ITEM 1. DESCRIPTION OF BUSINESS
Brilliant Digital Entertainment is a pioneering entertainment content
provider and 3D animation technology developer for the converging Internet and
television markets. We have expanded our business to include the broadcast and
webcast over the Internet and television, of live auctions through our
subsidiary, The Auctionchannel, Inc.
We use our proprietary software tools to develop and distribute
digitally-animated interactive content for the Internet, including our
Multipath(TM) Movies. We also develop technology and software tools for sale to
others to be used by them in the development of content for the Internet. Our
subsidiary, The Auction Channel, enables viewers to watch auction events on
television or the Internet and use the Internet or their telephone to bid in
real time against bidders present at an auction.
We are a Delaware corporation that was incorporated in July 1996. We were
formed through the combination of two businesses: Brilliant Interactive Ideas,
Pty. Ltd., an entertainment software developer and producer, and Sega Australia
New Developments, a research and development operation for leading edge software
tools. We acquired Trojan Television Limited in July 1999, and are in the
process of transferring Trojan to our subsidiary, The Auctionchannel, Inc. 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 websites, www.multipathmovies.com and
www.theauctionchannel.com, does not constitute part of this Form 10-KSB.
OUR DIGITAL ANIMATION BUSINESS
THE DIGITAL ENTERTAINMENT MARKET
Digital entertainment is created, stored and distributed electronically.
Examples of current digital entertainment products include computer games,
music, virtual reality attractions, computer-animated Internet and television
programs and feature films. Traditionally, digital entertainment has been
distributed on CD-ROM and game console cartridges. Leading edge digital
entertainment products are now also being released online to capitalize on the
current interest in the Internet and the World Wide Web. In addition, digital
entertainment products have recently been released as broadcast television and
cable programming, home videos, and even full-length feature movies, although on
a limited basis.
OUR MULTIPATH MOVIES
We produce Multipath Movies that are three-dimensional digitally animated
stories each with multiple plot alternatives, or paths, leading to multiple
distinct conclusions that are influenced by the user. The action of a Multipath
Movie does not stop while a user makes decisions. A user's decisions are
implemented seamlessly because our proprietary Digital Projector has the
technical ability to form and manipulate streams of complex three-dimensional
animated images in real time, sequentially, for the duration of the movie. Users
interact with Multipath Movies by responding with a mouse or keyboard to
decision points which affect the plot of a Multipath Movie. The Multipath Movie
allows the user to jump forward or back up to previously viewed scenes and, if
desired and permitted by the director, to select a different decision path.
MULTIPATH MOVIE PRODUCTION
We develop a broad range of titles designed to appeal to viewers of varying
ages and tastes. Our strategy is to continue to develop and produce a library of
Multipath Movie Webisodes for the Internet.
Webisodes are 3 to 7 minute movies that we typically syndicate to other
well-trafficked websites and offer on our own website for viewing on a weekly
basis. Users are reminded by way of a weekly email to view the next in the
series of Webisodes. We have developed titles in the following series:
KISS IMMORTALS SERIES. We collaborated with the rock group KISS to create,
develop and produce a unique new interactive digital entertainment and music
product based on and featuring KISS. The initial title, KISS IMMORTALS features
the voices, likenesses, trademarks and master recordings of the performances of
this legendary group.
SUPERMAN SERIES. Our agreement with D.C. Comics provides us with rights to
use the comic strip character SUPERMAN in Multipath Movies, which can be
distributed on CD-ROM and DVD and via the Internet. We recently licensed the
SUPERMAN titles to Time Warner's, Entertaindom website on an exclusive basis. To
date, we have confirmed orders from Entertaindom for 45 Webisodes.
XENA; WARRIOR PRINCESS SERIES. Our agreement with Universal Studios
provides us with rights to use certain story scripts from the live action
television series XENA: WARRIOR PRINCESS and animated character designs from the
direct-to-video motion picture HERCULES & XENA: THE ANIMATED MOVIE for use in
the production of Multipath Movies. The Multipath Movie titles based on the
original plots have been developed for CD-ROM and DVD, and will be distributed
via the Internet. In this series we have completed production of GIRLS JUST
WANNA HAVE FUN and DEATH IN CHAINS, and continue to produce Webisodes in this
series expected for release in the first half of 2000.
