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As Filed Pursuant to Rule 424(b)(1)
Registration No. 333-77963
PROSPECTUS
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2,500,000 Shares
[BIGSTAR.COM LOGO]
BIGSTAR ENTERTAINMENT, INC.
Common Stock
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BigStar Entertainment, Inc. is offering 2,500,000 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.
A principal stockholder of BigStar is purchasing 100,000 shares of common stock
in this offering. The common stock has been approved for listing on the Nasdaq
National Market under the symbol "BGST".
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Per Share Total
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Public offering price................................... $10.00 $25,000,000
Underwriting discounts and commissions.................. $0.70 $1,750,000
Proceeds, before expenses, to BigStar................... $9.30 $23,250,000
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SEE "RISK FACTORS" ON PAGES 5 TO 12 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 375,000 additional shares from BigStar at
the public offering price, less underwriting discounts and commissions. Delivery
and payment for the shares will be on August 6, 1999.
PRUDENTIAL SECURITIES
WASSERSTEIN PERELLA SECURITIES, INC.
FIRST SECURITY VAN KASPER
August 2, 1999
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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.
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................ 1
Risk Factors...................... 5
Trade Names and Trademarks........ 12
Forward-Looking Statements........ 12
Use of Proceeds................... 13
Dividend Policy................... 13
Dilution.......................... 14
Capitalization.................... 15
Selected Financial Data........... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 17
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PAGE
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Business.......................... 24
Management........................ 35
Certain Related Transactions...... 42
Principal Stockholders............ 43
Description of Capital Stock...... 45
Shares Eligible for Future Sale... 47
Underwriting...................... 50
Legal Matters..................... 52
Experts........................... 52
Where You Can Find More
Information..................... 53
Index to Financial Statements..... F-1
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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.
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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, that is exclusively dedicated to filmed
entertainment products. 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 estimate that the 1,106,000
unique visitors to our web sites coincided with approximately 41,000 product
orders. 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 33,000 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.
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THE OFFERING
Shares offered by BigStar................ 2,500,000 shares
Total shares outstanding after this
offering................................. 8,542,312 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.
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 August 2, 1999:
- 1,450,490 shares subject to outstanding options with a weighted
average exercise price of $3.22 per share;
- 962,646 shares subject to outstanding warrants with a weighted
average exercise price of $6.11 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.
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SUMMARY FINANCIAL DATA
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MARCH 2, 1998 MARCH 2, 1998
(INCEPTION) (INCEPTION) THREE MONTHS
TO TO ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1999
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Net sales............................. $ 789 $ -- $ 1,454
Cost of sales......................... 714 -- 1,254
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Gross profit.......................... 75 -- 200
Operating expenses:
Sales and marketing................ 1,467 -- 1,726
General and administrative......... 892 13 675
Web site and software
development...................... 970 15 782
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Total operating expenses.............. 3,329 28 3,183
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Loss from operations.................. (3,254) (28) (2,983)
Interest income, net.................. 7 -- 17
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Net loss.............................. $ (3,247) $ (28) $(2,966)
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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
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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 net proceeds from our sale of common stock in this
offering, at an initial public offering price of $10.00 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
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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 $31,568
Working capital................................ 794 7,303 29,553
Total assets................................... 4,094 10,603 32,853
Total long-term debt........................... 8 8 8
Total debt..................................... 10 10 10
Total stockholders' equity..................... 1,546 8,055 30,305
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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. We may also require additional financing over the next 12 months. We may not
be able to obtain the financing or obtain it on terms acceptable to us. If
revenues grow slower than we anticipate, or if operating expenses exceed our
expectations or cannot be reduced accordingly, or if we cannot obtain additional
financing, our business, operating results and financial condition may be
materially harmed.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF ONLINE COMMERCE. If online
commerce does not continue to grow or grows more slowly than expected, our
business will be materially harmed. A number of factors could slow the growth of
online commerce, including the following:
- the network infrastructure required to support a substantially larger
volume of transactions may not be developed;
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- government regulation may increase;
- telecommunications capacity problems may result in slower response times;
and
- consumers may have concerns about the security of online commerce
transactions.
WE COMPETE WITH OTHER ONLINE RETAILERS AND TRADITIONAL FILMED ENTERTAINMENT
RETAILERS WHO MAY BE MORE SUCCESSFUL THAN WE ARE IN ATTRACTING AND RETAINING
CUSTOMERS. The retail filmed entertainment industry is intensely competitive.
In addition, the online commerce market for retail filmed entertainment sales is
new, rapidly evolving and competitive. 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
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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.
