-----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, EtrWpe06flygLJAm13kq3vC1RowQg1Wiv87FpQMP6TYAPPXJz8pRQ2fKQurDQ0U9 EOEFpd2kFpdmivbmlViIlw== 0000950123-99-010276.txt : 19991117 0000950123-99-010276.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010276 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIGSTAR ENTERTAINMENT INC /NY CENTRAL INDEX KEY: 0001058430 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 133995258 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26793 FILM NUMBER: 99756530 BUSINESS ADDRESS: STREET 1: 19 FULTON ST 4TH FL STREET 2: 212-877-7633 CITY: NEW YORK STATE: NY ZIP: 10038 MAIL ADDRESS: STREET 1: 19 FULTON ST STREET 2: 5TH FL CITY: NEW YORK STATE: NY ZIP: 10038 10-Q 1 BIGSTAR ENTERTAINMENT, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-26793 BIGSTAR ENTERTAINMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-399-5258 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
19 FULTON STREET - 5TH FLOOR - NEW YORK, NEW YORK 10038 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (212) 981-6300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 the past 90 days. Yes [X]. No [ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, $.001 par value, as of the latest practicable date: 8,542,311 shares of common stock as of November 12, 1999 2 BIGSTAR ENTERTAINMENT, INC. FORM 10-Q FOR THE QUARTER ENDED September 30, 1999 INDEX PART I. FINANCIAL INFORMATION
PAGE NO. -------- ITEM 1. FINANCIAL STATEMENTS Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998 ........ 3 Statements of Operations for the nine months ended September 30, 1999 (unaudited) and the period March 2, 1998 (Date of Inception) to September 30, 1998 (unaudited) and the three months ended September 30, 1999 (unaudited) and 1998 (unaudited) .............................................................. 4 Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and the period March 2, 1998 (Date of Inception) to September 30, 1998 (unaudited) and the three months ended September 30, 1999 (unaudited) and 1998 (unaudited) .............................................................. 5 Notes to Condensed Financial Statements ....................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................................. 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................... 18 SIGNATURES .................................................................... 19
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. BIGSTAR ENTERTAINMENT, INC. BALANCE SHEETS AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September 30, December 31, 1999 1998 ------------- ------------ (unaudited) ASSETS: Cash and cash equivalents .................................... $ 22,154,426 $ 363,124 Cash held in escrow .......................................... -- 453,000 Accounts receivable, net of allowance ........................ 563,531 61,121 Prepaids and other current assets ............................ 1,055,128 8,711 ------------ ------------ Total current assets ......................................... 23,773,085 885,956 ------------ ------------ Property and equipment, net .................................. 1,265,037 452,134 Other assets ................................................. 545,901 -- ------------ ------------ Total assets ................................................. $ 25,584,023 $ 1,338,090 ============ ============ LIABILITIES: Accounts payable ............................................. $ 2,614,349 $ 380,540 Accrued expenses ............................................. 2,710,674 1,197,776 Accrued payroll costs ........................................ 170,000 243,240 Current portion of capital lease obligation .................. 8,038 11,031 ------------ ------------ Total current liabilities .................................... 5,503,061 1,832,587 ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock .............................................. -- -- Common stock ................................................. 8,541 3,022 Additional paid-in capital ................................... 36,924,632 2,361,716 Subscribed stock ............................................. -- 453,000 Deferred compensation ........................................ (479,996) (64,414) Accumulated Deficit .......................................... (16,372,215) (3,247,821) ------------ ------------ Total stockholders' equity (deficit) ................. 20,080,962 (494,497) ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit).. $ 25,584,023 $ 1,338,090 ============ ============
The accompanying notes are an integral part of these condensed financial statements. 3 4 BIGSTAR ENTERTAINMENT, INC. STATEMENTS OF OPERATIONS (Unaudited)
Nine Months March 2, 1998 Three months Three months Ended (Date of Inception) Ended Ended September 30, To September 30, September 30, September 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ NET SALES $ 8,126,528 $ 188,025 $ 3,671,202 $ 173,100 COST OF SALES 6,345,528 163,013 2,535,059 154,050 ------------ ------------ ------------ ------------ Gross profit 1,781,000 25,012 1,136,143 19,050 OPERATING EXPENSES Sales and marketing 9,486,175 292,173 4,394,308 252,087 Web site and software development 3,239,581 454,140 1,371,261 326,940 General and administrative 2,431,932 321,847 889,175 207,553 ------------ ------------ ------------ ------------ Total operating expenses 15,157,688 1,068,160 6,654,744 786,580 ------------ ------------ ------------ ------------ Loss from operations (13,376,688) (1,043,148) (5,518,601) (767,530) INTEREST INCOME (EXPENSE), net 252,294 (2,336) 181,816 (2,336) Net Loss $(13,124,394) $ (1,045,484) $ (5,336,785) $ (769,866) ============ ============ ============ ============ PER SHARE INFORMATION: Net loss per share - Basic and diluted $ (2.26) $ (0.43) $ (0.70) $ (0.29) ============ ============ ============ ============ Weighted average common shares outstanding - Basic and diluted 5,805,801 2,451,106 7,645,572 2,662,700 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial statements 4 5 BIGSTAR ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months March 2, 1998 Three months Three months Ended (Date of Inception) Ended Ended September 30, To September 30, September 30, September 30, 1999 1998 1999 1998 ------------- ------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(13,124,394) $ (1,045,484) $ (5,336,785) $ (769,866) Adjustments to reconcile net loss to net cash used in operating activities - Depreciation and amortization 219,624 12,772 100,892 8,772 Allowance for doubtful accounts 15,000 -- 655 -- Non-cash common stock option and warrant expenses 205,949 124,706 91,671 79,706 Changes in assets and liabilities - Cash in Escrow 453,000 -- -- -- Accounts receivable (517,410) (19,446) (268,096) (7,158) Prepaids and other current assets (1,046,417) (9,384) (811,420) (9,384) Other non current assets (545,901) (533) (518,790) 37 Accounts payable and accrued expenses 3,673,467 459,444 1,889,475 379,601 ------------ ------------ ------------ ------------ Net cash used in operating activities (10,667,082) (477,925) (4,852,398) (318,292) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,032,527) (119,974) (455,094) (53,423) ------------ ------------ ------------ ------------ Net cash used in investing activities (1,032,527) (119,974) (455,094) (53,423) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 33,946,904 1,882,813 22,008,918 1,297,706 Proceeds from subscribed stock (453,000) -- -- -- Repayment of capital lease obligations (2,993) (565) -- (275) Deferred Registration Costs -- -- 858,618 -- ------------ ------------ ------------ ------------ Net cash provided by financing activities 33,490,911 1,882,248 22,867,536 1,297,431 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net increase in cash 21,791,302 1,284,349 17,560,044 925,716 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, beginning of period 363,124 -- 4,594,382 358,633 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 22,154,426 $ 1,284,349 $ 22,154,426 $ 1,284,349 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ -- $ -- $ -- $ -- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Capital lease obligations incurred $ -- $ 12,000 $ -- $ --
The accompanying notes are an integral part of these condensed financial statements. 5 6 BIGSTAR ENTERTAINMENT, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Overview BigStar Entertainment, Inc. ("BigStar" or the "Company") is an online marketing company specializing in filmed entertainment. It began offering products for sale on its main web site, Bigstar.com in May 1998. Bigstar.com is an entertainment superstore for movie lovers and features more than 70,000 filmed entertainment products including feature films, educational, instructional, TV series, and fitness shows in all formats including videos, DVDs and laserdisc. The site integrates over a dozen filmed entertainment information databases, featuring reviews, celebrity chats, star biographies, and daily movie news. BigStar's customers can purchase videos and DVD's at discount prices or take advantage of special promotions daily on the site. BigStar has developed proprietary direct e-mail marketing technology that allows it to customize promotions and communications to its customers based on demographics, prior purchase history and browsing behavior. The Company operates in the online retail industry, which is new, rapidly evolving and intensely competitive. The Company competes primarily with traditional retail outlets and other entities that maintain similar commercial web sites. Basis of Presentation The financial statements as of September 30,1999, for the nine months ended September 30, 1999 and the period March 2, 1998 (date of inception) to September 30, 1998 and the three month periods ended September 30, 1999 and 1998 are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial information included in accordance with generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations. The results of operations for the interim periods ended September 30, 1999 are not necessarily indicative of the results which may be reported for any other interim period or for the year ending December 31, 1999. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue consists of sales of filmed entertainment in popular formats, primarily videos, and DVDs, over the Company's web sites and online advertising and promotional revenues. The Company recognizes revenue from its web sites when the products are shipped to customers and when advertisements and promotional items are served. Outbound shipping and handling charges are also included in net sales. Revenue from gift certificates is recognized upon product shipment following redemption. Provision is made for the estimated effect of sales returns where right-of-return privileges exist. Returns of product from customers are accepted in accordance with standard industry practice. The Company provides an allowance for sales returns based on historical return experience. 6 7 For the quarter and nine months ended September 30, 1999, net revenues included barter revenues of 9.3% and 7.7%, respectively. Cost of sales Cost of sales includes the cost of the filmed entertainment, as well as shipping and handling costs. Dependence on Supplier The Company's primary provider of filmed entertainment products and related order fulfillment services is Baker & Taylor, Inc. ("B&T"), from whom the Company obtained substantially all of its inventory in 1998 and the first nine months of 1999. The current contract extends through December 31, 2000 and includes renewal options for two year increments. Although the Company has agreements with several order fulfillment providers, it has no fulfillment operation or warehouse facility of its own and, accordingly, is dependent on maintaining its existing fulfillment relationships. Net Loss Per Share The Company accounts for net loss per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share". In accordance with SFAS No. 128, basic earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon the exercise of stock options, and warrants (using the Treasury Stock Method); common equivalent shares are excluded from the calculation if their effect is anti-dilutive. Diluted loss per share for the three months ended September 30, 1998, and the period from March 2, 1998 (date of inception) to September 30, 1998 and for the three and nine month periods ended September 30, 1999 does not include the impact of 961,134 and 2,469,423 common stock options and warrants then outstanding, respectively, as the effect of their inclusion would be anti-dilutive. Computer Software Developed for