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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1999
REGISTRATION NO. 333-77963
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BIGSTAR ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5735 13-399-5258
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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19 FULTON STREET
5TH FLOOR
NEW YORK, NEW YORK 10038
(212) 981-6300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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DAVID FRIEDENSOHN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
19 FULTON STREET -- 5TH FLOOR
NEW YORK, NEW YORK 10038
(212) 981-6300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE OF PROCESS)
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PLEASE SEND A COPY OF ALL COMMUNICATIONS TO:
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RUBI FINKELSTEIN, ESQ. MICHAEL R. LITTENBERG, ESQ.
RICHARD D. HARROCH, ESQ. SCHULTE ROTH & ZABEL LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP 900 THIRD AVENUE
666 FIFTH AVENUE NEW YORK, NEW YORK 10022
NEW YORK, NEW YORK 10103 (212) 756-2000
(212) 506-5380 (212) 593-3955 (FAX)
(212) 506-5151 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, par value $.001 per share..................... $49,910,000 $13,875(2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act.
(2) $12,788 of the registration fee was previously paid. The balance of $1,087
is being paid with this filing.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. BIGSTAR
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION -- JULY 7, 1999
PROSPECTUS
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3,100,000 Shares
BIGSTAR.COM LOGO
BIGSTAR ENTERTAINMENT, INC.
Common Stock
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BigStar Entertainment, Inc. is offering 3,100,000 shares of its common stock in
an initial public offering. Prior to this offering, there has been no public
market for BigStar's common stock.
BigStar is an online filmed entertainment superstore that sells filmed
entertainment products in all popular formats.
It is anticipated that the public offering price will be between $12.00 and
$14.00 per share. Application has been made for quotation of the common stock in
the Nasdaq National Market under the symbol "BGST".
<TABLE>
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Per Share Total
<S> <C> <C>
Public offering price............................. $ $
Underwriting discounts and commissions............ $ $
Proceeds, before expenses, to BigStar............. $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF BIGSTAR.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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The underwriters may purchase up to 465,000 additional shares from BigStar at
the public offering price, less underwriting discounts and commissions. Delivery
and payment for the shares will be on , 1999.
PRUDENTIAL SECURITIES
WASSERSTEIN PERELLA SECURITIES, INC.
FIRST SECURITY VAN KASPER
, 1999
<PAGE> 3
The inside front cover contains the following:
Pictures of the BigStar.com, abcBigStar.com, BigStarDVD.com and
Astrophile.com web sites that show search functions and featured filmed
entertainment products, as well as bullet points that indicate the markets
targeted and information offered by each of the web sites. In addition, logos of
some of BigStar's marketing partners are on the page.
The inside back cover contains the following:
Photos of people representing customers and potential customers. A diagram
shows how BigStar Direct Email software reaches customers and potential
customers through the use of personalized e-mail newsletters, e-mail
announcements and e-mail promotions.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary................ 4
Risk Factors...................... 8
Forward-Looking Statements........ 15
Use of Proceeds................... 16
Dividend Policy................... 16
Dilution.......................... 17
Capitalization.................... 18
Selected Financial Data........... 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 20
Business.......................... 26
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PAGE
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Management........................ 37
Certain Related Transactions...... 44
Principal Stockholders............ 45
Description of Capital Stock...... 47
Shares Eligible for Future Sale... 49
Underwriting...................... 51
Legal Matters..................... 53
Experts........................... 53
Where You Can Find More
Information..................... 53
Index to Financial Statements..... F-1
</TABLE>
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This prospectus also includes trade names and trademarks of other
companies. Use or display by BigStar of other parties' trade names, trademarks
or products is not intended to and does not imply a relationship with, or
endorsement or sponsorship of BigStar by, the trade name or trademark owners.
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer or sale
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front cover of
this prospectus.
3
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that investors should
consider before investing in our common stock. Investors should read the entire
prospectus carefully.
BIGSTAR
We are the leading online filmed entertainment superstore, based on
customer traffic to our web sites. BigStar sells videos, digital video discs, or
DVDs, and laserdiscs. Through our web sites, customers have the convenience of
shopping 24 hours a day, seven days a week. According to Media Metrix, we had
1,106,000 unique visitors to our web sites in May 1999, up from 67,000 in
September 1998. Based on this information, our web sites were the most
trafficked filmed entertainment shopping sites during May 1999. We were formed
in March 1998 and, accordingly, face challenges usually encountered by early
stage companies.
We have four web sites that target purchasers of filmed entertainment
products. Our main web site, BigStar.com, offers approximately 34,000 filmed
entertainment products, including feature films and educational, health and
fitness and instructional videos. Our other web sites are abcBigStar.com, which
targets the children's filmed entertainment market, BigStarDVD.com, which
focuses on DVD enthusiasts, and Astrophile.com, a content-only web site designed
to attract customers to our product web sites.
Among other marketing techniques, BigStar uses direct e-mail to attract new
customers and increase purchases by existing customers. Our recently developed
BigStar Direct(TM) Email software allows us to customize promotions to
individuals based upon pages an individual views on our web sites, demographic
information, indicated preferences and purchasing habits. Based on our
preliminary use of this software, we believe that it will enhance the
effectiveness of our e-mail promotions. At July 1, 1999, we had a database of
more than 630,000 e-mail addresses of current and prospective customers.
MARKET OPPORTUNITY
The Internet is emerging as a significant medium for commerce. In addition,
over the last several years, consumer video spending habits have shifted from
renting videos to purchasing them due to falling prices and broader
distribution. Paul Kagan Associates estimates that annual retail sales of videos
and DVDs in the United States will increase to $12.8 billion in 2003, up from
$9.1 billion in 1998. We believe that as commerce on the Internet increases,
online sales of filmed entertainment will also increase. We cannot assure you
that our sales will increase proportionately with the market.
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OUR ADVANTAGES
Web-based retailers of filmed entertainment products face challenges in
promoting and sustaining online sales. These challenges include competition from
online and traditional retailers and attracting and retaining customers. We
believe we are well-positioned to meet these challenges because of the following
key strengths:
- relationships with wholesalers that allow us to offer filmed
entertainment products without the risks associated with carrying
inventory;
- BigStar Direct(TM) Email software developed by us, which is designed to
increase sales through one-to-one marketing;
- software developed by us that integrates different sources of editorial
content into our web sites; and
- a management team experienced in electronic commerce and Internet
marketing.
To date, we have not achieved profitability. We expect to continue to incur
significant operating losses and net losses for at least the next several years.
OUR STRATEGY
Our objective is to be the leading online filmed entertainment superstore.
We intend to attain our objective through the following strategies:
- continue to grow our customer base through advertising campaigns,
strategic marketing relationships and our affiliate partner networks;
- continue to use targeted direct e-mail marketing;
- provide a superior shopping experience;
- continue to improve our technology; and
- pursue additional revenue opportunities.
OUR OFFICES
Our principal executive offices are located at 19 Fulton Street, 5th Floor,
New York, New York 10038 and our telephone number is (212) 981-6300. Our
Internet address is www.BigStar.com. Information contained in our web sites is
not part of this prospectus.
5
<PAGE> 7
THE OFFERING
Shares offered by BigStar................ 3,100,000 shares
Total shares outstanding after this
offering................................. 9,142,312 shares
Use of proceeds.......................... To (1) increase marketing,
advertising and promotional
spending, (2) upgrade computer
systems and develop additional
software programs, (3) hire
additional marketing, technical
and production personnel and (4)
fund operating losses and general
corporate purposes. A portion of
the proceeds also may be used for
possible future strategic
alliances and acquisitions.
Proposed Nasdaq National Market symbol... BGST
Unless otherwise stated, information throughout this prospectus assumes:
- the underwriters' over-allotment is not exercised;
- the effectiveness of a .485-for-one reverse stock split of common stock;
and excludes as of July 6, 1999:
- 1,450,490 shares subject to outstanding options with a weighted
average exercise price of $3.21 per share;
- 902,286 shares subject to outstanding warrants with a weighted
average exercise price of $4.81 per share;
- 300,000 shares reserved for issuance under our employee stock
purchase plan; and
- 489,510 shares reserved for issuance under our stock option and
incentive plans.
RISK FACTORS
Investors should consider the risk factors before investing in BigStar's
common stock and the impact from various events which could adversely affect our
business.
6
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SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
MARCH 2, 1998 MARCH 2, 1998
(INCEPTION) (INCEPTION) THREE MONTHS
TO TO ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1999
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 789 $ -- $ 1,454
Cost of sales......................... 714 -- 1,254
---------- --------- -------
Gross profit.......................... 75 -- 200
Operating expenses:
Sales and marketing................ 1,467 -- 1,726
General and administrative......... 886 13 675
Web site and software
development...................... 970 15 782
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Total operating expenses.............. 3,323 28 3,183
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Loss from operations.................. (3,248) (28) (2,983)
Interest income, net.................. 7 -- 17
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Net loss.............................. $ (3,241) $ (28) $(2,966)
========== ========= =======
Basic and diluted net loss per
share.............................. $ (1.25) $ (0.01) $ (0.77)
Shares used in computing basic and
diluted net loss per share......... 2,602,784 2,077,167 3,863,606
</TABLE>
The following table provides a summary of our balance sheet at March 31,
1999:
- on an actual basis;
- on a pro forma basis to reflect the sale of 1,394,777 shares of common
stock in April 1999 for total net proceeds of $6,509,000; and
- on a pro forma as adjusted basis to reflect (1) the sale of 1,394,777
shares of common stock in April 1999 for total net proceeds of $6,509,000
and (2) receipt of the estimated net proceeds from our sale of common
stock in this offering, at an assumed initial public offering price of
$13.00 per share, after deducting underwriting discounts and commissions
and our estimated offering expenses. See also "Use of Proceeds" and
"Capitalization."
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AT MARCH 31,
1999
----------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents...................... $2,809 $ 9,318 $45,797
Working capital................................ 794 7,303 43,782
Total assets................................... 4,094 10,603 47,082
Total long-term debt........................... 8 8 8
Total debt..................................... 10 10 10
Total stockholders' equity..................... 1,546 8,055 44,534
</TABLE>
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RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information included in this prospectus, before purchasing shares of
common stock of BigStar. Each of these risk factors could adversely affect our
business, operating results and financial condition, which could adversely in
turn affect the value of an investment in our common stock. This investment
involves a high degree of risk.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE WILL FACE DIFFICULTIES
TYPICALLY ENCOUNTERED BY DEVELOPMENT STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING
MARKETS. We commenced operations in March 1998. An investor purchasing our
common stock must therefore consider 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,
WHICH COULD DECREASE THE VALUE OF YOUR SHARES. 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 March 31, 1999, our
accumulated deficit was approximately $6.2 million. See "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We expect that our operating expenses will increase substantially as we
continue to expand our business. As a result, we will need to generate
significantly more revenues to achieve profitability. We may not be able to do
so. If revenues grow slower than we anticipate, or if operating expenses exceed
our expectations or cannot be reduced accordingly, 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
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<PAGE> 10
- 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. We expect that online competition will
further intensify since a competitor can launch a new site at relatively low
cost. 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 also is 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 and 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. See "Business -- Marketing and Promotion of our Online Filmed
Entertainment Superstore -- Strategic Marketing Relationships" for a discussion
of these relationships.
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
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.
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In the absence of federal legislation, several states have passed laws
limiting the use of e-mail marketing. 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 Entertainment, from whom we
obtained substantially all of our inventory in 1998 and the first quarter 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. Since September 1998, we have had minor systems disruptions when
visitors could not connect to our web sites and orders could not be processed.
None of these disruptions lasted more than several hours and the disruptions
have not had a material adverse effect on our operations. We expect further
interruptions in the future. 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
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<PAGE> 12
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.
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.
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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.
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.
In addition, some jurisdictions in the United States have objected to the
sale of copyrighted materials, such as books, that are deemed pornographic and
have started proceedings against online commerce companies selling these
materials. Should jurisdictions object to the sale of some filmed entertainment
products by us, we could be exposed to litigation that could be costly and that
could materially harm 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.
12
<PAGE> 14
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.
MANAGEMENT WILL CONTROL 34.7% OF BIGSTAR; THEIR INTERESTS MAY BE DIFFERENT
FROM AND CONFLICT WITH YOURS. The interests of management could conflict with
the interests of our other stockholders. Following this offering, executive
officers and directors will beneficially own a total of approximately 34.7%, and
33.1% if the underwriters' over-allotment option is exercised in full, of our
outstanding common stock. Accordingly, if they act together, they may have the
power to control the election of directors and the approval of actions for which
the approval of our stockholders is required.
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000" for a more extensive discussion of year 2000
risks.
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.
OUR MANAGEMENT WILL HAVE SUBSTANTIAL DISCRETION OVER THE USE OF PROCEEDS OF
THIS OFFERING AND MAY NOT APPLY THEM EFFECTIVELY. Management will have
significant flexibility in applying the net proceeds of this offering and may
apply the proceeds in ways with which you do not agree. The failure of
management to apply these funds effectively could materially harm our business.
See "Use of Proceeds" for a discussion of our intended uses of the net proceeds
of this offering.
WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT AN ACQUISITION OF OUR
BUSINESS AT A PREMIUM PRICE. Some of the provisions of our certificate of
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<PAGE> 15
incorporation and bylaws could discourage, delay or prevent an acquisition of
our company at a premium price or at all. These provisions:
- permit the board of directors to increase its own size and fill the
resulting vacancies;
- provide for a staggered board;
- authorize the issuance of preferred stock in one or more series; and
- limit the persons who may call special meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation Law also imposes
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our common stock. See "Description of Capital
Stock -- Preferred Stock" and "Description of Capital Stock -- Delaware Law and
Certificate of Incorporation and Bylaw Provisions" for a more detailed
discussion of these anti-takeover provisions.
OUR STOCK PRICE MAY FLUCTUATE, WHICH MAY MAKE IT DIFFICULT TO RESELL YOUR
SHARES AT ATTRACTIVE PRICES. The market price of our common stock may be highly
volatile. The market prices of securities of other technology-based companies,
particularly Internet-related companies, currently are highly volatile. Factors
that could cause volatility in our stock price include:
- fluctuations in our quarterly operating results;
- deviations in our results of operations from the estimates of securities
analysts;
- changes in the market valuations of other Internet companies and stock
market price and volume fluctuations generally;
- economic conditions specific to online commerce and the filmed
entertainment retailing industry;
- announcements by us or our competitors relating to new services or
technologies, significant acquisitions, strategic relationships, joint
ventures or capital commitments;
- regulatory developments; and
- additions or departures of our key personnel.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK PRICE. The
market price of our common stock could drop due to sales of a large number of
shares of our common stock or the perception that these sales could occur. These
factors could also make it more difficult to raise funds through future
offerings of common stock. In addition, we have entered into registration rights
agreements with some investors that entitle these investors to have their shares
registered for sale in the public market. See "Shares Eligible for Future Sale"
for further information concerning potential sales of our shares after this
offering, including information concerning the registration rights that we have
granted.
Our officers, directors and other stockholders have entered into lock-up
agreements under which they have agreed not to offer or sell any shares of
common stock or securities convertible into or exchangeable or exercisable for
shares of
14
<PAGE> 16
common stock for a period of 180 days from the date of this prospectus without
the prior written consent of Prudential Securities, on behalf of the
underwriters. These individuals may request that Prudential Securities consider
an early release from their lock-up agreement. Prudential Securities may, at any
time during the 180-day lock-up period and without notice, grant an early
release for shares subject to the lock-up agreements.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION. You will experience an
immediate and substantial dilution of $8.13 per share in the net tangible book
value per share of common stock from the initial public offering price, assuming
an initial public offering price of $13.00 per share. In addition, the exercise
of options and warrants currently outstanding could cause additional,
substantial dilution to you. See "Dilution" for more detailed information
regarding the potential dilution you may incur.
FORWARD-LOOKING STATEMENTS
This prospectus 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 the "Risk Factors" section and elsewhere in this prospectus. 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.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to BigStar from the sale of the shares of common stock in
this offering are estimated to be approximately $36.5 million, or $42.1 million
if the underwriters' over-allotment option is exercised in full, after deducting
underwriting discounts and commissions and estimated offering expenses, assuming
an initial public offering price of $13.00 per share.
We intend to use these net proceeds as described in the following table:
<TABLE>
<CAPTION>
AMOUNT OF
NET PROCEEDS PERCENTAGE
------------ ----------
<S> <C> <C>
Increase marketing, advertising and
promotional spending.................. $15,000,000 41.1%
Upgrade computer systems and develop
additional software programs.......... 4,000,000 10.9
Hire additional marketing, technical and
production personnel.................. 2,000,000 5.5
Fund operating losses and general
corporate purposes.................... 15,500,000 42.5
----------- ------
$36,500,000 100.0%
===========
</TABLE>
A portion of the net proceeds may also be used for possible future
strategic alliances and acquisitions. This would reduce the use of the net
proceeds for one or more of the uses indicated in the preceding table. We
presently do not have any understandings, commitments or agreements concerning
these types of transactions.
We have complete discretion over how to use the net proceeds of this
offering. Our use of the net proceeds may vary substantially from that indicated
in the preceding table due to unforeseen factors.
Pending these uses, we intend to invest the net proceeds temporarily in
short-term, investment grade, interest-bearing securities or guaranteed
obligations of the U.S. government.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain all of our earnings, if any, to finance the expansion
of our business and do not anticipate declaring or paying any cash dividends on
our common stock. Future cash dividends, if any, will be paid at the discretion
of our board of directors. The payment of dividends will depend upon:
- future operations;
- earnings;
- capital requirements and surplus;
- our general financial condition;
- contractual restrictions; and
- other factors deemed relevant by our board of directors.
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<PAGE> 18
DILUTION
Purchasers of the common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the common stock from
the initial public offering price. Pro forma net tangible book value per share
represents the amount of BigStar's total tangible assets less its total
liabilities, divided by the number of shares of common stock issued and
outstanding at March 31, 1999 after giving effect to the sale of 1,394,777
shares of common stock in April 1999 for total net proceeds of approximately
$6,509,000.
At March 31, 1999, BigStar had pro forma net tangible book value of
approximately $8,055,000 or $1.33 per share of common stock. After giving effect
to the sale of 3,100,000 shares of common stock offered by BigStar, at an
assumed initial public offering price of $13.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses,
BigStar's pro forma as adjusted net tangible book value, as of March 31, 1999,
would have been $44,534,000 or $4.87 per share. This represents an immediate
increase in net tangible book value of $3.54 per share to existing stockholders
and an immediate and substantial dilution of $8.13 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Pro forma net tangible book value as of March 31, 1999...... $1.33
Increase attributable to new investors...................... 3.54
-----
Pro forma as adjusted net tangible book value after this
offering.................................................. 4.87
------
Dilution to new investors................................... $ 8.13
======
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
the pro forma as adjusted net tangible book value of BigStar at March 31, 1999
would have been approximately $5.22 per share, representing an immediate
increase in net tangible book value of $3.89 per share to BigStar's existing
stockholders and an immediate and substantial dilution in net tangible book
value of $7.78 per share to new investors.
The following table summarizes, on a pro forma basis, as of March 31, 1999,
the number of shares of common stock purchased from BigStar, the total
consideration paid and the average price per share paid by existing stockholders
and by investors purchasing shares in this offering.
The following table excludes the deduction of underwriting discounts and
commissions and other estimated expenses payable by BigStar. In addition, the
following table assumes an initial public offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 6,042,312 66.1 $14,686,058 26.7 $ 2.43
New investors............ 3,100,000 33.9 40,300,000 73.3 $13.00
--------- ----- ----------- -----
Total.......... 9,142,312 100.0% $54,986,058 100.0%
========= ===== =========== =====
</TABLE>
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<PAGE> 19
CAPITALIZATION
The following table provides, as of March 31, 1999, the capitalization of
BigStar:
- on an actual basis;
- on a pro forma basis to reflect the sale of 1,394,777 shares of common
stock in April 1999 for total net proceeds of $6,509,000; and
- on a pro forma as adjusted basis to reflect (a) the sale of 1,394,777
shares of
common stock in April 1999 for total net proceeds of $6,509,000 and (b)
receipt
of the estimated net proceeds from our sale of common stock in this
offering, at an assumed initial public offering price of $13.00 per
share, after deducting underwriting discounts and commissions and our
estimated offering expenses. See also "Use of Proceeds."
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt.................................. $ 8 $ 8 $ 8
------- ------- -------
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000
shares authorized; no shares issued and
outstanding, actual, pro forma and pro
forma as adjusted.......................... -- -- --
Common stock, $.001 par value; 40,000,000
shares authorized; 4,647,535 shares issued
and outstanding, actual; 6,042,312 shares
issued and outstanding, pro forma; and
9,142,312 shares issued and outstanding,
pro forma as adjusted...................... 4 6 9
Additional paid-in capital.................... 7,874 14,381 50,857
Deferred compensation......................... (125) (125) (125)
Accumulated deficit........................... (6,207) (6,207) (6,207)
------- ------- -------
Total stockholders' equity................. 1,546 8,055 44,534
------- ------- -------
Total capitalization.................. $ 1,554 $ 8,063 $44,542
======= ======= =======
</TABLE>
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<PAGE> 20
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1998 and for
the period from March 2, 1998 (inception) to December 31, 1998 is derived from
the financial statements and related notes of BigStar, which have been audited
by Arthur Andersen LLP, independent public accountants. The selected financial
data as of March 31, 1999, for the period from March 2, 1998 (inception) to
March 31, 1998 and for the three months ended March 31, 1999 are derived from
our unaudited financial statements, which include all adjustments, consisting of
normal recurring adjustments, which we consider necessary for a fair
presentation of our financial position and results of operations as of and for
the periods then ended. The results of operations for the periods indicated do
not necessarily reflect the results to be expected for any other period. You
should read the selected financial data presented below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
MARCH 2, 1998 MARCH 2, 1998 THREE MONTHS
(INCEPTION) TO (INCEPTION) TO ENDED
DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1999
----------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $ 789 $ -- $ 1,454
Cost of sales................................ 714 -- 1,254
--------- --------- ---------
Gross profit................................. 75 -- 200
Operating expenses:
Sales and marketing....................... 1,467 -- 1,726
General and administrative................ 886 13 675
Web site and software development......... 970 15 782
--------- --------- ---------
Total operating expenses..................... 3,323 28 3,183
--------- --------- ---------
Loss from operations......................... (3,248) (28) (2,983)
Interest income, net......................... 7 -- 17
--------- --------- ---------
Net loss..................................... $ (3,241) $ (28) $ (2,966)
========= ========= =========
Basic and diluted net loss per share......... $ (1.25) $ (0.01) $ (0.77)
Shares used in computing basic and diluted
net loss per share........................ 2,602,784 2,077,167 3,863,606
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 363 $2,809
Working capital (deficit)........................ (938) 794
Total assets..................................... 1,338 4,094
Total long-term debt............................. 9 8
Total debt....................................... 11 10
Total stockholders' equity (deficit)............. (494) 1,546
</TABLE>
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<PAGE> 21
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 notes to those statements and the other financial
information appearing elsewhere in this prospectus.
OVERVIEW
BigStar was incorporated in March 1998. We began offering products for sale
on our main web site, BigStar.com, in May 1998. Until that time, our operating
activities related primarily to the development of the BigStar.com web site.
Since our inception, we have incurred significant operating losses. These
losses primarily result from development costs associated with building our web
sites and order processing systems, and marketing, advertising and promotion
expenses. As of March 31, 1999, we had an accumulated deficit of approximately
$6.2 million. As we expand our business, we believe that our operating expenses
will increase significantly primarily due to increased marketing, advertising
and promotion 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 for the
next several years.
RESULTS OF OPERATIONS
Quarterly Results of Operations
Described below are selected statement of operations data for each of our
quarters since inception through March 31, 1999. This information is derived
from unaudited quarterly financial statements that include, in the opinion of
management, all adjustments necessary for a fair presentation of the information
for these periods.
Results of operations for any fiscal quarter are not expected to be
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1998 JUNE 30, 1998 SEPT. 30, 1998 DEC. 31, 1998 MARCH 31, 1999
-------------- ------------- -------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............ $ -- $ 15 $ 173 $ 601 $ 1,454
Cost of sales........ -- 9 154 551 1,254
---- ----- ----- ------- -------
Gross profit......... -- 6 19 50 200
---- ----- ----- ------- -------
Operating expenses:
Sales and
marketing....... -- 40 252 1,175 1,726
General and
administrative... 13 95 208 570 675
Web site and
software
development..... 15 112 327 516 782
---- ----- ----- ------- -------
Total operating
expenses........... 28 247 787 2,261 3,183
---- ----- ----- ------- -------
Loss from
operations......... (28) (241) (768) (2,211) (2,983)
Interest income
(expense).......... -- -- (2) 9 17
---- ----- ----- ------- -------
Net loss............. $(28) $(241) $(770) $(2,202) $(2,966)
==== ===== ===== ======= =======
</TABLE>
20
<PAGE> 22
We have a limited operating history on which to base an evaluation of our
business and prospects. We believe that period-to-period comparisons of our
operating results are not meaningful and should not be relied upon as an
indication of future performance. Accordingly, period-to-period comparisons of
our operating results are not discussed below.
March 2, 1998 (inception) to December 31, 1998 and the Quarter Ended March 31,
1999
NET SALES. Net sales were approximately $789,000 from March 2, 1998
(inception) to December 31, 1998 and approximately $1.5 million for the quarter
ended March 31, 1999. BigStar recorded no barter income during 1998 or for the
quarter ended March 31, 1999. Net sales reflect sales of filmed entertainment
products, net of returns, and include shipping and handling charges. Sales are
recognized upon product shipment.
Through March 31, 1999, BigStar had approximately 60,000 customers. Until
November 1998, we sold primarily videos. Beginning in November 1998, we
commenced promoting DVDs through BigStarDVD.com and through BigStar.com. We
typically discount videos 15% and DVDs 30% from their suggested retail prices.
In order to increase our customer base, we promoted selected products through
aggressive pricing. We may, in the future, continue to offer selected products
at deeper than normal discounts in response to our competition or to attract or
retain customers. We are unable to anticipate the impact that these potential
pricing structures will have on our gross margins because they depend on the mix
of all products sold and their related gross margins.
COST OF SALES. Cost of sales was approximately $714,000 from March 2, 1998
(inception) to December 31, 1998, which resulted in a gross margin of 9.5% for
this period. For the quarter ended March 31, 1999, cost of sales was
approximately $1.3 million, with a gross margin of 13.8%. Cost of sales consists
of the cost of merchandise sold and shipping and handling costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
approximately $1.5 million from March 2, 1998 (inception) to December 31, 1998
and approximately $1.7 million for the quarter ended March 31, 1999.
Sales and marketing expenses consist primarily of payments related to
advertising, promotion and marketing programs. Sales and marketing expenses also
include the costs of promotional filmed entertainment products that are made
available to customers who agree to receive notification of future promotions.
The cost of promotional filmed entertainment products totaled approximately
$255,000 for the period from March 2, 1998 (inception) to December 31, 1998 and
approximately $442,000 for the quarter ended March 31, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $886,000 from March 2, 1998 (inception) to December 31, 1998
and approximately $675,000 for the quarter ended March 31, 1999.
General and administrative expenses include payroll and related expenses
for executive, accounting and administrative personnel, which were approximately
$355,000 for the period from March 2, 1998 (inception) to December 31, 1998 and
approximately $214,000 for the quarter ended March 31, 1999. Also included in
general and administrative expenses are professional fees, which were
approximately
21
<PAGE> 23
$185,000 for the period from March 2, 1998 (inception) to December 31, 1998, and
approximately $91,000 for the quarter ended March 31, 1999. Customer service as
well as other miscellaneous corporate expenses are also included in general and
administrative expenses.
WEB SITE AND SOFTWARE DEVELOPMENT EXPENSES. Web site and software
development expenses were approximately $971,000 from March 2, 1998 (inception)
to December 31, 1998 and approximately $782,000 for the quarter ended March 31,
1999. Web site and software development expenses consist primarily of personnel
costs and related expenses for the design, development and management of our web
sites. For the period from March 2, 1998 (inception) to December 31, 1998,
personnel costs were approximately $812,000 and for the quarter ended March 31,
1999 these costs were approximately $575,000. These expenses also include the
costs of systems and telecommunications services, which totaled approximately
$82,000 for the period from March 2, 1998 (inception) to December 31, 1998 and
approximately $117,000 for the quarter ended March 31, 1999. The cost of content
purchased and licensed from third parties totaled approximately $131,000 for the
period March 2, 1998 (inception) to December 31, 1998 and approximately $52,000
for the quarter ended March 31, 1999 respectively.
NET LOSS. BigStar's net loss was approximately $3.2 million from March 2,
1998 (inception) to December 31, 1998 and approximately $3.0 million for the
quarter ended March 31, 1999. 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, this net operating loss may be
limited due to ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operating cash requirements primarily
through sales of our common stock. During the first quarter of 1999, we raised
net proceeds of approximately $5.4 million through the sale of 1,625,228 shares
of common stock, including the exercise of 70,422 warrants. At March 31, 1999,
our cash balance was approximately $2.8 million. During April 1999, we sold an
additional 1,394,777 shares of our common stock for net proceeds of
approximately $6.5 million.
During 1998, net cash used in operating activities was approximately $1.7
million and was primarily due to our net loss of approximately $3.2 million,
offset by an increase in accounts payable and accrued expenses of $1.8 million.
Net cash used in operating activities for the quarter ended March 31, 1999 of
approximately $2.2 million was primarily due to our net loss of approximately
$3.0 million. The cash requirements associated with the loss were reduced by an
increase in accounts payable and accrued expenses of approximately $716,000, and
the availability of approximately $453,000 held in escrow, net of the increase
in accounts receivable of approximately $302,000 and other current and
noncurrent assets of approximately $172,000.
The increase in accounts payable and accrued expenses resulted primarily
from the increase in purchases of filmed entertainment and promotional products
over the preceding period, as well as additional advertising. The increase in
accounts receivable was 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.
22
<PAGE> 24
Net cash used in investing activities of approximately $470,000 for the period
from March 2, 1998 (inception) through December 31, 1998 and approximately
$314,000 during the quarter ended March 31, 1999 was used primarily for
purchases of computer equipment.
We currently have an agreement with our primary supplier, Baker & Taylor,
under which we receive credit in the amount of $1.0 million for the purchase of
goods with 60 day payment terms.
At March 31, 1999, our principal commitments consisted of obligations for
advertising under cancelable agreements. The minimum amount payable under these
agreements was approximately $550,000. We have no material commitments for
capital expenditures, but anticipate future purchases related to hardware and
related software enhancements of our web sites to expand the capabilities of the
sites to allow access by more customers and to enhance customers' experiences on
our web sites.
We believe that the net proceeds from this offering combined with our
current cash balances will be sufficient to meet our anticipated cash needs for
working capital, operating losses and capital expenditures for at least the next
12 months. Our future liquidity and capital requirements will depend upon
numerous factors discussed under the section entitled "Risk Factors." In
addition, we will, from time to time, consider the acquisition of or investment
in complementary businesses, services and technologies, which might increase our
liquidity requirements or cause us to issue additional equity or debt
securities. We cannot assure you that we will not require additional financing
within this time frame or that such additional funding, if needed, will be
available on terms acceptable to us or at all. We do not currently use
derivative financial instruments.