ACE VENTURA SERIES. The Ace Ventura series was developed through an
agreement with Morgan Creek, a major developer and distributor of feature films.
We have developed two titles in the series, THE DON IS DEAD and THE CASE OF THE
GRAVITY ANGELS SERIES. We have created an original series called GRAVITY
ANGELS, which currently consists of 4 episodes, totaling 16 Webisodes. We are in
the process of developing these titles into Webisodes and have created a version
of this series for distribution on television.
CHOOSE YOUR OWN NIGHTMARE SERIES. We have developed several titles in the
CHOOSE YOUR OWN NIGHTMARE series targeting children eight to twelve years of
age. Titles in the series include NIGHT OF THE WEREWOLF, HALLOWEEN PARTY, HOW I
BECAME A FREAK, THE EVIL PENPAL, THE CURSE OF THE MUMMY and THE BITE OF THE
VAMPIRE. All of these titles are based upon Bantam Doubleday Dell's popular
children's series, CHOOSE YOUR OWN NIGHTMARE.
POPEYE SERIES. The POPEYE series is targeted at children three to twelve
years of age. These titles are specifically designed to appeal to this age group
by including more comic-like characters and engaging music and sound effects.
Titles developed include QUEST FOR THE WOOLLY MAMMOTH, THE SUNKEN TREASURE and
THE RESCUE, all featuring POPEYE.
SALES AND MARKETING OF OUR MULTIPATH MOVIES
Our sales and marketing program is designed to achieve revenue growth,
capture new customers and promote the ongoing growth of the Multipath Movie
genre through various distribution methods and promotional initiatives. To
facilitate the broad acceptance of Multipath Movies, we are pursuing a broad
INTERNET AND ONLINE SERVICES. Given the importance of Internet and online
delivery in the overall success of the Multipath Movie and other movies using
our B3D technology, we believe that it is critical to make Multipath Movies
available to as many Internet and online service users as possible.
Consequently, we follow a syndication strategy to distribute content as broadly
as possible across the Internet. We will continue to focus more and more of our
efforts toward Internet distribution through third party websites. Much progress
has been made in this area during late 1999 and in the first quarter of 2000.
The development of compression technologies continues to be a significant
component of our business strategy and a primary focus of our research and
development efforts. We believe that reductions in the time to download and
stream Multipath Movie and B3D content over the Internet will lead to an
increase in online acceptance and distribution of our products.
CD-ROM/DVD RETAIL CHANNELS AND DIRECT-TO-RETAIL. We are continuing to
establish a retail distribution program in which Multipath Movies are marketed
through traditional software publishers and distributors nationwide. We are
making progress in the retail channel through our relationship with GT
Interactive, who is representing selected titles on CD-ROM through their
mass-market outlets. There are, however, numerous obstacles and uncertainties
involved in developing a retail distribution channel. Further, we intend to
release Multipath Movie titles to the DVD market for distribution commencing in
2000. We believe that distributing our titles on DVD will increase the awareness
of Multipath Movies in the retail market.
TELEVISION BROADCAST/CABLE PROGRAMMING AND HOME VIDEO. We have begun to
market our Multipath Movies as television programming and home video features.
Due to the episodic and serial nature of our Multipath Movies, our titles are
easily adaptable to the episodic television market. In addition, by grouping
multiple episodes together, we also can produce titles for the cable and direct
to video markets. In January 1999, we entered into an agreement with
Kaleidoscope Media Group for the distribution of GRAVITY ANGELS, a two-hour 3D
animated science fiction thriller, to the television broadcast/cable and home
video markets. We believe the convergence of television programming and Internet
content can create opportunities for more content to be produced using our
INTERNATIONAL SALES AND MARKETING OF OUR MULTIPATH MOVIES
Our international sales and marketing strategy is managed from the United
States and executed through a combination of domestic and offshore efforts. Our
strategy for international distribution is to utilize exclusive arrangements for
specific countries or dedicated territories with distributors that, in
management's opinion, are well suited to direct the commercial launch and
ongoing marketing support of products in that country or territory. We believe
we will continue to capitalize on management's extensive network of
international relationships and background in the international distribution of
CD-ROM and video game products. In 1997 we retained a managing director for
Europe, based in the United Kingdom. We are actively exploring distribution,
joint venture and strategic relationship opportunities in Europe. We believe
that product distribution in Europe will require implementation of localized
distribution strategies and methods through established regional distributors.
