default, (i) to communicate in its own name with any party to any Contract with regard to the assignment of the right, title, and interest of such Grantor in and under the Contracts hereunder and other matters relating thereto and (ii) to execute, in connection with the sale provided for in SECTION 8 hereof, any endorsements, assignments, or other instruments of conveyance or transfer with respect to the Collateral. 7. PERFORMANCE BY AGENT OF GRANTORS' OBLIGATIONS. If any Grantor fails to perform or comply with any of its agreements contained herein and Agent, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the reasonable expenses of Agent incurred in connection with such performance or compliance, together with interest thereon at the rate then in effect in respect of the Convertible Note Loans, shall be payable by such Grantor to Agent for the ratable benefit of Holders on demand and shall constitute Secured Obligations secured hereby. 8. REMEDIES, RIGHTS UPON DEFAULT. (a) If any Default or Event of Default shall occur and be continuing, Agent may, and shall at the request of the Required Holders, exercise in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing, or relating to the Secured Obligations, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, each Grantor expressly agrees that in any such event Agent, without demand of performance or other demand, advertisement, or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon such Grantor or any other person (all and each of which demands, advertisements, and/or notices are hereby expressly waived to the maximum extent permitted by the UCC and other applicable law), may forthwith collect, receive, appropriate, and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver such Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange or broker's board or at any of Agent's offices or elsewhere at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of such Collateral so sold, free of any right or equity of redemption, which equity of redemption such Grantor hereby releases. Each Grantor further agrees, at Agent's request, to assemble the Collateral and make it available to Agent at places that Agent shall reasonably select, whether at such Grantor's premises or elsewhere. The Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization, or sale, as provided in SECTION 8(D) hereof, such Grantor remaining liable for any deficiency remaining unpaid after such application, and only after so paying over such net proceeds and after the payment by Agent of any other amount required by any provision of law, including section 9615(a)(3) of the UCC, need Agent account for the surplus, if any, to such Grantor. To the maximum extent permitted by applicable law, each Grantor waives all claims, damages, and demands against Agent and Holders arising out of the repossession, retention, or sale of the Collateral except such as arise out of the gross negligence or willful misconduct of Agent or any Holder. Each Grantor agrees that the Agent need not give more than ten (10) days' notice (which notification shall be deemed given when mailed or delivered on an overnight basis, postage prepaid, addressed to such Grantor at its address referred to in Page 11 SECTION 12 hereof) of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Agent and Holders are entitled, such Grantor also being liable for the fees of any attorneys employed by Agent and Holders to collect such deficiency. (b) Each Grantor also agrees to pay all costs of Agent and Holders, including, without limitation, reasonable attorneys' fees, incurred in connection with the enforcement of any of its rights and remedies hereunder. (c) Each Grantor hereby waives presentment, demand, protest, or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral. (d) The Proceeds of any sale, disposition, or other realization upon all or any part of the Collateral shall be distributed by Agent in the following order: first to payment in full of all the Secured Obligations and then to pay to the Grantors, or their representatives or as a court of competent jurisdiction may direct, any surplus then remaining from such Proceeds. (e) For purposes of this SECTION 8, the term "Required Holders" shall mean Holders holding 60% or more of the then outstanding Secured Obligations. 9. GRANT OF LICENSE TO USE INTELLECTUAL PROPERTY COLLATERAL. For the purpose of enabling Agent to exercise rights and remedies under SECTION 8 hereof at such time as Agent, without regard to this SECTION 9, shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to Agent for the ratable benefit of Holders an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to any Grantor) to use, license, or sublicense any Copyright, Patent, Trade Secret, or Trademark, now owned or hereafter acquired by such Grantor, and wherever the same may be located, and including, without limitation, in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer and automatic machinery software and programs used for the compilation or printout thereof. 10. APPOINTMENT OF AGENT; LIMITATION ON AGENT'S DUTY IN RESPECT OF COLLATERAL. Agent, or any successor thereof, has been appointed as Agent hereunder by Holders under, and shall be entitled to the benefits of, the Purchase Agreements. Agent shall be obligated and shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the release or substitution of Collateral) solely in accordance with this Security Agreement and the Purchase Agreements, and Holders shall be bound thereby. Agent shall not have any duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of it or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto, except that Agent shall use reasonable care with respect to the Collateral in its possession or under its control. Furthermore, neither the Agent nor any of its officers, directors, agents, or employees shall be liable for any action taken or omitted by any of them hereunder or any other Transaction Document or in connection herewith or therewith, unless caused by it or their gross negligence or willful misconduct. Upon request of any Grantor, Agent shall account for any moneys received by it in respect of any foreclosure on or disposition of the Collateral. Page 12 11. REINSTATEMENT. This Security Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against any Grantor for liquidation or reorganization, should any Grantor become insolvent or make an assignment for the benefit of creditors, or should a receiver or trustee be appointed for all or any significant part of any Grantor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a "voidable preference", "fraudulent conveyance", or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored, or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored, or returned. 12. WAIVER OF RIGHTS UNDER SECTION 362 OF THE BANKRUPTCY CODE. In the event that one or more of the Grantors files a petition under the United States Bankruptcy Code or under any other similar federal or state law, each such Grantor unconditionally and irrevocably agrees that the Agent, on behalf of the Holders, shall be entitled, and each such Grantor hereby unconditionally and irrevocably consents, to relief from the automatic stay so as to allow the Agent to exercise its rights and remedies under this Agreement with respect to the Collateral, including taking possession of the Collateral, foreclosing on its lien or security interests or otherwise exercising its rights and remedies with respect to the Collateral. In such event, each such Grantor hereby agrees it shall not, in any manner, oppose or otherwise delay any motion filed by the Agent for relief from the automatic stay. 13. NOTICES. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration, or other communication shall or may be given to or served upon any of the parties by any other party, or whenever any of the parties desires to give or serve upon any other communication with respect to this Security Agreement, each such notice, demand, request, consent, approval, declaration, or other communication shall be in writing and either shall be delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, or by telecopy, and confirmed by telecopy answerback addressed as follows: (a) If to the Agent, at: Harris Toibb 6355 Topanga Canyon Blvd., Suite 411 Woodland Hills, CA 91367 Facsimile Number: (818) 883-5636 With copies to: Stutman, Treister & Glatt, Professional Corporation 3699 Wilshire Boulevard, Suite 900 Los Angeles, California 90010 Attn: Ronald Fein Facsimile Number: (213) 251-5288 Page 13 (b) If to any Grantor, at its principal business address specified on Schedule II hereto With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 2029 Century Park East, 24th Floor Los Angeles, California 90067 Attn: Murray Markiles Facsimile Number: (310) 728-2233 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied, and confirmed by telecopy answerback, or three (3) Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration, or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration, or other communication. 14. SEVERABILITY. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. NO WAIVER; CUMULATIVE REMEDIES. Neither Agent nor any Holder shall by any act, delay, omission, or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by Agent, and then only to the extent therein set forth. A waiver by Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Agent would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of Agent, any right, power, or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Security Agreement may be waived, altered, modified, or amended except by an instrument in writing, duly executed by Agent and, where applicable by the Grantors. 