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.
We are currently assessing 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.
We are in the process of making oral and written inquiries to third parties
to determine their year 2000 readiness. We have only received a small percentage
of responses to our inquiries thus far. As a result, we have not received year
2000
23
<PAGE> 25
compliance assurances from many of these parties nor do we expect to. We
anticipate that some entities with whom we have third-party relationships may
not respond to our request for year 2000 assurances because they have not
completed their year 2000 compliance efforts or they may lack sufficient
incentive to respond to our inquiries. We do not plan to independently verify
any of the assurances we receive. In addition, these parties are reliant upon
other companies' applications, some of which may contain or rely upon software
that is not year 2000 compliant and that may not be revealed through our
inquiries.
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 intend to complete our determination of the worst case scenarios after we
have received and analyzed responses to our inquiries of third parties. We
expect to complete our contingency plan by the end of September 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, we 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 our
financial statements. Accordingly, BigStar's comprehensive net loss is equal to
its net loss for the period from March 2, 1998 (inception) to December 31, 1998.
In June 1997, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for the way that a public enterprise
reports information about operating segments in annual financial statements, and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years must be restated. Management has
determined that it does not have any separately reportable business segments.
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In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance for determining whether computer software is internal-use software and
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. SOP 98-1
also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use. BigStar adopted SOP 98-1 in
1999 and there has not been any material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. This
statement is not expected to affect BigStar since it does not currently engage
in derivative instruments or hedging activities.
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BUSINESS
We are the leading online filmed entertainment superstore, based on
customer traffic to our web sites. We sell filmed entertainment products in all
popular formats such as videos, DVDs and laserdiscs. Through our web sites,
customers have the convenience of shopping 24 hours a day, seven days a week.
According to Media Metrix, we had 1,106,000 unique visitors to our web sites in
May 1999, up from 67,000 in September 1998. Based on this information, our web
sites were the most trafficked filmed entertainment shopping sites during May
1999.
Our main web site, BigStar.com, offers filmed entertainment products,
including feature films and educational, health and fitness and instructional
videos. Our other web sites are abcBigStar.com, which targets the children's
filmed entertainment market, BigStarDVD.com, which focuses on DVD enthusiasts,
and Astrophile.com, a content-only web site designed to attract customers to our
product web sites.
GROWTH OF THE INTERNET AND ONLINE COMMERCE
The Internet is emerging as a significant global communications medium. It
enables millions of people to conduct research, share information and transact
business electronically. International Data Corporation estimates that in 1998
there were approximately 70 million U.S. Internet users and that the number of
users will grow to approximately 154 million users in 2002. Further,
International Data Corporation estimates that 49.1% of U.S. households will be
online by 2002, up from 26.5% in 1998.
The growth in the Internet represents a substantial opportunity for
companies to conduct business online. Internet retailers are able to communicate
more effectively with customers by providing:
- visual product presentations;
- up-to-date pricing and product information;
- customer support, including opportunities for customer feedback;
- product offerings tailored to customer preferences; and
- electronic billing and payment systems.
An increasing number of products and services are sold online, including
books, brokerage services, computers, music and travel services. International
Data Corporation estimates that sales to U.S. households over the Internet will
increase from approximately $12.4 billion in 1998 to approximately $60.6 billion
in 2002.
THE FILMED ENTERTAINMENT INDUSTRY
Videos
Over the last several years, consumer video spending habits have shifted
from renting videos to purchasing them. This trend has been driven by falling
prices and broader distribution. According to the Veronis Suhler & Associates
1998 Communications Industry Forecast, the average household with a video
cassette recorder purchased 7.9 tapes in 1997, compared with only 3.8 tapes in
1992. According to Paul Kagan Associates, revenues from retail sales of videos
are expected to total more than
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$8.7 billion annually in 2003. However, we cannot make any assurances regarding
BigStar's future sales.
Sales of children's videos comprise a significant portion of the total
market for purchased filmed entertainment. BigStar aggressively targets this
market through its abcBigStar.com web site. According to Kalorama Information,
sales of children's videos in the United States were approximately $2.6 billion
in 1996 and are expected to increase to $3.8 billion in 2001.
Digital Video Discs
We believe growth in the market for filmed entertainment products will be
supported by the increased acceptance of DVDs. This new storage medium is
capable of storing substantially more data than videos, allows for easier
searching and frequently has better video and sound quality. DVD players may be
purchased as a component in a home entertainment system or integrated into a
computer system as a DVD-ROM storage device. Although DVD-ROM drives are
primarily for computer software storage and playback, they also may be used to
view filmed entertainment on a computer screen.
Paul Kagan Associates estimates that the installed base of DVD players in
U.S. households will increase from 1.1 million in 1998 to 18.4 million in 2003,
representing a compound annual growth rate of 75.7%. Paul Kagan Associates
estimates that retail sales of DVDs in the United States will increase from
approximately 14.3 million discs in 1998 to approximately 228.4 million discs in
2003, representing a compound annual growth rate of 74.0%. According to Paul
Kagan Associates, annual U.S. revenue from retail sales of DVDs was
approximately $286 million in 1998, and is expected to increase to approximately
$4.1 billion in 2003, representing a compound annual growth rate of 70.3%. We
cannot assure you that BigStar's sales will increase proportionately with the
market.
Laserdiscs
Due to the success of the DVD format, the laserdisc market has contracted.
However, according to Paul Kagan Associates, the installed base of laserdisc
players in U.S. households was more than two million in 1998. Accordingly, we
offer a large selection of laserdiscs to serve this substantial installed base
of potential purchasers.
Delivery of Filmed Entertainment
Within the next few years, new technologies may enable consumers to
download digital filmed entertainment directly into the home. We believe the
potential of this new market will depend on the expansion of affordable systems
that can accommodate delivery of video, audio, data and other services to
households and sales of significant numbers of storage devices capable of
receiving and recording large amounts of digital information. We intend to
capture a portion of this new market by developing the means to sell digital
filmed entertainment products to consumers.
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CHALLENGES OF ONLINE RETAILING
Web-based retailers of filmed entertainment products face challenges in
promoting and sustaining online sales, including the following:
- COMPETITION FROM TRADITIONAL RETAIL INDUSTRY. Most customers purchase
filmed entertainment products from traditional store-based retailers,
many of which have longer operating histories, larger customer bases and
greater brand recognition than online retailers. Online retailers must
convince customers that purchasing filmed entertainment on the Internet
offers advantages to them such as greater product selection, better
prices and increased convenience.
- ATTRACTING AND RETAINING CUSTOMERS. The online commerce market is new,
rapidly evolving and intensely competitive. Online retailers must
increase their brand awareness, attract customers, develop customer trust
and loyalty and maintain high levels of customer traffic on their web
sites.
THE BIGSTAR ADVANTAGES
We believe we are well-positioned to meet the challenges facing online
filmed entertainment retailers because of the following key strengths:
Wide Selection and Lower Costs
We currently offer approximately 34,000 filmed entertainment products for
sale. As a result of our distribution strategy, we do not need to carry physical
inventory. In contrast, traditional filmed entertainment retailers must make
significant investments in inventory, real estate and personnel for each store
location. The amount of space available in a physical store also limits the
number of titles and the amount of inventory that a traditional retailer can
carry in any one store.
BigStar Direct Email
Our recently developed BigStar Direct Email software will help us increase
sales through one-to-one-marketing with our customers. This software creates
personalized electronic catalogs based upon pages an individual views on
BigStar's web sites, demographic information, indicated preferences and
purchasing habits. BigStar Direct Email can also deliver graphics and pictures
to further enhance the effectiveness of
e-mail promotions.
BigStar Direct Email may be adapted to promote other products and services
to online buyers. BigStar believes there may be an opportunity to sell or
license this software to publishers, retailers and electronic commerce web
sites, but presently has no specific plans to do so.
Specialized Software
We have developed software to enhance our web sites and reduce costs. For
example, we enhance content licensed from third parties by using software that
generates links between sources of content. These links allow users to quickly
and easily locate news, biographies of actors and directors, photos and other
editorial programming contained in different databases. We believe that
integrating content
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from many sources produces a superior user experience, which in turn attracts
more users to our web sites, lengthens site visits and results in more
purchases.
We are also developing a software program that will allow us to
automatically select a wholesaler to fulfill a particular order based on
variables such as price, title availability, shipping costs, speed of delivery
and credit terms.
Targeted Web Sites
We have developed separate web sites for different demographic segments who
purchase filmed entertainment products. Through the BigStar web sites
BigStar.com, abcBigStar.com, BigStarDVD.com and Astrophile.com, we target
several distinct online groups, including:
- people seeking well-known feature films and specialty titles such as
educational, health and fitness and instructional videos;
- parents seeking to educate and entertain their children through the
purchase of filmed entertainment products;
- owners of DVD players who seek a wide variety of titles and in-depth
technical and product information; and
- movie fans seeking extensive information about films.
We believe that customers are more receptive to web sites that provide
information and products tailored to their interests. Our strategy of using
targeted web sites is designed to increase initial and repeat visits and sales.
Experienced Management Team
Our executive management team has more than 15 years of experience managing
electronic commerce sites and web marketing campaigns. In particular, one of our
founders was Chairman and Chief Executive Officer of an entertainment and
commerce web site. Our other founder served as a Director of Marketing for a
major online retailer of music and videos. In addition, our Vice
President -- Site Development was a senior consultant to several major online
and traditional marketers of books and filmed entertainment products. We believe
that our management team provides significant advantages in the rapidly evolving
market in which we compete.
OUR STRATEGY TO BECOME THE PREMIER ONLINE FILMED ENTERTAINMENT SUPERSTORE
Continue to Grow Customer Base
We intend to continue to grow our customer base through online and offline
advertising, strategic marketing relationships and our affiliate partner
networks. For example, we intend to significantly increase advertising on
leading web sites and other traditional media, conduct an ongoing public
relations campaign and develop business alliances and partnerships.
Continue to Use Direct E-mail Marketing
BigStar uses direct e-mail marketing to attract new customers and increase
purchases by existing customers. At July 1, 1999, we had a database of more than
630,000 e-mail addresses of current and prospective customers.
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Provide a Superior Shopping Experience
By providing customers with a superior shopping experience, we believe that
we can increase both our customer base and repeat customer purchases. Our web
sites are designed to be easy to use and contain search functions, an electronic
shopping basket, personalized user profiles and secure credit card payment
processing and allow customers to choose from a variety of delivery options. In
addition, we seek to offer our customers a superior shopping experience through
informative and entertaining editorial content.
Continue to Improve Technology
We believe that innovative technology is essential to successfully
providing online retail services. As a result, we have developed our BigStar
Direct Email software. We also have developed technology that enables other web
sites to create their own filmed entertainment web sites and link to
BigStar.com. We intend to continue to develop, acquire and implement
enhancements to our web sites and order processing systems.
Pursue Additional Revenue Opportunities
We intend to pursue additional revenue opportunities, which may include the
following:
- expand to fulfill international orders;
- expand into new product categories, such as movie soundtracks,
merchandise and memorabilia and video games;
- acquire complementary businesses or technologies;
- license our BigStar Direct Email technology to other web-based marketers;
and
- develop the capacity to sell filmed entertainment through the downloading
of these products over the Internet.
BIGSTAR WEB SITES
We have created four web sites to target purchasers of filmed entertainment
products. Our web sites are BigStar.com, abcBigStar.com, BigStarDVD.com and
Astrophile.com. We intend to develop additional web sites that feature specific
categories of filmed entertainment products.
BigStar.com
BigStar.com is our main web site and contains all of the filmed
entertainment products that can be purchased from us. This web site offers
filmed entertainment products, including feature films and educational, health
and fitness and instructional videos. BigStar.com also contains in-depth
information on more than 70,000 filmed entertainment titles, biographies of
actors and directors, daily movie news, movie stills and online chats with
Hollywood stars.
abcBigStar.com
We have targeted the children's market with the development of
abcBigStar.com. This web site offers approximately 2,600 children's filmed
entertainment products. This
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site also includes information that helps adults purchase suitable titles for
children, such as age-appropriate recommendations.
BigStarDVD.com
BigStar has targeted DVD enthusiasts with the development of
BigStarDVD.com. This web site offers approximately 2,600 DVD products and has
information about the features and technical standards of many of these titles.
Astrophile.com
Astrophile.com is a content-only entertainment web site designed to
entertain and educate users. This web site features more than 4,400 biographies,
240 interviews, movie stills and transcripts of chats with popular actors and
actresses and is updated weekly. We believe that this site is one of the most
comprehensive and up-to-date information sources on Hollywood celebrities on the
Internet.
We do not sell products through Astrophile.com. Instead, we use the site to
attract movie fans. Through hyperlinks, visitors to Astrophile.com can visit our
other web sites where products can be purchased.
WEB SITE FEATURES
Our web sites have several key features designed to enhance each customer's
shopping experience.
Content
We have enhanced our web sites by adding editorial content. We believe that
the inclusion of editorial content on our product web sites increases the time
each customer spends on our web sites, as well as the likelihood and frequency
of subsequent visits and purchases. Examples of our editorial content include
reviews, biographies, news, photos and other editorial programming. We license
the majority of our editorial content from third parties, rather than develop it
internally, because we believe that this approach is more cost-effective. In
addition, we have original editorial features including polls, chats and trivia.
Searching
Visitors can search our web sites by genre, category, title, actor,
director or other criteria. For example, the "kids search" function on
abcBigStar.com allows parents to select suitable filmed entertainment products
for children according to age. We also have developed software links that make
it easier for users to access editorial content from separate sources. For
example, a user reading a biography of a particular actor can click a single
button to view information about each of the movies in which the actor has
appeared.
Electronic Shopping Basket
Our web sites allow a customer to put each selected item into an electronic
shopping basket by clicking on the item. Customers can continue shopping while
adding to or deleting items from the electronic shopping basket. Once the
customer has finalized his or her selection, the customer submits an order. In
addition, a
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customer may save the items in the shopping basket and purchase them during a
later visit to our web sites.
Personalized Features
Visitors to our web sites can enter a profile that personalizes the web
sites to the user. Users that enter a profile are then greeted by name when they
log on to our web sites. They also receive personalized recommendations through
e-mail and other customized services such as personalized sales offers and
notices of exclusive sale promotions. We also send web site news, periodic
updates about new movies, featured selections and special offers to these
customers.
Secure Credit Card Payment
We utilize secure server software for transactions. Our software encrypts
all of the customer's personal information, including credit card number, name
and address, to ensure security and privacy.
Order Fulfillment
Customers can select from a variety of delivery options, including
overnight delivery and gift messages. We use e-mail to notify customers that
their orders have been received and shipped. Most of our products are available
for shipment within one to three days. Customers can also view the current
shipping status of their orders through our web sites and see a history of all
past orders.
MARKETING AND PROMOTION OF OUR ONLINE FILMED ENTERTAINMENT SUPERSTORE
We use a variety of methods, which are discussed below, to attract users to
our web sites. By using multiple methods to promote our web sites, we believe we
increase our traffic and sales. In addition, we are not dependent on any single
method of promotion or marketing partner. From our analysis of transaction
histories, we estimate that our web sites attracted more than 14.2 million
visits from March 2, 1998 (inception) through June 30, 1999. Of this amount, our
analysis indicates that approximately 10.0 million visits occurred from January
1, 1999 through June 30, 1999. We plan to significantly increase our marketing
and sales expenditures in 1999.
Online and Offline Advertising Campaigns
We have online marketing campaigns on a number of high traffic web sites.
From September 1998 through June 1999, we conducted campaigns on more than 90
web sites. These campaigns use a variety of online marketing techniques,
including:
- click-through banners that bring consumers directly to our web sites;
- campaigns that collect the e-mail addresses of visitors who wish to
receive online promotions;
- affiliate promotion campaigns;
- coupons, contests and other sponsorships; and
- inclusion of our search technology in relevant content areas of other web
sites.
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We also conduct special promotions at various times during the year, such as the
holiday season and the Academy Awards season. For example, we created a special
gift giving program on our web sites for the 1998 holiday season.
We generally enter into short-term advertising commitments that can be
canceled on a maximum of 60 days' notice. As a result, we can cancel and quickly
replace advertising that performs poorly.
In addition to Internet-specific marketing and advertising, we also use or
plan to use print, radio, outdoor and television advertising.
Strategic Marketing Relationships
We have entered into strategic marketing relationships with Yahoo!,
MovieFone, a wholly-owned subsidiary of America Online, EarthLink Network, The
New York Times on the Web, Mail.com, FortuneCity.com, Planet Direct and
Women.com Networks.
For example, the BigStar Celebrity Chat series is hosted by Yahoo! in its
Yahoo! Chat area. This series features chats with movie and television stars.
These chats are showcased and archived for future reference on our web sites. We
believe that the BigStar Celebrity Chat series is a highly effective means of
promoting our web sites because it reaches a large number of users.
BigStar is also the exclusive provider of videos, DVDs and laserdiscs for
MovieFone, the largest provider of movie tickets online. Our agreement with
MovieFone also allows us to send electronic mailings to MovieFone's mailing list
and advertise our products to MovieFone's online users.
We recently entered into a strategic marketing agreement with EarthLink
Network, a leading Internet service provider, or ISP, with over 1,000,000
subscribers. We will be the exclusive online provider of filmed entertainment
products on EarthLink's web site. The agreement calls for the establishment of a
link to a co-branded web site from EarthLink's home page, the inclusion of an
exclusive co-branded movie store for EarthLink's members, the placement of
BigStar advertisements on EarthLink's home page and other prominent placements
on the EarthLink web site.
In addition, we build customized filmed entertainment stores for our
strategic partners, such as the stores we have created for EarthLink and
Women.com Networks. These online stores offer customers search and selection
capabilities on the affiliates' web sites. These stores attract new customers
and increase sales for BigStar.
Affiliate Partner Networks
Our affiliate program enables other web sites to create their own filmed
entertainment web site and link to BigStar. When visitors follow a link to our
online superstore, the affiliated web site receives a commission ranging from
eight percent to fifteen percent of any resulting sale. Because there is no
payment unless a sale occurs, the program is an efficient means of acquiring new
customers.
In order to encourage other web sites to participate in the affiliate
program, we provide without charge all of the necessary software to establish
the filmed
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entertainment area and link, as well as other technical and customer service
support. BigStar has created software, called the MovieStore Wiz(TM), that
allows affiliates to build customized web sites using information found on the
BigStar web sites. Affiliate web site builders can create filmed entertainment
commerce and content sites with little or no computer programming experience.
ORDER FULFILLMENT AND CUSTOMER SERVICE
Our products are usually shipped directly from our wholesalers to the
customer. As a result, we currently do not maintain an inventory of products. In
some instances, we conduct contests or offer special promotions to customers
where prizes or promotional items may be shipped directly from BigStar's
offices.
For the period ended December 31, 1998 and the three months ended March 31,
1999, we purchased from Baker & Taylor substantially all of the filmed
entertainment products that we sold to customers. We also have contractual
relationships with Valley Media and Rentrak. We purchased a small percentage of
products from these wholesalers, which were used for promotional and sale
purposes.
Our distribution agreement with Baker & Taylor extends through December 31,
2000 and automatically renews for additional 24-month terms unless cancelled by
either party by prior written notice 90 days before the end of the term. Either
party may terminate the agreement upon the failure of the other party to fulfill
its obligations or a breach of warranty under the agreement or the bankruptcy of
the other party. BigStar has no obligation to make minimum purchases under this
agreement.
We utilize electronic links with our wholesalers to process orders. This
reduces processing time and costs. Products are generally shipped by our
wholesalers the same day they receive an order from us.
We are developing a software program that will enable us to automatically
select a wholesaler to fill a particular order based on variables such as price,
title availability, shipping costs, speed of delivery and credit terms. We
believe this program will reduce our cost of sales by enabling us to purchase
many products more efficiently. In addition, by providing electronic access to
the inventories of multiple wholesalers, this program will help us increase the
number of items we offer and the number that are in stock at any given time.
This software program also will give us the capability to bundle different types
of products together for product promotions. We expect this software to be in
use by the end of the third quarter of 1999.
We are currently reviewing whether to establish a wholly-owned and operated
distribution facility or to use a portion of a third-party warehouse for
distributing our products. We believe carrying selected inventory may allow us
to offer additional products and provide quicker shipping on some items and
special promotions to our customers. In addition, we believe that having our own
distribution facility may also facilitate fulfillment of international orders.
BigStar has not contracted to build, lease or buy any distribution facility, and
may not establish a facility. We have not developed any budgets that contain
cost estimates and we have no proceeds from this offering designated for a
facility. If BigStar builds, leases or purchases a facility, we believe it will
be economically comparable with our current methods of warehousing and
distributing our products, and will not result in higher product costs.
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We believe that our ability to attract and retain customers depends in part
on the strength of our customer support. We seek to achieve frequent
communication with and feedback from our customers to continually improve our
online superstore and related services. Our customer service staff monitors our
incoming customer e-mails and generally responds within 24 hours. We also send
automated e-mails after a purchase has been made to inform customers of the
status of their orders. In addition, we also plan to add a toll-free telephone
number that directs customer inquiries to a voice response system or a customer
service representative.
COMPETITION WITHIN THE RETAIL FILMED ENTERTAINMENT INDUSTRY
The online commerce market is new and rapidly evolving. We expect that our
online competition will further intensify. In addition, the broader retail
filmed entertainment industry is intensely competitive. Our competitors include:
- online sellers of videos, DVDs and other filmed entertainment products,
including DVD EXPRESS, Reel.com, a subsidiary of Hollywood Entertainment,
CDnow, Buy.com, Amazon.com, MovieStreet and Total E, an online store from
Columbia House;
- publishers and wholesalers of filmed entertainment products and related
products, such as Columbia House, Good Times Entertainment and Time Life
Video;
- traditional filmed entertainment retailers, such as Blockbuster and
Hollywood Entertainment, that currently sell filmed entertainment
products or services through stores or over the Internet; and
- specialty video retailers, mass merchandisers, department and electronic
consumer stores, as well as non-store retailers such as mail-order video
clubs.
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. To our knowledge, DVD EXPRESS and Reel.com
have in the past had greater sales of filmed entertainment products than
BigStar. Some of BigStar's competitors, like Hollywood Entertainment,
Blockbuster and Amazon.com, also may be able to secure merchandise from vendors
on more favorable terms, devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability policies and
devote substantially more resources to web site and systems development than we
can. We believe that the principal competitive factors in our market are:
- brand recognition;
- ease of use, content quality and web site convenience;
- price;
- selection; and
- personalized services.
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INTELLECTUAL PROPERTY
We use technology developed by us in our business. Most of our software and
systems have been developed internally. Some of our software is developed on our
behalf by outside consultants. We also license software from third parties.
The source code for our software is protected both as a trade secret and as
copyrighted work. We enter into confidentiality and assignment agreements with
our consultants and vendors with access to our proprietary information.
We have applied for the registration of some of our trademarks and service
marks in the United States. We have no patents.
EMPLOYEES
As of June 30, 1999, we had 55 full time employees, including 20 in
technology positions, 8 in marketing, 7 in site development, 10 in customer
service and 10 in administrative positions. We believe our relations with our
employees are satisfactory.
LEGAL PROCEEDINGS
BigStar is not currently involved in any material legal proceedings.
FACILITIES
Our principal executive offices are located at 19 Fulton Street, 5th Floor,
New York, New York 10038, where we lease approximately 8,000 square feet of
space.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of BigStar are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David Friedensohn*.................. 37 Chief Executive Officer and Chairman
of the Board
David Levitsky...................... 37 Executive Vice President, General
Manager, Secretary and Director
Robert S. Yingling.................. 37 Vice President -- Finance and Chief
Financial Officer
Donna M. Williams................... 36 Vice President -- Marketing
Anthony Witek....................... 47 Vice President -- Operations
Brooke Bessert...................... 31 Vice President -- Site Development
Eugene Mondrus...................... 30 Vice President -- Technology
D. Jonathan Merriman*............... 39 Director
William Lansing..................... 41 Director
Steven A. Ledger*................... 39 Director
Marleen McDaniel.................... 49 Director
I. Martin Pompadur.................. 64 Director
</TABLE>
- ---------------
* Member of audit and compensation committees.
David Friedensohn has served as the Chairman and Chief Executive Officer of
BigStar since our formation in March 1998. Prior to joining BigStar, Mr.
Friedensohn was the Chief Executive Officer of SonicNet, which was sold in
December 1997 as part of Paradigm Music Entertainment to TCI Music, an affiliate
of Tele-Communications, Inc. Mr. Friedensohn previously held the positions of
Vice President, Business Development and General Manager of the Wildflower
Partners Fund at Prodigy from October 1995 until January 1997 and was Chairman
of the Board and President of SonicNet from January 1996 to January 1997. Prior
to working at Prodigy, Mr. Friedensohn was President of GB Investment Corp., a
consulting company to the entertainment industry. Mr. Friedensohn received a
Bachelor of Arts from Dartmouth College in 1983 and a Masters in Business
Administration from Columbia University Graduate School of Business in 1987.
David Levitsky has served as the Executive Vice President, General Manager
and Secretary and as a Director of BigStar since our formation in March 1998.
From June 1997 to January 1998, Mr. Levitsky served as the Director of Marketing
of New Century Network, a joint venture of Cox Newspapers, Knight Ridder, The
New York Times Company and other large media companies. Prior to joining New
Century Network, Mr. Levitsky served as a Director of Marketing for Columbia
House Online. From 1990 through 1996, Levitsky served as a Director of Marketing
for the Columbia House Video Club. Mr. Levitsky received a Bachelor of Arts from
Columbia University in 1983 and a Masters in Business Administration in
Information Systems and Finance from New York University Stern School of
Business in 1996.
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Robert S. Yingling has served as the Vice President -- Finance and Chief
Financial Officer of BigStar since April 1999. Prior to joining BigStar, Mr.
Yingling was a consultant to several Internet companies, including EarthWeb and
DynamicWeb Enterprises, as well as BigStar. From January 1997 to August 1998,
Mr. Yingling was the Chief Financial Officer of GDC International. Previously,
Mr. Yingling was Director of Finance at Standard Microsystems and a Manager at
Arthur Andersen. Mr. Yingling received a Bachelor of Science in Accounting from
Lehigh University in 1983 and a Masters in Business Administration from Columbia
University Graduate School of Business in 1996. Mr. Yingling is a certified
public accountant.
Donna M. Williams has served as Vice President -- Marketing of BigStar
since April 1998. From April 1997 to April 1998, Ms. Williams ran a marketing
consulting business. From April 1994 to April 1997, Ms. Williams was employed by
The Times Mirror Company where she held various positions, including Vice
President of Business Development for Mosby, a subsidiary focused on medical
publishing. Ms. Williams also spent five years with the Bankers Trust Company in
the Merchant Banking division. Ms. Williams received her Bachelor of Arts in
Economics from Mount Holyoke College in 1984 and a Masters in Business
Administration from Columbia University Graduate School of Business in 1993.
Anthony Witek has served as Vice President -- Operations of BigStar since
April 1999. From December 1996 to April 1999, Mr. Witek was a Managing Director
of Thomson Newspapers in software development and production. Prior to joining
Thomson Newspapers, Mr. Witek was the Director of Application Development for
new business ventures for Prodigy Services. Mr. Witek received a Bachelor of
Business Administration from Hofstra University in 1974.
Brooke Bessert has served as Vice President -- Site Development of BigStar
since our formation in March 1998. From 1992 to 1998, Ms. Bessert acted as a
computer and web site consultant to various companies, including
barnesandnoble.com, Columbia House, Time Inc., The McGraw Hill Companies and
Radio Free Europe/ Radio Liberty. She received a Bachelor of Science in
Economics with a concentration in Marketing from The Wharton School, University
of Pennsylvania in 1990.
Eugene Mondrus has served as Vice President -- Technology of BigStar since
November 1998. Prior to joining BigStar, Mr. Mondrus was a software development
consultant with Oracle and a software and hardware analyst for Progressive
Strategies during 1998. From June 1996 to September 1997, Mr. Mondrus held the
position of Webmaster at Bigfoot International, directing web site operations.
Prior to joining Bigfoot International, Mr. Mondrus worked as a software
programmer and consultant for various companies.
D. Jonathan Merriman has served as a Director of BigStar since our
formation in March 1998. Mr. Merriman is the Managing Director of the Capital
Markets Group of First Security Van Kasper, an investment banking and brokerage
firm. Mr. Merriman joined First Security Van Kasper in June 1998 and oversees
the Research, Institutional Sales and Trading, Syndicate, and Derivatives
Trading Departments. Prior to joining First Security Van Kasper, Mr. Merriman
served as a Managing Director at The Seidler Companies. From 1994 to 1996, Mr.
Merriman was the Managing Director of the Equity Department at
Dabney/Resnick/Imperial. Mr. Merriman attended the New York University Stern
School of Business and
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received a Bachelor of Arts from Dartmouth College in 1982. Mr. Merriman serves
on the Board of First Security Van Kasper, as well as Brio Industries and Pacer
Technology.
William Lansing has served as a Director of BigStar since April 1999. Mr.
Lansing is the President and Chief Executive Officer of Fingerhut, a database
marketing company that sells a range of products and services through catalogs,
direct marketing and the Internet. Prior to joining Fingerhut in May 1998, Mr.
Lansing served as Vice President of Business Development for General Electric
from October 1996 to May 1998. Prior to joining General Electric, Mr. Lansing
served as Chief Operating Officer for Prodigy from January 1996 to October 1996,
an on-line joint venture of IBM and Sears. Mr. Lansing was also a Partner at
McKinsey & Company from October 1986 to January 1996, where he led the Internet
practice. Mr. Lansing received a Bachelor of Arts from Wesleyan University in
1980 and a law degree from the Georgetown University Law Center in 1985. Mr.
Lansing currently serves as a Director for Digital River, Select Comfort,
Freeshop.com, PCFlowers.com and Mountainzone.com.
Steven A. Ledger has served as a Director of BigStar since April 1999. Mr.
Ledger is a Managing Partner and Founder of Storie Partners, a private
partnership formed in 1993 to invest in emerging growth companies. Since 1993,
Mr. Ledger has served as a Managing Partner of the San Francisco Sentry
Investment Group and San Francisco Sentry Securities. Mr. Ledger received a
Bachelor of Arts from the University of Connecticut in 1982. Mr. Ledger
currently serves as a Director of APB Multimedia, HyCurve, PeopleNet
Communications and Software Technologies.
Marleen McDaniel has served as a Director of the Company since June 1999.
Ms. McDaniel has served as the President, Chief Executive Officer and
Chairperson of Women.com Networks since June 1994. From 1992 to June 1994, Ms.
McDaniel served as Senior Vice President and General Manager of Interop Company,
a division of Ziff-Davis Publishing. In 1990, Ms. McDaniel served as Vice
President of Marketing for Crescendo Communications, a high speed
internetworking company that later merged with Cisco Systems. From 1983 to 1990,
Ms. McDaniel served as Director of Sales and Marketing at Sun Microsystems. Ms.