In the absence of federal legislation, many states, including California,
Connecticut, Delaware, Iowa, Nevada, North Carolina, Oklahoma, Rhode Island,
Tennessee, Virginia, Washington and West Virginia, have passed laws limiting the
use of e-mail marketing. Because these laws have focused primarily on
unsolicited e-mail marketing, BigStar's business has yet to be affected by
current legislation. Other states have begun to consider placing restrictions on
e-mail marketing. If Congress or additional states pass legislation restricting
commercial uses of e-mail, it could harm our ability to communicate with
existing customers and attract new customers. Our sales growth could be
affected, which could materially harm our business, operating results and
financial condition.
OUR RAPID GROWTH IS PLACING A SIGNIFICANT STRAIN ON OUR RESOURCES. We
anticipate continued rapid expansion of our operations. If we are unable to
manage our growth effectively, our business could be materially harmed. Our
rapid expansion has placed a significant strain on our ability to manage our
growth, including our ability to monitor operations, bill customers, control
costs and maintain effective quality controls. Our anticipated future expansion
will increase this strain.
Our senior management team has been assembled in a very short period. These
individuals have not previously worked together. The ability of our senior
managers to work together effectively as a team is critical to successfully
managing our growth.
WE MUST MAINTAIN SATISFACTORY VENDOR RELATIONSHIPS TO COMPETE SUCCESSFULLY.
We rely on wholesalers to fill our customers' orders. Our primary vendor of
filmed entertainment products is Baker & Taylor 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
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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 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.
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Although we believe that our use of third-party material on our web sites
is permitted under current provisions of copyright law, some aspects of Internet
content and commerce law are not clearly settled. We may therefore be the
subject of alleged infringement claims of the trademarks and other intellectual
property rights of third parties. If we become subject to these types of claims,
our business could be materially harmed even if we successfully defend against
the claims. It also is possible that future legal developments would prohibit us
from having rights to downloadable information, sound or video.
THE PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN BECAUSE THE REGULATION OF
DOMAIN NAMES IS SUBJECT TO CHANGE. We currently hold various web domain names
relating to our brand, including BigStar.com, abcBigStar.com, BigStarDVD.com and
Astrophile.com. The acquisition and maintenance of domain names generally is
regulated by governmental agencies and their designees. The regulation of domain
names in the United States and in foreign countries is expected to change in the
near future. As a result, we may be unable to acquire or maintain relevant
domain names in all countries in which we may conduct business. If our ability
to acquire or maintain domain names is limited, it could materially harm our
business, operating results and financial condition.
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
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personnel, particularly David Friedensohn, our Chief Executive Officer and
Chairman of the Board, and David Levitsky, our Executive Vice President and
General Manager. We have entered into an employment agreement with David
Friedensohn. The agreement provides that he will be employed as the Chief
Executive Officer of BigStar for an unspecified period of time. Both BigStar and
Mr. Friedensohn may terminate the agreement at any time. If terminated without
cause, Mr. Friedensohn will be entitled to severance pay equal to two years of
his then current base salary. We have no employment contracts with any of our
other senior management or key personnel. If one or more members of our
management team become unable or unwilling to continue in their present
positions, our business could be materially harmed.
We have purchased key-man life insurance in the amounts of $1,000,000 for
David Friedensohn and $500,000 for David Levitsky with BigStar as the named
beneficiary. The benefits received under these policies would not be sufficient
to compensate BigStar for the loss of the services of Mr. Friedensohn or Mr.
Levitsky should suitable replacements not be employed.
In addition, to manage our anticipated growth, we must hire more employees.
Competition for personnel, particularly those having software development and
other technical expertise, is intense. If we are unable to hire additional
qualified employees, our growth could be impaired.
MANAGEMENT WILL CONTROL 37.4% 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 37.4%, and
35.9% 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
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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
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
11
<PAGE> 15
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 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 $6.45 per share in the net tangible book
value per share of common stock from the initial public offering price. 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.
TRADE NAMES AND TRADEMARKS
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.
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.
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to BigStar from the sale of the shares of common stock in
this offering are approximately $22.25 million, or $25.7 million if the
underwriters' over-allotment option is exercised in full, after deducting
underwriting discounts and commissions and estimated offering expenses.
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.................. $12,000,000 53.9%
Upgrade computer systems and develop
additional software programs.......... 3,250,000 14.6
Hire additional marketing, technical and
production personnel.................. 2,000,000 9.0
Fund operating losses and general
corporate purposes.................... 5,000,000 22.5
----------- ------
$22,250,000 100.0%
===========
</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> 17
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 2,500,000 shares of common stock offered by BigStar, at an
initial public offering price of $10.00 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 $30,305,000 or $3.55 per share. This represents an immediate
increase in net tangible book value of $2.22 per share to existing stockholders
and an immediate and substantial dilution of $6.45 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price........................... $10.00
Pro forma net tangible book value as of March 31,
1999.................................................. $1.33
Increase attributable to new investors.................. 2.22
-----
Pro forma as adjusted net tangible book value after
this offering......................................... 3.55
------
Dilution to new investors............................... $ 6.45
======
</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 $3.79 per share, representing an immediate
increase in net tangible book value of $2.46 per share to BigStar's existing
stockholders and an immediate and substantial dilution in net tangible book
value of $6.21 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.