16. SUCCESSORS AND ASSIGNS; GOVERNING LAW. (a) This Security Agreement and all obligations of each Grantor hereunder shall be binding upon the successors and assigns of such Grantor, and shall, together with the rights and remedies of Agent hereunder, inure to the benefit of Agent, Holders, all future holders of the Convertible Notes and their respective successors and assigns. No sales of participations, other Page 14 sales, assignments, transfers, or other dispositions of any agreement governing or instrument evidencing the Secured Obligations or any portion thereof or interest therein shall in any manner affect the security interest granted to Agent for the ratable benefit of Holders, hereunder. (b) This Security Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of California, without regard to the provisions thereof relating to conflict of laws. 17. USE AND PROTECTION OF INTELLECTUAL PROPERTY COLLATERAL. Notwithstanding anything to the contrary contained herein, unless a Default or Event of Default has occurred and is continuing, Agent shall from time to time execute and deliver, upon the written request of any Grantor, any and all instruments, certificates, or other documents, in the form so requested, necessary or appropriate in the judgment of such Grantor to permit such Grantor to continue to exploit, license, use, enjoy, and protect the Intellectual Property Collateral. 18. FURTHER INDEMNIFICATION. Each Grantor agrees to pay, and to save Agent and each Holder harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales, or other similar taxes that may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Security Agreement. 19. WAIVER OF JURY TRIAL. Each Grantor waives all right to trial by jury in any action or proceeding to enforce or defend any rights or remedies hereunder, or under the Purchase Agreements, or relating to each of the foregoing. 20. SECTION TITLES. The Section titles contained in this Security Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 21. COUNTERPARTS. This Security Agreement may be executed in any number of counterparts, which shall, collectively and separately, constitute one agreement. Page 15 IN WITNESS WHEREOF, each of the parties hereto has caused this Security Agreement to be executed and delivered by its duly authorized officer on the date first set forth above. BRILLIANT DIGITAL ENTERTAINMENT, INC., a Delaware corporation By: /S/ ROBERT CHMIEL ---------------------------- Robert Chmiel Title: Chief Operating Officer and Chief Financial Officer SUBSIDIARIES: BRILLIANT STUDIOS, INC., a Delaware corporation By: /S/ KEVIN BERMEISTER ---------------------------- Kevin Bermeister Title: President B3D, INC. a Delaware corporation By: /S/ KEVIN BERMEISTER ---------------------------- Kevin Bermeister Title: President Accepted and acknowledged by: HARRIS TOIBB, as Agent for the ratable benefit of Holders /S/ HARRIS TOIBB - ----------------------------- Harris Toibb Page 16 SCHEDULE I FILINGS
GRANTORS JURISDICTION FILING OFFICE - -------- ------------ ------------- Brilliant Digital Entertainment, Inc.; Delaware Secretary of State Brilliant Studios, Inc.; and B3D, Inc.
SCHEDULE II LOCATION OF RECORDS AND CERTAIN COLLATERAL
PRINCIPAL PLACE OF LOCATION OF BUSINESS AND INVENTORY GRANTOR LOCATION OF RECORDS AND EQUIPMENT - ------- ------------------- -------------- Brilliant Digital 6355 Topanga Canyon Blvd. 6355 Topanga Canyon Blvd. Entertainment, Inc. Suite 120 Suite 120 Woodland Hills, CA 91367 Woodland Hills, CA 91367 Facsimile: (818) 712-0810 Facsimile: (818) 712-0810 Brilliant Studios, Inc. 6355 Topanga Canyon Blvd. 6355 Topanga Canyon Blvd. Suite 120 Suite 120 Woodland Hills, CA 91367 Woodland Hills, CA 91367 Facsimile: (818) 712-0810 Facsimile: (818) 712-0810 B3D, Inc. 6355 Topanga Canyon Blvd. 6355 Topanga Canyon Blvd. Suite 120 Suite 120 Woodland Hills, CA 91367 Woodland Hills, CA 91367 Facsimile: (818) 712-0810 Facsimile: (818) 712-0810 and and Brilliant Interactive Ideas Brilliant Interactive Ideas Pty. Ltd. Pty. Ltd. Level 4 Level 4 75 Grafton Street 75 Grafton Street Bondi Junction, NSW 2022 Bondi Junction, NSW 2022 Australia Australia
EX-10 18 exhibit_10-54.txt EXHIBIT 10.54 INVESTOR RIGHTS AGREEMENT This Investor Rights Agreement (this "AGREEMENT") is made as of December 19, 2001, by and among Brilliant Digital Entertainment, Inc., a Delaware corporation (the "COMPANY"), and each of the parties (each an "INVESTOR" and collectively, the "INVESTORS") listed on the SCHEDULE OF INVESTORS attached hereto as EXHIBIT A (the "SCHEDULE OF INVESTORS"). RECITALS A. Certain of the parties hereto are parties to those certain Note and Warrant Purchase Agreements, dated April 2001, as amended, whereby the Investors provided loans to the Company in exchange for the Company's issuance of certain Secured Convertible Promissory Notes (the "ORIGINAL NOTES") convertible into shares of the Company's Common Stock, par value $0.001 per share (the "SHARES") and Warrants (the "ORIGINAL WARRANTS") to purchase shares (the "WARRANT SHARES") of Common Stock. B. Certain of the parties hereto are parties to those certain Note and Warrant Purchase Agreements, dated of even date herewith, pursuant to which certain of the Investors have invested additional capital in the Company in exchange for certain Secured Convertible Promissory Notes (the "NEW NOTES") convertible into the Shares and Warrants (the "NEW WARRANTS") to purchase additional Warrant Shares. C. The parties desire to enter into this Agreement which will govern the registration rights of the Shares held by the Investors in accordance with the terms and conditions herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. REGISTRATION RIGHTS. 1.1 DEFINITIONS. For purposes of this Agreement: "AFFILIATE" means, with respect to a Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such Person in question. For the purposes of this definition, "CONTROL" (including, with correlative meanings, the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "BOARD OF DIRECTORS" means the Board of Directors of the Company or any duly constituted committee of that Board which has been delegated the authority to take the specific action in question. "CAPITAL STOCK" means, with respect to any Person, any and all shares, interests, warrants, subscription rights, participations or other equivalents (however designated) of capital stock. "COMMON STOCK" means the Company's common stock, par value $0.001 per share. "ELIGIBLE OFFERING" means any public offering of Common Stock by the Company other than: (i) any registration relating solely to the sale of securities to participants in a Company stock plan, (ii) any registration relating to corporate reorganization or other transaction under Rule 145 of the Act, (iii) any registration on any form (other than Form S-1, S-2 or S-3) which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, and (iv) any registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC (or any other federal agency at the time administering the Securities Exchange Act of 1934, as amended) promulgated thereunder. "FORM S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "PERSON" means any individual, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, government bureau or agency or other subdivision thereof or other entity of any kind or nature. "QUALIFIED OFFERING" means a firmly underwritten public offering of the Company's Common Stock pursuant to an effective registration statement filed with the SEC. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document by the SEC. "REGISTRABLE SECURITIES" means (i) any Common Stock held by the Investors, (ii) any Common Stock issuable upon conversion and/or exercise of the Original Notes, the Original Warrants, the New Notes and the New Warrants, (iii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of the shares referenced in (i) or (ii) above, and (iv) any Common Stock of the Company issued by way of a stock split of the shares referenced in (i), (ii) or (iii) above. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC (or any other federal agency at the time administering the Securities Act of 1933, as amended) promulgated thereunder. Page 2 "TRADING DAY" shall mean any day on which shares of the Company's Common Stock are traded on the American Stock Exchange, any other national market or over the counter, as the case may be. 1.2 REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES. (a) FILING. At any time upon receipt of a written request delivered at any time after December 19, 2002, from the Investors holding at least fifty percent (50%) of the total Registrable Securities which are outstanding or which are issuable upon conversion or exercise at the time of the request, the Company agrees to file, and cause to become effective as promptly as practicable thereafter, a shelf registration statement pursuant to Rule 415 under the Securities Act of 1933 (the "REGISTRATION STATEMENT") on Form S-3 covering the shares of Common Stock into which the Shares may be converted (the "UNDERLYING SHARES"), which Registration Statement (or post-effective amendment filed under this Section 1.2) shall remain effective until the earlier of: (i) two (2) years from the date of effectiveness and (ii) such time as all registration rights granted to the Investor hereunder have terminated pursuant to Section 4.2 hereof (the "EFFECTIVENESS PERIOD"). If the Company is not eligible to use Form S-3, the Registration Statement shall be on Form S-1 and shall be amended to Form S-3 at such time as the Company becomes eligible to use Form S-3. NOTWITHSTANDING THE FOREGOING, the Company shall not be obligated to file and cause to be effective a Registration Statement in the event that (1) the Company shall furnish to the Investor a certificate signed by the Chief Executive Officer or Chairman of the Board of Directors stating that in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company and its stockholders for such Registration Statement to be effected at such time, in which event the Company shall have the right to defer the filing of the Registration Statement for a period of not more than 90 days, or (2) if the Company has already filed three Registration Statements at the request of the Investors pursuant to this Section 1.2(a); (b) EFFECTIVENESS. The Company shall use its commercially reasonable efforts to cause such Registration Statement to become effective within 90 days after filing with the SEC or, if earlier, within five (5) days of SEC clearance to request acceleration of effectiveness. The Registration Statement shall include appropriate language regarding reliance upon Rule 416 to the extent permitted by the SEC. The Company will notify the Investor of the effectiveness of the Registration Statement within one Trading Day of such event. (c) EXPENSES. All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under Section 1.2(a) and in complying with applicable Federal and State securities and Blue Sky laws shall be borne by the Company. The Investor shall bear the cost of underwriting and/or brokerage discounts, fees and commissions, if any, applicable to the Securities being registered. The Investor and his counsel shall have a reasonable period, not to exceed five (5) Trading Days, to review any amendment to the Registration Statement prior to filing with the SEC, and the Company shall provide the Investor with copies of any comment letters received from the SEC with respect thereto within two (2) Trading Days of receipt thereof. 