McDaniel holds a Bachelor of Arts in Psychology from the University of
California, Berkeley. Ms. McDaniel also serves on the Board of Directors of
eve.com, an online source for beauty products, and is a trustee for the
Institute for Women in Technology.
I. Martin Pompadur has served as a Director of the Company since June 1999.
Mr. Pompadur is an Executive Vice President of News Corporation, President of
News Corporation Eastern and Central Europe and a member of News Corporation's
Executive Management Committee, positions he has held since June 1, 1998. Since
1983, Mr. Pompadur has also been the President and Chief Executive Officer of RP
Companies and is currently the Chairman, Chief Executive Officer and Chief
Operating Officer of a number of private and public limited partnerships which
operate television stations, radio stations and cable television systems. From
1977 to 1982, Mr. Pompadur was President of Ziff Corporation. From 1960 to 1977,
Mr. Pompadur held various positions with American Broadcasting Companies,
including General Manager of the Television Network, Vice President of the
Broadcast Division and
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<PAGE> 41
President of the Leisure Activities Group. Mr. Pompadur received a Bachelor of
Arts from Williams College in 1955 and a law degree from the University of
Michigan in 1958.
BOARD COMPOSITION
Our board of directors consists of seven directors. Our bylaws provide that
the authorized number of directors may be changed by resolution of the board of
directors. Prior to the closing of this offering, the terms of office of the
members of the board of directors will be divided into three classes. At each
annual meeting of stockholders after the initial classification, the successors
to directors whose term will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following election.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one third of the total number of directors.
This classification of the board of directors may have the effect of delaying or
preventing changes in control or management of BigStar.
Each officer is elected by, and serves at the discretion of the board of
directors. Each of BigStar's officers and directors, other than non-employee
directors, devotes full time to the affairs of BigStar. BigStar's non-employee
directors devote such time to the affairs of BigStar as is necessary to
discharge their duties.
The audit committee of the board of directors is responsible for reviewing
any transactions, other than compensation arrangements, between BigStar and our
executive officers and directors, the plans for and audits of BigStar,
compliance with any written policies and procedures and the adequacy of our
systems of internal accounting controls. The audit committee also considers
annually the qualifications of our independent auditors. Effective upon
consummation of this offering, the audit committee will be composed of David
Friedensohn, Steven A. Ledger and D. Jonathan Merriman.
The compensation committee of the board of directors reviews and recommends
to the board the compensation and benefits of all executive officers of BigStar,
administers BigStar's stock option plans and establishes and reviews general
policies relating to compensation and benefits of employees of BigStar.
Effective upon consummation of the offering, the compensation committee will
consist of David Friedensohn, Steven A. Ledger and D. Jonathan Merriman. No
interlocking relationships exist between BigStar's board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
DIRECTOR COMPENSATION
Directors do not currently receive cash compensation from BigStar for their
service as members of the board of directors, although they are reimbursed for
some expenses in connection with attendance at board and committee meetings.
BigStar does not provide additional compensation for committee participation or
special assignments of the board of directors.
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LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation and bylaws contain provisions indemnifying
our directors and executive officers against liabilities to the fullest extent
permitted by law. In our certificate of incorporation, we have eliminated the
personal liability of our directors to BigStar and its stockholders for monetary
damages for breach of their fiduciary duty, including acts constituting gross
negligence. However, in accordance with Delaware law, a director will not be
indemnified for a breach of its duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct or a knowing violation or any
transaction from which the director derived improper personal benefit. In
addition, our bylaws further provide that BigStar may advance to our directors
and officers expenses incurred in connection with proceedings against them for
which they are entitled to indemnification.
BigStar will enter into indemnification agreements with its officers and
directors containing provisions which may require BigStar to, among other
things, indemnify its officers and directors against liabilities that may arise
by reason of their status or service as officers or directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid
during 1998 to our chief executive officer and each other executive officer
whose aggregate salary and bonus for 1998 was in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION SALARY ($)
- --------------------------- -------------------
<S> <C>
David Friedensohn
Chief Executive Officer................................. $160,000
David Levitsky
Executive Vice President................................ $120,000
</TABLE>
There were no option grants during 1998 for the officers listed in the
Summary Compensation Table. No options were exercised in 1998.
EMPLOYMENT AGREEMENTS
In March 1999, we entered into an employment agreement with David
Friedensohn. The agreement provides for Mr. Friedensohn to be employed as Chief
Executive Officer of BigStar for an unspecified period of time. As a result,
either BigStar or Mr. Friedensohn may terminate the employment relationship at
any time. Pursuant to the agreement, BigStar shall nominate Mr. Friedensohn to
serve on the board of directors. The agreement obligates BigStar to pay Mr.
Friedensohn an annual salary of $160,000 in 1999, $200,000 in 2000 and $250,000
in 2001. BigStar will also pay Mr. Friedensohn a guaranteed bonus of $90,000 in
1999, $20,000 in 2000 ($40,000 if BigStar then has publicly traded shares) and
$75,000 in 2001 ($150,000 if BigStar has publicly traded shares). In addition,
Mr. Friedensohn was granted options to purchase 194,000 shares of common stock
at an exercise price of $4.12 per share pursuant to our 1999 Stock Option and
Incentive Plan. The shares vest in equal installments over 48 months and are
exercisable until the earlier of five years or 90 days after Mr. Friedensohn's
termination of employment. If terminated without cause, Mr. Friedensohn will be
entitled to severance pay equal to two years of his then current base salary.
STOCK OPTION AND INCENTIVE PLANS
1998 and 1999 Plans
We currently have a 1998 Stock Option and Incentive Plan and a 1999 Stock
Option and Incentive Plan. Each stock option and incentive plan is administered
by the board of directors, which has the sole discretion to select the
employees, officers and consultants to whom awards are made, to determine the
nature and amounts of such awards and to interpret, construe and implement the
plans.
Each stock option and incentive plan provides for awards of the following:
- non-qualified stock options and incentive stock options;
- stock appreciation rights;
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<PAGE> 44
- restricted stock subject to forfeiture and restrictions on transfer; and
- performance awards entitling the recipient to receive cash or common
stock in the future following the attainment of performance goals
determined by the board of directors.
As of July 6, 1999, under the 1998 Stock Option and Incentive Plan, options
to purchase 485,000 shares were authorized and options to purchase 481,217
shares had been granted. As of July 6, 1999, under the 1999 Stock Option and
Incentive Plan, options to purchase 1,455,000 shares were authorized and options
to purchase 969,273 shares had been granted.
1999 EMPLOYEE STOCK PURCHASE PLAN
BigStar's employee stock purchase plan will become effective on the date of
this prospectus. The purchase plan is designed to allow eligible employees of
BigStar to purchase shares of common stock, at semi-annual intervals, through
periodic payroll deductions. BigStar has reserved 300,000 shares of common stock
for issuance under the purchase plan.
The purchase plan will initially be implemented in a series of overlapping
24-month offering periods beginning every six months. Offering periods will
generally run from the first business day in January and July to the last
business day in December or June, two years later. Each offering period consists
of four consecutive approximately six-month purchase periods. Purchase periods
will generally run from the first business day in January to the last business
day in June and from the first business day in July to the last business day in
December. However, the initial offering and purchase periods will begin on the
date of this prospectus and will end on June 30, 2001 and December 31, 1999.
Employees who are scheduled to work more than 20 hours per week as of the
first day of any offering period are eligible to enter the purchase plan on that
day. However, employees who own, or have options to purchase, 5% or more of the
common stock of Big Star may not participate.
Payroll deductions may not exceed 15% of the participant's gross earnings.
The payroll deductions of each participant accumulated during a purchase period
will be applied to the purchase of shares on the participant's behalf on each
purchase date. The purchase price per share will equal 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.
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<PAGE> 45
CERTAIN RELATED TRANSACTIONS
In March 1998, we issued and sold 123,190 shares of common stock at a
purchase price of $1.22 per share to Morton H. Meyerson, a principal stockholder
of BigStar. We also issued a warrant to Mr. Meyerson to purchase 123,190 shares
of common stock at a price per share of $1.22, which was exercised by Mr.
Meyerson in December 1998. In May 1998, we issued and sold to Mr. Meyerson
73,720 shares of common stock at a purchase price of $1.22 per share.
In April 1998, we issued a warrant to D. Jonathan Merriman, a director of
BigStar, to purchase 48,500 shares of common stock at a price per share of
$1.22, exercisable at any time prior to January 31, 2000. On January 1, 1999, we
also issued a warrant to Mr. Merriman to purchase 48,500 shares of common stock
at a price per share of $3.73, exercisable at any time prior to January 1, 2002.
Effective February 1, 1999, we entered into a lease for office space. David
Friedensohn, our Chief Executive Officer, is a partial guarantor of this lease.
In February and April 1999, we paid an aggregate of $310,360 to First
Security Van Kasper, of which Mr. Merriman is a Managing Director, as
compensation in connection with private equity financings. We also issued to
First Security Van Kasper warrants to purchase 61,300 shares of common stock at
an exercise price of $3.73 per share, exercisable at any time prior to February
18, 2003, and warrants to purchase 69,840 shares of common stock at an exercise
price of $6.45 per share, exercisable at any time prior to April 20, 2002.
In March 1999, pursuant to his employment agreement, we granted David
Friedensohn options to purchase 194,000 shares of common stock at an exercise
price of $4.12 per share. The shares vest in equal installments over 48 months
and are exercisable at any time until the earlier of five years or 90 days after
Mr. Friedensohn's termination of employment.
In April 1999, we issued and sold 802,758 shares of common stock at a
purchase price of $3.73 per share to Storie Partners and issued a warrant to
Storie Partners to purchase 116,400 shares of common stock at an exercise price
of $5.15 per share, exercisable any time prior to April 1, 2003. Steven A.
Ledger, a director of BigStar, is a Managing Partner and founder of Storie
Partners.
In April 1999, we issued a warrant to William Lansing, a director of
BigStar, to purchase 24,250 shares of common stock at an exercise price of $4.12
per share, exercisable at any time prior to April 20, 2003.
In June 1999, we granted to each of Marleen McDaniel and I. Martin
Pompadur, directors of BigStar, options to purchase 12,125 shares of common
stock at an exercise price equal to the initial public offering price per share.
We believe that the related party transactions described above were entered
into on terms no more favorable than those that would have been agreed to by an
unrelated third party.
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PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial ownership
of BigStar's common stock, as of July 6, 1999, and as adjusted for this
offering, assuming no exercise of the underwriters' over-allotment option by:
- each person who we know beneficially owns more than 5% of our common
stock;
- each of our directors;
- each of the officers listed in the Summary Compensation Table; and
- all of our directors and executive officers as a group.
We believe that each person named below has sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them, subject to community property laws where applicable. The number of shares
of common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying options or warrants held
by such person that are exercisable within 60 days after July 6, 1999, but
excludes shares of common stock underlying options or warrants held by any other
person. Unless otherwise indicated, the address of each listed director and
officer is c/o BigStar Entertainment, Inc., 19 Fulton Street, 5th Floor, New
York, NY 10038.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
SHARES SHARES
SHARES BENEFICIALLY BENEFICIALLY
BENEFICIALLY OWNED OWNED
OWNED PRIOR TO OFFERING AFTER THIS OFFERING
------------ ----------------- --------------------
<S> <C> <C> <C>
Storie Partners, L.P.(1)............ 919,158 14.9% 9.9%
100 Pine Street
San Francisco, California 94104
Morton H. Meyerson.................. 320,100 5.3 3.5
4514 Cole Avenue, Suite 400
Dallas, Texas 75205
David Friedensohn(2)................ 1,087,208 17.9 11.9
David Levitsky(3)................... 873,000 14.4 9.5
D. Jonathan Merriman(4)............. 234,831 3.7 2.5
William Lansing(5).................. 2,021 * *
Steven A. Ledger(6)................. 919,158 14.9 9.9
Marleen McDaniel.................... 0 * *
I. Martin Pompadur.................. 0 * *
All directors and executive officers
as a group (12 persons)(7)........ 3,393,314 50.8% 34.7%
</TABLE>
- -------------------------
* less than 1%
(1) Includes a warrant to purchase 116,400 shares of common stock.
(2) Includes 48,500 shares of common stock beneficially owned by The Friedensohn
1999 Annuity Trust. Mr. Friedensohn beneficially owns the shares of common
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<PAGE> 47
stock held by the trust. Also includes 20,208 shares beneficially owned by
Mr. Friedensohn issuable upon the exercise of options to purchase common
stock.
(3) Includes 36,375 shares of common stock beneficially owned by The Levitsky
1999 Annuity Trust. Mr. Levitsky beneficially owns the shares of common
stock held by the trust.
(4) Mr. Merriman is a Senior Managing Director of First Security Van Kasper. In
such capacity, Mr. Merriman beneficially owns the warrants of First Security
Van Kasper entitling it to purchase 131,140 shares of common stock. Also
includes 97,000 shares of common stock beneficially owned by Mr. Merriman
issuable upon the exercise of warrants to purchase common stock.
(5) Represents 2,021 shares of common stock beneficially owned by Mr. Lansing
issuable upon the exercise of a warrant to purchase common stock.
(6) Mr. Ledger is a Managing Partner of Storie Partners, the general partner of
Storie Partners. Mr. Ledger beneficially owns the shares of common stock
beneficially owned by Storie Partners and a warrant of Storie Partners to
purchase 116,400 shares of common stock.
(7) Includes 643,864 shares of common stock issuable upon the exercise of
warrants and options.
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<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The following description of the material terms of our capital stock is not
intended to be complete. Our capital stock is fully described in our certificate
of incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part. Our capital stock is also
governed by the provisions of applicable Delaware law.
Our authorized stock consists of 40,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share. As of July 6, 1999, 6,042,312 shares of common stock were
outstanding and were held by 115 holders of record. No shares of preferred stock
were outstanding.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders. There are no cumulative voting
rights. Holders of common stock are entitled to receive ratably dividends, if
any, as may be declared from time to time by the board of directors out of
legally available funds, except that holders of preferred stock issued after the
sale of the common stock in this offering may be entitled to receive dividends
before the holders of the common stock.
In the event of a liquidation, dissolution or winding up of BigStar,
holders of common stock would be entitled to share in our assets remaining after
the payment of liabilities and the satisfaction of any liquidation preference
granted the holders of any then outstanding shares of preferred stock. Holders
of common stock have no preemptive or conversion rights or other subscription
rights. In addition, there are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
the shares of common stock offered by us in this offering, when issued and paid
for, will be fully paid and nonassessable.
The rights, preferences and privileges of the holders of common stock may
be adversely affected by the rights of the holders of shares of any series of
preferred stock that we designate in the future.
PREFERRED STOCK
The board of directors is authorized, without stockholder approval, to
issue up to an aggregate of 10,000,000 shares of preferred stock, $0.001 par
value per share, in one or more series. Each series will have the rights and
preferences as are determined by the board of directors, including:
- voting rights;
- dividend rights;
- conversion rights;
- redemption privileges; and
- liquidation preferences.
Preferred stock will have voting, dividend and liquidation rights superior
to the common stock which may adversely affect the rights of holders of common
stock.
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WARRANTS
As of July 6, 1999, BigStar had outstanding warrants to purchase 902,286
shares of common stock at a weighted average exercise price of $4.23 per share.
Some of these warrants have net exercise provisions under which the holder may,
in lieu of payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares, based on the fair market value of BigStar's
common stock at the time of the exercise of the warrant, after deducting the
exercise price. These warrants expire on dates ranging from December 1999 to
April 2003.
DELAWARE LAW AND CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
BigStar is subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents BigStar from engaging,
under some circumstances, in a business combination, which includes a merger or
sale of more than 10% of its assets, with any interested stockholder, defined as
a stockholder who owns 15% or more of its outstanding voting stock, as well as
affiliates and associates of any such persons, for three years following the
date such stockholder became an interested stockholder unless:
- the transaction in which the stockholder became an interested stockholder
is approved by the board of directors prior to the date the interested
stockholder attained that status;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of BigStar's voting stock outstanding at the time the
transaction commenced, excluding shares owned by persons who are
directors or officers and shares owned by employee stock plans; or
- the business combination is approved by the board of directors and
authorized by the affirmative vote of at least two-thirds of the
outstanding voting stock not owned by the interested stockholder.
Some of the provisions of our certificate of incorporation and bylaws could
discourage, delay or prevent an acquisition of BigStar at a premium price. Our
certificate of incorporation provides that any vacancy on the board of directors
may be filled by a majority of the directors then in office, even if less than a
quorum, or by a plurality of the votes cast at a meeting of stockholders. Our
bylaws provide that special meetings of stockholders may be called only by a
majority of the directors of our board or by a designated committee of the board
of directors. Stockholders are not permitted to call a special meeting or to
require that the board call a special meeting of stockholders. Our bylaws also
provide for a staggered board upon consummation of this offering.
In addition, the certificate of incorporation also authorizes the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of BigStar.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
The market price of our common stock could drop due to sales of a large number
of shares of our common stock or the perception that such sales could occur.
These factors could also make it more difficult to raise funds through future
offerings of common stock.
After this offering, 9,142,312 shares of common stock will be outstanding,
9,607,312 shares if the underwriters exercise their over-allotment option in
full. Of these shares, the 3,100,000 shares sold in this offering (3,565,000
shares if the over-allotment option is exercised in full) will be freely
tradeable without restriction under the Securities Act except for any shares
purchased by affiliates of BigStar. The remaining 6,042,312 shares are
restricted securities under the Securities Act and generally may not be sold
unless they are registered under the Securities Act or are sold pursuant to an
exemption from registration, such as the exemption provided by Rule 144 under
the Securities Act.
Our officers, directors and other stockholders have entered into lock-up
agreements pursuant to which they have agreed not to offer or sell any shares of
common stock for a period of 180 days after the date of this prospectus without
the prior written consent of Prudential Securities, on behalf of the
underwriters. Prudential Securities may, at any time and without notice, waive
any of the terms of those lock-up agreements specified in the underwriting
agreement. Following the lock-up period, approximately 3,395,209 shares will be
eligible for resale in the public market without registration under the
Securities Act, provided the holders of the shares comply with the volume
limitations and other conditions of Rule 144 as described below.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus any person, including an affiliate, who has
beneficially owned shares for a period of at least one year is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then-outstanding shares of common stock and (ii) the
average weekly trading volume in the common stock during the four calendar weeks
immediately preceding the date on which the notice of such sale on Form 144 is
filed with the Securities and Exchange Commission. In addition, a person who has
not been an affiliate of BigStar at any time during the 90 days immediately
preceding a sale and who has beneficially owned the shares for at least two
years, would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitations and other conditions described above. The foregoing
summary of Rule 144 is not a complete description.
As soon as practicable following the consummation of this offering, BigStar
intends to file a registration statement under the Securities Act to register
the shares of common stock available for issuance pursuant to its stock option
and incentive plans. See "Management -- Stock Option and Incentive Plans."
Shares issued pursuant to these plans after the effective date of that
registration statement will be available for sale in the open market subject to
the lock-up period and, for affiliates of BigStar, subject to Rule 144.
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REGISTRATION RIGHTS
As part of the private placement of common stock that we consummated from
January 1999 through April 1999, BigStar entered into registration rights
agreements with the private placement investors. In January 1999, BigStar also
entered into registration rights agreements with David Friedensohn and David
Levitsky. According to the terms of the registration rights agreements, holders
of 5,070,229 registrable shares of common stock, including warrants exercisable
for common stock, will be entitled to piggyback registration rights in
connection with any registration by BigStar of its securities for its own
account or the account of other securityholders. In the event that BigStar
proposes to register any shares of common stock under the Securities Act, the
holders of the piggyback registration rights are entitled to receive notice and
are entitled to include their shares in the registration statement. Holders of
our common stock with piggyback registration rights will not be able to
participate in this offering.
In addition, holders of the registrable shares, which includes shares of
common stock issuable upon the exercise of warrants and options that have been
granted registration rights, are entitled to demand that BigStar file a
registration statement with respect to the registration of the shares under the
Securities Act. BigStar is required to notify all holders of the registrable
shares in the event that holders of at least 25% of the then outstanding
registrable shares notify BigStar that they intend to offer or cause to be
offered for public sale at least 25% of the then outstanding registrable shares.
BigStar is not required to effect:
- more than two demand registrations;
- a demand registration until 180 days after the effectiveness of the
registration statement filed in connection with this offering;
- a demand registration for up to 180 days following a good faith
determination by the board that it would be detrimental to BigStar; and
- a demand registration for up to 180 days following the effectiveness of
any registration statement (other than on Form S-8) covering BigStar's
capital stock.
At any time after BigStar becomes eligible to file a registration statement
on Form S-3, which is expected to be one year after this offering, the holders
of registrable securities may require BigStar to file one registration statement
on Form S-3 covering their shares during any given 12 month period, but no more
than four registrations in total on Form S-3. However, BigStar is not required
to file a Form S-3 registration statement if the market value of the registrable
shares to be sold by the holders in any Form S-3 registration is less than $1.0
million.
These registration rights terminate five years following the consummation
of this offering. In addition, holders may not exercise registration rights once
they can sell their shares in the public market without registration.
50
<PAGE> 52
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated, Wasserstein Perella
Securities, Inc. and First Security Van Kasper are acting as representatives. We
are obligated to sell, and the underwriters are obligated to purchase, all of
the shares offered on the cover page of this prospectus, if any are purchased.
Subject to the conditions of the underwriting agreement, each underwriter has
severally agreed to purchase the shares indicated opposite its name:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS ---------
<S> <C>
Prudential Securities Incorporated..........................
Wasserstein Perella Securities, Inc.........................
First Security Van Kasper...................................
----------
Total..................................................
==========
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, an over-allotment option to purchase up
to 465,000 additional shares from us. If any additional shares are purchased,
the underwriters will severally purchase the shares in the same proportion as
provided in the table above.
The representatives of the underwriters have advised us that the shares
will be offered to the public at the offering price indicated on the cover page
of this prospectus. The underwriters may allow to selected dealers a concession
not in excess of $ per share and these dealers may reallow a concession not
in excess of $ per share to other dealers. After the shares are released for
sale to the public, the representatives may change the offering price and the
concessions.
We have agreed to pay to the underwriters the following fees, assuming both
no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
FEE WITHOUT EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by BigStar........... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $1.0 million in
expenses for this offering. We have agreed to indemnify the underwriters against
some liabilities, including liabilities under the Securities Act, or contribute
to payments that the underwriters may make in respect of these liabilities.
In February and April 1999, we paid an aggregate of $310,360 to First
Security Van Kasper as compensation in connection with private equity
financings. We also issued to First Security Van Kasper warrants to purchase
61,300 shares of common stock at an exercise price of $3.73 per share,
exercisable at any time prior to
51
<PAGE> 53
February 18, 2003, and warrants to purchase 69,840 shares of common stock at an
exercise price of $6.45 per share, exercisable at any time prior to April 20,
2002 .
In April 1998, we issued a warrant to D. Jonathan Merriman, a Managing
Director of First Security Van Kasper and a director of BigStar, to purchase
48,500 shares of common stock at a price per share of $1.22, exercisable at any
time prior to January 31, 2000. On January 1, 1999, we also issued a warrant to
Mr. Merriman to purchase 48,500 shares of common stock at a price per share of
$3.73, exercisable at any time prior to January 1, 2002.
We, our officers, directors and other stockholders have entered into
lock-up agreements under which we and they have agreed not to offer or sell any
shares of common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period of 180 days from the date of
this prospectus without the prior written consent of Prudential Securities, on
behalf of the underwriters. Prudential Securities may, at any time and without
notice, waive the terms of those lock-up agreements specified in the
underwriting agreement.
Before this offering, there has been no public market for the common stock
of BigStar. The public offering price, negotiated between BigStar and the
representatives, is based upon BigStar's financial and operating history and
condition, its prospects, the prospects for the industry we are in and
prevailing market conditions.
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
- Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment option.
- Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
- Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing of short
covering transactions.
These activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, in the over-the-counter market or on
any trading market.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- the Public Offers of Securities Regulations 1995,
- the Financial Services Act 1986, and
- the Financial Services Act 1986 (Investment Advertisements)(Exemptions)
Order 1996 (as amended).
52
<PAGE> 54
We have asked the underwriters to reserve shares for sale at the same
offering price directly to our officers, directors, employees and other business
affiliates or related third parties. The number of shares available for sale to
the general public in the offering will be reduced to the extent these persons
purchase the reserved shares.
LEGAL MATTERS
Orrick, Herrington & Sutcliffe LLP, New York, New York, will pass upon
various legal matters for us with respect to the validity of the shares of
common stock offered in this offering. Orrick, Herrington & Sutcliffe LLP
beneficially owns 19,400 shares of common stock. Schulte Roth & Zabel LLP, New
York, New York, will pass upon various legal matters for the underwriters.
EXPERTS
The audited financial statements of BigStar as of December 31, 1998 and for
the period from March 2, 1998 (date of inception) to December 31, 1998 included
in this prospectus and elsewhere in the registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
BigStar has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock being offered. This prospectus does not contain all of
the information shown in the registration statement or in the exhibits to the
registration statement. For further information with respect to BigStar and the
shares to be sold in this offering, reference is made to the registration
statement. You should not assume that the information in this prospectus and the
applicable supplement is accurate as of any date other than the date on the
front cover of this document.
You may read and copy any document BigStar files at the Securities and
Exchange Commission's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the Securities and Exchange Commission
at 1-800-SEC-0300 for further information on the operation of its public
reference rooms. In addition, we are required to file electronic versions of any
document we file with the Securities and Exchange Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) System. These documents are available
at the Securities and Exchange Commission's Internet site at http://www.sec.gov.
As a result of the offering, the information and reporting requirements of
the Securities Exchange Act of 1934, will apply to us. Therefore, under the
Securities Exchange Act, we will file periodic reports, proxy statements and
other information with the Securities and Exchange Commission. We intend to
furnish to our stockholders annual reports containing audited financial
information for each of our fiscal years.
53
<PAGE> 55
BIGSTAR ENTERTAINMENT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
PAGE
---
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited)............................................ F-3
Statements of Operations for the Periods March 2, 1998
(date of inception) to December 31, 1998, March 2, 1998
(inception) to March 31, 1998 (unaudited) and the three
months ended March 31, 1999 (unaudited)................ F-4
Statements of Stockholders' Equity (Deficit) for the
Periods March 2, 1998 (inception) to December 31, 1998,
and the three months ended March 31, 1999
(unaudited)............................................ F-5
Statements of Cash Flows for the Periods March 2, 1998
(inception) to December 31, 1998, March 2, 1998
(inception) to March 31, 1998 (unaudited) and the three
months ended March 31, 1999 (unaudited)................ F-6
NOTES TO FINANCIAL STATEMENTS............................... F-7
</TABLE>
F-1
<PAGE> 56
After the reverse stock split discussed in Note 11 to BigStar
Entertainment, Inc.'s financial statements is effected, we expect to be in the
position to render the following audit report.
ARTHUR ANDERSEN LLP
New York, New York
May 5, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BigStar Entertainment, Inc.:
We have audited the accompanying balance sheet of BigStar Entertainment,
Inc. (a Delaware corporation) as of December 31, 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
period from March 2, 1998 (inception) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BigStar Entertainment, Inc.
as of December 31, 1998, and the results of its operations and its cash flows
for the period from March 2, 1998 (inception) to December 31, 1998, in
conformity with generally accepted accounting principles.
New York, New York
May 5, 1999 (except
with regard to the matter
discussed in Note 11, as to
which the date is , 1999).