<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 70.7 $14,686,058 37.0 $ 2.43
New investors............ 2,500,000 29.3 25,000,000 63.0 $10.00
--------- ----- ----------- -----
Total.......... 8,542,312 100.0% $39,686,058 100.0%
========= ===== =========== =====
</TABLE>
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<PAGE> 18
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 net proceeds from our sale of common stock in this offering, at an
initial public offering price of $10.00 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
8,542,312 shares issued and outstanding,
pro forma as adjusted...................... 4 6 9
Additional paid-in capital.................... 7,880 14,387 36,634
Deferred compensation......................... (125) (125) (125)
Accumulated deficit........................... (6,213) (6,213) (6,213)
------- ------- -------
Total stockholders' equity................. 1,546 8,055 30,305
------- ------- -------
Total capitalization.................. $ 1,554 $ 8,063 $30,313
======= ======= =======
</TABLE>
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<PAGE> 19
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................ 892 13 675
Web site and software development......... 970 15 782
--------- --------- ---------
Total operating expenses..................... 3,329 28 3,183
--------- --------- ---------
Loss from operations......................... (3,254) (28) (2,983)
Interest income, net......................... 7 -- 17
--------- --------- ---------
Net loss..................................... $ (3,247) $ (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> 20
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... 13 101 208 570 675
Web site and
software
development..... 15 112 327 516 782
---- ----- ----- ------- -------
Total operating
expenses........... 28 253 787 2,261 3,183
---- ----- ----- ------- -------
Loss from
operations......... (28) (247) (768) (2,211) (2,983)
Interest income
(expense).......... -- -- (2) 9 17
---- ----- ----- ------- -------
Net loss............. $(28) $(247) $(770) $(2,202) $(2,966)
==== ===== ===== ======= =======
</TABLE>
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<PAGE> 21
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 had no sales from March 2, 1998 (inception) to
March 31, 1998. 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%. BigStar had no cost of
sales from March 2, 1998 (inception) to March 31, 1998. Cost of sales consists
of the cost of merchandise sold and shipping and handling costs. The increase in
gross margin for the period ended March 31, 1999 is attributable to a greater
percentage of videos that were sold at smaller discounts to their suggested
retail price than in previous periods. The higher gross margins earned from
sales of videos were partially offset by the lower gross margins from sales of
DVDs, which are typically sold at deeper discounts to their suggested retail
price. BigStar's primary provider of filmed entertainment and related order
fulfillment services is Baker & Taylor from whom BigStar obtained substantially
all of its filmed entertainment products in 1998 and the first quarter of 1999.
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. BigStar had
no sales and marketing expenses from March 2, 1998 (inception) to March 31,
1998.
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.
BigStar records the charge of promotional filmed entertainment products upon
shipment to the customer based upon the cost charged to BigStar by its supplier.
Shipping charges on
18
<PAGE> 22
promotional filmed entertainment products are included in cost of sales and the
related customer billings are included in revenues. 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 $13,000 from March 2, 1998 (inception) to March 31, 1998,
approximately $892,000 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 $191,000 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 $15,000 from March 2, 1998 (inception)
to March 31, 1998, 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.
19
<PAGE> 23
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.
In addition, during 1998 we issued options and warrants to purchase 507,562
shares to consultants for investment advisory, marketing, web site design and
technical services and warrants to purchase 184,300 shares in exchange for
marketing, advertising and occupancy services. These options and warrants become
exercisable upon dates ranging from the date of grant to five years after the
date of grant, at exercise prices from $1.22 to $3.73 and have expiration dates
from 1 to 10 years after the date of grant. 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. In addition, during the first quarter of 1999, we issued
options and warrants to purchase 247,381 shares to consultants for investment
advisory, marketing, web site design and technical services and warrants to
purchase 19,400 shares in exchange for occupancy services. These options and
warrants become exercisable upon dates ranging from the date of grant to five
years after the date of grant, at exercise prices from $3.73 to $5.15 and have
expiration dates from 1 to 10 years after the date of grant.
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. 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.
On January 29, 1999, we entered into a strategic advertising partnership
agreement with The New York Times for a term of one year, in which we will
purchase advertising media from The New York Times to be run on The New York
Times on the Web. Under the terms of the agreement, we are obligated to pay
approximately $300,000 in net fees over the term of the agreement ($112,500 of
which has been paid to date), subject to the right of either party to terminate
this agreement for any reason. We will amortize any cash payments ratably over
the term of the agreement as we receive advertising ratably over the term.