In addition, we believe that greater emphasis on traditional retail distribution
methods will be required in Europe initially because of lower Internet usage in
We recently concluded an agreement with e-New Media, a Hong Kong-based
publicly traded company for the distribution of new and existing content and the
development of newly created content for the Asian market. The agreement
included an equity investment in Brilliant. In addition, we have an existing
agreement in place for the Latin American market with a Panamanian company for
the localization and distribution of selected titles in parts of Latin America.
Given the global nature of the World Wide Web, we believe that
international markets represent a significant incremental opportunity for our
Multipath Movies delivered over the Internet. Utilizing our proprietary
TalkTrack technology, we can deliver Multipath Movies in foreign languages
without significant logistical or cost issues.
DISTRIBUTION OF OUR MULTIPATH MOVIES
We have developed and continue to develop a large distribution network for
our Multipath Movies. Some of our distribution partners include:
TIME WARNER'S ENTERTAINDOM. A new site sponsored by Warner Bros. Online,
Entertaindom features a broad array of entertainment, information and services
including animation-, video-, music- and games-based entertainment. Our SUPERMAN
Multipath Movie webisodes are prominently displayed in a Multipath Movie channel
on the Entertaindom website with other selected Multipath Movie content,
including KISS IMMORTALS. The website will also feature links to our website to
access other Multipath Movie content.
Excite@HOME. We entered into a content and distribution agreement with
@Home Network, the leading provider of high-speed Internet services via cable
infrastructure, in December 1998. Under the agreement our Multipath Movie titles
are offered to @Home subscribers, enabling them to access our interactive
digital Webisodes via our website at www.multipathmovies.com. @Home's high-speed
network allows subscribers to download our content at faster speeds than users
connected to the Internet via standard modems can.
VH1. We entered into a revenue share distribution agreement with VH1
whereby the KISS series is featured on their website. VH1 has committed to
promote the series for a period not to exceed two years. Other programming
initiatives are in discussions.
ROAD RUNNER. We entered into a non-exclusive agreement with Road Runner,
the high-speed online service, whereby digitally animated, 3-D interactive
content, which we developed, including content optimized for broadband
distribution, is distributed and promoted to Road Runner subscribers. We also
participate in Road Runner's off-line marketing and promotions campaign, and our
content is promoted within the Road Runner Service. Road Runner's high-speed
network allows its subscribers to download and view our content much faster and
more readily than through a standard Internet connection.
SLINGSHOT. We entered into an agreement with Slingshot, a special purpose
DVD publisher and distributor, in March 1999. We granted to Slingshot exclusive
worldwide rights to distribute 20 of our Multipath Movies in DVD format. Under
the agreement Slingshot has made an up-front, non-refundable cash advance and
provided a minimum guarantee in exchange for its exclusive retail DVD
distribution rights. Initial DVD titles are expected to be available in retail
outlets in the second quarter of 2000.
GT INTERACTIVE SOFTWARE. We continue to distribute select Multipath Movies
on CD-ROM for the retail channel through GT Interactive.
OUR OTHER DIGITAL ANIMATION PRODUCTS
In addition to our Multipath Movies, we are in the process of developing
other digital animation products, including:
B3D SHORTS. We produce short movie segments up to5 minutes in length using
our B3D technology. These B3D Shorts cover a variety of genres, including
adventure, drama and abstract. We develop these B3D Shorts to demonstrate the
versatility of our proprietary software tools for use in creating engaging and
diverse animated content.
SPORTS TUTORIALS. We have produced a three dimensional, animated golf
tutorial using our B3D technology. We are actively involved in attempting to
secure sports personalities for use in these tutorials for a variety of sports,
including golf and tennis.
EDUCATION PRODUCTS. We are using our B3D technology to produce three
dimensional, animated content for use in the educational market in a number of
areas, including math, science and English.
E-COMMERCE PRODUCTS. We have produced a demonstration showcasing the use of
our B3D technology to create a three dimensional, animated shopping experience
on the Internet. We believe that the three dimensional shopping environment
created with B3D is superior to the more prevalent two dimensional shopping
environments currently found on most websites.