F-2
<PAGE> 57
BIGSTAR ENTERTAINMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
ASSETS:
Current assets --
Cash and cash equivalents...................... $ 363,124 $ 2,808,973
Cash held in escrow............................ 453,000 --
Accounts receivable, net of allowance of $5,000
and $13,146 as of December 31, 1998 and March
31, 1999 (unaudited), respectively........... 61,121 355,223
Prepaid expenses and other current assets...... 8,711 169,640
----------- -----------
Total current assets......................... 885,956 3,333,836
Property and equipment, net....................... 452,134 718,951
Deferred registration costs....................... -- 30,000
Other assets...................................... -- 11,333
----------- -----------
Total assets................................. $ 1,338,090 $ 4,094,120
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Current liabilities --
Accounts payable............................... $ 380,540 $ 1,300,638
Accrued expenses............................... 1,197,776 1,191,852
Accrued payroll costs.......................... 243,240 45,000
Current portion of capital lease obligation.... 2,226 2,270
----------- -----------
Total current liabilities.................... 1,823,782 2,539,760
----------- -----------
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATION....... 8,805 8,007
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 10,000,000
shares authorized; no shares issued and
outstanding at December 31, 1998 and March 31,
1999 (unaudited)............................... -- --
Common stock, $.001 par value; 40,000,000 shares
authorized; 3,022,307 and 4,647,535 issued and
outstanding at December 31, 1998 and March 31,
1999 (unaudited), respectively................. 3,022 4,646
Additional paid-in capital........................ 2,355,566 7,874,180
Subscribed stock.................................. 453,000 --
Deferred compensation............................. (64,414) (125,035)
Accumulated deficit............................... (3,241,671) (6,207,438)
----------- -----------
Total stockholders' equity (deficit)......... (494,497) 1,546,353
----------- -----------
Total liabilities and stockholders' equity
(deficit)................................. $ 1,338,090 $ 4,094,120
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 58
BIGSTAR ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 2, 1998 MARCH 2, 1998
(INCEPTION) (INCEPTION) THREE MONTHS
TO DECEMBER 31, TO MARCH 31, ENDED MARCH 31,
1998 1998 1999
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
NET SALES.......................... $ 789,107 $ -- $ 1,453,780
COST OF SALES...................... 714,443 -- 1,253,839
----------- ---------- -----------
Gross profit..................... 74,664 -- 199,941
OPERATING EXPENSES:
Sales and marketing.............. 1,467,075 -- 1,725,632
General and administrative....... 885,820 13,281 675,202
Web site and software
development................... 970,594 15,202 782,398
----------- ---------- -----------
Total operating expenses.... 3,323,489 28,483 3,183,232
----------- ---------- -----------
Loss from operations........ (3,248,825) (28,483) (2,983,291)
INTEREST INCOME, net............... 7,154 -- 17,524
----------- ---------- -----------
Net loss......................... $(3,241,671) $ (28,483) $(2,965,767)
=========== ========== ===========
PER SHARE INFORMATION:
Net loss per share --
Basic and diluted............. $ (1.25) $ (0.01) $ (0.77)
=========== ========== ===========
Weighted average common shares
outstanding --
Basic and diluted............. 2,602,784 2,077,167 3,863,606
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 59
BIGSTAR ENTERTAINMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN SUBSCRIBED DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK COMPENSATION DEFICIT EQUITY (DEFICIT)
--------- ------ ---------- ---------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 2, 1998
(inception)............... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders............. 1,940,000 1,940 8,060 -- -- -- 10,000
Issuance of common stock
for services............ 19,400 19 81 -- -- -- 100
Issuance of common stock,
net of $23,000 of
issuance costs.......... 939,717 940 1,947,268 -- -- -- 1,948,208
Subscribed stock.......... -- -- -- 453,000 -- -- 453,000
Issuance of stock options
for services............ -- -- 117,000 -- -- -- 117,000
Issuance of warrants for
services................ -- -- 54,300 -- -- -- 54,300
Employee stock option
compensation............ -- -- 14,706 -- -- -- 14,706
Deferred employee stock
option compensation..... -- -- 64,414 -- (64,414) -- --
Exercise of warrants...... 123,190 123 149,737 -- -- -- 149,860
Net loss.................. -- -- -- -- -- (3,241,671) (3,241,671)
--------- ------ ---------- -------- --------- ----------- -----------
BALANCE, December 31,
1998...................... 3,022,307 3,022 2,355,566 453,000 (64,414) (3,241,671) (494,497)
Issuance of common stock,
net of $108,351 of
issuance costs............ 302,480 302 1,021,752 -- -- -- 1,022,054
Issuance of common stock,
net of $356,735 of
issuance costs............ 1,252,326 1,252 4,322,098 -- -- -- 4,323,350
Issuance of common stock
upon exercise of
warrants.................. 70,422 70 85,598 -- -- -- 85,668
Issuance of stock options
for services.............. -- -- 6,888 -- -- -- 6,888
Issuance of warrants for
services.................. -- -- 9,265 -- -- -- 9,265
Employee stock option
compensation.............. -- -- 1,208 -- -- -- 1,208
Issuance of subscribed
stock..................... -- -- (453,000) -- -- (453,000)
Amortization of deferred
employee stock option
compensation.............. -- -- -- -- 11,184 -- 11,184
Deferred stock option and
warrant costs............. -- -- 71,805 -- (71,805) -- --
Net loss (unaudited)........ -- -- -- -- -- (2,965,767) (2,965,767)
--------- ------ ---------- -------- --------- ----------- -----------
BALANCE, March 31,
1999(unaudited)........... 4,647,535 $4,646 $7,874,180 $ -- $(125,035) $(6,207,438) $ 1,546,353
========= ====== ========== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 60
BIGSTAR ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 2, 1998 MARCH 2, 1998
(INCEPTION) (INCEPTION) THREE MONTHS
TO DECEMBER 31, TO MARCH 31, ENDED MARCH 31,
1998 1998 1999
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(3,241,671) $(28,483) $(2,965,767)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation and amortization............... 30,208 -- 47,484
Allowance for doubtful accounts............. 5,000 -- 8,146
Non-cash common stock option and warrant
expenses................................. 186,006 -- 28,545
Changes in assets and liabilities --
Cash held in escrow...................... (453,000) -- 453,000
Accounts receivable...................... (66,121) -- (302,248)
Prepaid expenses and other current
assets................................. (8,711) (20,500) (160,929)
Other assets............................. -- -- (11,333)
Accounts payable, accrued payroll costs
and accrued expenses................... 1,821,556 30,692 715,934
----------- -------- -----------
Net cash used in operating
activities.......................... (1,726,733) (18,291) (2,187,168)
----------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................ (470,342) (13,533) (314,301)
----------- -------- -----------
Net cash used in investing
activities.......................... (470,342) (13,533) (314,301)
----------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...... 2,108,168 303,559 5,431,072
Proceeds from private placement pending
closing.................................. 453,000 -- (453,000)
Deferred registration costs................. -- -- (30,000)
Repayment of capital lease obligations...... (969) -- (754)
----------- -------- -----------
Net cash provided by financing
activities.......................... 2,560,199 303,559 4,947,318
----------- -------- -----------
Net increase in cash and cash
equivalents......................... 363,124 271,735 2,445,849
CASH AND CASH EQUIVALENTS, beginning of
period...................................... -- -- 363,124
----------- -------- -----------
CASH AND CASH EQUIVALENTS, end of period...... $ 363,124 $271,735 $ 2,808,973
=========== ======== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest.... $ 2,300 $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Capital lease obligations incurred.......... $ 12,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 61
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
BigStar Entertainment, Inc. ("the Company") is an online filmed
entertainment superstore that sells videos, digital video discs, or DVDs, and
laserdiscs. The Company has four web sites that target purchasers of filmed
entertainment products. The Company's main web site, BigStar.com, offers
approximately 34,000 filmed entertainment products, including feature films and
educational, health and fitness and instructional videos. The Company's other
web sites are abcBigStar.com, which targets the children's filmed entertainment
market, BigStarDVD.com, which focuses on DVD enthusiasts, and Astrophile.com, a
content-only web site designed to attract customers to the Company's product web
sites.
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased. Included in the
balance at March 31, 1999 (unaudited) is a certificate of deposit for $180,600
securing a letter of credit issued in connection with the Company's facility
lease (Note 10).
Cash Held in Escrow
At December 31, 1998, $453,000 represents cash held in escrow for shares of
the Company's Common Stock which were issued in January 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. The Company recognizes
revenue from its web sites when the products are shipped to customers. 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.
F-7
<PAGE> 62
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Returns of product from customers are accepted in accordance with standard
industry practice. The Company provides an allowance for sales returns based on
historical returns experience.
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 and related order
fulfillment services is Baker & Taylor, Inc. ("B&T"). 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. There can be no assurance
that the Company will maintain its relationship with B&T beyond the term of its
existing strategic marketing agreement. Further, should the Company's
relationship with B&T terminate unexpectedly, or should its relationships
terminate with other providers of filmed entertainment products and related
fulfillment services, it may not be able to find an alternative, comparable
vendor capable of providing fulfillment services on satisfactory terms to the
Company and, therefore, there may be an adverse effect on the Company's results
of operations. In May 1999, the Company entered into a new Strategic Marketing
Agreement with B&T (Note 10).
Web Site and Software Development
Web site and software development expenses consist primarily of payroll and
related expenses for web site development, systems and telecommunications
operations personnel and consultants, systems and telecommunications
infrastructure related to the web sites. For the period March 2, 1998
(inception) to December 31, 1998, all web site and software development costs
have been expensed as incurred. In January 1999, the Company adopted Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. It also provides guidance on capitalization of
the costs incurred for computer software developed or obtained for internal use.
As a result of this adoption, the Company will expense all costs that are
incurred in the preliminary project stage for software developed for internal
use. In addition, the Company will capitalize all external direct costs of
materials and services consumed in developing or obtaining internal-use computer
software; payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use computer software
project (to the extent of the time spent directly on the project); and interest
costs incurred when developing computer software once the development has
reached the application development stage. All costs incurred for
F-8
<PAGE> 63
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
upgrades, maintenance and enhancements that do not result in additional
functionality will be expensed.
The Company does not intend to sell software to the public and the Company
has expensed all costs for the quarter ended March 31, 1999, as only maintenance
and operational costs relating to its web sites and previously developed
internal software have been incurred.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of those assets. Computer equipment, office equipment and furniture are
depreciated over estimated useful lives of 3 years. Leasehold improvements and
equipment held under capital lease are amortized utilizing the straight-line
method over the lesser of the estimated useful life of the asset or the term of
the lease.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets and for long-lived assets to be disposed of.
In performing a review for recoverability of long-lived assets, the Company
estimates the future cash flows expected to result from the use of an asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying values have
occurred as of December 31, 1998.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in results of operations in
the period that includes the enactment date. Because of the uncertainty
regarding the Company's future profitability, the future tax benefits of its
losses have been fully reserved for. Therefore, no benefit for the net operating
loss has been recorded in the accompanying financial statements.
F-9
<PAGE> 64
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Advertising Expense
Advertising and promotional costs are expensed as incurred. Advertising
expenses include the costs of online as well as traditional media. Promotional
expenses include the product costs of promotional items. These promotional items
are primarily videos distributed to customers who agree to receive notification
of future promotions. Advertising expenses were approximately $967,000 and
$959,000 for the three months ended March 31, 1999 (unaudited) and the period
from March 2, 1998 (inception) to December 31, 1998, respectively, and are
included in sales and marketing expense in the accompanying statements of
operations. There were no advertising or promotional costs for the period March
2, 1998 (inception) to March 31, 1998 (unaudited).
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Compensation expense related to employee stock options is recorded only if, on
the date of grant, the fair value of the underlying stock exceeds the exercise
price. The Company adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows entities to continue to
apply the provisions of APB Opinion No. 25 for transactions with employees and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock options as if the fair value based method of accounting in SFAS
No. 123 had been applied to these transactions.
The Company accounts for nonemployee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more readily determinable.
Basic and Diluted Net Loss Per Common Share
The Company accounts for net loss per common share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." In accordance with SFAS No.
128 and the Securities and Exchange Commission Staff Accounting Bulletin No. 98,
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 period from March 2, 1998 (inception)
to December 31, 1998 and for the three months ended March 31, 1999 (unaudited)
does not include the impact of 932,034 and 1,653,648 common stock options and
warrants then outstanding, respectively, as the effect of their inclusion would
be anti-dilutive.
F-10
<PAGE> 65
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 period from March 2, 1998 (inception) to
December 31, 1998, the period from March 2, 1998 (inception) to March 31, 1998
(unaudited) and the three months ended March 31, 1999 (unaudited).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
which establishes standards for the way that a public enterprise reports
information about operating segments in annual financial statements, and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years must be restated. Management has
determined that it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. This
statement is not expected to affect the Company since it does not currently
engage in derivative instruments or hedging activities.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial information included herein as of March 31, 1999,
for the period from March 2, 1998 (inception) to March 31, 1998 and for the
three months ended March 31, 1999, have been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited financial statements, reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The results of operations for interim periods are not
necessarily indicative of the results expected for a full year.
2. BUSINESS AND CREDIT CONCENTRATIONS
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash, accounts receivable, accounts payable
and accrued liabilities. The carrying amounts of these instruments approximate
fair value. The carrying
F-11
<PAGE> 66
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amount of the Company's capital lease approximates the fair value of this
instrument based upon management's best estimate of interest rates.
The Company maintains cash with a domestic financial institution. The
Company performs periodic evaluations of the relative credit standing of this
institution. From time to time, the Company's cash balances with this financial
institution may exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are primarily concentrated in the United States.
The Company performs credit card authorizations before products are shipped to
reduce the risk of fraudulent credit card use.
For the period from March 2, 1998 (inception) to March 31, 1998 (unaudited)
and the three months ended March 31, 1999 (unaudited) and the period from March
2, 1998 (inception) to December 31, 1998, there were no customers that accounted
for over 10% of total revenues generated by the Company, or of gross accounts
receivable at December 31, 1998 and March 31, 1999 (unaudited).
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Computer equipment....................... $449,548 $714,336
Office equipment and furniture........... 32,794 82,307
-------- --------
482,342 796,643
Less -- Accumulated depreciation and
amortization........................... 30,208 77,692
-------- --------
$452,134 $718,951
======== ========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Purchased video costs.................... $ 449,548 $ 696,825
Promotional costs........................ -- 215,000
Professional and consulting fees......... 78,025 119,431
Web advertising.......................... 364,586 60,855
Accrued purchased equipment costs........ 141,794 --
Other.................................... 163,823 99,741
---------- ----------
Total.......................... $1,197,776 $1,191,852
========== ==========
</TABLE>
F-12
<PAGE> 67
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
No provision for U.S. federal or state income taxes has been recorded for
the period from March 2, 1998 (inception) to December 31, 1998, the period from
March 2, 1998 (inception) to March 31, 1998 and the three months ended March 31,
1999 as the Company has incurred operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
DECEMBER 31, 1998 (UNAUDITED)
----------------- -----------------
<S> <C> <C>
Deferred tax assets, net:
Net operating loss carryforwards....... $ 1,102,000 $ 2,110,000
Allowance for sales returns and bad
debt................................ 10,200 5,149
Deferred compensation.................. 5,000 8,802
Less -- Valuation allowance............ (1,117,200) (2,123,951)
----------- -----------
Deferred tax assets, net............ $ -- $ --
=========== ===========
</TABLE>
Realization of deferred tax assets is dependent upon available future
earnings. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes that it is not more likely than
not that these assets will be realized. No income tax benefit has been recorded
for all periods presented because of the valuation allowance.
As of December 31, 1998 and March 31, 1999 (unaudited), the Company had net
operating loss carryforwards ("NOLs") for federal income tax purposes of
approximately $3,242,000 and $6,207,000 (unaudited), respectively. There can be
no assurance that the Company will realize the benefit of the NOLs. The federal
NOLs are available to offset future taxable income and expire in 2019 if not
utilized. Under Section 382 of the Internal Revenue Code, these NOLs may be
limited due to ownership changes.
6. CAPITAL LEASE OBLIGATIONS
At December 31, 1998 the Company was committed under a capital lease
agreement for office equipment. The asset and liability under the capital lease
are recorded at the lower of the present value of minimum lease payments or the
fair market value of the asset. At December 31, 1998, the carrying value of the
asset under capital lease was approximately $12,000. The interest rate on the
capital lease was 8% at December 31, 1998.
F-13
<PAGE> 68
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under the capital lease agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 3,011
2000...................................................... 3,011
2001...................................................... 3,011
2002...................................................... 3,011
2003...................................................... 753
-------
Total minimum lease payments...................... 12,797
Less --
Amounts representing interest.......................... 1,766
-------
Total minimum lease payments excluding interest........ $11,031
=======
Current portion........................................ $ 2,226
=======
Long-term portion...................................... $ 8,805
=======
</TABLE>
7. STOCKHOLDERS' EQUITY (DEFICIT)
Upon incorporation in March 1998, the Company issued 1,940,000 shares of
its common stock to its founders at $0.0052 per share. In addition, 19,400
shares of common stock were issued for legal services rendered in connection
with the incorporation of the Company. The Company valued the 19,400 shares
issued at a price of $0.0052 per share, which management deemed to be the fair
value of the common stock on the date of issuance. As such, the Company recorded
a charge to operations of $100, based upon the Company's determination of the
fair value of the shares issued, which was more readily measurable than the
value of the services performed.
From March through May 1998, the Company entered into Stock Purchase
Agreements with several investors pursuant to which the Company sold 472,677
shares of its common stock at $1.22 per share of which 118,046 shares were sold
to related parties for net proceeds of $575,008.
From July through October 1998, the Company entered into Stock Purchase
Agreements with several investors pursuant to which the Company sold 467,040
shares of its common stock at $2.99 per share for net proceeds of $1,373,200. In
addition, warrants to purchase 45,745 shares of the Company's common stock at
$2.99 per share were issued for investment advisory services. The Company
determined the fair market value of the warrants under the Black-Scholes Option
Pricing Model and recorded the aggregate fair value of the warrants of $12,183
as offering expenses for the sale of the common stock.
Warrants
During 1998, in connection with certain stock purchase agreements, the
Company issued an aggregate of 193,612 warrants, each to purchase one share of
common stock
F-14
<PAGE> 69
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at an exercise price of $1.22. The Company determined the fair market value of
the warrants under the Black-Scholes Option Pricing Model and recorded the
aggregate fair value of the warrants of $12,677 as offering expenses and an
offset to the proceeds received for the sale of the common stock.
During April 1998, a director of the Company provided consulting services
to the Company and received 48,500 warrants to purchase common stock,
exercisable at $1.22 per share. The Company determined the fair market value of
the warrants under the Black-Scholes Option Pricing Model and recorded a charge
to operations for consulting expenses of $6,150 in 1998.
During 1998, the Company issued 203,700 warrants to purchase common stock
at purchase prices between $1.22 and $3.73 for services rendered in lieu of cash
payments. As such, the Company recorded a charge of approximately $54,000 in the
accompanying statement of operations based upon a valuation of the fair market
value of the warrants on the date of grant under the Black-Scholes Option
Pricing Model.
In January and February 1999, in connection with certain stock purchase
agreements, the Company issued an aggregate of 141,651 warrants, each to
purchase one share of common stock at an exercise price of $3.73 (Note 10).
In January 1999, the Company issued 19,400 warrants, each to purchase one
share of common stock at an exercise price of $3.73 for services rendered in
lieu of cash payments. As such, the Company recorded a charge of $9,265 in the
accompanying statement of operations based upon a valuation of the fair market
value of the warrant on the date of grant under the Black-Scholes Option Pricing
Model.
In addition, in January 1999, the Company issued 48,500 warrants, each to
purchase one share of common stock at an exercise price of $3.73 for investment
advisory services to a director of the Company. As such, the Company determined
the fair market value of the warrants under the Black-Scholes Option Pricing
Model and recorded the aggregate fair value of the warrants of $23,163 as
offering expenses for the sale of the common stock.
F-15
<PAGE> 70
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of all warrants granted for the period from
March 2, 1998 (inception) to December 31, 1998 and for the three months ended
March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WARRANTS EXERCISE
GRANTED PRICE
--------- --------
<S> <C> <C>
Outstanding at March 2, 1998............................. -- $ --
Granted................................................ 491,557 2.19
Exercised.............................................. (123,190) 1.22
Canceled............................................... -- --
--------- -----
Outstanding at December 31, 1998......................... 368,367 2.52
Granted................................................ 209,551 3.73
Exercised.............................................. (70,422) 1.22
Canceled............................................... -- --
--------- -----
Outstanding at March 31, 1999 (unaudited)................ 507,496 $3.20
========= =====
</TABLE>
As of December 31, 1998 and March 31, 1999, the following number of
warrants to purchase common stock remain outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Exercise Price:
$1.22......................................... 138,322 67,900
$2.99......................................... 133,045 133,045
$3.73......................................... 97,000 306,551
------- ----------
Total warrants outstanding...................... 368,367 507,496
======= ==========
</TABLE>
8. STOCK OPTION PLANS
In 1998, the Company adopted the 1998 Stock Option and Incentive Plan
("1998 Plan") pursuant to which an aggregate of 485,000 shares of common stock
were reserved for issuance to directors, officers, employees and consultants of
the Company. The 1998 Plan provides for awards of both non-qualified stock
options and incentive stock options within the meaning of Section 422A of the
Internal Revenue Code, stock appreciation rights, restricted stock subject to
forfeiture and restrictions on transfer, and performance awards entitling the
recipient to receive cash or common stock in the future following the attainment
of performance goals determined by the board of directors.
The 1998 Plan is administered by the Board of Directors, which has the sole
discretion to select the employees, officers and consultants to whom awards are
made, to determine the nature and amounts of such awards and to interpret,
construe and
F-16
<PAGE> 71
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
implement the 1998 Plan. As of December 31, 1998 and March 31, 1999, options to
purchase 481,217 shares of the Company's common stock have been granted and
remain outstanding under the 1998 Plan.
In October 1998, the Company adopted the 1999 Stock Option and Incentive
Plan ("1999 Plan") pursuant to which an aggregate of 291,000 shares of common
stock were reserved for issuance to directors, officers, employees and
consultants of the Company. This number of shares was increased to 970,000
shares in March 1999 and increased to 1,455,000 shares in June 1999. The 1999
Plan provides for awards of both non-qualified stock options and incentive stock
options within the meaning of Section 422A of the Internal Revenue Code, stock
appreciation rights, restricted stock subject to forfeiture and restrictions on
transfer, and performance awards entitling the recipient to receive cash or
common stock in the future following the attainment of performance goals
determined by the Board of Directors. The 1999 Plan is administered by the Board
of Directors, which has the sole discretion to select the employees, officers
and consultants to whom awards are made, to determine the nature and amounts of
such awards and to interpret, construe and implement the 1999 Plan. Incentive
options granted to stockholders who own more than 10% of the outstanding stock
of the Company must be issued at 110% of the fair market value of the stock on
the date that the options are granted. As of December 31, 1998 and March 31,
1999 (unaudited), options to purchase 82,450 and 664,935, respectively, of the
Company's common stock have been granted and remain outstanding under the 1999
Plan.
Had compensation under the 1998 and 1999 Stock Option Plans been determined
consistent with the provisions of SFAS No. 123, the effect on the Company's net
loss and basic and diluted loss per share would have been changed to the
following pro forma amounts for the period from March 2, 1998 (inception) to
December 31, 1998 and March 2, 1998 (inception) to March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Net loss, as reported.................... $(3,241,671) $(2,965,767)
Net loss, pro forma...................... (3,274,424) (3,027,495)
Basic and diluted loss per share, as
reported............................... (1.25) (0.77)
Basic and diluted loss per share, pro
forma.................................. (1.26) (0.78)
</TABLE>
F-17
<PAGE> 72
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity under the 1998 and 1999 Plans during the periods
indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
GRANTED EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding at March 2, 1998.................. -- $ --
Granted............................................. 563,667 1.46
Canceled and Exercised.............................. -- --
--------- -----
Outstanding at December 31, 1998...................... 563,667 1.46
========= =====
Granted............................................. 582,485 3.96
Canceled and Exercised.............................. -- --
--------- -----
Outstanding at March 31, 1999 (unaudited)............. 1,146,152 $2.74
========= =====
Exercisable at March 31, 1999 (unaudited)............. 454,904 $1.30
========= =====
</TABLE>
The fair market value of each option grant has been estimated on the date
of grant using the Black-Scholes Option Pricing Model based upon expected option
lives of 3 to 7 years; risk free interest rate of between 4.49% and 5.49%;
expected volatility of 0% and a dividend yield of 0%.
The weighted-average remaining life of the options outstanding at December
31, 1998 and March 31, 1999 is 5.67 and 7.67 years, respectively. The
weighted-average fair value of options granted is $1.67 and $2.72 at December
31, 1998 and March 31, 1999, respectively.
For the period from March 2, 1998 (date of inception) to December 31, 1998,
the Company recorded compensation expense and deferred compensation expense of
$14,706 and $64,414, respectively, in connection with the grant of 44,620
options to employees. These options were granted at an exercise price per share
of $1.22 per share. At the time of the grant, the fair value of the Company's
common stock was $2.99 per share. Therefore, the Company calculated the
compensation expense and deferred expense as the difference between the fair
value of the common stock and the exercise price of the option on the date of
the grant.
For the three months ended March 31, 1999, the Company recorded
compensation expense and deferred compensation expense of $1,208 and $16,917
(unaudited), respectively, in connection with the grant of 24,250 options to
employees representing the difference between the fair value of the Company's
common stock at the date of grant and the exercise price of the related options.
During the three month period ended March 31, 1999, the Company recorded
deferred costs of $54,888 (unaudited) in connection with the grant of 48,500
options issued to consultants. Deferred compensation is presented as a reduction
of stockholders' deficit and amortized over the vesting period, typically two
years, of the applicable options.
F-18
<PAGE> 73
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additionally the Company recorded $117,000 for the period ended December
31, 1998 and $6,888 for the three months ended March 31, 1999 (unaudited) of
consulting expense related to 417,197 options granted to various consultants.
The exercise prices of the options were $1.22 to $2.99 and they expire five
years from the date of grant. All of the options were valued using the
Black-Scholes Option Pricing Model of valuation.
9. COMMITMENTS AND CONTINGENCIES
Effective February 1, 1999, the Company entered into a lease for its
facilities, which expires on September 30, 2002. In addition, the Company
maintains operating leases on certain equipment. Future minimum obligations
under noncancellable operating leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
For the year ending:
1999...................................................... $165,550
2000...................................................... 180,600
2001...................................................... 180,600
2002...................................................... 135,450
--------
$662,200
========
</TABLE>
Rent expense under its operating lease for its facilities for the period
from March 2, 1998 (date of inception) to December 31, 1998 was $8,000. In lieu
of cash payment for rent, the Company issued warrants to the landlord to
purchase 19,400 shares of the Company's common stock at a price of $1.22 per
share on March 15, 1998. These warrants were valued by the Company using the
Black-Scholes Option Pricing Model, considering the fair value of the Company's
common stock to be $1.22 at the date the warrants were granted. As such, the
Company recorded a charge to operations of $8,000, based upon the Company's
determination of the fair value of the warrants issued, which was more readily
measurable than the value of the services performed.
As of December 31, 1998, the Company had entered into various marketing
agreements with third parties whereby the third parties provide advertising
services and database links to the Company's web sites. Fees to be paid by the
Company under these agreements, which are generally cancellable with 60 days
notice, are determined as fixed monthly payments, or are calculated on a per
"click-through" basis, or as a percentage of net revenues, as defined in the
related agreements. As of December 31, 1998 and March 31, 1999 (unaudited), the
Company had committed to approximately $456,000 and $550,000, respectively, in
minimum payments under these agreements.
Employment Agreement
On March 15, 1999, the Company entered into an employment agreement with
its Chairman and Chief Executive Officer. The agreement obligates the Company to
pay an annual salary of $160,000 in 1999, $200,000 in 2000 and $250,000 in 2001.
The
F-19
<PAGE> 74
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company must pay a guaranteed bonus of $90,000 in 1999, $20,000 in 2000 ($40,000
if the Company has publicly traded shares) and $75,000 in 2001 ($150,000 if the
Company has publicly traded shares). In addition, the Chairman and Chief
Executive Officer was granted options to purchase 194,000 shares of common stock
at an exercise price of $4.12 per share pursuant to the 1999 Plan. In
management's opinion, these options were granted with an exercise price at or
above the fair market value of the Company's common stock at the date of grant
and therefore, no compensation expense was incurred by the Company. The shares
vest in equal installments over 48 months and are exercisable until the earlier
of five years or 90 days from the Chairman and Chief Executive Officer's
termination of employment with the Company.
Legal Proceedings
From time to time, the Company may be involved in various legal proceedings
and other matters arising in the normal course of business. The Company
currently has no material outstanding legal proceedings.
10. SUBSEQUENT EVENTS
Initial Public Offering
The Company is pursuing an initial public offering of its common stock. The
offering contemplates the sale of 3,100,000 shares of common stock at an
offering price of $12.00 to $14.00 before underwriting commissions and offering
expenses.
Facility Lease
As discussed in Note 9, effective February 1, 1999, the Company entered
into a 44 month lease for office space. Pursuant to the terms of the lease, the
Company entered into a Standby Letter of Credit for $180,600 and deposited funds
of $180,600 in a certificate of deposit as collateral (Note 9). The Company's
Chief Executive Officer is a partial guarantor for the lease.
Issuance of Common Stock and Warrants
In January and February 1999, the Company sold 1,554,808 shares of its
common stock at $3.73 per share for total proceeds of $5,345,404, net of
issuance costs of $465,086. In addition, warrants to purchase 141,651 shares of
the Company's common stock at $3.73 per share were issued to placement agents as
part of these transactions, of which 61,300 of the warrants were granted to an
entity of which one of the Company's directors is the managing director. As
such, the Company determined the fair market value of the warrants under the
Black-Scholes Option Pricing Model and recorded the aggregate fair value of the
warrants of $93,956 as offering expenses for the sale of the common stock.
Warrants to purchase 70,422 shares of common stock were also exercised in
January 1999 for total proceeds of $85,668.
During April 1999, the Company sold 802,758 shares of common stock to an
entity, of which one of the Company's directors is the managing director, at a
price of $3.73 per share for total proceeds of $2,850,000, net of issuance costs
of $150,000. The
F-20
<PAGE> 75
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company also issued a warrant to purchase 116,400 shares of the Company's common
stock at $5.15 per share. As such, the Company determined the fair market value
of the warrants to be immaterial under the Black-Scholes Option Pricing Model as
the warrants were issued at an exercise price that was above the then fair
market value of the Company's common stock. In connection with the sale of the
common stock, warrants to purchase 69,840 shares of the Company's common stock
at $6.45 per share were distributed to the placement agent, of which another of
the Company's directors is the managing director. As such, the Company
determined the fair market value of the warrants under the Black-Scholes Option
Pricing Model and recorded the aggregate fair value of the warrants of $24,322
as offering expenses and an offset to the proceeds received for the sale of the
common stock.
In addition, during April 1999, the Company sold an additional 592,019
shares of common stock at a price of $6.19 per share for total proceeds of
approximately $3,662,000.
On April 20, 1999, the Company issued a warrant to a director of the
Company to purchase 24,250 shares of common stock at a price per share of $4.12,
exercisable at any time prior to April 20, 2003.
From January through April 1999, the Company entered into registration
rights agreements with private placement investors. In addition, in January
1999, the Company entered into registration rights agreements with David
Friedensohn and David Levitsky. These registration rights agreements entitle
these persons to piggyback registration rights in connection with any
registration by the Company of its securities. These persons are also entitled
to demand registration rights enabling these persons to have their shares
registered if holders of at least 25% of the then outstanding registrable shares
demand that the Company file a registration statement under the Securities Act.
Stock Split
On May 3, 1999, the Company enacted a four-for-one stock split of its
common stock. Accordingly, all share and per share information in the
accompanying financial statements has been retroactively restated to reflect the
effect of the stock split.
Supplier Agreement
In May 1999, the Company entered into a Strategic Marketing Agreement
("Supplier Agreement") with B&T. The Supplier Agreement expires in December
2000, but has an automatic renewal option for 24 months unless cancelled in
writing by either party with ninety days notice prior to the end of the
preceding term, and includes specific credit terms as defined in the agreement.
In addition, the Company issued warrants to purchase 29,100 shares of the
Company's common stock at a price of $8.25 per share, exercisable at any time
over the next three years. As such, the Company determined the fair market value
of the warrants to be immaterial under the Black-Scholes Option Pricing Model as
the warrants were issued at an exercise price that was above the then fair
market value of the Company's Common Stock.
F-21
<PAGE> 76
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. EVENTS OCCURRING AFTER THE DATE OF THE AUDITOR'S REPORT
On July 6, 1999 the Board of Directors approved a .485-for-one reverse
split of the Company's common stock to take effect on the effective date of the
Company's initial public offering. Accordingly, all share and per share
information in the accompanying financial statements has been retroactively
restated to reflect the effect of the reverse split.
F-22
<PAGE> 77
- --------------------------------------------------------------------------------
Until , 1999, all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
[BIGSTAR.COM LOGO]
PRUDENTIAL SECURITIES
WASSERSTEIN PERELLA SECURITIES, INC.
FIRST SECURITY VAN KASPER
- --------------------------------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by BigStar in connection with
the sale of the securities being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the Nasdaq/NMS listing fee.
<TABLE>
<S> <C>
SEC Registration Fee....................................... $ 13,875
NASD Filing Fee............................................ 5,491
Nasdaq/NMS Listing Fee..................................... 84,875
Printing Expenses.......................................... 340,000
Legal Fees and Expenses.................................... 375,000
Accounting Fees and Expenses............................... 115,000
Blue Sky Fees and Expenses................................. 5,000
Transfer Agent and Registrar Fees.......................... 7,500
Miscellaneous.............................................. 53,259
Total...................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant.
The Delaware General Corporation Law provides that Section 145 is not
exclusive of other rights to which those seeking indemnification may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise. The Registrant's Bylaws provides for indemnification by the
Registrant of its directors, officers and employees in connection with any
proceeding to the fullest extent permitted by the Delaware General Corporation
Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's certificate of
II-1
<PAGE> 79
incorporation provides for indemnification by the Registrant of its directors in
connection with any proceeding to the fullest extent permitted by law.
The Registrant has obtained directors and officers insurance providing
indemnification for the Registrant's directors, officers and employees for
certain liabilities.