Internal Use The Company adopted the American Institute of Certified Public Accounts Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires computer software costs incurred during the preliminary project stage be expensed and provides for the capitalization of direct costs of materials and services, and payroll costs incurred once various capitalization criteria have been met. In accordance with the provision of SOP 98-1, during the three months ended September 30, 1999, the Company capitalized $142,352 of costs incurred related to the development of internal use software. The Company did not capitalize costs in earlier periods as the criteria of SOP 98-1 were not met. Comprehensive Income During 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The adoption of this standard has had no impact on the Company's financial statements. Accordingly, the Company's comprehensive net loss is equal to its net loss for the three months ended September 30, 1998 (unaudited) and the period March 2, 1998 (inception) to September 30, 1998 (unaudited) and the three and nine months ended September 30, 1999 (unaudited). 7 8 NOTE 2 - STOCKHOLDER'S EQUITY Initial Public Offering On August 2, 1999, the Company completed an initial public offering of common stock. A total of 2,500,000 shares were sold at a price of $10.00 per share. The offering resulted in net proceeds to the Company of $22,008,918, net of an underwriting discount of $1,750,000 million and offering expenses of $1,241,082. On August 2, 1999, in connection with it's Initial Public Offering the Company cancelled warrants to purchase 61,300 and 69,840 shares of the Company's common stock issued to First Security Van Kasper on February 18, 1999 and April 20, 1999, respectively, and a warrant to purchase 48,500 shares of the Company's common stock issued to a director of the Company, who is also a Managing Directory of First Security Van Kasper, on January 1, 1999. Concurrently the Company issued new warrants to First Security Van Kasper and the Managing Director, to purchase 160,000 and 80,000 shares of common stock, respectively, exercisable at a price of $10 per share, fully vested and exercisable from the date of grant to August 2, 2004. The Company determined the fair value of the warrants issued under the Black-Scholes Option Pricing Model to be approximately $525,000, based upon an expected life of 5 years, risk free interest rate of 5.00%, expected volatility of 0% and a dividend yield of 0%. The Company allocated the net proceeds from the initial public offering to the common stock issued in the offering and to the new warrants. Issuance of Stock Options The Company issued 59,201 options to purchase common stock to employees from July 1, 1999 through September 30, 1999. The options were granted at exercise prices ranging from $5.44 to $10.00 per share and vest over four-year periods. No options were granted with exercise prices lower than the fair market value of the Company's common stock. Employee Stock Purchase Plan Effective August 2, 1999, the BigStar Entertainment, Inc. Employee Stock Purchase Plan became effective. The plan is designed to allow eligible employees of BigStar to purchase shares of common stock, at semi-annual intervals, through periodic payroll deductions. Employees who own 5% or more of the Company's common stock are not eligible to participate. Eligible employees may contribute from 1% to 15% of their gross earnings during a purchase period to purchase shares equal to 85% of the lower of the fair market value of the common stock on the first day of the offering period or the fair market value on the purchase date. The Company has reserved 300,000 shares for issuance under the plan. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with BigStar's financial statements and the related notes to those statements and the other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" that may affect our results of operations and financial condition and the unaudited financial statements and related footnotes included herein and the audited financial statements in the Company's Registration Statement on Form S-1 dated August 2, 1999. This Form 10-Q includes forward-looking statements based on our current expectations, assumptions, estimates and projections about BigStar and our industry. These forward-looking statements are identified by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described in this Form 10-Q. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Given our short operating history and our limited operations during 1998, we believe that comparisons between the quarter and nine-month periods ended September 30, 1999 and the quarter ended September 30, 1998 and the period from March 2, 1998 (date of inception) to September 30, 1998 would not be meaningful; therefore, these comparisons are not discussed below. OVERVIEW BigStar Entertainment, Inc. was incorporated in March 1998. It began offering products for sale on its main web site, Bigstar.com in May 1998. BigStar.com is an entertainment superstore for movies lovers and features more than 70,000 filmed entertainment products including feature films, educational, instructional, TV series, and fitness shows in all formats including videos, DVDs and laserdisc. The site integrates over a dozen filmed entertainment information databases, featuring reviews, celebrity chats, star biographies, and daily movie news. According to the October report of Pc Data, Bigstar ranked as the leading site exclusively dedicated to filmed entertainment in their "Top 20 Web Retailers Among US Home Internet Users Survey," with 1.4 Million unique users. Bigstar's customers can purchase videos and DVDs at discount prices or take advantage of special promotions daily on the site. BigStar is a direct marketing company that has developed proprietary direct e-mail marketing technology that allows it to customize promotions and communications to its customers based on demographics, prior purchase history and browsing behavior. Management is considering various alternatives with respect to leveraging the technology it has developed related to its proprietary direct marketing software. Such alternatives include but are not limited to the licensing of or spin off or sale of various components of the software. Since our inception, we have incurred significant