COMPETITION FOR OUR DIGITAL ANIMATION CONTENT
The markets for our digital entertainment products are intensely
competitive, subject to rapid change and characterized by both the constant
demand for new product features at reduced prices and the pressure to accelerate
the release of new products and product enhancements. Our Multipath Movies and
webisodes compete with traditional feature films and television programming
produced by major movie studios, including Disney, Warner Bros and MCA Universal
as well as numerous other independent motion picture and television production
companies. Several movie studios already have developed their own internal
computer animation capability and have developed and released animated feature
films or created computer animation for special effects in animated films. We
expect additional competition in the animated feature film market from these and
other movie studios. We also compete with movie studios and Internet companies
for the acquisition of literary properties, production financing, the services
of performing artists, and the services of other creative and technical
personnel, particularly in the fields of animation and technical direction.
Internet entertainment companies include Atom Films, Pop.com, Protozoa.com,
Shockwave.com and others that produce animated or video content for distribution
on the Internet. We expect additional competition in the area of animated and
video content for Internet distribution.
OUR SOFTWARE TOOLS BUSINESS
Over the past four years, we have developed a suite of proprietary
authoring and broadcasting software tools that allow for the delivery of
full-screen, full-motion 3D animation over the Internet. The B3D tool suite has
proven critical in the current adoption of our proprietary Multipath Movie
CONTENT PRODUCTION TOOLS
The Company has developed several integrated proprietary software tools
that enable it to produce Internet-ready, high-quality animated content.
SCRIPNAV. ScripNav was developed specifically for the writing of complex
Multipath Movie 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 Multipath
TALKTRACK. TalkTrack automatically synchronizes a character's lip movements
with corresponding dialogue tracks. Talk Track does this by examining wave files
and generating output files that contain references to the appropriate mouth
shapes. TalkTrack allows for low cost modification of the Multipath content to
any language without the awkward appearance of dubbed movies.
B3D STUDIO. 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 layup, editing and final output. 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 Multipath Movie 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. Digital Projector contains all the necessary components
to load and play Multipath Movies 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 a Multipath Movie, and is generally the only software tool
that we must continually modify to permit the Multipath Movie to be adapted to
new platforms. We have developed the Digital Projector for PCs, and will develop
a Digital Projector for other platforms.
In addition to our proprietary software tools and engines, we use certain
commercially available sound and graphics tools in the Multipath Movie
CONTENT TOOLS APPLICATIONS
The B3D tools suite allows for the creation of three-dimensional objects
that function within a three-dimensional environment and that can be updated in
real time. Examples of the applications for the tool suite include:
o Entertainment content delivered over the Internet and 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
Entertainment content created with the B3D tools suite has premiered in
broadband on Excite@Home and RoadRunner, and premiered in narrowband on Time
Warner's Entertaindom portal. In addition, we have or will post our
three-dimensional animation content on VH-1, Nettaxi, Lycos, British Telecom,
Telekom-Germany and other sites during the first quarter of 2000.
We intend to offer three distinctive versions of our B3D tools suite
targeting different types of customers in the graphics and e-commerce markets.
These versions include B3D STUDIO, a fully-functional release aimed at major
studios and animation production facilities, B3D PROFESSIONAL, a release aimed
at professional web and content developers, and B3D MAX, a limited-feature
release aimed at individual artists.
THE ADVANTAGES OF OUR SOFTWARE TOOLS
We believe our B3D technology is the only known method for creating
high-quality linear and interactive programming for the Internet, traditional
television broadcasting, DVD and CD-ROM using 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
SMALL FILES AND FAST RENDERING. B3D files are highly compressed binary
images with simple command sets, requiring small files and resulting in fast
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 a movie 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 movie 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 automatically detects
Internet bandwidth and selects the best-quality soundtrack and textures that can
be streamed within this bandwidth. 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 movie
plays. In addition, B3D files compress to under 10% of video.