Reference is also made to the underwriting agreement filed as Exhibit 1.1
to the registration statement for information concerning the underwriters'
obligation to indemnify the Registrant and its officers and directors in certain
circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of the transactions by the Registrant during the
past three years involving sales of the Registrant's securities that were not
registered under the Securities Act:
1. On March 3, 1998, in connection with our formation, we issued and sold
(i) 1,067,000 shares of common stock at a purchase price of $0.0052 per
share to David Friedensohn, (ii) 873,000 shares of common stock at a
purchase price of $0.0052 per share to David Levitsky and (iii) 19,400
shares of common stock to Orrick, Herrington & Sutcliffe LLP for legal
services performed in connection with our formation and $100.00 in
consideration.
2. On March 11, 1998, we issued and sold 123,190 shares of common stock at
a purchase price of $1.22 per share to Morton H. Meyerson. We also
issued a warrant to Mr. Meyerson to purchase 123,190 shares of common
stock at a price per share of $1.22, exercisable at any time prior to
December 31, 1998.
3. On March 15, 1998, we issued a warrant to Andrew J. Pickup to purchase
19,400 shares of common stock at a price per share of $1.22,
exercisable at any time prior to December 31, 1999.
4. On March 17, 1998, we issued and sold 157,721 shares of common stock at
a price per share of $1.22 to CounterPoint Capital Management, L.L.C.
("CounterPoint Capital Management"), AJD Ventures, L.L.C. ("AJD") and
CounterPoint Master L.L.C. We also issued a warrant to each of
CounterPoint Capital Management and AJD to purchase 48,500 and 21,922
shares of common stock, respectively, at a price per share of $1.22,
exercisable at any time prior to January 31, 1999.
5. On March 17, 1998, we issued and sold 49,323 shares of common stock at
a purchase price of $1.22 per share to the Oscar Friedensohn Revocable
Trust and the Adele Friedensohn Revocable Trust.
6. On March 29, 1998, we issued and sold 68,723 shares of common stock at
a purchase price of $1.22 per share to the following entities: Richard
A. Horsch, Jane Friedensohn and Herbert Levitsky.
7. On April 1, 1998, we issued a warrant to D. Jonathan Merriman to
purchase 48,500 shares of common stock at a price per share of $1.22,
exercisable at any time prior to January 31, 2000.
II-2
<PAGE> 80
8. On May 21, 1998, we issued and sold 73,720 shares of common stock at a
purchase price of $1.22 per share to Morton H. Meyerson.
9. On July 7, 1998, we issued and sold 16,725 shares of common stock at a
purchase price of $2.99 to Paul Kagan. We also issued a warrant to Mr.
Kagan to purchase 19,400 shares of common stock at a price per share of
$2.99, exercisable at any time prior to December 31, 1999.
10. On July 28, 1998, we issued and sold 19,400 shares of common stock at
a purchase price of $2.99 per share to Trinkaus & Burkhardt.
11. On August 5, 1998, we issued and sold 16,725 shares of common stock at
a purchase price of $2.99 to Paul Kagan.
12. On August 10, 1998, we issued and sold 144,530 shares of common stock
at a purchase price of $2.99 per share to B.F. & W. Realty Company and
The Levitin Family Charitable Trust.
13. On August 12, 1998, we issued and sold 42,680 shares of common stock
at a purchase price of $2.99 per share to Marshall M. Becker, IRA
f/b/o Stanley S. Becker, DLJSC as Custodian, and Kenneth R. Levine.
14. On August 17, 1998, we issued and sold 135,800 shares of common stock
at a purchase price of $2.99 per share to BT Holdings, Inc.
15. On August 31, 1998, we issued and sold 58,200 shares of common stock
at a purchase price of $2.99 per share to Howard Balter and Rachel
BenSimon.
16. On September 22, 1998, we issued to MovieFone, Inc. a warrant to
purchase 67,900 shares of common stock at a price per share of $2.99,
exercisable at any time prior to September 22, 2001 and a warrant to
purchase 97,000 shares of common stock at a price per share of $3.73,
exercisable at any time prior to September 22, 2001.
17. On September 30, 1998, we issued a warrant to each of Kenneth R.
Levine and Marshall M. Becker to purchase 27,447 and 18,298 shares of
common stock, respectively, at a price per share of $2.99.
18. On October 2, 1998, we issued and sold 32,980 shares of common stock
at a purchase price of $2.99 per share to Stephen J. Clearman.
19. On December 30, 1998, we issued and sold 123,190 shares of common
stock at a purchase price of $1.22 per share to Morton H. Meyerson
upon Mr. Meyerson's exercise of his warrant to purchase common stock.
20. On January 1, 1999, we issued a warrant to D. Jonathan Merriman to
purchase 48,500 shares of common stock at a price per share of $3.73,
exercisable at any time prior to January 1, 2002.
21. On January 1, 1999, we issued a warrant to Andrew J. Pickup to
purchase 19,400 shares of common stock at a price per share of $3.73,
exercisable at any time prior to January 1, 2002.
22. On January 25, 1999, we issued and sold 48,500 and 21,922 shares of
common stock at a purchase price of $1.22 per share to CounterPoint
II-3
<PAGE> 81
Capital Management and AJD, respectively, upon each entity's exercise of a
warrant to purchase common stock.
23. On January 29, 1999, we issued and sold 302,480 shares of common stock
at a purchase price of $3.73 per share to the following entities: The
Arel Company, Profit Sharing Plan & Trust of Samuel E. Benjamin, MD,
Four Square Investments, LLC, Rentrak, Jeffrey Greenberg, Robert H.
Kriessman, James G. Kreissman, Douglas M. McGraime, James R. Eddings,
Kiam Interests, Ltd., Steven Stickler, Roger C. Dickinson, David G.
Sandelovsky, Dryden Advisory Group LLC, Brivis Investments, Ltd.,
Andrew Gershon, Ted. M. Goldberg, D. Jonathan Merriman, David G.
Catlin, John A. Johnson IRA, Nazareth Festekjian and Andrew Fleiss.
24. On January 29, 1999, we issued warrants to purchase 25,738 shares of
common stock for services rendered at a price per share of $3.73,
exercisable at any time prior to January 29, 2003 to the following
entities: First Equity Capital Securities, Inc. ("First Equity"),
Kenneth R. Levine and Marshall M. Becker.
25. On February 18, 1999, we issued and sold 1,252,326 shares of common
stock at a purchase price of $3.73 per share to the following
entities: Steven Glassman, Harald A. Kennedy, Barry Plost, George
Furla, Thomas A. Biebel Living Trust U/A/O 7/1/92 as amended, Herbert
B. Weaver Jr., Paul Kagan, Magnus J. Le'Vicki, John O. Harry, Gabelli
Funds, Inc., Hans Ullmark & Marie-Louise Ullmark, Mats H. Nilsson,
Beth Glassman IRA Delaware Charter Custodian, Emerging Technology
Limited, Howard Schraub, Herman O. Haenert IRA Delaware Charter Trust,
Thomas N. Barreca, Thomas Glendahl, Nordiska Fondkommission AB, Mans
Palmstierna, Michael Texido, Brian Kucich, Jack Malinow, Talisman
Capital Inc., Talisman Capital Opportunity Fund Ltd., Ronald Altbach &
Elka Altbach, Global Undervalued Securities Fund, L.P., Guarantee &
Trust Co. TTEE FBO Brian M. Kucich, Todd Jadwin, Global Strategic
Holdings Limited, Ocean Strategic Holdings Limited, Wangary Associates
S.A., Zebra Strategic Holdings Limited, Barbara Miller, Gem Management
Limited, Gary Najarian, CommVest LLC, John Mitnick, Herbert Levitsky,
Joseph F. Wayland, Michael V. DeFelice, Scot Powell French, Vanderlip
Children's 1998 Trust, Henrik N. Vanderlip, Ibra B. Morales, Patricia
Hopkins, MD, IRA, Lance Stuart Korman, I. Douglas Sherman, DLJ & P
Limited Partnership, Lars Enochson, Successway Holdings Ltd., Ronald
Nash, Herbert Lapidus, Gaynor Limited, Marvin S. Rosen, Charles Schwab
& Co. Inc. FBO Carolyn Scanlan IRA, Stephen Besen, Chatterjee Fund
Management L.P., Gem Singapore Pte. Ltd., Richard Cohen and Michael
Groveman.
26. On February 18, 1999, we issued warrants to purchase 115,913 shares of
common stock for services rendered at a price per share of $3.73,
exercisable at any time prior to February 18, 2003 to the following
entities: First Equity, Kenneth R. Levine, Marshall M. Becker, Van
Kasper & Company and Yee, Desmond, Schroeder & Allen, Inc.
II-4
<PAGE> 82
27. On April 1, 1999, we issued a warrant to Icon International, Inc. to
purchase 121,250 shares of common stock at a price per share of $5.15,
exercisable at any time prior to March 31, 2001.
28. On April 1, 1999, we issued and sold 802,758 shares of common stock at
a purchase price of $3.73 per share to Storie Partners, L.P.
("Storie") and issued a warrant to Storie to purchase an additional
116,400 shares of common stock at a price per share of $5.15,
exercisable at any time prior to April 1, 2003.
29. On April 20, 1999, we issued a warrant to William Lansing to purchase
24,250 shares of common stock at a price per share of $4.12,
exercisable at any time prior to April 20, 2003.
30. On April 20, 1999, we issued a warrant to First Security Van Kasper &
Company to purchase 69,840 shares of common stock at a price per share
of $6.45, exercisable at any time prior to April 20, 2002.
31. On April 28, 1999, we issued and sold 592,019 shares of common stock
at a purchase price of $6.19 per share to the following entities: JJJ
Investment Company, Jan Carlzon, Stephen Cyrus Freidheim, Carl
Palmstierna, Randi Slifka, Paul Kagan, Jih-Forg Kao, Robert London,
Dennis Mykytyn and Peter Tornquist.
32. On May 3, 1999, we issued a warrant to Baker & Taylor, Inc. to
purchase 29,100 shares of common stock at a price per share of $8.25,
exercisable at any time prior to May 3, 2002.
33. On May 5, 1999, we issued to Earthlink Network, Inc. warrants to
purchase 33,950 shares of common stock at a price per share of $20.62.
Exemption from registration for the transactions described above was
claimed pursuant to Section 4(2) of the Securities Act of 1933, as amended,
regarding transactions by the issuer not involving a public offering, in that
these transactions were made, without general solicitation or advertising, to
sophisticated investors with access to all relevant information necessary to
evaluate these investments and who represented to the Registrant that the shares
were being acquired for investment.
II-5
<PAGE> 83
ITEM 16. EXHIBITS.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation of the Registrant.**
3.2 Certificate of Amendment to Certificate of Incorporation.**
3.3 Amended and Restated Bylaws of the Registrant.
3.4 Certificate of Amendment to Certificate of Incorporation,
effective on completion of this offering.
4.1 Form of Registrant's Common Stock Certificate.
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP.
10.1 Form of Indemnification Agreement.**
10.2 1998 Stock Option and Incentive Plan.**
10.3 Amended 1999 Stock Option and Incentive Plan.
10.4 Employment Agreement, dated March 15, 1999 by and between
David Friedensohn and the Registrant.**
10.5 Distribution Agreement dated February 18, 1998 by and
between Baker & Taylor and the Registrant.+**
10.6 Strategic Marketing Agreement dated as of May 1999 by and
between Baker & Taylor and the Registrant.+
10.7 Rights Agreement among the Registrant and each of the
stockholders identified therein.**
10.8 Agreement of Lease dated February, 1999 between Seaport
Associates, LP and the Registrant.**
10.9 1999 Employee Stock Purchase Plan
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in
Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, Independent Public
Accountants.
24 Power of Attorney (included on page II-9).
27 Financial Data Schedule.
</TABLE>
- -------------------------
** Previously filed.
+ Confidential treatment has been requested for certain portions of these
exhibits. Omitted portions have been filed separately with the Commission.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be shown therein is not applicable or is shown in the financial
statements or notes.
II-6
<PAGE> 84
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering.
(3) It will provide to the underwriter at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
II-7
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 7th day of July 1999.
BIGSTAR ENTERTAINMENT, INC.
By: /s/ DAVID FRIEDENSOHN
-----------------------------------
David Friedensohn
Chairman of the Board and
Chief Executive Officer
II-8
<PAGE> 86
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below each severally constitutes and appoints David Friedensohn and David
Levitsky, and each of them, as true and lawful attorneys-in-fact and agents,
with full powers of substitution and resubstitution, for them in their name,
place and stead, in any and all capacities, to sign any and all amendments
(including pre-effective and post-effective amendments) to this registration
statement and to sign any registration statement (and any post-effective
amendments) relating to the same offering as this registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as they might or
could do in person, hereby ratifying and confirming all which said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do, or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLES DATE
---- ------ ----
<C> <S> <C>
/s/ DAVID FRIEDENSOHN Chairman and Chief Executive July 7, 1999
- --------------------------------------------------- Officer (principal executive
David Friedensohn officer)
/s/ DAVID LEVITSKY* Executive Vice President, General July 7, 1999
- --------------------------------------------------- Manager and Director
David Levitsky
/s/ ROBERT YINGLING* Chief Financial Officer (principal July 7, 1999
- --------------------------------------------------- accounting officer)
Robert Yingling
/s/ D. JONATHAN MERRIMAN* Director July 7, 1999
- ---------------------------------------------------
D. Jonathan Merriman
/s/ WILLIAM LANSING* Director July 7, 1999
- ---------------------------------------------------
William Lansing
/s/ STEVEN A. LEDGER* Director July 7, 1999
- ---------------------------------------------------
Steven A. Ledger
/s/ MARLEEN MCDANIEL Director July 7, 1999
- ---------------------------------------------------
Marleen McDaniel
/s/ I. MARTIN POMPADUR Director July 7, 1999
- ---------------------------------------------------
I. Martin Pompadur
*By /s/ DAVID FRIEDENSOHN
----------------------------------------------
David Friedensohn
Chairman and Chief Executive Officer
</TABLE>
II-9
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE I
To BigStar Entertainment, Inc:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of BigStar Entertainment, Inc. included in this
registration statement and have issued our report thereon dated May 5, 1999. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. This schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
May 5, 1999
S-1
<PAGE> 88
SCHEDULE II
BIGSTAR ENTERTAINMENT, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
For the period March 2, 1998
(inception) to December 31,
1998
Allowance for sales
returns................. $ -- $25,000 $ -- $ -- $25,000
======= ======= ======= ======= =======
Allowance for bad debt..... $ -- $ 5,000 $ -- $ -- $ 5,000
======= ======= ======= ======= =======
</TABLE>
S-2
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation of the Registrant.**
3.2 Certificate of Amendment to Certificate of Incorporation.**
3.3 Amended and Restated Bylaws of the Registrant.
3.4 Certificate of Amendment to Certificate of Incorporation,
effective on completion of this offering.
4.1 Form of Registrant's Common Stock Certificate.
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP.
10.1 Form of Indemnification Agreement.**
10.2 1998 Stock Option and Incentive Plan.**
10.3 Amended 1999 Stock Option and Incentive Plan.
10.4 Employment Agreement, dated March 15, 1999 by and between
David Friedensohn and the Registrant.**
10.5 Distribution Agreement dated February 18, 1998 by and
between Baker & Taylor and the Registrant.+**
10.6 Strategic Marketing Agreement dated as of May 1999 by and
between Baker & Taylor and the Registrant.+
10.7 Rights Agreement among the Registrant and each of the
stockholders identified therein.**
10.8 Agreement of Lease dated February, 1999 between Seaport
Associates, LP and the Registrant.**
10.9 1999 Employee Stock Purchase Plan.
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in
Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP, Independent Public
Accountants.
24 Power of Attorney (included on page II-9).
27 Financial Data Schedule.
</TABLE>
- -------------------------
** Previously filed.
+ Confidential treatment has been requested for certain portions of these
exhibits. Omitted portions have been filed separately with the Commission.
<PAGE> 1
AMENDED AND RESTATED BYLAWS
OF
BIGSTAR ENTERTAINMENT, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1.1 Annual Meetings. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as may be designated by resolution of the
Board of Directors from time to time. Any other proper business may be
transacted at the annual meeting.
SECTION 1.2 Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called at any time by the Board of Directors, or by a
committee of the Board of Directors which has been duly designated by the Board
of Directors and whose powers and authority include the power to call such
meetings, but such special meetings may not be called by any other person or
persons.
SECTION 1.3 Notice of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by applicable law or the Certificate of
Incorporation, the written notice of any meeting shall be given not less than
ten (10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting. If mailed, such notice shall be
deemed to be given when deposited in the mail, postage prepaid, directed to the
stockholder at his or her address as it appears on the records of the
Corporation.
SECTION 1.4 Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
SECTION 1.5 Quorum. At each meeting of stockholders, except where
otherwise provided by law or the Certificate of Incorporation or these Bylaws,
the holders of a majority of the outstanding shares of stock entitled to vote at
the meeting, present in person or by proxy, shall constitute a quorum. In the
absence of a quorum, the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided in Section 1.4 of these
Bylaws until a quorum shall attend. Shares of its own stock belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of any corporation to vote stock, including but not limited to its own
stock, held by it in a fiduciary capacity.
<PAGE> 2
SECTION 1.6 Organization. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in the absence of such person, the
President, or in his or her absence by a Vice President, or in the absence of
the foregoing persons, by a chairman designated by the Board of Directors, or in
the absence of such designation, by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
SECTION 1.7 Voting; Proxies. Unless otherwise provided by law or the
Certificate of Incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
him which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for him by proxy, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the Corporation. Unless otherwise required by
law, voting at meetings of stockholders need not be by written ballot and need
not be conducted by inspectors unless the Board of Directors, or holders of a
majority of the outstanding shares of all classes of stock entitled to vote
thereon present in person or by proxy at such meeting shall so determine. At all
meetings of stockholders for the election of directors a plurality of the votes
cast shall be sufficient to elect. All other elections and questions shall,
unless otherwise provided by law or by the Certificate of Incorporation or these
Bylaws, be decided by the vote of the holders of a majority of the outstanding
shares of stock entitled to vote thereon present in person or by proxy at the
meeting.
SECTION 1.8 Fixing Date for Determination of Stockholders of Record.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not precede the date such record date is fixed and shall not be more
than sixty (60) nor less than ten (10) days before the date of such meeting, nor
more than sixty (60) days prior to any other action. If no record date is fixed,
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given. The record date for any other
purpose other than stockholder action by written consent shall be at the close
of business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten (10) days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. Any
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<PAGE> 3
stockholder of record seeking to have the stockholders authorize or take
corporate action by written consent shall, by written notice to the Secretary,
request the Board of Directors to fix a record date. The Board of Directors
shall promptly, but in all events within ten (10) days after the date on which
such a request is received, adopt a resolution fixing the record date. If no
record date has been fixed by the Board of Directors within ten (10) days of the
date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by
applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or any officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by applicable law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the date on which the Board of
Directors adopts the resolution taking such prior action.
SECTION 1.9 List of Stockholders Entitled to Vote. The Secretary shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present. The stock ledger
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list of stockholders or the books of the Corporation, or
to vote in person or by proxy at any meeting of stockholders.
SECTION 1.10 Inspectors of Elections; Opening and Closing the Polls.
(a) If required by the Delaware General Corporation Law, the Board
of Directors by resolution shall appoint one or more inspectors, which inspector
or inspectors may include individuals who serve the Corporation in other
capacities, including, without limitation, as officers, employees, agents or
representatives of the Corporation, to act at the meeting and make a written
report thereof. The procedures, oath, duties, and determinations with respect to
inspectors shall be as provided under the Delaware General Corporation Law.
(b) The chairman of any meeting shall fix and announce at the
meeting the date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting.
SECTION 1.11 Action by Written Consent of Stockholders. Unless
otherwise restricted by the Certificate of Incorporation, any action required or
permitted to be taken at any annual or special meeting of the stockholders may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding
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<PAGE> 4
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 Number of Directors.
(a) The number of authorized members of the Board of Directors
shall be seven (7). The number of directors may be changed by an amendment to
this bylaw, duly adopted by the Board of Directors or by the stockholders, or by
a duly adopted amendment to the certificate of incorporation.
(b) Upon the closing of the first sale of the Corporation's common
stock pursuant to a firmly underwritten registered public offering (the "IPO"),
the directors shall be divided into three classes, with the term of office of
the first class, which class shall initially consist of two directors, to expire
at the first annual meeting of stockholders held after the IPO; the term of
office of the second class, which class shall initially consist of two
directors, to expire at the second annual meeting of stockholders held after the
IPO; the term of office of the third class, which class shall initially consist
of two directors, to expire at the third annual meeting of stockholders held
after the IPO; and thereafter for each such term to expire at each third
succeeding annual meeting of stockholders held after such election. Any
additional persons elected to the Board of Directors shall be classified at the
discretion of the Board of Directors.
SECTION 2.2 Election; Resignation; Removal; Vacancies. The Board of
Directors shall initially consist of the persons elected as such by the
incorporator or named in the Corporation's Certificate of Incorporation. At the
first annual meeting of stockholders and at each annual meeting thereafter, the
stockholders shall elect Directors to replace those Directors whose terms then
expire. Any Director may resign at any time upon written notice to the
Corporation. Any vacancy occurring in the Board of Directors may be filled by
the affirmative vote of a majority of the Board, although such majority is less
than a quorum, or by a plurality of the votes cast at a meeting of stockholders,
and each Director so elected shall hold office until the expiration of the term
of office of the Director whom he or she has replaced.
SECTION 2.3 Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board of Directors may from time to time determine. Notice
of regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
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SECTION 2.4 Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the President or a
majority of the members of the Board of Directors then in office and may be held
at any time, date or place, within or without the State of Delaware, as the
person or persons calling the meeting shall fix. Notice of the time, date and
place of such meeting shall be given, orally or in writing, by the person or
persons calling the meeting to all directors at least four (4) days before the
meeting if the notice is mailed, or at least twenty-four (24) hours before the
meeting if such notice is given by telephone, hand delivery, telegram, telex,
mailgram, facsimile or similar communication method. Unless otherwise indicated
in the notice, any and all business may be transacted at a special meeting.
SECTION 2.5 Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee designated by the Board, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
bylaw shall constitute presence in person at such meeting.
SECTION 2.6 Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the whole Board shall constitute a quorum for
the transaction of business. Except as otherwise provided in these Bylaws, or in
the Certificate of Incorporation or required by law, the vote of a majority of
the directors present shall be the act of the Board of Directors.
SECTION 2.7 Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or in his or her absence by
the Vice Chairman of the Board, if any, or in his or her absence by the
President, or in their absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
SECTION 2.8 Written Action by Directors. Unless otherwise restricted by
the Certificate of Incorporation, any action required or permitted to be taken
at any meeting of the Board of Directors, or of any committee thereof, may be
taken without a meeting if all members of the Board or such committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
SECTION 2.9 Powers. The Board of Directors may, except as otherwise
required by law or the Certificate of Incorporation, exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation.
SECTION 2.10 Compensation of Directors. Directors, as such, may
receive, pursuant to a resolution of the Board of Directors, fees and other
compensation for their services as directors, including without limitation their
services as members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
SECTION 3.1 Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of
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the committee. In the absence or disqualification of a member of the committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he, she or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in place
of any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in Section 151(a) of the
General Corporation Law, fix any of the preferences or rights of such shares,
except voting rights of the shares), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of
dissolution, or amending these Bylaws; and, unless the resolution expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
SECTION 3.2 Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for conduct of its business. In the absence of such rules each committee
shall conduct its business in the same manner as the Board of Directors conducts
its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
SECTION 4.1 Executive Officers; Election; Qualifications; Term of
Office; Resignation; Removal; Vacancies. The Board of Directors shall choose a
President and Secretary, and it may, if it so determines, choose a Chairman of
the Board and a Vice Chairman of the Board from among its members. The Board of
Directors may also choose one or more Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer
shall hold office until the first meeting of the Board of Directors after the
annual meeting of stockholders next succeeding this election, and until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. Any officer may resign at any time upon written notice to the
Corporation. The Board of Directors may remove any officer with or without cause
at any time, but such removal shall be without prejudice to the contractual
rights of such officer, if any, with the Corporation. Any number of offices may
be held by the same person. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise may be filled for the
unexpired portion of the term by the Board of Directors at any regular or
special meeting.
SECTION 4.2 Powers and Duties of Executive Officers. The officers of
the Corporation shall have such powers and duties in the management of the
Corporation as may be prescribed by the Board of Directors and, to the extent
not so provided, as generally pertain to their respective offices, subject to
the control of the Board of Directors. The Board of Directors may require any
officer, agent or employee to give security for the faithful performance of his
or her duties.
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SECTION 4.3 Compensation. The salaries of all officers and agents of
the Corporation shall be fixed from time to time by the Board of Directors or by
a committee appointed or officer designated for such purpose, and no officer
shall be prevented from receiving such compensation by reason of the fact that
he is also a director of the Corporation.
ARTICLE V
STOCK
SECTION 5.1 Certificates. Every holder of stock shall be entitled to
have a certificate signed by or in the name of the Corporation by the Chairman
or Vice Chairman of the Board of Directors, if any, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, certifying the number of shares
owned by him or her in the Corporation. Any of or all the signatures on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he or she were such officer, transfer agent, or registrar at
the date of issue.
SECTION 5.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of
New Certificates. The Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or his or her legal representative, to agree to
indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
SECTION 5.3 Other Regulations. The issue, transfer, conversion and
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 Right to Indemnification. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended in a manner more favorable to
indemnitees, any person (an "Indemnitee") who was or is made or is threatened to
be made a party or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding"), by
reason of the fact that he, she, or a person for whom he or she is the legal
representative, is or was a director or officer of the Corporation or, while a
director or officer of the Corporation, is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all liability
and loss suffered and expenses (including attorneys' fees) reasonably incurred
by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise
provided in Section 6.3, the Corporation shall be required to indemnify an
Indemnitee in connection with a proceeding (or part thereof) commenced by such
Indemnitee only if the commencement of such proceeding (or part thereof) by the
Indemnitee was authorized by the Board of Directors of the Corporation.
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SECTION 6.2 Prepayment of Expenses. The Corporation shall pay the
expenses (including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided, however, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should ultimately be
determined that the Indemnitee is not entitled to be indemnified under this
Article VI or otherwise; and provided, further, that the Corporation shall not
be required to advance any expenses to a person against whom the Corporation
directly brings a claim, in a proceeding, alleging that such person has breached
his or her duty of loyalty to the Corporation, committed an act or omission not
in good faith or that involves intentional misconduct or a knowing violation of
law, or derived an improper personal benefit from a transaction.
SECTION 6.3 Claims. If a claim for indemnification or payment of
expenses under this Article VI is not paid in full within sixty (60) days after
a written claim therefor by the Indemnitee has been received by the Corporation,
the Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the burden
of proving that the Indemnitee is not entitled to the requested indemnification
or payment of expenses under applicable law.
SECTION 6.4 Nonexclusivity of Rights. The rights conferred on any
Indemnitee by this Article VI shall not be exclusive of any other rights which
such Indemnitee may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders
or disinterested directors or otherwise. Additionally, nothing in this Article
VI shall limit the ability of the Corporation, in its discretion, to indemnify
or advance expenses to persons whom the Corporation is not obligated to
indemnify or advance expenses pursuant to this Article VI.
SECTION 6.5 Other Sources. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Indemnitee who was or is serving at its
request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Indemnitee may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or nonprofit enterprise.
SECTION 6.6 Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any Indemnitee in respect of any act or omission
occurring prior to the time of such repeal or modification.
SECTION 6.7 Other Indemnification and Prepayment of Expenses. This
Article VI shall not limit the right of the Corporation, to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Indemnitees when and as authorized by appropriate corporate action.
SECTION 6.8 Indemnification Contracts. The Board of Directors is
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of
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the Corporation, or any person serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
indemnification rights to such person. Such rights may be greater than those
provided in this Article VI.
SECTION 6.9 Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
SECTION 6.10 Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by him or her or
on his or her behalf in any such capacity, or arising out of his or her status
as such, whether or not the Corporation would have the power to indemnify him or
her against such liability under the provisions of this Article VI.
SECTION 6.11 Savings Clause. If this Article VI or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each director and officer of the
Corporation as to costs, charges and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Corporation, to the full extent
permitted by any applicable portion of this Article VI that shall not have been
invalidated and to the full extent permitted by applicable law.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION 7.2 Seal. The corporate seal shall have the name of the
Corporation inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
SECTION 7.3 Waiver of Notice of Meetings of Stockholders, Directors and
Committees. Any written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
SECTION 7.4 Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this
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reason, or solely because the director or officer is present at or participates
in the meeting of the Board or committee thereof which authorizes the contract
or transaction, or solely because his or her or their votes are counted for such
purpose, if: (1) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith authorizes
the contract or transaction by the affirmative votes of majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (2) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (3) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
SECTION 7.5 Form of Records. Any records maintained by the Corporation
in the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of any information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
SECTION 7.6 Reliance Upon Books and Records. A member of the Board of
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of his or her duties, be fully protected in relying in
good faith upon records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of the Corporation's
officers or employees, or committees of the Board of Directors, or by any other
person as to matters the member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
SECTION 7.7 Certification of Incorporation Governs. In the event of any
conflict between the provisions of the Corporation's Certificate of
Incorporation and these Bylaws, the provisions of the Certificate of
Incorporation shall govern.
SECTION 7.8 Severability. If any provision of these Bylaws shall be
held to be invalid, illegal, unenforceable or in conflict with the provisions of
the Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation, that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation) shall remain
in full force and effect.
SECTION 7.9 Amendments. Stockholders of the Corporation holding a
majority of the Corporation's outstanding voting stock shall have power to
adopt, amend or repeal Bylaws. To the extent provided in the Corporation's
Certificate of Incorporation, the Board of Directors of the Corporation shall
also have the power to adopt, amend or repeal Bylaws of the Corporation, except
insofar as Bylaws adopted by the stockholders shall otherwise provide.
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<PAGE> 1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
BIGSTAR ENTERTAINMENT, INC.
-----------------------------------------
The undersigned, for the purpose of (i) effectuating a .485-for-one reverse
stock split of the capital stock of BIGSTAR ENTERTAINMENT, INC., a Delaware
corporation (the "Corporation"), and (ii) changing the address of the
incorporator of the Corporation, does hereby certify that this Certificate of
Amendment of Certificate of Incorporation has been made and effected in
accordance with Section 242 of the General Corporation Law of the State of
Delaware and that:
FIRST: The name of the corporation is BIGSTAR ENTERTAINMENT, INC.
SECOND: Effectively immediately, upon the filing of this amendment to the
Certificate of Incorporation, each issued and outstanding share of Common Stock
of the Corporation shall automatically and without further action on the part of
the holder thereof be converted into .485 shares of validly issued, fully paid
and nonassessable Common Stock of the Corporation. No scrip or fractional shares
will be issued by reason of this amendment.
THIRD: Effective immediately, Article VIII of the Corporation's
Certificate of Incorporation is hereby amended and restated so that the name
and mailing address of the incorporator is as follows:
David Friedensohn
c/o BigStar Entertainment, Inc.