1.3 PIGGYBACK REGISTRATIONS. From and after December 19, 2002, Company shall notify the Investors in writing at least 20 days prior to filing any registration statement under the Securities Act for purposes of effecting an Eligible Offering, and will afford the Investors an opportunity to include in such registration statement all or any part of the Registrable Securities then Page 3 held by any Investor. If the Investors desire to include in any such registration statement all or any part of the Registrable Securities they hold, such Investors shall, within 10 days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice shall inform the Company of the number of Registrable Securities such Investor wishes to include in such registration statement. If any Investor decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Investor shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) UNDERWRITING. If a registration statement under which the Company gives notice under this Section 1.3 is for an underwritten offering, then the Company shall so advise the Investors. In such event, the right of the Investors' Registrable Securities to be included in a registration pursuant to this Section 1.3 shall be conditioned upon the Investors' participation in such underwriting and the inclusion of the Investors' Registrable Securities in the underwriting to the extent provided herein. If the Investors are proposing to distribute their Registrable Securities through such underwriting, such Investors shall enter into an underwriting agreement in customary form with the managing underwriter or underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Agreement, if the managing underwriter(s) determine(s) in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the managing underwriter(s) may exclude shares (including Registrable Securities) from the registration and the underwriting, and the number of shares that may be included in the registration and the underwriting shall be allocated, FIRST, to the Company, SECOND to the holders of any other registration rights granted by the Company prior to the date of this Agreement, and THIRD, to the Investors, on a pro rata basis based on the total number of Registrable Securities then held by each Investor. If any Investor disapproves of the terms of any such underwriting, such Investor may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. (b) EXPENSES. The Company shall pay all expenses incurred in connection with a registration pursuant to this Section 1.3 (excluding underwriters' or brokers' discounts and commissions), including, without limitation all federal and "blue sky" registration and qualification fees, printers' and accounting fees, and fees and disbursements of counsel for the Company and the fees and disbursements of special counsel for the Investors. 1.4 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities under this Agreement, the Company shall, as expeditiously as reasonably possible: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective, and, upon the request of a majority in interest of the Investors, keep such registration statement effective for the Effectiveness Period; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement Page 4 as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) furnish to the Investors such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by the Investors that are included in such registration; (d) use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by a majority in interest of the Investors, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering; (f) at such time as the Investors' Registrable Securities are covered by such registration statement, notify the Investors at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of a majority in interest of the Investors prepare and file an amendment to any such prospectus as may be necessary; (g) furnish, at the request of a majority in interest of the Investors if such Investors are requesting registration of Registrable Securities and such securities are being sold through underwriters, a "comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to the Investors requesting registration, addressed to the underwriters and to such Investors; (h) cause all Registrable Securities registered hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; (i) cause the Company's officers, directors and independent certified public accountants to provide all information reasonably requested by a representative of the Investors and any attorney or accountant retained by the Investors, in connection with such registration; (j) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of the Registration Statement; and (k) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any securities included in the registration Page 5 statement for sale in any jurisdiction, use its commercially reasonable efforts promptly to obtain the withdrawal of such order. 1.5 INVESTOR'S OBLIGATIONS. (i) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 1 that the Investors shall furnish to the Company such information regarding such Investors, the Registrable Securities held by the Investors and the intended method of disposition of such securities, as shall be required to timely effect the registration of its Registrable Securities. (ii) Investors agree that upon receipt of written notice of a Blackout Period from the Chief Executive Officer or Chairman of the Board of Directors, the Investors will not offer or sell Registrable Securities or engage in any transaction involving or relating to Registrable Securities during the time period set forth in such notice (such Blackout Period not to exceed 30 days) and will not disclose the contents of such notice until the Blackout Period has ended. For purposes of this Section 1.5: "BLACKOUT PERIOD": shall mean the occurrence of a material event which may be, in the good faith opinion of the Board of Directors, materially adverse to the Company's financial condition, business or operations or may require a disclosure which is not in the Company's best interest in light of the existence of (A) any material acquisition or financing activity involving the Company, including a proposed public offering of debt or equity securities, (B) an undisclosed material event, the public disclosure of which would have a material adverse effect on the Company, and (C) a proposed material transaction involving the Company and a material portion of its assets. 1.6 DELAY OF REGISTRATION. Investors shall not have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.7 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Section 1: (a) BY THE COMPANY. To the extent permitted by law, the Company will indemnify and hold the Investors harmless, any underwriter (as defined in the Securities Act) for the Investors and each person, if any, who controls an Investor or an Investor's underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any federal or state securities law or any rule or regulation Page 6 promulgated under the Securities Act, the Exchange Act or any federal or state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each Investor or its underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 1.7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by an Investor, his underwriter or any controlling person of an Investor. (b) BY THE INVESTORS. To the extent permitted by law, the Investors will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, or any underwriter, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, or underwriter may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by the Investors expressly for use in connection with such registration; and the Investors will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 1.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Investors, which consent shall not be unreasonably withheld; and PROVIDED FURTHER, that the total amounts payable in indemnity by the Investors under this subsection 1.7(b) in respect of any Violation shall not exceed the net proceeds received by the Investors in the registered offering out of which such Violation arises. (c) NOTICE. Promptly after receipt by an indemnified party under this Section 1.7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.7, but Page 7 the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.7. (d) DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing indemnity agreements of the Company and the Investors are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (e) SURVIVAL. The obligations of the Company and the Investors under this Section 1.7 shall survive the completion of any offering of Registrable Securities in a registration statement, and otherwise, and the termination of this Agreement. (f) SETTLEMENT. No indemnified party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 1.8 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to Section 1.2 and Section 1.3 may not be assigned by the Investors. 