operating losses. These losses resulted primarily from development costs associated with building our web sites and order processing systems, and marketing, advertising and promotion expenses. As of September 30, 1999, we had an accumulated deficit of approximately $16.4 million. As we expand our business, we believe that our operating expenses will increase significantly, primarily due to increased marketing, advertising and promotional expenses, strategic partnerships, software development and additional depreciation related to capital expenditures. As a result, we expect to incur operating and net losses and negative cash flow from operations. RESULTS OF OPERATIONS The three and nine months ended September 30, 1999. NET SALES. Net sales were $3,671,202 for the quarter ended September 30, 1999 compared to $173,100 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, revenues rose to $8,126,528, compared to revenues of $188,025 for the period March 2, 1998 (date of inception) to September 30, 1998. Net sales reflect sales of filmed entertainment products, net of returns, and include shipping and handling charges, as well as advertising and promotional revenues beginning in the second quarter of 1999. The Company recognized $730,175 and $1,013,787 in advertising and promotional revenues, including $343,787 and $627,399 of barter revenue, respectively, for the quarter and nine months ended September 30,1999, respectively. The Company did not 9 10 have advertising revenues during 1998. Sales are recognized upon the shipment of filmed entertainment products and the serving of advertisements and promotions. Sales for the quarter ended September 30,1998 and the period March 2, 1998 (date of inception) to September 30, 1998 include filmed entertainment products primarily in the videocassette format, whereas sales for the quarter and nine-month periods ended September 30, 1999 consisted primarily of videocassette and DVD formats. The continued growth in sales of filmed entertainment products reflects the significant increase in units sold, attributable to the growth of the Company's customer base, as well as repeat purchases from existing customers, and the generally higher selling prices of DVD products. COST OF SALES. Cost of sales were $2,535,059 for the quarter ended September 30, 1999 compared to $154,050 for the quarter ended September 30, 1998. Gross profit for the quarter ended September 30, 1999 was $1,136,143, resulting in a gross margin of 30.9%. Cost of sales for the nine months ended September 30, 1999 was $6,345,528, compared to $163,013 for the period March 2, 1998 (date of inception) to September 30, 1998. Gross profit for the nine months ended September 30, 1999, was $1,781,000, resulting in a gross margin of 21.9%. Cost of sales includes the cost of merchandise sold as well as shipping and handling charges. The increase in the gross profit for the quarter and nine month periods ended September 30, 1999 over previous periods reflects the higher percentage of videos and DVD's sold at smaller discounts to their suggested retail prices, as well as advertising and promotional revenues. 10 11 SALES AND MARKETING EXPENSES. Sales and marketing expenses were $4,394,308 for the quarter ended September 30, 1999 compared to $252,087 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, sales and marketing expenses were $9,486,175 compared to $292,173 for the period March 2, 1998 (date of inception) to September 30, 1998. Sales and marketing expenses consist primarily of the costs of advertising, promotional and marketing programs, as well as personnel costs. Advertising expenses were $2,785,815 for the quarter ended September 30, 1999. For the nine months ended September 30, 1999, advertising expenses were $5,632,596. Advertising expenses include the costs of advertisements served on line, as well as off line print, radio and display media. Promotional expenses include the costs of promotional filmed entertainment products that are made available to customers who agree to receive notification of future promotions, as well as coupons. The cost of promotional filmed entertainment products are based upon the prices charged to BigStar by its supplier, and are expensed upon the shipment of the related filmed entertainment products to the customer. Shipping charges related to promotional filmed entertainment products are included in cost of sales and the related customer billings for shipping charges are included in revenues. The cost of promotional filmed entertainment products and coupons totaled $1,173,520 and $2,886,775 for the quarter and nine months ended September 30, 1999, respectively. WEB SITE AND SOFTWARE DEVELOPMENT EXPENSES. Web site and software development expenses were $1,371,261 for the quarter ended September 30, 1999 compared to $326,940 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, web site and software development expenses were $3,239,581, compared to $454,140 for the period March 2, 1998 (date of inception) to September 30, 1998. Web site and software development expenses consist primarily of personnel costs and related expenses for the design, development and management of our web sites which totaled $1,066,634 and $2,485,119 for the quarter and nine-month periods ended September 30, 1999, respectively. Web site and software development expenses also include the costs of systems and telecommunications services, which totaled $201,259 and $459,073 for the quarter and nine-month periods ended September 30, 1999, respectively. The cost of content purchased and licensed from third parties totaled $65,511 and $204,265 for the quarter and nine-month periods ended September 30, 1999, respectively. Web site and software development expense increases primarily relate to increasing access to, and the performance of, our web sites as well as additional content to enhance the visitor's on-line experience. GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative expenses were $889,175 for the quarter ended September 30, 1999, compared to $207,553 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, general and administrative expenses were $2,431,932, compared to $321,847 for the period March 2, 1998 (date of inception) to September 30, 1998. General and Administrative expenses include personnel costs and related expenses for