On April 1, 1999, we entered into a strategic marketing agreement with Icon
International for a term of one year, under which we may purchase advertising
media
20
<PAGE> 24
and marketing consulting services from Icon. We may be obligated to pay
approximately $375,000 over the term of the agreement. In addition, we issued
warrants to Icon to purchase 121,250 shares of common stock at a price per share
of $4.12, exercisable at any time before March 31, 2001. We will expense any
cash payments as advertising services are received.
On May 5, 1999, we entered into a strategic marketing agreement with
EarthLink Network, an Internet service provider, or ISP. 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 a co-branded movie store
exclusively for EarthLink's members, the placement of BigStar advertisements on
EarthLink's home page and other placements on the EarthLink web site. Under the
agreement, we are obligated to pay EarthLink a total of approximately $1.1
million over the initial two years of the agreement which runs through May 5,
2001. We will amortize $450,000 ratably over the first year of the agreement and
$650,000 ratably over the second year of the agreement. The Company has agreed
to make additional payments under the agreement to EarthLink based on a
percentage of gross receipts generated under the agreement and performance
benchmarks. In addition, we issued warrants to EarthLink to purchase 33,950
shares of common stock at a price per share of $20.62, which vest over time
through January 31, 2001. We have the right to terminate this agreement upon 30
days written notice in the event specific customer goals are not met.
We have no material commitments for capital expenditures, but anticipate
expenditures of approximately $4,000,000 for hardware and related software
enhancements of our web sites during the next 12 months. These expenditures
would expand the capabilities of our web sites to allow access by more customers
and to enhance customers' experiences on our web sites. These expenditures are
expected to be funded by a portion of the net proceeds from this offering.
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
21
<PAGE> 25
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 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
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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.
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, that is exclusively dedicated to filmed
entertainment products. 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. We estimate
that the 1,106,000 unique visitors to our web sites coincided with approximately
41,000 product orders.
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
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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 $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 33,000 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, 2,000 movie stills and 150 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. We do not believe any of the agreements with these companies
are material to our business.
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, an Internet service provider, or ISP. 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 co-branded movie store exclusively for EarthLink's
members, the placement of BigStar advertisements on EarthLink's home page and
other 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.
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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 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
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believe it will be economically comparable with our current methods of
warehousing and distributing our products, and will not result in higher product
costs.
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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<PAGE> 40
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, Pacer
Technology and Fiberstars.
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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<PAGE> 42
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.
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.
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<PAGE> 43
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;
- 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 August 2, 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 August 2, 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.
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<PAGE> 44
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.
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.
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 $10.00 per share.
In August 1999, subject to board approval, we issued to First Security Van
Kasper and D. Jonathan Merriman warrants to purchase 160,000 and 80,000 shares
of common stock, respectively, at an exercise price equal to $10.00 per share,
exercisable at any time prior to August 2, 2004.
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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<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial ownership
of BigStar's common stock, as of August 2, 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 August 2, 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% 10.6%
100 Pine Street
San Francisco, California 94104
Morton H. Meyerson(2)............... 320,100 5.3 3.7
4514 Cole Avenue, Suite 400
Dallas, Texas 75205
David Friedensohn(3)................ 1,091,278 18.0 12.7
David Levitsky(4)................... 873,000 14.4 10.2
D. Jonathan Merriman(5)............. 295,191 4.7 3.3
William Lansing(6).................. 2,535 * *
Steven A. Ledger(7)................. 919,158 14.9 10.6
Marleen McDaniel.................... 0 * *
I. Martin Pompadur.................. 0 * *
All directors and executive officers
as a group (12 persons)(8)........ 3,461,510 51.2% 37.4%
</TABLE>
- -------------------------
* less than 1%
(1) Includes a warrant to purchase 116,400 shares of common stock.
(2) Mr. Meyerson is purchasing 100,000 shares of common stock in this offering.
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<PAGE> 47
(3) Includes 48,500 shares of common stock beneficially owned by The Friedensohn
1999 Annuity Trust. Mr. Friedensohn beneficially owns the shares of common
stock held by the trust. Also includes 24,278 shares beneficially owned by
Mr. Friedensohn issuable upon the exercise of options to purchase common
stock.
(4) 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.
(5) Mr. Merriman is a 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 160,000 shares of common stock. Also
includes 128,500 shares of common stock beneficially owned by Mr. Merriman
issuable upon the exercise of warrants to purchase common stock.
(6) Represents 2,535 shares of common stock beneficially owned by Mr. Lansing
issuable upon the exercise of a warrant to purchase common stock.
(7) Mr. Ledger is a Managing 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.