1.9 HOLDBACK AGREEMENTS. Investor shall not effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for equity securities of the Company, during the thirty days prior to and the 120-day period beginning on the effective date of any registration or any in which Registrable Securities are included (except as part of such underwritten offering), unless the underwriters managing the registered public offering otherwise agree. 1.10 RULE144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Registrable Securities to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times after the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) use its commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) as long as the Investors own any Registrable Securities, to furnish to the Investors forthwith upon request a written statement by the Company as to its compliance with Page 8 the reporting requirements of said Rule 144, and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company and such other reports and documents of the Company as the Investors may reasonably request in availing itself of any rule or regulation of the SEC allowing Investor to sell any such securities without registration (at any time after the Company has become subject to the reporting requirements of the Exchange Act). 1.11 TERMINATION OF REGISTRATION RIGHTS. Investors shall not be entitled to exercise any right provided in Section 1 hereof subsequent to the time at which all Registrable Securities held by the Investors (and any affiliates of the Investors with whom the Investors must aggregate their sales under Rule 144) can be sold in any three month period without registration in compliance with Rule 144 of the Act. 2. AMENDMENT. 2.1 Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investors. Any amendment or waiver effected in accordance with this Section 2.1 shall be binding upon the Investors and the Company. 3. GENERAL PROVISIONS. 3.1 NOTICES. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) hand delivered, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the first business day following the date of sending by reputable courier service, fully prepaid, addressed to such address, or (c) upon actual receipt of such mailing, if mailed. The addresses for such communications shall be: If to the Company: If to the Investors: Brilliant Digital Entertainment, Inc. To the addresses stated on 6355 Topanga Canyon Boulevard the signature pages hereto. Suite 120 Woodland Hills, California 91367 Attn: Chief Operating Officer Facsimile: 818-615-0995 Page 9 With Copies to: Akin, Gump, Strauss, Hauer & Feld 2029 Century Park East, 24th Floor Los Angeles, CA 90067-3010 Attn: Murray Markiles Fax Number: (310) 728-2233 Or at such address as the Investors shall have furnished to the Company in writing. The parties hereto may from time to time change their address or facsimile number for notices under this Section 3.1 by giving written notice of such changed address or facsimile number to the other parties hereto as provided in this Section 3.1. 3.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed as original but all of which together shall constitute one and the same instrument. 3.3 SEVERABILITY. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such 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 and shall be interpreted so as to be effective and valid. 3.4 CONSTRUCTION AND INTERPRETATION. Should any provision of this Agreement require judicial interpretation, the parties hereto agree that the court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against one party by reason of the rule of construction that a document is to be more strictly construed against the party that itself or through its agent prepared the same, it being agreed that the Company, the Investors and their respective agents have participated in the preparation hereof. 3.5 ENTIRE AGREEMENT. This Agreement and the other written agreements between the Company and the Investors represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein; PROVIDED, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the obligations described herein, the provisions of this Agreement shall control. 3.6 ARBITRATION. Any dispute or controversy arising under, out of, or in connection with or in relation to this Agreement, and any amendments thereto or the breach thereof, shall be determined and settled by arbitration to be held in County of Los Angeles, State of California, in accordance with the rules of the American Arbitration Association. Any award rendered therein shall be final and binding on each and all of the Parties and judgment may be entered thereon in any court of competent jurisdiction. 3.7 COSTS AND ATTORNEYS' FEES. If any action, suit, arbitration or other proceeding is instituted to remedy, prevent or obtain relief from a default in the performance by any party to this Agreement of its obligations under this Agreement, the prevailing party (as determined Page 10 by the court or other fact-finder) will be entitled to recover from the losing party all actual costs incurred in each and every such action, suit, arbitration or other proceeding, including any and all appeals or petitions therefrom, including, without limitation, reasonable attorneys' fees and disbursements. 3.8 GOVERNING LAW. THIS AGREMEENT IS MADE AND ENTERED INTO IN THE STATE OF CALIFORNIA AND THE LAWS OF SAID STATE, WITHOUT REFERENCE TO ITS CONFLICT OF LAWS PRINCIPLES, SHALL GOVERN THE VALIDITY AND INTERPRETATION HEREOF AND THE PERFORMANCE BY THE PARTIES HERETO OF THEIR RESPECTIVE DUTIES AND OBLIGATIONS HEREUNDER. 3.9 ADJUSTMENTS FOR STOCK SPLITS AND CERTAIN OTHER CHANGES. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock of the Company of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement shall automatically be proportionally adjusted to reflect the affect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend. SIGNATURE PAGES TO FOLLOW Page 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. BRILLIANT DIGITAL ENTERTAINMENT, INC. /S/ ROBERT CHMIEL -------------------------------------- By: Robert Chmiel Its: Chief Operating Officer and Chief Financial Officer Address: 6355 Topanga Canyon Boulevard Suite 120 Woodland Hills, California 91367 Attn: Chief Operating Officer Facsimile: 818-615-0995 Page 12 INVESTOR SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT INVESTORS: /S/ HARRIS TOIBB ----------------------------------- HARRIS TOIBB Address: 6355 Topanga Canyon Blvd. Suite 411 Woodland Hills, California 91367 Facsimile: 818-883-5636 EUROPLAY 1, LLC /S/ MARK DYNE ----------------------------------- By: Mark Dyne Title: Address: 21900 Burbank Blvd. Suite 270 Woodland Hills, California 91367 Attn: ________________________ Facsimile: 818-712-0810 PRESTON FORD INC. /S/ DAVID WILSON ----------------------------------- By: David Wilson Its: President Address: 218 S. Main Street Preston, MD 21655 Attn: _______________________ Facsimile: 410-673-2991 CAPEL CAPITAL LTD. /S/ NICK HANNAH ----------------------------------- By: Nick Hannah on behalf of Mentor Trustees Limited Its: Director Address: PO Box 212 Hadsley House St. Peter Port GUERNSEY Channel Islands Facsimile: 44-1481-713112 Exhibit A SCHEDULE OF INVESTORS Harris Toibb Europlay 1, LLC Preston Ford Inc. Capel Capital Ltd. EX-10 19 exhibit_10-55.txt EXHIBIT 10.55 GUARANTY THIS GUARANTY (this "GUARANTY"), is made and entered into as of the 19th day of December, 2001, by the Guarantors identified as such on the signature page hereof (individually a "GUARANTOR" and collectively "GUARANTORS"), in favor of Harris Toibb ("Toibb"), an individual, as agent (in such capacity "AGENT") for himself and the holder's party to the Purchase Agreements referred to below (Toibb and the holders party to the Purchase Agreements collectively "HOLDERS"). W I T N E S S E T H: WHEREAS, Brilliant Digital Entertainment, Inc., a Delaware corporation ("BORROWER"), and each of the Holders have entered into a Purchase Agreement, dated as of December 10, 2001 (as at any time amended, modified, or supplemented, each a "PURCHASE AGREEMENT" and collectively, the "PURCHASE AGREEMENTS"), pursuant to which each Holder has agreed to make a loan (collectively, the "CONVERTIBLE NOTE LOANS") to Borrower; WHEREAS, Guarantors and Borrower are members of the same consolidated group of companies and are engaged in related businesses, and Guarantors will receive a portion of the proceeds of Convertible Note Loans provided for in the Purchase Agreements and will derive other direct and indirect economic benefits therefrom; and WHEREAS, in connection with the making of the Convertible Note Loans under the Purchase Agreements and as a condition among others precedent thereto, Holders are requiring that each Guarantor shall have executed and delivered this Guaranty; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, and to induce Holders to provide the Convertible Note Loans and other extensions of credit under the Purchase Agreements, it is agreed as follows: 1. DEFINITIONS. Capitalized terms used herein shall have the meanings assigned to them in the Security and Pledge Agreement dated December 19, 2001, executed in connection with the Purchase Agreements ("Security Agreement"), or the Purchase Agreements, unless the context otherwise requires or unless otherwise defined herein. References to this "Guaranty" shall mean this Guaranty, including all amendments, modifications, and supplements and any exhibits or schedules to any of the foregoing, and shall refer to this Guaranty as the same may be in effect at the time such reference becomes operative. 