executive, accounting and administrative personnel which were $455,920 and $86,684 for the quarters ended September 30, 1999 and 1998, respectively, and $1,089,206 and $139,184 for the nine-month period ended September 30, 1999 and the period from March 2, 1998 (date of inception) to September 30, 1998, respectively. General and Administrative expenses also include professional fees which were $122,672 and $29,890 for the quarters ended September 30, 1999 and 1998, respectively, and $304,920 and $66,469 for the nine month period ended September 30, 1999 and the period from March 2, 1998 (date of inception) to September 30, 1998, respectively. INTEREST INCOME (EXPENSE), Net. Interest income was $181,816 and $252,294, respectively, for the quarter and nine month periods ended September 30, 1999. The Company invests its available cash and cash equivalents in short-term money market securities. NET LOSS. BigStar's net loss was $5,336,785 for the quarter ended September 30, 1999 and $769,866 for the quarter ended September 30, 1998. For the nine months ended September 30, 1999, the net loss amounted to $13,124,394, compared to $1,045,484 for the period from March 2 1998 (date of inception) to September 30, 1998. Because of the uncertainty regarding our future profitability, the future tax benefits of our losses have been fully reserved for and, therefore, no benefit for the net operating loss has been recorded. Under Section 382 of the Internal Revenue Code, the operating loss benefits may be limited due to ownership changes. 11 12 LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operating cash requirements primarily through sales of our common stock. On August 3, 1999, we completed our initial public offering of 2,500,000 shares of common stock. The offering resulted in $22,008,918 of proceeds net of an underwriting discount of $1,750,000 and other offering expenses of $1,241,082, which primarily related to legal and printing costs. Net cash used in operating activities for the quarter ended September 30, 1999 of $4,852,398 was primarily due to our net loss of $5,336,785. The cash requirements associated with the loss were offset by an increase in accounts payable and accrued expenses of $1,889,475, net of an increase of prepaids and other current assets of $811,420 and other non current assets of $518,790. For the nine months ended September 30, 1999, net cash used in operating activities of $10,667,082 was primarily due to our net loss of $13,124,394, offset by an increase in accounts payable and accrued expenses of $3,673,467. Additional operating uses of cash were the increase in accounts receivable, prepaids and other current assets, and other assets of $517,410, $1,046,417 and $545,901, respectively. These items were offset primarily by the reduction in cash in escrow of $453,000, and non-cash charges totaling $425,573, related to depreciation and amortization and charges for options and warrants. The increase in accounts payable and accrued expenses resulted primarily from the increase in purchases of filmed entertainment products, advertising and promotional products over the preceding period. The increase in accounts receivable is due to the lag between the shipment of filmed entertainment products and the resulting settlement with the credit card processor, and the related lag between the acceptance by the processor of the charges and the remittance of funds to BigStar's bank account. Net cash used in investing activities for the quarter and nine-month periods ended September 30, 1999 of $455,094 and $1,032,527, respectively, was used primarily for purchases of computer equipment. At September 30, 1998, BigStar's principal commitments consisted of obligations for advertising under cancelable agreements, which were approximately $2,248,323 guaranteed lease obligations of approximately $721,833. We have no material commitments for capital expenditures, but anticipate future purchases of approximately $3,500,000 for hardware and related software enhancements of our web sites during the next 12 months. These expenditures would expand the capabilities of our web sites to allow access by more customers and to enhance customers' experiences on our web sites. These expenditures are expected to be funded by our existing cash and cash equivalent balances. SEASONALITY AND REVENUE FLUCTUATIONS BigStar's limited operating history and rapid growth make it difficult to ascertain the effects of seasonality on its business. Seasonal fluctuations in sales of filmed entertainment products may affect our sales. Fluctuations in revenue also may result from the timing of hit releases on video cassettes and DVD. YEAR 2000 COMPLIANCE Our failure to address potential year 2000 malfunctions in our computer and non-information technology equipment and systems and those of our business partners could result in our suffering business interruption, financial loss, reputational harm and legal liability. Prior to purchasing information technology systems, we have received confirmation from our vendors that the systems are year 2000 compliant. Systems developed by third parties on our behalf were designed to be year 2000 compliant. We do not have any significant non-information technology equipment or systems. 12 13 We have addressed year 2000 compliance risks related to our subcontractors, strategic partners, suppliers, service providers and other third-party relationships. In particular, our business is dependent upon the operations and technology of various Internet sites, merchant acquiring banks, product wholesalers and credit card issuers. Year 2000 compliance problems also could undermine the general infrastructure necessary to support BigStar's operations. For example, we depend on third-party Internet Service Providers, or ISPs, or hosting centers to provide connections to the Internet and to customer information systems. Any interruption of service from ISPs or hosting centers to provide connections could result in a temporary interruption of the operation of our web sites. Any interruption in the security, access, monitoring or power systems at the ISPs or hosting centers could result in an interruption of services. Moreover, it is difficult to predict what effect year 2000 compliance problems will have on the integrity and stability of the Internet. Should we identify any problem