USER FRIENDLY. To achieve acceptance with the broadest possible audience,
we strive to make our products more user-friendly than those of our competitors,
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 WEBSITE 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 website operators.
o ANIMATORS. Using our B3D Max plug-in, animators using the popular 3D
Studio Max tools 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
o ADVERTISERS. The current standard advertising mechanism features
silent, 5-frame animated Graphics Interchange Format files. Our
technology allows for the use of real-time, 3D-based banner
advertisements with animated graphics and streaming sound. More
significantly, B3D advertisements themselves will be interactive. We
believe that interactive advertisements will improve the likelihood
that viewers will be interested in the ads and more likely to click on
the ads because they will not be transported out of the website in
which the ad appears. We believe our B3D ads will be desirable to
websites operators, who will encourage their use, because the website
will lose fewer viewers to linked advertiser sites.
o E-COMMERCE. B3D designers may program the files so that consumers can
only play the movie from within a specific website 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.
We have developed sophisticated 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 and automatically update the user's PC with the necessary items
required to display items in the order pre-determined by the vendor.
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 applied for various patents with
respect to our tools suite, which, if issued, will apply to the following
o Streaming Internet Data
o Automated Lip Sync
o Controlling 3D Object Gestures
o Preloading, Caching and Look Ahead of Internet Streamed Data
o Real Time Scalability of Real Time 3D Graphics
o 3D Data Compression
SALES, MARKETING AND DISTRIBUTION OF OUR SOFTWARE TOOLS
We are pursuing a strategy designed to encourage active use of our tools
and technology by a broad market of animators who are currently using 3D Studio
Max, an animation and three-dimensional design software package developed and
marketed by Discreet, a division of Autodesk. Our B3D Max tool is a plug-in to
3D Studio Max. It enables animators to output their animation to be played back
in real time on the Internet using our Digital Projector playback system. B3D
Max is distributed by Digimation Inc., an authorized distributor of 3D Studio
Max plug-ins, and by us directly to the market. The marketing program is
designed to encourage content creation and distribution on the Internet of B3D
Max to further encourage use of the Digital Projector, and through this, to
establish broader demand for our other tools and technology that we intend to
continue to release to the market. The tool is not limited to the production of
entertainment content. It can be applied to the production of artistic
renderings, education, architecture, engineering, e-commerce and other solutions
that require animation.
RESEARCH AND DEVELOPMENT
Our research and development efforts are principally focused on the
o Enhancing the B3D Max tool, documentation and Digital Projector;
o Implementing our relationships with new affiliates and other
o Completing our B3D Studio advanced animation production environment;
o Developing enhanced Internet delivery capabilities of our Multipath
Movies, including reduction of content file sizes though new
compression technology and streaming of animation data;
o Creating and implementing a progressive dowload system for shorter
movie download times;
o Developing our tools for use on Macintosh computers and other
o Increasing the efficiency of our object-oriented data libraries and
o Enhancing our software tools to continually add features identified
by, and of value to, the creative and production entertainment
o Improving our proprietary database to enhance facial expressions and
mouth movements of Multipath Movie characters; and
o Integrating our tools with third party databases for real time control
over B3D web objects for use in e-commerce and content applications.
We may determine to alter the course and scope of our research and
development effort 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
COMPETITION FOR OUR SOFTWARE TOOLS
The markets for our 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 as well as Pulse and Metacreations. Certain
competitive companies are focused on two dimensional technologies as can be seen
in the Macromedia Flash toolset, while others with less established technologies
have centered on three dimensional animation. B3D enjoys many competitive
advantages specific to its core area of expertise. We expect competitors to keep
coming into the market as the demand for Internet-ready content increases.
OUR AUCTION BUSINESS
We have recently expanded our business to offer Internet and television
based auction services through our subsidiary, Trojan Television Limited, which
we acquired in July 1999. Trojan is a London-based company doing business as The
Auction Channel. We are in the process of transferring Trojan to our subsidiary,
The Auctionchannel, Inc., which operates from offices located in New York.
Founded in 1996, The Auction Channel integrates live satellite, cable TV
and Web broadcasts of auction events conducted by auction houses, allowing for
participants to watch events on television and use the Internet or their
telephone to bid simultaneously with people actually present at the auction
house. The Auction Channel has been the first to:
o Provide individuals and businesses the ability to bid live on auctions
being conducted at auction houses around the world via the Internet
and the telephone; and
o Simulcast live auctions on both television and the Internet.