2. THE GUARANTY. The guaranty of Guarantors hereunder is as follows: 2.1. GUARANTY OF SECURED OBLIGATIONS OF BORROWER. Each Guarantor hereby jointly and severally unconditionally guaranties to Holders, and its successors, endorsees, transferees, and assigns, the prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of the Secured Obligations. Guarantors agree that this Guaranty is a guaranty of payment and performance and not of collection, and that their obligations under this Guaranty shall be primary, absolute, and unconditional, irrespective of, and unaffected by: (a) the genuineness, validity, regularity, enforceability, or any future amendment of, or change in this Guaranty, the Security Agreement or any other agreement, document, or instrument to which Borrower and/or Guarantors is or are or may become a party; (b) the absence of any action to enforce this Guaranty or the Security Agreement or the waiver or consent by Agent or Holders with respect to any of the provisions thereof; (c) the existence, value, or condition of, or failure to perfect the Lien against the Collateral, any security for the Secured Obligations or any action, or the absence of any action, by Agent or Holders in respect thereof (including, without limitation, the release of any such security); or (d) any other action or circumstances that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being agreed by each Guarantor that its obligations under this Guaranty shall not be discharged until the payment and performance, in full, of the Secured Obligations. Each Guarantor shall be regarded, and shall be in the same position, as principal debtor with respect to the Secured Obligations. Each Guarantor expressly waives all rights it may have now or in the future under any statute, or at common law, or at law or in equity, or otherwise, to compel Agent or any Holders to proceed in respect of the Secured Obligations against Borrower or any other party or against any security for the payment and performance of the Secured Obligations before proceeding against, or as a condition to proceeding against, any Guarantor. Each Guarantor agrees that any notice or directive given at any time to Agent or any Holders that is inconsistent with the waiver in the immediately preceding sentence shall be null and void and may be ignored by Holders, and, in addition, may not be pleaded or introduced as evidence in any litigation relating to this Guaranty for the reason that such pleading or introduction would be at variance with the written terms of this Guaranty, unless Agent has specifically agreed otherwise in writing. It is agreed between each Guarantor and Agent that the foregoing waivers are of the essence of the transaction contemplated by the Security Agreement and that, but for this Guaranty and such waivers, Holders would decline to make the Convertible Note Loans under the Purchase Agreements. 2.2. DEMAND BY AGENT. In addition to the terms of the Guaranty set forth in SECTION 2.1 hereof, and in no manner imposing any limitation on such terms, it is expressly understood and agreed that, if the then outstanding principal amount of the Secured Obligations under the Purchase Agreements (together with all accrued interest thereon) is declared to be immediately due and payable, then, Guarantors shall, upon demand in writing therefor by Agent to Guarantors, pay to the holder or holders of the Secured Obligations the entire outstanding Secured Obligations due and owing to such holder or holders. Payment by Guarantors shall be made to Agent for the ratable benefit of Holders, to be credited and applied upon the Secured Obligations, in immediately available Federal funds to an account designated by Agent for the ratable benefit of Holders or at the address set forth herein for the giving of notice to Agent or at any other address that may be specified in writing from time to time by Holders. Page 2 2.3. ENFORCEMENT OF GUARANTY. In no event shall Agent or Holders have any obligation (although it is entitled, at its option) to proceed against the Borrower or any other Person or any real or personal property pledged to secure the Secured Obligations before seeking satisfaction from Guarantors, and Holders may proceed, prior or subsequent to, or simultaneously with, the enforcement of Holder's rights hereunder, to exercise any right or remedy which it may have against any property, real or personal, as a result of any Lien or security interest it may have as security for all or any portion of the Secured Obligations. 2.4. WAIVER. In addition to the waivers contained in SECTION 2.1 hereof, Guarantors waive, and agree that they shall not at any time insist upon, plead, or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshalling of assets, or redemption laws, or exemption, whether now or at any time hereafter in force, which may delay, prevent, or otherwise affect the performance by the Guarantors of their obligations under, or the enforcement by Holders of, this Guaranty. Guarantors hereby waive diligence, presentment, and demand (whether for non-payment or protest or of acceptance, maturity, extension of time, change in nature or form of the Secured Obligations, acceptance of further security, release of further security, composition, or agreement arrived at as to the amount of, or the terms of, the Secured Obligations, notice of adverse change in Borrower's financial condition, or any other fact that might materially increase the risk to Guarantors) with respect to any of the Secured Obligations or all other demands whatsoever and waive the benefit of all provisions of law that are or might be in conflict with the terms of this Guaranty. Guarantors represent, warrant, and jointly and severally agree that, as of the date of this Guaranty, their obligations under this Guaranty are not subject to any offsets or defenses against Agent, Holders, or Borrower of any kind. Guarantors further jointly and severally agree that their obligations under this Guaranty shall not be subject to any counterclaims, offsets, or defenses against Agent or Holders, or against Borrower of any kind which may arise in the future. Additionally, neither the Agent nor Holders shall be required to take any action of any kind or nature against the Borrower or any other Person, or resort to any security held by the Agent or Holders or any other Person, at any time before the Agent or Holders may proceed against Guarantors hereunder. Guarantors hereby expressly waive, relinquish, and release any right, defense, protection, claim of exoneration, or other claim, and any right to assert any right, defense, protection, claim of exoneration, or other claim, in any action brought on, arising out of or relating to this Guaranty or otherwise: 2.4.1 based upon California Civil Code Section 2809, and/or any claim thereunder or otherwise, that any obligation of Guarantors under this Guaranty is larger in amount or in other respects more burdensome than that of the Borrower, or that any such obligation of Guarantors is reducible in proportion to any of the Secured Obligations; 2.4.2 based upon California Civil Code Section 2810, and/or any claim thereunder or otherwise, that for any reason there is no liability upon the part of the Borrower under any of the Purchase Agreements, the Convertible Notes or the Security Agreement at the time of the execution of any such agreements, or that, subject to the provisions of SECTION 2.8 hereof, the liability of the Borrower under any of the Purchase Agreements, the Convertible Notes or the Security Agreement thereafter ceases for any reason other than the full, effective, and irrevocable payment, performance; and/or satisfaction of such liability and the expiration of all time periods within which any court of competent jurisdiction, including any foreign court of competent jurisdiction, Page 3 could order any payment relating to the Secured Obligations to be disgorged, repaid, recovered, or paid into court or that, subject to the provisions of SECTION 2.8 thereof, the Agent or any Holder, or any other Person, has recovered any res which formed all or part of the consideration for any of the Purchase Agreements, the Convertible Notes or the Security Agreement except only to the extent that any of the Secured Obligations are fully, effectively, irrevocably and finally paid, performed, and satisfied, and all time periods have expired within which any court of competent jurisdiction, including any foreign court of competent jurisdiction, could order any payment relating to the Secured Obligations to be disgorged, repaid, recovered, or paid into court (and then subject to SECTION 2.8 hereof); 2.4.3 based upon California Civil Code Section 2815, and/or any claim thereunder or otherwise, that the Guaranty may be revoked in respect to future transactions, whether or not there is continuing consideration as to such transactions and whether or not Guarantors renounce any such consideration; 2.4.4 based upon California Civil Code Section 2819, and/or any claim thereunder or otherwise, that any Secured Obligation of the Borrower has been altered in any respect without Guarantors' consent (whether or not by any act of the Agent or Holders or any other Person), or that the remedies or rights of the Agent or Holders or any other Person against the Borrower in respect thereto, have been in any way impaired or suspended; 2.4.5 based upon California Civil Code Section 2822, and/or any claim thereunder or otherwise, that acceptance by the Agent or Holders of anything in partial satisfaction of the Secured Obligations reduces the obligations of Guarantors hereunder, or otherwise affects the continuing liability of Guarantors; 2.4.6 based upon California Civil Code Section 2839, and/or any claim thereunder or otherwise, that, subject to SECTION 2.8 hereof, performance of any or all of the Secured Obligations, or any offer of such performance, exonerates Guarantors except only to the extent that any of the Secured Obligations are fully, effectively, irrevocably, and finally paid, performed, and satisfied, and all time periods have expired within which any court of competent jurisdiction, including any foreign court of competent jurisdiction, could order any payment relating to