with respect to our year 2000 readiness, we will seek to develop a remedy, test the proposed remedy and prepare a contingency plan, if necessary. We intend to develop contingency plans to resolve our most reasonably likely worst case year 2000 problems, which have not yet been identified. If any of our third-party suppliers are not year 2000 compliant, we will attempt to replace them with a year 2000 compliant supplier. We expect to be Year 2000 compliant in the fourth quarter of 1999. We do not expect the costs of year 2000 compliance to be material to our operations. BigStar does not have any material contracts with external contractors to assist us in completing our year 2000 compliance effort. In addition, no employees have been hired or reassigned to complete our year 2000 compliance. RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES TYPICALLY ENCOUNTERED BY DEVELOPMENT STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS. We commenced operations in March 1998 and face the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, such as online commerce. These risks include our ability to: - continue to expand our customer base; - generate repeat business from existing customers; - respond to changes in a rapidly evolving and unpredictable business environment; - successfully compete against other companies that sell our products; - maintain current and develop new strategic relationships; - manage growth; - continue to develop and upgrade our technology; and - attract, retain and motivate qualified personnel. WE LACK SIGNIFICANT REVENUES AND EXPECT SIGNIFICANT CONTINUING LOSSES. We have not achieved profitability and expect to continue to incur significant operating losses and net losses for at least the next several years. As of September 30, 1999, our accumulated deficit was approximately $16.4 million. We expect that our operating expenses will increase substantially as we continue to expand our business. As a result, we will need to generate 13 14 significantly more revenues to achieve profitability. We may not be able to do so. We may also require additional financing. We may not be able to obtain the financing or obtain it on terms acceptable to us. If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be reduced accordingly, or if we cannot obtain additional financing, our business, operating results and financial condition may be materially harmed. OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF ONLINE COMMERCE. If online commerce does not continue to grow or grows more slowly than expected, our business will be materially harmed. A number of factors could slow the growth of online commerce, including the following: - the network infrastructure required to support a substantially larger volume of transactions may not be developed; - government regulation may increase; - telecommunications capacity problems may result in slower response times; and - consumers may have concerns about the security of online commerce transactions. WE COMPETE WITH OTHER ONLINE RETAILERS AND TRADITIONAL FILMED ENTERTAINMENT RETAILERS WHO MAY BE MORE SUCCESSFUL THAN WE ARE IN ATTRACTING AND RETAINING CUSTOMERS. The retail filmed entertainment industry is intensely competitive. In addition, the online commerce market for retail filmed entertainment sales is new, rapidly evolving and competitive. If we are unable to successfully compete against other retailers of filmed entertainment products, our business, operating results, and financial condition would be materially harmed. Price competition in our industry is also intense, and price is one of the principal factors on which consumers base their purchasing decisions. Price competition may reduce our gross margins, which could materially harm our business, operating results and financial condition. Some of our competitors use aggressive pricing policies to build market share. Some also have adopted business models that include selling filmed entertainment products for less than their product cost and not charging customers for shipping and handling. Software applications are also available that can determine which online site has the lowest price for a particular title which could direct customers to our competitors' sites. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we have. In addition, we believe some of our competitors devote substantially more resources to web site and systems development than we do. WE DEPEND UPON STRATEGIC MARKETING RELATIONSHIPS TO GENERATE SALES. We use strategic marketing relationships to attract new customers, and this is an important part of our growth strategy. These relationships may not generate significant numbers of new customers. Alternatively, these relationships may be successful at generating new customers, but we may not be able to maintain these customer relationships or enter into more of them. If any of these events were to occur, it could materially harm our business, operating results and financial condition. OUR RELIANCE ON E-MAIL MARKETING COULD LEAVE US VULNERABLE IF CONSUMERS REJECT THIS MARKETING TECHNIQUE OR ADDITIONAL GOVERNMENTAL REGULATION ARISES. E-mail marketing is a significant part of our growth strategy. If the acceptance or use of e-mail marketing is limited by consumer fear of e-mail computer viruses or additional government regulation, it could harm our business. To date, Congress has not enacted any legislation regulating commercial e-mail, but a number of bills are pending. One proposed law would prohibit online operators from sending most unsolicited commercial e-mail where the operators have no existing or personal relationship with the recipient and the e-mail is not sent at the request of or with the express consent of the recipient. Another proposed law would require operators of web sites and online services to disclose to users the personal information the operators have 14 15 collected and the personal information that it may share with other firms. It would further require operators to provide simple processes for users to provide or withhold consent to the operators' dissemination of the information. In the absence of federal legislation, many states, including California, Connecticut, Delaware, Iowa, Nevada, North Carolina, Oklahoma, Rhode Island, Tennessee, Virginia, Washington and West Virginia, have passed laws limiting