The Auction Channel's computer software and hardware systems currently are
used to host two types of auctions:
o REAL-TIME LIVE AUCTION EVENTS, which are broadcast on television or
webcast from an auction floor using The Auction Channel's technology
and which allow for interactive bidding either over the Internet or
with a touchtone telephone; and
o DELAYED ONLINE AUCTION EVENTS, which enable buyers to bid over a
defined period of time, such as 5 days, for a particular item.
The Auction Channel intends to expand its business to make its website,
www.theauctionchannel.com, a principal destination on the Internet for
collectors by offering live televised auctions, live webcast auctions, online
auctions, fixed-priced dealer e-commerce and business-to-business dealer
e-commerce, as well as by providing news, information, services and community
both to collectors and dealers. Additionally, The Auction Channel intends to
create the world's first 24 hour, 7 days a week global digital interactive
television channel devoted exclusively to collecting and auctions.
THE AUCTION MARKETS
There are three primary online auction markets, which include:
o BUSINESS TO BUSINESS: The business-to-business market focuses
primarily on products such as computers, industrial and biotech
equipment, coal and other commodities and any other industrial item
that is subject to liquidation or season-end excess inventory. This
category also includes dealers, such as fine art dealers, selling
through auction houses to other dealers.
o PERSON TO PERSON: This person-to-person market is exemplified by
Internet-based companies such as eBay, which act as a facilitator
between buyers and sellers regardless of their geographical location.
This market is characterized by a "buyer beware" policy since the
facilitator normally does not take responsibility for the
authentication of the goods being offered for sale.
o BUSINESS TO PERSON: The business to person market has been the slowest
of the auction markets to develop. We believe that this market will
become a useful means for large retail companies to discount and close
out unwanted inventory. This category also includes dealers selling
through auction houses to private individuals.
Within the auction market, we believe the following are the primary types
of online auction companies:
o AUCTION HOUSE WITH DEDICATED ONLINE TRADING AREA - includes companies
that have developed their own online trading environment for their own
o AUCTION HOUSE WITH DEDICATED ONLINE TRADING AREA AND DEALER NETWORK -
includes companies that have developed their own online trading
environment for their own auction activities and the auction
activities of members of a dealer network. Sotheby's is an example of
this type of online auction company.
o TRADING AREA - includes companies such as eBay which have developed
trading areas where individuals post items for auction which are
acquired by other individuals.
o TRADING AREA WITH `TIED' AUCTION HOUSE - includes companies with a
trading area that establish a relationship with an auction house in
order to benefit from increased volume and authentication services.
The relationship between Sotheby's and Amazon.com is an example of
these types of online auction companies.
o AUCTION HOUSE-TRADING CONDUIT OR CHANNEL - includes companies like The
Auction Channel that provide distribution and marketing services to
all auction houses.
One of the many benefits to auction houses of the technology used by The
Auction Channel is its low entry cost and low systems support and development
expenditure in relation to its high market penetration. This enables auction
houses to access and service new and fast growing markets with minimum
development costs. The Auction Channel has developed a real-time auction
environment specifically to add-value to existing auction house services, while
at the same time differentiating its services from existing online auction
THE AUCTION CHANNEL'S PRINCIPAL PRODUCTS AND SERVICES
The Auction Channel's principal products and services consist of the
INTERACTIVE BIDDING SYSTEM(TM) (IBS). IBS is a television-based service
that permits an audience to view a live auction event on television and
participate by placing bids over the telephone. The television signal is output
on a cable or broadcast television channel and/or for local viewing in the
auction room. To avoid confusion from poor synchronization of the television
output and the telephone relay, the telephone is used solely to bid and cannot
be used to listen in on auction events. The acceptance of a bid is communicated
to the participant on the telephone and displayed to all viewers on the
television screen. When the auctioneers hammer comes down stopping all further
bids, the winner's "paddle" details are displayed. IBS is currently being
developed to allow participants to bid using their television's remote control.
NETBIDLIVE(TM). NetBidLive is an Internet-based service that permits an
audience to view a live auction event on the Internet and participate by placing
bids over the Internet using their personal computer. Participants initially
access the Internet bidding Web site via The Auction Channel's Web site at
www.theauctionchannel.com. Prior to bidding, the participant must provide a
client number and personal identification number. The Web page shows a bid
button that shows the next bid increment, an image of the item currently being
bid upon and other details about the item. When the bid button is selected, the
bid is transmitted in real time and feedback as to the status of the bid is sent
to the participant. NetBidLive currently is being updated to include streaming
of video and audio data.