(8) Includes 712,061 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 August 2, 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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<PAGE> 49
WARRANTS
As of August 2, 1999, BigStar had outstanding warrants to purchase 962,646
shares of common stock at a weighted average exercise price of $6.11 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
August 2004.
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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<PAGE> 50
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, 8,542,312 shares of common stock will be outstanding,
8,917,312 shares if the underwriters exercise their over-allotment option in
full. Of these shares, the 2,500,000 shares sold in this offering (2,875,000
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:
- 1% of the then-outstanding shares of common stock; and
- the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of 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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<PAGE> 51
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 4,889,577 registrable shares of 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
connection with the private placement of common stock in January 1999 and
February 1999, BigStar issued to the placement agents warrants to purchase
196,757 shares of common stock, which have the same registration rights as the
private placement investors. 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.
48
<PAGE> 52
BigStar also granted registration rights to First Security Van Kasper and
D. Jonathan Merriman in connection with the issuance on August 2, 1999 to First
Security Van Kasper and Mr. Merriman of warrants to purchase 160,000 and 80,000
shares of common stock, respectively. The shares issuable upon the exercise of
the warrants are entitled to demand registration rights on one occasion, at the
expense of BigStar, as well as piggyback registration rights with respect to any
registration of equity securities of BigStar for a period of five years from
August 2, 1999.
49
<PAGE> 53
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.......................... 1,064,520
Wasserstein Perella Securities, Inc......................... 580,650
First Security Van Kasper................................... 290,330
BancBoston Robertson Stephens Inc. ......................... 56,450
Credit Lyonnais Securities (USA) Inc. ...................... 56,450
Donaldson, Lufkin & Jenrette Securities Corporation......... 56,450
Hambrecht & Quist LLC....................................... 56,450
Salomon Smith Barney Inc. .................................. 56,450
SG Cowen Securities Corporation............................. 56,450
George K. Baum & Company.................................... 28,225
First Albany Corporation.................................... 28,225
Gruntal & Co., L.L.C. ...................................... 28,225
Jefferies & Company, Inc. .................................. 28,225
C.L. King & Associates, Inc. ............................... 28,225
Morgan Keegan & Company, Inc. .............................. 28,225
Raymond James & Associates, Inc. ........................... 28,225
Sands Brothers & Co., Ltd. ................................. 28,225
----------
Total.................................................. 2,500,000
==========
</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 375,000 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 $0.40 per share and these dealers may reallow a concession not
in excess of $0.10 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.
50
<PAGE> 54
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........... $0.70 $1,750,000 $2,012,500
</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 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.
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.
In August 1999, we issued to First Security Van Kasper and Mr. Merriman
warrants to purchase 160,000 and 80,000 shares of common stock, respectively, at
an exercise price equal to $10.00 per share, exercisable at any time prior to
August 2, 2004. These warrants provide for adjustment in the number of shares of
common stock issuable upon their exercise as a result of subdivisions and
combinations of the common stock. The warrants also grant registration rights to
the holders. In addition, the warrants granted to First Security Van Kasper and
Mr. Merriman are restricted from offer or sale for the one year period from the
date of the prospectus.
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
51
<PAGE> 55
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).
We have asked the underwriters to reserve approximately 250,000 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.
52
<PAGE> 56
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> 57
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> 58
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.
ARTHUR ANDERSEN LLP
New York, New York
July 28, 1999
F-2
<PAGE> 59
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........................ 2,361,716 7,880,330
Subscribed stock.................................. 453,000 --
Deferred compensation............................. (64,414) (125,035)
Accumulated deficit............................... (3,247,821) (6,213,588)
----------- -----------
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> 60
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....... 891,970 13,281 675,202
Web site and software
development................... 970,594 15,202 782,398
----------- ---------- -----------
Total operating expenses.... 3,329,639 28,483 3,183,232
----------- ---------- -----------
Loss from operations........ (3,254,975) (28,483) (2,983,291)
INTEREST INCOME, net............... 7,154 -- 17,524
----------- ---------- -----------
Net loss......................... $(3,247,821) $ (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> 61
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
and warrants, 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
Issuance of warrants to
director for consulting
services................ -- -- 6,150 -- -- -- 6,150
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.................. -- -- -- -- -- (3,247,821) (3,247,821)
--------- ------ ---------- -------- --------- ----------- -----------
BALANCE, December 31,
1998...................... 3,022,307 3,022 2,361,716 453,000 (64,414) (3,247,821) (494,497)
Issuance of common stock and
warrants, net of $108,351
of issuance costs......... 302,480 302 1,021,752 -- -- -- 1,022,054
Issuance of common stock and
warrants, 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 $7,880,330 $ -- $(125,035) $(6,213,588) $ 1,546,353
========= ====== ========== ======== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 62
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.................................... $(3,247,821) $(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................................. 192,156 -- 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> 63
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. Returns of product from customers are accepted in accordance
with standard industry practice.