the Secured Obligations to be disgorged, repaid, recovered, or paid into court (and then subject to SECTION 2.8 hereof); 2.4.7 based upon California Civil Code Section 2845, and/or any claim thereunder or otherwise, that Guarantors may require the Agent or Holders, or any other Person, to proceed against the Borrower, or to pursue any other remedy in such Agent's or Holder's, or such other Person's, power which Guarantors cannot pursue and/or which would lighten Guarantors' burden, or that the Agent or Holders, or any other Person, have neglected so to proceed against the Borrower, or to pursue any such other remedy; 2.4.8 based upon California Civil Code Section 2846, and/or any claim thereunder or otherwise, that Guarantors may compel the Borrower to perform any Secured Obligation when due, whether as a condition precedent to any liability of Guarantors or otherwise; 2.4.9 based upon California Civil Code Section 2847, and/or any claim thereunder or otherwise, that if Guarantors satisfy any of the Secured Obligations (or any part Page 4 thereof), whether with or without legal proceedings, the Borrower is bound to reimburse what Guarantors have disbursed, whether or not including any necessary costs and expenses; 2.4.10 based upon California Civil Code Section 2848, and/or any claim thereunder or otherwise, that Guarantors, upon satisfying or discharging all or any part of any of the Secured Obligations, are entitled to enforce any remedy that the Agent or Holders, or any other Person, then has against the Borrower, whether to the extent of reimbursing what the Borrower has expended or otherwise, or to require any or all of any co-sureties of Guarantors to contribute thereto; 2.4.11 based upon California Civil Code Section 2849, and/or any claim thereunder or otherwise, that Guarantors are entitled to the benefit of any security for the performance of any of the Secured Obligations, whether any such security is held by the Agent or Holders, or by any co-surety of Guarantors, or otherwise, and whether any such security was held at the time of Guarantors' entering into this Guaranty or acquired afterwards, and whether Guarantors were aware of any such security or not; 2.4.12 based upon California Civil Code Section 2850, and/or any claim thereunder or otherwise, that as to any property of Guarantors that has been hypothecated with property of the Borrower's, Guarantors are entitled to have the property of the Borrower first applied to the discharge of any or all of the Secured Obligations; 2.4.13 based upon California Civil Code Section 2899, and/or any claim thereunder or otherwise, that the Agent or Holders, or any other Person, must resort to property upon which the Agent or Holders, or such other Person, has a lien in any particular order, or must otherwise marshal any such liens or property; 2.4.14 based upon California Civil Code Section 3433, and/or any claim thereunder or otherwise, that Guarantors may require the Agent or Holders, or any other Person, to seek satisfaction from funds to which Guarantors have no claim or must otherwise marshal assets; 2.4.15 otherwise based upon any of the sections of the California Civil Code referred to in this SECTION 2.4; and/or 2.4.16 based upon any other action or circumstance that might otherwise constitute a legal or equitable discharge, defense, or exoneration of a guarantor or surety. Without limiting the generality of the foregoing, Guarantors hereby expressly waive (a) pursuant to California Civil Code Section 2856(a)(1), all of Guarantors' rights of subrogation, reimbursement, indemnification and contribution and any other rights and defenses that are or may become available to Guarantors by reason of California Civil Code Sections 2787 to 2855, inclusive; (b) pursuant to California Civil Code Section 2856(a)(2), all rights and defenses arising out of any election of remedies by the Agent or Holders, even if any such election of remedies has destroyed or impaired any right or claim of subrogation and/or reimbursement that might otherwise have been available to Guarantors; (c) notice of the acceptance of this Guaranty by any Person; (d) notice of the Secured Obligations now existing or which may hereafter exist or be created; (e) notice of any adverse change in the financial condition of the Borrower or of any other fact that might increase Guarantors' risk hereunder; (f) notice of demand for payment or performance, or notice of default Page 5 or nonpayment or nonperformance, under the Loan Documents (or any of them), or otherwise in respect of any of the Secured Obligations; and (g) all other notices to which Guarantors might otherwise be entitled in connection with this Guaranty, the Purchase Agreements, the Convertible Notes or the Security Agreement (or any of them), or otherwise in respect of any Secured Obligation. 2.5. BENEFIT OF GUARANTY. The provisions of this Guaranty are for the benefit of Agent for the ratable benefit of Holders and their respective successors, transferees, endorsees, and assigns, and nothing herein contained shall impair, as between Borrower and Agent or Holders, the obligations of Borrower under the Purchase Agreements, the Convertible Notes and the Security Agreement. In the event all or any part of the Secured Obligations are transferred, endorsed, or assigned by Agent or Holders to any Person or Persons, any Holders reference to "Agent" or "Holders" herein shall be deemed to refer equally to such Person or Persons as the case may be. 2.6. MODIFICATION OF CONVERTIBLE NOTE LOANS. If Agent or Holders shall at any time or from time to time, with or without the consent of, or notice to, Guarantors or any of them: (a) change or extend the manner, place, or terms of payment of, or renew or alter all or any portion of, the Secured Obligations; (b) take any action under or in respect of the Purchase Agreements, the Convertible Notes or the Security Agreement in the exercise of any remedy, power or privilege contained therein or available to it at law, equity, or otherwise, or waive or refrain from exercising any such remedies, powers, or privileges; (c) amend or modify, in any manner whatsoever, the Purchase Agreements, the Convertible Notes or the Security Agreement; (d) extend or waive the time for any of Guarantors', Borrower's or other Person's performance of, or compliance with, any term, covenant, or agreement on its part to be performed or observed under the Purchase Agreements, the Convertible Notes or the Security Agreement, or waive such performance or compliance or consent to a failure of, or departure from, such performance or compliance; (e) take and hold security or collateral for the payment of the Secured Obligations guarantied hereby or sell, exchange, release, dispose of, or otherwise deal with, any property pledged, mortgaged, or conveyed, or in which Agent for the ratable benefit of Holders has been granted a Lien or security interest, to secure any indebtedness of Guarantors or Borrower to Agent or Holders; (f) release anyone who may be liable in any manner for the payment of any amounts owed by Guarantors or Borrower to Holders; (g) modify or terminate the terms of any intercreditor or subordination agreement pursuant to which claims of other creditors of Guarantors or Borrower are subordinated to the claims of Agent or Holders; and/or Page 6 (h) apply any sums by whomever paid or however realized to any amounts owing by Guarantors or Borrower to Agent or Holders in such manner as Agent shall determine in its discretion; then Agent and Holders shall not incur any liability to Guarantors pursuant hereto as a result thereof, and no such action shall impair or release the obligations of Guarantors or any of them under this Guaranty. 2.7. REINSTATEMENT. This Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against Borrower or any Guarantor for liquidation or reorganization, should Borrower or any Guarantor become insolvent or make an assignment for the benefit of creditors, or should a receiver or trustee be appointed for all or any significant part of Borrower's or any Guarantor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by Holders, whether as a "voidable preference", "fraudulent conveyance", or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored, or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored, or returned. 2.8. WAIVER OF SUBROGATION. (a) Guarantors shall not exercise any rights which they may have acquired by way of subrogation under this Guaranty, by any payment made hereunder or otherwise, nor shall any Guarantor seek any reimbursement from Borrower in respect of payments made by such Guarantor hereunder, unless and until all of the Secured Obligations shall have been paid to Holders and discharged, in full, and if any payment shall be made to Guarantors on account of such subrogation or reimbursement rights at any time when the Secured Obligations shall not have been paid and discharged, in full, each and every amount so paid shall forthwith be paid to Holders to be credited and applied against the Secured Obligations, whether matured or unmatured. (b) If, pursuant to applicable law, any or all Guarantors, by payment or otherwise, becomes subrogated to all or any of the rights of Agent or Holders under any of the Purchase Agreements, the Convertible Notes or the Security Agreement, the rights of Agent or Holders to which such Guarantors shall be subrogated shall be accepted by Guarantors "as is" and without any representation or warranty of any kind by Holders, express or implied, with respect to the legality, value, validity, or enforceability of any of such rights, or the existence, availability, value, merchantability, or fitness for any particular purpose of any Collateral and shall be without recourse to Agent or Holders. (c) If Agent or Holders may, under applicable law, proceed to realize their benefits under any of the Purchase Agreements, the Convertible Notes or the Security Agreement giving Agent or Holders a Lien upon any collateral, whether