GRANDSTAND. GrandStand also is an Internet-based service that permits an
audience to view a live auction event on the Internet, but the audience cannot
participate in the auction by placing a bid. If users of GrandStand are
interested in placing bids during an auction, they can push a button on their
computer screen to access the registration screen of NetBidLive.
AUDIODIRECT. AudioDirect is a telephone-based service that only permits
bidding by telephone without the ability to view the item up for auction. The
participant is provided with a catalogue of items up for auction in advance of
the auction event. At the time of the auction, the participant follows the
auction by listening over the telephone for item numbers and price information.
AudioDirect has additional features, including the ability to leave commission
bids, browse an electronic catalogue and select items that are up for auction,
request more information about the condition of an item, receive an alarm call
about a specific item, pay bills, obtain shipping price quotes and make shipping
arrangements. This system currently is installed and operational in Christie's
South Kensington, London sale room.
SALE VISION. SaleVision is a television-based service that displays
auction-related information on television screens throughout an auction house
during an auction event. The display includes information about currencies, item
descriptions and value estimates, as well as live footage of the auctioneer and
of the item currently being bid upon. The SaleVision system also is used to
output a television signal from the auction room to the broadcast satellite or
cable service from which the TV signal is distributed to homes in the television
CURRENCYVISION. CurrencyVision is a very basic television-based service
that includes only a current bid in different currencies for display on
television screens throughout an auction house during an auction event.
CurrencyVision is an entry-level product.
OTHER SERVICES. The Auction Channel also provides website design and
management assistance, marketing support, online catalogue design, customer
registration and general online support services.
The IBS, NetBidLive and AudioDirect products are designed to be used
simultaneously at a single auction. Bids placed using any of these systems are
consolidated and delivered to the auctioneer on a single screen or computer
monitor, making it possible for the auctioneer to receive in one location remote
bids from the IBS, NetBidLive and AudioDirect systems.
MARKETING OF THE AUCTION CHANNEL'S PRODUCTS AND SERVICES
The Auction Channel was founded and had its principal offices in the United
Kingdom. Due to its geographic location and the abundance of auction houses
located in the United Kingdom, The Auction Channel has first tested and marketed
its products and services primarily in the United Kingdom. We plan to further
expand The Auction Channel's business in the United Kingdom, and to commence
operations outside of the United Kingdom, including in North America, Asia and
the remaining countries of Europe. The Auction Channel has established
relationships with well known auction houses such as CHRISTIES, PHILLIPS,
BROOKS, BONHAMS, ALLSOPS and ANTIQUORUM to deliver products and services,
increase participation in auction events and help build auction house brand
awareness. The Auction Channel's existing relationships with auction houses
include exclusive and non-exclusive fixed term arrangements and arrangements
relating to individual auction events.
The Auction Channel markets its services to auction houses and television
and cable networks through direct sales efforts by its senior management team.
The Auction Channel markets and develops consumer awareness of its Web site and
services by featuring its World Wide Web address, www.theauctionchannel.com, on
all of its television programs, through Internet banner advertisements and
links, newsletter subscriptions and media releases.
The Auction Channel has entered into strategic relationships with auction
and television companies to facilitate the growth of its auction business.
The Auction Channel has provided its NetBidLive technology and Interactive
Bidding System to a number of major international auction houses, including
CHRISTIES, PHILLIPS, BROOKS, BONHAMS, ALLSOPS and ANTIQUORUM. The Auction
Channel is developing an audio-only version of its IBS system for use at
CHRISTIE'S SOUTH KENSINGTON, and has been providing its Internet and television
auction services for CHRISTIE'S auctions broadcast by Sky Sports. For ALLSOP,
The Auction Channel has agreement to webcast ALLSOP'S London-based auctions over
the Internet. The Auction Channel has provided its Internet and/or television
auction services to PHILLIPS, BROOKS, BONHAMS and ANTIQUORUM and expects to
continue to provide similar services to these auction houses in 2000.