19 Fulton Street, 5th Floor
New York, New York 10038
* * * * *
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Certificate of Incorporation to be signed as of the ____ day of
July, 1999, by its Chief Executive Officer, who hereby affirms and acknowledges,
under penalty of perjury, that this Certificate is the act and deed of the
Corporation and that the facts stated herein are true.
BIGSTAR ENTERTAINMENT, INC.
By:
________________________
David Friedensohn
Chief Executive Officer
<PAGE> 1
[bigstar.com logo]
BIGSTAR ENTERTAINMENT, INC.
NUMBER SHARES
-------- --------
BSE
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 089896 10 4
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES, PAR VALUE $.001 PER SHARE,
OF THE COMM0N STOCK OF
- --------------------------------------------------------------------------------
BIGSTAR ENTERTAINMENT, INC.
(hereinafter the "Corporation")
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[Bigstar Entertainment, Inc.
/s/ David Levitsky Corporate Seal /s/ David Friedensohn
SECRETARY 1999 CHIEF EXECUTIVE OFFICER
Delaware]
COUNTERSIGNED AND REGISTERED
CONTINENTAL STOCK TRANSFER & TRUST COMPANY.
(JERSEY CITY, NJ)
TRANSFER AGENT
AND REGISTRAR.
By
-------------------------------------------
AUTHORIZED OFFICER
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences, and relative,
participating, optional or other special rights of each class and series of
stock of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT--______Custodian_______
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act________________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
| |
| |
| |
|_______________________________________|_______________________________________
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated __________________________________
______________________________________
The signature to this assignment must
correspond with the name as written
NOTICE: upon the face of the certificate in
every particular, without alteration
or enlargement or any change whatever.
Signatures(s) Guaranteed:
________________________________________
The signatures(s) should be guaranteed
by an eligible guarantor institution
(banks, stockbrokers, savings and loan
associations and credit unions with
membership in an approved signature
guarantee medallion program), pursuant to
SEC Rule 17Ad-15
<PAGE> 1
July 7, 1999
BigStar Entertainment, Inc.
19 Fulton Street, Fifth Floor
New York, New York 10038
Re: BigStar Entertainment, Inc.
Registration Statement on Form S-1
We have acted as counsel to BigStar Entertainment, Inc., a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to 3,565,000 shares of the Company's Common Stock (the
"Shares") pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act"). This opinion is being
furnished in accordance with the requirements of Item 16(a) of Form S-1 and Item
601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K. This opinion letter is rendered as of the date first
written above and we disclaim any obligation to advise you of facts,
circumstances, events or developments which hereafter may be brought to our
attention and which may alter, affect or modify the opinion expressed herein.
Our opinion is expressly limited to the matters set forth above and we render no
opinion, whether by implication or otherwise, as to any other matters relating
to the Company or the Shares.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE> 1
BIGSTAR ENTERTAINMENT, INC.
AMENDED 1999 STOCK OPTION AND INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Purposes of this Plan................................................ 1
2. Definitions.......................................................... 1
3. Stock Subject to this Plan........................................... 3
4. Administration of this Plan.......................................... 3
5. Eligibility.......................................................... 5
6. Term of Plan......................................................... 5
7. Exercise Price and Consideration..................................... 5
8. Options.............................................................. 6
9. Stock Purchase Rights................................................ 8
10. Stock Appreciation Rights............................................ 8
11. Restricted Shares.................................................... 9
12. Performance Units and Performance Shares............................. 10
13. Non-Transferability of Options and Stock Purchase Rights............. 11
14. Adjustments Upon Changes in Capitalization, Merger or Other Events... 11
15. Time of Grant........................................................ 11
16. Amendment and Termination............................................ 12
17. Conditions Upon Issuance of Shares................................... 12
18. Reservation of Shares................................................ 12
19. Option, Stock Purchase and Stock Bonus Agreements.................... 13
20. Shareholder Approval................................................. 13
21. Information to Optionees and Purchasers.............................. 13
22. Right of Company to Terminate Employment or Consulting Services...... 13
23. Rights of First Refusal and Repurchase............................... 13
24. Withholding.......................................................... 14
25. Separability......................................................... 14
26. Non-Exclusivity of this Plan......................................... 14
27. Governing Law........................................................ 14
28. Cancellation of and Substitution for Nonstatutory Options............ 14
29. Market Standoff...................................................... 15
</TABLE>
Exhibit 1 - Form of Stock Option Agreement
-i-
<PAGE> 3
BIGSTAR ENTERTAINMENT, INC.
AMENDED 1999 STOCK OPTION AND INCENTIVE PLAN
1. Purposes of this Plan. The general purpose of this Amended 1999
Stock Option and Incentive Plan is to promote the interests of the Company and
its shareholders by (i) providing certain Employees of and Consultants to the
Company with additional incentives to continue and increase their efforts with
respect to achieving success in the business of the Company, its Affiliates and
its Subsidiaries, and (ii) attracting and retaining the best available personnel
to participate in the ongoing business operations of the Company and its
Subsidiaries.
Options granted under this Plan may be either Incentive Stock
Options or Nonstatutory Stock Options, as determined at the discretion of the
Board and as reflected in the terms of the written option agreements. The Board
may also grant Stock Purchase Rights hereunder.
2. Definitions. As used in this Plan, the following definitions shall
apply:
"Affiliates" means any other entity directly or indirectly
controlling, controlled by, or under common control, with the Company.
"Affiliated SAR" means a SAR that is granted in connection with a
related Option, and which will be deemed to automatically be exercised
simultaneous with the exercise of the related Option.
"Award" means, individually or collectively, a grant under this
Plan, including any Nonqualified Stock Options, Incentive Stock Options, SARs,
Restricted Stock, Performance Units, or Performance Shares.
"Award Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and provisions applicable
to Awards granted to Participants under the Plan.
"Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.
"Board of Directors" means the full Board of Directors of the
Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute or statutes thereto. Reference to any
particular Code section shall include any successor section.
"Committee" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4(a) of this Plan, if one is appointed, or
if no Committee is appointed, the Board of Directors.
"Common Stock" shall mean the Common Stock of the Company.
"Company" shall mean BigStar Entertainment, Inc., a Delaware
corporation.
<PAGE> 4
"Consultant" shall mean any person who is engaged by the
Company or by any Parent or Subsidiary to render consulting services and is
compensated for such consulting services, and any director of the Company
whether compensated for such services or not.
"Continuous Status as an Employee" shall mean the absence of
any interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board; provided
that such leave is for a period of not more than 90 days or reemployment upon
the expiration of such leave is guaranteed by contract or statute.
"Disinterested Person" shall mean a member of the Board of
Directors of the Company: (i) who was not during the one year prior to service
as an administrator of this Plan granted or awarded equity securities pursuant
to this Plan, or any other plan of the Company or any of its affiliates
entitling the participants therein to acquire equity securities of the Company
or any of its affiliates except as permitted by Rule 16b-3(c)(2)(i) promulgated
under the Exchange Act ("Rule 16b-3(c)(2)(i)"); or (ii) who is otherwise
considered to be a "disinterested person" in accordance with Rule
16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of
the Securities and Exchange Commission.
"Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company as
a common-law employee. The payment of a director's fee by the Company shall not
be sufficient to constitute "employment" by the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Freestanding SAR" means a SAR that is granted independently
of any Options.
"Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
"Major Event" shall be deemed to have occurred if (i) there
shall be consummated any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's common stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of the
Company's common stock immediately prior to the merger generally have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger; (ii) there shall be consummated any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company; (iii) proceedings or actions
for the liquidation or dissolution of the Company are initiated by the Company;
or (iv) any "person" (as defined in Sections 13(d) and 14(d) of the Exchange
Act) (other than persons who beneficially own more than 30% of the capital stock
of the Company on a fully diluted and as converted basis outstanding as of the
date of adoption of this Plan by the Board of Directors) becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 30% or more of the Company's outstanding capital stock on a fully
diluted and as converted basis at such time; provided, however, that a "Major
Event" shall not be deemed to have occurred solely by reason of the consummation
of a public offering by the Company of common stock registered under the
Securities Act.
"Nonstatutory Stock Option" shall mean an Option which is not
intended to qualify as an Incentive Stock Option.
"Option" shall mean a stock option granted pursuant to this
Plan.
"Optioned Stock" shall mean the Common Stock subject to an
Option.
2
<PAGE> 5
"Optionee" shall mean an Employee or Consultant who receives
an Option.
"Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
"Participant" means an Employee of the Company who has
outstanding an Award granted under the Plan.
"Performance Unit" means an Award granted to an Employee
pursuant to Section 12.
"Performance Share" means an Award granted to an Employee,
pursuant to Section 12 herein.
"Period of Restriction" means the period during which the
transfer of Shares of Restricted Stock is limited in some way (based on the
passage of time, the achievement of performance goals, or upon the occurrence of
other events as determined by the Committee, in its discretion), and the Shares
are subject to a substantial risk of forfeiture, as provided in Section 11.
"Plan" shall mean this 1998 Stock Option and Incentive Plan.
"Purchaser" shall mean an Employee or Consultant who exercises
a Stock Purchase Right.
"Restricted Stock" means an Award granted to a Participant
pursuant to Section 11.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Share" shall mean a share of Common Stock, as adjusted in
accordance with Section 14 of this Plan.
"Stock Appreciation Right" or "SAR" means an Award, granted
alone or in connection with a related Option, designated as a SAR, pursuant to
the terms of Section 10.
"Stock Purchase Right" shall mean a right to purchase Common
Stock pursuant to this Plan or the right to receive a bonus of Common Stock for
past services.
"Subsidiary" shall mean a "subsidiary corporation", whether
now or hereafter existing, as defined in Section 424(f) of the Code.
"Tandem SAR" means a SAR that is granted in connection with a
related Option, the exercise of which shall require forfeiture of the right to
purchase a Share under the related Option (and when a Share is purchased under
the Option, a SAR shall similarly be cancelled).
3. Stock Subject to this Plan. Subject to the provisions of Section 14
of this Plan, the maximum aggregate number of Shares under this Plan is
3,000,000 (this takes into account the Company's 4 for 1 stock split approved in
March 1999). The Shares may be authorized but unissued, or reacquired Common
Stock, or both. If an Option or Stock Purchase Right should expire, terminate,
be cancelled or become unexercisable for any reason without having been
exercised in full, then the unpurchased Shares which were subject thereto shall,
unless this Plan shall have been terminated, become available for future grant
or sale under this Plan. In addition, Shares issued under this Plan and later
repurchased or otherwise reacquired by the Company shall, unless this Plan shall
have been terminated, become available for future grant or sale under this Plan.
3
<PAGE> 6
4. Administration of this Plan.
(a) Procedure. This Plan shall be administered by the Board of
Directors of the Company unless and until the Board of Directors delegates
administration to a Committee, as provided in this Section 4(a).
(i) Subject to Section 4(a)(ii), the Board of Directors may
appoint a Committee consisting of not less than two persons (who need not be
members of the Board of Directors) to administer this Plan on behalf of the
Board of Directors, subject to such terms and conditions not inconsistent with
this Plan as the Board of Directors may prescribe. Once appointed, the Committee
shall continue to serve until otherwise directed by the Board of Directors.
Members of the Board who are either eligible for Options and/or Stock Purchase
Rights or have been granted Options and/or Stock Purchase Rights may vote on any
matters affecting the administration of this Plan or the grant of any Options
and/or Stock Purchase Rights pursuant to this Plan, except that no such member
shall act upon the granting of an option to such member, but any such member may
be counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Options and/or
Stock Purchase Rights to such member.
(ii) Notwithstanding the foregoing Section 4(a)(i), if the
Company registers any class of any equity security pursuant to Section 12 of the
Exchange Act, from the effective date of such registration until six months
after the termination of such registration, any grants of Options and/or Stock
Purchase Rights to directors or officers who are subject to Section 16 of the
Exchange Act shall be made only by a Committee consisting of two or more
persons, each of whom shall be a Disinterested Person (if necessary to meet the
requirements of Rule 16b-3 promulgated under the Exchange Act). The Board shall
otherwise comply with the requirements of Rule 16b-3 promulgated under the
Exchange Act, as from time to time in effect, unless the Board expressly
declares that any such requirement shall not apply.
(iii) Subject to the foregoing Sections 4(a)(i) and 4(a)(ii),
from time to time the Board of Directors may increase the size of the Committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies however caused,
or remove all members of the Committee and thereafter directly administer this
Plan. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board of Directors.
(b) Powers of the Board. Subject to the provisions of this Plan, the
Board shall have plenary authority, in its discretion and without limitation, to
do the following: (i) to grant Incentive Stock Options, Nonstatutory Stock
Options or Stock Purchase Rights; (ii) to determine, upon review of relevant
information and in accordance with Section 7 of this Plan, the fair market value
of the Common Stock; (iii) to determine the exercise price per share of Options
or Stock Purchase Rights to be granted, which exercise price shall be determined
in accordance with Section 7 hereof; (iv) to determine the Employees or
Consultants to whom, and the time or times at which, Options or Stock Purchase
Rights shall be granted and the number of Shares to be represented by each
Option or Stock Purchase Right; (v) to interpret this Plan; (vi) to prescribe,
amend and rescind rules and regulations relating to this Plan, and in the
exercise of this power, to correct any defect, omission or inconsistency in this
Plan or in any agreement relating to an Option or Stock Purchase Right, in a
manner and to the extent the Board shall deem necessary or expedient to make
this Plan fully effective; (vii) to determine the terms and provisions of each
Option or Stock Purchase Right granted (which need not be identical) and, with
the consent of the holder thereof, modify or amend each Option or Stock Purchase
Right; (viii) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option or Stock Purchase Right
previously granted by the Board; and (ix) to make all other determinations
deemed necessary or advisable for the administration of this Plan.
4
<PAGE> 7
(c) Board Determinations. In making determinations under this Plan,
the Board may take into account the nature of the services rendered by the
respective Employees, their present and potential contributions to the success
of the Company, or its Subsidiaries, as the case may be, and such other factors
as the Board in its discretion shall deem relevant. All decisions,
determinations and interpretations of the Board shall be final and binding on
all Optionees, Purchasers and any other holders of any Options and/or Stock
Purchase Rights granted under this Plan.
5. Eligibility.
(a) Options and Stock Purchase Rights may be granted to Employees,
provided that Incentive Stock Options may only be granted to Employees. An
Employee who has been granted an Option or Stock Purchase Right may, if such
Employee is otherwise eligible, be granted additional Option(s) or Stock
Purchase Right(s).
(b) No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other Incentive Stock Options granted to such Employee
by the Company or by any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of grant
of the Option covering such Share) in excess of $100,000 (or such different
amount as provided for under the Code requirements for Incentive Stock Options)
becoming first available for purchase upon exercise of one or more incentive
stock options during any calendar year.
(c) Section 5(b) of this Plan shall apply only to an Incentive Stock
Option evidenced by a stock option agreement which sets forth the intention of
the Company and the Optionee that such Option shall qualify as an Incentive
Stock Option. Section 5(b) of this Plan shall not apply to any Option evidenced
by a stock option agreement which sets forth the intention of the Company and
the Optionee that such Option shall be a Nonstatutory Stock Option.
(d) On and after the effective date of the registration of any class
of equity security of the Company pursuant to Section 12 of the Exchange Act, a
member of the Board of Directors who is not an Employee shall not be eligible
for the benefits of this Plan unless at the time an Option or Stock Purchase
Right is granted to such member, the Board expressly declares that such
exclusion will not apply.
6. Term of Plan. This Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by vote of the
holders of a majority of the outstanding shares of the Company entitled to vote
on the adoption of this Plan. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 16 of this Plan.
7. Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option or Stock Purchase Right shall be such price as
is determined by the Board, but shall be subject to the following provisions:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per share exercise price shall be no less than 110% of the fair
market value per share on the date of grant.
5
<PAGE> 8
(B) granted to any Employee other than an Employee described
in Section 7(a)(i)(A), the per share exercise price shall be no less than 100%
of the fair market value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option:
(A) granted to an Employee or Consultant who, at the time of
the grant of such Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per share exercise price shall be no less than 110% of the fair
market value per share on the date of the grant.
(B) granted to any Employee or Consultant, other than an
Employee or Consultant described in Section 7(a)(ii)(A), the per share exercise
price shall be no less than 85% of the fair market value per share on the date
of grant.
(iii) In the case of a Stock Purchase Right granted to any
person, the per share exercise price shall be no less than 85% of the fair
market value per share on the date of grant; provided, however, that if such
person at the time of the grant of such Stock Purchase Right, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per share exercise price
shall be no less than 100% of the fair market value per share on the date of the
grant.
(b) Fair market value shall be determined by the Board in its
discretion; provided, however, that where there is an active public market for
the Common Stock, the fair market value per share shall be determined as
follows:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, then the closing or last sale
price, respectively, on the date of grant, as reported in the Wall Street
Journal (or, if not so reported, as otherwise reported by the NASDAQ System).
(ii) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System but is traded in the over-the-counter
market, then the mean of the closing bid and asked prices on the date of grant
as reported in the Wall Street Journal (or, if not so reported, as otherwise
reported by the NASDAQ System).
(c) The consideration to be paid for the Shares to be issued upon
exercise of an Option or Stock Purchase Right, including the method of payment,
shall be determined by the Board and may consist entirely of cash, check,
promissory note or other deferred payment arrangement, other Shares of Common
Stock having a fair market value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option or Stock Purchase Right
shall be exercised, or any combination of such methods of payment, or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable law. In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company.
8. Options.
(a) Term of Option. The term of each Option shall be ten (10) years
from the date of grant thereof or such shorter term as may be provided in the
stock option agreement relating to such Option; provided that the term of a
Nonstatutory Stock Option may, as provided in Section 8(b)(iv), be extended for
a period of up to six (6) months. However, in the case of an Option granted to
an Employee
6
<PAGE> 9
who, at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Option shall be five (5) years from the
date of grant thereof or such shorter time as may be provided in the stock
option agreement relating to such Option.
(b) Exercise of Option.
(i) Procedure for Exercise; Rights as a Shareholder. Any Option
granted under this Plan shall be exercisable at such times and under such
conditions as determined by the Board, such as vesting conditions and/or
performance criteria with respect to the Company and/or the Optionee, and as
shall be permissible under the terms of this Plan. Notwithstanding anything
herein to the contrary, no Option granted hereunder shall have a vesting period
in excess of five (5) years.
An Option may, but need not, include a provision whereby at any
time prior to termination of the Optionee's Continuous Status as an Employee,
the Optionee may elect to exercise the Option as to all or any part of the
Shares subject to the Option prior to the stated vesting date of the Option or
of any vesting installment or installments specified in the Option. Any shares
so purchased from any unvested installment or Option may be subject to a
repurchase right in favor of the Company or to any restriction the Board
determines to be appropriate.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. An Option may not be exercised for a fraction of a Share. Full payment
may, as authorized by the Board, consist of any consideration and method of
payment allowable under Section 7 of this Plan. Until the issuance (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Option. No adjustment will be made for a dividend
or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of this Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of
this Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(ii) Termination of Status as an Employee. In the event of
termination of an Optionee's Continuous Status as an Employee (as the case may
be), such Optionee may, but only within thirty (30) days after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise the Option to the
extent that such Employee was entitled to exercise it at the date of such
termination. To the extent that such Employee was not entitled to exercise the
Option at the date of such termination, or if such Employee does not exercise
such Option (which such Employee was entitled to exercise) within such thirty
(30) day time period, the Option shall terminate.
(iii) Disability of Optionee. Notwithstanding the provisions of
Section 8(b)(ii) above, in the event of termination of an Optionee's Continuous
Status as an Employee as a result of such Employee's disability, such Employee
may, but only within six (6) months from the date of such termination (but in no
event later than the date of expiration of the term of such option as set forth
in the Option Agreement), exercise the Option to the extent such Employee was
entitled to exercise it at the date of such termination; provided however, that
if the Option is an Incentive Stock Option and the disability is
7
<PAGE> 10
not a total and permanent disability (as defined in Section 422(c)(6) of the
Code), then if the Optionee does not exercise the Option within three months
after such termination, such Option shall automatically convert into a
Nonstatutory Stock Option; and provided, further, that if the termination is as
a result of a total and permanent disability (as defined in Section 422(c)(6) of
the Code), such Employee may within one (1) year from the date of such
termination, but in no event later than the date of expiration of the term of
such option as set forth in the Option Agreement), exercise the Option to the
extent such Employee was entitled to exercise it at the date of such
termination. To the extent that such Employee was not entitled to exercise the
Option at the date of termination, or if such Employee does not exercise such
Option (which such Employee was entitled to exercise) within the time periods
specified above, as the case may be, the Option shall terminate.
(iv) Death of Optionee. In the event of the death of an
Optionee: (A) while the Optionee is an Employee or Consultant, (B) during the
thirty (30) day period described in Section 8(b)(ii), or (C) during the one (1)
year period described in Section 8(b)(iii), the Option may be exercised, at any
time within one (1) year following the date of death (but, in the case of an
Incentive Stock Option, in no event later than the date of expiration of the
term of such Incentive Stock Option as set forth in the Option Agreement), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the time of death of the Optionee. To the extent
that such Employee or Consultant was not entitled to exercise the Option at the
date of death, or if such Employee or Consultant, estate or other person does
not exercise such Option (which such Employee or Consultant, estate or person
was entitled to exercise) within the one (1) year time period specified in this
Plan, the Option shall terminate.
9. Stock Purchase Rights.
(a) Rights to Purchase. After the Board determines that it will
offer an Employee or Consultant a Stock Purchase Right, it shall deliver to the
offeree a stock purchase agreement or stock bonus agreement, as the case may be,
setting forth the terms, conditions and restrictions relating to the offer,
including the number of Shares which such person shall be entitled to purchase,
and the time within which such person must accept such offer, which shall in no
event exceed six (6) months from the date upon which the Board made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a stock purchase agreement or stock bonus agreement in the form
approved by the Board.
(b) Issuance of Shares. Forthwith after payment therefor, the
Shares purchased shall be duly issued; provided, however, that the Board may
require that the Purchaser make adequate provision for any federal and state
withholding obligations of the Company as a condition to the Purchaser
purchasing such Shares.
(c) Other Provisions. The stock purchase agreement or stock bonus
agreement shall contain such other terms, provisions and conditions not
inconsistent with this Plan as may be determined by the Board, including rights
of first refusal as set forth in Section 20 hereof.
10. Stock Appreciation Rights.
(a) Grants of SARs. Tandem SARs may be awarded by the Committee in
connection with any Option granted under the Plan, either on the Date of Grant
of the Option or thereafter at any time prior to the exercise, termination or
expiration of the Option Nontandem SARs may also be granted by the Committee at
any time. On the Date of Grant of a Nontandem SAR, the Committee shall specify
the number of shares of Common Stock covered by such right and the base price of
shares of Common Stock to be used in connection with the calculation described
in Section 10(c) below. SARs
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<PAGE> 11
shall be subject to such terms and conditions not inconsistent with the other
provisions of this Plan as the Committee shall determine.
(b) Exercise of Tandem SARs. A Tandem SAR shall be exercisable only
to the extent that the related Option is exercisable and shall be exercisable
only for such period as the Committee may determine (which period may expire
prior to the expiration date of the related Option). Upon the exercise of all or
a portion of a Tandem SAR, the related Option shall be canceled with respect to
an equal number of shares of Common Stock. A Tandem SAR shall entitle the
Grantee to surrender to the Corporation unexercised the related Option, or any
portion thereof, and to receive from the Corporation in exchange therefor that
number of shares of Common Stock having an aggregate fair market value equal to
(A) the excess of (i) the fair market value of one (1) share of Common Stock as
of the date the Tandem SAR is exercised over (ii) the Option price per share
specified in such Option, multiplied by (B) the number of shares of Common Stock
subject to the Option, or portion thereof, which is surrendered. Cash shall be
delivered in lieu of any fractional shares.
(c) Exercise of Nontandem SARs. A Nontandem SAR shall be
exercisable during such period as the Committee shall determine prior to the
Date of Grant. The exercise of a Nontandem SAR shall entitle the Grantee to
receive from the Corporation that number of shares of Common Stock having an
aggregate fair market value equal to (A) the excess of (i) the fair market value
of one (1) share of Common Stock as of the date on which the Nontandem SAR is
exercised over (ii) the base price of the shares covered by the Nontandem SAR,
multiplied by (B) the number of shares of Common Stock covered by the Nontandem
SAR, or the portion thereof being exercised. Cash shall be delivered in lieu of
any fractional shares.
(d) Settlement of SARs. As soon as is reasonably practicable after
the exercise of a SAR, the Corporation shall (i) issue, in the name of the
Grantee, stock certificates representing the total number of full shares of
Common Stock to which the Grantee is entitled pursuant to Section 10(b) or 10(c)
hereof and cash in an amount equal to the fair market value, as of the date of
exercise, of any resulting fractional shares, and (ii) if the Committee causes
the Corporation to elect to settle all or part of its obligations arising out of
the exercise of the SAR in cash pursuant to Section 10(e), deliver to the
Grantee an amount in cash equal to the fair market value, as of the date of
exercise, of the shares of Common Stock it would otherwise be obligated to
deliver.
(e) Cash Settlement. The Committee, in its discretion, may cause
the Corporation to settle all or any part of its obligation arising out of the
exercise of a SAR by the payment of cash in lieu of all or part of the shares of
Common Stock it would otherwise be obligated to deliver in an amount equal to
the fair market value of such shares on the date of exercise.
11. Restricted Shares.
(a) Grant of Restricted Shares. The Committee may from time to time
cause the Corporation to issue Restricted Shares under the Plan, subject to such
restrictions, conditions and other terms as the Committee may determine in
addition to those set forth herein.
(b) Restrictions. At the time a grant of Restricted Shares is made,
the Committee shall establish a period of time (the "Restricted Period")
applicable to such Restricted Shares. Each grant of Restricted Shares may be
subject to a different Restricted Period. The Committee may, in its sole
discretion, at the time a grant is made, prescribe restrictions in addition to
or other than the expiration of the Restricted Period, including the
satisfaction of corporate or individual performance objectives, which shall be
applicable to all or any portion of the Restricted Shares. Except with respect
to grants of Restricted Shares intended to qualify as performance based
compensation for purposes of Section 162(m) of the Code, the Committee may also,
in its sole discretion, shorten or terminate the Restricted
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<PAGE> 12
Period or waive any other restrictions applicable to all or a portion of such
Restricted Shares. None of the Restricted Shares may be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of prior to the date on
which such Restricted Shares vest in accordance with Section 11(c).
(c) Restricted Stock Certificates. The Corporation shall issue, in
the name of each Grantee, stock certificates with proper legends representing
the total number of Restricted Shares granted to the Grantee, as soon as
reasonably practicable after the Date of Grant. The Secretary of the Corporation
shall hold such certificates, properly endorsed for transfer, after the
Grantee's benefit until such time as the Restricted Shares are forfeited to the
Corporation or until the Restricted Shares vest. In lieu of the foregoing,
Restricted Shares awarded to a Grantee may be held under the Grantee's name in a
book entry account maintained by or on behalf of the Corporation.
(d) Rights of Holders of Restricted Shares. Except as otherwise
determined by the Committee either at the time Restricted Shares are awarded or
at any time thereafter prior to the lapse of the restrictions, holders of
Restricted Shares shall not have the right to vote such shares or the right to
receive any dividends with respect to such shares. All distributions, if any,
received by an employee or consultant with respect to Restricted Shares as a
result of any stock split-up, stock distribution, combination of shares, or
other similar transaction shall be subject to the restrictions of this Section
11.
(e) Termination of Employment Relationship. Any Restricted Shares
granted pursuant to the Plan shall be forfeited if the Grantee terminates
employment or consultant relationship with the Corporation or its subsidiaries
for reasons other than death or disability prior to the expiration or
termination of the Period of Restriction and the satisfaction of any other
conditions applicable to such Restricted Shares. Upon such forfeiture, the
Secretary of the Corporation shall either cancel or retain in its treasury the
Restricted Shares that are forfeited to the Corporation. Upon the death of a
Grantee prior to his termination of employment or service as a consultant, or
upon a Grantee's termination of employment as a result of disability, all
Restricted Shares previously awarded to such Grantee which have not previously
vested shall be forfeited unless the Committee in its sole discretion shall
determine otherwise.
(f) Delivery of Restricted Shares. Subject to the provisions of
this Section, at such time as the Grantee shall become vested in his Restricted
Shares, the restrictions applicable to the Restricted Shares shall lapse and a
stock certificate for the number of Restricted Shares with respect to which the
restrictions have lapsed shall be delivered, free of all such restrictions, to
the Grantee or the Grantee's beneficiary or estate, as the case may be.
12. Performance Units and Performance Shares.
(a) Grant of Performance Units/Shares. Subject to the terms of the
Plan, Performance Units and Performance Shares may be granted to eligible
Employees and Consultants at any time and from time to time, as shall be
determined by the Committee, in its sole discretion. The Committee shall have
complete discretion in determining the number of Performance Units and
Performance Shares granted to each Participant.
(b) Value of Performance Units/Shares. Each Performance Unit shall
have an initial value that is established by the Committee at the time of the
grant. Each Performance Share shall have an initial value equal to the Fair
Market Value of a Share on the date of grant. The Committee shall set
performance goals in its discretion which, depending on the extent to which they
are met, will determine the number and/or value of Performance Units/Shares that
will be paid out to the Participants. The time period during which the
performance goals must be met shall be called a "Performance Period."
Performance Periods of Awards granted to Insiders shall, in all cases, exceed
six (6) months in length.
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<PAGE> 13
(c) Earning of Performance Units/Shares. After the applicable
Performance Period has ended, the holder of Performance Units/Shares shall be
entitled to receive a payout of the number of Performance Unit/Shares earned by
the Participant over the Performance Period, to be determined as a function of
the extent to which the corresponding performance goals have been achieved.
Notwithstanding the preceding sentence, after the grant of a Performance
Unit/Share, the Committee, in its sole discretion, may waive the achievement of
any performance goals for such Performance Unit/Share.
(d) Form and Timing of Payment of Performance Units/Shares. Payment
of earned Performance Units/Shares shall be made in a single lump sum, within
forty-five (45) calendar days following the close of the applicable Performance
Period. The Committee, in its sole discretion, may pay earned Performance
Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market
Value equal to the value of the earned Performance Units/Shares at the close of
the applicable Performance Period) or in combination thereof.
Prior to the beginning of each Performance Period, Participants
may, in the discretion of the Committee, elect to defer the receipt of any
Performance Unit/Share payout upon such terms as the Committee shall determine.
(e) Cancellation of Performance Units/Shares. Subject to the
applicable Award Agreement, upon the earlier of (a) the Participant's
termination of employment, or (b) the date set forth in the Award Agreement, all
remaining Performance Units/Shares shall be forfeited by the Participant to the
Company, the Shares subject thereto shall again be available for grant under the
Plan.
(f) Nontransferability. Performance Units/Shares may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further a Participant's
rights under the Plan shall be exercisable during the Participant's lifetime
only by the Participant or the Participant's legal representative.
13. Non-Transferability of Options and Stock Purchase Rights. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee or Purchaser, only by the Optionee or Purchaser.