owned by Borrower or by any other Person, either by judicial foreclosure or by non-judicial sale or enforcement, Agent may, at its sole option, determine which of its remedies or rights it may pursue without affecting any of its rights and remedies under this Guaranty. If, in the exercise of any of its rights and remedies, Agent or Holders shall forfeit any of their rights or remedies, including their right to enter a deficiency Page 7 judgment against Borrower or any other Person, whether because of any applicable laws pertaining to "election of remedies" or the like, Guarantors hereby consent to such action by Agent and waive any claim based upon such action, even if such action by Agent or Holders shall result in a full or partial loss of any rights of subrogation which Guarantors might otherwise have had but for such action by Agent or Holders. Any election of remedies that results in the denial or impairment of the right of Agent or Holders to seek a deficiency judgment against Borrower shall not impair each Guarantor's obligation to pay the full amount of the Secured Obligations. In the event Holders shall bid at any foreclosure or trustee's sale or at any private sale permitted by law or the Security Agreement, Agent for the ratable benefit of Holders may bid all or less than the amount of the Secured Obligations and the amount of such bid need not be paid by Agent but shall be credited against the Secured Obligations. The amount of the successful bid at any such sale, whether Agent for the ratable benefit of Holders or any other party is the successful bidder, shall be conclusively deemed to be the fair market value of the collateral and the difference between such bid amount and the remaining balance of the Secured Obligations shall be conclusively deemed to be the amount of the Secured Obligations guarantied under this Guaranty, notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Agent for the ratable benefit of the Holders might otherwise be entitled but for such bidding at any such sale. 2.9. CONTINUING GUARANTY. Guarantors agree that this Guaranty is a continuing guaranty and shall remain in full force and effect until the payment and performance in full of the Secured Obligations. 3. DELIVERIES. In a form satisfactory to Holders, Guarantors shall deliver to Agent for the ratable benefit of Holders, concurrently with the execution of this Guaranty and the Purchase Agreement, such of the Transaction Documents and other instruments, certificates and documents as are required to be delivered by Guarantors to Agent for the ratable benefit of Holders under the Purchase Agreement. 4. REPRESENTATIONS AND WARRANTIES. To induce Holders to make the Convertible Note Loans under the Purchase Agreements, each Guarantor jointly and severally makes the following representations and warranties to Holders, each and all of which shall survive the execution and delivery of this Guaranty: 4.1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each Guarantor (i) is a corporation duly organized, validly existing, and in good standing under the laws of the state of its organization; (ii) is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification (except for jurisdictions in which such failure so to qualify or to be in good standing would not have a materially adverse effect on (A) the business, operations, prospects, or financial condition of Borrower or each Guarantor, (B) each Guarantor's ability to pay the Secured Obligations in accordance with the terms hereof, or (C) the Collateral, Holder's Lien on the Collateral, or the priority of any such Lien); (iii) has the requisite corporate power and authority and the legal right to own, pledge, mortgage, and operate its properties, to lease the property it operates under lease, and to conduct its business as now, heretofore, and proposed to be conducted; (iv) has all material licenses, permits, consents, or approvals from or by, and has made all material filings with, and has given all material notices to, all governmental authorities having jurisdiction, to the extent required for such ownership, operation, and conduct; (v) is in compliance with its articles or Page 8 certificate of incorporation and by-laws; and (vi) is in compliance with all applicable provisions of law where the failure to comply would have a materially adverse effect on (A) the business, operations, prospects, assets, or financial or other condition of Borrower or such Guarantor, (B) such Guarantor's ability to pay the Secured Obligations in accordance with the terms hereof, or (C) the Collateral, Holder's Lien on the Collateral, or the priority of any such Lien. 4.2. EXECUTIVE OFFICES. Each Guarantor's executive office and principal place of business are as set forth in Schedule II to the Security Agreement. 4.3. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE SECURED OBLIGATIONS. The execution, delivery and performance of this Guaranty and all of the Purchase Agreements and the Security Agreement and all instruments and documents to be delivered by each Guarantor hereunder and under the Purchase Agreements and the Security Agreement are within such Guarantor's corporate powers, have been duly authorized by all necessary or proper corporate action, including the consent of stockholders where required, are not in contravention of any provision of such Guarantor's articles or certificate of incorporation or by-laws, will not violate any law or regulation, or any order or decree of any court or governmental instrumentality, will not conflict with or result in the breach of, or constitute a default under, any indenture, mortgage, deed of trust, lease, agreement, or other instrument to which any Guarantor is a party or by which any Guarantor or any of its property is bound, will not result in the creation or imposition of any Lien upon any of the property of any Guarantor, other than those in favor of Agent or Holders, and the same do not require the consent or approval of any governmental body, agency, authority, or any other Person except those already obtained. This Guaranty and each of the Purchase Agreements and the Security Agreement to which any Guarantor is a party shall have been duly executed and delivered for the benefit of or on behalf of such Guarantor, and each shall then constitute a legal, valid, and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or other similar laws affecting the rights of creditors generally or by the application of general equity principles. 5. PERMITTED ASSIGNMENT BY HOLDERS. Agent and Holders may freely assign their rights and delegate their duties under this Guaranty, but no such assignment or delegation shall increase or diminish any Guarantor's obligations hereunder. Agent or Holders shall give Guarantors prompt notice of such assignment or delegation and agree to use their best efforts to give such notice at least three (3) Business Days prior to such assignment or delegation, but the consent of Guarantors shall not be required for any such assignment or delegation and failure to give such notice shall not affect the validity or enforceability of any such assignment or delegation or this Guaranty or subject Agent or Holders to any liability. 6. FURTHER ASSURANCES. Each Guarantor agrees, upon the written request of Agent, to execute and deliver to Agent, from time to time, any additional instruments or documents reasonably considered necessary by Agent to cause this Guaranty to be, become, or remain valid and effective in accordance with its terms. 7. PAYMENTS FREE AND CLEAR OF TAXES. All payments required to be made by each Guarantor hereunder shall be made to Agent for the ratable benefit of Holders free and clear of, and without deduction for, any and all present and future taxes, withholdings, levies, duties, and other governmental charges ("TAXES"), excluding such income and franchise taxes of the United States and any political subdivision thereof that Agent or Holders would otherwise have been payable by Page 9 Agent or Holders if Borrower had paid the Secured Obligations to Agent or Holders in accordance with the terms of the Transaction Documents. Upon request by Agent, each Guarantor shall furnish to Agent for the ratable benefit of Holders a receipt for any Taxes paid by such Guarantor pursuant to this SECTION 7 or, if no Taxes are payable with respect to any payments required to be made by such Guarantor hereunder, either a certificate from each appropriate taxing authority or an opinion of counsel acceptable to Agent, in either case stating that such payment is exempt from or not subject to Taxes. If Taxes are paid by Agent or Holders such Guarantor will, upon demand of Agent or Holders, and whether or not such Taxes shall be correctly or legally asserted, indemnify Agent or Holders for such payments, together with any interest, penalties, and expenses in connection therewith plus interest thereon at the rate specified in the Purchase Agreement applicable to the Convertible Note Loan (calculated as if such payments constituted overdue amounts of principal as of the date of the making of such payments). 8. MISCELLANEOUS. 8.1. ENTIRE AGREEMENT; AMENDMENTS. This Guaranty, together with the Purchase Agreements, the Convertible Notes and the Security Agreement, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to a guaranty of the loans and advances under the Purchase Agreements, the Convertible Notes and the Security Agreement and may not be amended or supplemented except by a writing signed by Guarantors and Agent. 8.2. HEADINGS. The headings in this Guaranty are for convenience of reference only and are not part of the substance of this Guaranty. 8.3. SEVERABILITY. In the event that any one or more of the provisions contained in this Guaranty shall be determined to be invalid, illegal, or unenforceable in any respect for any reason, the validity, legality, and enforceability of any such provision or provisions in every other respect and the remaining provisions of this Guaranty shall not be in any way impaired. 