F-7
<PAGE> 64
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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") from whom the Company
obtained substantially all of its inventory in 1998 and the first quarter of
1999. 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> 65
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.
An impairment loss is measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. 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.
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
F-9
<PAGE> 66
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the product costs of promotional items. The Company records the charge of the
promotional filmed entertainment products upon shipment to the customer based
upon the cost charged to the Company by its supplier. Shipping charges on the
promotional filmed entertainment products are included in cost of sales, and the
related customer billings are included in revenues. 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> 67
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> 68
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> 69
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accrued purchased video costs represent the costs of videos purchased by
the Company that have been shipped to customers prior to the period end and for
which the Company was billed subsequent to the period end. Accrued purchased
equipment costs represent the cost of equipment purchased and received by the
Company prior to the period end and for which the Company was billed subsequent
to the period end.
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 $3,248,000 and $6,214,000 (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
F-13
<PAGE> 70
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 196,910 shares were sold
to a principal stockholder of the Company, for net proceeds of $575,008. The
Company also issued a warrant to the principal stockholder to purchase 123,190
shares of common stock at a price per share of $1.22. The Company allocated the
net proceeds from the sale of the common stock to the common stock and to the
warrant. The Company determined the fair value of the warrant issued under the
Black-Scholes Option Pricing Model to be approximately $8,077, based upon an
expected life of 1 year, a risk free interest rate of 5.61%, expected volatility
of 0% and a dividend yield of 0%. The principal stockholder exercised the
warrant in December 1998.
F-14
<PAGE> 71
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, exercisable at any time through December 31, 2002, were issued
for investment advisory services. The Company determined the fair value of the
warrants issued under the Black-Scholes Option Pricing Model to be approximately
$12,183, based upon an expected life of 2 years, a risk free interest rate of
4.72%, expected volatility of 0% and a dividend yield of 0%. The services were
performed in connection with a private placement of the Company's common stock
and, as such, the Company allocated the net proceeds from the sale of the common
stock to the common stock and to the warrants.
Warrants
During 1998, in connection with certain stock purchase agreements, the
Company issued an aggregate of 193,612 warrants (of which 123,190 were issued to
a principal stockholder, as described above), each to purchase one share of
common stock at an exercise price of $1.22. The Company allocated the net
proceeds from the sale of the common stock to the common stock and to the
warrants. The Company determined the fair value of the warrants issued under the
Black-Scholes Option Pricing Model to be approximately $12,677 ($8,077 allocated
to the warrant issued to the principal stockholder), based upon an expected life
of 1 year, a risk free interest rate of 5.61%, expected volatility of 0% and a
dividend yield of 0%.
During April 1998, a director of the Company provided investment and
business consulting services to the Company and received a warrant 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. The Company determined the fair market value of
the warrant issued under the Black-Scholes Option Pricing Model to be
approximately $6,150, based upon an expected life of 2 years, a risk free
interest rate of 5.58%, expected volatility of 0% and a dividend yield of 0%. As
such, the Company recorded a charge to consulting expense of $6,150 for the year
ended December 31, 1998.
During 1998, the Company issued 203,700 warrants to purchase common stock
at purchase prices between $1.22 and $3.73, exercisable as follows: 38,800
through December 31, 1999; 97,000 through September 22, 2001; and 67,000 through
September 22, 2009. These warrants were issued for marketing, web site design
and technical 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, based upon
expected lives of 1-2 years, risk free interest rates between 4.72% and 5.55%,
expected volatility of 0% and a dividend yield of 0%.
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).
F-15
<PAGE> 72
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In January 1999, the Company issued 19,400 warrants, each to purchase one
share of common stock at a price per share of $3.73, exercisable at any time
through January 1, 2002, for technical consulting services rendered in lieu of
cash payments. The Company determined the fair value of the warrants issued
under the Black-Scholes Option Pricing Model to be approximately $9,265, based
upon an expected life of 3 years, a risk free interest rate of 4.61%, expected
volatility of 0% and a dividend yield of 0%. As such, the Company recorded a
charge of $9,265 for the three months ended March 31, 1999 (unaudited).
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
F-16
<PAGE> 73
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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.................... $(3,247,821) $(2,965,767)
Net loss, pro forma...................... (3,280,574) (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> 74
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 a consultant for web site maintenance and technical services
rendered. The options vest over a period of seven years. The Company determined
the fair value of the options issued under the Black-Scholes Option Pricing
Model to be approximately $54,888, based upon an
F-18
<PAGE> 75
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expected life of 7 years, a risk free interest rate of 5.20%, expected
volatility of 0% and a dividend yield of 0%. As such, the Company will amortize
this amount over the vesting period as services are rendered. Deferred
compensation is presented as a reduction of stockholders' deficit and amortized
over the vesting period, typically two years, of the applicable options.