14. Adjustments Upon Changes in Capitalization, Merger or Other Events.
Subject to any required action by the shareholders of the Company, the number of
shares of Common Stock covered by each outstanding Option and Stock Purchase
Right, and the number of shares of Common Stock which have been authorized for
issuance under this Plan but as to which no Options or Stock Purchase Rights
have yet been granted or which have been returned to this Plan upon cancellation
or expiration of an Option or Stock Purchase Right, or repurchase of Shares from
a Purchaser or Optionee upon termination of employment or otherwise, as well as
the price per share of Common Stock covered by each such outstanding Option or
Stock Purchase Right, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock of the Company or the payment of a stock dividend with respect
to the Common Stock. Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an Option or Stock Purchase
Rights.
In the event of the dissolution or liquidation of the Company, all
Options and Stock Purchase Rights will terminate immediately prior to the
consummation of such proposed action if not
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<PAGE> 14
previously exercised. The Board, at its option, may provide for one or more of
the following from time to time or in any stock option agreement or stock
purchase agreement that, in the event of a Major Event, then (A) all Options and
Stock Purchase Rights will be assumed or equivalent options or stock purchase
rights will be substituted by such surviving corporation (or other entity) or a
parent or subsidiary of such surviving corporation (or other entity), (B) all
Options and Stock Purchase Rights will continue in full force and effect, or (C)
all Options and Stock Purchase Rights will terminate if not exercised prior to
the consummation of the transaction.
The foregoing adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
The grant of an Option or Stock Purchase Right pursuant to this
Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or any part of its business or assets.
15. Time of Grant. The date of grant of an Option or Stock Purchase
Right shall, for all purposes, be the date on which the Board makes the
determination granting such Option or Stock Purchase Right. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
16. Amendment and Termination.
(a) Amendment. The Board may amend this Plan from time to time in
such respects as the Board may deem advisable; provided that the shareholders of
the Company must approve the following amendments or revisions within 12 months
before or after the adoption of such revision or amendment:
(i) any increase in the number of Shares subject to this Plan,
other than in connection with an adjustment under Section 14 of this Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options (to the extent such modification requires
shareholder approval in order for the Plan to satisfy the requirements of
Section 422(b) of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Exchange Act); or
(iii) any other revision or amendment if such revision or
amendment requires shareholder approval in order for this Plan to satisfy the
requirements of Section 422(b) of the Code or to comply with the requirements of
Rule 16b-3 promulgated under the Exchange Act if applicable to the Company.
(b) Shareholder Approval. If any amendment requiring shareholder
approval under Section 16(a) of this Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 20 of this Plan.
(c) Suspension and Termination. The Board may suspend or terminate
this Plan at any time. No Options or Stock Purchase Rights may be granted while
this Plan is suspended or after it is terminated.
(d) Effect of Amendment; Termination or Suspension. Any such
amendment, termination or suspension of this Plan shall not affect Options or
Stock Purchase Rights already granted
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<PAGE> 15
and such Options or Stock Purchase Rights shall remain in full force and effect
as if this Plan had not been amended, terminated or suspended, unless mutually
agreed otherwise between the Optionee or Purchaser (as the case may be) and the
Company, which agreement must be in writing and signed by the Optionee or
Purchaser (as the case may be) and the Company.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange or other stock trading system upon which the Shares may then be listed.
As a condition to the exercise of an Option or Stock Purchase
Right, the Company may require the person exercising such Option or Stock
Purchase Right to make such representations and warranties at the time of any
such exercise as the Company may at that time determine, including without
limitation, representations and warranties that (i) the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares in violation of applicable federal or state securities
laws, and (ii) such person is knowledgeable and experienced in financial and
business matters and is capable of evaluating the merits and the risks
associated with purchasing the Shares.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of this Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares under this
Plan, shall relieve the Company of any liability in respect of the failure to
issue or sell such Shares as to which such requisite authority shall not have
been obtained.
19. Option, Stock Purchase and Stock Bonus Agreements. Options shall be
evidenced by written stock option agreements in such form as the Board shall
approve. Upon the exercise of Stock Purchase Rights, the Purchaser shall sign a
stock purchase agreement or stock bonus agreement in such form as the Board
shall approve.
20. Shareholder Approval.
(a) The shareholders of the Company shall have approved this Plan
within 12 months before or after this Plan is adopted. Any shares purchased
before shareholder approval is obtained shall be rescinded if shareholder
approval is not obtained within 12 months before or after this Plan is adopted.
Such shares shall not be counted in determining whether such approval is
obtained.
(b) If the Company registers any class of equity securities
pursuant to Section 12 of the Exchange Act, any required approval of the
shareholders of the Company obtained after such registration shall be solicited
substantially in accordance with Section 14(a) of the Exchange Act and the rules
and regulations promulgated thereunder.
(c) If the Company registers any class of equity securities
pursuant to Section 12 of the Exchange Act and if prior to such time either (x)
the shareholders of the Company did not approve this Plan or (y) the Company did
not solicit shareholder approval substantially in accordance with Section 14(a)
of the Exchange Act and the rules and regulations promulgated thereunder, then
the Company shall take all necessary actions to qualify the Plan under Rule
16(b)(3) promulgated under the Exchange Act at or prior to the later of (A) the
first annual meeting of shareholders held subsequent to the first registration
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<PAGE> 16
of any class of equity securities of the Company under Section 12 of the
Exchange Act or (B) the granting of an Option hereunder to an officer or
director after such registration.
21. Information to Optionees and Purchasers. The Company shall provide
annually to each Optionee and Purchaser, during the period that such Optionee or
Purchaser has one or more Options or Stock Purchase Rights outstanding, copies
of the annual financial statements of the Company.
22. Right of Company to Terminate Employment or Consulting Services.
This Plan shall not confer upon any Optionee or holder of a Stock Purchase Right
any right with respect to continuation of employment by or the rendition of
consulting services to the Company, any of its Subsidiaries or its Parent, nor
shall it interfere in any way with his or her right or the Company's, any of its
Subsidiaries' or its Parent's right to terminate his or her employment or
services at any time, with or without cause.
23. Rights of First Refusal and Repurchase.
(a) The written agreements evidencing Options or Stock Purchase
Rights may contain such provisions as the Board shall determine (or pursuant to
a separate agreement) to the effect that if an Optionee or Purchaser elects to
sell all or any Shares that the Optionee or Purchaser acquired upon the exercise
of an Option or Stock Purchase Right, then any proposed sale of such Shares by
such Optionee or Purchaser shall be subject to a right of first refusal in favor
of the Company.
(b) The Board may require, at its option, that a stock purchase
agreement, stock option agreement, stock bonus agreement, or other agreement
pursuant to this Plan grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the Purchaser's employment with the
Company for any reason (including death or disability). The repurchase price
shall be at the higher of the original purchase price or fair value of the
Shares on the date of termination of employment. If the Board so determines, the
purchase price for shares repurchased may be paid by cancellation of any
indebtedness of the Purchaser to the Company. The repurchase option must be
exercised by the Company within 90 days of termination of employment for cash or
cancellation of money indebtedness for the Shares and the right shall terminate
when the Company's Common Stock becomes publicly traded. The Board may require
such a repurchase right in other events.
(c) Certificates representing shares issued upon exercise of
Options or Stock Purchase Rights shall bear a restrictive legend to the effect
that the transferability of such shares is subject to the restrictions contained
in this Plan and the applicable written agreement between the Optionee or
Purchaser and the Company.
24. Withholding. The Company's obligation to deliver shares of Common
Stock under this Plan shall be subject to applicable federal, state and local
tax withholding requirements. To the extent provided by the terms of the stock
option agreement relating to an Option, the Optionee may satisfy any federal,
state or local tax withholding obligation relating to the exercise of such
Option by any or a combination of the following means: (i) cash payment or wage
withholding; (ii) authorizing the Company to withhold from the Shares otherwise
issuable to the Optionee upon exercise of the Option the number of Shares having
a fair market value less than or equal to the amount of the withholding tax
obligation; or (iii) delivering to the Company unencumbered shares of Common
Stock owned by the Optionee having a fair market value less than or equal to the
amount of the withholding tax obligation; provided, however, that with respect
to clauses (ii) and (iii) above the Board in its sole discretion may disapprove
such payment and require that such taxes be paid in cash.
25. Separability. At a time when the Company has a class of equity
securities registered pursuant to Section 12 of the Exchange Act, if any of the
terms or provisions of this Plan conflict with the requirements of Rule 16b-3
promulgated under the Exchange Act and/or Section 422 of the Code, then
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<PAGE> 17
such terms or provisions shall be deemed inoperative to the extent they so
conflict with the requirements of Rule 16b-3 promulgated under the Exchange Act,
and/or with respect to Incentive Stock Options, Section 422 of the Code. The
foregoing sentence shall not apply with respect to the requirements of Rule
16b-3 promulgated under the Exchange Act if the Board has expressly declared
that such requirements shall not apply. With respect to Incentive Stock Options,
if this Plan does not contain any provision required to be included herein under
Section 422 of the Code, such provision shall be deemed to be incorporated
herein with the same force and effect as if such provision had been set out at
length herein. To the extent any Option that is intended to qualify as an
Incentive Stock Option cannot so qualify, such Option, to that extent, shall be
deemed to be a Nonstatutory Stock Option for all purposes of this Plan.
26. Non-Exclusivity of this Plan. The adoption of this Plan by the
Board shall not be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options and the awarding of
stock and cash otherwise than under this Plan, and such arrangements may be
either generally applicable or applicable only in specific cases.
27. Governing Law. This Plan shall be governed by, and construed in
accordance with the laws of the State of New York.
28. Cancellation of and Substitution for Nonstatutory Options. The
Company shall have the right to cancel any Nonstatutory Stock Option at any time
before it otherwise would have expired by its terms and to grant to the same
Optionee in substitution therefor a new Nonstatutory Stock Option stating an
option price which is lower (but not higher) than the option price stated in the
cancelled Option. Any such substituted option shall contain all the terms and
conditions of the cancelled Option; provided, however, that such substituted
Option shall not be exercisable after the expiration of ten (10) years and one
day from the date of grant of the cancelled Option.
29. Market Standoff. Unless the Board determines otherwise, each
Optionee or Purchaser shall not sell or otherwise transfer any Shares or other
securities of the Company during the 180-day period following the effective date
of a registration statement of the Company filed under the Securities Act;
provided, however, that such restriction shall apply only to the first two
registration statements of the Company to become effective under the Securities
Act which includes securities to be sold on behalf of the Company to the public
in an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
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<PAGE> 18
Exhibit 1
Form of Stock Option Agreement
<PAGE> 19
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered
into as of the date of grant set forth below (the "Date of Grant") by and
between BigStar Entertainment, Inc., a Delaware corporation (the "Company"), and
the optionee named below ("Optionee"). Capitalized terms not defined herein
shall have the meaning ascribed to them in the Company's Amended 1999 Stock
Option & Incentive Plan (the "Plan").
Optionee:
Social Security Number:
Address:
Total Option Shares:
Exercise Price Per Share:
Date of Grant:
Type of Stock Option: [ ] Incentive Stock Option ("ISO")
(Check one): [ ] Non-Statutory Stock Option
1. Grant of Option. The Company hereby grants to Optionee an
option (the "Option") to purchase the total number of shares of Common Stock of
the Company set forth above (the "Shares") at the Exercise Price Per Share set
forth above (the "Exercise Price"), subject to all of the terms and conditions
of this Agreement and the Plan. If designated as an Incentive Stock Option
above, the Option is intended to qualify as an "incentive stock option" ("ISO")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). Only Employees of the Company shall receive ISOs.
2. Exercise Price. The Exercise Price, is not less than the fair
market value per share of Common Stock on the date of grant, as determined by
the Board; provided, however, in the event Optionee is an Employee and owns
stock representing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of its Parent or Subsidiary
corporations immediately before this Option is granted, said exercise price is
not less than one hundred ten percent (110%) of the fair market value per share
of Common Stock on the date of grant as determined by the Board.
3. Exercise of Option. This Option shall be exercisable during
its term in accordance with the provisions of Section 8 of the Plan as follows:
(i) Vesting
(a) This Option shall not become exercisable as to any of the
number of the Shares as follows (check one):
<PAGE> 20
[ ]: until the date that is one (1) year from the date of grant
of the Option (the "Anniversary Date"). On the Anniversary
Date, this Option may be exercised to the extent of 25% of the
Shares. Upon the expiration of each calendar month from the
Anniversary Date, this Option may be exercised to the extent
of the product of (a) the total number of Shares set forth at
the beginning of this Agreement and (b) the fraction the
numerator of which is one (1) and the denominator of which is
forty-eight (48) (the "Monthly Vesting Amount"), plus the
shares as to which the right to exercise the Option has
previously accrued but has not been exercised; provided,
however, that notwithstanding any of the above, the 25%
exercisable on the Anniversary Date and the Monthly Vesting
Amount with respect to any calendar month shall become
exercisable only if the Employee was an employee of the
Company or any Subsidiary of the Company as of the Anniversary
Date and the last day of such month, respectively.
[ ]: ____ % of the shares vesting over ____ months, pro rata for
each month of Optionee providing continued service to the
Company.
[ ]: ______________________________________________.
(b) This Option may not be exercised for a fraction of a
Share.
(c) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 7, 8 and 9 below, subject to the limitations contained in subsection
3(i)(d).
(d) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in Section 11 below.
(ii) Method of Exercise. This Option shall be exercisable by
written notice which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by Optionee and
shall be delivered in person or by certified mail to the President, Secretary or
Chief Financial Officer of the Company. The written notice shall be accompanied
by payment of the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange upon which the Shares may then be
listed. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
(iii) Adjustments, Merger, etc. The number and class of the Shares
and/or the exercise price specified above are subject to appropriate adjustment
in the event of changes in the capital stock of the Company by reason of stock
dividends, split-ups or combinations of shares, reclassifications, mergers,
consolidations, reorganizations or liquidations. Subject to any required action
of the stockholders of the Company, if the Company shall be the surviving
corporation in any merger or consolidation, this Option (to the extent that it
is still outstanding) shall pertain to and apply to the securities to which a
holder of the same number of shares of Common Stock that are then subject to
this Option would have been entitled. A dissolution or liquidation of the
Company, or a merger or consolidation in which the Company is not the surviving
corporation, will cause this Option to terminate, unless the agreement or merger
or consolidation shall otherwise provide, provided that the Optionee shall, if
the Board expressly authorizes, in such event have the right immediately prior
to such dissolution or liquidation, or merger or consolidation, to exercise this
Option in whole or part. To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive. In
the event that (i) Optionee is an Employee, and (ii) the Company consummates a
merger resulting in a change in control of the Company, and (iii) the Employee
is
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<PAGE> 21
terminated without cause, then any options remaining unvested hereunder shall be
deemed to automatically vest.
4. Optionee's Representations. By receipt of this Option, by its
execution, and by its exercise in whole or in part, Optionee represents to the
Company that Optionee understands that:
(i) both this Option and any Shares purchased upon its
exercise are securities, the issuance by the Company of which requires
compliance with federal and state securities laws;
(ii) these securities are made available to Optionee only on
the condition that Optionee makes the representations contained in this Section
4 to the Company;
(iii) Optionee has made a reasonable investigation of the
affairs of the Company sufficient to be well informed as to the rights and the
value of these securities;
(iv) Optionee understands that the securities have not been
registered under the Securities Act of 1933, as amended (the "Act") in reliance
upon one or more specific exemptions contained in the Act, which may include
reliance on Rule 701 promulgated under the Act, if available, or which may
depend upon (a) Optionee's bona fide investment intention in acquiring these
securities; (b) Optionee's intention to hold these securities in compliance with
federal and state securities laws; (c) Optionee having no present intention of
selling or transferring any part thereof (recognizing that the Option is not
transferable) in violation of applicable federal and state securities laws; and
(d) there being certain restrictions on transfer of the Shares subject to the
Option;
(v) Optionee understands that the Shares subject to this
Option, in addition to other restrictions on transfer, must be held indefinitely
unless subsequently registered under the Act, or unless an exemption from
registration is available; that Rule 144, the usual exemption from registration,
is only available after the satisfaction of certain holding periods and in the
presence of a public market for the Shares; that there is no certainty that a
public market for the Shares will exist, and that otherwise it will be necessary
that the Shares be sold pursuant to another exemption from registration which
may be difficult to satisfy; and
(vi) Optionee understands that the certificate representing
the Shares will bear a legend prohibiting their transfer in the absence of their
registration or the opinion of counsel for the Company that registration is not
required, and a legend prohibiting their transfer in compliance with applicable
state securities laws unless otherwise exempted.
5. Method of Payment. Payment of the purchase price shall be made by
cash, check or, in the sole discretion of the Board at the time of exercise,
promissory notes or other Shares of Common Stock having a fair market value on
the date of surrender equal to the aggregate purchase price of the Shares being
purchased.
6. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation. As a condition to the
exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
7. Termination of Status as an Employee. In the event of termination of
Optionee's Continuous Status as an Employee for any reason other than death or
disability, Optionee may, but only within thirty (30) days after the date of
such termination (but in no event later than the date of expiration of the term
of this Option as set forth in Section 11 below), exercise this Option to the
extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise this
Option at the date of such termination, or if Optionee does not exercise this
Option within the time specified herein, this Option shall terminate.
3
<PAGE> 22
8. Disability of Optionee. In the event of termination of Optionee's
Continuous Status as an Employee as a result of Optionee's disability, Optionee
may, but only within six (6) months from the date of termination of employment
or consulting relationship (but in no event later than the date of expiration of
the term of this Option as set forth in Section 11 below), exercise this Option
to the extent Optionee was entitled to exercise it at the date of such
termination; provided, however that if the disability is not total and permanent
(as defined in Section 22(e)(3) of the Code) and the Optionee exercises the
option within the period provided above but more than three months after the
date of termination, this Option shall automatically be deemed to be a
Nonstatutory Stock Option and not an Incentive Stock Option; and provided,
further, that if the disability is total and permanent (as defined in Section
22(e)(3) of the Code), then the Optionee may, but only within one (1) year from
the date of termination of employment or consulting relationship (but in no
event later than the date of expiration of the term of this Option as set forth
in Section 11 below), exercise this Option to the extent Optionee was entitled
to exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise this Option at the date of termination, or if Optionee
does not exercise such Option (which Optionee was entitled to exercise) within
the time periods specified herein, this Option shall terminate.
9. Death of Optionee. In the event of the death of Optionee:
(i) during the term of this Option while an Employee of the
Company and having been in Continuous Status as an Employee since the date of
grant of this Option, this Option may be exercised, at any time within one (1)
year following the date of death (but, in the case of an Incentive Stock Option,
in no event later than the date of expiration of the term of this Option as set
forth in Section 11 below), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the time of death of the Optionee.
To the extent that such Employee was not entitled to exercise the Option at the
date of death, or if such Employee, estate or other person does not exercise
such Option (which such Employee, estate or person was entitled to exercise)
within the one (1) year time period specified herein, the Option shall
terminate; or
(ii) during the thirty (30) day period specified in Section 7
or the one (1) year period specified in Section 8, after the termination of
Optionee's Continuous Status as an Employee, this Option may be exercised, at
any time within one (1) year following the date of death (but, in the case of an
Incentive Stock Option, in no event later than the date of expiration of the
term of this Option as set forth in Section 11 below), by Optionee's estate or
by a person who acquired the right to exercise this Option by bequest or
inheritance, but only to the extent of the right to exercise that had accrued at
the date of termination. To the extent that such Employee was not entitled to
exercise this Option at the date of death, or if such Employee, estate or other
person does not exercise such Option (which such Employee, estate or person was
entitled to exercise) within the one (1) year time period specified herein, this
Option shall terminate.
10. Non-Transferability of Option. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee, only by Optionee. The
terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
11. Term of Option. Subject to the other terms of this Agreement, this
Option may not be exercised more than five (5) years from the date of grant of
this Option, and may be exercised during such term only in accordance with the
Plan and terms of this Option; provided, however, that the term of this option,
if it is a Nonstatutory Stock Option, may be extended for the period set forth
in Section 9(i) or Section 9(ii) in the circumstances set forth in such
Sections.
12. Early Disposition of Stock; Taxation Upon Exercise of Option. If
Optionee is an Employee and the Option qualifies as an ISO, Optionee understands
that, if Optionee disposes of any Shares received under this Option within two
(2) years after the date of this Agreement or within one (1) year after such
Shares were transferred to Optionee, Optionee will be treated for federal income
tax purposes as having received ordinary income at the time of such disposition
in any amount generally measured as the difference between the price paid for
the Shares and the lower of the fair market value of the Shares at the
4
<PAGE> 23
date of exercise or the fair market value of the Shares at the of disposition.
Any gain recognized on such premature sale of the Shares in excess of the amount
treated as ordinary income will be characterized as capital gain. Optionee
hereby agrees to notify the Company in writing within thirty (30) days after the
date of any such disposition. Optionee understands that if Optionee disposes of
such Shares at any time after the expiration of such two-year and one-year
holding periods, any gain on such sale will be treated as long-term capital gain
laws subject to meeting various qualifications. If Optionee is a Consultant or
this is a Nonstatutory Stock Option, Optionee understands that, upon exercise of
this Option, Optionee will recognize income for tax purposes in an amount equal
to the excess of the then fair market value of the Shares over the exercise
price. Upon a resale of such shares by the Optionee, any difference between the
sale price and the fair market value of the Shares on the date of exercise of
the Option will be treated as capital gain or loss. Optionee understands that
the Company will be required to withhold tax from Optionee's current
compensation in some of the circumstances described above; to the extent that
Optionee's current compensation is insufficient to satisfy the withholding tax
liability, the Company may require the Optionee to make a cash payment to cover
such liability as a condition to exercise of this Option.
13. Tax Consequences. The Optionee understands that any of the
foregoing references to taxation are based on federal income tax laws and
regulations now in effect, and may not be applicable to the Optionee under
certain circumstances. The Optionee may also have adverse tax consequences under
state or local law. The Optionee has reviewed with the Optionee's own tax
advisors the federal, state, local and foreign tax consequences of the
transactions contemplated by this Agreement. The Optionee is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents. The Optionee understands that the Optionee (and not the Company)
shall be responsible for the Optionee's own tax liability that may arise as a
result of the transactions contemplated by this Agreement.
14. Severability; Construction. In the event that any provision in
this Option shall be invalid or unenforceable, such provision shall be severable
from, and such invalidity or unenforceability shall not be construed to have any
effect on, the remaining provisions of this Option. This Option shall be
construed as to its fair meaning and not for or against either party.
15. Damages. The parties agree that any violation of this Option
(other than a default in the payment of money) cannot be compensated for by
damages, and any aggrieved party shall have the right, and is hereby granted the
privilege, of obtaining specific performance of this Option in any court of
competent jurisdiction in the event of any breach hereunder.
16. Governing Law. This Option shall be deemed to be made under
and governed by and construed in accordance with the laws of the State of New
York. Jurisdiction for any disputes hereunder shall be solely in New York, New
York.
17. Delay. No delay or failure on the part of the Company or the
Optionee in the exercise of any right, power or remedy shall operate as a waiver
thereof, nor shall any single or partial exercise by any of them of any right,
power or remedy preclude other or further exercise thereof, or the exercise of
any other right, power or remedy.
18. Restrictions. Notwithstanding anything herein to the contrary,
Optionee understands and agrees that Optionee shall not dispose of any of the
Shares, whether by sale, exchange, assignment, transfer, gift, devise, bequest,
mortgage, pledge, encumbrance or otherwise, except in accordance with the terms
and conditions of this Section 18, and Optionee shall not take or omit any
action which will impair the absolute and unrestricted right, power, authority
and capacity of Optionee to sell Shares in accordance with the terms and
conditions hereof.
Any purported transfer of Shares by Optionee that violates any
provision of this Section 18 shall be wholly void and ineffectual and shall give
to the Company or its designee the right to purchase from Optionee all but not
less than all of the Shares then owned by Optionee for a period of 90 days from
the date the Company first learns of the purported transfer at the Agreement
Price and on the Agreement Terms (as those terms are defined in subsections
(b)(3) and (b)(4), respectively, of this
5
<PAGE> 24
Section 18). If the Shares are not purchased by the Company or its designee, the
purported transfer thereof shall remain void and ineffectual and they shall
continue to be subject to this Agreement.
The Company shall not cause or permit the transfer of any Shares to be
made on its books except in accordance with the terms hereof.
(a)(1). Permitted Transfers.
(i) Optionee may sell, assign or transfer any Shares held by
the Optionee but only by complying with the provisions of subsection (b)(1) of
this Section 18.
(ii) Optionee may sell, assign or transfer any Shares held by
the Optionee without complying with the provisions of subsection (b)(1) by
obtaining the prior written consent of the Company's shareholders owning 50% of
the then issued and outstanding shares of the Company's Common Stock (determined
on a fully diluted basis) or a majority of the members of the Board of Directors
of the Company, provided that the transferee agrees in writing to be bound by
the provisions of this Option and the transfer is made in accordance with any
other restrictions or conditions contained in the written consent and in
accordance with applicable federal and state securities laws.
(iii) Upon the death of Optionee, Shares held by the Optionee
may be transferred to the personal representative of the Optionee's estate
without complying with the provisions of subsection (b)(1). Shares so
transferred shall be subject to the other provisions of this Option, including
in particular subsection (b)(2).
(a)(2). No Pledge. Unless a majority of the members of the Board of
Directors consent, Shares may not be pledged, mortgaged or otherwise encumbered
to secure indebtedness for money borrowed or any other obligation for which the
Optionee is primarily or secondarily liable.
(a)(3). Stock Certificate Legend. Each stock certificate for Shares
issued to the Optionee shall have conspicuously written, printed, typed or
stamped upon the face thereof, or upon the reverse thereof with a conspicuous
reference on the face thereof, one or both of the following legend:
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE TRANSFERRED IN THE ABSENCE OF REGISTRATION THEREUNDER OR AN
APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT. SUCH SHARES
MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN ANY MANNER
EXCEPT IN ACCORDANCE WITH AND SUBJECT TO THE TERMS OF THE STOCK OPTION
AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
UNLESS A MAJORITY OF THE MEMBERS OF THE BOARD OF DIRECTORS CONSENT, SUCH STOCK
OPTION AGREEMENT PROHIBITS ANY PLEDGE, MORTGAGE OR OTHER ENCUMBRANCE OF SUCH
SHARES TO SECURE ANY OBLIGATION OF THE HOLDER HEREOF. EVERY CREDITOR OF THE
HOLDER HEREOF AND ANY PERSON ACQUIRING OR PURPORTING TO ACQUIRE THIS CERTIFICATE
OR THE SHARES HEREBY EVIDENCED OR ANY INTEREST THEREIN IS HEREBY NOTIFIED OF THE
EXISTENCE OF SUCH STOCK OPTION AGREEMENT, AND ANY ACQUISITION OR PURPORTED
ACQUISITION OF THIS CERTIFICATE OR THE SHARES HEREBY EVIDENCED OR ANY INTEREST
THEREIN SHALL BE SUBJECT TO ALL RIGHTS AND OBLIGATIONS OF THE PARTIES TO SUCH
STOCK OPTION AGREEMENT AS THEREIN SET FORTH.
(ii) [any legend required by applicable state securities laws]
(b)(1) Sales of Shares.
(i) Company's Right of First Refusal. In the event that the
Optionee shall desire to sell, assign or transfer any Shares held by the
Optionee to any other person (the "Offered Shares") and shall be in receipt of a
bona fide offer to purchase the Offered Shares ("Offer"), the following
procedure shall apply. The Optionee shall give to the Company written notice
containing the terms and conditions of
6
<PAGE> 25
the Offer, including, but not limited to (a) the number of Offered Shares; (b)
the price per Share; (c) the method of payment; and (d) the name(s) of the
proposed purchaser(s).
An offer shall not be deemed bona fide unless the Optionee has
informed the prospective purchaser of the Optionee's obligation under this
Option and the prospective purchaser has agreed to become a party hereunder and
to be bound hereby. The Company is entitled to take such steps as it reasonably
may deem necessary to determine the validity and bona fide nature of the Offer.
Until 30 days after such notice is given, the Company or its
designee shall have the right to purchase all of the Offered Shares at the price
offered by the prospective purchaser and specified in such notice. Such purchase
shall be on the Agreement Terms, as defined in subsection (b)(4).
(ii) Failure of Company or its Designee to Purchase Offered Shares. If
all of the Offered Shares are not purchased by the Company and/or its designee
within the 30-day period granted for such purchases, then any remaining Offered
Shares may be sold, assigned or transferred pursuant to the Offer; provided,
that the Offered Shares are so transferred within 30 days of the expiration of
the 30-day period to the person or persons named in, and under the terms and
conditions of, the bona fide Offer described in the notice to the Company; and
provided further, that such persons agree to execute and deliver to the Company
a written agreement, in form and content satisfactory to the Company, agreeing
to be bound by the terms and conditions of this Option.
(b)(2) Manner of Exercise.
Any right to purchase hereunder shall be exercised by giving
written notice of election to the Optionee, the Optionee's personal
representative or any other selling person, as the case may be, prior to the
expiration of such right to purchase.
(b)(3) Agreement Price.
The "Agreement Price" shall be the higher of (A) the fair
market value of the Shares to be purchased determined in good faith by the Board
of Directors of the Company and (B) the original exercise price of the Shares to
be purchased.
(b)(4) Agreement Terms. "Agreement Terms" shall mean and include the
following:
(i) Delivery of Shares and Closing Date. At the closing, the
Optionee, the Optionee's personal representative or such other selling person,
as the case may be, shall deliver certificates representing the Shares, properly
endorsed for transfer, and with the necessary documentary and transfer tax
stamps, if any, affixed, to the purchaser of such Shares. Payment of the
purchase price therefor shall concurrently be made to the Optionee, the
Optionee's personal representative or such other selling person, as provided in
subsection (ii) of this subsection (b)(4). Such delivery and payment shall be
made at the principal office of the Company or at such other place as the
parties mutually agree.
(ii) Payment of Purchase Price. The Company shall pay the
purchase price to the Optionee at the closing.
(b)(5) Right to Purchase Upon Certain Other Events.
The Company or its designee shall have the right to purchase
all, but not less than all, of the Shares held by the Optionee at the Agreement
Price and on the Agreement Terms for a period of 90 days after any of the
following events:
(i) an attempt by a creditor to levy upon or sell any of the
Optionee's Shares;
(ii) the filing of a petition by the Optionee under the U.S.
Bankruptcy Code or any insolvency laws;
7
<PAGE> 26
(iii) the filing of a petition against Optionee under any
insolvency or bankruptcy laws by any creditor of the Optionee if such petition
is not dismissed within 30 days of filing; or
(iv) the entry of a decree of divorce between the Optionee and
the Optionee's spouse.
The Optionee shall provide the Company written notice of the occurrence of any
such event within 30 days of such event.