8.4. NOTICES. Whenever it is provided herein that any notice, demand, request, consent, approval, declaration, or other communication shall or may be given to or served upon any of the parties by another, or whenever any of the parties desires to give or serve upon another any such communication with respect to this Guaranty, each such notice, demand, request, consent, approval, declaration, or other communication shall be in writing and either shall be delivered in person with receipt acknowledged or by registered or certified mail, return receipt requested, postage prepaid, or by telecopy confirmed by telecopy answerback addressed as follows: (a) If to the Agent, at: Harris Toibb 6355 Topanga Canyon Blvd., Suite 411 Woodland Hills, CA 91367 Facsimile Number: (818) 883-5636 With copies to: Stutman, Treister & Glatt, Professional Corporation Page 10 3699 Wilshire Boulevard, Suite 900 Los Angeles, California 90010 Attn: Ronald Fein Facsimile Number: (213) 251-5288 (b) If to any Guarantor, at its principal business address specified on Schedule II to the Security Agreement With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 2029 Century Park East, 24th Floor Los Angeles, California 90067 Attn: Murray Markiles Facsimile Number: (310) 728-2233 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied and confirmed by telecopy answerback, or three (3) Business Days after the same shall have been deposited with the United States mail. 8.5. BINDING EFFECT. This Guaranty shall bind Guarantors and shall inure to the benefit of Agent for the ratable benefit of Holders and their respective successors and assigns. Guarantors may not assign this Guaranty. 8.6. NON-WAIVER. The failure of Agent or Holders to enforce any right or remedy hereunder, or promptly to enforce any such right or remedy, shall not constitute a waiver thereof, nor give rise to any estoppel against Agent or Holders, nor excuse Guarantors or any of them from its or their Secured Obligations hereunder. Any waiver of any such right or remedy by Agent or Holders must be in writing and signed by Agent. 8.7. TERMINATION. This Guaranty shall terminate and be of no further force or effect at such time as the Secured Obligations shall be paid and performed in full. Upon payment and performance in full of the Secured Obligations, Agent shall deliver to Guarantors such documents as Guarantors may reasonably request to evidence such termination. 8.8. GOVERNING LAW. The terms of this Guaranty shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of California (exclusive of any rules as to conflict of laws) and the laws of the United States applicable therein. Each Guarantor hereby submits to personal jurisdiction and waives any objection as to venue in the County of Los Angeles, State of California. Service of process on Guarantors in any action arising out of or relating to this Guaranty shall be effective if mailed to Guarantors in accordance with Section 8.4 hereof. Nothing herein shall preclude Agent for the ratable benefit of Holders from bringing suit or taking other legal action in any other jurisdiction. Page 11 8.9. REIMBURSEMENT. To the extent that any Guarantor shall be required to repay a portion of the Convertible Note Loans which shall exceed the greater of (i) the amount of such Convertible Note Loans actually received by such Guarantor and (ii) the amount that such Guarantor would otherwise have paid if such Guarantor had repaid the aggregate amount of such Convertible Note Loans (excluding the amount thereof repaid by Borrower) in the same proportion as each Guarantor's net worth immediately after the date hereof bears to the aggregate net worth of all Guarantors immediately after the date hereof, then such Guarantor shall be reimbursed by the other Guarantors for the amount of such excess, pro rata based on their respective net worths immediately after the date hereof. This SECTION 8.9 is intended only to define the relative rights of Guarantors, and nothing set forth in this SECTION 8.9 is intended to or shall impair the obligations of Guarantors, jointly and severally, to pay to Agent for the ratable benefit of Holders the Secured Obligations as and when the same shall become due and payable in accordance with the terms hereof. 8.10. COUNTERPARTS. This Guaranty may be executed in any number of counterparts which shall individually and collectively constitute one agreement. Page 12 IN WITNESS WHEREOF, Guarantors have executed and delivered this Guaranty as of the date first above written. GUARANTORS BRILLIANT STUDIOS, INC., a Delaware corporation By: /S/ KEVIN BERMEISTER ---------------------------- Name: Kevin Bermeister Title: President B3D INC. a Delaware corporation By: /S/ KEVIN BERMEISTER ---------------------------- Name: Kevin Bermeister Title: President Accepted and acknowledged by: HARRIS TOIBB as Agent for the ratable benefit of Holders By: /S/ HARRIS TOIBB ----------------------------- Harris Toibb Page 13 EX-10 20 exhibit_10-56.txt EXHIBIT 10.56 ACKNOWLEDGEMENT, CONSENT AND REAFFIRMATION Each of the undersigned parties (each a "Guarantor") is party to a certain Guaranty, dated as of May 23, 2001 (the "Guaranty"; terms defined in the Guaranty are used herein as therein defined), in favor of Harris Toibb, as agent for himself and the other parties to the Purchase Agreements. Pursuant to the Guaranty, each Guarantor guaranteed the payment and performance of the Secured Obligations. Each Guarantor acknowledges and agrees that the Guaranty is in full force and effect in all respects as of the date hereof. Each Guarantor acknowledges and is aware that Brilliant Digital Entertainment, Inc. ("BDE") has requested that Harris Toibb and another party make additional loans to BDE to finance BDE's and each Guarantor's operations (the "New Loans"). In connection with, and as a condition to, the making of the New Loans, the Purchase Agreements, the Convertible Notes, the Security Agreement and certain other documents will be amended pursuant to certain documents (the "Amendment Documents") that will be executed and delivered in connection with the New Loans. It is a condition to the making of the New Loans and the Amendment Documents that the Guarantors execute this Acknowledgement, Consent and Reaffirmation. Each Guarantor acknowledges that the making of the New Loans directly benefits each Guarantor. Each Guarantor represents that it has read the Amendment Documents and the documents to be executed in connection with the New Loans, is aware of and understands the terms and conditions contained therein and fully and freely consents to such transactions and the amendments contemplated in the Amendment Documents. Each Guarantor hereby agrees that all references in the Guaranty to the "Purchase Agreements", "Convertible Note Loans", "Secured Obligations", "Security Agreement", or any of the other documents executed in connection therewith shall mean and be a reference to such documents and terms as and to the extent they are amended by the Amendment Documents. Each Guarantor hereby agrees that the Guaranty is and shall continue in full force and effect and is hereby confirmed in all respects and each Guarantor hereby reaffirms each and every obligation thereunder and each of the waivers and consents made therein. Each Guarantor represents and warrants that it has reread the Guaranty and, in particular, each of the obligations, waivers and consents set forth in the Guaranty, and that its reaffirmation of the Guaranty and such obligations, waivers and consents herein have been made after consultation with legal counsel and with full knowledge of their significance and consequences, with the understanding that events giving rise to any defense or right waived may diminish, destroy, or otherwise Page 1 adversely affect rights that the Guarantors otherwise may have against each other or against the Agent or the Holders or against any collateral pledged to the Agent for the benefit of the Holders, and that, under the circumstances, the waivers and consents herein given are reasonable and not contrary to public policy or law. Dated: December 19, 2001 BRILLIANT STUDIOS, INC. a Delaware corporation By: /S/ KEVIN BERMEISTER ------------------------------ Name: Kevin Bermeister ------------------------ Title: CEO ------------------------ Dated: December 19, 2001 B3D, INC. a Delaware corporation By: /S/ KEVIN BERMEISTER ------------------------------ Name: Kevin Bermeister ------------------------ Title: CEO ------------------------ Page 2 EX-21 21 exhibit_21-1.txt EXHIBIT 21.1 BRILLIANT DIGITAL ENTERTAINMENT, INC. SUBSIDIARIES 1. Brilliant Interactive Ideas Pty. Ltd., an Australian corporation. 2. Brilliant Digital Entertainment Pty. Ltd., an Australian corporation. 3. B3D, Inc., a Delaware corporation. 4. Brilliant Studios, Inc., a Delaware corporation. 5. Digital Hip Hop, Inc.* 6. Altnet, Inc., a Delaware corporation.** * Brilliant Digital Entertainment, Inc. owns seventy-five percent (75%) of the outstanding shares of this corporation. ** Brilliant Digital Entertainment, Inc. owns fifty-one percent (51%) of the outstanding shares of this corporation. EX-23 22 exhibit_23-1.txt BDO EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the inclusion in this Annual Report on Form 10-KSB for the period ended December 31, 2001, and to the incorporation by reference in the Registration Statements on Forms S-8, as amended (File Nos. 333-91601, 333-85979, 333-18411 and 333-44710) and Forms S-3, as amended (File Nos. 333-70031, 333-56519, 333-91573, 333-82103, 333-34782 and 333-40794) or our report dated March 26, 2002, relating to the audit of the consolidated balance sheet of Brilliant Digital Entertainment, Inc. as of December 31, 2001 and the consolidated results of their operations and comprehensive loss, cash flows and stockholders' deficit for the year ended December 31, 2001, which appears in this Form 10-KSB. /s/ BDO Seidman, LLP Los Angeles, CA March 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----