Additionally the Company granted 417,197 options to purchase common stock
to various consultants for marketing, website design and technical services
rendered. The exercise prices of the options were $1.22 to $2.99 and they expire
five years from the date of grant. The Company determined the fair value of the
options issued under the Black-Scholes Option Pricing Model to be approximately
$117,000 and $6,888, for the year ended December 31, 1998 and the three months
ended March 31, 1999 (unaudited), respectively, based upon an expected life of 3
years, risk free interest rates between 5.50 and 5.56%, expected volatility of
0% and a dividend yield of 0%.
9. COMMITMENTS AND CONTINGENCIES
Effective February 1, 1999, the Company entered into a lease for its
facilities, which expires on September 30, 2002. The Company's Chief Executive
Officer is a partial guarantor of this lease. 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 leases for the period from March 2, 1998
(date of inception) to December 31, 1998 was $8,000. On March 15, 1998, 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, exercisable at any time prior to December 31, 1999. The Company
determined the fair value of the options issued under the Black-Scholes Option
Pricing Model to be approximately $8,000, based upon an expected life of 1 year,
a risk free interest rate of 5.55%, expected volatility of 0% and a dividend
yield of 0%. As such, the Company recorded a charge to operations of
approximately $1,250, 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 received.
As of December 31, 1998 and March 31, 1999, 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
F-19
<PAGE> 76
BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 (Note 10).
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 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 2,500,000 shares of common stock at an
offering price of $10.00 per share 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,
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BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of which 61,300 of the warrants were granted to First Security Van Kasper, of
which one of the Company's directors is the managing director. The warrants are
exercisable at any time prior to February 18, 2003. The Company allocated the
net proceeds from the sale of the common stock to the common stock and to the
warrants. The Company determined the fair value of the warrants issued under the
Black-Scholes Option Pricing Model to be approximately $93,956, based upon an
expected life of 4 years, risk free interest rates between 4.61 and 5.02%,
expected volatility of 0% and a dividend yield of 0%.
In addition, in January 1999, the Company issued an additional warrant to a
director, for investment advisory services, to purchase 48,500 shares of common
stock, exercisable at $3.73 per share, fully vested and exercisable at any time
prior to January 1, 2002. The Company determined the fair value of the warrants
issued under the Black-Scholes Option Pricing Model to be approximately $23,119,
based upon an expected life of 3 years, risk free interest rate of 4.61%,
expected volatility of 0% and a dividend yield of 0%. The services were
performed in connection with a private placement of the Company's common stock.
The Company allocated the net proceeds from the sale of the common stock in the
private placement to the common stock and to the warrants issued.
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
Storie Partners, 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 Company also issued a warrant to purchase
116,400 shares of the Company's common stock at $5.15 per share, exercisable at
any time prior to April 1, 2003. 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, First Security
Van Kasper. The Company allocated the net proceeds from the sale of the common
stock to the common stock and to the warrants. The Company determined the fair
value of the warrants issued under the Black-Scholes Option Pricing Model to be
approximately $24,322, based upon an expected life of 2 years, a risk free
interest rate of 5.00%, expected volatility of 0% and a dividend yield of 0%.
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.
Included in the offering expenses for the equity financings in February and
April 1999 is $310,360 in fees paid to First Security Van Kasper. These fees
have been recorded as an offset to the equity proceeds.
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BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company determined the fair
value of the warrant issued under the Black-Scholes Option Pricing Model to be
immaterial based upon an expected life of 2 years, risk free interest rate of
5.00%, expected volatility of 0%, dividend yield of 0%, and a fair market of the
Company's common stock of $3.73.
Issuance of Stock Options
The Company issued 275,288 options to purchase common stock to employees
from April 1, 1999 through June 28, 1999. The options were granted at exercise
prices ranging from $3.73 to the anticipated initial public offering price and
vest over four-year periods. Of these options, 120,280 options were granted with
exercise prices, which were lower than the fair market value of the Company's
common stock. As such, the Company will record approximately $441,000 of
non-cash compensation expense over the vesting periods, which represents the
difference between the exercise price and the fair market value of the
underlying common stock.
On April 30, 1999, the Company granted 12,125 options to purchase common
stock to three consultants for technical consulting services at an exercise
price of $6.19 per share. The options are fully vested. The Company determined
the fair value of the options issued under the Black-Scholes Option Pricing
Model to be approximately $7,100, based upon an expected life of 2 years, a risk
free interest rate of 5.00%, expected volatility of 0% and a dividend yield of
0%. As such, the Company will record a charge of $7,100 to consulting expense.
In June 1999, the Company granted to each of two directors, stock options
to purchase 12,125 shares of common stock at a price equal to the anticipated
initial public offering price. The options vest over a four-year period.