(c)(1) Termination. The provisions of this Section 18 shall terminate
and all rights of each such party hereunder shall cease except for those which
shall have theretofore accrued upon the occurrence of any of the following
events:
(i) cessation of the Company's business;
(ii) bankruptcy, receivership or dissolution of the Company;
(iii) ownership of all of the issued and outstanding shares of
the Company by a single shareholder of the Company;
(iv) written consent or agreement of the shareholders of the
Company holding 50% of the then issued and outstanding shares of the
Company (determined on a fully diluted basis);
(v) consent or agreement of a majority of the members of the
Board of Directors of the Company; or
(vi) registration of any class of equity securities of the
Company pursuant to Section 12 of the Securities Exchange Act of 1934,
as amended.
(c)(2). Amendment. This Section 18 may be modified or amended in whole
or in part by a written instrument signed by shareholders of the Company holding
50% of the outstanding shares of Common Stock (determined on a fully diluted
basis) or a majority of the members of the Board of Directors of the Company.
19. Market Standoff. Unless the Board of Directors otherwise consents,
Optionee agrees hereby not to sell or otherwise transfer any Shares or other
securities of the Company during the 180-day period following the effective date
of a registration statement of the Company filed under the Act; provided,
however, that such restriction shall apply only to the first two registration
statements of the Company to become effective under the Act which includes
securities to be sold on behalf of the Company to the public in an underwritten
public offering under the Act. The Company may impose stop-transfer instructions
with respect to securities subject to the foregoing restrictions until the end
of such 180-day period.
20. Complete Agreement. This Agreement constitutes the entire agreement
between the parties with respect to its subject matter, and supersedes all other
prior or contemporaneous agreements and understandings both oral or written;
subject, however, that in the event of any conflict between this Agreement and
the Plan, the Plan shall govern. This Agreement may only be amended in a writing
signed by the Company and the Optionee.
21. Privileges of Stock Ownership. Participant shall not have any of
the rights of a shareholder with respect to any Shares until Optionee exercises
the Option and pay the Exercise Price.
8
<PAGE> 27
22. Notices. Any notice required to be given or delivered to the
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated above or to such other address as
such party may designate in writing from time to tome to the Company. All
notices shall be deemed to have been given or delivered upon: personal delivery;
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); one (1) business day after deposit
with any return receipt express courier (prepaid); or one (1) business day after
transmission by rapifax or telecopier.
DATE OF GRANT:
BIGSTAR ENTERTAINMENT, INC.
By:
Name:
Title:
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE COMPANY'S PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND
THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING
PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT
OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING
RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan, represents that
Optionee is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of this Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board or
of the Committee upon any questions arising under the Plan.
Dated:
Optionee
<PAGE> 28
Consent of Spouse
The undersigned spouse of the Optionee to the foregoing Stock
Option Agreement acknowledges on his or her own behalf that: I have read the
foregoing Stock Option Agreement and I know its contents. I hereby consent to
and approve of the provisions of the Stock Option Agreement, and agree that the
Shares issued upon exercise of the options covered thereby and my interest in
them are subject to the provisions of the Stock Option Agreement and that I will
take no action at any time to hinder operation of the Stock Option Agreement on
those Shares or my interest in them.
Signature of Spouse
Address
10
<PAGE> 1
* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Commission.
STRATEGIC MARKETING AGREEMENT
AGREEMENT, dated as of May, 1999 by and between BigStar Entertainment, Inc.
("BigStar") a Delaware corporation with offices at 19 Fulton St. 5th Floor,
New York, NY, 10038 Tel. 212/422-1160, Fax. 212/422-1950 and Baker &
Taylor, Inc. ("B&T") 2709 Water Ridge Parkway, Charlotte, NC 28217, Tel.,
704/329-9102, Fax 704/329-9105.
BigStar wishes to establish a strategic marketing relationship with B & T
pursuant to the terms and conditions set forth herein.
1) Term
The initial term of this Agreement will begin on May 1, 1999 and will end
December 31, 2000. This Agreement will renew automatically for 24 month
Additional Terms unless cancelled in writing by either party with 90 days
notice prior the end of the preceding term.
2) B & T Duties
B & T shall be responsible for all of the following:
a) Fulfillment of entertainment products, order processing and customer
fulfillment terms ("Fulfillment Services") for BigStar and BigStar
customers pursuant to the terms and conditions set forth in the
Agreement dated 18 February, 1998 between B&T and BigStar, except as
expressly revised by the terms of this Agreement.
b) Expansion of credit for the purchase of goods ("Purchases") from B &
T for BigStar to $1 million with 60 day payment terms (the "B&T
Credit"), such credit terms to be expanded to at least $[*] upon the
successful completion of an Initial Public Offering by BigStar (the
"IPO") of $[*] of BigStar common stock or more. These credit terms will
become subject to B & T's standard reasonable commercial credit terms
[*] months after the completion of an IPO or [*] months after the
signature date of this Agreement, if no IPO is completed in that time.
c) Reasonable commercial best efforts to assist in the sourcing and
price negotiation of advertising media co-operative funding, barter
advertising opportunities, market development funds and:
d) Other areas of cooperation that B & T may feel is in the best
interest of BigStar.
3) No Obligation to Purchase
BigStar shall no obligation to make any minimum purchases from B & T and this
Agreement is mutually non-exclusive.
4) Warrant Agreement
In additional consideration for the rights and agreements detailed in this
Agreement, BigStar will grant warrants that provide B & T with the right, but
not the obligation, to purchase 60,000 BigStar Entertainment Inc. shares at
$4.00 per share at any time in the next 3 years. These warrants will be subject
to the terms of, and detailed further in, a "B & T BigStar Warrant Agreement"
attached in draft form as Appendix I. The current outstanding stock of BigStar
is detailed in Appendix II [NOTE BigStar Entertainment is currently filing a
4:1 stock split with the State of Delaware. The Terms in this Agreement are all
on a "post-split" basis.]
5) Termination
Subject to Section 1 herein, this Agreement shall terminate pursuant to the
terms and conditions of the Fulfillment Services agreement.
6) Confidentiality
Each party acknowledges that during the course of this Agreement it may be
entrusted with certain confidential information of the other party that is
identified as such in writing, and agrees that it will protect
<PAGE> 2
the confidentiality thereof with the same measures that it would use to protect
its own similar information, but in no event shall the care be less than
reasonable and that it will not (i) use such confidential information for any
purpose except the performance of this Agreement, or (ii) disclose any such
confidential information to any person except employees on a need to know basis
where such persons have agreed to be contractually bound by this confidentiality
provision. These obligations shall not apply to any information generally
available to the public or information approved for release by BigStar and
Subscriber without restriction.
7) Governing Law
This Agreement shall be governed pursuant to the governing law and contents
of law provisions of the Fulfillment Services agreement.
8) Dispute Resolution
All disputes shall be governed pursuant to the dispute resolution provisions
of the Fulfillment Services agreement.
9) General Provisions
The provisions hereof, including the attachments and any written supplemental
agreement hereto signed as of the date hereof constitute the entire agreement
between the parties relating to the transactions contemplated herein and
merge and supersede all prior discussions, agreements, and understandings of
every kind and nature between them. No oral modification or additions hereto
shall be binding. Neither party shall be bound by any condition, definition,
warranty or representation other than as expressly provided for in this
Agreement or as may be duly set forth in a writing signed by an authorized
officer of the party hereto which is to be bound thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
Baker & Taylor, Inc. BigStar Entertainment, Inc.
/s/ W. Polich/Pres. David Friedensohn
- ------------------------- -------------------------
(Name & Title) (Name & Title)
/s/ W. Polich /s/ David Friedensohn
- ------------------------- -------------------------
(Signature) (Signature)
5/3/99
- ------------------------- -------------------------
(Date) (Date)
<PAGE> 1
BIGSTAR ENTERTAINMENT, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1 PURPOSE....................................................................................1
Section 2 DEFINITIONS................................................................................1
2.1 "1934 Act".....................................................................................1
2.2 "Board"........................................................................................1
2.3 "Code".........................................................................................1
2.4 "Committee"....................................................................................1
2.5 "Common Stock".................................................................................1
2.6 "Company"......................................................................................1
2.7 "Compensation".................................................................................1
2.8 "Eligible Employee"............................................................................1
2.9 "Employee".....................................................................................2
2.10 "Employer" or "Employers"......................................................................2
2.11 "Enrollment Date"..............................................................................2
2.12 "Grant Date"...................................................................................2
2.13 "Participant"..................................................................................2
2.14 "Plan".........................................................................................2
2.15 "Purchase Date"................................................................................2
2.16 "Subsidiary"...................................................................................2
Section 3 SHARES SUBJECT TO THE PLAN.................................................................2
3.1 Number Available...............................................................................2
3.2 Adjustments....................................................................................2
Section 4 ENROLLMENT.................................................................................3
4.1 Participation..................................................................................3
4.2 Payroll Withholding............................................................................3
Section 5 OPTIONS TO PURCHASE COMMON STOCK...........................................................3
5.1 Grant of Option................................................................................3
5.2 Duration of Option.............................................................................3
5.3 Number of Shares Subject to Option.............................................................4
5.4 Other Terms and Conditions.....................................................................4
Section 6 PURCHASE OF SHARES.........................................................................4
6.1 Exercise of Option.............................................................................4
</TABLE>
-I-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
6.2 Delivery of Shares.............................................................................4
6.3 Exhaustion of Shares...........................................................................5
Section 7 WITHDRAWAL.................................................................................5
7.1 Withdrawal.....................................................................................5
Section 8 CESSATION OF PARTICIPATION.................................................................5
8.1 Termination of Status as Eligible Employee.....................................................5
Section 9 DESIGNATION OF BENEFICIARY.................................................................5
9.1 Designation....................................................................................5
9.2 Changes........................................................................................5
9.3 Failed Designations............................................................................6
Section 10 ADMINISTRATION.............................................................................6
10.1 Plan Administrator.............................................................................6
10.2 Actions by Committee...........................................................................6
10.3 Powers of Committee............................................................................6
10.4 Decisions of Committee.........................................................................7
10.5 Administrative Expenses........................................................................7
10.6 Eligibility to Participate.....................................................................7
10.7 Indemnification................................................................................7
Section 11 AMENDMENT, TERMINATION, AND DURATION.......................................................7
11.1 Amendment, Suspension, or Termination..........................................................7
11.2 Duration of the Plan...........................................................................8
Section 12 GENERAL PROVISIONS.........................................................................8
12.1 Participation by Subsidiaries..................................................................8
12.2 Inalienability.................................................................................8
12.3 Severability...................................................................................8
12.4 Requirements of Law............................................................................8
12.5 Compliance with Rule 16b-3.....................................................................8
12.6 No Enlargement of Employment Rights............................................................9
12.7 Apportionment of Costs and Duties..............................................................9
12.8 Construction and Applicable Law................................................................9
12.9 Captions.......................................................................................9
</TABLE>
-II-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
EXECUTION ...........................................................................................9
</TABLE>
-III-
<PAGE> 5
BIGSTAR ENTERTAINMENT, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED AND RESTATED AS OF JULY 6, 1999)
SECTION 1
PURPOSE
BigStar Entertainment, Inc. hereby establishes the BigStar
Entertainment, Inc. 1999 Employee Stock Purchase Plan, effective as of the first
Enrollment Date, in order to provide eligible employees of the Company and its
participating Subsidiaries with the opportunity to purchase Common Stock through
payroll deductions. The Plan is intended to qualify as an employee stock
purchase plan under Section 423(b) of the Code.
SECTION 2
DEFINITIONS
2.1 "1934 Act" means the Securities Exchange Act of 1934, as
amended. Reference to a specific Section of the 1934 Act or regulation
thereunder shall include such Section or regulation, any valid regulation
promulgated under such Section, and any comparable provision of any future
legislation or regulation amending, supplementing or superseding such Section or
regulation.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Code" means the Internal Revenue Code of 1986, as
amended. Reference to a specific Section of the Code or regulation thereunder
shall include such Section or regulation, any valid regulation promulgated under
such Section, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such Section or regulation.
2.4 "Committee" shall mean the committee appointed by the
Board to administer the Plan. Any member of the Committee may resign at any time
by notice in writing mailed or delivered to the Secretary of the Company. As of
the effective date of the Plan, the Plan shall be administered by the
Compensation Committee of the Board.
2.5 "Common Stock" means the common stock of the Company.
2.6 "Company" means BigStar Entertainment, Inc., a Delaware
corporation.
2.7 "Compensation" means a Participant's regular wages. The
Committee, in its discretion, may (on a uniform and nondiscriminatory basis)
establish a different definition of Compensation prior to an Enrollment Date for
all options to be granted on such Enrollment Date.
2.8 "Eligible Employee" means every Employee of an Employer,
except (a) any Employee who immediately after the grant of an option under the
Plan, would own stock and/or hold outstanding options to purchase stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Subsidiary of the Company
(including stock attributed to such Employee pursuant to Section 424(d) of the
<PAGE> 6
Code), or (b) as provided in the following sentence. The Committee, in its
discretion, from time to time may, prior to an Enrollment Date for all options
to be granted on such Enrollment Date, determine (on a uniform and
nondiscriminatory basis) that an Employee shall not be an Eligible Employee if
he or she: (1) has not completed at least two years of service since his or her
last hire date (or such lesser period of time as may be determined by the
Committee in its discretion), (2) customarily works not more than 20 hours per
week (or such lesser period of time as may be determined by the Committee in its
discretion), (3) customarily works not more than 5 months per calendar year (or
such lesser period of time as may be determined by the Committee in its
discretion), or (4) is an officer or other manager.
2.9 "Employee" means an individual who is a common-law
employee of any Employer, whether such employee is so employed at the time the
Plan is adopted or becomes so employed subsequent to the adoption of the Plan.
2.10 "Employer" or "Employers" means any one or all of the
Company, and those Subsidiaries which, with the consent of the Board, have
adopted the Plan.
2.11 "Enrollment Date" means such dates as may be determined
by the Committee (in its discretion and on a uniform and nondiscriminatory
basis) from time to time.
2.12 "Grant Date" means any date on which a Participant is
granted an option under the Plan.
2.13 "Participant" means an Eligible Employee who (a) has
become a Participant in the Plan pursuant to Section 4.1 and (b) has not ceased
to be a Participant pursuant to Section 8 or Section 9.
2.14 "Plan" means the BigStar Entertainment, Inc. 1999
Employee Stock Purchase Plan, as set forth in this instrument and as hereafter
amended from time to time.
2.15 "Purchase Date" means such dates as may be determined by
the Committee (in its discretion and on a uniform and nondiscriminatory basis)
from time to time prior to an Enrollment Date for all options to be granted on
such Enrollment Date.
2.16 "Subsidiary" means any corporation in an unbroken chain
of corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
SECTION 3
SHARES SUBJECT TO THE PLAN
3.1 Number Available. A maximum of 300,000 shares of Common
Stock shall be available for issuance pursuant to the Plan. Shares sold under
the Plan may be newly issued shares or treasury shares.
3.2 Adjustments. In the event of any reorganization,
recapitalization, stock split, reverse stock split, stock dividend, combination
of shares, merger, consolidation, offering
2
<PAGE> 7
of rights or other similar change in the capital structure of the Company, the
Board may make such adjustment, if any, as it deems appropriate in the number,
kind and purchase price of the shares available for purchase under the Plan and
in the maximum number of shares subject to any option under the Plan.
SECTION 4
ENROLLMENT
4.1 Participation. Each Eligible Employee may elect to become
a Participant by enrolling or re-enrolling in the Plan effective as of any
Enrollment Date. In order to enroll, an Eligible Employee must complete, sign
and submit to the Company an enrollment form in such form, manner and by such
deadline as may be specified by the Committee from time to time (in its
discretion and on a nondiscriminatory basis). Any Participant whose option
expires and who has not withdrawn from the Plan automatically will be
re-enrolled in the Plan on the Enrollment Date immediately following the
Purchase Date on which his or her option expires. Any Participant whose option
has not expired and who has not withdrawn from the Plan automatically will be
deemed to be un-enrolled from the Participant's current option and be enrolled
as of a subsequent Enrollment Date if the price per Share on such subsequent
Enrollment Date is lower than the price per Share on the Enrollment Date
relating to the Participant's current option.
4.2 Payroll Withholding. On his or her enrollment form, each
Participant must elect to make Plan contributions via payroll withholding from
his or her Compensation. Pursuant to such procedures as the Committee may
specify from time to time, a Participant may elect to have withholding equal to
a whole percentage from 1% to 15% (or such lesser percentage that the Committee
may establish from time to time for all options to be granted on any Enrollment
Date). A Participant may elect to increase or decrease his or her rate of
payroll withholding by submitting a new enrollment form in accordance with such
procedures as may be established by the Committee from time to time. A
Participant may stop his or her payroll withholding by submitting a new
enrollment form in accordance with such procedures as may be established by the
Committee from time to time. In order to be effective as of a specific date, an
enrollment form must be received by the Company no later than the deadline
specified by the Committee, in its discretion and on a nondiscriminatory basis,
from time to time. Any Participant who is automatically re-enrolled in the Plan
will be deemed to have elected to continue his or her contributions at the
percentage last elected by the Participant.
SECTION 5
OPTIONS TO PURCHASE COMMON STOCK
5.1 Grant of Option. On each Enrollment Date on which the
Participant enrolls or re-enrolls in the Plan, he or she shall be granted an
option to purchase shares of Common Stock.
5.2 Duration of Option. Each option granted under the Plan
shall expire on the earliest to occur of (a) the completion of the purchase of
shares on the last Purchase Date occurring within 27 months of the Grant Date of
such option, (b) such shorter option period as may be established by the
Committee from time to time prior to an Enrollment Date for all options to be
granted on such Enrollment Date, or (c) the date on which the Participant ceases
to
3
<PAGE> 8
be such for any reason. Until otherwise determined by the Committee for all
options to be granted on an Enrollment Date, the period referred to in clause
(b) in the preceding sentence shall mean the period from the applicable
Enrollment Date through the last business day prior to the immediately following
Enrollment Date.
5.3 Number of Shares Subject to Option. The number of shares
available for purchase by each Participant under the option will be established
by the Committee from time to time prior to an Enrollment Date for all options
to be granted on such Enrollment Date.
5.4 Other Terms and Conditions. Each option shall be subject
to the following additional terms and conditions:
(a) payment for shares purchased under the option shall be
made only through payroll withholding under Section 4.2;
(b) purchase of shares upon exercise of the option will be
accomplished only in accordance with Section 6.1;
(c) the price per share under the option will be determined as
provided in Section 6.1; and
(d) the option in all respects shall be subject to such other
terms and conditions (applied on a uniform and nondiscriminatory
basis), as the Committee shall determine from time to time in its
discretion.
SECTION 6
PURCHASE OF SHARES
6.1 Exercise of Option. Subject to Section 6.2, on each
Purchase Date, the funds then credited to each Participant's account shall be
used to purchase whole shares of Common Stock. Any cash remaining after whole
shares of Common Stock have been purchased shall be carried forward in the
Participant's account for the purchase of shares on the next Purchase Date. The
price per Share of the Shares purchased under any option granted under the Plan
shall be eighty-five percent (85%) of the lower of:
(a) the closing price per Share on the Grant Date for such
option on the NASDAQ National Market System; or
(b) the closing price per Share on the Purchase Date on the
NASDAQ National Market System;
provided, however, that with respect to any Grant Date under the Plan that
coincides with the date of the final prospectus for the initial public offering
of the Common Stock, the price in clause (a) above shall be the price per Share
at which shares of Common Stock are initially offered for sale to the public by
the Company's underwriters in such offering.
6.2 Delivery of Shares. As directed by the Committee in its
sole discretion, shares purchased on any Purchase Date shall be delivered
directly to the Participant or to a
4
<PAGE> 9
custodian or broker (if any) designated by the Committee to hold shares for the
benefit of the Participants. As determined by the Committee from time to time,
such shares shall be delivered as physical certificates or by means of a book
entry system.
6.3 Exhaustion of Shares. If at any time the shares available
under the Plan are over-enrolled, enrollments shall be reduced proportionately
to eliminate the over-enrollment. Such reduction method shall be "bottom up",
with the result that all option exercises for one share shall be satisfied
first, followed by all exercises for two shares, and so on, until all available
shares have been exhausted. Any funds that, due to over-enrollment, cannot be
applied to the purchase of whole shares shall be refunded to the Participants
(without interest thereon).
SECTION 7
WITHDRAWAL
7.1 Withdrawal. A Participant may withdraw from the Plan by
submitting a completed enrollment form to the Company. A withdrawal will be
effective only if it is received by the Company by the deadline specified by the
Committee (in its discretion and on a uniform and nondiscriminatory basis) from
time to time. When a withdrawal becomes effective, the Participant's payroll
contributions shall cease and all amounts then credited to the Participant's
account shall be distributed to him or her (without interest thereon).
SECTION 8
CESSATION OF PARTICIPATION
8.1 Termination of Status as Eligible Employee. A Participant
shall cease to be a Participant immediately upon the cessation of his or her
status as an Eligible Employee (for example, because of his or her termination
of employment from all Employers for any reason). As soon as practicable after
such cessation, the Participant's payroll contributions shall cease and all
amounts then credited to the Participant's account shall be distributed to him
or her (without interest thereon). If a Participant is on a Company-approved
leave of absence, his or her participation in the Plan shall continue for so
long as he or she remains an Eligible Employee and has not withdrawn from the
Plan pursuant to Section 7.1.
SECTION 9
DESIGNATION OF BENEFICIARY
9.1 Designation. Each Participant may, pursuant to such
uniform and nondiscriminatory procedures as the Committee may specify from time
to time, designate one or more Beneficiaries to receive any amounts credited to
the Participant's account at the time of his or her death. Notwithstanding any
contrary provision of this Section 9, Sections 9.1 and 9.2 shall be operative
only after (and for so long as) the Committee determines (on a uniform and
nondiscriminatory basis) to permit the designation of Beneficiaries.
9.2 Changes. A Participant may designate different
Beneficiaries (or may revoke a prior Beneficiary designation) at any time by
delivering a new designation (or revocation of a prior designation) in like
manner. Any designation or revocation shall be effective only if it is received
by the Committee. However, when so received, the designation or revocation shall
be effective as of the date the designation or revocation is executed (whether
or
5
<PAGE> 10
not the Participant still is living), but without prejudice to the Committee on
account of any payment made before the change is recorded. The last effective
designation received by the Committee shall supersede all prior designations.
9.3 Failed Designations. If a Participant dies without having
effectively designated a Beneficiary, or if no Beneficiary survives the
Participant, the Participant's Account shall be payable to his or her estate.
SECTION 10
ADMINISTRATION
10.1 Plan Administrator. The Plan shall be administered by the
Committee. The Committee shall have the authority to control and manage the
operation and administration of the Plan.
10.2 Actions by Committee. Each decision of a majority of the
members of the Committee then in office shall constitute the final and binding
act of the Committee. The Committee may act with or without a meeting being
called or held and shall keep minutes of all meetings held and a record of all
actions taken by written consent.
10.3 Powers of Committee. The Committee shall have all powers
and discretion necessary or appropriate to supervise the administration of the
Plan and to control its operation in accordance with its terms, including, but
not by way of limitation, the following discretionary powers:
(a) To interpret and determine the meaning and validity of the
provisions of the Plan and the options and to determine any question
arising under, or in connection with, the administration, operation or
validity of the Plan or the options;
(b) To determine any and all considerations affecting the
eligibility of any employee to become a Participant or to remain a
Participant in the Plan;
(c) To cause an account or accounts to be maintained for each
Participant;
(d) To determine the time or times when, and the number of
shares for which, options shall be granted;
(e) To establish and revise an accounting method or formula
for the Plan;
(f) To designate a custodian or broker to receive shares
purchased under the Plan and to determine the manner and form in which
shares are to be delivered to the designated custodian or broker;
(g) To determine the status and rights of Participants and
their Beneficiaries or estates;
6
<PAGE> 11
(h) To employ such brokers, counsel, agents and advisers, and
to obtain such broker, legal, clerical and other services, as it may
deem necessary or appropriate in carrying out the provisions of the
Plan;
(i) To establish, from time to time, rules for the performance
of its powers and duties and for the administration of the Plan;
(j) To adopt such procedures and subplans as are necessary or
appropriate to permit participation in the Plan by employees who are
foreign nationals or employed outside of the United States;
(k) To delegate to any one or more of its members or to any
other person, severally or jointly, the authority to perform for and on
behalf of the Committee one or more of the functions of the Committee
under the Plan.
10.4 Decisions of Committee. All actions, interpretations, and
decisions of the Committee shall be conclusive and binding on all persons, and
shall be given the maximum possible deference allowed by law.
10.5 Administrative Expenses. All expenses incurred in the
administration of the Plan by the Committee, or otherwise, including legal fees
and expenses, shall be paid and borne by the Employers, except any stamp duties
or transfer taxes applicable to the purchase of shares may be charged to the
account of each Participant. Any brokerage fees for the purchase of shares by a
Participant shall be paid by the Company, but fees and taxes (including
brokerage fees) for the transfer, sale or resale of shares by a Participant, or
the issuance of physical share certificates, shall be borne solely by the
Participant.
10.6 Eligibility to Participate. No member of the Committee
who is also an employee of an Employer shall be excluded from participating in
the Plan if otherwise eligible, but he or she shall not be entitled, as a member
of the Committee, to act or pass upon any matters pertaining specifically to his
or her own account under the Plan.
10.7 Indemnification. Each of the Employers shall, and hereby
does, indemnify and hold harmless the members of the Committee and the Board,
from and against any and all losses, claims, damages or liabilities (including
attorneys' fees and amounts paid, with the approval of the Board, in settlement
of any claim) arising out of or resulting from the implementation of a duty, act
or decision with respect to the Plan, so long as such duty, act or decision does
not involve gross negligence or willful misconduct on the part of any such
individual.
SECTION 11
AMENDMENT, TERMINATION, AND DURATION
11.1 Amendment, Suspension, or Termination. The Board, in its
sole discretion, may amend or terminate the Plan, or any part thereof, at any
time and for any reason. If the Plan is terminated, the Board, in its
discretion, may elect to terminate all outstanding options either immediately or
upon completion of the purchase of shares on the next Purchase Date, or may
elect to permit options to expire in accordance with their terms (and
participation to
7
<PAGE> 12
continue through such expiration dates). If the options are terminated prior to
expiration, all amounts then credited to Participants' accounts which have not
been used to purchase shares shall be returned to the Participants (without
interest thereon) as soon as administratively practicable.
11.2 Duration of the Plan. The Plan shall commence on the date
specified herein, and subject to Section 11.1 (regarding the Board's right to
amend or terminate the Plan), shall remain in effect thereafter.
SECTION 12
GENERAL PROVISIONS
12.1 Participation by Subsidiaries. One or more Subsidiaries
of the Company may become participating Employers by adopting the Plan and
obtaining approval for such adoption from the Board. By adopting the Plan, a
Subsidiary shall be deemed to agree to all of its terms, including (but not
limited to) the provisions granting exclusive authority (a) to the Board to
amend the Plan, and (b) to the Committee to administer and interpret the Plan.
An Employer may terminate its participation in the Plan at any time. The
liabilities incurred under the Plan to the Participants employed by each
Employer shall be solely the liabilities of that Employer, and no other Employer
shall be liable for benefits accrued by a Participant during any period when he
or she was not employed by such Employer.
12.2 Inalienability. In no event may either a Participant, a
former Participant or his or her Beneficiary, spouse or estate sell, transfer,
anticipate, assign, hypothecate, or otherwise dispose of any right or interest
under the Plan; and such rights and interests shall not at any time be subject
to the claims of creditors nor be liable to attachment, execution or other legal
process. Accordingly, for example, a Participant's interest in the Plan is not
transferable pursuant to a domestic relations order.
12.3 Severability. In the event any provision of the Plan
shall be held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Plan, and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included.
12.4 Requirements of Law. The granting of options and the
issuance of shares shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or securities
exchanges as the Committee may determine are necessary or appropriate.
12.5 Compliance with Rule 16b-3. Any transactions under this
Plan with respect to officers (as defined in Rule 16a-1 promulgated under the
1934 Act) are intended to comply with all applicable conditions of Rule 16b-3.
To the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee. Notwithstanding any contrary provision of the
Plan, if the Committee specifically determines that compliance with Rule 16b-3
no longer is required, all references in the Plan to Rule 16b-3 shall be null
and void.
8
<PAGE> 13
12.6 No Enlargement of Employment Rights. Neither the
establishment or maintenance of the Plan, the granting of options, the purchase
of shares, nor any action of any Employer or the Committee, shall be held or
construed to confer upon any individual any right to be continued as an employee
of the Employer nor, upon dismissal, any right or interest in any specific
assets of the Employers other than as provided in the Plan. Each Employer
expressly reserves the right to discharge any employee at any time, with or
without cause.
12.7 Apportionment of Costs and Duties. All acts required of
the Employers under the Plan may be performed by the Company for itself and its
Subsidiaries, and the costs of the Plan may be equitably apportioned by the
Committee among the Company and the other Employers. Whenever an Employer is
permitted or required under the terms of the Plan to do or perform any act,
matter or thing, it shall be done and performed by any officer or employee of
the Employers who is thereunto duly authorized by the Employers.
12.8 Construction and Applicable Law. The Plan is intended to
qualify as an "employee stock purchase plan" within the meaning of Section
423(b) of the Code. Any provision of the Plan which is inconsistent with Section
423(b) of the Code shall, without further act or amendment by the Company or the
Committee, be reformed to comply with the requirements of Section 423(b). The
provisions of the Plan shall be construed, administered and enforced in
accordance with such Section and with the laws of the State of New York
(excluding New York's conflict of laws provisions).
12.9 Captions. The captions contained in and the table of
contents prefixed to the Plan are inserted only as a matter of convenience, and
in no way define, limit, enlarge or describe the scope or intent of the Plan nor
in any way shall affect the construction of any provision of the Plan.
EXECUTION
IN WITNESS WHEREOF, BigStar Entertainment, Inc., by its duly
authorized officer, has executed this Plan on the date indicated below.
BIGSTAR ENTERTAINMENT, INC.
Dated: July 6, 1999 By: /s/ David Friedensohn
Title: Chief Executive Officer
9
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated May 5, 1999 for BigStar Entertainment, Inc. included in or made a
part of this Amendment No. 1 to the Registration Statement File No. 333-77963
filed on Form S-1.
ARTHUR ANDERSEN LLP
New York, New York
July 7, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,808,973
<SECURITIES> 0
<RECEIVABLES> 368,369
<ALLOWANCES> 13,146
<INVENTORY> 0
<CURRENT-ASSETS> 3,333,836
<PP&E> 796,643
<DEPRECIATION> 77,692
<TOTAL-ASSETS> 4,094,120
<CURRENT-LIABILITIES> 2,539,760
<BONDS> 0
0
0
<COMMON> 4,646
<OTHER-SE> 1,541,707
<TOTAL-LIABILITY-AND-EQUITY> 4,094,120
<SALES> 1,453,780
<TOTAL-REVENUES> 1,453,780
<CGS> 1,253,839
<TOTAL-COSTS> 1,253,839
<OTHER-EXPENSES> 3,183,232
<LOSS-PROVISION> 8,146
<INTEREST-EXPENSE> (17,524)
<INCOME-PRETAX> (2,965,767)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,965,767)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,965,767)
<EPS-BASIC> (.77)
<EPS-DILUTED> (.77)
</TABLE>