The Auction Channel also has entered into strategic relationships with
broadcast, cable and satellite television companies. In the United Kingdom, The
Auction Channel is working with Sky Sports, the largest provider in the United
Kingdom of sports programming for satellite and cable television. During 1998
and 1999, The Auction Channel produced approximately 12 sporting memorabilia
auctions in various sports categories for distribution by Sky Sports. The
Auction Channel has extended its agreement with Sky Sports to continue to
provide additional auction programs in 2000.
In 1999, The Auction Channel entered into an agreement with CanWest Global
Communications, an international media company, to produce two auction events.
Under the agreement, The Auction Channel produced a golf memorabilia auction in
London, England that was transmitted to viewers in Canada, and expects to
produce the remaining auction event in 2000.
The Auction Channel also has entered into a memorandum of understanding
with Viasat, a division of Modern Times Group, a Swedish media company, to form
a joint venture for the production, distribution and exploitation of auction
programming and Internet operations in certain markets served by Viasat. The
Auction Channel and Viasat currently are negotiating the terms of the joint
COMPETITION IN THE ONLINE AUCTION MARKET
Competition in the on-line auction market is intense. Many competitors of
The Auction Channel are substantially larger and have significantly greater
resources and revenues. Principal competitors include eBay,
QXL, LiveBid, Onsale and Amazon.com. We estimate that eBay will have over 6
million registered users by the end of 1999 trading in tens of millions of
items. Recently, eBay acquired Butterfield & Butterfield auctioneers, a
traditional auction house. QXL, which uses the eBay delayed auction model and
has announced that it is Europe's equivalent of eBay, has recently started an
auction affiliate network. Onsale, Inc. is an electronic retailer that sells
merchandise through an interactive online auction service. Amazon.com, Inc., is
an online book, CD and video retailer which acquired LiveBid.com. LiveBid.com
provides live bidding on online auctions. Additionally, Amazon.com has formed
Amazon.Sotheby.com, a strategic partnership with Sotheby's, a traditional
auction house. In addition to the above companies, most of the major portal Web
sites, such as Yahoo and America Online, have instituted their own auction
Many of the underlying computer software and hardware technologies used by
The Auction Channel, including the Interactive Bidding System and associated
products, are licensed from Articulate UK Limited. The Auction Channel has, with
respect to these technologies, a worldwide, irrevocable license, with rights to
exploit and improve, to any and all software, patents, technology, object code,
documentation and know how developed or owned or licensable by Articulate UK.
The license granted to The Auction Channel currently is exclusive, but will
become nonexclusive if The Auction Channel and its affiliates collectively do
not spend with the Articulate UK and its affiliates at least 150,000 British
Pounds in the first 12 months of the license term and 200,000 British Pounds in
each year thereafter. The Auction Channel has the right to sublicense this
technology to third party licensees including auctioneers but excluding parties
in the business of providing auction related services to auctioneers. Articulate
UK's right to license its technology is similarly restricted. Articulate UK
retains the right to use the licensed technologies for its own internal business
purposes, including its operation of an auction service in direct competition
with The Auction Channel.
The United Kingdom Independent Television Commission requires that any
person broadcasting television transmissions into or out of the United Kingdom
must hold an ITC broadcast license. The Auction channel currently holds an ITC
RESEARCH AND DEVELOPMENT
The Auction Channel has been developing the software to enable the
Interactive Bidding System to successfully integrate with existing auction house
technologies since the fourth quarter of 1998. The Auction Channel has spent
approximately $287,000 on research and development during the fifteen months
ended December 31, 1999.
At December 31, 1999, we had 93 full-time employees, of which 18 were
engaged in research and development, 48 in production, 16 in general
administration and finance and 11 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 four independent software developers and four consultants in
administrative and business development roles pursuant to contractual
relationships. Twelve of our employees, including the Chairman and CEO, the
President, the CFO and the Director of Licensing, are based in Los Angeles,
California. Two employees are located in The Auction Channel's offices in New
York, New York and twelve are based in The Auction Channel's offices in London,
England. Sixty-seven employees operate out of facilities located in Bondi
Junction, a suburb of Sydney, Australia. Finally, our managing director for
Europe is based in London, England. We expect to hire additional staff in 2000
in our Bondi Junction facility and in The Auction Channel's New York office.