the use of e-mail marketing. Because these laws have focused primarily on unsolicited e-mail marketing, BigStar's business has yet to be affected by current legislation. Other states have begun to consider placing restrictions on e-mail marketing. If Congress or Additional states pass legislation restricting commercial uses of e-mail, it could harm our ability to communicate with existing customers and attract new customers. Our sales growth could be affected, which could materially harm our business, operating results and financial condition. OUR RAPID GROWTH IS PLACING A SIGNIFICANT STRAIN ON OUR RESOURCES. We anticipate continued rapid expansion of our operations. If we are unable to manage our growth effectively, our business could be materially harmed. Our rapid expansion has placed a significant strain on our ability to manage our growth, including our ability to monitor operations, bill customers, control costs and maintain effective quality controls. Our anticipated future expansion will increase this strain. Our senior management team has been assembled in a very short period. These individuals have not previously worked together. The ability of our senior managers to work together effectively as a team is critical to successfully managing our growth. WE MUST MAINTAIN SATISFACTORY VENDOR RELATIONSHIPS TO COMPETE SUCCESSFULLY. We rely on wholesalers to fill our customers' orders. Our primary vendor of filmed entertainment products is Baker & Taylor, Inc. from whom we obtained substantially all of our inventory in 1998 and the first nine months of 1999. We also obtain filmed entertainment products from Valley Media and Rentrak. We are dependent upon maintaining these relationships for filling our customers' orders because there are only a limited number of wholesalers who sell filmed entertainment products. If we are unable to maintain suitable relationships with vendors, we will be materially harmed. As we continue to grow, our wholesalers will need to satisfy our increasing product requirements on a timely basis. They also must continue to provide adequate selections of filmed entertainment titles and competitive prices. If our wholesalers are unable or unwilling to do so, it would materially harm our ability to compete, which would in turn materially harm our business, operating results and financial condition. WE COULD EXPERIENCE SYSTEM FAILURES THAT INTERFERE WITH CUSTOMERS' ACCESS TO OUR ONLINE SUPERSTORE. Our business depends on the efficient and uninterrupted operation of our computer and communications, hardware and software systems. Systems interruptions that cause our web sites to be unavailable or that reduce our ability to process transactions could materially harm our business, operating results and financial condition. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events. We have fully redundant systems but have not yet established a formal disaster recovery plan. ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS. To protect confidential information, we rely on encryption technology, which transforms information into a code designed to be unreadable by third parties. We also use authentication technology that utilizes passwords and other information to prevent unauthorized persons from accessing a customer's information. If a person circumvents our security measures, he or she could misappropriate confidential information about us, or our customers, or cause interruptions in our operations. Security breaches that result in access to confidential information also could damage our reputation and expose us to a risk of loss or liability. In addition, we may be required to make significant expenditures and expend considerable effort to try and protect against security breaches or remedy problems caused by these breaches. 15 16 IF WE FAIL TO KEEP PACE WITH RAPID CHANGES INVOLVING THE INTERNET, IT COULD MATERIALLY HARM OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS. Internet technology, commercial applications and online uses are all rapidly evolving. If we do not successfully respond to rapid changes involving the Internet, our business will be materially harmed. For example, we must respond to marketplace developments in a timely and cost-effective manner. In this regard, we must continue to develop, enhance and improve the responsiveness and features of our web sites and develop new features to meet customer needs. We also must respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis, including the development of technology to sell digital filmed entertainment to consumers through systems that can accommodate delivery of video, audio, data and other services. WE DO NOT PUBLISH OUR OWN EDITORIAL CONTENT, WHICH MEANS WE MUST RELY ON LICENSED THIRD-PARTY CONTENT ON OUR WEB SITES. We license third-party content, including filmed entertainment reviews, news reports and features, in order to attract and retain web site users. If we are unable to obtain desirable content from our content licensors or from new licensors, it could reduce visits to our web sites, which could materially harm our business. In addition, if we are unable to obtain content at an acceptable cost, it could materially harm our ability to compete and our operating results and financial condition. WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. We regard our trademarks, trade secrets and similar intellectual property as important to our success. We have applied for the registration of some of our trademarks and service marks in the United States. However, our efforts to establish and protect our intellectual property rights may be inadequate to prevent misappropriation or infringement of our intellectual property rights. If we are unable to safeguard our intellectual property rights, it could materially harm our business, operating results and financial condition. WE MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. We have established a network of links with numerous small online sites. Many of the sites may not have licenses for the use of the intellectual property that they display. The copyright holders of this intellectual property or their licensees may assert infringement claims against our affiliate partner sites and us because of our relationships with these sites. Although we believe that our use of third-party material on our web sites is permitted under current provisions of copyright law, some aspects of Internet content and commerce law are not clearly settled. We may therefore be the subject of alleged infringement claims of the trademarks and other intellectual property rights of third parties. If we become subject to these types of claims, our business could be materially harmed even if we successfully defend against the claims. It also is possible that future legal developments would prohibit us from having rights to downloadable information, sound or video. THE PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN BECAUSE THE REGULATION OF DOMAIN NAMES IS SUBJECT TO CHANGE. We currently hold various web domain names relating to our brand, including BigStar.com, abcBigStar.com, BigStarDVD.com and Astrophile.com. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. The regulation of domain names in the United States and in foreign countries is expected to change in the near future. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we may conduct business. If our ability to acquire or maintain domain names is limited, it could materially harm our business, operating results and financial condition. 16 17 WE ARE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES THAT MAY BE COSTLY AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS. Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent. These laws and regulations could expose us to compliance costs and substantial liability, which could materially harm our business, operating results and financial condition. In addition, the growth of the Internet, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws. These laws would also be likely to impose additional burdens on our business. WE MAY BE SUBJECT TO LIABILITY FOR SALES AND OTHER TAXES. We do not collect sales or other similar taxes in most states, although we do so in New York, California and Illinois. Our business could be materially harmed if additional sales and similar taxes are imposed on us, or if penalties are assessed on us for past nonpayment of these taxes. Recently adopted legislation provides that, prior to October 2001, a state cannot impose sales taxes on products sold on the Internet unless these taxes could be charged on non-Internet transactions involving the products. During this moratorium, it is possible that taxing mechanisms may be developed that would, following the moratorium, impose increasing sales and similar tax burdens on us. If these burdens are placed on us, our business could be materially harmed and there could be a material adverse effect on our operating results and financial condition. OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL. Our success is substantially dependent on the ability and experience of our senior management and other key personnel, particularly David Friedensohn, our Chief Executive Officer and Chairman of the Board, and David Levitsky, our Executive Vice President and General Manager. We have entered into an employment agreement with David Friedensohn. The agreement provides that he will be employed as the Chief Executive Officer of BigStar for an unspecified period of time. Both BigStar and Mr. Friedensohn may terminate the agreement at any time. If terminated without cause, Mr. Friedensohn will be entitled to severance pay equal to two years of his then current base salary. We have no employment contracts with any of our other senior management or key personnel. If one or more members of our management team become unable or unwilling to continue in their present positions, our business could be materially harmed. We have purchased key-man life insurance in the amounts of $1,000,000 for David Friedensohn and $500,000 for David Levitsky with BigStar as the named beneficiary. The benefits received under these policies would not be sufficient to compensate BigStar for the loss of the services of Mr. Friedensohn or Mr. Levitsky should suitable replacements not be employed. In addition, to manage our anticipated growth, we must hire more employees. Competition for personnel, particularly those having software development and other technical expertise, is intense. If we are unable to hire additional qualified employees, our growth could be impaired. WE MAY EXPERIENCE PROBLEMS FROM COMPUTER SYSTEMS THAT ARE NOT READY ON A TIMELY BASIS TO PROCESS INFORMATION ASSOCIATED WITH THE YEAR 2000. Many existing software programs may not accurately process dates arising in the year 2000 and after because they use only two digits to identify a year and assume that the two missing digits are always "19." We cannot assure you that all of the computer systems and related products and software that are important to our business will be ready by the deadline to address the concerns arising from the year 2000 problem. If they are not ready, we may experience difficulty in properly managing our web sites and face the possibility of business interruptions, financial loss, reputational harm and legal liability. Any of these could materially harm our business, operating results and "financial condition. Our business is dependent upon the operations and technology of various Internet sites, merchant acquiring banks, product wholesalers and credit, card issuers, as well as, other third parties. Our business, operating results and financial condition may be materially harmed if these or other third parties are not year 2000 compliant on a timely basis. 17 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) List of Exhibits: 27 Financial Data Schedule. (b) Reports on Form 8-K filed during the quarter ended September 30, 1999: None. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BIGSTAR ENTERTAINMENT, INC. Dated: November 15, 1999 By:/s/ David Friedensohn ---------------------------------- David Friedensohn, Chief Executive Officer Dated: November 15, 1999 By:/s/ Robert S. Yingling ---------------------------------- Robert S. Yingling, Chief Financial Officer and Vice President-Finance
19 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 22,154,426 0 583,531 20,000 0 23,773,085 1,514,870 249,833 25,584,023 5,503,061 0 0 0 8,541 20,072,421 25,584,023 8,126,528 8,126,528 6,345,528 6,345,528 15,157,688 0 (252,294) (13,124,394) 0 (13,124,394) 0 0 0 (13,124,394) (2.26) (2.26)
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