Registration Rights Agreements
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 and Reverse Stock Split
On May 3, 1999, the Company enacted a four-for-one stock split of its
common stock. On July 6, 1999, the Board of Directors approved a .485-for-one
reverse stock split of the Company's common stock effective July 28, 1999.
Accordingly, all share
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BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and per share information in the accompanying financial statements has been
retroactively restated to reflect the effects of the stock split and the reverse
split.
Supplier Agreement
On May 3, 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. The Company determined the fair value of the warrants
issued under the Black-Scholes Option Pricing Model to be approximately $30,000,
based upon an expected life of 2 years, a risk free interest rate of 5.00%,
expected volatility of 0%, a dividend yield of 0% and a fair market value of the
Company's common stock of $8.50. As such, the Company will amortize this amount
over the life of the Supplier Agreement.
Strategic Marketing Agreements
On January 29, 1999, the Company entered into a strategic advertising
partnership agreement with The New York Times Electronic Media Co. ("The Times")
for a term of one year, whereby the Company will purchase advertising media from
The Times to be run on The New York Times on the Web. Under the terms of the
agreement, the Company is obligated to pay approximately $300,000 in net fees
over the term of the agreement (of which $112,500 has been paid to date),
subject to the right of either party to terminate this agreement for any reason.
The Company will amortize any cash payments ratably over the term of the
agreement as the Company receives advertising ratably over the term.
On April 1, 1999, the Company entered into a strategic marketing agreement
with Icon International, Inc. ("Icon") for a term of one year, whereby the
Company may purchase advertising media and marketing consulting services from
Icon. The Company may be obligated to pay approximately $375,000 over the term
of the agreement. In addition, the Company issued warrants to Icon to purchase
121,250 shares of common stock at a price per share of $5.15, exercisable at any
time before March 31, 2001. The Company determined the fair value of the
warrants issued under the Black-Scholes Option Pricing Model to be immaterial
based upon an expected life of 2 years, a risk free interest rate of 5.00%,
expected volatility of 0%, a dividend yield of 0% and a fair market of the
Company's common stock of $3.73. The Company will expense any cash payments as
advertising services are received.
On May 5, 1999, the Company entered into a strategic marketing agreement
with EarthLink Network ("EarthLink"), an Internet service provider, or ISP.
Under the agreement, which runs through May 5, 2001, the Company 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
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BIGSTAR ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
page, the inclusion of a co-branded movie store exclusively for EarthLink's
members, the placement of BigStar advertisements on EarthLink's home page and
other placements on the EarthLink web site. Under the agreement, the Company is
obligated to pay EarthLink a total of approximately $1.1 million over the
initial two years of the agreement. The Company will amortize $450,000 ratably
over the first year of the agreement and $650,000 ratably over the second year
of the agreement. The Company has agreed to make additional payments under the
agreement to EarthLink based on a percentage of gross receipts generated under
the agreement and performance benchmarks. In addition, the Company issued
warrants to EarthLink to purchase 33,950 shares of common stock at a price per
share of $20.62, which vest over time through January 31, 2001. The Company has
the right to terminate this agreement upon 30 days written notice in the event
specific customer goals are not met. The Company determined the fair value of
the warrants issued under the Black-Scholes Option Pricing Model to be
immaterial based upon an expected life of 2 years, a risk free interest rate of
5.00%, expected volatility of 0%, a dividend yield of 0% and a fair market of
the Company's common stock of $8.50.
On August 2, 1999, the Company cancelled warrants to purchase 61,300 and
69,840 shares of the Company's common stock issued to First Security Van Kasper
on February 18, 1999 and April 20, 1999, respectively, and a warrant to purchase
48,500 shares of the Company's common stock issued to a director of the Company,
who is also a Managing Director of First Security Van Kasper, on January 1,
1999. In connection with its pending initial public offering, the Company then
issued, subject to board approval, new warrants to First Security Van Kasper and
the Managing Director, to purchase 160,000 and 80,000 shares of common stock,
respectively, exercisable at a price equal to the initial public offering price,
assumed to be $10.00 per share, fully vested and exercisable beginning on the
date of grant until August 2, 2004. The Company determined the fair value of the
warrants issued under the Black-Scholes Option Pricing Model to be approximately
$525,000, based upon an expected life of 5 years, risk free interest rate of
5.00%, expected volatility of 0% and a dividend yield of 0%. The Company will
allocate the net proceeds from the initial public offering to the common stock
issued in the offering and to the new warrants.
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Until August 27, 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.
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[BIGSTAR.COM LOGO]
PRUDENTIAL SECURITIES
WASSERSTEIN PERELLA SECURITIES, INC.
FIRST SECURITY VAN KASPER
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